Confidential Information: The Importance of Keeping Trade Secrets

Business.com / Legal / Last Modified: February 22, 2017

KFC's secret recipe. Coca-cola's often imitated, never duplicated taste. What "trade secrets" are—and how to keep yours safe.

Ever wonder why generic forms of cola never seem to taste quite like the taste made famous by Coca-Cola brand?

Or why nothing quite measures up to the “special sauce” in a McDonald’s Big Mac? 

It’s not for lack of effort by way of competitors, but instead, a careful product of some of the best-kept industry secrets.

While many industries basically work to reproduce the same type of product in different forms, what helps a company distinguish itself from its competitors, gain notoriety, and keep a competitive edge is the little known inner workings that make their products stand out from the pack.

Related Article: 3 Ways to Protect Your Business's Intellectual Property

These little-known facts about a product, business model, or algorithm that are kept under lock and key by major companies and small to medium businesses alike are known as trade secrets. 

A more formal, yet broad, definition for trade secrets includes any confidential business information, including sales methods, distribution methods, recipes, manufacturing processes, consumer profiles, supplier and client lists or advertising strategies which provide a 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. 

While trade secrets receive protection without registration, generally, for information to be considered a trade secret, certain conditions must be met, though specific conditions vary depending on jurisdiction.

Article 39 of the Trade-Related Aspects of Intellectual Property Rights Agreement (TRIPS) provides general guidance on necessary conditions for trade secrets:

  • The information must be secret (i.e. it is not generally known among, or readily accessible to, circles that normally deal with the kind of information in question);
  • It must have commercial value because it is a secret (emphasis added); and
  • It must have been subject to reasonable steps by the rightful holder of the information to keep it secret (e.g., through confidentiality agreements, non-disclosure agreements, etc.). 

Real World Trade Secret Scenario

Your company, a fast growing data analytics firm, develops a new algorithm to crunch data, making it more accurate than other data analytics software or platforms, and accounts for a smaller margin of error than typical in the industry. While this algorithm may be a combination of known source code, the way it has been combined and processed has not been done before, thus leading to your firm having a competitive edge over other data analytics firms. How can your firm ensure its new algorithm qualifies for trade secret protection? 

By ensuring only engineers and programmers that are on a need-to-know basis know the algorithm, having all employees of the firm sign strict confidentiality and non-disclosure agreements, and keeping high-security measures to prevent data breaches which may compromise the algorithm from being disclosed. 

If you are licensing your algorithm out to use by others, having confidentiality agreements that include a prohibition on reverse engineering and use restrictions for only those with a need-to-know basis will help guarantee that all third parties understand that the information is meant to be kept in secret.  

If the algorithm is disclosed by an employee or licensee, the disclosure would be considered a violation of your company’s trade secrets, and a legal case could be brought against the discloser for the various state-law unfair competition claims that govern trade secrets (e.g. breach of contract, breach of confidentiality, breach of privacy, corporate espionage, etc.). 

Related Article: The Copyright Question: The Difference Between Inspiration and Infringement

What Industries Make Use of Trade Secrets? 

There is no limit to what type of industry may make use of trade secrets to protect their valuable intellectual property that helps separate them from the rest. 

Some of the most well-known examples of trade secrets include Google’s search algorithm, WD-40’s multi-purpose formula, KFC’s fried chicken coating recipe, The New York Times' “Best Seller” list methodology, and, as previously mentioned and perhaps the most infamous “trade secret” of all—Coca Cola’s cola soda recipe, which the company chose to keep as secret over registering it for a patent, in order to not disclose its ingredients to the public. 

With patents, copyrights, and trade secrets all available to help secure protection for a business’s intellectual property, a clear understanding of the pros, cons, and requirements of each avenue is essential. Since engaging in these conversations at the beginning of a new venture is important for planning out business strategies and for meeting filing requirements of certain types of protection, as a rule of thumb, it’s best to not keep secrets from your trusted legal advisor. 

Login to Business.com

Login with Your Account
Forgot Password?
New to Business.com? Join for Free

Join Business.com

Sign Up with Your Social Account
Create an Account
Sign In

Use of this website constitutes acceptance of the Terms of Use, Community Guidelines, and Privacy Policy.

Reset Your Password

Enter your email address and we'll send you an email with a link to reset your password.

Cancel