Hidden Armor: Basics of Trade Secret Law
When most founders think about protecting their business, the first thing that comes to mind is patents. But in many cases, the most valuable intellectual property your company owns isn’t filed with any government office—it’s kept secret. Trade secrets can be your company’s most powerful weapon, but only if you know how to protect them. (Trade secrets can be your company’s most powerful weapon, but only if you know how to protect them.)
Let’s break down what trade secret law is, how it works, and how to make sure you’re protecting what’s yours.
What Are Trade Secrets?
At its core, a trade secret is any information that gives your business a competitive edge simply because it's not publicly known. This could be anything from a manufacturing process to a customer list to a secret recipe. (This could be anything from a manufacturing process, a customer list, to a secret recipe.)
To qualify as a trade secret, the information must meet three main criteria:
1. Secrecy: The information must not be generally known or readily accessible to people who could benefit from it.
2. Economic Value: The fact that it’s secret must give the business a competitive advantage.
3. Reasonable Efforts to Protect It: The company must take reasonable steps to ensure the information remains secret.
Failing to safeguard these elements can undermine your claim that something is a trade secret. Just because your product formula or customer data is valuable doesn’t mean it’s protected unless you’ve actively taken steps to guard it. (Just because your product formula or customer data is valuable, doesn’t mean it’s protected unless you’ve actively taken steps to guard it.)
Trade Secret Criteria: Breakdown
Federal vs. State Trade Secrets Law: The Defend Trade Secrets Act
For a long time, trade secret law was primarily the domain of state courts, many applying their own version of the Uniform Trade Secrets Act (UTSA) or, like New York, developing their own trade secrets doctrine through court decisions. (For a long time, trade secret law was primarily the domain of state courts, many applying their own version of the Uniform Trade Secrets Act (UTSA), or, like New York, developed its own trade secrets doctrine through court decisions.)
In 2016, Congress passed the Defend Trade Secrets Act (DTSA), which created a federal cause of action for trade secret misappropriation. This was a game-changer for businesses because it meant that trade secret claims could now be brought in federal court. Unlike state laws, which can vary, the DTSA provides a uniform standard, making it easier to bring claims across multiple states.
But the DTSA didn’t replace state laws—it works alongside them. So, businesses still need to be aware of how their state defines and enforces trade secrets.
Yellowfin Yachts v. Barker Boatworks: A Case Study
A perfect example of how trade secrets work in practice is Yellowfin Yachts, Inc. v. Barker Boatworks LLC. In this 2018 case, Yellowfin accused its former VP of stealing customer information and proprietary designs to start his own competing company, Barker Boatworks. The court ruled in Yellowfin’s favor, emphasizing that customer lists, even ones that aren’t particularly complex, can qualify as trade secrets if they aren’t publicly known and the company took steps to keep them secret. (The court ruled in Yellowfin’s favor, emphasizing that customer lists, even those that aren’t particularly complex, can qualify as trade secrets if they aren’t publicly known, and the company took steps to keep them secret.)
The takeaway here is simple: even seemingly mundane information, like customer lists, can be protected if it provides an advantage and is carefully guarded. But you must be able to show the court that you took reasonable steps to maintain that secrecy.
Trade Secrets vs. Patents: Which Should You Choose?
One of the biggest strategic decisions for a business is whether to pursue trade secret protection or patent an invention. Here’s a quick comparison:
- Trade Secrets: Trade secret protection can last indefinitely, but only as long as the information remains secret. The advantage is you don’t have to disclose the secret publicly, and there are no expiration dates.
- Patents: Patents offer exclusive rights for a set period (usually 20 years), but in exchange, you have to publicly disclose the details of your invention. Once the patent expires, anyone can use the invention.
So, which is better? It depends. If the process or invention is easy to reverse-engineer or will be widely known once used, a patent is probably the better option. But if the value lies in keeping it secret—like the formula for Coca-Cola—a trade secret may be the way to go.
Non Disclosure vs Public Disclosure
Best Practices for Protecting Trade Secrets
The key to maintaining a trade secret lies in the reasonable efforts your business takes to protect it. If you can’t show that you’ve taken these steps, courts are less likely to recognize your claim. Here are some best practices to ensure your trade secrets remain, well, secret:
- Limit Access: Only those who need to know the information should have access to it. Use passwords, encryption, or physical locks if necessary.
- Confidentiality Agreements: Make sure employees, contractors, and anyone else who interacts with your sensitive information sign Non-Disclosure Agreements (NDAs). But be careful—NDAs are only as good as the details they contain. Broad, vague NDAs often won’t hold up in court. (Broad, vague NDAs often do not hold up in court.)
- Training: Regularly educate your employees on what trade secrets are and how they should be handled. The more your team understands the value of protecting this information, the better your chances of avoiding accidental disclosures.
Avoiding Common NDA Mistakes
Many companies rely on NDAs as their primary tool for protecting trade secrets. While NDAs are important, they’re not foolproof. Here are some common mistakes to avoid:
- Vague Language: An NDA should clearly define what constitutes confidential information. If it’s too vague, a court might not enforce it.
- No Time Limit: NDAs should specify how long the information needs to be kept secret. A perpetual NDA might seem like a good idea, but it could be viewed as unreasonable or unenforceable.
- Lack of Enforcement: If you’re not willing to enforce an NDA, it sends the message that protecting trade secrets isn’t a priority. Always be prepared to follow through on enforcement if necessary. (Always be prepared to act on enforcement if necessary.)
Litigating Trade Secrets: When Things Go Wrong
If someone misappropriates your trade secret, you have legal options, and under the Defend Trade Secrets Act, you can bring your claim in federal court. However, trade secret litigation can be tricky. The biggest challenge is often proving that the information was, in fact, a trade secret and that you took reasonable steps to protect it.
This is why documentation is so critical. Courts want to see evidence—such as policies, agreements, and proof of security measures—that shows you were actively protecting the information. Without that, your claim might not hold up.
Once you prove misappropriation, you could be entitled to damages, injunctive relief to stop the misuse, and even punitive damages if the theft was particularly egregious. But remember, the key to success in these cases is showing that you’ve taken proactive steps to protect the information all along.
Conclusion: Keep Your Secrets Safe
Trade secrets can be the lifeblood of your business, but they’re only as valuable as the efforts you make to protect them. Whether you’re deciding between trade secrets and patents, drafting NDAs, or figuring out how to enforce your rights, having a solid strategy in place from day one is critical. Stay proactive, protect your most valuable information, and you’ll be in a much stronger position to defend your business when challenges arise.