TRADE SECRETS: THE HIDDEN INTELLECTUAL PROPERTY

Did you know that trade secrets are intellectual property, just like copyrights and trademarks and patents?

We think of trade secrets as being confidential information, but we don't think about them as being intellectual property. This is probably because, unlike copyrights and trademarks and patents, we protect them not by registering them – there is no registration process for trade secrets -- but by keeping them secret.

Famous examples of trade secrets involve:

We are all familiar with KFC and their secret recipe for their Kentucky Fried Chicken. Coca-Cola’s famous trade secret is the secret ingredient in their Coca-Cola formula. Google’s algorithm is a trade secret.

Each of these companies have decided to use trade secrets to protect their intellectual property instead of using patent protection. Patents are registered and all patent registrations are public information, like copyrights and trademarks. Google, KFC, Coca-Cola each made the choice to use trade secret protection instead of patent registration which would have led to the disclosure of the components or ingredients.

Examples of possible trade secrets are:

• Databases

• Proprietary business models

• Client lists

• Internal market analyses or forecasts

• R&D information

• Software algorithms

• Formulas

• Ingredients

Why the emphasis on the word “possible”?

Because there is a difference between confidential information and trade secrets.

Confidential Information versus Trade Secrets

“Confidential information” is the broad category of any non-public information. Think financial statements or employee records.

In order to rise to the level of a trade secret and become intellectual property, there are additional requirements.

A “trade secret” is generally defined as information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (a) has independent material economic value because it is not generally known and not readily ascertainable by proper means by others who can exploit the information, and (b) is subject to reasonable efforts to maintain its secrecy.

Restated, a trade secret is confidential information that has an independent material economic value, and the value comes from being a secret that is not easily ascertainable (i.e., discoverable) without some sort of theft, and is subject to reasonable efforts to maintain its secrecy.

Let’s break this down:

“Independent material economic value” means the information to be protected gives you a competitive advantage in the marketplace; in other words, if the information were widely known and used by competitors, it would harm your business.

Let’s use employee records as an example. They are certainly confidential and you do not want them disclosed or made public. They have great value to you and your business. But do they have “independent material economic value”?

If a competitor got ahold of them, would they have independent material economic value for the competitor? Probably not.

So your employee records would fail that first test of whether or not something would qualify as a trade secret.

The next element requires that it's not readily ascertainable. Would it be extremely difficult for it to be discovered independently? Let's think about Coca-Cola.

I imagine that for the last hundred years, people have been trying to figure out what that secret ingredient is, but they have not been able to, hard as they try. Is there independent economic value in that secret? 1000% Is it readily ascertainable? Obviously not because nobody can figure out what it is.

Coca-Cola's formula easily meets those first two elements of independent material economic value and not readily ascertainable. The third element is that you use reasonable efforts to maintain its secrecy.

This is a bit less straight forward. What are “reasonable efforts”? That depends on the nature of the information being protected.

We all know that we need to sign non-disclosure agreements, aka NDAs or confidentiality agreements, before sharing confidential information. However, more than a signed NDA is required for confidential information to rise to the level of a trade secret.

Reasonable efforts include, but are not limited to:

• Providing physical restrictions, such locked storage, watermarking, stamping or labeling documents as “confidential” or “secret”, or technical restrictions, such as passwords, to secure and protect the information;

• Limiting the dissemination of the information to third parties to a strict need-to-know basis and tightly controlling the ability of the third party to further disseminate the information;

• Printing and copying of the information is limited; and

• Requiring that all confidential information is retrieved when the use has concluded.

That’s the tricky part of the term “reasonable”. What's reasonable to protect a trade secret worth billions of dollars is different than what's reasonable to protect a trade secret that's worth a million dollars.

Ultimately, the amount of resources that you expend to protect your trade secrets should be in line with the value of that trade secret. What is reasonable to protect your trade secrets is not going to be the same as what’s reasonable for Coca-Cola to protect theirs.

You Can’t Unring the Bell

So by now you might be thinking, I’ve got my NDAs, why do I need to do all this extra stuff?

Because you cannot unring the bell.

Trade secrets lose protection if: (i) the information is or becomes public for any reason whatsoever, including inadvertent disclosure or illegal disclosure; or (ii) the information is independently discovered or created, whether by happenstance or reverse engineering

That means that if, for whatever reason, a trade secret becomes public, it loses trade secret protection under intellectual property laws. Even if it happens accidentally. You're at a WeWork and you leave your your business plans in the office and the next person comes along, finds it, and puts it on the internet. Poof. Your trade secret is gone.

Or if an employee has access to it and they take it with them when they leave. That would obviously be an illegal disclosure, but still the bell cannot be unrung.

If it is independently discovered--for instance, that Coca-Cola recipe--if someone independently discovers what it is, then the Coca-Cola trade secret goes away.😬

Value of the extra level of diligence.

Yes, NDAs do provide legal protections, just like any other enforceable contract.

However, when a trade secret is protected by intellectual property laws, there are additional protections and additional remedies available to you.

The biggie -- trade secret misappropriation is a crime. The idea that you are going to be federally prosecuted if you steal my trade secrets. That is a pretty nice deterrent.

To find out more about trade secrets, watch my LinkedIn Live training here: Click here.​

For more about confidentiality agreements and NDAs, read my blog post here: Click here.​