Trade Secret Basics

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Trade secret law gives the owner of important commercial information the right to keep others from usingit. Here's what business owners need to know to protect trade secrets and maintain a competitiveedge.

What is a trade secret?

In most states, a trade secret may consist of any formula, pattern, physical device, idea, process,compilation of information, or other information that is both of the following:

• Provides the owner of the information with a competitive advantage in the marketplace
• Is treated in a way that can reasonably be expected to prevent the public or competitors from learning about it, barring improper acquisition or theft

Some examples of potential trade secrets are a formula for a sports drink, survey methods used byprofessional pollsters, recipes, a new invention for which a patent application has not yet been filed,marketing strategies, manufacturing techniques, and computer algorithms. Unlike other forms of intellectualproperty such as patents, copyrights, or trademarks, trade secrecy is basically a do-it-yourself form ofprotection. You don't register with the government to secure your trade secret; you simply keep theinformation confidential. Trade secret protection lasts for as long as the secret is kept confidential. Once atrade secret is made available to the public, trade secret protection ends.

How do businesses put trade secrets to use?

Trade secrets often protect valuable technical information that cannot be sheltered under other forms ofintellectual property law, such as the formula for Coca-Cola. Trade secrets may also do the following:

• Protect ideas that offer a business a competitive advantage, thereby enabling a company or individual to get a head start on the competition -- for example, an idea for a new type of product or a new Web site
• Keep competitors from learning that a product or service is under development and from discovering its functional or technical attributes -- for example, how a new software program works
• Protect valuable business information such as marketing plans, cost and price information, and customer lists -- for example, a company's plans to launch a new product line
• Protect "negative know-how" -- that is, information you've learned during the course of research and development on what not to do or what does not work optimally -- for example, research revealing that a new type of drug is ineffective
• Protect any other information that has some value and is not generally known by your competitors -- for example, a list of customers ranked by how profitable their business is

What rights does the owner of a trade secret have?

A trade secret owner can prevent the following groups of people from copying, using, and benefiting fromits trade secrets or disclosing them to others without permission:

• People who are automatically bound by a duty of confidentiality not to disclose or use trade secret information, including any employee who routinely comes into contact with the employer's trade secrets as part of the employee's job
• People who acquire a trade secret through improper means such as theft, industrial espionage, or bribery
• People who knowingly obtain trade secrets from people who have no right to disclose them
• People who learn about a trade secret by accident or mistake but had reason to know that the information was a protected trade secret
• People who sign nondisclosure agreements (also known as confidentiality agreements) promising not to disclose trade secrets without authorization from the owner
  This may be the best way for a trade secret owner to establish a duty of confidentiality. Even though bound under an implied duty not to disclose sensitive information, all employees who come into contact with a company's trade secrets -- including high-level employees and company presidents -- should sign nondisclosure agreements because such agreements make it clear to the employee that the company's trade secrets must be kept confidential. In addition, a company's lenders, investors, and potential investors may require employees to sign nondisclosure agreements.

There is one group of people that cannot be stopped from using information protected under trade secretlaw. These are people who discover the secret independently -- that is, without using illegal means orviolating agreements or state laws. For example, it is not a violation of trade secret law to analyze (or"reverse engineer") any lawfully obtained product and determine its trade secret.

Example

XCEL glue is made of a formula protected by trade secret. Phil, a chemist, analyzes the contents of XCEL glue, determines its composition, and re-creates the formula. Phil can legally use this information to make and sell his own glue.

How can a business protect its trade secrets?

By now it should be clear that simply calling information a trade secret will not make it so. A businessmust behave in a way that proves its desire to keep the information secret. Some companiesgo to extreme lengths -- for example, the formula for Coca-Cola (perhaps the world's most famous tradesecret) is kept locked in a bank vault in Atlanta, which can be opened only by a resolution of theCoca-Cola Co.'s board of directors. Only two Coca-Cola employees ever know the formula at thesame time; their identities are never disclosed to the public, and they are not allowed to fly on the sameairplane.

Fortunately, such extraordinary trade secrecy protection measures are seldom necessary. Although youshould take reasonable precautions to protect any information you regard as a trade secret, you don't haveto turn your office into an armed camp to do so. Sensible precautions include, for example, markingdocuments containing trade secrets "confidential," locking away trade secret materials after businesshours, maintaining computer security, and limiting access to secrets to people with a reasonable need toknow.

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