Your business’s trade secrets give it an edge over its competitors and play a crucial role in its success. Unfortunately, many businesses, both small and large, still don’t have a basic grounding in trade secrets law. So, our intellectual property solicitors are here to explain the basics of confidentiality and trade secrets in our Trade Secrets FAQs.
Jump to individual trade secrets FAQs:
- What is a trade secret?
- What is an example of a trade secret?
- What steps can businesses take to identify their trade secrets?
- How can trade secrets be protected under English law?
- What are ‘reasonable steps’ to keep a trade secret confidential?
- How are trade secrets valued?
- How long does trade secret protection last?
- Can trade secrets be licensed or transferred to other businesses?
- What can be done to deter past employees from using trade secrets and other confidential information?
- What’s the difference between trade secrets and confidential information?
- What’s the difference between trade secrets and know-how?
- What’s the difference between trade secrets and NDAs?
- What’s the difference between trade secrets and undisclosed Information?
- What’s the difference between trade secrets and proprietary information?
- What’s the difference between trade secrets and restrictive covenants?
- Summary
What is a trade secret?
A trade secret is an intellectual property right. In contrast to other intellectual property rights, such as patents and trade marks, trade secrets are, by definition, not disclosed to the world at large. They can protect information such as processes, methods, inventions, formulas or anything else that gives your business an advantage over competitors. There are no restrictions on the types of information that can constitute a trade secret; provided they satisfy the legal criteria, they are protected.
What is an example of a trade secret?
The Coca-Cola recipe and the secret ingredients in Kentucky Fried Chicken are among the most famous examples of trade secrets.
By choosing to protect their recipes as trade secrets rather than registering them as patents, Coca-Cola and KFC can, in theory, keep them a secret forever. KFC’s recipe is held in a safe in Kentucky and Coca-Cola stores theirs in a vault in Atlanta. Only a very limited number of employees are privy to the recipes, and they are bound by strict confidentiality agreements.
What steps can businesses take to identify their trade secrets?
While some types of information, such as the Coca-Cola and KFC recipes, are obvious candidates for protection as trade secrets, the law can be used to protect a multitude of business assets. Examples of the types of assets that may be deemed ‘trade secrets’ include customer lists, software code and manufacturing processes.
If you haven’t already done so, it’s a good idea to conduct an audit of all information held by your business and highlight any that you believe to be trade secrets. To qualify as a trade secret, the information must be secret, in that it is not generally known to others, and have actual commercial value. Crucially, the owner must keep it confidential, meaning you must take proactive steps to protect it. For example, you should ensure the information is stored securely, and disclose it to a minimal number of individuals under strict non-disclosure agreements.
How can trade secrets be protected under English law?
Unlike other intellectual property rights, such as trade marks, you cannot register a trade secret to gain legal protection. Instead, if the information fulfils the relevant criteria, it will be automatically protected under the common law of confidentiality and the Trade Secrets Regulations. We explain more about these laws below.
You can also impose contractual obligations on anyone you share the information with by making them sign a non-disclosure agreement promising not to divulge it to others. Sometimes, an agreement may be implied, even without a written contract.
The common law of confidentiality
The law of confidentiality is based on the principle that a person cannot take unfair advantage of information received in confidence. If they do so, and if the situation meets the following requirements, you may have a claim against them for breach of confidence.
The requirements are as follows:
- the information must have the necessary quality of confidence;
- there must be an obligation of confidence – this can be imposed by contract or implied by the circumstances of disclosure or the relationship between the parties, such as employer/employee; and
- there must have been an unauthorised use of the information.
Trade Secrets Regulations 2018
The Trade Secrets Regulations run in parallel with the rights conferred by the law of confidentiality. They provide the owners of trade secrets with a statutory claim in addition to a common law claim for breach of confidence. This means that your information may be protected by both.
The Regulations define a ‘trade secret’ as follows:
- information which is secret; and
- has commercial value because it is secret; and
- has been subject to reasonable steps (see below) to keep it secret
The definition of a trade secret is narrower than the one developed by the courts under the law of confidentiality. It places greater emphasis on whether the information has been kept secret rather than its inherently secret nature. To gain complete legal protection, businesses must take ‘reasonable steps’ to keep a trade secret confidential.
What are ‘reasonable steps’ to keep a trade secret confidential?
What is ‘reasonable’ will depend on the nature of the information, including its external value, uniqueness and form. Suggested best practice steps that a business should take to protect its trade secrets include the following:
- Educating staff
Trade secrets are valuable only as long as they are not disclosed. Simply mark a document as ‘confidential’ will not suffice. You must go further and educate staff on the measures required to protect your confidential information.
It is not enough for you and others in charge of your business to appreciate the importance of confidential information and the need to protect it. You must educate everyone else who may come into contact with it, too. By training employees, collaborators and suppliers who are most likely to access your confidential information on how to handle that information and the need to maintain secrecy, you give your information the best chance of being protected.
- Non-disclosure agreements (NDAs) and confidentiality agreements
You should use bespoke, carefully drafted and watertight NDAs or confidentiality agreements before disclosing your confidential information and trade secrets to employees, suppliers, collaborators and clients.
- Safeguarding
You should assess how well your trade secrets are safeguarded and address any vulnerabilities. If needed, you should introduce new policies detailing how trade secrets should be handled. For example, you might need to implement new IT procedures ensuring that the information is encrypted, or warnings appear before it is accessed. If your information is in physical form, it should be locked away and not accessible by anyone other than those with express permission.
You might consider designating a team to take overall responsibility for the protection of trade secrets.
- Records
Keep an accurate, up-to-date register of your confidential information and trade secrets (keeping the detail to a minimum) and a record of who has access to it.
- Ongoing duties
‘Reasonable steps’ for the purposes of trade secrets protection are not a one-off exercise. Your due diligence must be ongoing, and you should continually improve policies and procedures to reduce the risk of your secrets being leaked and increase the chances of the law stepping in to assist if it is.
How are trade secrets valued?
Trade secrets are amongst your business’s most valuable assets, but putting a price on them isn’t easy. You may need to value your trade secrets for a variety of reasons, including when selling your business or seeking damages against a third party who has unlawfully taken them.
There are various means through which your trade secrets may be valued. Examples of the considerations that may be taken into account include the following:
- Demand/market
The expected demand for the products or services that embody the trade secret can be a key indicator of their value. As is the case when valuing most business assets, what other buyers in the market have paid for similar assets can give a feel for the likely value of your trade secrets.
- Protection period
The longer your information is likely to remain secret, the more valuable it is. So, the expected period of protection in terms of the effect of the likelihood of being discovered can affect the value of your trade secrets.
- Substitutes
The existence or expected progress of adequate substitutes may impact the competitive advantages provided by the trade secret and, in turn, its value.
- Investment spend
The cost of developing or purchasing and protecting the trade secret might considered when deciding its value. This includes the time taken to develop and test the trade secret, labour costs, and investment in physical capital, such as equipment and property.
- Income generated
The additional economic benefits expected from using the trade secret are instrumental in its valuation. Regard might be had to benefits such as increased sales, price premiums or costs reduction over the remaining life of the trade secret.
How long does trade secret protection last?
Trade secrets can, in principle, be protected forever.
Can trade secrets be licensed or transferred to other businesses?
Yes. Your trade secrets are a business asset and can be licensed or sold to another business in the same way as any other intellectual property or tangible assets. If you choose to licence them, you must take care to ensure that your licensees understand the confidential nature of the information and are under a strict duty to maintain its secrecy.
What can be done to deter past employees from using trade secrets and other confidential information?
Some employees require access to your business’s confidential information and trade secrets to do their job. When they leave your employment, you run the risk that they will share them with their new employer or use them to form a new business in competition with yours.
Employees are under an implied duty to keep their employer’s trade secrets and confidential information secret during the course of their employment. When their employment ends, they must continue to keep your trade secrets confidential, but the duty may not extend to all types of confidential information.
To protect your trade secrets and confidential information you should ensure you have the necessary contractual documentation in place.
- Make sure your employment contracts contain watertight clauses dealing with confidential information and trade secrets. Ensure ‘confidential information’ and ‘trade secrets’ are defined as broadly and clearly as possible to minimise the risk of a dispute over whether specific types of information fall within the definition.
- Include garden leave provisions in your contracts of employment where necessary. These clauses enable you to prevent an employee from attending the workplace, even when still employed. You can remove access to your confidential information and trade secrets to reduce the risk of them spending their notice period collating information to use when their employment ends.
- Review your IT systems to identify any unusual activity, such as the employee forwarding company information to their personal email account. If such conduct is identified, remind the employee of their legal obligations and insist they provide evidence that the information has been deleted and destroyed. You should remind them of their legal obligations regarding your confidential information and trade secrets and inform them that you will take legal action should you discover them to be in breach.
Unfortunately, you can never completely eliminate the risk of ex-employees taking your trade secrets and confidential information. If your ex-employee takes the information, you may need to take legal action against them, seeking an injunction and damages.
What’s the difference between trade secrets and confidential information?
Confidential information isany kind of information that is confidential, in that it is not publicly available, and is shared in confidence with others. Trade secrets fall under the umbrella of confidential information, but they have actual commercial value and must be proactively protected by their owners to gain protection.
There is overlap between confidential information and trade secrets, although the criteria your material must satisfy to qualify as a trade secret are more stringent than those applicable to confidential information. If your information does pass the trade secrets test, it is protected as of right. Unlike a claim for breach of confidence, you do not need to show that the information has been used or disclosed to succeed, merely that it was unlawfully obtained. This important distinction makes trade secrets incredibly valuable.
What’s the difference between trade secrets and know-how?
Know-how is the knowledge and skills you have acquired through experience and research (such as unpatented inventions, formulae, designs, drawings, procedures and methods) that give your business an advantage over its competitors. Unlike trade secrets, know-how does not possess the essential characteristic of being secret; it may or may not be confidential.
Often, know-how precedes and forms the basis of trade secrets. It is an important economic asset that should be converted into a trade secret as soon as possible.
What’s the difference between trade secrets and NDAs?
An NDA is a legally binding contract between the parties that requires them to keep certain information, such as trade secrets, confidential. You should insist that anyone with whom you intend to share your trade secrets signs an NDA before you proceed. Not only will it focus their minds on the importance of the issue and potential consequences if they divulge your secrets, but it will also give you additional rights against them. If they share your trade secrets with anyone else, you may be able to bring a breach of contract claim against them.
What’s the difference between trade secrets and undisclosed Information?
The concept of ‘undisclosed information’ was introduced by the World Trade Organisation in the ‘TRIPS Agreement’, which imposes minimum standards of IP protection on all member countries. Information that constitutes a trade secret under the Trade Secret Regulations will constitute undisclosed information under the TRIPS Agreement.
The TRIPS Agreement specifically deals with an issue faced by pharmaceutical companies and agricultural chemical producers, who are often required to submit extensive data when seeking marketing approval for their products. Under the TRIPS Agreement, that data must be protected as undisclosed information provided it meets various criteria, including that it has not previously been disclosed, is crucial to obtaining marketing consent, and was obtained with considerable effort by its owner.
What’s the difference between trade secrets and proprietary information?
Proprietary Information is information owned by the holder. It may include trade secrets but, like confidential information, covers a broader spectrum. To qualify as a trade secret, the proprietary information must satisfy the requirements of the Trade Secret Regulations.
What’s the difference between trade secrets and restrictive covenants?
Restrictive covenants are clauses in contracts that restrict what one party can do during the contractual term, and afterwards. They are often used in the context of trade secrets to prohibit the recipient of the information – often an employee – from disclosing it to others. If they do so, they will breach the covenant, and you may have a claim against them.
Summary
Despite sometimes being overlooked by business owners, trade secrets and confidential information are crucial business assets. Often borne out of years of hard work, trial and error and, sometimes, strokes of genius, trade secrets and confidential information can span everything from the very foundation of your business, as in the case of the Coca-Cola recipe, to your software code, customer lists and manufacturing processes. They enable you to run your business efficiently, give you a competitive edge, and facilitate expansion.
The law recognises the importance of these types of information and assists businesses in protecting them. It is the responsibility of the business owner to take proactive steps to benefit from, and enhance, that legal protection. If you do so, your trade secrets may, in principle, remain protected forever.
