Trade Secret Basics FAQ

What every business owner should know about trade secret law.

What is a trade secret?

According to the law of most states, a trade secret may consist of any formula, pattern, physical device, idea, process or compilation of information that both:

  • provides the owner of the information with a competitive advantage in the marketplace, and
  • is treated in a way that can reasonably be expected to prevent the public or competitors from learning about it, absent improper acquisition or theft.

Some examples of potential trade secrets are:

  • a formula for a sports drink
  • survey methods used by professional 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 intellectual property such as patents, copyrights, and trademarks, trade secrecy is basically a do-it-yourself form of protection. You do not register with the government to secure your trade secret; you simply keep the information confidential. Trade secret protection lasts for as long as the secret is kept confidential. Once a trade secret is made available to the public, trade secret protection ends.

What types of information can trade secrets protect?

Copyright, patents, and trademarks are fairly well-known forms of intellectual property protection. But trade secrets are another extremely useful form of protection that often protects valuable technical or confidential information. What can trade secrets protect?

  • Ideas that offer a business a competitive advantage, thereby enabling a company or individual to get a "head start" on the competition. This might include, for example, an idea for a new type of product or marketing approach.
  • Competitors knowledge that a product or service is under development and its functional or technical attributes including, for example, the workings of a new software program.
  • Valuable business information such as marketing plans, cost and price information, and customer lists.
  • So-called "negative know-how," meaning information that you have learned during the course of research and development on what not to do or what does not work optimally. Often, this information is almost as valuable as the products or techniques that do work.
  • Virtually any other information that has some value and is not generally known by your competitors. This might include, for example, a list of customers ranked by the profitability of their business.

What rights do trade secrets confer?

A trade secret owner can prevent the following groups of people from copying, using, or benefiting from its 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. This would include, for example, a member of the Board of Directors or leadership team of a company.
  • People who acquire a trade secret through improper means such as theft, industrial espionage, or bribery.
  • 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 (sometimes used synonymously with "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. To learn more, see Nondisclosure Agreements.

There is one group of people that cannot be stopped from using information protected under trade secret law. These are people who discover the "secret" independently, that is, without using illegal means or violating 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.

For example, imagine that XCEL glue is comprised of a trade secret protected formula. Phil, a chemist, analyzes the contents of XCEL glue, determines its composition and recreates the formula. Phil can legally use this information to make and sell his own glue. Similarly, Phil could attempt to determine XCEL's customer list based on publicly available information, such as the names of people who follow XCEL on Facebook.

How can a business protect its trade secrets?

Simply calling information a "trade secret" will not make it so. A business must affirmatively behave in a way that proves its desire to keep the information secret. This means taking certain precautions over secrecy. Some companies go to extreme lengths.

How can a business enforce its rights if someone steals or improperly discloses confidential information?

Every state has a law prohibiting theft or disclosure of trade secrets. Most of these laws are derived from the Uniform Trade Secrets Act (UTSA), a model law drafted by legal scholars. A listing of states that have adopted some version of the UTSA is provided at the end of this FAQ.

A trade secret owner can enforce rights against someone who steals confidential information by asking a court to issue an order (an injunction) preventing further disclosure or use of the secrets. A trade secret owner can also collect damages for any economic injury suffered as a result of the trade secret's improper acquisition and use. Here are some examples of incidents that can lead to trade secret lawsuits:

  • Sarah, a former employee of C-com, discloses C-com trade secrets to her new employer (whether orally or in writing).
  • Mary hacks her way into the network for a computer company and downloads the specs for a new silicon chip. She sells the information to a rival computer company.
  • Sheldon is a software programmer who works as an independent contractor for Diskco. Sheldon signed a nondisclosure agreement with Diskco, but later discloses Diskco secrets to a rival.

To prevail in a trade secret infringement suit, a trade secret owner must show:

  • that the information alleged to be confidential provides a competitive advantage, and
  • the information really is maintained in secrecy.

In addition, the trade secret owner must show that the information was either improperly acquired by the defendant (if the defendant is accused of making commercial use of the secret) or improperly disclosed by the defendant (if the defendant is accused of leaking the information).

Is stealing trade secrets a crime?

Intentional theft of trade secrets can constitute a crime under both federal and state laws. The most significant federal law dealing with trade secret theft is the Economic Espionage Act of 1996 (EEA). The EEA gives the U.S. Attorney General sweeping powers to prosecute any person or company involved in trade secret misappropriation and punishes intentional stealing, copying or receiving of trade secrets. Penalties for violations are severe: Individuals may be fined up to $500,000 and corporations up to $5 million. A violator may also be sent to prison for up to ten years. All property used and proceeds derived from the theft can be seized and sold by the government.

The EEA applies not only to thefts that occur within the United States, but also to thefts outside the U.S. if the thief is a U.S. citizen or corporation, or if any act in furtherance of the offense occurred in the U.S. If the theft is performed on behalf of a foreign government or agent, the corporate fines can double and jail time may increase to 15 years.

Many states have also enacted laws making trade secret infringement a crime. For example, in California it is a crime to acquire, disclose or use trade secrets without authorization. Violators may be fined up to $5,000, sentenced to up to one year in jail, or both. Under Cal. Penal Code Section 499(c), trade secret theft is categorized as essentially a form of larceny.

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