A Guide to Trade Secrets

Trade secrets offer a powerful tool to protect your innovative ideas and processes. This guide unpacks the essentials of trade secrets, empowering startup founders and tech executives to leverage them effectively.

What are trade secrets?

A trade secret is a piece of confidential information that gives your business a unique advantage. 

It can be a formula, algorithm, process, technique, design, or even customer list, as long as it meets three key criteria:

1. Actual secrecy: The information must be genuinely secret, not something readily known or easily discoverable by others in your industry.

2. Reasonable efforts to maintain secrecy: You must demonstrate that you take reasonable steps to protect the confidentiality of the information. This could include using non-disclosure agreements (NDAs) with employees and third parties, limiting access to the information only to those who need it, and implementing robust data security measures.

3. Independent economic value: The information must provide a competitive advantage. This means it has some value that others would find beneficial and be willing to pay for, such as giving you a cost advantage in production or creating a superior product.

NOTE : No requirement for novelty: A trade secret does not have to be original or unique. Multiple companies can have trade secrets that are substantially similar.

Examples of trade secrets in typical startups

While the specific nature of trade secrets will vary depending on the industry, here are some common examples that startups might possess:

1. Unique algorithms or software code: This could be the secret sauce behind your machine learning model or the key to your innovative app's functionality.

2. Proprietary manufacturing processes: A special technique for brewing a unique craft beer or a novel method for assembling a high-performance gadget could be valuable trade secrets.

3. Customer lists or pricing strategies: While not always protectable, under certain circumstances, customer lists or unique pricing models can qualify as trade secrets if they are not generally known and offer a competitive edge.

Protecting your trade secrets: A proactive approach

Unlike patents or copyrights, trade secrets don't require formal registration.

Protection hinges on maintaining secrecy and taking concrete steps to demonstrate that intent. Here are some key actions you can take:

1. Confidentiality agreements: NDAs are a cornerstone of trade secret protection. Have all employees, contractors, and any third parties who will be exposed to your confidential information sign watertight NDAs that clearly define the secret information and outline their obligations to keep it confidential.

2. Internal controls: Limit access to trade secrets on a "need-to-know" basis. Implement measures like password protection, restricted file access, and security awareness training for employees to minimize the risk of accidental disclosure.

3. Marking confidential information: Clearly label documents and data containing trade secrets as "confidential" to reinforce their sensitive nature.

Beyond the basics: Practical considerations for startups

Building a strong trade secret program requires a nuanced approach. Here are some additional points to consider:

1. Employee onboarding and offboarding: During onboarding, educate new hires about the importance of confidentiality and the specific trade secrets they may encounter. During offboarding, ensure all confidential information is returned or destroyed.

2. Open source software: Be cautious when incorporating open-source software into your products, as it may conflict with trade secret protection if it requires disclosing certain information.

3. Mergers and acquisitions: If your startup is involved in a merger or acquisition, carefully manage the transfer of trade secrets through confidentiality agreements and due diligence processes.

Limitations of trade secrets

While valuable, trade secret protection has limitations:

1. Independent development: Someone can legally develop the same information independently, even if it replicates your trade secret.

2. Reverse engineering: In some cases, someone might be able to legally discover your trade secret by reverse engineering your product.

3. Disclosure and statute of limitations: Once a trade secret is publicly disclosed, it loses protection. Additionally, there's a time limit (usually three years) to sue someone for misappropriating your trade secret after you discover, or should reasonably have discovered, the misappropriation.

Conclusion

Trade secrets are a strategic weapon in your competitive arsenal.

By understanding the requirements for protection and taking proactive steps to safeguard your confidential information, you can ensure your innovative ideas continue to propel your business forward. Remember, an attorney can provide tailored guidance for your specific situation.