4 Essentials of Trade Secrets
Trade secrets are one of a number of tools – including patents, trademarks, designs and copyright widely – which protect ‘creations of the mind’. Companies, researchers, inventors and creators often hold economically valuable information. They often keep this secret to give them an advantage over their competitors.
We’ve developed this interactive guide with eminent academics and experts to share tips and deepen your understanding of trade secrets. Thanks to the following organisations for their valuable insights, engagement and support.
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4 Essentials of Trade Secrets
Take a look at some examples of business and technical trade secrets.
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Trade secrets can last for decades (for example recipes or chemical compounds like Coca-Cola’s formula) or for a short time (like marketing survey results, new brand names, prices, product launch dates or bids).
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The most valuable trade secrets are source code, commercial bids and contracts, customer or suppliers lists, financial information and business plans. Learn WIPO presentation.
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To understand the types of trade secrets held by different SMEs and sectors, take a look at these EPO case studies.
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Their value can be actual or potential. There’s no minimum value threshold, since often value is difficult to work out and might change. So any perceived benefit often qualifies as commercial value.
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If a trade secret could be relatively easy to discover independently or through reverse engineering, patent protection could be a better bet. Usually the simpler the information the easier it is to reverse engineer. For instance, skilled programmers can often see how a product works and design something similar. But code is trickier (and sometimes impossible) to reverse engineer – so keeping it as a trade secret works well.
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The case of ‘Compulife Software v. Newman’ shows what happens when data isn’t kept secret. Lifting information from public websites doesn’t count as stealing a trade secret. Compulife got rate tables from insurers and used them on its website to let visitors get free insurance quotes. Newman then just used that data to generate quotes on their own websites.
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Trade secret owners must take reasonable steps to keep them secret. For example telling third parties about them, marking them as confidential or taking preventative measures to stop them being found out.
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Several EU countries make trade secret owners give evidence of how they aim to keep information confidential to grant protection or remedy issues. You can read more in this document.
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Energy storage company Skeleton has a structure in place for protecting technical know-how that can’t be patented and which they’ve decided should be a trade secret. It manages secrecy on a compartmentalised, need-to-know basis. They use the system to create access levels and move knowledge between different parts of the company.
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There was a recent trade secrets case on reverse engineering the mRNA sequence for Moderna’s COVID-19 vaccine from droplets left in used vials. This shows the importance of sound innovation protection strategies and processes for trade secrets.
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For something to be a trade secret it should have economic value, not be widely known or easily accessible and the owners should be taking proper steps to keep it secret.
Take a look at this document to find out more
Trade secrets give advantages to their owners simply because of the fact that competitors and others don’t know them.
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There’s a common misconception that you can only protect items of technology as trade secrets. But any information with actual or potential business value could be trade secrets too – whether financial, commercial, strategic or technical and scientific.
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Businesses can review their assets to discover trade secrets. They should also work out who needs access to them (and who doesn’t). Proving a trade secret is yours is also useful in a potential legal dispute.
Find out more in this fact sheet
Questions to identify a trade secret: Is it valuable? It is distinct from general knowledge or individual skill? Is it protected against unauthorised access or misuse? Did developing it take time, effort and money? Could others independently generate, duplicate, reverse engineer, or acquire it?
Find out more in this report
It’s vital to have well-defined information/document classification and stamping systems. They clarify which information is confidential and which can be shared restrictedly or freely.
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The ‘Levandowski case’ shows the need for written policies for employees to identify and protect trade secrets, to help them understand what belongs to the company and stop a trade secret being inadvertently disclosed.
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Organisations should have processes and systems for protecting, using and managing trade secrets as part of their business and Intellectual Property strategies.
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Make sure you protect and restrict access to trade secrets. That means storing trade secret information in locked cabinets or password-protecting electronic files. It also means monitoring activity around trade secrets, tracking when documents are opened or copied and telling employees about the measures (letting them know helps deter theft).
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Employees should only have access to data actually utilised or needed for a transaction.
Measures to manage trade secret information: Store organisational information in structured and systematic documents (physical and electronic), separate confidential and non–confidential information, control access (both electronic and physical), have a disaster recovery plan, encrypt your files, use antivirus software for electronic storage systems.
Measures to control access by third parties and employees: Review employment contracts, run regular information security policy awareness training for employees, use NDAs with liability clauses, report trade secret breach incidents, run information security audits, declassify information when it’s no longer a trade secret, enforce your information security policy quickly when a breach happens, conduct and document employee joining and exit interviews.
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Quality fabrics designer Vlisco protected its high-tech processes and methods as trade secrets inside its Dutch HQ. Not even Vlisco’s West Africa subsidiaries know the secret formulas for the company’s wax production.
Read Vlisco’s story
There are plenty of practical contractual options to protect trade secrets. They mainly consist of NDAs, non-use agreements, licence and know-how agreements for commercially transferring or lawfully using technology. Employment or consultancy agreements can also feature non-compete clauses or technical security measures for preventing trade secrets being stolen.
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An NDA is a contract telling the person signing it that they can’t share your confidential information, including after the relationship ends. Use NDAs for potential clients, licensees, advisers, ad-hoc project contributors and employees.
Read this factsheet to find out more
Other helpful tools to keep information secret: Non-disclosure or non-compete clauses in agreements or memoranda of understanding, non-solicitation clauses and agreements agreeing not to ‘steal’ the employees or customers of either party.
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Baking company Vilniaus Duona restricts access to its trade secrets with a combination of strategies, confidentiality and NDAs for staff and also by using technology like document management systems.
Read the case study
Companies and inventors with limited budgets use trade secrets as a cheaper – but not as safe as IP – way of protecting the results of their innovation efforts.
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The EU Trade Secrets Directive (EU) 2016/943 provides fast, effective, and accessible provisional measures, procedures and remedies for the immediate termination of the unlawful acts. A prerequisite of all these acts is the lack of consent of the trade secret holder (Article 4).
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You don’t need to register a trade secret. So it can be protected for an unlimited time and isn’t restricted by territory. But it has fairly limited protection compared to registered IP rights. Trade secrets rely on information protection policies to keep them secret.
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Assignment agreement linked to intellectual property right in addition to confidentiality agreements ensures a commitment from the employees to protect the company's intellectual property which includes all creative aspects of the employees' work, innovations, company sensitive information such as trade secrets. Read some cases of breached fiduciary duties and stolen trade secrets when former employees or consultants were hired by competitors.
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A trade secret isn’t the same as having exclusive rights over the information.
If someone else develops the same information by their own means, they can use it freely. Trade secret owners can’t prevent competitors from developing the same solutions through reverse engineering. This means finding out a device, object or system’s technological principles by analysing its structure, function and operation – it’s entirely legal.
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The EU Trade Secrets Directive sets a minimum standard for trade secret protection in the EU. Its Art. 3 explains how trade secrets might be legally learnt: (i) independent discovery or creation, (ii) reverse engineering, (iii) right of workers / unions to information or (iv) any other honest commercial practice.
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Read about reverse engineering the mRNA sequence for the Moderna COVID-19 vaccine.
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A trade secret is only legally protected if someone discovers it through illegitimate means – like theft, spying or bribery.
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Examples of improperly acquiring, using or disclosing a trade secret: Accessing it without your authorisation, copying it for personal use, giving it to someone else, or breaching an NDA and giving the information to someone else.
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Optics company EKSPLA sometimes keeps innovations as a trade secrets instead of applying for patents. It decides on a case-by-case basis, making improvements without disclosing them. But if a competitor does copy an improvement, they know they’ll have little protection.
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Misappropriation usually means a trade secret being improperly acquired by someone who had proper access to it (internal theft) or by outsiders (external theft). For example ex-employees passing the trade secrets of their old employer to a new employer, or using the trade secrets of their old employer in a new business or new job. The key question is whether or not someone with proper access to a trade secret had a duty of trust and confidence which they violated by using and/or disclosing it.
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In principle, misappropriating a trade secret doesn’t have to be intentional or negligent. So a trade secret holder can still get an injunction against an infringer even if it’s not their fault. But damages claims do need proof that they knew or should have known they were doing it.
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Motorola filed a lawsuit against ICS – and several ex-Motorola managers who left its Timing Solutions operation to set up a new ICS operation. Motorola said ICS did this to get its trade secrets – and that the ex-managers had breached fiduciary duties and misappropriated trade secrets.
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This study investigates the impact on European businesses and organisations of new risks from the digital revolution and a specific type of cyber incident – industrial cyber espionage and cyber theft of trade secrets.
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If your invention is reverse-engineered, leaked or patented by someone else, your trade secret could prove to be hugely costly.
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Once disclosed (whether legally or not) a trade secret owner can’t stop anyone else using the subject of that secret.
To have credible court evidence it’s essential to record everything you do to secure a trade secret.
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Trade secrets can be legally discovered through reverse engineering. So they’re often difficult to enforce compared to patents. And most trade secret laws only protect against someone who obtains information improperly or who are in specified relationships with a trade secret owner. Patents are different because they can be fully enforced against infringers, regardless of their intention.
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Information can be disclosed ‘in seriatim’ (like onion layers being peeled back) – revealing the most valuable information only after lengthy discussion and negotiation and if recipients agree to be bound by a confidentiality agreement. This is how trade secrets can aid licensing transactions.
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To protect against dishonest behaviour, you can initiate a legal proceeding before a court. The outcome might be a court order banning whoever disclosed, acquired or used the trade secret from using or disclosing it further. It could also include financial compensation.
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See the conclusion of the EUIPO study "Protecting innovation through Trade Secrets and Patents: Determinants for European Union firms” (July 2017).
Trade secrets help extend the lead time of first-mover advantage by keeping advantageous information secret. ‘First-mover advantage’ is when a company enters a market earlier than its competitors. This often helps it grab a big market share for a particular product or service.
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Silk-making company De Negri’s technical innovation is a main element of its success. It uses trade secrets to protect how it modifies, improves and customises its production – from twisting to dying and weaving to finishing.
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Trade secrets and IP are complementary ways of appropriating intangible assets, but trade secrets don’t grant exclusive rights. Trade secrets are often part of the creative process leading to innovation and IP rights. For example, before an inventor patents something, they keep it secret to guard its novelty. So trade secrets are at the origin of patents (new inventions), copyright (new novels or songs), trademarks (new branded products), and designs (new product model designs).
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Usually, companies use secrecy when the valuable information cannot be protected by patents, because it does not pass the patentability thresholds, nor other intellectual property rights. More reasons and limitations behind trade secrets in this European Commission document.
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Deciding how to protect a technical improvement depends on whether it’s easily copyable. If it is, it’s best to protect it with IP rights. If not, and it’s unlikely someone else would come up with the same thing, then keeping it as a trade secret usually raises a good enough barrier for competitors.
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A European Observatory on Infringements of IP Rights study found that trade secrets (alone or combined with patents) were usually used for maintaining or boosting an innovation’s competitiveness, in particular around open innovation practices like research cooperation and especially with distant (non-European) partners.
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Some researchers say patenting inventions – rather than keeping them secret – is better for society. They argue that the disclosures patents demand encourage more innovation as others can build on the original idea.
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It’s important to guard trade secrets well during early development stages to protect information that gives competitive advantage. In a development phase, a company typically decides whether an idea is commercial and whether it might need something like a patent. Patents are sometimes better for maintaining a lead time on confidential information.
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“Sometimes the best option is a combination of patent protection for the basic technology and trade secrets for details of the invention.” Virginija Petrauskienė IP specialist, EKSPLA.
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Trade secrets can protect an invention even after patent protection lapses. The US Federal Appeals Court awarded DuPont Co. $919.9m compensation for the theft of trade secrets. DuPont owned several patents on a product (Klevar) and kept the commercial manufacturing process a secret even after the patents expired.
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Manufacturer Facit Homes’ initial IP strategy assessed copyright for architecture (plans, building, software), patents (how components were put together), design (components’ appearance), trademarks (brand names and logos), trade secrets (how designs became manufactured components).
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You should look for what you need to get to market, but take into account the confidential nature of a trade secret.
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Trade secrets as property rights are licensable, so you can include them in licensing agreements alongside registered IP rights. A well-written licensing agreement should stipulate separate royalties for each form of right. This makes sure that if one IP right becomes invalid, another might keep providing income. Trade secrets can also be assigned or sold. So they can improve a new business’s prospects – crucial for spin-offs or start-ups.
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Pilkington Group Ltd. spread its innovative float glass manufacturing process globally. They adopted a combined strategy by protecting the process through patents and trade secrets and licensing them to traditional companies.
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Trade secrecy makes it more difficult for analysts and institutional investors to follow companies. As a consequence they may refuse to sign NDAs. Stronger trade secret protection reduces the quality of analysts’ forecasts in terms of dispersion and accuracy.
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This EUIPO study found that export and publicly funded firms prefer patents over trade secrets – probably because of requirements associated with public funding.
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The EPO case study of Oxeon: A portfolio approach that combines patents, trademarks and trade secrets provides complementary protection, facilitating both exclusivity and licensing of technology and IP assets. Read more here
The EPO case study of Dyemansion: Carefully consider how to protect your IP: through patents, trade secrets, etc., or defensive publication. Live case study presentation
The EPO case study of Bender MedSystems: Operational excellence including trade secrets is the key intellectual asset to secure the future of your employees after an exit. Read more here
