What Is a Trade Secret?
Let me tell you directly: a trade secret is any piece of company information, like a practice, process, formula, technique, or device, that you keep confidential and share only with those who absolutely need to know.
This kind of information gives your company a real edge over competitors, often coming from your own internal research and development efforts.
In the United States, for something to legally count as a trade secret, you have to make reasonable efforts to keep it hidden, it must have actual or potential economic value, and it needs to be valuable to others who can't get it through legal means.
Trade secrets form part of your company's intellectual property, but unlike patents, they're not out in the open for everyone to see.
Key Takeaways
You should remember that trade secrets are pieces of information with real or potential economic value that help your company stay ahead of competitors.
They can vary by jurisdiction, but they always share three traits: they're not public, they provide some economic benefit, and they're actively protected.
In the US, they're covered by the Economic Espionage Act of 1996, and Coca-Cola's syrup recipe has stayed a trade secret for over 130 years.
Understanding a Trade Secret
Trade secrets can come in many forms, such as a proprietary process, instrument, pattern, design, formula, recipe, method, or practice that's not obvious to outsiders.
You might use them to build a business that outshines competitors or delivers real value to customers.
Definitions differ by jurisdiction, but they all have this in common: the information is confidential and not public, its secrecy brings economic benefits to you as the holder, and you actively protect that secrecy.
Think of trade secrets as the business world's version of classified documents, guarded just like top-secret government files.
Developing products and processes can be expensive, far more so than spying on competitors, so companies are motivated to uncover what makes rivals tick.
To safeguard your trade secrets, you might require employees who know them to sign non-disclosure agreements (NDAs) when they're hired. Non-compete agreements used to be an option, but the FTC banned them in April 2024.
Important Note on Protection
Here's a critical point: if you as the trade secret holder don't properly safeguard it, or if someone independently discovers it, releases it, or it becomes common knowledge, you lose all protection for that secret.
Trade Secret Legal Treatment
In the US, trade secrets are defined and protected under the Economic Espionage Act of 1996, found in Title 18, Part I, Chapter 90 of the US Code.
They also come under state jurisdiction, and following a 1974 ruling, each state can set its own rules. About 48 states and the District of Columbia have adopted versions of the Uniform Trade Secrets Act (UTSA).
Defend Trade Secrets Act of 2016
The latest major law on this is the Defend Trade Secrets Act of 2016, which allows private civil actions under federal law for trade secret misappropriation.
Federal law defines trade secrets as all forms and types of financial, business, scientific, technical, economic, or engineering information.
This includes patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes.
It covers tangible or intangible info, no matter how it's stored, compiled, or memorialized—physically, electronically, graphically, photographically, or in writing.
The law requires that you've taken reasonable measures to keep the information secret, and that it derives independent economic value from not being generally known or easily obtainable by proper means to someone who could profit from it.
Other jurisdictions might handle trade secrets differently—some see them as property, others as a contract right.
Examples
You'll find trade secrets in both tangible and intangible forms. For instance, Google's search algorithm is intellectual property in code, constantly updated to enhance and protect its operations.
Coca-Cola's formula, locked in a vault as a reasonable secrecy measure, is a classic example of a trade secret recipe that's never been patented and has remained hidden for over 130 years.
The New York Times Bestseller list is a process trade secret; it factors in sales from chains, independents, and wholesalers, but isn't just raw sales numbers—sometimes lower-selling books make it while higher ones don't.
Why Is Protecting Trade Secrets Important?
Protection matters because trade secrets can directly impact your company's revenue, profits, longevity, and even survival, going beyond just your own efforts to keep them secret.
What Cannot Be a Trade Secret?
Information that's common knowledge, at least within your industry, can't be a trade secret. Also, anything without economic value or the potential for it likely won't qualify.
How Long Does a Trade Secret Last?
It lasts as long as it holds financial value and you continue striving to keep it confidential.
The Bottom Line
Trade secrets are pieces of information with potential or actual economic value to your company—and to others who can't legally get them—that you make ongoing efforts to shield from public knowledge. They're protected by both federal and state laws.
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