Skip to main content

Trade Secrets: What Are They and How Can They Protect Your Business’s Valuable Assets?

When growing a business, entrepreneurs are often concerned with how to best protect their creations and ideas. While trademark, copyright and patent protection are commonly used to protect intellectual property the benefits of trade secret protection should not be overlooked. Whether a business is trying to protect a food recipe, cosmetics formula, or list of important customers, trade secret protection can be an effective option.  

What is a Trade Secret

A trade secret is any “secret formula, pattern, compilation, program, device, method, technique, process, or other information”[1] that an owner has made reasonable efforts to keep secret and which gives that owner an economic advantage over competitors. There is no limit on the form that a trade secret may take. For example, something can still qualify as a trade secret even if it can be retained in one’s memory.[2] Unlike a trademark or patent, trade secret protection does not require any filing or registration with a state or federal agency. Additionally, unlike a patent, novelty is not a requirement for trade secret protection. This means that two different entities can develop the same secret and both can protect it as a trade secret. 

Requirements for Trade Secret Protection

            It is important to note that there is no presumption that a trade secret exists. The owner of a claimed trade secret is responsible for proving the existence of the trade secret. Businesses interested in trade secret protection should be mindful of three core requirements in proving the existence of a trade secret: 

(1)   The creation must actually be a secret. This means that any public disclosure of the secret relinquishes the owner’s protectable right. Of course, business owners often need to share secret information with their employees, manufacturers, or suppliers. In that case, nondisclosure agreements become key in protecting the secret. Furthermore, an owner does not lose trade secret protection if they disclose the information to a party that is bound by a duty of confidentiality (e.g., their lawyer).

(2)   The owner must make reasonable efforts to protect the secret from disclosure. Trade secret protection is largely dependent on the extent of the owner’s efforts to protect. What is considered “reasonable” efforts might depend on the point in time and the size of the business. Generally, the following is evidence of reasonable efforts:

●      Confidentiality agreements

●      Notifying employees of the trade secret status of information

●      Restricted access to the secret

●      Password protection when secrets are stored on a computer

It is also recommended that businesses only disclose secret information on a “need to know” basis and continuously remind employees of their confidentiality agreements.

(3)   The secret must give the owner an economic advantage over competitors. This is often the easiest element to satisfy. A secret is considered as having an economic advantage when it would require cost, time, and effort for the competitor to duplicate.

Advantages and Disadvantages

            Trade secrets have several benefits. First, as previously mentioned, trade secrets do not require any filings or registrations. This can make trade secret protection a much cheaper option than trademarks or patents. Second, unlike a patent, a trade secret is not limited to any specific term. As long as the trade secret is protected and retains economic value, it can be protected indefinitely. Third, trade secrets can protect information that does not meet the requirements of a patent or copyright, such as the novelty requirement.

            Although trade secrets certainly present many benefits, there are some limitations. One limitation is the Independent Development Doctrine, which states that there is no remedy against another party if they independently develop the information (e.g., without theft, espionage, or improper disclosure) or use reverse engineering. However, trade secret protection is not abandoned if that other party also keeps the information secret and the economic value is not ruined. Additionally, a business owner must ensure that he or she is continuously making “reasonable efforts” to keep the information secret. If efforts are reduced or cease, then the owner risks losing the trade secret protection. Lastly, the statute of limitations -- the time in which an owner can bring suit for a trade secret misappropriation -- is relatively short. An owner must bring suit within three years after the claimed misappropriation is discovered. Available remedies for trade secret misappropriation include: injunctive relief (an order restraining the party from using the secret), monetary damages, and attorneys’ fees.


[1]The author relied on this publication for the information provided here: https://plus.lexis.com/api/permalink/da8c4816-9ad1-4208-9f63-3be9eb2a8422/?context=1530671

[2] See, e.g., Pelican Bay Forest Prods., Inc. v. W. Timber Prods., Inc., 297 Or. App. 417, 431 (2019).

https://depositphotos.com/50721013/stock-illustration-top-secret-stamp.html


By Ivona Dimov

Labels:

Popular posts from this blog

A Breakdown of Fair Use

Is your small business trying to spruce up your website by adding some new pictures? Want to raise money for your nonprofit by hosting a community movie night? Trying to update your marketing materials with a brand-new promotional video with cool background music? If so, you could be opening yourself up to potential copyright lawsuits and should read up on the doctrine of fair use! An important aspect of starting a small business or nonprofit is exposure, and as organizations work to market themselves and increase awareness of their goals and activities in the communities they serve, they could open themselves up to legal danger. Litigation is expensive, and the cost can be especially devastating to small businesses and nonprofits. In all promotional or informational materials (including brochures, flyers, websites, etc.), organizations need to be sure that they are legally protected from copyright infringement claims.   What is Fair Use? Fair use is a legal doctrine that per...
Read more

BIPOC Executive Leadership Representation in Nonprofits

  Halloween has already passed, but as a lowly law student with arithmophobia, I feel compelled to provide you all with some spooky statistics in November. It is no secret that the upper ranks of America’s professional workforce have a diversity problem, and in particular, a racial diversity problem. Unfortunately, this remains true in the nonprofit sector: -           Studies have shown that just 20% of nonprofit executive directors and CEOs are people of color, and 66% of nonprofit Board members are white. [1] -           Another study reported that between July 2019 and January 2024, “ 47% of all staff… 70% of CEOs/Executive Directors (EDs)... as well as 66% of Board members identify as white.” [2] Compare these figures with the general population per USAFacts: over 40% of the U.S. population identified as non-white in 2023, a figure that has grown over 17% since 1990. [3] ...
Read more

Michigan Low-Profit Limited Liability Company (L3C): Mixing Social Impact and Profit

              Given the variety of legal structures, it is essential to pick the one that is best for your business and the goals you’ve laid out for them. And, in this age of conscious consumerism, businesses have looked towards merging both societal benefit and profit. [1] With that in mind, businesses are looking towards the sort of entity forms that provide a structure to achieve this dual-pronged purpose. One such entity in particular that has gathered attention is the relatively new statutory business entity the Low-Profit Limited Liability Company (L3C) . [2] An L3C is considered an entity for entrepreneurs who “value purpose and profits,” and is intended to provide entrepreneurs with the opportunity to form an entity that caters to both these goals. [3] The L3C is the states’ response to the demand of a growing number of social entrepreneurs that seek to combine the financial benefits of a traditional for-profit entity with the social benefi...
Read more