Trade secrets: the hidden IP right

By Prajwal Nirwan, Associate, Miller Sturt Kenyon, London, United Kingdom

Our world is becoming ever more open and inclusive. New ideas are widely shared on public platforms and more research is being published than ever before. In this increasingly complex, highly competitive, hyper-connected world, some things that might ordinarily be protected by traditional intellectual property (IP) rights such as patents, trademarks and design rights are best kept secret.

Some of the world’s most famous trade secrets – including the Coca-Cola recipe and Google’s search algorithm – have immense value. These companies quickly recognized that the value of these particular intellectual assets lay in their secrecy, and by treating them as trade secrets they could maintain their competitive advantage.

What exactly are trade secrets?

Trade secrets are secrets that add value to a business. A generally less well-known form of intellectual property right, for many years trade secrets have been in the shadows, but today they are gaining traction as an effective way to protect certain intellectual assets. Any commercially valuable and sensitive information – a business strategy, a new product roadmap, or lists of suppliers and customers – can qualify as a trade secret. And unlike other IP rights, trade secrets can protect a much wider range of subject matter and are not limited to a set term of protection. Trade secrets are not exclusive rights like patents, and therefore cannot be enforced against anyone who independently discovers the secret. However, any unlawful acquisition or misuse of a trade secret either under breach of confidence or theft is actionable. And the proprietor of the trade secret can get compensation and an injunction in respect of such unlawful acts.

Trade secret laws around the world

Like other IP rights, trade secrets are subject to the national laws of the country in which they are protected. Unlike patents and trademarks, there are no formal requirements to register trade secrets with an official authority, but most countries have laws that deal with the misappropriation or unauthorized acquisition of trade secrets. For example, in the United Kingdom no formal definition of a trade secret exists and there is no restriction as to the type of information that can constitute a trade secret. The legislation around trade secrets is largely drawn from case law relating to breach of confidence, with effective remedies for instances in which trade secrets have been improperly acquired, disclosed or used.

In the United States, the policy on trade secrets states that they consist of information that may include a formula, pattern, compilation, program, device, method, technique or process. And to qualify as such, a trade secret must be used in business and give an opportunity to obtain an economic advantage over competitors who do not know or use it. The Defend Trade Secrets Act of 2016 strengthens trade secret protection in the United States and offers parties the option of settling disputes under either state or federal laws. While they differ in some respects, there is a great deal of similarity among state laws because almost all of them have adopted some variation of the Uniform Trade Secrets Act.

In Europe, policymakers took a major step forward in codifying trade secret laws in all countries of the European Union (EU) in June 2016 with the adoption of the EU Trade Secrets Directive. The Directive covers the unlawful acquisition, use and disclosure of trade secrets. EU member states are required to bring their domestic laws into line with the objectives of the Directive by mid-2018. According to Article 2(1) of the Directive:

“‘trade secret’ means information which meets all of the following requirements:

1. “it is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;
2. “it has commercial value because it is secret;
3. “it has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.”

The recent adoption of policies on trade secrets by the world’s strongest economies underlines the growing significance of trade secrets in the current business climate.

Trade secrets and patents

When it comes to protecting an intellectual asset, one tough decision businesses have to make is whether to protect it with classical IP rights, for example by filing for patent protection, or to keep it as a trade secret. While in some cases the answer may not be quite so straightforward, in many instances answering the following questions can clarify a company’s thinking on the best way forward.

• Is the technology in question a patentable invention? Note that most countries do not grant patents for business methods, software (which is typically protected under copyright law), mathematical formulas, presentation of information, and the like. However, any of these assets may be protected as a trade secret!
• Is the asset in question commercially valuable and worth keeping secret?
• What are the chances of competitors being able to find out how your asset works by reverse engineering or other means?
• Is there a high risk of someone else patenting your asset?
• Is your asset something that could remain valuable for a much longer term of protection than that which is provided by a patent (usually 20 years)?
• Would the company be able to ensure its secrecy?

There are, of course, other considerations that need to be taken into account, such as costs of protection and investor interests. Both patents and trade secrets are effective forms of IP protection, but one may be more suitable than the other depending on the subject matter and circumstances. It is important that those taking decisions about IP strategy are aware that trade secrets can potentially be as valuable as patents (if not more so), if they are protected diligently and used strategically.

Trade secrets: a boon for small businesses

While most large multinational companies have the resources and funds to invest in the patenting process, which can be costly and time-consuming, small and medium-sized enterprises (SMEs) often struggle with it. Trade secrets, on the other hand, are relatively straightforward, entail no registration costs or lengthy legal processes and can add real value for small businesses. That is why it is so important to raise awareness among SMEs about the value of trade secrets and how to protect them effectively. To benefit directly from trade secrets, an SME may:

• Consider keeping undetectable manufacturing techniques or hidden components in their products as trade secrets.
• Consider keeping lists of suppliers and customers as trade secrets, especially if operating in a niche business.
• Consider keeping patentable inventions as trade secrets if they are short of funds, and only file for patent protection when funding becomes available or a keen investor is identified.
• Consider licensing their trade secrets, but ensure a confidentiality agreement and enforceable contracts are in place before revealing the secrets to third parties.
• Educate their employees and decision makers about trade secrets.

Various intellectual property authorities and educational institutions around the world are reaching out to the business community to improve awareness of the usefulness and value of trade secrets, but there is still a long way to go to raise their profile and strengthen the laws surrounding them.