Shhh! It’s a (trade) secret

If you have a manufacturing process or a formula or even a way of doing business that is unique to you and that no-one else knows how to reproduce, then you have a trade secret.

Perhaps the best-known trade secret in the world is the original formula for Coca-Cola, which the soft drinks giant has kept closely guarded since 1891, and which is now sealed in a vault in the World of Coca-Cola museum in Atlanta, Georgia.

You probably don’t have a recipe for the next Coca-Cola in your files; but you will almost certainly have developed other trade secrets that are just as valuable to your business as that recipe is to Coca-Cola. Such trade secrets are part of the inventory of intellectual property and intangible assets (IP) you own, but unlike some IP, they can’t be registered. But that doesn’t mean they can’t be protected.

First off, what counts as a trade secret? Pretty much anything that:

1. Is not known generally to the public, including rivals;

2. Has commercial value because it is secret;

3. Is subject to reasonable steps to keep it secret.

Many different things can be classified as trade secrets, including processes, materials, data, plans, financial information, recipes and formulas.

They don’t have to be 130+ years old, like the Coca-Cola formula – they could be a business plan drawn up last week – but if you have information that is unique to your business, adds value to your operations that might be jeopardised if other people knew it, and can be kept confidential, then trade secrets are likely to be an important class of intangible asset for your company. 

How to keep your trade secrets secret

Your trade secrets should be:

1. clearly marked as confidential;

2. stored and catalogued securely;

3. only accessible to those with a “need to know.

The biggest risk with trade secrets concerns accidental or deliberate disclosure by employees, former employees or other confidants. The importance of trade secrets to the company should be made clear in employment contracts and backed up with company training.

A trade secret can be shared with people outside the company, for example professional advisers such as lawyers, suppliers or potential business partners or licensees. If such sharing is necessary, you should use robust formal legal documents such as Non Disclosure Agreements. It is good practice to have NDAs in place prior to discussing anything secret with a third party.

If you are licensing a trade secret, then the licensing agreement must obviously cover NDAs, requirements for secrecy, and audit rights for the IP owner to inspect and check the licensee’s operations to ensure the trade secret is being kept secret, as well as the usual clauses you would find in a licensing agreement.

Are Trade Secrets protected by law?

In most developed countries, yes. In the UK, The Trade Secrets (Enforcement, etc.) Regulations 2018 enacted the EU Directive on the Protection of Trade Secrets and is still in force despite the UK leaving the European Union.

These regulations recognise the value of trade secrets to companies and, under certain circumstances, gives them special treatment under law that can be used to stop suppliers, employees or others who obtain the information from using or repeating it without your permission.

Under UK law, though, until recently, trade secrets could not be stolen as such, because they are not registered and hence not property. So court cases involving trade secrets tended to revolve around breach of confidence, or related crimes such as fraud. 

However, the National Security Act 2023, which became law in July 2023, addresses trade secret misappropriation in the context of industrial espionage by a foreign government, making the unauthorised conduct of obtaining, copying, recording or retaining a trade secret, or disclosing or providing access to a trade secret, under certain circumstances, a criminal offence punishable by up to 14 years in prison.

US laws can be even tougher. Trade secret theft is a criminal offence if either it’s done to benefit a foreign government or company, or to benefit someone who isn’t the owner of the original secret through either international or interstate US trade. Punishments can be jail terms and/or fines – potentially in the millions of dollars. Alternatively, trade secrets owners can take civil action.

Note that that laws can’t protect a business against “reverse engineering” – for example, dismantling a product to discover how it works, and using this knowledge to create a competing product. This is considered acceptable healthy competition by the courts. If you wish to prevent this from happening, patenting is likely to prove a better strategy. 

Why not patent your trade secrets?

Patenting an idea can be expensive, depending on how many territories the protection is applied for, plus you are legally required obliged to explain clearly how your innovation works. In return, you get a limited-time monopoly (usually up to 20 years) on the patented innovation. After that, though, anyone can reproduce it.

Trade secret protection, on the other hand, lasts for as long as you can keep the secret.

One possible strategy for the owner of a trade secret is to have all the paperwork prepared for filing a patent, but only actually put in the application if there is strong evidence that someone else has reverse-engineered your innovation, or researchers are close to understanding the underlying mechanisms behind it. This does, however, require constant vigilance on the part of the trade secret owner; but an innovative company should always be scanning the horizon anyway.

Conclusion

Trade secrets can be a very valuable form of IP, so long as they are secret, they have real value, and the owner takes reasonable steps to keep them secret. While they cannot enjoy the same protection as registered IP such as patents, they do have the advantage that the can theoretically last indefinitely. But companies need to review what trade secrets they might have and how they need to be protected. This might include enhanced cybersecurity measures, more stringent company processes such as record keeping, a robust employee training program, and the widespread use of NDAs covering third parties.

https://www.youtube.com/watch?v=UsVfTKcUOz0&t=5s