Trade Secrets

Trade Secrets

A trade secret is unlike a patent or copyright in that it must be kept a secret. The information has value only as a secret, and an infringer is one who divulges the secret. Once divulged, the information usually cannot be made secret again.

Characteristics of Trade Secrets

A trade secret is information that gives one company a competitive edge over others. For example, the formula for a soft drink is a trade secret, as is a mailing list of customers or information about a product due to be announced in a few months.

The distinguishing characteristic of a trade secret is that it must always be kept secret. Employees and outsiders who have access to the secret must be required not to divulge the secret. The owner must take precautions to protect the secret, such as storing it in a safe, encrypting it in a computer file, or making employees sign a statement that they will not disclose the secret.

If someone obtains a trade secret improperly and profits from it, the owner can recover profits, damages, lost revenues, and legal costs. The court will do whatever it can to return the holder to the same competitive position it had while the information was secret and may award damages to compensate for lost sales. However, trade secret protection evaporates in case of independent discovery. If someone else happens to discover the secret independently, there is no infringement and trade secret rights are gone.

Reverse Engineering

Another way trade secret protection can vanish is by reverse engineering. Suppose a secret is the way to pack tissues in a cardboard box to make one pop up as another is pulled out. Anyone can cut open the box and study the process. Therefore, the trade secret is easily discovered. In reverse engineering, one studies a finished object to determine how it is manufactured or how it works.

Through reverse engineering someone might discover how a telephone is built; the design of the telephone is obvious from the components and how they are connected. Therefore, a patent is the appropriate way to protect an invention such as a telephone. However, something like a soft drink is not just the combination of its ingredients. Making a soft drink may involve time, temperature, presence of oxygen or other gases, and similar factors that could not be learned from a straight chemical decomposition of the product. The recipe of a soft drink is a closely guarded trade secret. Trade secret protection works best when the secret is not apparent in the product.

Applicability to Computer Objects

Trade secret protection applies very well to computer software. The underlying algorithm of a computer program is novel, but its novelty depends on nobody else's knowing it. Trade secret protection allows distribution of the result of a secret (the executable program) while still keeping the program design hidden. Trade secret protection does not cover copying a product (specifically a computer program), so it cannot protect against a pirate who sells copies of someone else's program without permission. However, trade secret protection makes it illegal to steal a secret algorithm and use it in another product.

The difficulty with computer programs is that reverse engineering works. Decompiler and disassembler programs can produce a source version of an executable program. Of course, this source does not contain the descriptive variable names or the comments to explain the code, but it is an accurate version that someone else can study, reuse, or extend.

Difficulty of Enforcement

Trade secret protection is of no help when someone infers a program's design by studying its output or, worse yet, decoding the object code. Both of these are legitimate (that is, legal) activities, and both cause trade secret protection to disappear.

The confidentiality of a trade secret must be ensured with adequate safeguards. If source code is distributed loosely or if the owner fails to impress on people (such as employees) the importance of keeping the secret, any prosecution of infringement will be weakened. Employment contracts typically include a clause stating that the employee will not divulge any trade secrets received from the company, even after leaving a job. Additional protection, such as marking copies of sensitive documents or controlling access to computer files of secret information, may be necessary to impress people with the importance of secrecy.