What is a 'Trade Secret'

A trade secret is any practice or process of a company that is generally not known outside of the company. Information considered a trade secret gives the company an economic advantage over its competitors and is often a product of internal research and development. In order to be legally considered a trade secret in the United States, a company must take a reasonable effort in concealing the information from the public, the secret must intrinsically have economic value and the trade secret must contain information. Trade secrets are a part of a company's intellectual property. Unlike a patent, a trade secret is not publicly known.

Breaking Down 'Trade Secret'

Trade secrets may take a variety of forms, such as a proprietary process, instrument, pattern, design, formula, recipe, method or practice that is not evident to others and may be used as a means to create an enterprise that offers an advantage over competitors or provides value to customers.

Trade secrets are defined differently based on jurisdiction, but all have the following characteristics in common: 

  • They are not public information
  • Their secrecy provides an economic benefit to their holder
  • Their secrecy is actively protected 

As confidential information (as trade secrets are known in some jurisdictions), trade secrets are the "classified documents" of the business world, just as top-secret documents are closely guarded by government agencies. Because of the cost in developing certain products and processes is much more expensive than competitive intelligence, companies have an incentive to figure out what makes their competitors successful. To protect its trade secrets, a company may require employees privy to the information to sign non-compete or non-disclosure agreements (NDA) upon hire.

Trade Secret Treatment

In the United States, trade secrets are defined and protected by the Economic Espionage Act of 1996 outlined in Title 18, Part I, Chapter 90 of the U.S. Code and also fall under state jurisdiction. As a result of a 1974 ruling, each state may adopt its own trade secret rules. Some 47 states have adopted some version of the Uniform Trade Secrets Act (USTA). The most recent legislation addressing trade secrets came in 2016 with the Defend Trade Secrets Act, which gives the federal government cause for action in cases involving the misappropriation of trade secrets.

The federal law defines trade secrets as "all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing [...]"

The law also provides the conditions that the owner has taken reasonable measures to keep such information secret and that "the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information."

Other jurisdictions may treat trade secrets somewhat differently; some consider them property while others consider them as an equitable right.

Trade Secret Examples

There are numerous examples of trade secrets that are both tangible and intangible. For example, Google Inc.'s search algorithm exists as intellectual property in code and is regularly updated to improve and protect its operations. The secret formula for Coca-Cola, which is locked in a vault, is an example of a trade secret that is a formula or recipe. Since it has not been patented, it has never been revealed. The New York Times Bestseller list is an example of a process trade secret. While the list does factor in book sales by compiling chain and independent store sales, as well as wholesaler data, the list is not merely sales numbers (books with lower overall sales may make the list while a book with higher sales may not).

RELATED TERMS
  1. Industrial Espionage

    Industrial espionage is the illegal and unethical theft of business ...
  2. Confidential Treatment Application

    A confidential treatment application is a form filled out in ...
  3. Intellectual Property

    Intellectual property is a set of intangibles owned and legally ...
  4. Property

    Property is anything tangible or intangible over which a person ...
  5. Confidential Treatment Order - ...

    A confidential treatment order provides confidential treatment ...
  6. Intellectual Property Rights (Biotechnology)

    Intellectual Property Rights (Biotechnology) give companies a ...
Related Articles
  1. Small Business

    How To Protect Your Intellectual Property

    Intellectual property rights - patents, trademarks, trade secrets and copyrights - protect creators of everything from new products to new pop songs.
  2. Investing

    TJX Goes Down Under With Trade Secret Buyout

    TJX Companies (NYSE: TJX) -- better known to consumers as T.J. Maxx, although it also owns the Marshall's and Sierra Trading Post brands -- is expanding in the Southern Hemisphere with the acquisition ...
  3. Investing

    Wells Fargo Fined $185M Over Illegal Accounts

    One of the nation's "big four" banks is about to fork over a pile of cash to regulators. Wells Fargo (NYSE: WFC) will pay $185 million in fines and $5 million in customer remediation payments, ...
  4. Managing Wealth

    Comparing Tangible and Intangible Assets

    Tangible assets are physical assets such as land, vehicles or equipment.
  5. Insights

    6 Companies Thriving In The Recession

    The recession has left many companies scrambling, reporting losses often into the double digits.
  6. Investing

    Why It's No Shock L Brands' Sales Fell 7% in March

    L Brands (NYSE: LB) reported Thursday that its sales fell 7% year over year to $951.4 million in March, while comparable-store sales declined 10%. Breaking out comps at its major units, Victoria's ...
  7. Retirement

    4 Wealth-Building Secrets

    Protect what you have while shifting risk is the motto of the rich. Find out how a life insurance policy can help you do the same.
  8. Investing

    Norwegian's Dining Epiphany (NCLH)

    This secret is much simpler than you might expect.
  9. Investing

    L Brands Selloff Intrigues Analysts

    L Brands looks increasingly attractive to analysts as shares plunge on poor sales.
  10. Managing Wealth

    Iceland PM Resigns in 1st Major Casualty of Panama Papers

    A sensational release of documents by the German newspaper Süddeutsche Zeitung exposes the network of corruption and abuse of tax havens by the mega-rich.
RELATED FAQS
  1. How do tangible and intangible assets differ?

    Tangible assets are physical assets that are used in a company's operations. Intangible assets are nonphysical, long-term ... Read Answer >>
  2. How do I determine my company's competitive advantage?

    Find out how to determine if your company has a competitive advantage and, if so, learn how to figure out how to make it ... Read Answer >>
  3. Why is Switzerland considered a tax haven?

    Learn how Switzerland is considered a tax haven, even though its government has signed agreements to disclose information ... Read Answer >>
  4. Can you realize capital gains on intangible property?

    Learn more about capital gains and losses and how they may apply to intangible assets. Find examples of intangible assets ... Read Answer >>
  5. What are some common methods of gathering competitive intelligence (CI)?

    Read about some common methods of acquiring competitive business intelligence and discover what a good intelligence analysis ... Read Answer >>
Trading Center