What is a Trade Secret?

In our blog, “What is Intellectual Property?”, we identified several kinds of intellectual property, i.e., products created through one’s creativity and intellect, that others may not use without permission. One of those is trade secrets. The most famous example is the Coca-Cola formula, maintained as a trade secret since its creation.

Each state, including California, enacts its own trade secret laws. California Civil Code sections 3426 – 3426.11 define a trade secret as “information, including a formula, pattern, compilation, program, device, method, technique, or process” which meets two criteria. First it must have “independent economic value” whether “actual or potential,” based on the fact that it is not “generally known to the public” or to people who would be able to make money or gain other economic value from using or disclosing the information. Second, its owner must take reasonable efforts to keep it secret from unauthorized persons.

If you have an invention, source code, a chemical formula that you are developing to create some product, an idea or prototype for some device, or anything with current or potential economic value, you can claim trade secret protection. An advantage over patents is that trade secrets are not filed with the government and thus not made public.

However, to claim trade secret protection, it is crucial that you comply with the second requirement by taking reasonable measures to safeguard the secrecy of the information that fit the situation. For example, you developed source code for a new computer app, but need funding to market it. If you give a potential funding source your source code to review without any confidentiality measures, you are not making reasonable efforts to keep the source code secret. On the other hand, if you have an attorney create a strong non-disclosure agreement (NDA) and require the potential funding source and its staff to sign that document in advance of disclosure, this could well be deemed a reasonable effort. In 2012, a small company, TechForward, won a $27 million verdict against Best Buy for misappropriating its trade secrets because it had done that.

If you left the papers containing such source code lying around the office conference room where unauthorized persons might be able to pick it up, you would not be taking reasonable efforts to keep it secret. Such material should be stored securely with access permitted only by people with a need to know and obligated to non-disclosure by an adequate, signed NDA. Your measures might also include non-disclosure of access passwords or encryption codes by otherwise authorized persons as well as other special technological procedures, such as required deletion or erasure by any employee who inadvertently receives trade secret data he or she is not permitted to hold.

What measures will be deemed reasonable under the trade secret law depends on various factors, such as the value of the trade secret, the size and income of your company, and the likelihood of industrial espionage in your industry aimed at the particular type of property. For the Coca-Cola Company, this meant specially constructing a large vault to protect its trade secret.

A downside to relying on trade secret protection is that if it does get out in spite of your efforts and becomes generally known to the public or to those who can profit from using it, that protection likely will be lost. A decision to treat information as a trade secret – as well as just what confidentiality measures are necessary to protect it – should be made deliberately with skilled attorney assistance.

For any questions concerning trade secrets, please contact attorney Helena Kobrin.

Helena Kobrin, February 18, 2015