What are trade secrets?
Trade secrets are a type of intellectual property (IP) that cover various types of information considered economically valuable because they are not publicly known. A trade secret usually gives a business an advantage over its competitors.
An example of a trade secret could be the special sauce a fast food restaurant uses on all of its hamburgers, a client list at a B2B company, or an algorithm that a technology software company uses.
Did you know? Coca-Cola’s recipe is a trade secret that only a few select, anonymous employees know.
Firms and organizations use intellectual property management software to track these important assets.
Types of trade secrets
Trade secrets are defined and protected under Title 18, Part 1, Chapter 90 of the U.S. Code and fall under state jurisdiction. Types of trade secrets, as defined in Chapter 90, include the following:
- Financial
- Business
- Scientific
- Technical
- Economic
- Engineering
- Patterns
- Plans
- Compilations
- Program devices
- Formulas
- Designs
- Prototypes
- Methods
- Techniques
- Processes
- Procedures
- Programs
- Codes
The law also specifies that the types of trade secrets above can be tangible or intangible. Information can be physical, electronic, graphical, photographic, or written.
Elements of trade secrets
There are three elements that must exist to constitute a trade secret. The trade secret will no longer be protected if at any point one or more elements no longer exist.
- The information is valuable to the owner and is not publicly known. If a trade secret is independently discovered or released by the owner, its protection is removed.
- The owner has taken reasonable measures to protect the secrecy of the information. There must be an intentional effort to safeguard the information by the owner or owners.
- The information is valuable to those who cannot obtain it. No matter what type of information the trade secret is, it must have economic, actual, or potential value from its confidentiality.
Benefits of trade secrets
Regardless of the industry, several benefits of trade secrets exist.
- Indefinite protection: Trade secrets are protected indefinitely under the law. As long as the intellectual property is protected, there are no time limits or expirations.
- No application or renewal fees: Unlike patents, there are no associated application or renewal fees for trade secrets. Since there are no registration costs, businesses can spend this money protecting the IP instead.
- Goes into effect immediately: Protection is effective immediately because trade secrets don't need to be legally registered to be protected. They don’t require any procedural processes or formalities to obtain them.
Drawbacks of trade secrets
As with all forms of protection, there are some drawbacks of trade secrets to consider.
- Leaks and reverse engineering: A trade secret is no longer protected if it gets leaked. Similarly, if a trade secret is “reverse engineered” or discovered through legitimate means, it is no longer protected.
- Internal processes and procedures must be followed: Keeping trade secrets safe within a business requires implementing processes and procedures to protect them. It requires a great deal of trust, as well as non-disclosure agreements (NDAs) and other contracts. A trade secret can be at risk if an employee doesn’t follow the processes and procedures.
- More difficult to sell or license: Compared to patents, trade secrets can be more challenging to sell or license to others since they’re less formalized. Less potential for monetization may not be a good fit for all businesses.
- Potential for patent: If an independent party discovers a trade secret independently, they could patent it. This could lead to legal complications.
Trade secrets best practices
When protecting a trade secret, organizations should follow specific best practices to ensure correct procedures.
- Establish clear policies and convey them across the organization. Be open and honest with the organization about the importance of trade secret protection. Create policies to ensure all team members understand their roles and the consequences of leaking secrets.
- Conduct training on confidential information. Give teams the knowledge to understand and protect confidential information. Tell employees when new information is confidential.
- Know the jurisdiction. Trade secrets fall under state jurisdiction. It’s essential to understand the law to ensure a trade secret is protected in its jurisdiction at all times.
- Develop a response plan if a breach occurs. Prepare for the worst-case scenario and develop a response plan in advance. Outline steps stakeholders need to take if there is a breach.
Trade secrets vs. patents
Both trade secrets and patents constitute types of intellectual property, but there are some significant differences between the two.
Trade secrets derive their protection from being private. Trade secret protection is indefinite as long as the information is kept confidential and meets the elements that make information a trade secret. No registration is required, nor are there any associated fees. It’s possible to discover or “reverse engineer” a trade secret independently.
Patents are protected through public disclosure and a legal registration process. They provide 20-year fixed terms for protection. If the information is patented, independent discovery and recreation are not possible.
Alyssa Towns
Alyssa Towns works in communications and change management and is a freelance writer for G2. She mainly writes SaaS, productivity, and career-adjacent content. In her spare time, Alyssa is either enjoying a new restaurant with her husband, playing with her Bengal cats Yeti and Yowie, adventuring outdoors, or reading a book from her TBR list.
