What is Trade Secret

Feb 12, 2021

What is Trade Secret

In order to protect intellectual and intangible assets, various businesses adopt different policies. A company active in publishing books and literature, prioritizes copyright, while an online sales company focuses on trademark registration and an innovative manufacture use patenting as its core strategy. While it is possible also to use a combination of available protecting strategies.

A key question is what is the most common type of intellectual property assets of the companies that must be protected? Most people cite one of the above in answer to this question. But such a point of view is not true in every case. Contrary to popular belief, the most common form of protection in various businesses remains confidentiality. Confidentiality of know-how and other intangible assets in the form of "Trade Secrets" is one of the most common and old strategies of various businesses that we discuss in this article.

Are trade secrets also part of intellectual property rights? How can they be used? What are the differences between trade secrets and other formal types of intellectual property rights? These are the questions we try to answer in this article.


What is the trade secret?

Trade secrets in a simple word are any information that you do not want other competitors/people/public know them. It is interesting to note that the Privacy Act covers not only formulas, designs, and business secrets, but also some simple facts such as the features of the new iPhone model that will be available in the market in the next future.

For thousands of years, secrecy has been an integral part of the business. For example, it would have allowed parts of China to benefit from the clever cultivation and harvesting of silkworms for centuries, or a family in Armenia, a top producer of orchestral instruments and instruments for 400 years, by keeping their trade secrets confidential.

A trade secret works as a legal regime that protects confidential information based on trusting relationships between business partners. Before the age of industrialization, people tried to keep their "business tricks and secrets" in their small, often family-run business. However, as traditional business converted to large factories and industries, a legal system was needed that could guarantee employee commitment and confidentiality of a particular process or piece of equipment used or implemented.

Confidentiality of trade secrets (e.g. customer information, their needs, and preferences) is one of the main approached SMEs use to protect their competitive advantage. Trade secret laws speed up technology transfer by reassuring their owners to enter into technological collaborations and, more generally, open innovation, and provide a convenient path for disseminating information and exchanging them among companies.

To better understand the economic values of trade secrets, imagine that you cannot rely only on a specific rule to be in accordance with the trust-related obligations in the business environment.

In this case, fewer people are employed by industries and businesses (risk of disclosure of confidential information), costs associated with the physical implementation of information security increase (locks and fences, computer systems without flash, etc.), and, most importantly, many licensing transactions and research collaborations never happen. These all have happened because there is no warranty that the trade secrets will not be disclosed by the partners. In short, if there is no protection to keep trade secrets, the flow of information is extremely reduced and as a result, the rate of innovation is completely slowed down.


Why less attention paid to the trade secret, despite the extensive use of them?

Every day we hear much news about patent strategies or giant companies' disputes over patents, industrial designs, copyrights, and trademarks. However, the news and advertising dimension of trade secrets are much not as much of them. There are several reasons for this, perhaps the most important one is the lack of formal registration of trade secrets in intellectual property systems. In other words, a trade secret can only be kept confidential by businesses and only among them, and therefore, it does not require any application registration process. This intellectual property strategy is to be used as a practical solution by any business.

The second reason relates to the way these rights are enforced and pursued. Although the general principles of the Trade Secret Law, also known as the protection of the Confidential Information Law, are established in most countries but does not exist general rules and regulations in the countries to enforce their protection. In addition, companies' disputes over trade secrets are generally confidential as well and the disputes resolved during business negotiations. That is why they are not discussed in public.

It should be noted that in recent years due to cyber-attacks and spying of company's information, the trade secrets and keeping them has become an issue. On the other hand, due to the interest of companies and industries in technological cooperation and joint development of innovation, conflicts, and tension over trade secrets have built up and governments seek to address these issues by-laws and implementing innovative programs.


Why do businesses still keep secrecy to maintain many of their competitive advantages?

The most important reason for the intense interest of businesses in trade secrets is its low cost! Trade secrets are much cheaper than other types of IP protection. since they do not require registration in intellectual property systems, the costs associated with hiring a lawyer and IP specialists is decreases. You just have to be careful about keeping your core information secret, and certainly, you do not have to disclose agreements with your employees and business partners. For sure, it should be noted that if for any reason, this trade secret is leaked, this cheap method can become one of the costliest risks for that business and even lead to the collapse of the business.

Another advantage of using trade secret is its wide and diverse scope. For Protecting a technology as a patent, the technology has to have some specific condition. However, for a trade secret, there is not necessary to fulfill some conditions, even if it has already been used by someone else. The only requirement for this is the lack of public knowledge of the information that allows you to protect it in the form of trade secrets.

Another advantage of the trade secrets is its unlimited protection time. Unlike patents and copyrights, which have limited validity of exclusive rights (20 and 70 years) and need to renew trademarks, trade secrets do not have these restrictions. An old example of this advantage is Coca-Cola's strategy of preserving the unique and highly valuable formula of its beverages. Due to the trade secret unbounded to time, the company has not taken any action to register this special formula in the patent system, and by accepting the risk of its discovery and disclosure by other competitors (during independent research and development projects), it is more than a century (since 1891 its formula has kept by trade secret). However, this does not mean that Coca-Cola is not interested in the patent system or does not take advantage of this protective advantage. The company also seriously pursues the use of patents to protect its valuable achievements.

Another issue with the protection of trade secrets is the growing importance of this type of IP right in patent-based businesses and transferring technology. In some businesses, confidentiality is an important part of the innovation process. Since national and international patent laws have set novelty as one of the requirements for patenting, the invention must be kept away from any public disclosure until it is registered by the applicant. Regardless of those technological innovations that could be kept secret by their nature, it would be very difficult to keep the innovation confidential when the technology needs to be developed and improved outside of the laboratory. This factor has made information confidentiality contracts a key requirement for businesses in the early stages of innovation development and before filing a patent application.

Advantages of Trade secrets can weigh up from another angle; Smaller companies and individual inventors can work with large and multinational companies to come up with fresh and innovative ideas. But creativity and innovation in the early stages of cooperation, where patenting is not fast obtainable, make the parties cooperate with a kind of distrust. This suspicion is more common in small local businesses. They worry that local knowledge and ideas will be taken away by large corporations, and therefore, the only available tool is to protect trade secrets. The legal framework for the protection of trade secrets allows small companies and individual inventors to protect their information and secrets and, as a result, to simply disclose and use them in joint innovation. From this perspective, trade secrets are considered a tool to create " truthful networks" that promote innovation in the form of an open innovation paradigm.

As mentioned earlier, in addition to all the above benefits, a trade secret is strictly limited. Although the protection of information through trade secrets is cheap and widely available, there will be no guarantee to have a monopoly similar to what is granted to you by a patent. If someone else, your competing business, or even your business partner comes across your trade secret without any stealing or infringing, there is nothing you can do about it. This restriction is the main issue in many businesses, such as the chemical and pharmaceutical industries, and for this reason, they are turning to more formal and guaranteed methods such as patents.


What is the legal protection of trade secrets?

The trade secret law, like other forms of intellectual property, is administrated by national legal systems. However, to protect the confidentiality, some international standards are set out in the 1995 TRIPS Agreement as Undisclosed Information. According to the agreement, member states must protect undisclosed information against unauthorized exploitation and contrary to the principles of fair use and just trade (unfair and unlawful practices include breaches of confidentiality agreements and unfair competition). It should be noted that information can be protected in the form of these principles:

• Not publicly known and not readily available;

• be valuable because they are hidden;

• Keep them secret through a series of Reasonable Steps.

In addition to the above, which defines trade secrets and the limits and scope of their protection, the TRIPS Agreement also covers its legal implementation. This requires a legal proceeding to enforce all IP rights, including "confidential information", but due to various approaches in which national judicial systems obtain evidence of trade secret infringement, the enforcement of this type of intellectual property rights is oppressed with disproportion. There are many around the world.


Some of the World-famous trade secrets

1. Google Search Algorithm: Google search engine is one of the most popular concepts on the Internet that few people in the world are unfamiliar with. Google has developed and improved its search algorithm every year, and despite announcing some changes, it has kept the whole algorithm as a valuable secret.

۲. Kentucky Roast Chicken: The ingredients used in KFC Roast Chicken were originally on the mind of its inventor, Colonel Sanders, who, after writing his instructions, is kept in a secret safe in this complex of famous chain restaurants. Some of the selected employees have access to this instruction on a confidential basis, but for added protection, half of the ingredients are in the ownership of one company and the other half in the hands of the second company, which mix the spices separately based on they follow their instructions and then the two packages are automatically processed together and the final standard mixture is delivered to the restaurants.

3. Coca-Cola: Instead of patenting itself, Coca-Cola decided to protect it as a trade secret, and that decision has sparked a wave of rumors in recent decades. For example, it is said that cocaine is probably one of the ingredients in this formula, and for this reason, Coca-Cola does not register it. Despite this gossips, one thing is certain, and that is the attempts have been done to steal this valuable trade secret. In 2006, a Coca-Cola employee, with the help of two others, tried to steal the secret and sell it to Pepsi Cola (Coca-Cola as a powerful competitor), but Pepsi revealed the attempt and announced it to Coca-Cola.

4. "LISTERINE": This drug formula is a very tangible example of trade secrets that are presented in most law schools to better understand students. The inventor of this drug formula licensed its use to the current pharmaceutical company "Pfizer" and the company has paid a total of $ 22 million to the family of this inventor in 70 years. Eventually, Pfizer tried to stop its payments, arguing that the trade secret had been leaked and was no longer a secret. However, the court stated: "The contract does not state that the agreement will be terminated if the formula is discovered and disclosed by others. "Especially since the pharmaceutical company achieved this formula while it was secretive and has been a factor in the company's competitive advantage." According to the ruling, the pharmaceutical company Pfizer will still be required to pay royalties to the inventor's survivors.


Cyber ​​ spying; The future challenge for businesses

As noted, the implementation of trade secret protection is a widespread challenge in most national and international intellectual property systems, and many responsible organizations seek to perform and implement normal laws and regulations. However, the practical challenges of protecting trade secrets are even more complex than the legal considerations involved. Paradoxically, increasing innovation, especially in the information and communication industry, along with the many benefits it has brought to societies, has made it easier to steal valuable business information.

Commercial spying through a process called "Spear-Phishing" is a particular example of this. Thieves send a fake email to a person's account on social networks such as Facebook, and by opening it by the user, without his knowledge, malware is installed on his system, and in complete silence, for months and maybe years, valuable information. Searches and uploads something among the files. This information can be sold through hackers or passed directly to a rival company as a spy agent.

Due to the ubiquity of the Internet in recent years, it is very difficult to track cyber-spying sources. Similarly, estimating the damage caused by cyber espionage is challenging; Because many companies do not know for a long time that their trade secrets are compromised, and even if they are aware, they are reluctant to report and disclose this issue.


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