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Trade Secret Law Basics

Intellectual property results from exercise of the faculties of the mind. For example, intellectual property may be in the form of a trade secret. A trade secret is generally defined as a formula, practice, process, design, instrument, pattern or compilation of information used by a business to obtain an advantage over competitors who do not know the information. Trade secrets are also referred to as “confidential information.” In this regard, trade secret law protects the owner of the trade secret with respect to theft of the trade secret. Trade secrets are not protected by federal patent, trademark or copyright law. Trade secrets are only protected by trade secret law. Trade secret protection lasts forever, as long as the information is kept secret. However, a competitor is not prevented from independently obtaining, such as by reverse engineering, and using the secret information.

Examples of trade secrets include customer lists, product pricing, marketing strategies, unpublished company profit and loss statements, manufacturing processes, recipes, an invention for which a patent application has not been filed, and chemical formulae.

For example, to qualify as a trade secret under California law, the item seeking trade secret protection must:

  • contain information
  • not be generally known;
  • derive economic value from the fact that it is treated as a secret
  • be treated as a secret and must be the subject of reasonable efforts to protect or maintain its secrecy.

This definition is codified under Section 3426 to 3426.11 of the California Civil Code. With regard to maintaining secrecy, a trade secret should be kept under lock and key or otherwise kept from public scrutiny.

As previously mentioned, trade secret law protects against theft or misappropriation of the trade secret. For example, if an employee had access to the trade secret, leaves the company and then uses the trade secret with his new employer, then that former employee and possibly the new employer may be liable for theft of trade secrets. Theft or misappropriation of trade secrets is also a federal crime and subjects the guilty party to fines and imprisonment.

However, what should the owner of a trade secret do if he needs to disclose the trade secret to others in order to obtain venture capital or sales? In this case, he can ask the other party to sign a confidential disclosure agreement (CDA), also known as a nondisclosure agreement, confidential information agreement or secrecy agreement. A CDA is a contract between parties that describes confidential materials or knowledge the parties wish to share with one another for specified purposes, but wish to restrict from public disclosure and use. Under the contract, the parties agree not to disclose information covered by the CDA. In fact, the CDA may state that the existence of the CDA itself cannot be disclosed.

Trade secret information is often disclosed to an employee so that the employee can perform the duties of his employment. Trade secrets disclosed to or conceived by an employee during the course of his employment are owned by the employer, whether or not there is a written agreement to this effect. However, it is prudent for the employer to require the employee to sign such an agreement to avoid misunderstandings regarding ownership of trade secrets.

For details and further reading regarding trade secret law, please visit our Library Reading Room.

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