Trade Secret Protection Criteria: What Qualifies as a Trade Secret?

Most businesses possess trade secrets that contribute to their competitive advantage. But what specific information qualifies for "trade secret" status? To be considered a trade secret under federal law, information must meet specific criteria.

Trade secrets protect business information that gives you an advantage because others do not know it. There is no registration needed for trade secrets.

The Three Key Criteria for Trade Secret Protection

To be a trade secret under federal law, information must meet three criteria:

1. It must be “financial, business, scientific, technical, economic, or engineering information.”
2. “Reasonable measures” need to have been taken to keep the information secret.
3. The information must derive “independent economic value” from “not being generally known” or “readily ascertainable.”

1. Type of Information

First, it must be “financial, business, scientific, technical, economic, or engineering information.” Other kinds of information may be valuable, but are not sufficiently related to a trade.

2. Reasonable Measures to Maintain Secrecy

Second, “reasonable measures” need to have been taken to keep the information secret. Publicly available information usually does not qualify as a trade secret, although proprietary analysis or a compilation of such information can.Publicly available information usually does not qualify as a trade secret, although proprietary analysis or a compilation of such information can.

A strong trade secret program is layered. It combines people controls, process controls, and technology controls. The goal is not perfection. Reasonable security is the goal.

Reasonable efforts to maintain secrecy may include:

• Clearly labeling documents and folders as confidential or trade secret.
• Keeping sensitive details compartmentalized.
• Not leaving confidential materials on a desk in a shared space.
• Keeping laptops and drives under lock and key.

These steps show reasonable efforts to maintain secrecy.

3. Independent Economic Value

Third, the information must derive “independent economic value” from “not being generally known” or “readily ascertainable.” If information is worthless to a business’s competitors, it is not a trade secret, even if it has value for the business that identified it.

Types of Information That Qualify

Many different types of information can meet these criteria. A federal statute identifies broad examples, such as “patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes.”

Courts have identified many others, including computer programs, customer lists, and recipes. Even “negative know-how,” i.e., knowledge of what does not work, can be a trade secret if its unauthorized disclosure would help competitors avoid development costs or bring a rival product to market more quickly.

A trade secret can be a formula, a process, a method, a data set, source code, a pricing model, a supplier program, a customer list with nonpublic details, or a launch plan.

The Importance of Business Practices

Ultimately, information’s status as a trade secret depends as much on what a business does as the nature of the information itself. If a business works to prevent competitors from learning its information, because that information can be used to create value (or avoid expense), then the information is likely a trade secret.

If a skilled competitor could find or build the same information quickly from public sources or simple testing, it is less likely to qualify as a trade secret.

The lesson is not the famousness of the recipe. Many companies use both. Companies that protect famous recipes illustrate strong day to day discipline. An often-cited example is the KFC blend of herbs and spices.

Reports describe the recipe being held in a secure vault with limited access, strict need to know rules, and vendor processes that split production so that no single outside party has the full formula. The program uses physical security, contract controls, and process design to reduce the chance that any one person or vendor could leak or reconstruct the secret.

Trade Secrets vs. Patents

Deciding how to protect intellectual property (IP) is often difficult. Innovators typically protect inventions and innovations, opposed to literary works and designs, with either a patent or a trade secret. Federal law alone protects patents, while both state and federal laws govern trade secret protection.

Most states adopted a version of the Uniform Trade Secret Act (“UTSA”), while Congress has enacted both the Defend Trade Secret Act (“DTSA”) and the Economic Espionage Act to provide both civil and criminal remedies for trade secret misappropriation. Pros and cons exist for both patent protection and trade secret protection.

Patents require public disclosure. Trade secret protection keeps qualifying information confidential for as long as you maintain reasonable safeguards. Choose secrecy when the advantage depends on methods or data that others cannot easily reverse engineer and that you can keep the information confidential at a reasonable cost.

Trade secrets let you capture value without public disclosure. Trade secret protection keeps qualifying information confidential for as long as you maintain reasonable safeguards, which may be a significant benefit for process details, data sets, and methods that competitors cannot easily discover.

Key Differences Between Patents and Trade Secrets

• Patents: Require public disclosure, offer a limited term of protection (20 years from filing date), and grant the right to exclude others from using the invention.
• Trade Secrets: Maintain confidentiality indefinitely as long as reasonable safeguards are in place, do not require registration, and protect information that provides a competitive advantage.

Maintaining Trade Secret Protection

To qualify as a trade secret, the party seeking trade secret protection must have made reasonable efforts under the circumstances to maintain the information’s secrecy. Courts will look at the totality of the circumstances to determine whether the company’s protections were “reasonable” given the circumstances. Circumstances include the resources of the company, its level of sophistication, and the importance of the secret being protected.

Steps to maintain secrecy:

• Establish appropriate policies relating to confidential information and intellectual property.
• Limit disclosure to those who need to know.
• Label documents appropriately.
• Require third-party non-disclosure agreements (NDA).
• Use appropriate contractual protections with employees.
• Train employees on the importance of confidentiality.
• Implement appropriate exit procedures.
• Ensure that confidential information does not appear in promotional or other public material.
• Prepare for an inadvertent disclosure.
• Periodically audit the company’s trade secrets and confidential information.
• Monitor changes in or new interpretations of the law.
• Respond to suspected misappropriation.

What Does Not Qualify as a Trade Secret?

Certain types of information are unlikely to be afforded trade secret status:

• Generally Known: Information that is generally known or readily ascertainable.
• Used in the Industry: Information that is generally used by others in the same industry.
• Outdated: Information that is no longer valuable or is outdated by subsequent business developments.

Legal Frameworks for Trade Secret Protection

Understanding of the three criteria that must be met for trade secret protection is important for trade secret holders because:

• businesses can avoid a mistaken assumption that the information they possess is a trade secret and spend their resources to maintain its secrecy
• it helps businesses to make informed decisions about the best way to protect their valuable information (for example, seeking patent protection)
• since there is no registration of trade secrets and no presumption of its validity, in a case where trade secrets are misappropriated, trade secret holders must prove that the information they possess meets these three criteria.

At the national level, trade secrets are protected by common law and/or statute. In some countries, trade secrets are primarily protected by the law of confidence, while in some other countries, they are regulated under laws that prevent unfair competition or specific trade secret laws.

In the United States of America, each state has its own state law regarding trade secrets, while at the federal level, there is also a federal law that allows a trade secret holder to file a trade secret misappropriation claim in federal court.

Although some countries have a long history of full-fledged national trade secret systems, many others have started shaping their national systems relatively recently, compared with other types of IPRs.

Trade secret protection varies in different countries and regions of the world

Maintaining confidentiality and preventing the unauthorized use of trade secrets can be difficult in a dynamic and interconnected business landscape.

Trade secret management comes with unique challenges for businesses depending on the business sector.

WIPO Symposia on Trade Secrets and Innovation

Provide fora for exchanging ideas and perspectives on issues relating to the interface between trade secrets and innovation. Trade secrets are a key component of IP portfolios helping businesses protect their secret formulas, know-how and other key information that gives them a competitive edge.

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