Trade Secret Basics

A trade secret is any formula, pattern, device or compilation of information that is used in one's business, and which gives the owner of the secret an opportunity to obtain an advantage over competitors who do not know or use it. In order to maintain ownership rights over a trade secret, the owner must treat the information with secrecy. It can only be disclosed to a person who agrees to maintain confidentiality. Any public disclosure will end trade secrecy status. The material will no longer be considered a trade secret and anyone is free to use it.

Keep it Secret

The owner of a copyright or a patent makes money from the publication and distribution of the copyrighted or patented material. But the owner of a trade secret makes money because the trade secret is not published or publicly distributed. Unlike other forms of proprietary rights, the secretive nature of trade secrets makes them unsuitable for any form of public registration. With the exception of certain computer software, if the secret is registered, it is no longer a "secret." Therefore, many companies use trade secret law to protect copyrightable or patentable material, prior to registration. In addition, trade secrets are an important proprietary right because they may be used to protect unpublished materials which may not qualify for copyright or patent protection.

Illegal to Steal

The underlying principal of trade secrets law is to encourage development and competition. The legal protection of confidential material creates an incentive for a business to invest in development and research. Because of trade secret law, a business can have some security in the knowledge that the unlawful misappropriation of confidential research will be punished and damages can be recovered. The protection of trade secrets helps to maintain an ethical standard for business competition. In addition to civil damages, some states have enacted penal code provisions which establish criminal sanctions for misappropriation. These statutes usually involve theft or fraud in the procurement of trade secrets.

Federal Protection: The Economic Espionage Act of 1996

In 1996, President Clinton signed the Economic Espionage Act making it a federal crime to steal a trade secret or to receive or possess trade secret information knowing that it is stolen. One purpose of the Act is to provide protection against high-tech thefts of trade secrets (for example, over the Internet).

Individuals can be imprisoned up to 10 years and fined up to $500,000. (A corporation or other organization can be fined up to $5,000,000.) If the trade secret theft benefits a foreign government, foreign instrumentality or foreign agent, an individual can be imprisoned up to 15 years imprisonment and fined up to $500,000. (A corporation or other organization can be fined up to $10,000,000). A foreign instrumentality is any institution, organization or business substantially owned or controlled by a foreign government.

State Laws

State law protects trade secrets in two ways. First there are state laws prohibiting the misappropriation of trade secrets. Most states have specific statutes which express the rights and remedies of the owner of a trade secret. Some of these state statutes are based upon the Uniform Trade Secrets Act, a "model" act which was created by lawyers, judges and scholars in order to conform the rules of different states. Almost half of the states have adopted some variation on the Uniform Trade Secrets Act.

Misappropriation is the acquisition of a trade secret by a person who has reason to know that the trade secret was obtained by improper means or the disclosure or use of a trade secret without consent by a person who either had a duty to maintain secrecy or who used improper means to acquire it.  Trade secrets are also protected under principles of state contract law. To prevent disclosure of a trade secret, a company may require a party to enter into a contract called a confidentiality or nondisclosure agreement.           

Secret Must Provide an Advantage

Only material which provides a business with a competitive edge can be properly claimed as a trade secret. However, this standard of "economic value" is easy to prove. A business can usually demonstrate that information has economic value by proving the cost of developing or acquiring the information. The fact that a competitor has made attempts to acquire the information may also demonstrate the value. For example, a restaurant has developed a popular barbecue sauce which it uses on its foods and also sells in bottles. A competitor offers the restaurant $10,000 for the recipe. If the recipe were stolen, its value could be proven by the sales of the sauce, the success of the restaurant, and the $10,000 offer.  The owner of the secret may prove economic value by demonstrating the profits attributable to the secret, the effectiveness of the marketing resulting from the secret or the savings made by use of the confidential material. It is rare that material loses trade secrecy status because of the information has no economic value.  However, this can occur if the value of the trade secret has dissipated over time.  For example, a method of writing software code to CP/M style computers may have lost its value after the CP/M operating system was superseded by DOS-based computers.

No Misappropriation

It is not a misappropriation of a trade secret to independently create confidential information even if the resulting creation is identical to a trade secret. For example, if a magician independently creates a trick identical to a competitor without any improper means there is no misappropriation of the trade secret. Similarly if the secret is obtained through a legitimate means and without any limitation on disclosure, then the party who learns the secret is free to use it. Check here for more on trade secrets and for sample agreements.