Trade Secret

A trade secret is confidential business information that derives economic value from secrecy and is subject to reasonable efforts to maintain that secrecy. Covered information includes formulas, processes, algorithms, customer lists, source code, manufacturing techniques, pricing strategies, internal documentation, and training methods. Trade secrets are protected under federal law via the Defend Trade Secrets Act of 2016 and under state law in essentially all 50 states, with protection lasting indefinitely as long as the secret remains secret. It is the IP category that protects much of what software companies create, and the protection most-overlooked by founders who assume their IP is automatically covered by some other category.

The two requirements for trade-secret protection: (1) economic value from secrecy (the information must provide a competitive advantage because competitors don't have it), and (2) reasonable secrecy efforts (the owner must take reasonable steps to protect the information, including NDAs with employees and contractors, access controls on systems containing the secret, restrictions on physical and digital access, marking documents as confidential, and consistent practices around handling sensitive information). The classic example: the Coca-Cola formula, a trade secret since 1886, never patented (because patent protection would have required disclosure and expired after 20 years), kept in a vault, with only a handful of people knowing the complete recipe at any time, protected for nearly 140 years and counting. Other famous trade secrets: Google's search ranking algorithm (publicly partially documented but the actual implementation is a trade secret), Kentucky Fried Chicken's 11 herbs and spices, WD-40's formula. The 2016 Defend Trade Secrets Act (DTSA) created a federal cause of action for trade-secret misappropriation, allowing companies to sue in federal court (not just state court) and providing meaningful remedies including injunctions and damages. The strategic trade-off versus patents: trade secrets last forever as long as secrecy holds, but provide no protection against independent reinvention; patents disclose the invention publicly but provide 20-year exclusivity against all uses including independent reinvention. For software, trade secrets are often the better protection.

What founders get wrong: Assuming their source code or algorithms are protected by some default IP category and failing to take the reasonable secrecy steps that establish trade-secret protection. Without NDAs, access controls, and confidentiality practices, the company has no trade-secret protection because it didn't make reasonable efforts to maintain secrecy. The protections are cheap to establish; the cost of not having them surfaces when a former employee takes the secret to a competitor.

Related: Patent · Copyright · Trademark · NDA

FAQ

What is a trade secret?
Confidential business information (formulas, processes, algorithms, customer lists, source code, manufacturing techniques, pricing strategies) that derives economic value from not being generally known and is subject to reasonable efforts to maintain its secrecy. Protected under the federal Defend Trade Secrets Act of 2016 and state law in essentially all 50 states.

What's the most famous trade secret?
The Coca-Cola formula, a trade secret since 1886, never patented, kept in a vault, with only a handful of people knowing the complete recipe at any time, protected for nearly 140 years and counting. Other famous examples: Google's search ranking algorithm, KFC's 11 herbs and spices, WD-40's formula.

Trade secret vs patent: which protects software better?
Trade secret is usually better for software. Trade secrets last indefinitely as long as secrecy holds; patents expire after 20 years and force public disclosure. Patents protect against independent reinvention; trade secrets don't. For most software companies (especially algorithms and internal processes), trade-secret protection is more durable and avoids the disclosure-and-expiration tradeoff that patents require.