What are trade secrets, and how does the DTSA change things?
The goal of this article is to briefly introduce what trade secrets are, how they can be useful for any type of business or enterprise, and what you can do if the secret gets out. This article also briefly discusses the recently enacted the Defend Trade Secret Act (“DTSA”) which offers an additional avenue for protection against and recovery for trade secret misappropriation and theft. As always, it’s a good idea to speak with an attorney about an individualized approach for implementing and protecting your trade secrets.
What is a Trade Secret?
A trade secret is a form of Intellectual Property (“IP”) that nearly every business or prospective business has, sometimes without even realizing it. A trade secret is defined by the World Intellectual Property Organization as “any confidential business information which provides an enterprise a competitive edge.”1 The classic example of trade secrets are the secret Coca-Cola and KFC recipes, but trade secrets can encompass virtually any technique, method, or information used to gain a competitive edge so long as it is a secret.
To qualify as a trade secret, a given piece of information, technique, invention, or method must be (1) not generally known, (2) kept confidential, and (3) associated with a competitive advantage to the company. A good shorthand to determining eligibility for trade secret protection is to ask whether something confers a competitive advantage to your company, in part due to the secrecy of that thing, whether it be a method, process, recipe, or information.
How can they be useful?
A trade secret can be a very useful, low-cost alternative to obtaining copyrights or patents, and if kept secret can be protected indefinitely (in contrast to other forms of IP such as patents or copyrights that have natural expiration or disclosure dates). They also can protect a broader scope of methods or information including non-patentable subject matter. This is particularly beneficial for start-up companies that utilize unique methods, techniques, or information but do not want to spend sometimes substantial up-front legal costs formally registering and protecting them as patents or copyrights.
However, keep in mind that trade secrets are of limited use if the information, method, or technique in question is available in some capacity to the general public. If, for example, a tech company releases a hidden piece of code to the general public as a secret process in a larger software suite, trade secret protection may be insufficient due to the possibility of reverse engineering the code. In this example, if any member of the public successfully reverse engineers that secret code and discloses the code to the public or to members of the industry in question, the code loses its secrecy and therefore no longer exists as a trade secret. Trade secrets are most useful in business-end processes or methods where secrecy can be maintained and exposure to the secret can be minimized to relatively few individuals.
How do you protect trade secrets?
As mentioned above, trade secrets have the tremendous benefit of costing nothing to create and can be maintained for an indefinite, theoretically endless period of time. However, if there is one large weakness to trade secrets, it is that they can be destroyed as quickly as created in the event the information becomes publicly known or generally known to a given industry— simply put, by destroying confidentiality, you destroy a trade secret. Accordingly, keeping the relevant information secret is of the utmost importance.
Luckily, there are both legal and non-legal methods that can be employed to protect trade secrets. From a legal perspective, businesses can require employees to sign nondisclosure or confidentiality agreements pertaining to trade secrets which legally require those employees to maintain their secrecy. Businesses can also implement non-legal protective measures such as password-protecting or encrypting documents related to the secret, limiting the number of individuals who know of or utilize the underlying trade secret, or even physically locking away the secret in a vault until needed, as Coca-Cola famously does with its secret recipe.2
What if the secret gets out?
Despite legal and nonlegal efforts to protect the secrecy of confidential information, there is always a risk of the trade secret getting publicly leaked, losing its secrecy, and accordingly losing its legal force as protectable intellectual property. In the event a trade secret is misappropriated or at risk of being disseminated to the public, there are a number of legal options to protect your trade secret or recover from its public disclosure.
Historically, trade secret misappropriation claims have occurred exclusively in the state law context, though both federal and state claims exist as of May 2016. With respect to the state law claims, what constitutes illegal behavior, relief, and the forms of remedies available to your business will vary depending on state. Many states offer injunctive relief to prevent the dissemination of secret information from occurring, monetary damages for actual losses to your business for the loss of secrecy and for value gained by the misappropriating individual, royalties for misappropriation and use by a competing company, or potentially punitive damages for intentional and willful misappropriations. Because relief depends on state law, you should familiarize yourself with your state’s trade secret laws to fully determine state law remedies and protections available for your business.
On May 11, 2016, the Defend Trade Secrets Act (“DTSA”)3 was passed into law as an additional, federal law means of protecting trade secrets in a federal context. Keep in mind that, while the DTSA offers federal causes of action with respect to trade secrets, it does not replace state law claims discussed above, and you may consider either or both federal and state laws as tools of protecting trade secrets and their economic worth. The DTSA offers any business a forum for injunctive relief, damages, and double damages for willful or malicious misappropriation in federal courts. The DTSA also allows for the owner of a trade secret to unilaterally (without notifying the other party) apply for a seizure order of materials to prevent the dissemination of a trade secret. These are powerful remedies that could save an owner’s trade secret protections or provide an additional avenue for reimbursement following misappropriation and should be considered regardless of where your business is located.
Trade secrets are an extremely valuable and often overlooked form of IP protection that can be utilized with little to no cost—all you need to do to create and protect trade secrets is keep some piece of competitively valuable information secret. This can offer legal protections and recourse for important intellectual property without the expenses and downsides of other forms of IP. Given the recent addition of federal claims for trade secret misappropriation in the Defend Trade Secrets Act, legal protections for trade secrets have never been stronger. However, trade secrets are fragile in nature, offering continued trade secret protection only for as long as secrecy is maintained. Accordingly, implementing smart, tailored legal and non-legal methods of protecting the trade secret is vital.
1 See “What is a Trade Secret,” available at: www.wipo.int/sme/en/ip_business/trade_secrets/trade_secrets.htm
3 For the full language of the act, visit https://www.congress.gov/bill/114th-congress/senate-bill/1890/text
This article was written by Steven T. Swanson. Steven is an associate of Snyder Law, LLP and obtained his J.D. Degree from University of California, Berkeley, School of Law, where he was awarded a Law and Technology Certificate for his studies in and contributions to Boalt’s Intellectual Property community.