One can think of a patent as an externally-declared right (i.e., a right granted by a governmental body – the U.S. Patent and Trademark Office, which is part of the Department of Commerce). Conversely, one can think of trade secrets as internally declared rights.
A trade secret is any confidential information that is valuable because it provides a competitive advantage to the holder of the information. The only requirement for the law to protect a trade secret, as its name suggests, is that the owner must take reasonable steps to keep it secret.
Reasonable steps include limiting access to the trade secret by, for example, utilizing locked file cabinets, designating restricted areas within your firm’s facilities and requiring employees (and even potential investors) to sign a confidentiality agreement before disclosing the secret to them.
Trade secrets are protected by each individual state’s laws and require no formal application, examination or registration procedures. Thus, the trade secret form of IP protection is very inexpensive. Further, unlike patents and copyrights, trade secret protection does not expire.
It remains a trade secret as long as the owner can keep it confidential. (The best-known example of a long-lasting trade secret is the formula for Coca-Cola, which has remained a trade secret for more than 150 years.)
The owner of a trade secret can exploit it by being the only one to offer goods or services created from or utilizing the trade secret, or by licensing someone else the right to utilize it in exchange for royalty payments. Should someone obtain that secret by improper means and use it to unfairly compete, the owner can sue.
A court, upon finding misappropriation of the trade secret, may award monetary damages, order an injunction and/or grant attorneys’ fees and costs.
Because trade secrets are internally declared, they have to be accepted, and granted legitimacy, by each partner with whom you share them. That is, from both a psychological and legal perspective, they do not have the “government seal of approval” and presumption of validity that a patent enjoys.
Moreover, they carry a greater burden of proof for their owner, should their existence and validity be challenged. Finally, trade secrets reduce the “innovative ripple” you can lay claim to, and thus they may reduce your strategies for licensing and distribution further downstream. Consequently, as opposed to patents, trade secrets place a greater burden on the creator to actually practice or utilize the subject matter of the trade secret.
In sum, trade secrets place a greater degree of responsibility on the business to have the necessary complimentary assets required for success. Generally speaking, however, if you had those complimentary assets and basic resources, you’d likely be a large company and not a start-up.
