What Is a Trade Secret? Definition and Examples

A trade secret is a type of intellectual property. The rights to this confidential information may be sold or licensed.

Trade secrets are protected intellectual property, and with appropriate protection, you can enforce a trade secret like you would a patent or copyright.

With business markets becoming more global every day, it's more critical that you know the importance of your intellectual property so it can be protected.

What qualifies as a trade secret?

It's important to understand that not all secrets are worthy of being designated a trade secret. According to the United States Patent and Trademark Office (USPTO), information is legally considered a trade secret if it meets these three criteria:

• The information has either actual or potential independent economic value because it's not generally known to the public.
• It has value to others who cannot obtain that information legitimately.
• Reasonable efforts are taken to ensure this information is kept secret.

A trade secret can take many forms. This could include:

• Proprietary processes
• Instruments
• Patterns
• Designs
• Formulas
• Recipes
• Methods

In essence, a trade secret should be a practice that is not evident to others and would give one company an advantage over competitors and provide value to customers.

What are some examples of trade secrets?

Many large, successful companies have closely guarded trade secrets. Businesses from Coca-Cola with their uniquely flavored soda to Google and its algorithm have trade secrets that have made them a success over many decades.

To understand trade secrets a little better, let’s dive into some real-world examples of companies with closely guarded trade secrets.

Recipes

One type of trade secret that companies can protect is recipes. Companies from KFC to McDonald’s to Heinz ketchup have closely guarded recipes for their beloved foods and sauces. 

One such protected recipe is the composition of WD-40. The chemist who developed the anti-corrosion compound kept the formula secret and then sold it. Today, it is still the company’s only product.

In recent years, the company has gone so far as to confirm the recipe includes no known cancer-causing chemicals, but otherwise, has kept the composition of WD-40 secret since the inception of the product.

WD-40 keeps the formula in a bank vault to keep it from prying eyes. The only time it’s been removed was to change banks and for its 50th anniversary celebration. This protection is one of the reasons the company can maintain that the recipe is a trade secret, even though it has been reverse-engineered over the years.

Customer lists and databases

Another example of something a business might maintain as a trade secret is the business’ customer lists.

If a business wants to maintain its customer list as a trade secret, there are some guidelines they must follow. Those include:

• They must prove they’ve made a reasonable effort to protect the data and keep it confidential
• They’ve gained financial value by keeping the information from the public

Many online companies track customer information, such as spending habits, interests, and demographics, for targeted marketing. When properly protected, these databases can be considered a trade secret.

Recommendation algorithms

Another interesting modern trade secret is the recommendation algorithms used by companies such as Spotify, Netflix, and TikTok.

These companies want customers to spend as much time and interest in their products as possible. That means they need to hold your attention. One surefire way to do that is to show you content that you’re most likely to be interested in.

The recommendation algorithms that choose your short-form videos, TV shows, and music are highly protected and sought after. Many people have attempted to reverse engineer the algorithms to understand how to build their own products or to increase attention to their content, but the companies fiercely protect their proprietary algorithms.

The future of trade secret law is currently being tested with AI algorithms and other aspects of AI technology in interesting ways. 

What are the key differences between a trade secret and a patent?

If you’re looking to protect some proprietary aspect of your business, there are many different avenues you might be able to follow. Both trade secrets and patents can be used to protect your intellectual property. Not all protectable assets are eligible for both types of protection.

Public vs. private

Unlike a trade secret that can be kept under lock and key indefinitely, when you patent an invention, that information is made public. The patent owner has the right to exclude all others from making, using, or selling that intellectual property for 20 years, but that information is still out there in the open. And once your patent expires, your idea or invention is no longer protected.

Ease of establishment

Unlike patents, establishing ownership over trade secret information is much easier.

You actually have to apply for a patent, and it's an expensive process. It involves a lot of paperwork, great technical detail, and examination. It may take years before your patent is awarded.

A trade secret is much easier to establish. You don't have to file for protection. There are no government agencies overseeing them or hassles with compliance. The trade secret designation takes effect immediately. You just have to keep it a closely guarded secret.

Increased limitations

Many people wonder if you can actually patent a trade secret. Here's what to consider: Under trade secret law, the definition of protectable information is very broad, but if you're considering patent protection, there are more limitations. 

For instance, you can't patent a client list. Some intellectual property owners choose to patent certain aspects of their invention while keeping other aspects a trade secret. 

How you protect your information depends on your business and analyzing each type of intellectual property protection's applicability and benefits.

What is trade secret law?

Today, trade secret law is adjudicated under federal law and in federal courts. There are three pieces of federal legislation that provide protection to trade secrets.

• The Uniform Trade Secrets Act (UTSA), first published in 1979 and amended in 1985, was created to align the different state laws and support companies doing business in several states.
• The Economic Espionage Act of 1996 covers economic espionage that benefits any foreign government, foreign instrumentality, or foreign agent. It also criminalized the theft of trade secrets for commercial use. These crimes are prosecuted by the Department of Justice and are punishable by imprisonment and/or fines.
• The Defend Trade Secrets Act (DTSA), enacted by Congress in May 2016, amended the Economic Espionage Act to provide a civil cause of action for the theft of a trade secret. It doesn't preempt existing state trade secret law but gives trade secret owners the option of state or federal venues.

How to protect trade secrets and why it matters

When it comes to trade secrets, here's the bottom line. Some competitors will find it easier and more profitable to steal your information than spend the time and money in research and development trying to develop their own. And some unscrupulous employees may be tempted to steal your intellectual property to sell it to the highest bidder. So, you must take the necessary precautions to safeguard your valuable trade secrets to protect your business and your profits.

To protect your trade secret, you must take reasonable steps to maintain confidentiality, which might include:

• Request employees and contractors with access to the information sign non-disclosure agreements or confidentiality agreements
• Limit the number of people who have access to the trade secret
• Mark the trade secret as confidential
• Create restrictions around access to the trade secret, such as encrypting the file or physically locking it away
• Ask departing employees to return any confidential information they might have

If you think you have a misappropriated trade secret, you'll need to:

• Gather proof of the illegitimate access and usage of the trade secret
• Collect information proving that the use has caused the value of the trade secret to be lowered
• Get documentation that proves ownership of the trade secret
• Contact a lawyer experienced in working with intellectual property law

FAQs

Is it possible to sell and license trade secrets?

Yes, it is possible to sell and license trade secrets. If you are a trade secret holder, you can solicit interest and eventually sell that trade secret. You’ll need a clear contract denoting the sale and the agreement around the sale.

What happens if a trade secret is stolen?

Theft or unlawful sharing of a trade secret can result in federal legal consequences. The burden of proof is on the trade secret owner to prove that the trade secret was used and laws were violated.

It is not illegal for someone to discover a trade secret through public knowledge or to reverse engineer to figure out a trade secret.

Federal penalties for violating trade secret law can result in up to ten years in prison and fines up to $250,000 or twice the gross loss in business. The court will determine the severity of the crime and a fit punishment.

How can I protect a trade secret?

To protect a trade secret, you must:

• Maintain the secret
• Take reasonable steps to protect the secret from other's knowledge
• Show that the information derives independent economic value by staying a secret and gives your company a competitive edge

Boni Peluso contributed to this article.