What Is a Trade Secret?

Trade secrets are often called the fourth category of intellectual property, after copyrights, patents, and trademarks. They cover a broad range of information and have actual or potential economic value to the holder. They can include formulas, products, software, manufacturing processes, compilations of data, customer lists, and financial information. To be legally protectable as a trade secret, however, a piece of information must not be generally known or easily determined by others. That is a significant part of its economic value. The formula for Coca-Cola and the famous “11 herbs and spices” of Kentucky Fried Chicken are two popular examples in which the value is in the secret itself.

Trade Secret Laws

Trade secret law often works side by side with patent law in that it allows a company to protect its R&D activities that might lead to a patentable invention. Trade secret law can also allow a company to protect a product that might not otherwise be patentable or when it is to the advantage of the company to keep information about its product a secret. Patents must be disclosed publicly in return for patent protection lasting only 20 years. By using trade secret law to protect the formula for Coca-Cola, rather than patenting it, the Coca-Cola Co. indefinitely retains its exclusivity over the formula.

Trade secrets must be kept secret to maintain their legal protection. One of the issues explored in a trade secret theft case is what efforts the owner made to protect its information. The efforts can be physical (e.g., Coca-Cola’s famous vault), in the form of locks and keys or boxes and enclosures, etc. The protections can be contractual, such as nondisclosure agreements, or they can be electronic, such as password protection or firewalls.

A trade secret theft case would also explore the methods that the person who obtained the secret used. Were they legitimate or unscrupulous? Methods such as outright theft, coercion, fraud, inducement to breach a contract, or outright breach of a contract are generally seen as creating an assumption that the secret was stolen or misappropriated. However, reverse engineering (of a legitimately obtained item), independent research or information gathering, or the common knowledge of the industry likely will create an assumption that either the secret was legitimately determined, or it wasn’t really a secret.

Currently, trade secrets are largely protected by state law, which means that each state determines what is and is not a trade secret, what steps are required to protect and enforce a trade secret, and the legal procedures for recovering from the loss or theft of a trade secret. This state law jurisdiction largely arose from the idea that trade secrets and their protection are more of a business practice issue than an intellectual property issue. In an effort to streamline the approaches of 50 different states, over the last 30 years, most states have adopted the Uniform Trade Secrets Act, a model statute developed by a commission of legal scholars and legislators.

The Uniform Trade Secrets Act helped, but companies continued to struggle to enforce trade secrets across state lines. Many states that adopted the act did so with modifications to suit their own political or economic interests. Even without modifications, states often interpreted the law differently, making it challenging for companies to enforce their trade secrets nationally, much less internationally.

The Defend Trade Secrets Act

The Defend Trade Secrets Act is intended to resolve those problems by providing a single, national standard at the federal level that would be evenly enforceable for all 50 states and would allow trade secret owners to seek recovery in the federal courts. This act largely follows the Uniform Trade Secrets Act in its definitions of what are and are not trade secrets and what constitutes misappropriation of trade secrets, but goes well beyond it in standardizing claims that cross state lines, establishing the penalties and remedies for trade secret violations, and creating new federal enforcement mechanisms.

Three areas of the act are generating particular interest for holders of trade secrets. First, it provides an entirely new mechanism that allows for government seizure of “property necessary to prevent the propagation or dissemination of the trade secret … [to prevent] an immediate and irreparable injury.” Previously, the best that a business could hope for would be a legal injunction preventing the use of the secret. With this new proposal, the property could be physically seized and held by the court, pending a resolution of the claim. This could include products or prototypes, documentation or other written information, or manufacturing equipment or tools, as well as digital information that could be seized via a hard drive, server, or other storage mechanism.

Second, the act largely replicates the Uniform Trade Secrets Act in providing for damages, injunctions to prevent the use of misappropriated trade secrets, or royalties when use takes place, but it also provides for a standard of triple damages for willful and maliciously appropriated trade secrets. It places a standard 3-year statute of limitations on any claim for theft or misuse.

Third, a particular challenge in managing trade secrets is how to handle the mobility of employees who know about them. When employees work for a particular company, they gain knowledge of the company’s trade secrets, but also gain knowledge and experience in their particular field. When they leave to go to a competing company, they have the right to use their full range of knowledge and experience, but not the right to use any trade secrets gained from the former employer for the benefit of the new employer. Keeping those competing interests balanced is tricky. The act addresses this issue—it encourages employee mobility by limiting injunctions to only when the use of an employee’s knowledge of his former employer’s trade secrets is “inevitable.”

Sen. Orrin Hatch (R-Utah), a co-author of the Defend Trade Secrets Act, described it as a “critical victory for the intellectual property and business communities.” Also expressing support of the act are the Intellectual Property Owners Association (IPO), the U.S. Chamber of Commerce, and a number of industrial and technology companies. Some concerns developed, however, that the proposal doesn’t go far enough in protecting against global, cyber-based industrial espionage and hacking.

Following the approval of both the House and the Senate, the act was sent to President Barack Obama, who is expected to sign it into law. It would go into effect immediately.