Trade secrets represent some of the most valuable assets a business can possess. From customer lists and pricing strategies to manufacturing processes and proprietary software, confidential business information provides competitive advantages that companies depend upon for success. Protecting trade secrets requires understanding what qualifies for protection and implementing comprehensive strategies to maintain confidentiality in an era of employee mobility and digital information sharing.
What Qualifies as a Trade Secret
A trade secret is information that derives economic value from being secret and is subject to reasonable efforts to maintain its secrecy. This definition encompasses a broad range of business information, including formulas, patterns, compilations, programs, devices, methods, techniques, and processes. The key requirements are that the information provides competitive advantage because competitors do not have it, and that the owner takes appropriate steps to keep it confidential.
Not all confidential information qualifies as a trade secret. Information that is generally known in the industry or easily discoverable through legitimate means typically lacks protection. Similarly, information that provides no economic benefit from being secret falls outside trade secret law. However, combinations of otherwise known elements may qualify if the particular combination is not generally known and provides competitive value.
Common Types of Trade Secrets
Businesses protect many categories of information as trade secrets. Technical trade secrets include manufacturing processes, chemical formulas, software code, engineering specifications, and product designs. The formula for Coca-Cola and the recipe for KFC's chicken coating are famous examples of technical trade secrets that have been protected for generations.
Business trade secrets encompass customer and supplier lists, pricing information, marketing strategies, business plans, and financial data. While individual pieces of information like customer names might be publicly available, compiled lists with contact details, purchase history, and other details often qualify for protection. Sales strategies, cost structures, and upcoming product plans similarly deserve protection when they provide competitive advantages.
Reasonable Secrecy Measures
Trade secret protection requires that owners take reasonable steps to maintain secrecy. What constitutes reasonable measures varies based on the nature of the information, the size of the business, and industry practices. Courts examine the totality of circumstances when determining whether secrecy efforts were adequate, and failure to implement appropriate protections can result in loss of trade secret status.
Physical security measures include limiting access to sensitive areas, using locked storage for confidential documents, and implementing visitor protocols. Digital security involves password protection, encryption, access controls, and network security measures appropriate to the sensitivity of the information. Employee-focused measures include confidentiality agreements, training on information handling, and clear policies identifying confidential information.
Employee Confidentiality Agreements
Confidentiality agreements, also called non-disclosure agreements, form a cornerstone of trade secret protection. These contracts create explicit legal obligations for employees and others with access to confidential information. Well-drafted agreements identify the categories of information considered confidential, specify how that information must be handled, and establish the consequences of unauthorized disclosure.
Timing matters with confidentiality agreements. Having employees sign NDAs at the beginning of employment, when consideration is provided through the job itself, is standard practice. Requiring existing employees to sign new agreements may require additional consideration beyond continued employment in some jurisdictions. Agreements should be renewed or reaffirmed when employees change positions or gain access to different confidential information.
Exit Procedures and Departing Employees
When employees leave, whether voluntarily or involuntarily, proper exit procedures help protect trade secrets. Exit interviews should remind departing employees of their ongoing confidentiality obligations and collect all company property, devices, and documents. Requiring employees to certify that they have returned all confidential information and will honor their agreements creates documentation useful if problems arise later.
Technical measures complement procedural ones. Promptly terminating access to company systems, email, and cloud services prevents continued access to confidential information. For employees departing to competitors, additional scrutiny of their recent activities may be warranted, including review of email, downloads, and document access logs to identify potential misappropriation before it becomes a larger problem.
Trade Secrets vs. Patents
Businesses often face a choice between seeking patent protection or maintaining information as a trade secret. Patents provide exclusive rights for a limited period, typically twenty years, but require public disclosure of the invention. Trade secrets can potentially last forever but provide no protection against independent discovery or reverse engineering.
The appropriate choice depends on the nature of the information and business circumstances. Inventions that competitors could easily reverse engineer are often better suited for patent protection, while information that can be kept secret indefinitely may be better protected as trade secrets. Some businesses pursue both strategies, patenting core technologies while keeping manufacturing refinements and business information as trade secrets.
When Trade Secrets Are Compromised
Despite best efforts, trade secrets sometimes become compromised through employee departures, data breaches, or corporate espionage. Acting quickly when misappropriation is suspected is critical to minimizing damage and preserving legal options. This includes conducting internal investigations, preserving evidence, and consulting with legal counsel about available remedies.
Both federal law, through the Defend Trade Secrets Act, and state laws provide remedies for trade secret misappropriation. Remedies include injunctions preventing further use or disclosure, damages for actual losses and unjust enrichment, and in cases of willful and malicious misappropriation, exemplary damages and attorney fees. Understanding these legal options helps businesses respond effectively when their confidential information is stolen or misused.