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Confidential Information: The Importance of Keeping Trade Secrets

Jamie Johnson
Jamie Johnson
business.com Contributing Writer
Updated Jun 24, 2022

Special recipes, processes and strategies can be the secrets of a business's success. Learn exactly what trade secrets are – and how to keep yours safe.

Ever wonder why generic forms of cola never seem to taste quite like Coca-Cola? Or why nothing quite measures up to the “special sauce” in a McDonald’s Big Mac? It’s certainly not for lack of effort by their competitors. 

Companies like Coca-Cola and McDonald’s have product processes and recipes that distinguish them from other companies – and it’s information they keep secret. This exclusivity gives them a competitive edge, so it’s critical they work hard to keep that information confidential. Doing so may be vital for your business too.

What is a trade secret?

A trade secret is any confidential business information that you don’t want your competitors to know. This includes sales and distribution methods, recipes, manufacturing processes, consumer profiles, supplier and client lists, and advertising strategies. A trade secret is any intellectual property that gives your business a competitive advantage. 

Much like common law trademark or trade dress protection, trade secrets are granted protection under laws regulating unfair competition or specific legislative provisions. But unlike trademark and patent law, trade secrets are not subject to procedural formalities, such as registration, and can receive protection for an uncapped period of time. 

Certain conditions must be met for information to be considered a trade secret, though the exact stipulations may vary depending on the jurisdiction. Article 39 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) provides general guidance on the requirement for trade secrets.

  • The information must be secret – it cannot be widely known or immediately accessible to other parties. 
  • It must have commercial value because it is a secret. 
  • It must have been subject to reasonable steps by the rightful holder of the information to keep it secret (e.g., through confidentiality agreements or nondisclosure agreements). 

Did you know?Did you know? Nondisclosure agreements (NDAs) and noncompete agreements are two different legal documents, but they often go hand in hand.

Why keeping trading secrets confidential is important

To succeed in the marketplace, businesses typically need a unique product or some kind of intangible good or service that is proprietary. You obviously need other things too, like creative marketing and distribution plans, but a company can live and die by the quality of its product. Even if you’re manufacturing a hair dryer, there should be something about your blow dryer that makes it stand out.

Odds are, that uniqueness is a trade secret, and it sets your company apart from its competitors. If rival businesses have access to the proprietary information that makes your product so valuable, they can replicate it and try to steal your market share. Even without knowing specific details, the competition may attempt to copy you anyway; it’s why Coca-Cola and Pepsi have such similar beverage lines, even though their respective recipes are different and secretive.

Similarly, you probably don’t want a competing business to know the latest customer analytics you’ve completed or the inner workings of the marketing campaign you’re about to launch. It wouldn’t be beneficial for you if they knew the methodology behind your pricing, either. The specifics of your trade secrets are essential to your company’s success, and leaks could negatively impact your business and its position in the marketplace. That isn’t a risk worth taking.

Industries that use trade secrets 

Many industries make use of trade secrets to protect their intellectual property, including food and beverage, software technology, pharmaceuticals, and manufacturing. Here are some of the best-known examples of businesses with famous trade secrets:

  • Google’s search algorithm
  • WD-40’s multipurpose formula
  • KFC’s fried chicken recipe
  • The New York Times’ bestseller list
  • Coca-Cola’s Coke recipe

All of these are trade secrets that the companies choose not to disclose to the public because the information is crucial to their uniqueness and success. Fortunately, there are patents, copyrights and legal documents available to help keep this kind of information secure. 

FYIFYI: You need a plan not only for how you’ll protect your trade secrets, but also for how you’ll respond if they are stolen. Quick action is key to protect your trade secrets and minimize damage. The first step should be reaching out to your general counsel or contacting an intellectual property attorney.

How to keep trade secrets confidential

Keeping your trade secrets safe is an ongoing effort, so you need to have a process in place to maintain that security. Staying vigilant is the best way to protect your business, but here are some steps to help you get started:

  • Identify the trade secrets your company needs to keep safe. What do they consist of?
  • If you have to divulge this private information to other people in order to operate your business, clearly communicate that these are trade secrets and shouldn’t be shared.
  • Make any recipients of trade secret information sign a nondisclosure agreement that outlines your confidentiality provisions.
  • If you store trade secrets on computers, make sure that information is password-protected and your security software is up to date. [Consider the best internet security software.]
  • Provide ongoing security training to any executives, employees and contractors who have access to trade secrets. 

TipTip: When you’re drafting NDAs or confidentiality agreements, work with a lawyer who’s familiar with trade secret law.

Real-world trade secret scenario

Let’s say your company is a fast-growing data analytics firm that’s developing a new algorithm to crunch numbers. This algorithm makes it more accurate than other data analytics software and accounts for a smaller margin of error than the industry average. While this algorithm may be a combination of known source code, it has been processed in a new way, giving your firm a competitive edge. How can you ensure your unique algorithm is kept confidential? 

The first step is to make sure that only engineers and programmers on a need-to-know basis have access to the algorithm. All of your employees should sign confidentiality and nondisclosure agreements. And you should have strong security measures in place to prevent data breaches that could expose your algorithm. 

If you’re licensing your algorithm for use by others, you should establish a confidentiality agreement that prohibits reverse engineering. It should also include restrictions so that only certain individuals can access the algorithm. If the algorithm is disclosed by an employee or licensee, this would be considered a violation of your company’s trade secrets. You could then bring a legal case against the perpetrator for breach of confidentiality.

Daliah Saper contributed to the writing and research in this article.

Image Credit:

shironosov / Getty Images

Jamie Johnson
Jamie Johnson
business.com Contributing Writer
Jamie Johnson is a Kansas City-based freelance writer who writes about finance and business. She has also written for the U.S. Chamber of Commerce, Fox Business and Business Insider. Jamie has written about a variety of B2B topics like finance, business funding options and accounting. She also writes about how businesses can grow through effective social media and email marketing strategies.