Trade Secret

A trade secret is a formula, practice, process, design, instrument, pattern, commercial method, or compilation of information which is not generally known to the public or reasonably ascertainable by others.

Trade secrets Overview

Main Guide: Intellectual Property

A trade secret is a formula, practice, process, design, instrument, pattern, commercial method, or compilation of information which is not generally known to the public or reasonably ascertainable by others. By definition, a trade secret must confer an economic advantage over competitors or customers upon the business.

Trade Secret Criteria

In most jurisdictions, a trade secret must meet these three criteria:

  • Is not generally known to the public;
  • Confers some sort of economic benefit on its holder. The benefit must derive specifically from not being publicly known, not just from the information itself;
  • Is the subject of reasonable efforts to maintain it's secrecy.

Legal Protection of Trade Secrets

By definition, trade secrets are not disclosed to the public. Therefore, owners must seek to protect trade secret information from competitors and the public by implementing special procedures for handling it, technological & security safe guards, and proper legal protection.

Legal protections include:

  • non-disclosure agreements (NDA),
  • non-compete clauses (note: non-compete clauses are not enforceable in California),
  • Employee assignment of intellectual work produced during the course (or as a condition) of employment to the employer,
  • Non-disclosure agreements and non-compete clauses with vendors and licensees.

Legally protecting confidential information allows a perpetual monopoly in the secret information - the duration of a trade secret does not expire as a patent would. However, the lack of formal protection means that a third party is not prevented from independently duplicating and using the information once it is revealed to the public.

Coca-Cola is the most famous company to use trade secrets. It has no patent for it's Coca-Cola formula, and has been very effective in protecting the trade secret for decades (upwards of 20 years longer than if they had opted to get a patent on the formula). The disadvantage is that Coca-Cola has no protection if the information is ever uncovered by others through legal means (ex: reverse engineering).

Non-Disclosure Agreement - free legal document

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Non-Disclosure Agreement Checklist - free legal document

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Comparison to other types of intellectual property

Main Article: Intellectual Property

Federal Protection

In the United States, trade secrets are not protected by federal law. Instead, trade secrets are protected under state laws, and the majority of states have enacted the Uniform Trade Secrets Act (UTSA). In comparison, trademarks and patents are protected by federal statutes, the Lanham Act and the Patent Act respectively.

Comparison with Trademarks

Trademark owners in the United States acquire rights in a trademark when the mark is first used in commerce. It is possible to register a trademark in the United States on both the federal and state level. Trademark registration is not required, however it does confer some advantages, including stronger protection and additional remedies. Assuming the trademark meets basic standards of protectibility, the mark is protected from infringement. By definition, a trademark has no protection unless it has been disclosed to the public through use in commerce. This is a stark contrast to trade secrets, which by definition are a secret.

Comparison with Patents

To acquire a patent, full disclosure of information about the method or product has to be supplied to the patent office. The patent office in turn makes this available to the public. After expiration of the patent term (typically 20 years), competitors are legally free to copy the method or product. The secure, temporary monopoly on the subject matter of the patent is regarded as a tradeoff for disclosing the information to the public.

While patent protection and trade secret protection are commonly viewed to be incompatible with one another, there are many situations in which they can be complimentary. In many situations, improvements will be made and additional information learned about an invention even after the filing of the patent application. None of this information is required to be disclosed to the USPTO, and thus this information can be maintained as a secret.

The advantage of a trade secret over a patent is that trade secrets are not limited in time, meaning that it continues to be protected indefinitely as long as the secret is not revealed to the public. In contrast, patents are only valid for 20 years. Additionally, trade secret does not have registration costs, does not require compliance with formalities, and does not require disclosure to the public. The disadvantages of trade secret protection include that others may be able to legally discover the secret and therefore be entitled to use it.

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