What Is a Trade Secret?
A trade secret is any practice or process of a company that is generally not known outside of the company.Information considered a trade secret gives the company a competitive advantage over its competitors and is often a product of internal research and development.
To be legally considered a trade secret in the United States, a company must make a reasonable effort in concealing the information from the public; the secret must intrinsically have economic value, and the trade secret must contain information. Trade secrets are a part of a company's intellectual property. Unlike a patent, a trade secret is not publicly known.
Key Takeaways
- Trade secrets are secret practices and processes that give a company a competitive advantage over its competitors.
- Trade secrets may differ across jurisdictions but have three common traits: not being public, offering some economic benefit, and being actively protected.
- U.S. trade secrets are protected by the Economics Espionage Act of 1996.
Understanding a Trade Secret
Trade secrets may take a variety of forms, such as a proprietary process,instrument, pattern, design, formula, recipe, method, or practice that is not evident to others and may be used as a means to create an enterprise that offers an advantage over competitors or provides value to customers.
Trade secrets are defined differently based on jurisdiction, but all have the following characteristics in common:
- They are not public information.
- Their secrecy provides aneconomic benefit to their holder.
- Their secrecy isactively protected.
If a trade secret holder fails to safeguard the secret or if the secret is independently discovered, released, or becomes general knowledge, protection of the secret is removed.
As confidential information (as trade secrets are known in some jurisdictions), trade secrets are the "classified documents" of the business world, just as top-secret documents are closely guarded by government agencies.
Because the cost of developing certain products and processes is much more expensive than competitive intelligence, companies have an incentive to figure out what makes their competitors successful. To protect its trade secrets, a company may require employees privy to the information to sign non-disclosure agreements (NDA) upon hire. Non-compete agreements were also used, but the FTC banned them in April 2024.
Trade Secret Treatment
In the United States, trade secrets are defined and protected by the Economic Espionage Act of 1996 (outlined in Title 18, Part I, Chapter 90of the U.S. Code)and also fall under state jurisdiction. As a result of a 1974 ruling, each state may adopt its own trade secret rules.
Some47 states and the District of Columbia have adopted some version of the Uniform Trade Secrets Act (USTA). The most recent legislation addressing trade secrets came in 2016 with the Defend Trade Secrets Act, which gives the federal governmentcause for action in cases involving the misappropriation of trade secrets.
The federal law defines trade secrets as "all forms and types of" the following information:
- Financial
- Business
- Scientific
- Technical
- Economic
- Engineering
Such information, according to federal law, includes:
- Patterns
- Plans
- Compilations
- Program devices
- Formulas
- Designs
- Prototypes
- Methods
- Techniques
- Processes
- Procedures
- Programs
- Codes
The above includes, according to federal law, "tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing."
The lawalso provides the condition that the owner has taken reasonable measures to keep such information secret and that "the information derives independent economicvalue, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, anotherpersonwho can obtain economic value from the disclosure or use of the information."
Other jurisdictions may treat trade secrets somewhat differently; some consider them property, while others consider them as an equitable right.
Real-World Examples
There are many examples of trade secrets that are tangible and intangible. For example, Google's search algorithm exists as intellectual property in code and is regularly updated to improve and protect its operations.
The secret formula for Coca-Cola, which is locked in a vault,is an example of a trade secret that is a formula or recipe. Since it has not been patented, it has never been revealed.
The New York Times Bestseller list is an example of a process trade secret. While the list does factor in book sales by compiling chain and independent store sales, as well aswholesaler data, the list is not merely sales numbers (books with lower overall sales may make the list while a book with higher sales may not).
