Trade secret

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A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable to the public, by which a business can obtain an economic advantage over competitors or customers. Most trade secrets concern the production of goods, but a trade secret might also be a special mailing list of customers or suppliers, a method of bookkeeping, a distribution method, consumer profiles, or a special advertising and marketing strategy.[1] Two of the most famous trade secrets in the United States, for example, are the recipe for Coca Cola and Colonel Harland Sanders' handwritten Original Recipe(R) for Kentucky Fried Chicken.

Unlike a trademark, which is publicly associated with a particular company, or a patent, which is registered and legally protected for a specific period of time, a trade secret can only be protected as long as it remains secret. Trade secrets are protected without registration or procedural formalities. Companies use a variety of legal and commercial means to keep their special knowledge out of the hands of competitors, such as Non-disclosure agreements (NDA) and non-compete clauses for employees, and confidentiality agreements for vendors or third parties in business negotiations. A wide range of internal security measures, including shredding of documents, encryption of computer files, permissions and security clearances, and disclaimers on faxes and emails, protects confidential information. In the United States, under the Uniform Trade Secrets Act (UTSA), and the Economic Espionage Act of 1996, companies can legally seek damages and injunctions when their trade secrets are misappropriated if they have taken reasonable measures to protect them. The sanctioned protection of information such as trade secrets from public disclosure is an important aspect of law that guards the overall economic vitality of a society. The World Intellectual Property Organization (WIPO), a specialized agency of the United Nations established in 1967, is dedicated to developing a balanced and accessible international system to protect intellectual property (IP) in the interest of developing the global economy.[2]

Contents

Definition

Any confidential business information which gives a business a competitive edge may be considered a trade secret. The precise language by which a trade secret is defined varies by legal jurisdiction (as do the particular types of information that are subject to trade secret protection). However, there are three factors that, although subject to differing interpretations, are common to all such definitions: a trade secret is information that:

  • Is not generally known to the public
  • Confers some sort of economic benefit on its holder (where this benefit must derive specifically from its not being generally known, not just from the value of the information itself)
  • Is the subject of reasonable efforts to maintain its secrecy

In some legal jurisdictions, such secrets are referred to as "confidential information" or "classified information." Where trade secrets are legally recognized, the creator of knowledge regarded as a "trade secret" is entitled to regard such "special knowledge" as intellectual property.

Other factors that define a trade secret are the extent to which it is known by employees and others involved in the same business; the measures which are taken to guard the secrecy of the information; the ease with which the same information could be independently acquired by someone else; and the amount of investment in developing the information.[3] Trade secrets are different from other business secrets such as the amount or terms of a secret bid for a contract, the salary of certain employees, or the plans for a new model. A trade secret is a process or device continually used in the operation of a business. Most trade secrets concern the production of goods, for example, a machine or formula for the manufacture of an article. However, a trade secret might be a code for determining discounts or rebates in a price list or catalog, a special mailing list of customers or suppliers, a method of bookkeeping, a distribution method, consumer profiles, or a special advertising and marketing strategy.[4]

Legal protection of trade secrets

The sanctioned protection of information such as trade secrets from public disclosure is an important aspect of law that guards the overall economic vitality of a society. Depending on the legal system, the protection of trade secrets forms part of the general concept of protection against unfair competition, or is based on specific provisions or laws protecting confidential information. A company typically invests money, time and labor in refining its processes, operations, and marketing strategies. Its ability to survive and maintain its market dominance or market share will be impaired if competitors gain access to the same knowledge, especially if they acquire that knowledge directly from the company in an illegal manner.

A company can protect its confidential information through non-compete and non-disclosure contracts with its employees (within the constraints of employment law, and within reasonable limits on time and location), and by taking measures to keep the information secret. The protection of a trade secret is perpetual and does not expire after a specific length of time, as a patent does. The lack of formal protection, however, means that a third party is not prevented from independently duplicating and using the secret information once it is discovered.

In the United States, trade secrets are not protected by law in the same manner as trademarks or patents. Trademarks and patents are protected under Federal statutes, the Lanham Act (1947) and Patent Act (1790, 1793, 1836, 1952, 2007) respectively. Trade secrets are defined and protected by state laws. Most states have adopted the Uniform Trade Secrets Act (UTSA), a model law drafted by the National Conference of Commissioners on Uniform State Laws to better define rights and remedies of common law trade secret. It has been adopted by 46 states, the District of Columbia and the U.S. Virgin Islands. Massachusetts, New Jersey, New York, and Texas have not adopted the UTSA. Some of these states continue to apply common law to trade secrets, and some have adopted separate state statutes. In 2007, the UTSA was introduced in both the New York and New Jersey legislatures.

In Commonwealth common law jurisdictions, confidentiality and trade secrets are regarded as an 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 Court of Appeal of England and Wales 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."

Comparison with trademarks

A trademark, or “mark” is a distinctive sign or indicator used by an individual, business organization or other legal entity to identify that the goods or services with which that trademark appears originate from a unique source. A trademark is typically a name, word, phrase, logo, symbol, design, image, style of work uniform, or a combination of these elements and is considered a type of intellectual property. To acquire rights to a trademark under U.S. law, one must simply use the mark "in commerce."[5] It is possible to legally register a trademark in the U.S., both at the federal and state levels. Registration of trademarks confers some advantages, but it is not required in order to get protection.[6] Registration may be required in order to file a lawsuit for trademark infringement. Other nations have different laws and policies regarding trademarks.

A trademark is protected from infringement on the grounds that its use by another person or business might confuse consumers as to the origin or nature of the goods or services offered for sale. By definition, a trademark enjoys no protection (as a trademark) until it is made public and associated with a particular company. (A company’s plans to use a certain trademark might be protectible as a trade secret until the mark is actually made public.) A trade secret, on the other hand, can only be protected as long as it remains secret.

Comparison with patents

To acquire a patent, full information about the method or product has to be supplied to the patent office and upon publication or issuance, becomes available to all. Though the information is now available to the public, a temporary monopoly is granted to the patent holder on the use of the method or product. After the patent expires, competitors can legally copy the method or product.

To be patented, a product must be unique and not be a duplication of a previous invention or technique. A trade secret may not necessarily be a novel invention or technique; it can be a process that anyone with access to similar information could arrive at using common sense.

Protection of a trade secret can, in principle, extend indefinitely while patent protection lasts only for a specifically limited period of time. Coca-Cola, the most famous trade secret example, has no patent for its formula and has been very effective in protecting it for much longer than the twenty years of protection that a patent would have provided. At least twice, Coca-Cola has refused to reveal its trade secret under judges' orders.[7] Nevertheless, such protection is comparatively easy to lose. Another company might use reverse engineering or chemical analysis to discover how a product is made or a strategy is carried out, and there is no minimum time period of guaranteed protection for a trade secret, as there is with a patent.

Protecting trade secrets

Owners of trade secrets use a variety of legal and commercial means to keep their special knowledge out of the hands of competitors. Non-disclosure agreements (NDA) and non-compete clauses are widely used; as a condition of employment, new employees sign an agreement not to reveal the prospective employer's proprietary information. Often, an employee will also sign over rights to the ownership of intellectual works produced during the course (or as a condition) of his or her employment. Violation of the agreement typically carries stiff financial penalties. Similar confidentiality agreements are signed by other companies with whom the holder of a trade secret is engaged, such as vendors, or third parties in licensing talks or other business negotiations.

Companies implement a wide range of internal security measures to prevent their trade secrets from becoming public. Many firms and individuals who deal regularly with trade secret information routinely include a notice in their emails and fax cover sheets advising of the confidential nature of the contents. Documents are shredded rather than simply being thrown in a trash can or recycling bin. Computer files are encrypted and elaborate systems requiring permissions and passwords are put in place to protect sensitive information from computer hackers or unscrupulous employees. These measures are particularly important if it becomes necessary to present a legal challenge in court.

Colonel Harland Sanders' handwritten Original Recipe(R) for Kentucky Fried Chicken (KFC) ranks among America's most valuable trade secrets. For 68 years it was kept locked in a safe at KFC corporate headquarters. In 2008, while security was being upgraded, the recipe was transported to an undisclosed location in a locked briefcase handcuffed to a national corporate security expert, who rode in an armored car escorted by the Louisville Metro Police Department. Only two KFC executives know the recipe of 11 herbs and spices. A third executive knows the combination to the safe where the handwritten recipe is kept. These three executives are not allowed to travel together on the same plane or in the same car, and less than a handful of KFC employees knows their identities. Multiple suppliers, bound by strict secrecy agreements, are involved in the process of producing and blending the herbs, and none of the individual suppliers know the entire formula. KFC does not publicly identify the suppliers involved in producing and blending the recipe.[8]

Discovering trade secrets

Companies often try to discover one another's trade secrets through lawful methods such as reverse engineering, and through potentially unlawful methods including industrial espionage. Acts of industrial espionage are illegal in their own right, and this illegality is important to the protection of trade secrets. If a trade secret is acquired by improper means, the secret can be deemed to have been misappropriated, and its acquirer will be liable in a court of law. In such a case, the holder of the trade secret must have taken reasonable steps to maintain its secrecy.

The Economic Espionage Act of 1996 (18 U.S.C. § 1831), made the theft or misappropriation of a trade secret a federal crime in the United States. This law contains two provisions, criminalizing the theft of trade secrets to benefit foreign powers 18 U.S.C. § 1831(a), and criminalizing their theft for commercial or economic purposes 18 U.S.C. § 1832. The statutory penalties are different for the two offenses.

Misappropriation is defined as acquiring the secret through improper means or from another person knowing that they acquired the secret by improper means; or as disclosing or using the secret without consent when the circumstances create a duty not to disclose or use it. Misappropriation also occurs when a secret is acquired by accident or mistake (for example, through a misdirected email or facsimile transmission), if before using or disclosing the trade secret the person acquiring it learns that it is a trade secret.

The UTSA imposes civil rather than criminal liability for misappropriation of trade secrets and creates a private cause of action for the victim. A successful plaintiff is entitled to various forms of judicial relief, including injunctions, damages, including "exemplary" (punitive) damages, and, in cases of bad faith or willful and malicious misappropriation, reasonable attorney's fees. The act also permits courts to grant protective orders to maintain the secrecy of a trade secret during a court case and to prevent disclosure by witnesses.

If the trade secret consists of a patentable device or process, the court will ordinarily prevent the further use of it, and require an accounting of any profits derived from it by someone who misappropriated the trade secret. If, on the other hand, the trade secret consists of improvements or information that could be arrived at by any skilled professional, liability may be limited to damages, and it may not be appropriate to issue an injunction against the future use of the trade secret.[9]

See also

  • Intellectual property
  • Patent
  • Trademark

Notes

  1. World Intellectual Property Organization, Trade Secrets. Retrieved November 1, 2008.
  2. World Intellectual Property Organization, What is WIPO. Retrieved November 1, 2008.
  3. About.com, Trade Secret. Retrieved November 1, 2008.
  4. World Intellectual Property Organization, Trade Secrets. Retrieved November 1, 2008.
  5. United States Patent and Trademark Office, General Questions. Retrieved November 1, 2008.
  6. Ibid.
  7. Mark Pendergrast, For God, Country & Coca-Cola, 2nd ed. (Basic Books, 2000), 456.
  8. Restaurant News Resource, KFC to Showcase Historic Safe & Move Colonel Sanders' Famed Secret Recipe Via High-Security Motorcade (September 9, 2008). Retrieved November 1, 2008.
  9. About.com, Trade Secret, by Mary Bellis. Retrieved November 1, 2008.

References

  • Buchanan Ingersoll Professional Corporation. Trade Secret Law. White paper series. Pittsburgh, PA: Buchanan Ingersoll Professional Corporation. 1995.
  • Elias, Stephen, and Lisa Goldoftas. Patent, Copyright & Trademark: A Desk Reference to Intellectual Property Law. Berkeley: Nolo Press. 1996. ISBN 0873372360.
  • Goldscheider, Robert. Licensing Best Practices the LESI Guide to Strategic Issues and Contemporary Realities. Intellectual property—general, law, accounting & finance, management, licensing, special topics series. New York: Wiley. 2002. ISBN 0471423181.
  • Lockerby, Michael J. The Trade Secret Handbook Protecting Your Franchise System's Competitive Advantage. Chicago, IL: American Bar Association. 2000. ISBN 0585354138.
  • Pendergrast, Mark. For God, Country, and Coca-Cola: The Unauthorized History of the Great American Soft Drink and the Company That Makes It. New York: Scribner's, 1993. ISBN 0684193477.

External links

All links retrieved November 1, 2008.

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