What is a Trade Secret?

trade-secret-glassesIf you ask the owners of most companies whether they have any intellectual property assets, assuming they even know what you are talking about, they will almost certainly answer “no.” The problem is that the answer should universally be a resounding YES!  Every company has intellectual property assets.  The name of your company is an asset that can be protected through state and federal trademark registration. Like your own name and good reputation, your business name can and does generate good will, which is potentially the largest asset of any kind that a business will have. Explained in this way many will at least acknowledge that they have some intellectual property assets, and they may even proudly tell you they have taken steps to protect their name, or at least own the domain name associated with their business name. But there is another form of intellectual property that virtually all businesses ignore.

It is hard to imagine that any business could ever operate without having protectable trade secrets.  The trouble is that most small businesses don’t know what a trade secret is, what trade secrets they have, nor do they know what could be protected as a trade secret.

Let’s start with understanding what a trade secret is.

A trade secret is defined as any valuable business information that is not generally known and is subject to reasonable efforts to preserve confidentiality. Generally speaking, a trade secret will be protected from exploitation by those who either obtain access through improper means, those who obtain the information from one who they know or should have known gained access through improper means, or those who breach a promise to keep the information confidential. While virtually every business has at least some trade secrets, they are quite fragile because they protect information and resources that are secret, which necessarily means that protection is lost if and when the secret becomes publicly known. For that reason, when other forms of intellectual property protection are available, such as copyright or patent protection, one should carefully consider the wisdom of relying only on trade secret protection.

Before proceeding let’s return to the statement above that says that virtually all businesses have at least some trade secrets. It is critical to understand that a trade secret protects any business related information that is valuable because it is secret. Every business has at least some information that could qualify. One key category of information that can be and should be preserved as trade secret information is your customer list. Would it be valuable to an upstart competitor to obtain your customer list so they could market directly to those who they know already are interested in the products or services they are selling? Of course!

For example, let’s say you own a home cleaning business. For years you have advertised in your community and over time have developed a loyal customer base. If a competitor were to enter your geographical area how much could they save by not having to advertise in a broad way, but instead focus only on your customers who have already shown a willingness to hire someone to clean their home? That customer list for a competitor would be worth a lot, and if they were to siphon off customers from you it would cost you a lot. Therefore, that customer list needs to be protected as a trade secret.

If you must disclose information about a trade secret to a third party, perhaps information relating to an invention, particularly prior to having a patent application pending, you should absolutely use a Confidentiality Agreement. We have several free sample agreements that you can use and modify as necessary. Similarly, you should make sure your employees sign agreements promising to keep your trade secret business information confidential and not to use it for their own benefit even after they have stopped working for you. This is called a non-compete agreement. State law varies with respect to what you can put into a non-compete agreement, so you should consult an employment lawyer in your state to help you draft the proper language. It will cost you a little up front to do it right, but save you a lot later because if you are making money in business you can be certain others will try and enter your market and frequently those others are former employees.

Returning to trade secrets specifically, virtually all states have adopted a portion of or modified version of the Uniform Trade Secrets Act, which was drafted by the National Conference of Commissioners on Uniform State Laws in 1970 and amended in 1985. According to the text of the Uniform Trade Secrets Act, a “trade secret” is:

information, including a formula, pattern, compilation, program device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from no being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Trade secret misappropriation can be thought of as a type of unfair competition. According to the Uniform Trade Secrets Act, misappropriation is defined as:

(i) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (ii) disclosure or use of a trade secret of another without express or implied consent by a person who (A) used improper means to acquire knowledge of the trade secret; or (B) at the time of disclosure or use knew or had reason to know that his knowledge of the trade secret was (I) derived from or through a person who has utilized improper means to acquire it; (II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (C) before a material change of his position, knew or had reason to know that it was a trade secret ad that knowledge of it had been acquired by accident or mistake.

The Uniform Trade Secrets Act defines “improper means” to include “theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.”

Remedies for infringement of a trade secret include damages, profits, reasonable royalties, and an injunction. With respect to damages the Uniform Trade Secrets Act explains:

(a) Except to the extent that a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation renders a monetary recovery inequitable, a complainant is entitled to recover damages for misappropriation. Damages can include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss. In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty for a misappropriator’s unauthorized disclosure or use of a trade secret.

(b) If willful and malicious misappropriation exists, the court may award exemplary damages in the amount not exceeding twice any award made under subsection (a).

With respect to injunctive relief the Uniform Trade Secrets Act explains:

(a) Actual or threatened misappropriation may be enjoined. Upon application to the court an injunction shall be terminated when the trade secret has ceased to exist, but the injunction may be continued for an additional reasonable period of time in order to eliminate commercial advantage that otherwise would be derived from the misappropriation.

(b) In exceptional circumstances, an injunction may condition future use upon payment of a reasonable royalty for no longer than the period of time for which use could have been prohibited. Exceptional circumstances include, but are not limited to, a material and prejudicial change of position prior to acquiring knowledge or reason to know of misappropriation that renders a prohibitive injunction inequitable.

(c) In appropriate circumstances, affirmative acts to protect a trade secret may be compelled by court order.

Attorneys fees are also available under the Uniform Trade Secret Act if the misappropriate is willful and malicious, or if a motion to terminate an injunction is made in bad faith. Some statutes also provide for enhanced damages and attorneys fees in certain circumstances.


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Join the Discussion

3 comments so far.

  • [Avatar for Lance Arnold]
    Lance Arnold
    August 4, 2016 09:07 pm

    I am putting together a presentation to license my invention, should I have the personnel sign a confidentiality and a trade secret agreement before I begin the presentation?

  • [Avatar for Anon]
    April 12, 2016 08:21 pm

    Mr. Heller,

    Trade secrets may in fact be broader than what Gene indicates, and there is NO nexus required to any sense of “technology” – no matter how that word is defined.

    Your someday “business methods” has LONG been present. Even more to the point, the trade secret in a business sense need not even rise to the level of being a process at all!

    I take it then that your hands on experience with trade secrets is a little “light” (not that such is bad, or that I am attempting to put you down – it’s just that you appear rather naive about what trade secrets can encompass).

  • [Avatar for Edward Heller]
    Edward Heller
    April 12, 2016 03:26 pm

    Gene: “A trade secret is defined as any valuable business information that is not generally known and is subject to reasonable efforts to preserve confidentiality. ”

    That seems too broad and includes virtually any confidential information, for example, the salaries of its workers.

    When I think of trade secrets, I think in term of technology: something the owner knows that others do not know that enables him to produce goods and services better or more cheaply.

    Obviously, the issue may arise someday whether “business methods” are protectable under trade secret law. I can see good arguments on both sides of that equation.

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