Imagine what would happen if Pepsi knew how to make Coca Cola. Not a mere knock-off, but the exact thing: Coke Classic in all its caffeinated, sugar-laden glory, complete with just a hint of lime essence. What would happen?
Well, Pepsi could start selling its version of Coke for 99 cents per six pack, and once consumers caught on and realized that this stuff really was Coke, the Real Thing, not even the most zealous Coke loyalist would keep paying four bucks for a six-pack from Atlanta. Pepsi would corner the market on cola products, and within a year Coke would be bankrupt.
“Absurd!” you say. “Surely Pepsi could replicate Coke exactly if it wanted! It chooses not to in order to appease those with a taste for its products.” I disagree. I do not think Pepsi or anyone else except the Coca Cola Company knows precisely how to make Coke, and therein lies the power of trade secrets. Hidden in an Atlanta vault sits the list of ingredients and the method of preparation that makes the exact formula one of if not the most valuable trade secret on the planet and the reason Coke is the number one cola worldwide.
By definition, a trade secret is something that has independent value because it is a secret. In addition to the formula for Coke, other famous examples include Mrs. Field’s cookie recipe and the precise mechanisms that run the Google PageRank algorithm. In all cases, the person who wishes to preserve the value in a trade secret must take steps to maintain its secret status. Just like the formula for Coke in my hypothetical, once the secret is out the value is lost, and you cannot “unring the bell” and restore the trade secret status.
Many things can qualify as trade secrets and add value to your company. Common examples are customer lists, recipes, formulas, sales techniques and business methods. The key is that you must use efforts that are reasonable under the circumstances to maintain the secrecy—and thus the value—of the trade secret. If you place your customer list on the break room refrigerator door, you will have a hard time suing a former employee for trade secrets misappropriation if they take a copy of the list when they leave and use it to compete with you. And unlike, e.g., patents, no formal filing with a governmental agency is required to create and protect trade secrets.
Here are some ways to help preserve the value in your trade secrets:
1. Inventory and identify your trade secrets. What does your business derive value from because nobody else knows exactly what it is or how to do it? Your secret chili recipe? Your method for making clutch linings? Your customer list with contact information?
2. Identify (if you have one) or implement (if you don’t) processes for keeping your trade secrets secret using steps that are reasonable under the circumstances. Has everyone in and outside your company who has access to the trade secrets signed a Non-Disclosure Agreement? Are your secrets under lock and key (or whatever is reasonable under the circumstances)?
3. Remember that as a general rule, trade secrets laws vary from state to state, unlike patent, trademark and copyright law, which have overarching federal governance. The federal Defend Trade Secrets Act of 2015, currently proposed via substantively identical Senate Bill 1890 and H.R. 3326, would create a federal civil cause of action for trade secret misappropriation, whereas currently, only such state law causes of action may exist. This federal legislation remains pending, however, so know your state’s laws.
4. Make liberal use of ancillary intellectual property protections to help preserve the value of your trade secrets. KFC’s trade-secret blend of 11 herbs and spices is supported by a large portfolio of trademarks and copyrights, all of which add value to the company.
5. When you sell your company, remember that trade secrets can be a valuable part of the transaction if you have identified them and taken steps to protect them. And don’t show them to the buyer unless they sign a Non-Disclosure Agreement first!
6. Actively enforce your trade secrets. If an employee or contractor leaves with some or all of your trade secrets, act immediately to get them back and place the bad actor on notice that you will take legal steps to protect your valuable trade secrets.
Identifying and protecting your trade secrets will build and strengthen your brand, give you remedies against unlawful competition and create value for investors or when you sell the company.