Leadership Laboratory

Leadership Lab: Intellectual Property Series

This series of essays can help the IT manager learn how to identify and protect intellectual property and intangible assets.

Trademark Infringement - The Likelihood of Confusion - Updated October 27th, 2008
Valuation of Intellectual Property Case Study - IPWatchdog.com -
What is Intellectual Property - March 14th, 2007
Creative Commons and Intellectual Property - May 1st, 2007
What Is a Patent? - April 7th, 2007
Copyright - April 7th, 2007
Digital Rights Management - April 7th, 2007
Trademark and Brand - April 7th, 2007
Trade Secrets - April 7th, 2007
The Value of IP - April 7th, 2007
Licensing and Franchising - April 3rd, 2007
10 Steps to Protect IP - March 13th, 2007

Trade Secrets

April 7th, 2007
By Stephen Northcutt


Copyrights, patents and marks are all examples of intellectual property that can be registered with governments or the World Intellectual Property Organization. A trade secret, like know-how and other similar intangible intellectual property, is something you do not register, instead, you protect it.

Definition of trade secret from the Restatement of Torts
"A trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers.

It differs from other secret information in a business in that it is not simply information as to single or ephemeral events in the conduct of the business. Some examples are the amount or other terms of a secret bid for a contract, the salary of certain employees, the security investments made or contemplated, and the date fixed for the announcement of a new policy or for bringing out a new model or the like.
A trade secret is a process or device for continuous use in the operations of the business. Generally it relates to the production of goods as for example, a machine or formula for the production of an article. It may, however, relate to the sale of goods or to other operations in the business such as a code for determining discounts, rebates or other concessions in a price list or catalogue, a list of specialized customers, or a method of bookkeeping or other office management.

The subject matter of a trade secret must be secret
Matters of public knowledge or of general knowledge in an industry cannot be appropriated by one as one's secret. Matters which are completely disclosed by the goods which one markets cannot be one's secret. Substantially, a trade secret is known only in the particular business in which it is used. It is not requisite that only the proprietor of the business knows it. He may, without losing his protection, communicate it to employees involved in its use. He may likewise communicate it to others pledged to secrecy. Others may also know of it independently; for example, when they have discovered the process or formula by independent invention and are keeping it secret.

Nevertheless, a substantial element of secrecy must exist, so that, except by the use of improper means, there would be difficulty in acquiring the information. An exact definition of a trade secret is not possible. Some factors to be considered in determining whether given information is one's trade secret are:
  1. The extent to which the information is known outside of his business;
  2. The extent to which it is known by employees and others involved in his business;
  3. The extent of measures taken by him to guard the secrecy of the information;
  4. The value of the information to him and his competitors;
  5. The amount of effort or money expended by him in developing the information;
  6. The ease or difficulty with which the information could be properly acquired or duplicated by others.
"Novelty and prior art"
A trade secret may be a device or process which is patentable; but it need not be that. It may be a device or process which is clearly anticipated in the prior art or one which is merely a mechanical improvement that a good mechanic can make. Novelty and invention are not requisite for a trade secret as they are for patentability. These requirements are essential to patentability because a patent protects against unlicensed use of the patented device or process even by one who discovers it properly through independent research. The patent monopoly is a reward to the inventor. But such is not the case with a trade secret. Its protection is not based on a policy of rewarding or otherwise encouraging the development of secret processes or devices. The protection is merely against breach of faith and reprehensible means of learning another's secret. For this limited protection, it is not appropriate to require also the kind of novelty and invention which is a requisite of patentability.

The nature of the secret is, however, an important factor in determining the kind of relief that is appropriate against one who is subject to liability under the rule stated in this section. Thus, if the secret consists of a device or process which is a novel invention, one who acquires the secret wrongfully is ordinarily enjoined from further use of it and is required to account for the profits derived from his past use. If, on the other hand, the secret consists of mechanical improvements that a good mechanic can make without resort to the secret, the wrongdoer's liability may be limited to damages, and an injunction against future use of the improvements made with the aid of the secret may be inappropriate."1

Our understanding of trade secrets are further enhanced by Uniform Trade Secrets Act which was drafted by the National Conference of Commissioners on Uniform State Laws, as amended 1985. "Trade secret" means information, including a formula, pattern, compilation, program device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from no being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.2

The need to baseline trade secrets
This is clearly a case for information centric defense in depth and you cannot protect the information if you do not know where it is.3 In future discussions we will enumerate places to look for trade secrets from our experience, but they should be part of the inventory for your organization. When possible, try to quantify the value of the trade secret in dollars to your organization. As an example, over time we have produced a formula that from nine weeks out to the start of a major conference4 allows us to calculate about how many people we expect to show up. This method allows us to order the right number of books and shirts for students which eliminates wastage and provides a considerable savings. Because when an event is over the books are obsolete and you almost cannot give away a shirt advertising a past event. When we compare our overrun costs before the calculation was developed to our current wastage rate, we see a per event savings of about $70 dollars per student for which we did not over plan.

Try it now!
Take a minute and think about your own organization. Try to think of one thing you do that gives you an advantage; it could be a calculation or even a sales trick, but, so far as you know, this is something unique to your organization. Is it explicitly labeled and protected? Know-how primarily falls into three categories, but, since data labeling has four major functional categories, that is what we will use:
You may be scratching your head if you are not in the health care business about medical. But, with the cost of health care as high as it is and increasing, there are techniques to lower these costs. So while it is not as fruitful an area to find intellectual property as the first three in most organizations, it counts.

1 http://www.osha.gov/pls/oshaweb/owadisp.show_document?p_id=10103&p_table=STANDARDS
2 http://nsi.org/Library/Espionage/usta.htm
3 http://www.sans.edu/resources/securitylab/321.php
4 http://www.sans.org/annualevent