# Trade Secret: Definition, Examples, Laws, Vs. Patent

![Trade Secret: Secret practices and processes that give a company a competitive advantage over its competitors.](https://www.investopedia.com/thmb/TkN7xxH16qKxnB2_vPEukCkuXl0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/trade-secret.asp-final-7f9591b82cdc44b0bb28d325c3a4cfba.png)

*— Investopedia / Mira Norian*

## What Is a Trade Secret?

A trade secret is any company information, such as a practice, a process, a formula, a technique, or device, that is kept confidential from all except those with a need to know.

Information considered to be a trade secret gives a company a [competitive advantage](https://www.investopedia.com/terms/c/competitive_advantage.asp) over its competitors and is often a product of internal [research and development](https://www.investopedia.com/terms/r/randd.asp).

To be legally considered a trade secret in the United States:

*   A company must make a reasonable effort to conceal the information.
*   The information must have actual or potential economic value.
*   The information has value to others who can't obtain it legally.

Trade secrets are a part of a company's [intellectual property](https://www.investopedia.com/terms/i/intellectualproperty.asp). Unlike a [patent](https://www.investopedia.com/terms/p/patent.asp), a trade secret is not publicly known.

### Key Takeaways

*   Trade secrets are information with potential or actual economic value that give a company a competitive advantage over its competitors.
*   Trade secrets may differ across jurisdictions but have three common traits: they are not public knowledge, they offer some economic benefit, and they are actively protected.
*   U.S. trade secrets are protected by the Economic Espionage Act of 1996.
*   Coca-Cola's syrup recipe has been a trade secret for over 130 years.

## Understanding a 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.

They 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, as noted above, all have the following characteristics in common:

*   They are confidential, not public information.
*   Their secrecy provides an economic benefit to their holder.
*   Their secrecy is actively protected.

As confidential information, trade secrets are the classified documents of the business world, just as top-secret documents are closely guarded by government agencies.

Because the cost of 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-disclosure agreements (NDAs)](https://www.investopedia.com/terms/n/nda.asp) upon their hire. [Non-compete agreements](https://www.investopedia.com/terms/n/noncompete-agreement.asp) were also used at one time, but the FTC banned them in April 2024.

> **Important**
>
> If a trade secret holder fails to safeguard the secret or if the secret is independently discovered, released, or becomes general knowledge, protection of the secret is removed.

## Trade Secret Legal Treatment

In the U.S., 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). 

They also fall under state jurisdiction. As a result of a 1974 ruling, each state may adopt its own trade secret rules. Some 48 states and the District of Columbia have adopted some version of the Uniform Trade Secrets Act (USTA).

### Defend Trade Secrets Act of 2016

The most recent legislation addressing trade secrets was passed in 2016 with the Defend Trade Secrets Act. The act gives private civil cause for action under federal law in cases involving the misappropriation of trade secrets.

The federal law defines trade secrets as all forms and types of the following information:

*   Financial
*   Business
*   Scientific
*   Technical
*   Economic
*   Engineering

Such information includes:

*   Patterns
*   Plans
*   Compilations
*   Program devices
*   Formulas
*   Designs
*   Prototypes
*   Methods
*   Techniques
*   Processes
*   Procedures
*   Programs
*   Codes

In addition, the above includes, according to federal law, "tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing."

The law also provides the condition that the owner has taken reasonable measures to keep such information secret.

It states 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 a contract right.

## Examples

There are many examples of trade secrets that are tangible and intangible. For example, [Google's](https://www.investopedia.com/articles/investing/020515/business-google.asp) search algorithm exists as intellectual property in code and is regularly updated to improve and protect its operations.

The formula for [Coca-Cola](https://www.investopedia.com/articles/markets/112515/how-does-cocacola-actually-make-money.asp), which is locked in a vault (a reasonable effort to keep it confidential), 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 company has kept the formula secret for more than 130 years.

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 built using sales figures. In fact, books with lower overall sales may make the list while a book with higher sales may not.

## Why Is Protecting Trade Secrets Important?

Protection, even beyond a company's own efforts to keep vital information secret, is recognized as important because trade secrets can tie directly to a company's revenue, profits, longevity, and even survival.

## What Cannot Be a Trade Secret?

Company information that is common knowledge for, at the least, people in a company's industry cannot be considered a trade secret. Information without economic value or the potential for it probably won't be seen as a trade secret, either.

## How Long Does a Trade Secret Last?

It can last as long as it has financial value and a company strives to keep it confidential.

## The Bottom Line

Trade secrets are information of potential or actual economic value to a company—and to others who cannot obtain them legally—that the company makes an ongoing effort to protect from public knowledge. They are protected by federal and state laws.

> **Article Sources**
>
> 1.  United States Patent and Trademark Office. "[Trade Secrets/Regulatory Data Protection](https://www.uspto.gov/ip-policy/trade-secret-policy#:~:text=A%20trade%20secret:,efforts%20to%20maintain%20its%20secrecy.)."
>     
> 2.  FTC. "[FTC Announces Rule Banning Noncompetes](https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes)."
>     
> 3.  Cornell Law School, Legal Information Institute. "[Economic Espionage](https://www.law.cornell.edu/wex/economic_espionage)."
>     
> 4.  Cornell Law School, Legal Information Institute. "[18 U.S. Code Chapter 90 Part I - Protection of Trade Secrets](https://www.law.cornell.edu/uscode/text/18/part-I/chapter-90)."
>     
> 5.  FindLaw. "[Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974)](https://caselaw.findlaw.com/court/us-supreme-court/416/470.html)."
>     
> 6.  Cornell Law School, Legal Information Institute. "[Trade Secret](https://www.law.cornell.edu/wex/trade_secret)."
>     
> 7.  United States Congress. "[S.1890 – Defend Trade Secrets Act of 2016](https://www.congress.gov/bill/114th-congress/senate-bill/1890)."
>     
> 8.  Cornell Law School, Legal Information Institute. "[18 U.S. Code § 1839 - Definitions](https://www.law.cornell.edu/uscode/text/18/1839#3)."
>     
> 9.  Cornell Law School, Legal Information Institute. "[Trade Secret, Source: 18 USC § 1839(3)](https://www.law.cornell.edu/definitions/uscode.php?width=840&height=800&iframe=true&def_id=18-USC-1484837652-1439925513&term_occur=78&term_src=)."
>     
> 10.  The Coca-Cola Company. "[Is the Coca‑Cola Formula Kept Secret Because the Company Has Something to Hide?](https://www.coca-cola.com/ng/en/about-us/faq/is-the-coca-cola-formula-kept-secret-because-the-company-has-som#:~:text=Is%20the%20Coca%E2%80%91Cola%20formula,it%20has%20never%20been%20replicated.)"
>      
> 11.  Novlr. "[The Reading Room: The New York Times Bestseller Lists Explained](https://www.novlr.org/the-reading-room/the-new-york-times-bestseller-lists-explained/)."