Are trade secrets protected by trademarks?

Under the Uniform Trade Secrets Act (“UTSA”), a trade secret is defined as information that derives independent economic value because it is not generally known or readily ascertainable, and it is the subject of efforts to maintain secrecy. Unlike copyrights, patents, and trademarks, trade secrets are not registered with a government agency. However, in some cases, they can represent a company’s most valuable intellectual property assets.

The UTSA has been enacted by most states, but in states where it has not been enacted, infringement or “misappropriation” of a trade secret remains a common law tort. Common issues involving trade secrets are:

• Nondisclosure Agreements
• Noncompete Agreements
• Infringement
• Enforcement

Trade secrets are easily misappropriated. Often, they consist of information that can be memorized or noted down by employees, customers, developers, suppliers, and others. The more people know a trade secret in an economy where employee turnover is high, the harder it is to keep the information secret. If a competitor, journalist, or blogger gets hold of the trade secret, the information may be put to use immediately. Once a trade secret becomes public, its status as a trade secret may be lost.

Examples of Trade Secrets

Information that can be kept as a trade secret includes formulas, patterns, compilations, programs, devices, methods, techniques, or processes. Some examples of trade secrets include customer lists and manufacturing processes. The economic value of the information can be actual or potential. For example, if you have not actually started producing a particular useful device according to a blueprint, you can still protect the blueprint as a trade secret on the basis that it has the potential for economic value.

Sometimes the information that is protected as a trade secret may also be protectable as an invention under a patent. However, in order to obtain a patent, you must make a public disclosure of how an invention can be reproduced. Patent protection is a limited monopoly for a specific time, whereas trade secret protection continues until the trade secret is publicly disclosed. The same invention cannot receive patent and trade secret protection at the same time.

What Do You Need to Prove in a Trade Secret Claim?

In most states, in order to prove a trade secret claim, you will need to prove that:

• The subject matter at issue is a trade secret;
• You made reasonable efforts to prevent the trade secret from being disclosed; and
• Somebody else misappropriated the information.

There are two types of illegal appropriation of a trade secret. It may be acquired improperly, or it may involve a breach of confidence. A competitor can lawfully use independent discovery, acquire a trade secret through an accidental disclosure based on the trade secret owner’s failure to reasonably guard the secret, or use reverse engineering.

Some companies wonder what the court considers “reasonable” efforts to guard trade secrets. In general, disclosure of trade secrets should be limited to a need-to-know basis. Anyone to whom the trade secret must be disclosed should have to sign a nondisclosure agreement, and when possible, a noncompete agreement. These agreements can include clauses that restrain employees from working on confidential information from their home computers. Any documents or items that contain trade secrets should be conspicuously marked “confidential.” The policy regarding trade secrets should be clearly articulated in the company handbook, and measures should be taken to restrict access to the trade secrets, such as by issuing employee badges or installing locks and passwords.

Since no government entity monitors trade secrets, enforcement of trade secrets is largely a matter of policing by private companies that can afford to do so. However, in the case of intentional theft of trade secrets, the federal Economic Espionage Act of 1996 and some state laws provide criminal penalties. Misappropriation of trade secrets is also a form of unfair competition.

Last reviewed October 2022

• Running the Business

The crown jewels of a typical technology company are often found in its intellectual property portfolio. Having a good basic understanding of intellectual property protection is essential for entrepreneurs to extract value out of their company's key assets and manage opportunities and risk arising from them. Among these key assets is the trade secret.

What is a trade secret?

Trade secrets are information of any type that is valuable to its owner because it is not generally known in the industry and its owner has taken reasonable steps to maintain the information in confidence. Examples of trade secrets include customer lists, source code, and semiconductor manufacturing processes. Trade secrets can include both positive and negative information. For example, the knowledge of which compounds are not effective therapeutic drugs against cancer can be very valuable and save a company tens or even hundreds of millions of dollars. Trade secrets arise automatically if a company takes the appropriate steps to maintain the information as a secret and they continue to be enforceable so long as they meet those criteria.  Consequently, a trade secret can endure forever. Trade secret law provides rather limited protection: it prevents the "misappropriation" of the trade secret. Misappropriation of a trade secret requires "wrongful" taking. For example, a classic example of trade secret misappropriation occurs when an individual takes confidential information from his employer to start a new company. On the other hand, reverse engineering, unless such reverse engineering breaches an agreement, is not misappropriation.

Trade secrets have long been governed by state law with most of the states adopting their own versions of the Uniform Trade Secrets Act (Massachusetts and New York being the only exceptions). On May 11, 2016, the Federal governments enacted the Defend Trade Secret Acts. This new law requires that employee inventions agreements and contractor agreements with individuals (not contractors or consultants that are entities) that are executed or updated (ie, amendments or modifications to existing agreements) beginning on May 12, 2016 include notice of certain immunities provided under the law. The law gives an employee and individual independent contractor immunity from civil and criminal liability under state and federal law for disclosing a trade secret if the disclosure was made to report or investigate an alleged violation of law and the new law requires that companies include notice of such immunity in any agreement with an employee or independent contractor that governs the use of trade secret or confidential information. Failure to provide this notice would result in the company not being able to recover exemplary damages or attorneys' fees from the employee if the company were to sue the employee for misappropriation of trade secrets.

When do you protect information as a trade secret?

Most products and services can be protected by a combination of intellectual property rights. For example, computer software can be protected by patents, copyrights, trademarks and trade secrets. Microsoft protects certain functions of its Windows software with patents; it uses copyright to protect the actual code of the Windows software from copying; it uses trademark law to protect the "Microsoft" and "Windows" trademarks which identify the product; and it uses trade secret law to protect the structure and methodology of its source code. However, once a patent is issued, trade secrets in the part of the computer software protected by the patent will be disclosed and will no longer be protected by trade secret law.

Because patent applications are published and made available to the public during the application process, inventions covered by patents are not protectable as trade secrets. Some companies may want to keep an invention as a trade secret for competitive market reasons and so may opt not to pursue patent protection and instead rely on trade secrets to protect their intellectual property assets.

Some information may not be protectable as intellectual property other than as a trade secret. Examples of such information can include pricing and cost information (but not if that information is readily ascertainable from customers), profit margin information, recipes and customer lists (unless readily ascertainable from public sources).

What happens if my company does not own the trade secrets created by one of its founders?

The most common mistake by startups is failing to obtain proper written assignments or licenses of intellectual property rights that are developed by the founders prior to the startup's incorporation or rights  developed by employees or consultants after the startup's incorporation. If a startup does not actually own or have a license to the intellectual property in its products, a disgruntled founder or employee can hold the startup hostage until the company either revises the product to remove his contributions or makes a deal to obtain assignment or license of the rights. A very common form of this problem is the failure to obtain the assignment of the intellectual property rights to the product developed by the founders either prior to incorporation of the startup or prior to the founders becoming employees of the startup. This mistake can be very expensive to resolve; in some situations, it can be fatal to the startup when it's seeking investment or about to be acquired.

A major risk for a startup is the use by founders of materials from their prior employer.  Such materials can range from trade secrets such as customer lists or semiconductor design methodology to computer software. This mistake can cripple a startup, because companies are becoming more aggressive in defending their intellectual property rights: a lawsuit, even if the startup wins, can prove to be fatal either due to delays in product introduction or distraction of the startup's management. If the startup loses, it will need to recommence its product development and may have to pay substantial damages. In more serious cases, the founders can be subject to criminal liability and may even serve time in jail.

For a sample form of independent contractor agreement that would be used by a company hiring a contractor who could develop trade secret information for the company, see our Starter Kit for a form of independent contractor agreement.

Where do I find sample agreements that I can use to protect my company's trade secret information?

The most typical way a company protects its trade secrets is through the use of non disclosure agreements when it is disclosing trade secret  and other confidential information. For different forms of non disclosure agreements, please see the mutual confidentiality agreement and two forms of one-way confidentiality agreement in our Starter Kit.

The form of employee proprietary information and inventions agreement also includes typical confidentiality obligations that protect the company's trade secret information. You can find that form agreement in our Starter Kit.

What are alternatives to an assignment of a trade secret?

Sometimes an outright assignment of a trade secret may not be possible. Short of getting an assignment, it may be sufficient for some startups to obtain a broad exclusive, perpetual and irrevocable license. Such licenses may be royalty bearing or royalty free.

What do I do if I have a question?

If you have questions about ensuring that your company has all the intellectual property rights it needs to get started we're here to help. Reach out to our Technology Sourcing and Commercial practice.

If you have questions about whether or not there is a risk of a former employer making a trade secret misappropriation against one of your employees or the company, please contact our Commercial Litigation practice.

In the meantime, feel free to review our starter kit for forms of employee inventions and proprietary information agreement, independent contractor services agreement and founder stock purchase agreement with intellectual property assignment.

Also, if you're interested in learning more about copyright protection in other key jurisdictions around the world, see the IPT volume in our "Guide to Going Global" series. The current version provides an overview of intellectual property protections and key commercial terms in over 35 countries.

Can trade secrets be protected?

What is the difference between trademarks and trade secrets?

Do intellectual property laws protect trade secrets?

What laws provide protection to trade secrets?