2010-03-11

TRADE SECRETS

A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers. In some jurisdictions, such secrets are referred to as "confidential information" or "classified information".

Definition

The precise language by which a trade secret is defined varies by jurisdiction (as do the particular types of information that are subject to trade secret protection). However, there are three factors that, although subject to differing interpretations, are common to all such definitions: a trade secret is information that:

• is not generally known to the public;
• confers some sort of economic benefit on its holder (where this benefit must derive specifically from its not being generally known, not just from the value of the information itself);i
• s the subject of reasonable efforts to maintain its secrecy.

Protection

A company can protect its confidential information through non-compete and non-disclosure contracts with its employees (within the constraints of employment law, including only restraint that is reasonable in geographic and time scope). The law of protection of confidential information effectively allows a perpetual monopoly in secret information - it does not expire as would a patent. The lack of formal protection, however, means that a third party is not prevented from independently duplicating and using the secret information once it is discovered.

The sanctioned protection of such type of information from public disclosure is viewed as an important legal aspect by which a society protects its overall economic vitality. A company typically invests money, time and energy (work) into generating information regarding refinements of processes and operations. If competitors had access to the same knowledge, the first company's ability to survive or maintain its market dominance or market position and market share would be impaired. Where trade secrets are recognized, the creator of knowledge regarded as a "trade secret" is entitled to regard such "special knowledge" as intellectual property.

In the United States, trade secrets are not protected by law in the same manner as trademarks or patents. Specifically, both trademarks and patents are protected under Federal statutes, the Lanham Act and Patent Act, respectively. Trade secrets arise out of state laws. Most states have adopted the Uniform Trade Secrets Act (UTSA). Only Massachusetts, New York, New Jersey, North Carolina, and Texas have not adopted the UTSA. One of the most significant differences between patents and trademarks and trade secrets is that a trade secret is only protected when the secret is not disclosed.

Protecting Trade Secrets

Trade secrets are by definition not disclosed to the world at large. Instead, owners of trade secrets seek to keep their special knowledge out of the hands of competitors through a variety of civil and commercial means, not the least of which is the use of non-disclosure agreements (NDA) and non-compete clauses. In exchange for the opportunity to be employed by the holder of secrets, an employee will sign an agreement not to reveal his or her prospective employer's proprietary information. Often, the employee will also sign over rights to the ownership of own intellectual works produced during the course (or as a condition) of their employment. Violation of the agreement generally carries the possibility of stiff financial penalties. These penalties operate as a disincentive to revealing trade secrets. Similar agreements are often signed by other companies with whom the trade secret holder is engaged, e.g. with the trade secret holder's vendors, or third parties in licensing talks or involved in other business negotiations.

Trade secret protection can, in principle, extend indefinitely and in this may offer an advantage over patent protection, which lasts only for a specifically limited period of time. Coca-Cola, the most famous trade secret example, has no patent for its formula and has been very effective in protecting it for many more years than the twenty years of protection that a patent would have provided. In fact, Coca-Cola refused to reveal its trade secret under at least two judges' orders. However, the "down side" of such protection is that it is comparatively easy to lose (for example, to reverse engineering, which a patent will withstand but a trade secret will not) and comes equipped with no minimum guaranteed period of years.

Historically, trade secrets took the form of keeping advanced military technology from one's enemies. In more recent times, it often takes the form of keeping Industrial Revolution-era technology secret.

Discovering trade secrets

Companies often try to discover one another's trade secrets through lawful methods of reverse engineering on one hand, and potentially unlawful methods including industrial espionage on the other. Acts of industrial espionage are generally illegal in their own right under the relevant governing laws. The importance of that illegality to trade secret law is as follows: if a trade secret is acquired by improper means (a somewhat wider concept than "illegal means" but inclusive of such means), the secret is generally deemed to have been misappropriated. Thus if a trade secret has been acquired via industrial espionage, its acquirer will probably be subject to legal liability for acquiring it improperly. (The holder of the trade secret is nevertheless obliged to protect against such espionage to some degree in order to safeguard the secret. As noted above, under most trade secret regimes, a
trade secret is not deemed to exist unless its purported holder takes reasonable steps to maintain its secrecy.)