Understanding the Legal Definition of Trade Secrets

Understanding the definition of a trade secret is crucial for businesses looking to protect their valuable information. 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.

Trade secrets are often considered a form of intellectual property, although they are not legally protected in the same way as patents, trademarks or copyrights. Instead, trade secrets are generally protected by contract law and unfair competition law, which prohibit the unauthorized disclosure and use of trade secrets by third parties.

The United States Patent and Trademark Office refers to a trade secret as a type of intellectual property. This definition of trade secret is in reference to the business ownership of a formula, pattern, compilation, program, device, method, technique, or process that provides a competitive edge. The government has a responsibility to protect trade secrets. The passage of the Defend Trade Secrets Act of 2016 (DTSA) also increased trade secret protection.

This law offers limited protection from trade secret misappropriation, which is the unauthorized disclosure and use of the confidential information. Courts can order parties not to violate the confidentiality of a misappropriated trade secret.

Trade Secret Definition Under Federal Law (DTSA)

The DTSA, which amends the Economic Espionage Act (EEA), incorporates a definition of trade secrets that is closely aligned with the UTSA. According to the DTSA, trade secrets encompass a wide range of information types, including but not limited to financial, business, scientific, technical, economic, or engineering information.

Understanding the nuances of what constitutes a trade secret under the DTSA and state laws is essential for businesses looking to protect their proprietary information. This is becoming more important as artificial intelligence plays an ever-increasing role in the process of creation.

State Law and the Uniform Trade Secrets Act (UTSA)

Trade secrets are also defined by state law. While there is no single, universal definition of a trade secret across all states, most states have enacted a version of the Uniform Trade Secrets Act (UTSA), which serves as a model for state statutes. The UTSA provides a framework for defining trade secrets that most states have adopted in some form or fashion.

According to the UTSA, a trade secret is information that can include a wide range of data, such as formulas, patterns, compilations, programs, devices, methods, techniques, or processes.

Before the widespread adoption of the UTSA, trade secrets were primarily defined by common law, which remains relevant today, especially in states that have not adopted statutory protections for trade secrets. Courts sometimes refer to the Restatement of Torts and the Restatement (Third) of Unfair Competition for guidance on common law definitions. The Restatement of Torts defines a trade secret as business information that provides a competitive advantage to those who are not aware of it or not using it. Examples include chemical compounds, customer lists, manufacturing processes, formulas, and patterns.

Given that the DTSA is largely modeled after the UTSA, federal courts interpreting trade secret definitions under the DTSA often look to state interpretations for guidance. This results in a somewhat consistent analysis between federal and state claims.

Key Elements of a Trade Secret

For information to be protected as a trade secret, it must meet specific criteria:

• Valuable Because of Secrecy: For information to be protected as a trade secret, it must be secret and derive economic value from its secrecy.
• Protected by Reasonable Efforts to Maintain Secrecy: To ensure that information remains a trade secret, access to it should be limited to individuals who “need to know.” This includes employees, contractors, vendors, and business partners. Those with access should be contractually prohibited from disclosing the information.
• Is information that has either actual or potential independent economic value by virtue of not being generally known.
• Derives value from disclosure or use of the information by others who cannot ascertain the information through proper means.
• Is subject to reasonable efforts to maintain such information secret.

All three of the listed elements are required. If any one of them ceases to exist, then the trade secret will also cease to exist.

With that, the law sets forth a number of foundational requirements for granting protection to a trade secret:

• It must be secret: Meaning, not in the public domain and cannot be discovered without special effort.
• It must have business value, meaning: It grants its owner an advantage over his competitors.
• The owner of the secret must take reasonable measures to keep it secret.

Taking those same “reasonable measures” is critical to maintain the protection, and business owners and companies must formulate a policy to protect trade secrets that will make it possible to prove that the trade secret was indeed kept secret. Thus, for example, failure to lock a computer containing confidential information can be considered as failure to take reasonable measures to protect the secrecy of a trade secret, whereas having employees sign a nondisclosure agreement, noncompete clauses, and distributing memoranda to employees regarding their obligation to maintain confidentiality will all be considered reasonable measures to protect a trade secret.

The commercial and economic value of a trade secret results from its secrecy.

Trade secrets work best for know-how that cannot be reverse-engineered.

In comparison to patents or utility certificates, trade secrets can have an unlimited lifetime and cover a much broader range of business information suitable for protection. Such a protection can include aspects like formulas, practices, processes, software in general, business methods, customer information and the like.

Trade secrets can include information on products, services, manufacturing techniques, sales methods, processes, business strategies, financial data, business plans and other sensitive information.

Trade secrets protect undisclosed know-how and valuable business information against their unlawful acquisition, use, and disclosure.

Trade secret protection gives owners the right to prevent information under their control from being disclosed, acquired, or used by others without their consent.

How to Protect Trade Secrets

Protecting trade secrets is essential for companies to maintain their competitive edge in the marketplace. Companies can protect their trade secrets by adopting internal policies to protect the confidentiality of information, by using confidentiality agreements with employees, subcontractors and business partners, and by taking legal action against those who infringe their intellectual property rights.

Trade secrets are not established by simply not talking about them in public. Sound measures are required to make a trade secret valid and enforceable in agreements or legal proceedings.

Common measures to protect trade secrets:

• Labelling trade secrets as restricted information, with indication on documents or other kind of information.
• Contractual obligation for the non-disclosure of restricted information.
• Information about the use of restricted information after leaving the company.
• Indication of potential sanctions in case of confidentiality breach.
• Access to restricted information based on a need-to-know principle only.
• Guideline for sharing restricted information outside the company and with other employees.
• Technical safeguards to restrict the access to protected information.

Trade Secrets vs. Patents

Trade secrets have emerged as a valuable form of intellectual property protection for areas that may have been traditionally thought of as patentable.Trade secrets means information whether technical, commercial or financial, which is held by a company and which has economic value because of its confidential nature.

Trade secrets can be sold or licensed too.

However, secrecy and confidentiality are also a critical factor prior to obtaining a patent. As discussed before, one criterion for patentability is novelty. Most IP offices and lawmakers are very strict on this aspect. The owner is not even allowed to communicate or present an invention idea publicly if patent protection is sought for it. This means that any kind of publication of an invention idea before its patent filing destroys its novelty, even if it was only a presentation to a limited audience - for example on a fair or at an event.

So, to be on the safe side and safeguard your innovations: before any presentation or communication of a new product or idea to an external audience, be it at an event or to a business partner, such as customers or suppliers, be sure you know whether your idea is sensitive and needs to be kept secret.

A trade secret owner, however, cannot stop others from using the same technical or commercial information, if they acquired or developed such information independently by themselves through their own R&D, reverse engineering or marketing analysis, etc.

Since trade secrets are not made public, unlike patents, they do not provide “defensive” protection, as being prior art.

You, as a trade secret owner, cannot hinder or limit others from using the same information or idea if they acquired the information or idea in a legitimate business transaction, or developed the information or idea independently.

Trade secrets work best for know-how that cannot be reverse-engineered.

Trade secrets can have an unlimited lifetime and cover a much broader range of business information suitable for protection.

International Considerations

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

In 2016, the European Union adopted a directive on the protection of trade secrets, which establishes uniform rules for the protection of trade secrets in all EU member states. The directive defines Trade secrets as information that meets certain conditions, including that it is secret, that it has commercial value by virtue of its confidentiality, and that it has been the subject of reasonable measures to protect its confidentiality.

Trade secrets are part of fair competition law. Unfair practices in respect of secret information are, for example, industrial or commercial espionage, breach of contract, and breach of confidence.

The USPTO provides policy leadership, advocacy, and technical expertise in the domestic and international protection of trade secrets. government in bilateral and multilateral intellectual property (IP) and trade negotiations, including representation at the World Intellectual Property Organization (WIPO) and other international and domestic forums and frameworks.

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