Trade Secrets

In the normal course of business, most businesses utilize proprietary information which is not generally known to their competitors, and which provides them with a competitive advantage. This type of information may constitute a "trade secret". Trade secrets can include customer lists, proprietary recipes and formulas, business plans, special processes and formulas, and pricing and accounting formulas used in a manufacturing process, and research and development information.

Advantages of Trade Secret Protection

The advantage of protecting this type of information as a "trade secret" is that as long as the secret is properly maintained, the secret cannot be used by business competitors. For example, the formula for making Coca Cola is a trade secret. While that formula could have been patented, the formula would have become public domain when the patent expired. Instead it has remained the exclusive property of the Coca Cola Company, long after the date when a patent would have expired. Had a patent been sought, the formula would have ceased being a trade secret no later than the date of the publication of the patent.

The Law of Trade Secrets

Trade secrets are largely regulated by state law, meaning that there is some variation in the law from state to state. States are free to protect trade secrets so long as their laws do not conflict with federal intellectual property statutes. There is ordinarily a three-pronged analysis to determine whether information may be protected by trade secret law:

  1. Is the information common public knowledge, or common knowledge within the industry;

  2. Does the information have demonstrable value; and

  3. Has the information been protected and maintained as confidential by its owner?

Disclosure of information to an individual who is not an employee of a business, and is not otherwise subject to confidentiality restrictions, will usually defeat its status as a trade secret. When disclosure of trade secret information is made to people outside of the business that owns the secret, care should be taken to ensure that anybody who accesses the information has committed to a written nondisclosure agreement.

Protecting Trade Secrets

Care should also be taken to limit access to trade secret information within a company, and it makes sense for businesses to have formal written policies restricting who can access their trade secrets and under what circumstances access is permitted, and restricting the copying of confidential documents and information. Employees who do not need to know the substance of a trade secret should not be permitted access to that information. Any document or electronic record which includes a trade secret should be clearly marked as confidential. Employees who have access to trade secrets should be required to sign confidentiality and nondisclosure agreements.

In some ways, trade secrets provide less protection than patents, as it may be possible for a competitor to reverse-engineer a product to determine the secret information. This is the trade-off a company must make when choosing whether to try to obtain an indefinite benefit by maintaining information as a trade secret, or guaranteed exclusive use of the idea for a fixed number of years under patent law.

Copyright © 2003 Aaron Larson, All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you use a quotation, excerpt or paraphrase of this article, except as otherwise authorized in writing by the author of the article you must cite this article as a source for your work and include a link back to the original article from any online materials that incorporate or are derived from the content of this article.

This article was last reviewed or amended on Nov 7, 2014.