Trade Secrets 101 – What You Need to Know

Trade Secrets 101 – What You Need to Know

This article will cover the basics of trade secrets – what they are, why they are valuable, and how they are protected.

First, what is a trade secret?

A trade secret can be any information that has economic value because the information itself is not generally known or readily accessible. When the information (let’s call it the “secret sauce”) is kept from becoming generally known or readily accessible to others, it is a trade secret. Once the information of economic value becomes known (no longer secret) it is no longer a trade secret.

Some common examples of trade secrets are recipes and formulas (think Coca-Cola and KFC), but other examples include business plans, customer lists, and other methods or designs. The key is that the information is protected, kept from becoming general knowledge, and has economic value due to the fact that it is not generally known or readily accessible.

How is a trade secret valuable?

A trade secret is an asset that falls into the category of property called intellectual property. The owners of intellectual property receive varying degrees of rights and protections depending on the type of intellectual property – generally categorized as copyrights, patents, trademarks, and trade secrets.

A trade secret enjoys certain advantages over other types of intellectual property protection. For example, while a patent grants a temporary monopoly on an invention, this type of protection generally lasts only 20 years and is granted by the government in exchange for publicly disclosing the details of the invention. A trade secret, on the other hand, can be protected as long as the owner takes reasonable steps to protect it and as long as it does not become generally known or readily accessible.

Additionally, like other intellectual property, a trade secret can be sold or licensed by the owner, keeping in mind that reasonable steps of protection need to be maintained. The key is that in order to remain valuable, the trade secret must remain secret by the buyer as well.

How is a trade secret protected?

Since trade secrets derive value from not being generally known or readily accessible, it makes sense that a trade secret is protected by keeping it secret. Protection requires keeping trade secret information confidential and taking reasonable steps to keep it secret.

The most extreme example is the Coca-Cola formula, which is kept in a massive vault at the World of Coca-Cola Museum in Atlanta, Georgia. More practical examples of reasonable steps include limiting access to trade secret information on a need-to-know basis within the business, keeping the information in a secure location with physical security protections, implementing cybersecurity measures to protect against unauthorized access, and requiring employees and contractors to sign non-disclosure agreements.

The key to trade secret status is maintaining the secrecy of the trade secret to derive economic benefit while the information is not generally known or readily accessible.

How long does trade secret protection last?

If trade secret information remains undisclosed through reasonable steps, a trade secret can last indefinitely. As long as the owner of the trade secret continues to take reasonable steps to maintain its secrecy, the trade secret is legally protected.

If, however, the information becomes generally known or accessible to others, it will no longer be a protected trade secret. A trade secret may lose its protection if it is publicly disclosed, intentionally or unintentionally, or if it is discovered through reverse engineering.

What if someone reverse engineers a trade secret?

Reverse engineering involves the process of working backward to determine how a finished product or good came to be. Reverse engineering can be done by determining a product’s recipe, functionality, composition, or process.

Reverse engineering may sound like cheating, but reverse engineering is generally legal. A competitor that successfully reverse engineers a trade secret can theoretically create and sell a product with the same formula as the original, with no legal consequences.

A famous copycat that won the reverse engineering war is the Oreo. The war between Hydrox and Oreo is the legendary story of how remarkably similar products fought for cookie supremacy. The high drama of this battle is best captured in the History Channel’s The Food That Built America: The Cookie Wars.

In some cases, however, if a trade secret holder sells or licenses out its trade secret, the use of a product may involve an agreement to not to reverse engineer it. In the modern era (well past the Cookie War) if a person or company reverse engineers something (for example, a computer program) that is subject to an agreement that prohibits reverse engineering in its terms and conditions, licensing agreement, or related policy, that person or company might have some legal troubles.

Contact Avisen today for more help with your intellectual property law questions.

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Kimberly Lowe

Kimberly Lowe

For over 20 years I have lawyered from the trenches with experience based on a comprehensive knowledge and understanding of how both for-profit and nonprofit enterprises operate. I guide entrepreneurs, executive management teams, boards of directors, multigenerational families, shareholders and investors through all aspects of the business life cycle from formation to operation to exit. Read Kim's Bio.

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