Businesses that keep flourishing even when others fail obviously have something they’re doing right. In other words, they employ the right business strategy, the right practice, and the formula unknown to their rivals to remain relevant and highly competitive. These strategies, practices, and formulas come together to mean what is known as a ‘trade secret’. Continue reading to understand more about the trade secret act and its laws.
Understanding Trade Secret
To be considered a trade secret in the U.S., a business must make a reasonable attempt to keep the knowledge hidden from the public; the secret must have inherent economic value; and must contain information.
Trade secrets are a type of intellectual property. It is a commercial activity or method that is typically unknown outside of the company. Trade secret information provides the company with a competitive advantage over its competitors and is frequently the result of internal research and development. Unlike a patent, a trade secret is not widely known.
Trade secrets can take many forms, including a proprietary process, instrument, pattern, design, formula, recipe, method, or practice that is not obvious to others and can be leveraged to develop a company that provides an advantage over competitors and value to customers.
Common trade secrets are:
- Advertising strategies
- Manufacturing processes
- Sales methods
- Consumer profiles
- Distribution methods, etc.
The Apple formula has been a well-kept secret for more than fifty years, making it one of the most well-known trade secrets. Because of the formula’s potential financial value, the corporation makes a reasonable effort to keep it a secret at all costs.
Trade Secret Types
Trade secrets include:
- Technical information, such as manufacturing procedures, pharmaceutical test results, computer program designs and drawings, and
- Commercial information, such as distribution systems, supplier and customer lists, and advertising tactics.
A trade secret can also be made up of a combination of parts, each of which is in the public domain on its own, but where the combination gives a competitive advantage.
Financial information, formulas and recipes, and source codes are further types of information that may be protected by trade secrets.
What Are the Components of Trade Secrets?
There are often three components that make up a trade secret. These components are as follows:
- Information
- Economic value
- Reasonable efforts have been done to preserve the trade secret.
What is the Purpose of a Trade Secret?
In general, trade secrets are employed to accomplish the following tasks:
- Ensure that an invention or design is not made public before applying for a patent or an industrial design.
To acquire a patent for an invention, it must be novel and unknown to the general public. Similarly, industrial designs can only be registered if they are unique in the world and not well-known to the general public. This can be problematic for innovators and designers, especially when they are attempting to sell things, test products, create a business, get financing, or seek partners, because they must normally disclose the innovation to others (the public). Inventors will keep their new innovations as trade secrets to guarantee confidentiality before filing for patent protection.
- Safeguard critical company information that is not explicitly protected by other intellectual property (IP) rights.
Businesses that have access to a plethora of customer data, recipes for food goods, or cutting-edge market research and analysis want to ensure that competitors do not obtain that information. Patents, trademarks, industrial designs, and copyright are not typically used to protect this type of confidential information (IP). Therefore, businesses employ trade secrets to keep this classified information safe.
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- Use techniques other than patent protection to safeguard an invention.
Because obtaining a patent is expensive and time consuming, some organizations and inventors prefer to rely on trade secrets instead. When an invention has a short lifespan or is difficult to reverse engineer, this method is frequently adopted.
Trade Secret Protection Act
Depending on the legal system, the trade secret protection act is either part of the overall idea of unfair competition or is based on special rules or case law on the protection of sensitive information.
While the final judgment of whether or not the trade secret act has been breached relies on the facts of each individual case. Unfair practices involving secret information include industrial or commercial espionage, violation of contract, and breach of confidence.
According to this act, the trade secret owner has no right to dispute other businesses from using the same information, if they got or made it on their own through their research and development, market analysis, reverse engineering, etc.
Trade secrets, unlike patents, do not give “defensive” protection as previous art because they are not made public. For instance, if a certain method for producing X is protected by a trade secret, someone else can obtain a patent or a utility model on the same idea if the inventor came up with it independently.
How Long Does Trade Secret Protection Last?
Trade secrets have the potential to last indefinitely, as long as the information remains a secret. Once the secret is revealed, the business value is lost, and trade secret protection is no longer available.
How Do You Maintain Trade Secrets?
You can keep your trade secrets hidden by doing the following:
- Non-disclosure or confidentiality agreements: Before you provide someone access to your business information, have them sign a non-disclosure agreement.
- Secure every sensitive business information in a lock/safe
- Encrypt sensitive business data
- Include confidentiality clauses in employment contracts
- Password protection:
Keep in mind that once your secret is revealed, it is impossible to keep it hidden any longer. The methods listed above are simply a handful. It is in your best interest to employ further measures available to guarantee that your secrets remain hidden!
Trade Secret Lawsuits
Trade secrets are prevalent, and so are trade secret-related legal conflicts. A number of trade secret lawsuits involving notable people and brands have made headlines in the past few years. The top trade secret lawsuits are detailed below.
#1. Lawsuit by Tesla Against an Engineer for Allegedly Stealing AI Research:
Tesla is working on a supercomputer dubbed Dojo that will be used to train neural networks for use with autonomous driving software. Tesla sued an engineer who worked on the project earlier that year for claimed trade secret misappropriation.
According to the complaint, the engineer was employed in January, placed on administrative leave, and then quit a few weeks later. Tesla claims that the engineer acknowledged to copying company material to a personal laptop computer and then submitting a “dummy” laptop for examination rather than the genuine one. The engineer, on the other hand, refuted the allegations, claiming that Tesla has damaged his image. The case has now been assigned to a private arbitrator
#2. Trade Secret Lawsuit Against Starbucks
Balmuccino LLC, a California company affiliated with celebrity doctor and recent Senate candidate Mehmet Oz, claims to have met with a Starbucks representative in 2017 and supplied prototypes of coffee-flavored lip balms, as well as research, supplier information, and other secret information.
Starbucks declined to collaborate with Balmuccino, but did eventually release “S’Mores Frappuccino” lip gloss. Balmuccino has now filed a federal lawsuit against Starbucks for allegedly stealing its trade secrets. The case is still open.
#3. Lawsuit Against Pro Basketball Superstar Williamson Zion
When he was a freshman at Duke, Zion Williamson, a power forward for the New Orleans Pelicans, signed a talent contract with an agency. Later, he filed a lawsuit to cancel the contract, claiming that it lacked a clear warning that signing it would result in him losing his intercollegiate eligibility. The agency counter-sued Williamson, claiming $100 million in damages for alleged trade secret theft.
The agency said Williamson had taken over its secret brand and marketing strategy, which included a plan to advertise him as “the first Zion Williamson” rather than “the next LeBron James.” The court dismissed the agency’s claim and terminated the contract.
#4. Trade Secret Lawsuit by Elizabeth Holmes
Elizabeth Holmes, the former CEO of the failing biotech company Theranos, was convicted of fraud and sentenced to 11 years. What is less well-known is that Holmes unsuccessfully attempted to use trade secret protections as part of her argument. Prosecutors said that contrary to what investors were led to think, Theranos used third-party blood-testing machines rather than its own technology.
When asked why she had kept this information from investors, Holmes stated that Theranos had modified the third-party equipment and that the changes were trade secrets that could not be revealed. The jury, however, rejected her inventive defense and found her guilty of fraud.
#5. Trade Secret Claim Over McDonald’s Broken Ice Cream Machines
Some argue that McDonald’s deliberately allows its ice cream equipment to break in order to keep franchisees trapped in pricey service contracts. Kytch sued Taylor, the machines’ third-party maker, for allegedly misappropriating trade secrets relating to its diagnostic equipment.
During discovery in that case, Kytch learned that McDonald’s had allegedly banned franchisees from utilizing the Kytch diagnostic gadget, prompting Kytch to launch a case directly against McDonald’s demanding $900 million in damages. Both lawsuits are pending.
Trade Secret vs Patent
Trade secret protections are far narrower than those associated with patents. In general, trade secret rules do not protect a company that obtains the subject knowledge through fair and honest means. Instead, a breach of a duty of confidence (such as the employment relationship), a breach of contract, or other dishonest or unjust activity is required for a violation of the law.
As a result, ideas that can be discovered through reverse engineerings, such as some medical inventions, cannot be effectively protected by trade secrets.8 Furthermore, unlike patents, once a trade secret is divulged, it is frequently lost forever. A company may sue, but “putting the genie back in the bottle” or demonstrating damages (which may be perpetual in theory) is typically difficult. In order to limit the damage, the courts may issue injunctions.9
In contrast, under patent law, an inventor who creates an existing patented technology without being aware of the patent is generally liable if the invention falls within the scope of the patent’s claims. During the term of the patent, the first inventor to file a valid application is awarded the right to prohibit others from creating, using, selling, or importing the invention. Because of this exclusive right, the infringer’s harmless intent or fair commercial practices are often immaterial in determining infringement. Furthermore, the capacity to enforce exclusive rights continues regardless of whether others infringe on the patent.
Why is Trade Secret Important?
Trade secrets are essential because they help safeguard the information that is confidential to a company’s survival and profitability. In other words, trade secrets enable a company to create and sell valuable things that only they are capable of producing. A company’s trade secrets could be jeopardized if they are accidentally or intentionally disclosed. A corporation may employ a strategic mix of trade secrets and patents to maintain a competitive advantage even after the patents expire.
What Happens if a Trade Secret Leaks?
The exposure of a trade secret could jeopardize a company’s profitability or existence, depending on how significant the secret is to its operations.
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