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A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information used by a business to obtain an advantage over competitors within the same industry or profession. In some jurisdictions, such secrets are referred to as "confidential information", while in others they are a subset or example of confidential information.
Definition
A company can protect its confidential information through non-compete non-disclosure contracts with its employees. The law of protection of confidential information effectively allows a perpetual monopoly in secret information - it does not expire as would a patent or trademark. The lack of formal protection, however, means that a third party is not prevented from independently duplicating and using the secret information once it is discovered.
The sanctioned protection of such type of information from public disclosure is viewed as an important legal aspect by which a society protects its overall economic vitality. A company typically invests time and energy (work) into generating information regarding refinements of process and operation. If competitors had access to the same knowledge, the first company's ability to survive or maintain its market dominance would be impaired. Where trade secrets are recognised, the creator of property regarded as a "trade secret" is entitled to regard such "special knowledge" as intellectual property.
The precise language by which a trade secret is defined varies by jurisdiction (as do the particular types of information that are subject to trade secret protection). However, there are three factors that (though subject to differing interpretations) are common to all such definitions: a trade secret is some sort of information that:
- is not generally known to the relevant portion of the public;
- confers some sort of economic benefit on its holder (where this benefit must derive specifically from its not being generally known, not just from the value of the information itself);
- is the subject of reasonable efforts to maintain its secrecy.
Trade secrets are not protected by law in the same manner as trademarks or patents. Probably one of the most significant differences is that a trade secret is protected without disclosure of the secret.
Compared with Trademarks
To acquire rights in a trademark under U.S. law, one simply uses the mark in the course of business. (It is possible to register a trademark in the U.S. but, though registration confers some advantages including stronger protection in certain respects, it is not required in order to get protection at all. Other nations have different trademark regimes and the following remarks may not apply to them.) Assuming the mark in question meets certain other standards of protectibility, it is protected from infringement on the grounds that other uses might confuse consumers as to the origin or nature of the goods once the mark has been associated with a particular supplier. (Similar considerations apply to service marks and trade dress.) By definition, a trademark enjoys no protection (qua trademark) until and unless it is "disclosed" to consumers, for only then are consumers able to associate it with a supplier or source in the requisite manner. (That a company plans to use a certain trademark might itself be protectible as a trade secret, however, until the mark is actually made public.)
Compared with Patents
To acquire a patent, full information about the method or product has to be supplied to the patent bureau and will then be available to all. After expiration of the patent, competitors can copy the method or product legally. The temporary monopoly on the subject matter of the patent is regarded as a quid pro quo for thus disclosing the information to the public.
Protecting Trade Secrets
Trade secrets are by definition not disclosed to the world at large. Instead, owners of trade secrets seek to keep their special knowledge out of the hands of competitors through a variety of civil and commercial means, not the least of which is the employment of non-disclosure agreements (NDA) and non-compete clauses. In exchange for the opportunity to be employed by the holder of secrets, a worker will sign an agreement not to reveal his prospective employer's proprietary information. Often, he will also sign over rights to the ownership of his own intellectual production during the course (or as a condition) of his employment. Violation of the agreement generally carries stiff financial penalties, agreed to in writing by the worker and designed to operate as a disincentive to going back on his word. Similar agreements are often signed by representatives of other companies with whom the trade secret holder is engaged, e.g. in licensing talks or other business negotiations.
Trade secret protection can, in principle, extend indefinitely and in this respect offers an advantage over patent protection (which lasts only for a specifically delimited period -- currently twenty years in the U.S.). (One company that has no patent for its formula and has been very effective in protecting it for many more years than a patent would have is Coca Cola.) However, the "down side" of such protection is that it is comparatively easy to lose (for example, to reverse engineering, which a patent will withstand but a trade secret will not) and comes equipped with no minimum guaranteed period of years.
Historically, trade secrets have been with us after a fashion since early times in the form of keeping advanced military technology from one's enemies - and in more recent times, in keeping Industrial Revolution-era technology secret.
Discovering Trade Secrets
Companies often try to discover one another's trade secrets through lawful methods of reverse engineering on one hand and less lawful methods of industrial espionage on the other. Acts of industrial espionage are generally illegal in their own right under the relevant governing laws, of course. The importance of that illegality to trade secret law is as follows: if a trade secret is acquired by improper means (a somewhat wider concept than "illegal means" but inclusive of such means), the secret is generally deemed to have been misappropriated. Thus if a trade secret has been acquired via industrial espionage, its acquirer will probably be subject to legal liability for acquiring it improperly. (The holder of the trade secret is nevertheless obliged to protect against such espionage to some degree in order to safeguard the secret. As noted above, under most trade secret regimes, a trade secret is not deemed to exist unless its purported holder takes reasonable steps to maintain its secrecy.)
Legal Development to Protecting Trade Secrets
A relatively recent development in the USA is the adoption of the UTSA, the Uniform Trade Secrets Act, which has been adopted by approximately 40 states as the basis for trade secret law. It is believed that a measure of uniformity among different states' laws will strengthen business' claims on their trade secrets.
Another significant development in U.S. law is the Economic Espionage Act of 1996 (18 U.S.C. §§ 1831-1839), which makes the theft or misappropriation of a trade secret a federal crime. This law contains two provisions criminalizing two sorts of activity. The first, 18 U.S.C. § 1831(a), criminalizes the theft of trade secrets to benefit foreign powers; the second, 18 U.S.C. § 1832, criminalizes their theft for commercial or economic purposes. (The statutory penalties are different for the two offenses.)
In Commonwealth common law jurisdictions, confidentiality and trade secrets are regarded as an equitable right rather than a property right (with the exception of Hong Kong where a judgment of the High Court indicates that confidential information may be a property right). The English Court of Appeal in the case of Saltman Engineering Co Ltd v. Campbell Engineering Ltd, (1948) 65 P.R.C. 203 held that the action for breach of confidence is based on a principle of preserving "good faith".
The test for a cause of action for breach of confidence in the common law world is set out in the case of Coco v. A.N. Clark (Engineers) Ltd, (1969) R.P.C. 41 at 47:
- the information itself must have the necessary quality of confidence about it;
- that information must have been imparted in circumstances imparting an obligation of confidence;
- there must be an unauthorised use of that information to the detriment of the party communicating it.
The "quality of confidence" highlights that trade secrets are a legal concept. With sufficient effort or through illegal acts (such as break and enter), competitors can usually obtain trade secrets. However, so long as the owner of the trade secret can prove that reasonable efforts have been made to keep the information confidential, the information remains a trade secret and generally remains legally protected as such. Conversely, trade secret owners who cannot evidence reasonable efforts at protecting confidential information, risk losing the trade secret, even if the information is obtained by competitors illegally. It is for this reason that trade secret owners shred documents and do not simply recycle them. Presumably an industrious competitor could piece together the shredded documents again. Legally the trade secret remains a trade secret because shredding the document is considered to have kept the quality of confidence of the information.
A successful plaintiff is entitled to various forms of judicial relief, including:
- an injunction
- an account of profits or an award of damages
- a declaration
External links
- Trade Secret Law by Eugene R. Quinn, Jr. (IPWatchdog)
"Trade secret"