Trade Secrets

What is the relationship between trade secrets and a covenant not to compete?

2007///

A covenant not to compete is an agreement or contract that prevents or restains a person from performing a lawful profession, trade, or business for a period of time. For instance, an engineering firm may want to restrain departing employees from working at competing companies for a certain period of time. The rationale behind these noncompetition provisions is based on the argument that a departing employee will inevitably use concepts, ideas, and potentially trade secrets learned while working at the company once it goes to work for a competing firm. What companies regard as valuable IP is often very broad and goes beyond the legal definition of trade secrets (e.g. employeed trainning, business methods, general experience gained while working, etc.) The regulation of these contracts is a matter of state law and varies from state to state. In general, however, any contract that presents a person from performing his lawful profession or business is generally considered to restrain free trade and is not favored by the corts. Some states, such as California, prohibit these type of restrains on trade. These contracts are enforsable when they meet the requirements of 1) consideration (i.e. the employee must receive something in exchange from it), 2) protection of a legitimate business interest, and 3) reasonabless of the restrain (duration, scope, etc).

Covenants not to compete are intimately related to trade secrets. In fact, companies use these contract to protect their "intellectual property" (defined in more general terms than its legal definition) and competitive advantage. While companies may not be able to enforce some of the noncompetition provisions in certain states, they always can prohibit an employee from using "confidential information" (i.e. trade secrets). If the company can demonstrate that a departing employee is using information that meets the legal requirements of trade secret, it can file a lawsuit to prevent this from happening and seek compensation for the damages caused. The success of these lawsuits greatly depends on the specificity of the trade secret and the company's trade secret management and security plan (e.g. the nature of the confidentiality agreement, how the company treats the secret information, etc.).

Primary Reference:
[1] Stim, R. "Intellectual Property. Patents, Trademarks, and Copyrights" West Legal Studies.
[2] Black's Law Dictionary 5th ed., (West Publishing, 1979).

Tags: trade secrets

What are the two ways to protect trade secrets under state law?

2007///

Trade secrets (i.e. any formula, pattern, device, or compilation of information of economic value treated in confidentiality) are protected by state law in two ways: 1) misappropriation and 2) contract law. Trade secret law is primarily derived from common law, state statues, federal law, and the Restatement of Torts. State laws prohibit the misappropriation of trade secrets. Under the Uniform Trade Secrets Act of 1975 (amended in 1985) misappropriation is defined as "(i) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (ii) disclosure or use of a trade secret of another without express or implied consent by a person who (A) used improper means to acquire knowledge of the trade secret; or (B) at the time of disclosure or use knew or had reason to know that his knowledge of the trade secret was (I) derived from or through a person who has utilized improper means to acquire it; (II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (C) before a material change of his position, knew or had reason to know that it was a trade secret ad that knowledge of it had been acquired by accident or mistake."

The Uniform Trade Secrets Act does not affect: (1) contractual remedies, whether or not based upon misappropriation of a trade secret, (2) other civil remedies that are not based upon misappropriation of a trade secret, and/or (3) criminal remedies, whether or not based upon misappropriation of a trade secret. Consequently, trade secrets are also protected under the principles of state contract law. Companies are advised to require the relevant parties to enter into a contract that includes a confidentiality or nondisclosure agreement.

Finally, in addition to the protection granted by state law, since 1996 trade secrets are also protected by federal law under the Economic Espionage Act of 1996.

What is a Trade Secret?

Broadly speaking, any confidential business information which provides an enterprise a competitive edge may be considered a trade secret. Trade secrets encompass manufacturing or industrial secrets and commercial secrets. The unauthorized use of such information by persons other than the holder is regarded as an unfair practice and a violation of the trade secret. Depending on the legal system, the protection of trade secrets forms part of the general concept of protection against unfair competition or is based on specific provisions or case law on the protection of confidential information.

The subject matter of trade secrets is usually defined in broad terms and includes sales methods, distribution methods, consumer profiles, advertising strategies, lists of suppliers and clients, and manufacturing processes. While a final determination of what information constitutes a trade secret will depend on the circumstances of each individual case, clearly unfair practices in respect of secret information include industrial or commercial espionage, breach of contract and breach of confidence.

Trade secrets are a type of intellectual property that comprise formulas, practices, processes, designs, instruments, patterns, or compilations of information that have inherent economic value because they are not generally known or readily ascertainable by others, and which the owner takes reasonable measures to keep secret.^[1] In some jurisdictions, such secrets are referred to as confidential information.

Contents

• 1Definition
• 2Value
• 3Protection
• 4Misappropriation
• 5History
  • 5.1Roman law
  • 5.219th century
  • 5.3Worldwide
    • 5.3.1Commonwealth nations
      • 5.3.1.1England and Wales
      • 5.3.1.2Hong Kong
    • 5.3.2European Union
    • 5.3.3United States
      • 5.3.3.1State law
      • 5.3.3.2Federal law
• 6Comparison to other types of intellectual property law
  • 6.1Comparison with trademarks
  • 6.2Comparison with patents
• 7Criticism
• 8Cases
• 9See also
• 10References and notes
• 11Further reading
• 12External links

Definition[edit]

The precise language by which a trade secret is defined varies by jurisdiction, as do the particular types of information that are subject to trade secret protection. Three factors are common to all such definitions:

A trade secret is information that

• is not generally known to the public;
• confers economic benefit on its holder because the information is not publicly known; and
• where the holder makes efforts to maintain its secrecy.

In international law, these three factors define a trade secret under article 39 of the Agreement on Trade-Related Aspects of Intellectual Property Rights, commonly referred to as the TRIPS Agreement.^[2]

Similarly, in the United States Economic Espionage Act of 1996, "A trade secret, as defined under 18 U.S.C. § 1839(3)(A),(B) (1996), has three parts: (1) information; (2) reasonable measures taken to protect the information; and (3) which derives independent economic value from not being publicly known."^[3]

Value[edit]

Trade secrets are an important, but invisible component of a company's intellectual property (IP). Their contribution to a company's value, measured as its market capitalization, can be major.^[4] Being invisible, that contribution is hard to measure.^[5] Patents are a visible contribution, but delayed, and unsuitable for internal innovations. Having an internal scoreboard provides insight into the cost of risks of employees leaving to serve or start competing ventures.^{[citation needed]}

Protection[edit]

In contrast to registered intellectual property, trade secrets are, by definition, not disclosed to the world at large. Instead, owners of trade secrets seek to protect trade secret information from competitors by instituting special procedures for handling it, as well as technological and legal security measures.^[6] Legal protections include non-disclosure agreements (NDAs), and work-for-hire and non-compete clauses. In other words, in exchange for an opportunity to be employed by the holder of secrets, an employee may sign agreements to not reveal their prospective employer's proprietary information, to surrender or assign to their employer ownership rights to intellectual work and work-products produced during the course (or as a condition) of employment, and to not work for a competitor for a given period of time (sometimes within a given geographic region). Violation of the agreement generally carries the possibility of heavy financial penalties which operate as a disincentive to reveal trade secrets. However, proving a breach of an NDA by a former stakeholder who is legally working for a competitor or prevailing in a lawsuit for breaching a non-compete clause can be very difficult.^[7] A holder of a trade secret may also require similar agreements from other parties he or she deals with, such as vendors, licensees, and board members.

As a company can protect its confidential information through NDA, work-for-hire, and non-compete contracts with its stakeholders (within the constraints of employment law, including only restraint that is reasonable in geographic- and time-scope), these protective contractual measures effectively create a perpetual monopoly on secret information that does not expire as would a patent or copyright. The lack of formal protection associated with registered intellectual property rights, however, means that a third party not bound by a signed agreement is not prevented from independently duplicating and using the secret information once it is discovered, such as through reverse engineering.

Green Chartreuse liqueurprotected by confidential information of the ingredients

Therefore, trade secrets such as secret formulae are often protected by restricting the key information to a few trusted individuals. Famous examples of products protected by trade secrets are Chartreuse liqueur and Coca-Cola.^[8]

Because protection of trade secrets can, in principle, extend indefinitely, it therefore may provide an advantage over patent protection and other registered intellectual property rights, which last only for a specific duration. The Coca-Cola company, for example, has no patent for the formula of Coca-Cola and has been effective in protecting it for many more years than the 20 years of protection that a patent would have provided. In fact, Coca-Cola refused to reveal its trade secret under at least two judges' orders.^[9]

Misappropriation[edit]

Companies often try to discover one another's trade secrets through lawful methods of reverse engineering or employee poaching on one hand, and potentially unlawful methods including industrial espionage on the other. Acts of industrial espionage are generally illegal in their own right under the relevant governing laws, and penalties can be harsh.^[10] The importance of that illegality to trade secret law is: if a trade secret is acquired by improper means (a somewhat wider concept than "illegal means" but inclusive of such means), then the secret is generally deemed to have been misappropriated. Thus, if a trade secret has been acquired via industrial espionage, its acquirer will probably be subject to legal liability for having acquired it improperly⁠ ⁠— this notwithstanding, the holder of the trade secret is nevertheless obliged to protect against such espionage to some degree in order to safeguard the secret, as under most trade secret regimes, a trade secret is not deemed to exist unless its purported holder takes reasonable steps to maintain its secrecy.^{[citation needed]}

History[edit]

Roman law[edit]

Commentators starting with A. Arthur Schiller assert that trade secrets were protected under Roman law by a claim known as actio servi corrupti, interpreted as an "action for making a slave worse" (or an action for corrupting a servant). The Roman law is described as follows:

[T]he Roman owner of a mark or firm name was legally protected against unfair usage by a competitor through the actio servi corrupti ... which the Roman jurists used to grant commercial relief under the guise of private law actions. "If, as the writer believes [writes Schiller], various private cases of action were available in satisfying commercial needs, the state was acting in exactly the same fashion as it does at the present day."^[11]

The suggestion that trade secret law has its roots in Roman law was introduced in 1929 in a Columbia Law Review article called "Trade Secrets and the Roman Law: The Actio Servi Corrupti", which has been reproduced in Schiller's, An American Experience in Roman Law 1 (1971). See Trade Secrets and Roman Law: The Myth Exploded, at 19. However, the University of Georgia Law School professor Alan Watson argued in Trade Secrets and Roman Law: The Myth Exploded that the actio servi corrupti was not used to protect trade secrets p. 19. Rather, he explained:

Schiller is sadly mistaken as to what was going on. ... The actio servi corrupti presumably or possibly could be used to protect trade secrets and other similar commercial interests. That was not its purpose and was, at most, an incidental spin-off. But there is not the slightest evidence that the action was ever so used. In this regard the actio servi corrupti is not unique. Exactly the same can be said of many private law actions including those for theft, damage to property, deposit, and production of property. All of these could, I suppose, be used to protect trade secrets, etc., but there is no evidence they were. It is bizarre to see any degree the Roman actio servi corrupti as the counterpart of modern law for the protection of trade secrets and other such commercial interests.^[11]

19th century[edit]

Trade secret law as known today made its first appearance in England in 1817 in Newbery v. James,^{[12][dubious – discuss]} and in the United States in 1837 in Vickery v. Welch.^{[13][14][clarification needed]} While those cases involved the first known common law causes of action based on a modern concept of trade secret laws, neither involved injunctive relief; rather, they involved damages only.^[14] In England, the first case involving injunctive relief came in 1820 in Yovatt v Winyard,^[15] while in the United States, it took until the 1866 case Taylor v. Blanchard.^{[16][17][clarification needed]}

Trade secrets law continued to evolve throughout the United States as a hodgepodge of state laws. In 1939, the American Law Institute issued the Restatement of Torts, containing a summary of trade secret laws across states, which served as the primary resource until the latter part of the century. As of 2013, however, only four states—Massachusetts, New Jersey, New York, and Texas—still rely on the Restatement as their primary source of guidance (other than their body of state case law).^{[citation needed]} It has also been recently^[when?]theorized that the doctrine of trade secrets should protect competitively valuable, personal information of company executives, in a concept known as "executive trade secrets".

Worldwide[edit]

Commonwealth nations[edit]

In Commonwealth common law jurisdictions, confidentiality and trade secrets are regarded as an equitable right rather than a property right.^{[citation needed]}

England and Wales[edit]

See also: Breach of confidence in English law

The Court of Appeal of England and Wales in the case of Saltman Engineering Co Ltd v. Campbell Engineering Ltd^[18] held that the action for breach of confidence is based on a principle of preserving "good faith".

The test for a cause of action for breach of confidence in the common law world is set out in the case of Coco v. A.N. Clark (Engineers) Ltd:^[19]

• The information itself must have the necessary quality of confidence about it;
• That information must have been imparted in circumstances imparting an obligation of confidence;
• There must be an unauthorized use of that information to the detriment of the party communicating it.

The "quality of confidence" highlights that trade secrets are a legal concept. With sufficient effort or through illegal acts (such as breaking and entering), competitors can usually obtain trade secrets. However, so long as the owner of the trade secret can prove that reasonable efforts have been made to keep the information confidential, the information remains a trade secret and generally remains legally protected. Conversely, trade secret owners who cannot evidence reasonable efforts at protecting confidential information risk losing the trade secret, even if the information is obtained by competitors illegally. It is for this reason that trade secret owners shred documents and do not simply recycle them.^{[citation needed]}

A successful plaintiff is entitled to various forms of judicial relief, including:

• An injunction
• An account of profits or an award of damages
• A declaration

Hong Kong[edit]

Hong Kong does not follow the traditional commonwealth approach, instead recognizing trade secrets where a judgment of the High Court indicates that confidential information may be a property right.^{[citation needed]}

European Union[edit]

The EU adopted a Directive on the Protection of Trade Secrets on 27 May 2016.^[20] The goal of the directive is to harmonize the definition of trade secrets in accordance with existing international standards, and the means of obtaining protection of trade secrets within the EU.^[20]

United States[edit]

Within the U.S., trade secrets generally encompass a company's proprietary information that is not generally known to its competitors, and which provides the company with a competitive advantage.^[21]

Although trade secrets law evolved under state common law, prior to 1974, the question of whether patent law preempted state trade secrets law had been unanswered. In 1974, the United States Supreme Court issued the landmark decision, Kewanee Oil Co. v. Bicron Corp., which resolved the question in favor of allowing the states to freely develop their own trade secret laws.^[22]

State law[edit]

In 1979 several U.S. states adopted the Uniform Trade Secrets Act (UTSA), which was further amended in 1985, with approximately 47 states having adopted some variation of it as the basis for trade secret law. Another significant development is the Economic Espionage Act (EEA) of 1996 (18 U.S.C. §§ 1831–1839), which makes the theft or misappropriation of a trade secret a federal crime.

This law contains two provisions criminalizing two sorts of activity.

1. 18 U.S.C. § 1831(a), criminalizes the theft of trade secrets to benefit foreign powers.
2. 18 U.S.C. § 1832, criminalizes their theft for commercial or economic purposes.

The statutory penalties are different for the two offenses. The EEA was extended in 2016 to allow companies to file civil suits in federal court.^[23]

Federal law[edit]

On May 11, 2016, President Obama signed the Defend Trade Secrets Act (DTSA), 18 U.S.C.§§1839 et seq., which for the first time created a federal cause of action for misappropriating trade secrets.^[24] The DTSA provides for both a private right of action for damages and injunction and a civil action for injunction brought by the Attorney General.^[25]

The statute followed state laws on liability in significant part, defining trade secrets in the same way as the Uniform Trade Secrets Act as,

all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.

However, the law contains several important differences from prior law.

1. Because it is a federal law, trade secret cases can be prosecuted in federal courts with concomitant procedural advantages.
2. It provides for the unusual remedy of preliminary seizure of "property necessary to prevent the propagation or dissemination of the trade secret," 18 U.S.C. §1836
3. It provides for remedies to include royalties in appropriate cases and exemplary damages up to two times the actual damages in cases of "willful and malicious" appropriation, 18 U.S.C. §1836(b)(3).

The DTSA also clarifies that a United States resident (including a company) can be liable for misappropriation that takes place outside the United States, and any person can be liable as long as an act in furtherance of the misappropriation takes place in the United States, 18 U.S.C. §1837. The DTSA provides the courts with broad injunctive powers. 18 U.S.C. §1836(b)(3).

The DTSA does not preempt or supplant state laws, but provides an additional cause of action. Because states vary significantly in their approach to the "inevitable disclosure" doctrine,^[26] its use has limited, if any, application under the DTSA, 18 U.S.C.§1836(b)(3)(A).^[27]

Comparison to other types of intellectual property law[edit]

In the United States, trade secrets are not protected by law in the same manner as patents or trademarks. Historically, trademarks and patents are protected under federal statutes, the Lanham Act and Patent Act, respectively, while trade secrets are usually protected under state laws, and most states have enacted the Uniform Trade Secrets Act (UTSA), except for Massachusetts, New York, and North Carolina. However, since 2016 this situation changed with the enactment of the Defend Trade Secrets Act (DTSA), making trade secrets also protectable under a federal law. One of the differences between patents and trademarks, on the one hand, and trade secrets, on the other, is that a trade secret is protected only when the owner has taken reasonable measures to protect the information as a secret (see 18 U.S.C. § 1839(3)(A)).

Comparison with trademarks[edit]

Nations have different trademark policies. Assuming the mark in question meets certain other standards of protectibility, trademarks are generally protected from infringement on the grounds that other uses might confuse consumers as to the origin or nature of the goods once the mark has been associated with a particular supplier. Similar considerations apply to service marks and trade dress.

By definition, a trademark enjoys no protection (qua trademark) until and unless it is "disclosed" to consumers, for only then are consumers able to associate it with a supplier or source in the requisite manner. (That a company plans to use a certain trademark might itself be protectable as a trade secret, however, until the mark is actually made public.)^[28]

To acquire a trademark rights under U.S. law, one must simply use the mark "in commerce".^[29] It is possible to register a trademark in the United States, both at the federal and state levels. Registration of trademarks confers some advantages, including stronger protection in certain respects, but registration is not required in order to get protection.^[29] Registration may be required in order to file a lawsuit for trademark infringement.

Comparison with patents[edit]

To acquire a patent, full information about the method or product has to be supplied to the patent office and upon publication or issuance, will then be available to all. After expiration of the patent, competitors can copy the method or product legally. The temporary monopoly on the subject matter of the patent is regarded as a tradeoff for thus disclosing the information to the public.^{[citation needed]}

One popular misconception held by many is that trade secret protection is incompatible with patent protection. It is typically said that if one applies for a patent one can no longer maintain a trade secret on the invention, but this is an oversimplification.^[30] In order to obtain a patent, the inventor must disclose the invention, so that others will be able to both make and use the invention. Also, to obtain a patent in the United States, any preferences^{[clarification needed]} must likewise be disclosed.^[31] What is typically not appreciated though is that the critical time for satisfying this disclosure requirement is at the time the application is filed. In many if not most situations, improvements will be made to an invention even after filing of the patent application, and additional information will be learned. None of this additional information must be disclosed and can instead be kept as a secret.^[32] Virtually all patent licenses include clauses that require the inventor to disclose any trade secrets they have. Frequently it is this information not disclosed in the patent that is the most commercially viable. Thus, patent licensors should take steps to continue to maintain trade secrets as secrets, otherwise they will be lost. Accordingly, before disclosing any secrets not already protected by an issued patent the licensor will use a non-disclosure agreement.

Compared to patents, the advantages of trade secrets are that a trade secret is not limited in time (it "continues indefinitely as long as the secret is not revealed to the public", whereas a patent is only in force for a specified time, after which others may freely copy the invention), a trade secret does not imply any registration costs,^[33] has an immediate effect, does not require compliance with any formalities, and does not imply any disclosure of the invention to the public.^[33] The disadvantages of trade secrets include that "others may be able to legally discover the secret and be thereafter entitled to use it", "others may obtain patent protection for legally discovered secrets", and a trade secret is more difficult to enforce than a patent.^[34]

Criticism[edit]

Trade secret regulations that mask the composition of chemical agents in consumer products have been criticized for allowing the trade secret holders to hide the presence of potentially harmful and toxic substances. It has been argued that the public is being denied a clear picture of such products' safety, whereas competitors are well positioned to analyze its chemical composition.^[35] In 2004, the National Environmental Trust tested 40 common consumer products; in more than half of them they found toxic substances not listed on the product label.^[35]

Cases[edit]

• Data General Corp. v. Digital Computer Controls, Inc., 297 A.2d 433 (Del. Ch. 1971): protection and disclosure of design documents.
• Rivendell Forest Prods. v. Georgia-Pacific Corp., 28 F.3d 1042: trade secrets and software systems.
• IBM v. Papermaster (No. 08-9078, 2008 U.S. Dist): Mark Papermaster moving from IBM to Apple computer in 2008.
• Du Pont de Nemours and Company v. Kolon Industries Incorporated, Nos. 10-1103, 10-1275. U.S. Court of Appeals for the Fourth Circuit. Argued Oct. 26, 2010–March 11, 2011.^[36] trade secrets case involving Kevlar fiber, resulting in award to DuPont of ~US$920 million.^[37][38][39]
• Silvaco Data Systems v. Intel Corp. addressed the question of whether possession of software object code can result in misappropriation of trade secrets
• Christou v. Beatport, LLC constituted that MySpace profiles could be held as trade secrets.

Trade Secrets

Under the Uniform Trade Secrets Act (“UTSA”), a trade secret is defined as information that derives independent economic value because it is not generally known or readily ascertainable, and it is the subject of efforts to maintain secrecy. Unlike copyrights, patents, and trademarks, trade secrets are not registered with a government agency. However, in some cases, they can represent a company’s most valuable intellectual property assets.

The UTSA has been enacted by most states, but in states where it has not been enacted, infringement or “misappropriation” of a trade secret remains a common law tort. Common issues involving trade secrets are:

• Nondisclosure Agreements
• Noncompete Agreements
• Infringement
• Enforcement

Trade secrets are easily misappropriated. Often, they consist of information that can be memorized or noted down by employees, customers, developers, suppliers, and others. The more people know a trade secret in an economy where employee turnover is high, the harder it is to keep the information secret. If a competitor, journalist, or blogger gets hold of the trade secret, the information may be put to use immediately. Once a trade secret becomes public, its status as a trade secret may be lost.

Examples of Trade Secrets

Information that can be kept as a trade secret includes formulas, patterns, compilations, programs, devices, methods, techniques, or processes. Some examples of trade secrets include customer lists and manufacturing processes. The economic value of the information can be actual or potential. For example, if you have not actually started producing a particular useful device according to a blueprint, you can still protect the blueprint as a trade secret on the basis that it has the potential for economic value.

Sometimes the information that is protected as a trade secret may also be protectable as an invention under a patent. However, in order to obtain a patent, you must make a public disclosure of how an invention can be reproduced. Patent protection is a limited monopoly for a specific time, whereas trade secret protection continues until the trade secret is publicly disclosed. The same invention cannot receive patent and trade secret protection at the same time.

What Do You Need to Prove in a Trade Secret Claim?

In most states, in order to prove a trade secret claim, you will need to prove that:

• The subject matter at issue is a trade secret;
• You made reasonable efforts to prevent the trade secret from being disclosed; and
• Somebody else misappropriated the information.

There are two types of illegal appropriation of a trade secret. It may be acquired improperly, or it may involve a breach of confidence. A competitor can lawfully use independent discovery, acquire a trade secret through an accidental disclosure based on the trade secret owner’s failure to reasonably guard the secret, or use reverse engineering.

Some companies wonder what the court considers “reasonable” efforts to guard trade secrets. In general, disclosure of trade secrets should be limited to a need-to-know basis. Anyone to whom the trade secret must be disclosed should have to sign a nondisclosure agreement, and when possible, a noncompete agreement. These agreements can include clauses that restrain employees from working on confidential information from their home computers. Any documents or items that contain trade secrets should be conspicuously marked “confidential.” The policy regarding trade secrets should be clearly articulated in the company handbook, and measures should be taken to restrict access to the trade secrets, such as by issuing employee badges or installing locks and passwords.

Since no government entity monitors trade secrets, enforcement of trade secrets is largely a matter of policing by private companies that can afford to do so. However, in the case of intentional theft of trade secrets, the federal Economic Espionage Act of 1996 and some state laws provide criminal penalties. Misappropriation of trade secrets is also a form of unfair competition.

Noncompete Agreements

By definition, trade secrets carry a competitive advantage. They provide a company with an economic benefit, and they are not told to others because those others might create competing products or services. However, trade secrets and sensitive business information must be disclosed to certain employees and other companies in order to carry out the business of a company. When employees who possess your trade secrets leave, they may take your secret and use it for their personal advantage by opening a competing business or by working for a competitor who uses your secret. Many businesses use carefully drafted noncompete agreements, in conjunction with a nondisclosure agreement, to protect their trade secrets from being misappropriated by the competition. The purpose of a noncompete agreement is to prevent unfair competition.

A noncompete agreement is one in which an employee promises not to work for direct competitors of the employer for a limited term after leaving a company. This means that competitors will not have access to the confidential information you disclose to an employee for a specific period of time, during which time you can exploit the economic benefits of your trade secret.

Many companies would like to keep a trade secret indefinitely. In theory, this is possible unless the company also seeks a patent for the information or invention. Patents require a public disclosure of proprietary information. However, courts usually do not enforce noncompete agreements that leave the term of the agreement open indefinitely.

Noncompete agreements can be enforced in most states, but it is important to be aware that courts highly value an individual’s right to earn a living. Each state has its own laws regarding the circumstances under which they may be enforced. If your business is in California, you should be aware that the state has a settled public policy in favor of open competition, and it has enacted a law that presumptively voids noncompete agreements except in very limited circumstances.

Among the limited circumstances in California are noncompete agreements that are necessary to protect an employer’s trade secrets. However, this is a judicially created exception, under which employers rarely prevail. If you are accused of breaching a noncompete agreement in California, you may have a number of strong defenses. In contrast, if you are accused of breaching a reasonable noncompete agreement in another state, your defenses may be quite limited.

What Makes a Noncompete Agreement Reasonable?

In most states, some general rules apply. An employer should have a good business reason for asking an employee to sign a noncompete agreement. Usually, the protection of sensitive trade secret information is a good reason. As an employer, it can be helpful to be selective about which employees sign the agreement. You should only ask those employees to sign the agreement who are likely to be exposed to trade secrets.

Moreover, it is important for an employer to establish that signing the noncompete agreement is a prerequisite for receiving the job. An employee who is already employed must be provided some other benefit, such as a promotion in title or a raise, in exchange for his or her signature. If you are an existing employee who is asked to sign a noncompete agreement, you should be aware that you have greater leverage in negotiating your noncompete agreement than you had as a job applicant.

The court must consider the noncompete agreement “reasonable.” Each state has its own nuances when it comes to what courts think is reasonable. In general, a noncompete agreement should be of limited duration and limited geographic range, and it should only prohibit the employee from engaging in a limited number of businesses. Usually, a noncompete agreement that lasts longer than two years is in danger of running afoul of the reasonableness rule. Too many restrictions on an employee will seem to the court like the company is trying to punish him or her for leaving the company.

In general, if you are an employee who has been exposed to trade secrets, it is probably wise to honor a reasonable noncompete agreement that is limited to a short period of time, a specific city or state, and a single business. However, if any of these limitations is extremely restrictive, or if you are in California, you should consult an attorney about other options.

Nondisclosure Agreements

Trade secrets are an important form of intellectual property. Like other intellectual property, they are considered business assets. Trade secrets may include formulas, manufacturing assets, customer lists, or sales plans. In order to be considered a trade secret, information that confers an economic advantage must also be the subject of reasonable efforts to maintain the information’s secrecy. However, in order to run a business, you may need to disclose a trade secret to employees, vendors, suppliers, or other businesses.

Some companies take secrecy to extreme levels, but this requires great expense and is not always necessary. One of the simple ways that companies reasonably protect a trade secret is by requiring anyone to whom they disclose the secret to sign a nondisclosure agreement (NDA). Often, an employee is required to sign both an NDA and a noncompete agreement in order to make it easier to enforce a trade secret.

An NDA is a contract in which the parties to the contract promise to protect the confidentiality of any secret information disclosed to them. The contract creates a confidential relationship. The NDA can be mutual, in which both parties are exchanging secrets, or it can be a one-way agreement, such as when you disclose confidential information to an employee in order to grow your business or develop a product. It is better for the agreement to be in writing, since the contents of a written document are easier to prove than the nature of a conversation. The NDA ensures your secrets remain secret, and if they do not you have legal recourse against the person or entity that disclosed them.

When an NDA is violated, you can ask the court to enjoin the party responsible from infringing or misappropriating your trade secrets, and you can sue for any resulting damages. This type of contract allows the owner of the trade secret, who may be developing products that will later be able to be reverse engineered, to get time to beat out competitors.

What Should Be Included in a Nondisclosure Agreement?

In general, it is a sound business practice to have an experienced attorney draft your nondisclosure agreement. An attorney can anticipate the way the court will view the agreement, if it ever needs to be enforced, and can make the language as strong as possible. An NDA typically includes:

• A definition of what information will be kept confidential,
• The obligations of the party receiving the information,
• The time period during which the information must kept confidential, and
• Exclusions.

It is important to have a full explanation of what is to be kept protected, but usually this is a list of categories of information that are to be kept secret, not the trade secrets themselves. The categories may be such things as financial information, customer lists, manufacturing processes, or innovative methods.

The party receiving the information must agree to hold and maintain trade secrets in confidence, not breaching the confidential relationship or inducing others to acquire the secret through improper means. Often, an NDA also requires the party receiving the information to limit use to specific situations authorized by the other party.

Five years is a common time period to maintain the confidentiality outlined in an NDA. However, this is sometimes a point of negotiation, particularly when foreign companies are involved.

Most NDAs also exclude information from protection. Often, this includes information that has been created or discovered by the receiving party before receiving the trade secret. It may also include trade secrets that the receiving party learned from another company through a different NDA. Most NDAs also include boilerplate, such as whether attorney’s fees will be awarded to a prevailing party in a lawsuit and what state laws apply to the agreement.

Trade Secret Enforcement

There is no central agency that enforces trade secrets. In most states, you must enforce your trade secret through a misappropriation (infringement) lawsuit brought within the statute of limitations. Most state laws are adaptations of the Uniform Trade Secrets Act (UTSA), a model law. However, even states that have not enacted a version of the UTSA have a common law tort cause of action that prohibits the improper acquisition or disclosure of trade secrets.

Under the UTSA, the statute of limitations to bring a misappropriation lawsuit is three years from the time a plaintiff discovers the misappropriation or should have discovered it in the exercise of reasonable care. However, many states have amended this model law when they adopted it, and the changes can include the statute of limitations. Therefore, it is important to seek legal counsel as soon as you become aware of the misappropriation.

In order to win a trade secret misappropriation suit in most states, the trade secret owner will need to show that the information at issue qualifies as a trade secret. It must be secret information that confers a competitive advantage and was the subject of reasonable efforts to maintain its secrecy. Also, the defendant must have improperly acquired the information or improperly disclosed it. Improper acquisition methods include espionage, fraud, theft, and bribery. Improper disclosure usually occurs when the person disclosing or publishing the information has reason to know it was improperly acquired.

If you enforce your trade secret through a misappropriation lawsuit, you may be able to recover remedies. These can include injunctive relief against a defendant who has misappropriated your trade secret, monetary damages for the economic harm resulting from the misappropriation, including both your losses and a defendant’s profits, punitive damages if the defendant is found to have acted willfully or maliciously, and attorneys’ fees.

An injunction is an order that prevents further disclosure or use of the trade secrets. However, once a trade secret is disclosed, it is no longer secret, and an injunction may be insufficient to prevent losing trade secret protection. A better remedy may be monetary damages, which are intended to compensate for economic injuries that are suffered because of the misappropriation. A trade secret owner can recover for its own losses, as well as any profits made by the person or group that misappropriated the secret.

The Inevitable Disclosure Doctrine

Some companies enforce their trade secrets by requiring employees exposed to the secret to sign a nondisclosure agreement and noncompete agreement. Breaches of these agreements may give rise not only to a misappropriation claim but also to a breach of contract claim. Some courts have enjoined employees who have signed these agreements from working for competitors if working for the competitor would inevitably lead to disclosure of the trade secret.

Generally, the inevitable disclosure doctrine has been applied to very high-level employees who were among a tiny number of employees to whom the secret was disclosed. In many states, however, the inevitable disclosure doctrine does not apply because the doctrine unduly restrains employees from changing jobs.

Criminal Prosecution for Stealing Trade Secrets

Federal and some state laws criminalize trade secret misappropriation in some cases. The primary federal law that prohibits trade secret theft is the Economic Espionage Act of 1996. This statute allows the U.S. Attorney General to prosecute a person, organization, or company that intentionally steals, copies, or receives trade secrets.

Sentencing under the Economic Espionage Act can include imprisonment for up to 10 years. If a conviction is obtained against an individual, the defendant can be fined up to $500,000. If a conviction is obtained against a corporation, the fine may be up to $5 million. Corporate fines may be doubled if a theft is performed for a foreign government or agent, and the jail time can be up to 15 years in that case. Moreover, the government can seize and sell proceeds derived from the theft and property used to commit the theft.

Trade Secret Infringement

Most states have adopted the Uniform Trade Secret Act (UTSA), a model law, or a modified form of it. Under the UTSA, a trade secret is defined as information that confers a competitive economic advantage over competitors that is the subject of reasonable efforts to keep it secret. If a trade secret owner does not make reasonable efforts to keep the information secret, it will no longer be a trade secret.

Trade secret infringement is called “misappropriation.” It occurs when someone improperly acquires a trade secret or improperly discloses or uses a trade secret without consent or with having reason to know that knowledge of the trade secret was acquired through a mistake or accident. Misappropriation need not be intentional. It can happen inadvertently or through negligence.

Misappropriation also occurs when someone discloses or uses a trade secret without consent when, at the time of disclosure, he or she had reason to know that knowledge of the trade secret was:

• Derived from someone who obtained it through improper means;
• Obtained under circumstances that gave rise to maintain its secrecy or limit its use; or
• Derived through a person who owed a duty of confidentiality to the trade secret owner.

What counts as “improperly” acquiring a trade secret? Breaches of nondisclosure agreements, industrial espionage, theft, fraud, and bribery are all improper means of acquiring a trade secret. For example, if you hack into a company’s computer and copy the files, this act of acquiring the secrets improperly is misappropriation. If you are asked to sign a nondisclosure agreement that states you can only work on secret information on company computers, and you log in to do some work on your unsecured private laptop in a public place one weekend, this may also be considered misappropriation.

If a person or entity discloses or publishes a trade secret while knowing it was improperly obtained, or by inducing someone to improperly obtain it, misappropriation exists. For example, if you run an online website and an employee of a major corporation breaches a nondisclosure agreement to give you the corporation’s trade secret formula for a popular soft drink, you may be liable if you publish the formula while having facts that suggest the employee breached the nondisclosure agreement. Similarly, if you are a journalist and a source gives you encrypted files containing a secret manufacturing process, and you decrypt and publish them, you may be liable for misappropriation. A court may find that the encryption and the context in which you acquired encrypted files are reason to know that your source improperly acquired the files.

Usually, once a trade secret is misappropriated and published, it loses its status as a trade secret. Information that is known to those who could economically benefit from it no longer meets the definition for a trade secret under UTSA.

Defenses to a Misappropriation Lawsuit

If you are accused of misappropriating trade secrets, your best defense in many states is actual independent development. Independently developing information from one’s own pool of knowledge or the public domain is a complete defense to a company’s claim of trade secret misappropriation. You will need to use your own files and records to prove that you completed development before any dates on which the alleged misappropriation occurred.

Related, but less strong, is a defense of reverse engineering. For example, if you reverse engineer a trade secret formula for a popular soft drink, this is not misappropriation in most states. However, you should be aware that sometimes reverse engineering is actionable under other theories. Some software comes with end-user licensing agreements in which the end user agrees to refrain from reverse engineering. Moreover, if you did not acquire the product you reverse engineered legally, that can also make this defense problematic.

Another strong defense is to attack the plaintiff’s efforts to keep the information secret. A plaintiff that does not make reasonable efforts to keep information secret cannot prove a misappropriation claim. For example, it would be unreasonable to disclose trade secrets to a customer or supplier without a nondisclosure agreement. Similarly, failure to provide adequate protection to one’s documents or files (such as by allowing open public access to one’s offices) may be construed as a failure to use reasonable efforts at secrecy.

You can also defend on the grounds that the information that is supposedly secret is actually public. A plaintiff cannot claim as a trade secret information that is already in the public domain. With this defense, you will probably need to produce patents, articles, and books from which the trade secret information is “readily ascertainable” or revealed. However, you should be aware with this defense that unique combinations of publicly known concepts and ideas may be considered a trade secret.

Choosing Among Patent, Copyright, and Trademark

While most people understand the differences between tangible property and intellectual (intangible) property, understanding the differences among various forms of intellectual property can be more challenging. Patents, copyrights, and trademarks contain certain distinctive features. This makes it important to understand which alternative offers the best option to protect your rights.

Differences Between Patents and Copyrights

Patents usually involve a product or process that has a functional use. By contrast, copyrights involve the creative arts. Thus, patents usually apply to technologies, while copyrights apply to paintings, novels, songs, movies, and other areas of the humanities. Design patents can bear some similarities to copyrights because they relate to the non-functional appearance of objects.

Differences Between Patents and Trademarks

Patents cover the use of a new technology, while trademarks distinguish a product or service from competing products or services. A patent provides stronger protection because it prevents anyone else from making, selling, or using an invention without the patent owner’s permission. A trademark simply prevents other parties from marketing similar products in a manner that confuses consumers. Sometimes a patent that covers a design feature in an invention may overlap with trademark protection if the design feature also sets apart the product from competing products in the market.

Differences Between Copyrights and Trademarks

Copyrights apply to works that have a minimal amount of creativity and are fixed in a tangible medium. They do not cover individual words or phrases, and they do not protect titles of works. Trademarks serve this purpose by covering words and phrases, as well as logos and other visual images, if they are sufficiently distinctive to set apart a source of products or services from the competition. Copyright and trademark can overlap when a logo contains artistic features. Copyright protection may apply to the logo as an artistic work, while trademark protection may apply to prevent competitors from using the logo in a way that causes consumer confusion. Also, trademarks apply to the names of products and marketing slogans used in advertising, while copyrights protect the artistic features of an ad, such as additional passages of text, music, or video components.

Getting Permission

Patent It Yourself

Trademark

What is a trade secret?

Trade secrets are a form of intellectual property. According to the law of most U.S. states, a trade secret may consist of any formula, pattern, physical device, idea, process or compilation of information that both:

1. provides the owner of the information with a competitive advantage in the marketplace, and
2. is treated in a way that can reasonably be expected to prevent the public or competitors from learning about it, absent improper acquisition or theft.

Some examples of potential trade secrets include:

• the formula for an energy drink
• survey methods used by professional political pollsters
• recipes for cookies
• a new invention for which a patent application has not yet been filed
• marketing strategies
• manufacturing techniques, and
• computer algorithms.

Unlike other forms of intellectual property, such as patents, copyrights, and trademarks, which generally require registration in order to be fully effective, trade secrets are essentially a "do-it-yourself" form of protection.

You do not register with the government to secure your trade secret; you most simply keep the information under wraps. Trade secret protection lasts for as long as the secret is kept confidential without any statutory limitations period. However, once a trade secret is made available to the public, trade secret protection ends.

What types of information can trade secrets protect?

Copyright, patents, and trademarks are fairly well-known forms of intellectual property protection. But trade secrets are another extremely useful form of protection that often protects valuable technical or confidential information. Here's a sampling of what trade secrets can protect:

• Ideas that offer a business a competitive advantage, thereby enabling a company or individual to get a "head start" on the competition. This might include, for example, an idea for a new type of product or marketing approach.
• Competitors' knowledge that a product or service is under development and its functional or technical attributes including, for example, the workings of a new software program.
• Valuable business information such as marketing plans, cost and price information, and customer lists.
• So-called "negative know-how," meaning information learned during the course of research and development on what not to do or what does not work optimally. Often, this information is almost as valuable as the products or techniques that do work.
• Virtually any other information that has some value and is not generally known by competitors. This might include, for example, a list of customers ranked by the profitability of their business.

What rights do trade secrets confer?

A trade secret owner can prevent the following groups of people from copying, using, or benefiting from its trade secrets or disclosing them to others without permission:

• People who are automatically bound by a duty of confidentiality not to disclose or use trade secret information, including any employee who routinely comes into contact with the employer's trade secrets as part of the employee's job. This would include, for example, a member of the Board of Directors or leadership team of a company.
• People who acquire a trade secret through improper means such as theft, industrial espionage, or bribery.
• People who learn about a trade secret by accident or mistake, but had reason to know that the information was a protected trade secret.
• People who sign nondisclosure agreements (sometimes used called confidentiality agreements" or "NDAs") promising not to disclose trade secrets without authorization from the owner. This may be the most effective way for a trade secret owner to establish a duty of confidentiality. To learn more, see Using Nondisclosure Agreements to Protect Business Trade Secrets.

There is one group of people that cannot be stopped from using information that's protected under trade secret law. These are people who discover the "secret" independently, that is, without using illegal means or violating agreements (such as NDAs) or state laws.

For example, it's not a violation of trade secret law to analyze (or "reverse engineer") any lawfully obtained product and determine its trade secret.

Imagine, for example, that XCEL Glue is a popular adhesive that is made from a trade-secret-protected formula. Phil, a chemist, analyzes the contents of XCEL, determines its composition, and recreates the formula. Phil can legally use this information to make and sell his own glue. Similarly, Phil could attempt to determine XCEL's customer list based on publicly available information, such as the names of people who follow XCEL on Facebook.

How can a business protect its trade secrets?

Simply calling information a "trade secret" will not make it so. A business must affirmatively behave in a way that proves its desire to keep the information secret. This means taking certain precautions over secrecy. Some companies go to extreme lengths.

The formula for Coca-Cola (perhaps the world's most famous trade secret) is kept locked in a bank vault that can be opened only by a resolution of the Coca-Cola Company's board of directors. Only two Coca-Cola employees ever know the formula at the same time; their identities are never disclosed to the public and they are not allowed to fly on the same airplane.

Fortunately, extraordinary trade secrecy protection measures are seldom necessary. Although you should take reasonable precautions to protect any information you regard as a trade secret, you do not have to turn your office into an armed camp to do so.

Sensible precautions include marking documents containing trade secrets "Confidential," locking trade secret materials away after business hours, maintaining computer security and providing access to secret information only to people with a reasonable need to know. These actions would show a court that you intend to maintain secrecy.

The most common and most effective way to protect trade secrets is through use of nondisclosure agreements (NDAs). Courts have repeatedly reiterated that the use of nondisclosure agreements is the most important way to maintain the secrecy of confidential information. Learn more about nondisclosure agreements, or create an NDA online.

How can a business enforce its rights if someone steals or improperly discloses confidential information?

Every state has a law prohibiting theft or disclosure of trade secrets. Most of these laws are derived from the Uniform Trade Secrets Act (UTSA), a model law drafted by legal scholars. A list of states that have adopted some version of the UTSA is provided at the end of this FAQ.

A trade secret owner can enforce rights against someone who steals confidential information by asking a court to issue an order (an injunction) preventing further disclosure or use of the secrets. A trade secret owner can also collect damages for any economic injury suffered as a result of the trade secret's improper acquisition and use. Here are some examples of incidents that can lead to trade secret lawsuits:

• Sarah, a former employee of C-com, discloses C-com trade secrets to her new employer (whether orally or in writing).
• Mary hacks her way into the network for a computer company and downloads the specs for a new silicon chip. She sells the information to a rival computer company.
• Sheldon is a software programmer who works as an independent contractor for Diskco. Sheldon signed a nondisclosure agreement with Diskco, but later discloses Diskco secrets to a rival.

To prevail in a trade secret infringement lawsuit, a trade secret owner must show:

• that the information alleged to be confidential provides a competitive advantage, and
• the information really is maintained in secrecy.

In addition, the trade secret owner must show that the information was either improperly acquired by the defendant (if the defendant is accused of making commercial use of the secret) or improperly disclosed by the defendant (if the defendant is accused of leaking the information).

The "Inevitable Disclosure" Doctrine

In some cases, a company may prevent a former employee from working for a competitor if the company can demonstrate that employment with the competitor will inevitably lead to disclosure of trade secrets.

What makes disclosure "inevitable"? In a 1995 case, PepsiCo successfully argued that a former executive could not work as Chief Executive Officer of Gatorade/Snapple because the executive could not help but rely on PepsiCo's trade secrets as he plotted Gatorade and Snapple's new course, giving the competitor an unfair advantage over PepsiCo.

Some states have rejected the inevitable disclosure doctrine because it challenges an employee's basic freedom to switch employers. In many cases, courts will refuse to apply the doctrine unless there was additional showing of bad faith, underhanded dealing, or employment by a competitor lacking comparable technology. Ultimately, this will be a highly fact-specific question for the court to determine based on the particular circumstances surrounding the employee's knowledge.

Is stealing trade secrets a crime?

Intentional theft of trade secrets can constitute a crime under both federal and state laws. The most significant federal law dealing with trade secret theft is the Economic Espionage Act of 1996 (EEA).

The EEA gives the U.S. Attorney General sweeping powers to prosecute any person or company involved in trade secret misappropriation and punishes intentional stealing, copying or receiving of trade secrets. Penalties for violations are severe: Individuals may be fined up to $500,000 and corporations up to $5 million. A violator may also be sent to prison for up to ten years. All property used and proceeds derived from the theft can be seized and sold by the government.

The EEA applies not only to thefts that occur within the United States, but also to thefts outside the U.S. if the thief is an American citizen or corporation, or if any act in furtherance of the offense occurred in the U.S. If the theft is performed on behalf of a foreign government or agent, the corporate fines can double and jail time may increase to 15 years.

Many states have also enacted laws making trade secret infringement a crime. For example, in California it is a crime to acquire, disclose or use trade secrets without authorization. Violators may be fined up to $5,000, sentenced to up to one year in jail, or both. Under Cal. Penal Code Section 499(c), trade secret theft is categorized as essentially a form of larceny.

What is a trade secret?

Broadly speaking, any confidential business information which provides an enterprise a competitive edge may be considered a trade secret. Trade secrets encompass manufacturing or industrial secrets and commercial secrets. The unauthorized use of such information by persons other than the holder is regarded as an unfair practice and a violation of the trade secret. Depending on the legal system, the protection of trade secrets forms part of the general concept of protection against unfair competition or is based on specific provisions or case law on the protection of confidential information.

The subject matter of trade secrets is usually defined in broad terms and includes sales methods, distribution methods, consumer profiles, advertising strategies, lists of suppliers and clients, and manufacturing processes. While a final determination of what information constitutes a trade secret will depend on the circumstances of each individual case, clearly unfair practices in respect of secret information include industrial or commercial espionage, breach of contract and breach of confidence.

Patents or trade secrets?

Trade secrets are essentially of two kinds. On the one hand, trade secrets may concern inventions or manufacturing processes that do not meet the patentability criteria and therefore can only be protected as trade secrets. This would be the case of customers lists or manufacturing processes that are not sufficiently inventive to be granted a patent (though they may qualify for protection as a utility model). On the other hand, trade secrets may concern inventions that would fulfil the patentability criteria and could therefore be protected by patents. In the latter case, the SME will face a choice: to patent the invention or to keep it as a trade secret.

Some advantages of trade secrets include:

• Trade secret protection has the advantage of not being limited in time (patents last in general for up to 20 years). It may therefore continue indefinitely as long as the secret is not revealed to the public.
• Trade secrets involve no registration costs (though there may be high costs related to keeping the information confidential).
• Trade secrets have immediate effect.
• Trade secret protection does not require compliance with formalities such as disclosure of the information to a Government authority.

There are, however, some concrete disadvantages of protecting confidential business information as a trade secret, especially when the information meets the criteria for patentability:

• If the secret is embodied in an innovative product, others may be able to inspect it, dissect it and analyze it (i.e. "reverse engineer" it) and discover the secret and be thereafter entitled to use it. Trade secret protection of an invention in fact does not provide the exclusive right to exclude third parties from making commercial use of it. Only patents and utility models can provide this type of protection.
• Once the secret is made public, anyone may have access to it and use it at will.
• A trade secret is more difficult to enforce than a patent. The level of protection granted to trade secrets varies significantly from country to country, but is generally considered weak, particularly when compared with the protection granted by a patent.
• A trade secret may be patented by someone else who developed the relevant information by legitimate means.

How are trade secrets protected?

Contrary to patents, trade secrets are protected without registration, that is, trade secrets are protected without any procedural formalities. Consequently, a trade secret can be protected for an unlimited period of time. For these reasons, the protection of trade secrets may appear to be particularly attractive for SMEs. There are, however, some conditions for the information to be considered a trade secret. Compliance with such conditions may turn out to be more difficult and costly than it would appear at first glance. While these conditions vary from country to country, some general standards exist which are referred to in Art. 39 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement):

• 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.
• It must have been subject to reasonable steps by the rightful holder of the information to keep it secret (e.g., through confidentiality agreements).

Example

An SME develops a process for the manufacturing of its products that allows it to produce its goods in a more cost-effective manner. Such a process provides the enterprise a competitive edge over its competitors. The enterprise in question may therefore value its know-how as a trade secret and would not want competitors to learn about it. It makes sure that only a limited number of people know the secret, and those who know it are made well aware that it is confidential. When dealing with third parties or licensing its know-how, the enterprise signs confidentiality agreements to ensure that all parties know that the information is a secret. In such circumstances, the misappropriation of the information by a competitor or by any third party would be considered a violation of the enterprise's trade secrets.

Cases in which your SME may benefit from trade secret protection

While a decision will have to be taken on a case-by-case basis, in the following circumstances it would be advisable to make use of trade secret protection:

• When the secret is not patentable.
• When the likelihood is high that the information can be kept secret for a considerable period of time. If the secret information consists of a patentable invention, trade secret protection would only be convenient if the secret can be kept confidential for over 20 years (period of protection of a patent) and if others are not likely to come up with the same invention in a legitimate way.
• When the trade secret is not considered to be of such great value to be deemed worth a patent (though a utility model may be a good alternative in countries where utility model protection exists).
• When the secret relates to a manufacturing process rather than to a product, as products would be more likely to be reverse engineered.
• When you have applied for a patent and are waiting for the patent to be granted.

It is important to bear in mind, however, that trade secret protection is generally weak in most countries, that the conditions for, and scope of, its protection may vary significantly from country to country depending on the existing statutory mechanisms and case law, and that the courts may require very significant and possibly costly efforts to preserve secrecy. Patent or utility model protection, wherever possible, will provide much stronger protection.

Intellectual property is one of the most important forms of capital in business. Often times, people think of patents, trademarks and copyrights to protect intellectual property.However, these types all required some form of registration or filing. On the other hand, trade secrets are ways, methods or strategies used by an enterprise to gain a competitive advantage. Many online business models run on trade secrets. As a business owner, you might be able increase your sales by licensing out your processes to other companies. Here is a guide on how to sell your trade secrets successfully.

Define Your Trade Secret

Before selling a trade secret, it should be something worthwhile. A trade secret includes a formula, technique or pattern used in business. Since it gives a business an advantage over its competitors, the trade secret you choose to sell should be something the competitors do no know how to do. Make sure you pick something that is valuable to other companies. Of course, they should not know how to execute the process already themselves. Once you have a clear idea of the right process, you can choose that process for a trade secret license deal.

Find Potential Companies To Sell

In order to get a licensing deal, a list of potential buyers is required. In order to create a list, think about the companies that could potentially buy your company outright. These might be your competitors in distant regions, major corporations or well funded start ups. Of course, companies in the same industry like Salesforce compeitors are most likely to be able to leverage a trade secret licensing partnership. This way, your potential licensing buyer list has the capital required to pay royalties now and in the future.

Prepare A Trade Secrets License

Next, it is time to prepare a draft trade secret licensing agreement. Remember, trade secrets are not registered. Cautiously, you must be able to describe the trade secret without disclosing the entire process. A common example is the Coca-Cola recipe. You know what the secret contains. But, you don’t know what it is. If you disclose the trade secret without a non-disclosure or license agreement in place, it may be difficult to protect your trade secret. The license agreement usually includes the right for the licensee to receive the trade secret itself, offering protection to the IP property.

Negotiate Licensing Terms

With a prepared agreement, it’s time to sell your trade secret to companies. When pitching them on the sale, be flexible in your negotiations. Some companies might request a hybrid license that works with an associated patent. Others might want exclusive rights to the trade secrets along with future improvements. Depending on your licensing sale goals, you can structure royalties or payments in the short term as well as the long term. Certainly, the negotiation process is a key part to finding the right trade secrets licensing partners.

Maintain Trade Secret Confidentiality

Finally, when closing a trade secrets license deal, make confidentiality a top priority. If possible, include clauses in the agreement to maintain confidentiality after the transferring of rights. This will require the licensee to adhere to strict confidentiality practices, labeling associated items and data storage solutions as confidential. And, they must take reasonable steps to protect the commercial or financial information from other third parties. Based on the nature of the trade secret, the long term confidentiality could hold significant value for all parties.

These steps will allow you to sell company trade secrets to other business. Be sure to choose a process that is valuable to other enterprises. Then, create a licensing agreement that protects a trade secret. Finally, present and sell trade secrets with confidentiality. If done diligently, you could significantly increase the sales of your business with licensing deals on processes you already know how to do.

In the world of intellectual property, trade secrets and patents are two valuable ways of protecting your assets, and the future of your business or product. They each offer different types of security, and depending on your needs, you may need to pursue one or both in order to remain fully protected from your competition.

Trade Secrets vs. Patents

Before reviewing the differences, it helps to understand what each type of protection entails. Trade secrets protect information, processes, products or other concepts that are not disclosed to the general public, while a product or invention must be fully disclosed to the US Patent and Trademark Office (USPTO) in order to be eligible for a patent.

This is the main factor that separates trade secrets and patents. If your business advantage or strategy is dependent upon keeping the confidentiality of your information or processes, then a trade secret is an appropriate type of protection.

But if you plan on distributing or selling your invention, a patent would offer the best level of protection. Each inventor or business has a different strategy: Coca-Cola keeps their product protected with a trade secret, while a business like Apple must patent their technology in order to prevent competitors from duplicating their products.

Differences in Property Protection

1. Trade secrets are more informal, while patents are easier to enforce.

Because trade secrets are not based on disclosure, there’s no formal paperwork or registration to maintain one. There are also no costs involved, which is much different than filing for a patent.

Patent registration takes significant time and money to process, and this is often one of the largest obstacles to overcome for inventors.

But the informality of trade secrets makes them more difficult to legally enforce. A misappropriation of trade secrets claim must prove that a trade secret was acquired improperly, which often makes for vague and complex legal cases. And if a trade secret is acquired lawfully, then the acquiring party can then use that information for their own purposes.

On the other hand, patent protection is more enforceable because there is more documentation to back up the dates and specifics of an invention and its patent protection.

2. Trade secrets and patents are protected by different laws and statutes.

Patents are offered at the federal level, by the USPTO, while trade secrets are protected under state laws, usually by the Uniform Trade Secrets Act (USTA), except in a handful of states. In Arizona, for example, the USTA has been adopted and is part of the state’s statutes in Title 44, Chapter 4.

Only Massachusetts, North Carolina and New York have yet to adopt the USTA, though they have their own statutes regarding trade secrets and misappropriation.

3. Patents have a limited length of protection, while trade secrets have no time restrictions.

For the most common types of patents, inventors receive 20 years of protection from the time that the patent is filed. After this period, anyone, including competing businesses and inventors, can legally produce, distribute or sell the product.

With trade secrets, there is no fixed length of protection, and as long as the trade secret meets its requirements, it can be protected for an infinite amount of time. Coca-Cola, for example, has held its trade secret for decades and has successfully kept the public from knowing its confidential information.

4. Patents can be expensive to file, while trade secrets are essentially free.

Filing for a patent is considered an investment in a product’s future, and the cost of filing is one of the main considerations many investors weigh before pursuing legal protection. The process typically involves hiring legal help to complete an effective patent application, and if amendments are required, the cost of filing can fluctuate even more.

Trade secrets, however, require no paperwork and therefore, no filing or registration fees. This gives secrets a financial edge, but again, only for those products or processes that depend on confidentiality. If your business requires a patent, then the financial investment outweighs the risk of another party patenting an invention before you do.

 5. Trade secrets are immediately effective; full patent protection can take years.

As soon as a trade secret is acknowledged and the owner of the secret takes the steps needed to ensure it’s a trade secret, it is immediately protected under the respective state laws on trade secrets.

According to the USPTO, the average patent application takes more than two years to be processed. Starting on the filing date, the inventor automatically receives “patent pending” status for the invention, which offers some protection to the inventor.

But full patent protection comes only after the patent has been approved, and in the two years that it may take to get approval, competing businesses or parties may come up with similar or improved products that can affect your invention’s future.

Deciding Which is Right for You

As you can see, patents and trade secrets offer varying levels of protection for intellectual property, and deciding what’s right for you and your product is based on your operation and goals.

In many situations, the best type of protection is a combination of trade secrets and patents – in the case of Coca-Cola, for example, they may keep their ingredient formulas a trade secret, but may patent a certain product in order to keep competing products off the market.

Determining what’s best for your business can be easier by discussing your needs with a qualified attorney. At JacksonWhite Law, our intellectual property team can help you focus on what matters most to you and your business. We can help create an effective intellectual property plan that allows you to best manage your assets and products. We may be based in Phoenix, but we work globally to offer inventors the best IP solutions.

How Much Does a Patent Cost: Everything You Need to Know

A patent can cost from $900 to between $5,000 and $10,000+ with the help of patent lawyers, but depends on the type of patent and complexity of the invention.7 min read

How Much Does it Cost?

A patent can cost from $900 for a do-it-yourself application to between $5,000 and $10,000+ with the help of patent lawyers.

A patent protects an invention and the cost of the process to get the patent will depend on the type of patent (provisional, non-provisional, or utility) and the complexity of the invention.

The Cost of Each Patent Application Type

Before you can think about patent costs, you must come up with a unique product idea that doesn't copy prior art. Prior art is any idea or product that already exists. After you have an original idea, you are ready to file a patent application.

The cost of filing a patent application can usually be divided into three parts: United States Patent and Trademark Office (USPTO) filing fees, lawyer fees, and drawing fees.

When you think about how simple or how complex ideas and inventions can be, you can understand why patents have different costs. More complex inventions cost more to patent than simpler designs. Patent lawyers can give you more exact estimates after they review your invention.

Patent costs vary based on many factors, including the patent application type. You'll find two key types of patent applications: a provisional patent application and a non-provisional patent (also called an utility patent application).

Provisional Patent Application

Think of a provisional patent application as a preliminary patent.

After you successfully file a provisional patent application, you have one year to file for a non-provisional patent.

Although a provisional patent isn't considered a true patent, it protects your intellectual property for 12 months the way a non-provisional patent would.

Filing a provisional patent application can cost as low as $65. However, provisional patent applications typically cost between $5,000 and $9,000 plus legal fees.

Non-Provisional Patent Application

A non-provisional patent (also called a utility patent) is a full patent which protects an inventor's intellectual property for as long as the patent is in effect.

Filing a non-provisional patent application is more expensive and costs about $900. This total also includes search and review as well as examination fees which cost around $220. Once you add legal fees, non-provisional patents usually cost between $8,000 and $15,000 or more.

Filing a non-provisional patent with lawyer fees will usually cost the following for each invention type:

• An extremely simple invention, such as a paper clip or coat hanger, will cost between $5,000 and $7,000.
• A relatively simple invention, such as a board game or umbrella, will cost between $7,000 and $8,500.
• A minimally complex invention, such as a power hand tool or camera, will cost between $8,500 and $10,000.
• A moderately complex invention, such as a ride-on lawn mower or a cell phone, will cost between $10,000 and $12,000.
• A relatively complex invention, such as a shock-absorbing prosthetic product, will cost between $12,000 and $14,000.
• A highly complex invention, such as an MRI scanner or satellite technology, will cost between $14,000 and $16,000.
• A software-related invention, such as an automated system or a business program, will cost more than $16,000.

Design Patent

A design patent is another, more limited, patent option which protects a product's unique appearance only.

Design patents are commonly used to protect apparel and fashion pieces, the shape of medical products, and the way manufactured goods look. A fashion house might patent a handbag to make sure competitors don't copy the bag's design features.

With legal fees for preparation and filing, getting a design patent usually costs between $2,500 and $3,000 including a $140 examination fee.

Plant Patent

A plant patent is one that people who discover and reproduce a plant can use. This plant can't be grown by tubers, types of underground plant storage structures, or found in an uncultivated state.

Filing a plant patent application costs between $360 and $720. The examination fees for a plant patent are $170. Including these costs, legal fees, and other charges, a plant patent typically costs between $4,660 and $7,620.

Factors That Can Affect a Patent's Cost

While the type of patent is the largest part that affects costs, other factors can also play a part:

• The size of the business or the type of person applying for a patent. Individuals pay less than small businesses. Large firms pay the most for their patents.
• The invention's technology. If the invention has much technology behind it, it will be more expensive than one that doesn't rely so much on technology.
• Market opportunities for the invention. In a strong market, inventors will often spend more money to make sure their invention has the best protection.
• Similar products with patents. In a crowded marketplace, inventors need to make more effort to show that their new products are unique enough to get patents.
• Geography. Protecting the idea behind an invention in several countries requires more money.

More Costs Connected With Filing Patents

Most inventors pay other costs to file their patent applications. While the USPTO decides if an invention is original by using its own patent search, many inventors pay between $1,000 and $3,000 for professional patent searches before they send their applications.

A patent search lets inventors know if their ideas are unique enough and worth spending time and money to develop.

A professional patent search with opinion will usually cost the following for each invention type:

• An extremely or relatively simple invention will cost between $1,000 and $1,250.
• A minimally complex invention will cost between $1,250 and $1,500.
• A moderately complex invention will cost between $1,500 and $1,750.
• A relatively complex invention will cost between $1,750 and $2,000.
• A highly complex invention will cost between $2,000 and $2,500.
• A software-related invention will cost between $2,500 and $3,000.

If a patent has more than three claims, an extra $220 applies per claim. When more than 10 claims are present, $52 per claim applies.

Many patent applications include professional drawings. Getting these drawings can typically raise an application's cost by between $300 and $500.

Legal fees may also go higher if a client needs a lot of patent prosecution during the application's patent-pending phase. Prosecution costs can become higher as inventions get more complex. Inventors can expect to spend the following on prosecution costs:

• $2,500 to $4,000 and above for a basic mechanical invention
• $3,000 to $7,000 and above for a complex mechanical invention
• $2,500 to $7,000 for a basic electrical or software invention
• $3,500 to $7,500 for a complex electrical or software invention

Many patents get rejected after they're filed. Inventors can appeal their cases to reverse the USPTO's decision, but appeals cost more money. Filing a written response usually costs between $2,000 and $5,000. Inventors may speak to patent examiners in person, but a face-to-face meeting also costs several thousands of dollars.

Inventors must also pay maintenance fees every few years to keep their provisional patent valid:

• $980 after 3 1/2 years
• $2,480 after 7 1/2 years
• $4,110 after 11 years

Inventors who change their patents must also pay amendment fees. With new legal fees, amendments usually cost between $2,200 and $3,500.

Inventors may also face other fees during their patents' prosecution and 20-year terms, including:

• Extension-of-time fees
• Post-issuance fees
• Financial service (administrative) fees
• Trademark processing fees

Example of Costs for a Patent

With so many costs, you might not understand how much a patent might cost for a company. Imagine an inventor with a small startup firm wants to patent a unique alarm clock. This inventor might expect the following costs:

• Patent search with a lawyer's opinion: $2,000
• Creating and filing a provisional patent application: $2,500
• Filing the utility patent with the USPTO: $130 (cost for small entity)
• Non-provisional patent application based off provisional filing: $10,500
• Filing fee to the USPTO for non-provisional patent application: $800 (cost for small entity)
• Professional illustrations for non-provisional patent application: $400
• Total cost: $16,330

The inventor here could have saved $130 by skipping the provisional patent application, but the person wanted the 12-month period for more market research to refine the design.

Frequently Asked Questions

• Why should I use a patent lawyer?
  Small mistakes can hurt your chances for patent approval. Patent lawyers receive training in all aspects of patent law. They also usually have technical degrees in fields such as biotechnology and computer science that give them a high level of understanding of the inventions they represent. They can greatly help during the patent application process. While their experience in patent applications comes at a cost, a patent lawyer can save you money and stress from sending incomplete or incorrect patent applications.

• Should I go for a provisional patent application first?
  This decision is a personal one, but many inventors like to go for a provisional patent application before they file a non-provisional patent application. They use the provisional patent's 12-month period to further develop their products and do market research. After this period, the inventors can apply for full patents, safe in the knowledge that their intellectual property was protected while they refined their work.

• What can I do to cut down costs on my legal bills?
  You could create your own patent application and ask a patent lawyer to review your application when you're ready to send it to the USPTO. Search for similar patents online and use them as templates for your own. Since you have done much of the work, most patent lawyers will offer a discount for your efforts.

You should also do some thorough research to make sure you're getting the best-value patent lawyer. The prices patent lawyers charge vary, so get a few quotes. While you shouldn't downplay your legal costs, you don't necessarily need to pay high fees either.

• Should I get a trademark too?
  Just as a patent protects a product's content, a trademark protects its name. A trademark can cut the risk of competitors impacting your profits and become a valuable selling point for potential licensees. In some states, you must use the trademark in interstate commerce before you register it, so check your state's laws.

Once you've decided on your trademark, promote it using the ™ symbol and register your trademark with the USPTO. Once approved, which usually takes 10 to 14 months, you can use the ® symbol to show your trademark's registration.

Getting clear information about the costs involved with establishing a patent can help inventors better manage their budgets when developing new products. A patent lawyer can help you gain a clearer picture of all costs for getting a patent. To learn more about the costs of getting a patent or starting the process, post your legal need here to get free custom quotes from patent lawyers. UpCounsel screens for the top 5% of patent lawyers who are familiar with the patent process.

How much does a U.S. copyright registration cost?

By Nicholas Wells

The short answer is “not much.”  A more useful answer:  $35-$55 if you do it yourself or $250-$500 if you hire an attorney to help you.

The fee at the U.S. Copyright Office is $ 55 for most applications, or $ 35 if your application (1) has one author, and (2) the author is also the owner, and (3) you are just registering a single work (not a collection of photos), and (4) it was not a work made for hire.

Here are more specifics.

Anything you create is protected by copyright as soon as it exists in a tangible form, whether it’s a book, article, photo, sculpture, musical composition or dance (among other types of creative works).  But under United States law, you can’t enforce your copyright unless you have it registered.  It also helps people take you more seriously if you’re telling them that your work is copyrighted.  I’ve written more about this elsewhere.

Do-It-Yourself Copyright Registration

So once you’re ready to register your copyright, all you need to do is

1. Create an online account at www.copyright.gov (no charge for that).
2. Log in and start a new “claim” (a new copyright application).
3. Fill in the online form (between about 8 and 12 screens of information).
4. Pay the government filing fee of $35 or $ 55 with your credit card.
5. Upload a copy of your copyrighted work (many formats are supported; you can also mail it in if you really prefer that method).

Your copyright registration certificate will arrive in the mail after 2-18 months and will be dated as of the date you submitted your application.  (Yes, usually takes a really long time, and it is completely unpredictable.  Plus, there is no easy online system to check the status of your application as you can with a trademark application.)

Of course, you can have the registration issued in about a week if you are trying to sue someone or have another good reason, but that will cost about $ 800 extra.

Using A Lawyer

What if you want some help?

An experienced intellectual property lawyer will typically charge from $250 to $500 to prepare and file your application to register a copyright.  It’s not a difficult process, but there are questions on the application form that will require some research, so if you haven’t done it before, it can be very helpful to have professional assistance.  If you do it wrong, you may need to file more forms to correct your registration, or you may have trouble enforcing your copyright if someone infringes it.

Many lawyers will prepare a copyright application on a flat-fee basis (as I do); others will charge based on the time required, but most should still be willing to give you an estimate of the total cost.  Be prepared to give your lawyer the documents and other information that he or she requests in order to efficiently prepare the application form.

What Is a Trade Secret?

A trade secret is any practice or process of a company that is generally not known outside of the company. Information considered a trade secret gives the company an economic advantage over its competitors and is often a product of internal research and development.

To be legally considered a trade secret in the United States, a company must make a reasonable effort in concealing the information from the public, the secret must intrinsically have economic value, and the trade secret must contain information. Trade secrets are a part of a company's intellectual property. Unlike a patent, a trade secret is not publicly known.

KEY TAKEAWAYS

• Trade secrets are secret practices and processes that give a company an economic advantage over its competitors.
• Trade secrets may differ across jurisdictions but have three common traits: not being public, offering some economic benefit, and being actively protected.
• US trade secrets are protected by the Economics Espionage Act of 1996.

Understanding Trade Secrets

Trade secrets may take a variety of forms, such as a proprietary process, instrument, pattern, design, formula, recipe, method, or practice that is not evident to others and may be used as a means to create an enterprise that offers an advantage over competitors or provides value to customers.

Trade secrets are defined differently based on jurisdiction, but all have the following characteristics in common: 

• They are not public information.
• Their secrecy provides an economic benefit to their holder.
• Their secrecy is actively protected.

As confidential information (as trade secrets are known in some jurisdictions), trade secrets are the "classified documents" of the business world, just as top-secret documents are closely guarded by government agencies. Because of the cost of developing certain products and processes is much more expensive than competitive intelligence, companies have an incentive to figure out what makes their competitors successful. To protect its trade secrets, a company may require employees privy to the information to sign non-compete or non-disclosure agreements (NDA) upon hire.

 

If a trade secret holder fails to safeguard the secret or if the secret is independently discovered, released, or becomes general knowledge, protection of the secret is removed.

Trade Secret Treatment

In the United States, trade secrets are defined and protected by the Economic Espionage Act of 1996 (outlined in Title 18, Part I, Chapter 90 of the U.S. Code) and also fall under state jurisdiction. As a result of a 1974 ruling, each state may adopt its own trade secret rules. 

Some 47 states have adopted some version of the Uniform Trade Secrets Act (USTA). The most recent legislation addressing trade secrets came in 2016 with the Defend Trade Secrets Act, which gives the federal government cause for action in cases involving the misappropriation of trade secrets.

The federal law defines trade secrets as "all forms and types of" the following information:

• Financial
• Business
• Scientific
• Technical
• Economic
• Engineering

Such information, according to federal law, includes:

• Patterns
• Plans
• Compilations
• Program devices
• Formulas
• Designs
• Prototypes
• Methods
• Techniques
• Processes
• Procedures
• Programs
• Codes

The above includes, according to federal law, "tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing."

The law also provides the conditions that the owner has taken reasonable measures to keep such information secret and that "the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information."

Other jurisdictions may treat trade secrets somewhat differently; some consider them property, while others consider them as an equitable right.

Examples of Trade Secrets

There are many examples of trade secrets that are tangible and intangible. For example, Google Inc.'s search algorithm exists as intellectual property in code and is regularly updated to improve and protect its operations.

The secret formula for Coca-Cola, which is locked in a vault, is an example of a trade secret that is a formula or recipe. Since it has not been patented, it has never been revealed. The New York Times Bestseller list is an example of a process trade secret. While the list does factor in book sales by compiling chain and independent store sales, as well as wholesaler data, the list is not merely sales numbers (books with lower overall sales may make the list while a book with higher sales may not).

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