Trade Secrets – An Overview

A “trade secret” is generally defined as any information that (1) derives independent economic value from not being generally known to, and not being readily ascertainable by, the public and (2) is subject to reasonable efforts to maintain its secrecy. Such information may include formulas, patterns, compilations, programs, devices, methods, techniques, products, systems, processes, designs, prototypes, procedures, and computer programming instructions or codes. Common examples of trade secrets include the formula for Coca-Cola® and KFC’s fried chicken recipe. However, information doesn’t have to be famous to be a trade secret – may trade secrets remain secret simply because the general public is unaware that the information exists. More common examples of trade secrets may include business methods and plans, pricing information, manufacturing techniques, repair methods, engineering notebooks, computer software, customer lists, marketing plans, and personnel information.

Because the value of a trade secret resides in the information not being generally known or ascertainable, a trade secret cannot be patented. Obtaining a patent requires that the information to be patented be disclosed to the public. In the United States, a patent protects the patent holder’s right to the sole use of the information for either fourteen, seventeen, or twenty years, depending upon the type of patent. In contrast, one of the main benefits of holding information as a trade secret is that the secret holder’s right to the sole use of the information can continue in perpetuity if certain conditions are met. The information holder should make a determination between whether to patent the information or hold the information as a trade secret.

Considerations in determining whether to apply for a patent or hold the information as a trade secret include:

• Whether the information is properly patentable;
• The likelihood that the information can be reverse engineered;
• The likelihood that the information can be discovered by independent invention;
• Your ability to implement procedures to maintain the secrecy of the information;
• The type of information;
• The value of the information to the holder and third parties; and
• The extent to which employees will need to access the information.

If the information holder decides to maintain the information as a trade secret rather than obtaining a patent on the information, he or she should take certain precautions to ensure that the information remains a trade secret. Minimum measures should include:

• Disseminating confidential information only on a “need to know” basis;
• Marking documents and materials as confidential;
• Restricting and supervising visitor access;
• Locking doors and file cabinets;
• Issuing employee identification badges;
• Including a strong trade secret policy statement in your employee handbook;
• Requiring security passwords for computers and networks;
• Requiring employees, contractors and other third parties to sign non-disclosure, non-circumvention, and non-competition agreements;
• Prohibiting employees from removing documents from a certain location; and
• Prohibiting employees from working on certain materials from their home computers.

Properly drafted employment agreements are an essential aspect of protecting any trade secret.

Unlike patents and trademarks, trade secrets are not protected through registration with the federal government. Instead, trade secrets are governed by various state and federal laws. Forty-six states have adopted the Uniform Trade Secrets Act, with the non-adopting states being Massachusetts, New York, New Jersey, North Carolina and Texas. Among other things, the Uniform Trade Secrets Act makes it a felony offense to steal, misappropriate or otherwise obtain a trade secret by “improper means.” Civil penalties may also be imposed under the Uniform Trade Secrets Act for misappropriation of a trade secret. The main federal law protecting trade secrets is the Economic Espionage Act of 1996, codified at 18 U.S.C. § 1831-39, although there are a number of other federal laws which provide protections for trade secrets (i.e., the “Computer Crimes” Statue, 18 U.S.C. § 1030, the Mail and Wire Fraud Act, 18 U.S.C. §§ 1341, 1343, and the National Stolen Property Act , 18 U.S.C. §§ 2311-33).