Trade secret
A trade secret is information that a business keeps confidential to maintain a competitive advantage. Well-known examples include the Coca-Cola formula and the recipe for Kentucky Fried Chicken.
Unlike other forms of intellectual property, trade secrets do not require formal registration and can remain protected indefinitely, provided the information continues to meet the legal requirements for trade secret status. Instead, non-disclosure agreements, among other measures, are commonly used to keep the information secret.
Like other IP assets, trade secrets may be sold or licensed. Unauthorized acquisition, use, or disclosure of a trade secret by others in a manner contrary to honest commercial practices is considered misappropriation of the trade secret. If trade secret misappropriation happens, the trade secret holder can seek various legal remedies.
Definition
The precise definition of a trade secret varies by jurisdiction, as do the types of information eligible for trade secret protection. However, in general, trade secrets are confidential information that is:- not generally known among or accessible to individuals within the relevant business sector;
- commercially valuable because it is secret; and
- subject to reasonable steps taken by the rightful holder of the information to keep it secret.
Trade secret protection covers confidential information, which can include technical and scientific data, business and commercial information, and financial records. Even "negative" information, like failed experiments, can be valuable by helping companies avoid repeating costly mistakes.
In international law, while "trade secrets" and "confidential information" are often used interchangeably, trade secrets are technically a subset of confidential information. To qualify as a trade secret, confidential information must meet the specific requirements set by a country's national laws, which are often influenced by Article 39 of the TRIPS Agreement.
History
Early origins
Commentators like A. Arthur Schiller have argued that trade secrets were protected under Roman law by a claim known as actio servi corrupti, meaning an "action for making a slave worse" or "an action for corrupting a servant." The Roman law is described as follows:he Roman owner of a mark or firm name was legally protected against unfair usage by a competitor through the actio servi corrupti... which the Roman jurists used to grant commercial relief under the guise of private law actions. "If, as the writer believes , various private cases of action were available in satisfying commercial needs, the state was acting in exactly the same fashion as it does at the present day."
The suggestion that trade secret law has its roots in Roman law was introduced in 1929 in a Columbia Law Review article called "Trade Secrets and the Roman Law: The Actio Servi Corrupti", which has been reproduced in Schiller's, An American Experience in Roman Law 1.
However, the University of Georgia Law School professor Alan Watson argued in Trade Secrets and Roman Law: The Myth Exploded that the actio servi corrupti was not used to protect trade secrets. Rather, he explained:
Schiller is sadly mistaken as to what was going on.... The actio servi corrupti presumably or possibly could be used to protect trade secrets and other similar commercial interests. That was not its purpose and was, at most, an incidental spin-off. But there is not the slightest evidence that the action was ever so used. In this regard the actio servi corrupti is not unique. Exactly the same can be said of many private law actions including those for theft, damage to property, deposit, and production of property. All of these could, I suppose, be used to protect trade secrets, etc., but there is no evidence they were. It is bizarre to see any degree the Roman actio servi corrupti as the counterpart of modern law for the protection of trade secrets and other such commercial interests.
Early case law
Modern trade secret law is primarily rooted in Anglo-American common law. The earliest recorded court case was the 1817 English case Newbery v. James, which involved a secret formula for gout treatment. In the United States, this concept was first recognized in the 1837 case Vickery v. Welch, involving the sale of a chocolate factory and the seller’s agreement to keep the secret recipe confidential.Newbery and Vickery only awarded compensation for losses and did not issue orders to prevent the misuse of secrets. The first English case involving injunctive relief was Yovatt v. Winyard in 1820, where the court issued an injunction to prevent a former employee from using or disclosing recipes he had secretly copied from his employer's veterinary medicine practice.
In the United States, the 1868 Massachusetts Supreme Court decision in Peabody v. Norfolk is one of the most well-known and well-reasoned early trade secret cases, as it established foundational legal principles that continue to be central to common law. In this case, the court ruled that Peabody’s confidential manufacturing process was a protectable trade secret and issued an injunction preventing former employees from using or disclosing it after they shared it with a competitor.
Uniform lawmaking and legislation
In 1939, the Restatement of Torts, published by the American Law Institute, offered, among other things, one of the earliest formal definitions of a trade secret. According to Section 757, Comment b, a trade secret may consist of "any formula, pattern, device, or compilation of information which is used in one's business, and which gives the business an opportunity to obtain an advantage over competitors who do not know or use it." This definition became widely used by courts across the United States. As the first attempt to outline the accepted principles of trade secret law, the Restatement served as the primary authority adopted in virtually every reported case.Trade secret law saw further development in 1979 when the Uniform Law Commission introduced a model law known as the Uniform Trade Secrets Act, which was later amended in 1985. The UTSA defines the types of information eligible for trade secret protection, establishes a private cause of action for misappropriation, and outlines remedies such as injunctions, damages, and, in certain cases, attorneys' fees. It has since been adopted by 48 states, along with the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, with New York and North Carolina as the exceptions.
The UTSA influenced the Defend Trade Secrets Act of 2016, which created a federal civil cause of action for trade secret misappropriation, allowing plaintiffs to file cases directly in federal courts if "the trade secret is related to a product or service used in... interstate or foreign commerce."
International standards
Trade secret law is governed by national legal systems. However, international standards for protecting secrets were established as part of the TRIPS Agreement in 1995. Article 39 of TRIPS obligates member countries to protect “undisclosed information” from unauthorized use conducted “in a manner contrary to honest commercial practices,” including actions such as breach of contract, breach of confidence, and unfair competition. For the information to qualify, it must not be generally known or easily accessible, must hold value due to its secrecy, and must be safeguarded through “reasonable steps” to keep it secret.Value
Trade secrets are an important, but invisible component of a company's intellectual property. Their contribution to a company's value can be major. Being invisible, that contribution is hard to measure. Still, research shows that changes in trade secrets laws affect business spending on R&D and patents. This research provides indirect evidence of the value of trade secrecy.Protection
Unlike other forms of intellectual property, trade secrets do not require formal registration and can be protected indefinitely, as long as they remain secret. Maintaining secrecy is both a practical necessity and a legal obligation, as trade secret owners must take "reasonable" measures to protect the confidentiality of their trade secrets to qualify for legal protection. "Reasonable" efforts are decided case by case, considering factors like the type and value of the secret, its importance to the business, the company’s size, and its organizational complexity.The most common reason for trade secret disputes to arise is when former employees of trade secret-bearing companies leave to work for a competitor and are suspected of taking or using valuable confidential information belonging to their former employer. Legal protections include non-disclosure agreements, and work-for-hire and non-compete clauses. In other words, in exchange for an opportunity to be employed by the holder of secrets, an employee may agree to not reveal their prospective employer's proprietary information, to surrender or assign to their employer ownership rights to intellectual work and work-products produced during the course of employment, and to not work for a competitor for a given period of time.
Violating the agreement generally carries the possibility of heavy financial penalties, thus disincentivizing the revealing of trade secrets. Trade secret information can be protected through legal action including an injunction preventing breaches of confidentiality, monetary damages, and, in some instances, punitive damages and attorneys’ fees too. In extraordinary circumstances, an ex parte seizure under the Defend Trade Secrets Act also allows for the court to seize property to prevent the propagation or dissemination of the trade secret.
However, proving a breach of an NDA by a former stakeholder who is legally working for a competitor or prevailing in a lawsuit for breaching a non-compete clause can be very difficult. A holder of a trade secret may also require similar agreements from other parties, such as vendors, licensees, and board members.
As a company can protect its confidential information through NDA, work-for-hire, and non-compete contracts with its stakeholders, these protective contractual measures effectively create a monopoly on secret information that does not expire as would a patent or copyright. The lack of formal protection associated with registered intellectual property rights, however, means that a third party not bound by a signed agreement is not prevented from independently duplicating and using the secret information once it is discovered, such as through reverse engineering.
Therefore, trade secrets such as secret formulas 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.
Because protection of trade secrets can, in principle, extend indefinitely, it may provide an advantage over patent protection and other registered intellectual property rights, which last for a limited duration. For example, the Coca-Cola company has no patent for the formula of Coca-Cola and has been effective in protecting it for many more years than the 20 years of protection that a patent would have provided. In fact, Coca-Cola refused to reveal its trade secret under at least two judges' orders.
Trade secret legal protection can reduce the knowledge spillover, which enhances the knowledge spread and technology improvement. Therefore, while trade secret laws strengthen R&D exclusivity and encourage firms to engage in innovative activities, broadly reducing knowledge spillovers can harm economic growth.