Trade secrets include formulas, practices, processes, designs, instruments, patterns, or compilations of information, which are not generally known and cannot be easily found out, by which a business can obtain an economic advantage over competitors. In some countries, trade secrets are called
"confidential information". Trade secrets, like patents, trademarks and copyrights, are a form of
In the United States, trade secrets are not protected by federal law to the same extent as patents, trademarks or copyrights. Patents, trademarks and copyrights are protected under federal statutes, the Patent Act, Trademark (or Lanham) Act and the Copyright Act. But trade secrets are protected primarily under state laws, and most states have enacted the Uniform Trade Secrets Act (UTSA), except for Massachusetts, New York, and North Carolina. An important difference between trade secrets and the other forms of intellectual property is that trade secrets are protected only when they are not disclosed to the public.
To acquire a patent, full information about the method or product has to be supplied to the U.S. Patent & Trademark Office (or a similar agency in another country) and upon publication or issuance, will then be available to all. When the patent expires, it is legal for competitors to copy the method or product. The temporary monopoly on the subject matter of the patent is the benefit gained in exchange for disclosing the information to the public.
Trade secret protection of some details about an invention is not always incompatible with patent protection of other aspects of the invention. When you apply for a patent you can no longer maintain a trade secret on what is disclosed about the invention in the patent application after it is issued or published.. In order to obtain a patent you must disclose enough about your invention so that a person of ordinary skill in the art (i.e., the area of technology to which the invention relates) will be able to both make and use the invention. (To obtain a patent in the United States, you also have to disclose the best mode of practicing your invention, but under the America Invents Act passed in 2011, failure to disclose the best mode is no longer grounds for holding the patent invalid.) The critical time for satisfying this disclosure requirement is at the time the application is filed. In many if not most situations, improvements will be made to an invention even after filing of the patent application, and additional information will be learned. None of this additional information must be disclosed and can instead be kept as a secret.
Patent licenses almost always include clauses that require the inventors to disclose any trade secrets they have. Often, it is information not disclosed in the patent that is the most commercially valuable. If you are attempting to sell or license your patent rights, you want to make sure that you take steps to continue to maintain your trade secrets as secrets, otherwise they will be lost. Before disclosing any secrets not already protected by an issued patent, you should use a non disclosure agreement.
Compared to patents, the advantages of trade secrets are that a trade secret:
(1) is not limited in time, but continues indefinitely as long as the secret is not revealed to the public, whereas a patent is only in force for a specified time, after which others may freely copy the invention;
(2) does not require any registration costs or compliance with any formalities;
(3) has an immediate effect; and
(4) does not imply any disclosure of the invention to the public.
The disadvantages of trade secrets are that:
(1) others may be able to legally discover the secret and be thereafter entitled to use it;
(2) others may obtain patent protection for legally discovered secrets; and
(3) a trade secret is more difficult to enforce than a patent.
To acquire rights in a trademark under U.S. law, one must simply use the mark in commerce. It is possible to register a trademark in the United States, both at the federal and state levels. (Registration of trademarks confers some advantages, including stronger protection in certain respects, but it is not required in order to get protection. Registration is required in order to file a lawsuit for copyright infringement. Other nations have different trademark and copyright policies and this information may not apply to them.) Assuming that 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 (as a 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 required 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.)
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, although subject to differing interpretations, are common to all such definitions, namely, a trade secret is information that:
Is not generally known to the public;
Confers some sort of economic benefit on its holder (where this benefit must derive specifically from its not being publicly known, not just from the value of the information itself); and
Is the subject of reasonable efforts to maintain its secrecy.
These three aspects are incorporated in Article 39 of the Agreement on Trade Related Aspects of Intellectual Property Rights
("TRIPS") administered by the World Trade Organization.
Under U.S. law, a trade secret, as defined under 18 U.S.C. § 1839 (3) (A) and (B), has three parts: (1) information; (2) reasonable measures taken to protect the information; and (3) independent economic value from not being publicly known.
Trade secrets, by definition, are not disclosed to the world at large. Owners of trade secrets protect trade secret information from competitors by adopting special procedures for handling it, as well as technological and legal security measures. Legal protections include non disclosure agreements
("NDAs") and non compete clauses. As a condition of employment by the holder of trade secrets, employees may be required to sign an agreement not to reveal their
employer's proprietary information. Employee may also surrender or assign to their employer the right to their own intellectual work produced during the course (or as a condition) of employment. Violation of the agreement generally carries the possibility of heavy financial penalties. These penalties operate as a disincentive to reveal trade secrets. However, proving a breach of an NDA against a former employee who is legally working for a competitor
can be very difficult. A holder of a trade secret may also require similar agreements from other parties he deals with, such as vendors or licensees.
Companies can protect their confidential information through non compete and non disclosure contracts with their employees. (Such contracts must be within the constraints of employment law, including only restraint that is reasonable in geographic and time scope). The law of protection of confidential information effectively allows a perpetual monopoly in secret information it does not expire as would a patent. But the lack of formal protection means that a third party is not prevented from independently duplicating and using the secret information, once it is discovered.
Secret formulae are often protected by restricting the key information to a few trusted individuals. Famous examples of products protected by trade secrets are Chartreuse liqueur and Coca Cola. Protection of a trade secret can, in principle, extend indefinitely, and therefore
may provide an advantage over patent protection, which lasts only for a specific period of time.
The French government once attempted to take over the production of Chartreuse liqueur from the order of monks that made it, but as it did not have the secret formula that the monks used, the
government-produced Chartreuse liqueur was not of similar quality, so no one would buy it, and the business was eventually returned to the monks.
Coca Cola has no patent for its present formula, but has been very effective in protecting it for many more years than the twenty years of protection that a patent would have provided. (Its original formula was patented in the nineteenth century, but no patent was obtained for the revised formula.) It is said that only two executives know the complete formula, and they never travel together. In fact, Coca Cola refused to reveal its trade secret under at least two judges' orders, and pulled out of the Indian subcontinent to avoid doing so. The disadvantage is that there is no protection once information protected as a trade secret is uncovered by others, such as through reverse engineering, whereas patent has a guaranteed time of protection in exchange for disclosing the information to the public. One suspects that Coca-Cola and Pepsi-Cola employ chemists who can analyze each others= products, and that they have long since
"reverse engineered" their competitors' products, but it is good advertising to claim that they have a secret formula.
Companies often try to discover one another's trade secrets through lawful methods of reverse engineering or employee poaching on one hand, and potentially unlawful methods including industrial espionage on the other. Acts of industrial espionage are generally illegal in their own right under the relevant governing laws. 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. Under most trade secret regimes, a trade secret is not deemed to exist unless its purported holder takes reasonable steps to maintain its secrecy.)
Although some scholars see precedents for legal protection of trade secrets in ancient Roman law, trade secret law as we know it today in Anglo-American law made its first appearance in England in 1817 in
Newbery v. James, and in the United States in 1837 in Vickery v.
Welch. While those cases involved the first known common law causes of action based on a modern concept of trade secret law, neither involved injunctive relief (i.e., a court order prohibiting infringement); rather, they involved damages (i.e., monetary compensation) only. In England, the first case involving injunctive relief came in 1820 in
Yovatt v. Winyard, while in the United States, it took until the 1866 case
Taylor v. Blanchard.
Trade secrets law continued to evolve throughout the United States as a hodgepodge of state laws. In 1939, the American Law Institute issued the Restatement of Torts, containing a summary of trade secret laws across states, which served as the primary resource until the latter part of the century. Presently, only four states, Massachusetts, New Jersey, New York, and Texas, still rely on the Restatement as their primary source of guidance (other than their body of state case law). Trade Secrets were omitted from the Second Restatement of Torts.
Although trade secret law evolved under state common law, prior to 1974, the question of whether patent law preempted state trade secret law had been unanswered. In 1974, the United States Supreme Court issued the landmark decision,
Kewanee Oil Co. v. Bicron Corp., which resolved the question in favor of allowing the states to freely develop their own trade secret laws.
In 1979 the National Conference of Commissioners on Uniform State Laws promulgated the Uniform Trade Secrets Act (UTSA), and amended it in 1985. Forty-seven states have now adopted it as their basis for trade secret law. The USTA is fairly short as legislative enactments go, having only twelve sections.
Another significant development is the Economic Espionage Act of 1996 (18 U.S.C.
§ 1831), 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.)
Note that "uniform" laws are not passed by Congress; rather, they must be passed separately by each
state's legislature. States often adopt non-uniform amendments to uniform laws. Furthermore, each
state's uniform laws are interpreted separately be each state's judiciary, and those separate interpretations are followed in cases in the federal courts. It may be asked what is the point of having a federal system of government, if the state laws are uniform. I suppose that the answer is that state laws are not required to be uniform, so one state is able to experiment with a non-uniform law, at little or no risk to the rest of the United States. Such experiments are more likely in a federal system, than in a unitary national government. Other advantages of a federal system are that it makes possible more participatory democracy than in a unitary national government, that dispersion of power reduces the risk of dictatorship, and that laws may be adapted to local circumstances.
In British 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 Court of Appeal of England and Wales, in the case of
Saltman Engineering Co. Ltd. v. Campbell Engineering Ltd., held that the action for breach of confidence is based on a principle of preserving
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.:
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; and
There must be an unauthorized 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 breaking and entering), 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. 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. A successful plaintiff is entitled to various forms of judicial relief, including an injunction, an account of profits or an award of damages; and a declaration.