What Is a Trade Secret?
A trade secret encompasses any practice or process within a company that is not generally known outside of it. This confidential information grants the company an edge over its competitors and typically arises from internal research and development. For legal recognition in the United States, a company must exert a reasonable effort to conceal the information from the public, ensuring its inherent economic value and informational content. Unlike patents, trade secrets remain undisclosed to the public.
Key Takeaways
- Trade secrets consist of undisclosed practices and processes that give businesses a competitive edge.
- Although specifics vary by jurisdiction, all trade secrets share common traits: secrecy, economic benefit, and vigorous protection.
- In the U.S., the Economic Espionage Act of 1996 safeguards trade secrets.
Understanding a Trade Secret
Trade secrets can manifest in various forms: proprietary processes, instruments, patterns, designs, formulas, recipes, methods, or practices not evident to others. These are utilized to establish a business advantage or add customer value. Regardless of jurisdiction, trade secrets exhibit certain consistent characteristics:
- They are non-public.
- Secrecy provides economic benefits.
- Efforts are made to actively protect the secrecy.
Failure to safeguard trade secrets or their independent discovery, release, or public knowledge nullifies their protection. Some jurisdictions refer to trade secrets as “confidential information.” Within the business world, trade secrets are akin to government-classified documents.
To shield trade secrets, companies often require employees privy to this information to sign non-disclosure agreements (NDAs). The prohibition of non-compete agreements by the FTC came into effect in April 2024.
Trade Secret Treatment in the United States
The Economic Espionage Act of 1996 outlines the protection of U.S. trade secrets, covered in Title 18, Part I, Chapter 90 of the U.S. Code. States have varied authority due to a 1974 ruling, adopting individual trade secret regulations. Forty-seven states and the District of Columbia have embraced some version of the Uniform Trade Secrets Act (UTSA). The Defend Trade Secrets Act of 2016 enables federal involvement in cases of trade secret misappropriation.
Federal law defines trade secrets as “all forms and types of” information related to finance, business, science, technology, economics, and engineering. This encompasses:
- Patterns
- Plans
- Compilations
- Program devices
- Formulas
- Designs
- Prototypes
- Methods
- Techniques
- Processes
- Procedures
- Programs
- Codes
Information—whether tangible, intangible, physically stored, compiled, or memorialized electronically, graphically, photographically, or in writing—is protected if the owner has taken reasonable measures to maintain its secrecy and it holds independent economic value by not being readily known or ascertainable.
Other jurisdictions may view trade secrets as property or equitable rights, varying their treatment accordingly.
Real-World Examples of Trade Secrets
Trade secrets abound, both tangible and intangible. A few notable examples include:
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Google’s Search Algorithm: Google holds its search algorithm as a closely-guarded intellectual property enshrined in code, undergoing regular updates to enhance and secure its operations.
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Coca-Cola’s Secret Formula: Coca-Cola’s famously secret formula, kept locked in a vault and unpatented, remains unrevealed to the world.
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New York Times Bestseller List Methodology: The compilation process for the New York Times Bestseller list is a trade secret. It integrates various sales data sources (chain stores, independent stores, wholesaler information) but does not rely solely on sales figures, allowing books with varying sales metrics to appear on the list.
Related Terms: competitive advantage, intellectual property, patent, non-disclosure agreement, designs, formulas.
References
- FTC. “FTC Announces Rule Banning Noncompetes”.
- Cornell Law School. “Trade secret”.
- Cornell Law School. “Trade secret”.
