Benjamin Franklin professed that “three may keep a secret, if two of them are dead”. The same principle bodes well for trade secrets.
Do you have any idea of the practical lengths that Coca Cola goes to in order to keep its recipe for its coca cola beverage secret? For starters, the recipe is locked up in a vault, which can only be opened by a hierarchy of company resolutions and only two individuals at one time may know the actual recipe of the unmistakable flavour combination, who may never board a flight at the same time and whose identity is never made known. Although it sounds absurd, it makes absolute sense once we consider the significant value of trade secrets, as well as the brittle nature thereof.
A trade secret is seen as an asset, which falls under the umbrella of intellectual property. However, there is no distinct body of law that regulates this form of intellectual property and instead, it is enforced by means of unfair competition law, contract law and criminal law. This nomad nature of trade secrets makes it a high risk, high reward asset. The benefit in retaining the secret means infinite and unfettered use, however the concept does not prohibit a third party from unravelling the trade secret, reverse engineering it or stumbling upon it through honest means. Unlike patents, where the proprietor has an absolute right to prevent a copycat, even if the copycat stumbles on it or reverse engineers a product, a trade secret is fair game to those willing to crack the code, provided that the trade secret has not been acquired by deceptive measures.
A violation of a trade secret will be present where a competitor has been shown to have misappropriated a trade secret, that there has been a misuse of the information obtained and that the trade secret proprietor had taken all reasonable steps to maintain the secrecy of the information.
So far trade secrets seem like a viable strategy, especially seeing that it could relate to almost any information, such as source code, formulas, marketing and sales strategies, proprietary recipes, technical drawings, business plans and test data, to mention a few, however a trade secret must meet three universal requirements in order to be protectable:
- the information must not be known in the general business circles to which it relates , or the general public for that matter;
- the confidentiality of the relevant information must represent an economic benefit; and
- the information must be subject to reasonable efforts made to maintain its secrecy.
In order to show that reasonable efforts have been made to maintain secrecy, consider introducing certain checks and balances to ensure that there are proactive steps being taken in this regard. Internally, you should be considering appropriate document marking and management, ensuring that employment and partnership agreements create confidentiality obligations and that your company follows clean desk and secured system policies. When dealing with external third parties, your efforts should extend a little further. Aim to include confidentiality notices on important documents which record trade secrets or confidential information, conclude non-disclosure agreements (where necessary) and confidentiality agreements with relevant parties who may have access to such information and ensure that all agreements make sufficient provision for confidentiality obligations.
Lastly, consider clear definitions in all agreements as to what is included as confidential information and ensure that each agreement provides for protective obligations as it relates to confidential information.
Trade secrets are high risk, high reward, especially seeing that the lifespan of a trade secret is as long as you can keep it out of the public, unlike patents or copyright, which offer a limited protection lifespan. In order to ensure successful retention of trade secrets, it will be important to take stock of internal and external processes used by you to protect confidential information and to include appropriate checks and balances, where necessary. As can be seen, it’s not that easy to protect a trade secret, but when it works the benefits truly outweigh the effort. If you don’t believe me, try finding the recipe for coca cola.