Questions and answers that explain what every business owner should know about trade secret law.

What's Below:

What is a trade secret?
How do businesses put trade secrets to use?
What rights does the owner of a trade secret have?
How can a business protect its trade secrets?
How can a business enforce its rights if someone steals or improperly discloses confidential information?
Is stealing trade secrets a crime?

What is a trade secret?

In most states, a trade secret may consist of any formula, pattern, physical device, idea, process or compilation of information that both:

• provides the owner of the information with a competitive advantage in the marketplace, and
• is treated in a way that can reasonably be expected to prevent the public or competitors from learning about it, absent improper acquisition or theft.

Some examples of potential trade secrets are a formula for a sports drink, survey methods used by professional pollsters, recipes, a new invention for which a patent application has not yet been filed, marketing strategies, manufacturing techniques and computer algorithms. Unlike other forms of intellectual property such as patents, copyrights and trademarks, trade secrecy is basically a do-it-yourself form of protection. You don't register with the government to secure your trade secret; you simply keep the information confidential. Trade secret protection lasts for as long as the secret is kept confidential. Once a trade secret is made available to the public, trade secret protection ends.

How do businesses put trade secrets to use?

Trade secrets often protect valuable technical information that cannot be sheltered under other forms of intellectual property law, such as the formula for Coca-Cola. Trade secrets may also:

• protect ideas that offer a business a competitive advantage, thereby enabling a company or individual to get a head start on the competition -- for example, an idea for a new type of product or a new website
• keep competitors from learning that a product or service is under development and from discovering its functional or technical attributes -- for example, how a new software program works
• protect valuable business information such as marketing plans, cost and price information and customer lists -- for example, a company's plans to launch a new product line
• protect "negative know-how" -- that is, information you've learned during the course of research and development on what not to do or what does not work optimally -- for example, research revealing that a new type of drug is ineffective, or
• protect any other information that has some value and is not generally known by your competitors -- for example, a list of customers ranked by how profitable their business is.

What rights does the owner of a trade secret have?

A trade secret owner can prevent the following groups of people from copying, using and benefiting from its trade secrets or disclosing them to others without permission:

• people who are automatically bound by a duty of confidentiality not to disclose or use trade secret information, including any employee who routinely comes into contact with the employer's trade secrets as part of the employee's job
• people who acquire a trade secret through improper means such as theft, industrial espionage or bribery
• people who knowingly obtain trade secrets from people who have no right to disclose them
• people who learn about a trade secret by accident or mistake, but had reason to know that the information was a protected trade secret, and
• people who sign nondisclosure agreements (also known as "confidentiality agreements") promising not to disclose trade secrets without authorization from the owner. This may be the best way for a trade secret owner to establish a duty of confidentiality. Even though employees are bound under an implied duty not to disclose sensitive information, all employees who come into contact with a company's trade secrets -- including high-level employees and company presidents -- should sign nondisclosure agreements, because such agreements make it clear to the employee that the company's trade secrets must be kept confidential. In addition, a company's lenders, investors and potential investors may require employees to sign nondisclosure agreements.

There is one group of people that cannot be stopped from using information protected under trade secret law. These are people who discover the secret independently, that is, without using illegal means or violating agreements or state laws. For example, it is not a violation of trade secret law to analyze (or "reverse engineer") any lawfully obtained product and determine its trade secret.