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Trade secret

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A trade secret is a confidential practice, method, process, design, or other information used by a company to compete with other businesses. It is also referred to in some jurisdictions as confidential information.

The concept is that, sometimes, Company A is more successful than Company B, or is successful at all, not so much due to access to markets, resources, or personnel, but due to special knowledge owned by Company A. If others had access to the same knowledge, then Company A's ability to survive in an otherwise equal markeplace would be impaired. Thus, such secrets are guarded jealously.

The precise language by which a trade secret is defined varies by jurisdiction. However, there are three factors that (though subject to differing interpretations) are common to all such definitions: a trade secret is some sort of information that (a) is not generally known to the relevant portion of the public, (b) provides some sort of economic advantage to its holder (where, note well, this benefit must derive specifically from the fact that it is not generally known, not just from the value of the information itself), and (c) is the subject of reasonable efforts to maintain its secrecy.

Trade secrets are neither necessarily nor always protected by law in the same manner as a trademark or patent. To aquire a patent, full information about the method or product has to be supplied to the patentbureau and will then be available to all. After expiration of the patent, competitors can copy the method or product legally. Instead, owners of trade secrets seek to keep their special knowledge out of the hands of competitors through a variety of civil and commercial means, not the least of which is the employment of confidentiality agreements. In exchange for the opportunity to be employed by the holder of secrets, a worker will sign an agreement not to reveal his prospective employer's proprietary information. Often, he will also sign over rights to the ownership of his own intellectual production during the course (or as a condition) of his employment. Violation of the agreement generally carries stiff financial penalties, agreed to in writing by the worker and designed to operate as a disincentive to going back on his word. A company that has no patent for its formula and has been very effective in protecting it for many more years than a patent would have is Coca Cola.

Historically, trade secrets have been with us after a fashion since early times in the form of keeping advanced military technology from one's enemies - and in more recent times, in keeping Industrial Revolution-era technology secret.

Companies often try to discover one another's trade secrets through lawful methods of reverse engineering on one hand and less lawful methods of industrial espionage on the other. Acts of industrial espionage are generally illegal in their own right under the relevant governing laws, of course. The importance of that illegality to trade secret law is as follows: if a trade secret is acquired by improper means (a somewhat wider concept than "illegal means" but inclusive of such means), the secret is generally deemed to have been misappropriated. Thus if a trade secret has been acquired via industrial espionage, its acquirer will probably be subject to legal liability for acquiring it improperly. (The holder of the trade secret is nevertheless obliged to protect against such espionage to some degree in order to safeguard the secret. As noted above, under most trade secret regimes, a trade secret is not deemed to exist unless its purported holder takes reasonable steps to maintain its secrecy.)

A relatively recent development in the USA is the adoption of the UTSA, the Uniform Trade Secrets Act, which has been adopted by approximately 40 states as the basis for trade secret law. It is believed that a measure of uniformity among different states' laws will strengthen business' claims on their trade secrets.

Another significant development in U.S. law is the Economic Espionage Act of 1996 (18 U.S.C. §§ 1831-1839), which makes the theft or misappropriation of a trade secret a federal crime. This law contains two provisions criminalizing two sorts of activity. The first, 18 U.S.C. § 1831(a), criminalizes the theft of trade secrets to benefit foreign powers; the second, 18 U.S.C. § 1832, criminalizes their theft for commercial or economic purposes. (The statutory penalties are different for the two offenses.)

In Commonwealth common law jurisdictions, confidentiality and trade secrets are regarded as a negative equitable right rather than a property right (with the exception of Hong Kong where a judgment of the High Court indicates that confidential information may be a property right). The English Court of Appeal in the case of Saltman Engineering Co Ltd v. Campbell Engineering Ltd, (1948) 65 P.R.C. 203 held that the action for breach of confidence is based on a principle of preserving "good faith".

The law of protection of confidential information effectively allows a perpetual monopoly in secret information - it does not expire as would a patent or trade mark. The lack of formal protection, however, means that a third party is not prevented from independently duplicating the secret information.

The test for a cause of action for breach of confidence in the common law world is set out in the case of Coco v. A.N. Clark (Engineers) Ltd, (1969) R.P.C. 41 at 47:

  • the information itself must have the necessary quality of confidence about it;
  • that information must have been imparted in circumstances imparting an obligation of confidence;
  • there must be an unauthorised use of that information to the detriment of the party communicating it.

The "quality of confidence" highlights the fact that trade secrets are a legal concept. With sufficient effort or through illegal acts (such as break and enter), competitors can usually obtain trade secrets. However, so long as the owner of the trade secret demonstrates that reasonable efforts have been made to keep the information confidential, the information remains a trade secret and is legally protected as such. Conversely, trade secret owners who do not demonstrate reasonable effort at protecting confidential information, risk losing the trade secret, even if the information is obtained by competitors illegally. It is for this reason that trade secret owners shred documents and do not simply recycle them. Presumably an industrious competitor could piece together the shredded documents again. Legally the trade secret remains a trade secret because shredding the document is considered to have kept the quality of confidence of the information.

A successful plaintiff is entitled to various judicial relief, including:

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