Legal protection of trade secrets
and know-how

Trade secret law or tort law protects valuable business information from misappropriation by others. The main requirement is that the information must be kept a secret by its owner. Any kind of information, ranging from manufacturing know-how, formulas or devices to marketing intelligence can be protected as a trade secret. A misappropriator can be convicted to pay damages or to cease using the trade secret information.

Trade secrets are a form of intellectual property, but trade secret protection does not offer rights comparable to those offered by copyright, patent or trademark laws. In most countries, trade secret misappropriation is regarded as a specific form of unfair competition. Some countries have specific laws on the protection of confidential business information. The TRIPS Agreement requires that countries implement adequate legal protection for "undisclosed information".

What can be a trade secret

Any kind of information can be protected as a trade secret. Something qualifies for trade secret protection if it is kept a secret, and there is economic value because of the secrecy.

Because there often is no specific law on trade secrets, it is hard to give a definition of the things that can be protected as a trade secret. Trade secret protection has successfully been claimed for formulas, manufacturing know-how, compilations of information (such as customer lists), bid prices, computer programs and technical designs. Even physical devices, as opposed to mere information, can in theory be protected as a trade secret.

The most common type of knowledge protected with trade secrets is know-how. Know-how is a general term for any unique knowledge and/or skills regarding manufacture, products, services and so on. Because it is usually rather specifically tied to a particular production process or type of product, and so ages rather quickly, a patent on know-how often is not very valuable.

An important requirement for trade secret protection is that the information should provide an economic advantage over competitors because it is kept a secret. The value of for example the secrecy of the formula for Coca-Cola is evident: if others know this formula they can make the same soft drink, which would hurt Coca-Cola's position in the market.

Requirement to keep secret

A trade secret is only protected if it is in fact kept a secret by its owner. Public information cannot be protected as a trade secret, no matter how economically valuable it is.

To qualify for trade secret protection, the owner of the information needs to maintain reasonable precautions to keep the information secret. It is not necessary to take extreme measures, such as storing the information in a vault surrounded by armed guards. On the other hand, putting the information on a notice board visible from the lobby is insufficient, since any visitor entering the lobby can read the information.

A related requirement is that the owner of information needs to prove that he did in fact take the necessary precautions. There are a few common practices that are very helpful in this regard.

• Marking information as confidential: by marking the information as confidential or proprietary, those who gain access to the information are aware of its status and must realize that they have to keep the information secret. Such a marking is not the same thing as a copyright notice. A copyright notice only indicates who the copyright holder is. It does not say anything about the confidentiality of the material.
• Nondisclosure agreements: When a party signs a nondisclosure agreement (NDA), he agrees to keep certain information confidential. This party then later cannot claim that he thought the information was public. This makes it easy to prove a case of trade secret misappropriation.
• Restricting distribution: As the saying goes, a secret known to three people is only secret if two of them are dead. However, assassinating those who know "too much" is only an option in spy movies. The best thing for companies is to make sure that trade secret information is only disseminated to those people who have a real need to know the information. For information on paper colored paper can be used to make copying more difficult, indicating to the owner of the paper that the document is not supposed to be copied. With electronic documents, it is sometimes possible to indicate that the document may not be copied, printed or forwarded. Although such indicators can be removed, this is difficult to do by accident. Intentionally removing such indicators proves intent to damage the trade secret status of the information.

Non-disclosure agreements

With a non-disclosure agreement, the owner of a trade secret can share information with a third party without damaging the secrecy of the information.

A nondisclosure agreement (NDA) is a contract in which it is agreed to keep certain information secret. Often an NDA is single-sided: one party supplies the information and the other must keep it a secret. An NDA can also be mutual or double-sided: both parties exchange information and agree to keep the information they receive a secret.

NDAs typically contain a definition of information to which the NDA applies. Often a requirement is that such information must be labeled as "confidential" or must contain a reference to the NDA. Another option, especially for oral disclosures, is to later send the receiving party a letter pointing out that the contents of the disclosure is to be regarded as confidential.

Misappropriation

Trade secrets are protected against misappropriation, the unauthorized taking or copying of trade secret information. Misappropriation usually is a tort and can under certain circumstances be a criminal act.

What is misappropriation

Misappropriation covers illegal acts, such as wiretapping or theft. But also improper acts that might strictly speaking legal can qualify as misappropriation.

For example, in a famous US lawsuit on trade secret theft, a chemical company was building a plant in which a secret process was to be used. At some point during the construction it was possible to look through the roof to see details of the process. A competitor hired a small plane to fly over the plant and took photos. Although flying over someone's property is not trespassing, this act was still held to qualify as misappropriation because it was performed explicitly for the purpose of circumventing the precautions taken by the chemical company to protect its secret process.

Breach of confidential relationship

Misappropriation can occur when a confidential relationship is breached. If someone receives information under NDA and then reveals this information to others, he violates the NDA and so is guilty of misappropriation of the trade secret information. But breach of confidentiality can also occur even if no NDA was signed.

The circumstances might make it clear that a confidential relationship exists. For example, a contractor who is asked to submit a quotation to build a certain product should normally consider the information regarding the product to be confidential. At the same time, the person soliciting the quotations should know that these quotations should be kept confidential. Knowing the quotations of his competitors enables a contractor to lower his price to have a bigger chance of getting the contract.

Liability for misappropriators of trade secrets

Someone who misappropriated a trade secret is liable for damages. Also, the owner of the information can apply for an injunction to stop him from using the information. The misappropriation may have resulted in loss of the trade secret status. Then an injunction is often limited in time to the "lead time" obtained by the misappropriator. That is, the court tries to determine how long it would have taken to independently come up with the same information, and forbids the misappropriator to use trade secret information for that period.

If in the meantime a lot of different people have legitimately acquired the protected knowledge, the court is less likely to award an injunction. The only remedy then is a compensation for the damages suffered by the loss of trade secret status. These damages can be computed as the profit made by the misappropriator.

No misappropriation

Trade secret protection does not extend to someone who obtained the same information from another source. A customer list may qualify as a trade secret, but a competitor may have compiled the same list independently (for example, if the number of potential customers is limited). Also, the information could have been obtained from a public source, which means that no trade secret misappropriation occurred. This applies also if the information can be derived from a product sold by the information owner, unless the product was sold under NDA.

Publications of trade secrets

Loss of trade secret status occurs when the secret is published. This may happen even if the publication was unauthorized.

Publication removes trade secret status

Loss of trade secret status occurs when the secret is published. There are many ways in which this can occur. For example, a trade secret owner may publish the secret in an academic journal, in a newspaper or in any other forum. In some cases selling a commercial product that embodies the secret also counts as disclosure of the secret.

It normally does not matter whether the publication by the trade secret owner is intentional. If the owner accidentally publishes details of a trade secret in a brochure, the status is lost anyway.

Someone other than the trade secret owner may also disclose the trade secret. For example, he might reverse engineer the product to learn how it works. This is normally allowed. An exception would be that the product was sold under a contract that forbids reverse engineering, or that the product was handed over in confidence.

Unauthorized publications

The information could have been made available to the public by someone who stole it from the owner. It is not clear whether this automatically removes the trade secret status of the information. On the one hand, the information is now publicly available, but on the other hand this might seem unfair to the owner because the disclosure occurred against his wishes. Depending on how widespread the publication was (e.g. a national newspaper versus a one-time oral disclosure at a lecture) and how actively the owner tried to prevent or recall the publication, the information may remain secret.

In many cases the misappropriated information is not published but instead used by the person who misappropriated it. This usually also occurs in secret and so does not affect the trade secret status of the information.

Trade secrets and patents

Both trade secret law and patent law can be used to protect an invention, although not at the same time. Patent law gives strong protection, even against independent re-invention, but requires publication of the invention. Trade secret law only protects against misappropriation.

Trade secret protection is the principal alternative to patent protection. Like with patents, the owner of a trade secret can stop others from using his intellectual property. But unlike patents, the owner of a trade secret can only act against those who actually used his information. Someone who independently came up with the same information does not infringe on the trade secret protection. A patent holder can stop anyone from making, using or selling the invention, even when the infringer developed the invention completely independently without using any information supplied by the patent holder.

An invention can be protected by a patent or as a trade secret, but not both. The details of an invention become public when the patent application for that invention is published. These details then can no longer be protected as a trade secret. However, it is possible to have a patented invention together with trade secret know-how on specific ways to implement or use the invention. However, the patent still needs to have a disclosure that is sufficiently clear and complete so as to enable a person skilled in the art to practice the invention. In the USA, the patent must disclose the best mode of the invention known to the inventors at the priority date. So, leaving implementation details out of the patent application may result in the patent being invalid.

If someone keeps an invention a trade secret, someone else may later independently re-invent it and apply for a patent. The patent holder can then stop the earlier inventor because he infringes on the patent. Because the earlier inventor kept the information a secret, his use is not prior art. In some countries, patent laws have limited exceptions on infringement for such a "secret prior use".