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Intellectual Property: Trade Secret

       A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information used by a business to obtain an advantage over competitors or customers.  The precise language by which a trade secret is defined varies by jurisdiction. There are three primary factors that are common to all such definitions -- a trade secret is some sort of information that:

  • is not generally known to the relevant portion of 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); and
  • is the subject of reasonable efforts to maintain its secrecy.

     Trade secrets are not protected by law in the same manner as trademarks or patents. Probably one of the most significant differences is that a trade secret is protected without disclosure of the secret.  Trade secrets are by definition not disclosed to the world at large. Instead, owners of trade secrets take measures to keep their special knowledge out of the hands of competitors through a variety of civil and commercial means, including the use of non-disclosure agreements (NDA's), designed to operate as a disincentive to 3rd party exposure and development.   Violation of the signed NDA agreement, generally carries exposure to stiff financial penalties.  Similar agreements are often signed by representatives of other companies with whom the trade secret holder is engaged in licensing talks or other business negotiations.  

        Trade secret protection can, in principle, be in effect indefinitely and in this respect offers an advantage over patent protection, which lasts only for a specifically delimited period (U.S. patents expire 20 years after the filing date).  For example, Coca Cola has no patent for its cola formula but has been very effective in protecting it for many more years than a patent would have.  The "down side" of such protection is that it is comparatively easy to lose (for example, by Reverse Engineering or unintentional exposure , which a patent will withstand but a trade secret will not) and comes equipped with no minimum guaranteed period of years.  Trade secrets are highly protected yet can be exposed through industrial espionage or reverse engineering. Under most trade secret regimes, a trade secret is not deemed to exist unless its purported holder takes reasonable steps to maintain secrecy.  See Reverse Engineering.

Protecting Trade Secrets

      The US adoption of the UTSA, the Uniform Trade Secrets Act has been adopted by most states as the basis for trade secret law.  Uniformity among different states' laws will strengthen business' claims on their trade secrets.  Another significant development in U.S. law is the Economic Espionage Act of 1996), which makes the theft or misappropriation of a trade secret a federal crime.  In common law jurisdictions, confidentiality information and trade secret rights are regarded as an equitable right rather than a property right.  In general, the action for breach of confidence is based on a principle of preserving "good faith". 

See Patents, Trademarks & Copyrights 
See Royalty - License Agreement

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