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Trade secret

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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".


[edit] 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);
  • is the subject of reasonable efforts to maintain its secrecy.

By comparison, under US law, "A trade secret, as defined under 18 U.S.C. – 1839(3) (A), (B) (1996), has three parts: (1) information; (2) reasonable measures taken to protect the information; and (3) which derives independent economic value from not being publicly known."[1]

[edit] 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.

[edit] Comparison with trademarks

To acquire rights in a trademark under U.S. law, one must simply use the mark "in commerce."[2] It is possible to register a trademark in the U.S., both at the federal and state levels. (Registration of trademarks confers some advantages, including stronger protection in certain respects, but it is not required in order to get protection.)[2] Registration may be required in order to file a lawsuit for trademark infringement. Other nations have different trademark policies and this information may not apply to them. Assuming the mark in question meets certain other standards of protectibility, it is protected from infringement on the grounds that other uses might confuse consumers as to the origin or nature of the goods once the mark has been associated with a particular supplier. (Similar considerations apply to service marks and trade dress.) By definition, a trademark enjoys no protection (qua trademark) until and unless it is "disclosed" to consumers, for only then are consumers able to associate it with a supplier or source in the requisite manner. (That a company plans to use a certain trademark might itself be protectible as a trade secret, however, until the mark is actually made public.)

[edit] Comparison with patents

To acquire a patent, full information about the method or product has to be supplied to the patent office and upon publication or issuance, will then be available to all. After expiration of the patent, competitors can copy the method or product legally. The temporary monopoly on the subject matter of the patent is regarded as a quid pro quo for thus disclosing the information to the public.

One popular misconception held by many is that trade secret protection is incompatible with patent protection. It is typically said that if you apply for a patent you can no longer maintain a trade secret on the invention, but this is an oversimplification.[3] It is true that in order to obtain a patent you must disclose your invention so that others will be able to both make and use the invention, and, to obtain a patent in the United States, if you have any preferences you must likewise disclose your preferences.[4] What is typically not appreciated though is that the critical time for satisfying this disclosure requirement is at the time the application is filed. In many if not most situations, improvements will be made to an invention even after filing of the patent application, and additional information will be learned. None of this additional information must be disclosed and can instead be kept as a secret.[5] Virtually all patent licenses include clauses that require the inventor to disclose any trade secrets they have. Frequently it is this information not disclosed in the patent that is the most commercially viable. Thus, if you are attempting to sell or license your patent rights you want to make sure that you take steps to continue to maintain your trade secrets as secrets, otherwise they will be lost. Accordingly, before disclosing any secrets not already protected by an issued patent you should use a non-disclosure agreement.

[edit] 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.[6] 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.

[edit] 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.)

[edit] Legal development to protecting trade secrets

A relatively recent development in the United States is the adoption of the UTSA, the Uniform Trade Secrets Act, which has been adopted by approximately 46 states as the basis for trade secret law. Another significant development in U.S. law is the Economic Espionage Act of 1996 (18 U.S.C. – 1831'1839), which makes the theft or misappropriation of a trade secret a federal crime. This law contains two provisions criminalizing two sorts of activity. The first, 18 U.S.C. – 1831(a), criminalizes the theft of trade secrets to benefit foreign powers. The second, 18 U.S.C. – 1832, criminalizes their theft for commercial or economic purposes. (The statutory penalties are different for the two offenses.)

In Commonwealth common law jurisdictions, confidentiality and trade secrets are regarded as an equitable right rather than a property right (with the exception of Hong Kong where a judgment of the High Court indicates that confidential information may be a property right). The Court of Appeal of England and Wales in the case of Saltman Engineering Co Ltd v. Campbell Engineering Ltd, (1948) 65 P.R.C. 203 held that the action for breach of confidence is based on a principle of preserving "good faith".

The test for a cause of action for breach of confidence in the common law world is set out in the case of Coco v. A.N. Clark (Engineers) Ltd, (1969) R.P.C. 41 at 47:

  • the information itself must have the necessary quality of confidence about it;
  • that information must have been imparted in circumstances imparting an obligation of confidence;
  • there must be an unauthorized use of that information to the detriment of the party communicating it.

The "quality of confidence" highlights that trade secrets are a legal concept. With sufficient effort or through illegal acts (such as break and enter), competitors can usually obtain trade secrets. However, so long as the owner of the trade secret can prove that reasonable efforts have been made to keep the information confidential, the information remains a trade secret and generally remains legally protected. Conversely, trade secret owners who cannot evidence reasonable efforts at protecting confidential information, risk losing the trade secret, even if the information is obtained by competitors illegally. It is for this reason that trade secret owners shred documents and do not simply recycle them.[citation needed]

A successful plaintiff is entitled to various forms of judicial relief, including:

[edit] Cases

[edit] See also

[edit] Notes

  1. ^ Common Issues and Challenges in Prosecuting Trade Secret and Economic Espionage Act Cases, U.S. Attorneys' Bulletin, at 7 (Nov. 2009).[1]
  2. ^ a b United States Patent and Trademark Office, General Questions
  3. ^ Jorda on Trade Secrets by Karl Jorda
  4. ^ 35 U.S.C. 112
  5. ^ Considerations Relevant to Best Mode MPEP 2165.01
  6. ^ For God, Country & Coca-Cola, by Mark Pendergrast, 2nd Ed., Basic Books 2000, p. 456

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