The importance of trade secrets in business: Some things are better left unsaid

trade-secret

A key component in a good economy is the existence of competitive marketplaces. The success of a business is largely determined by its strategies and many businesses have ideas which give them a competitive edge but do not fall within the popular categories of intellectual property law comprising of copyright, trade marks, patents and designs. These ideas could potentially qualify as trade secrets, an often-overlooked category of intellectual property law which provides a unique form of protection.

What is a Trade Secret?

The World Intellectual Property Organisation defines trade secrets as confidential information which may be sold or licensed. These can include business strategies, manufacturing formulas and unique recipes. Popular examples include Coca-Cola’s secret formula for their beverages & KFC’s secret recipe for their fried chicken. There is no registration required for a trade secret as is the case with trade marks, patents and designs. The term of protection is not fixed and is dependent on how long the information remains a secret. The absence of any registration requirement makes it seem as if protection is cost effective, however keeping the information a secret could make it a costly exercise as highlighted in this article. If the trade secret is worth the cost, the expenses are worthwhile.

 

What is required for information to qualify as a trade secret?

It must be commercially valuable as a result of it being secret.  This means that its value must largely be linked to its confidentiality. A secret recipe is of great value as no other business is able to prepare, manufacture or create a particular product as the method required is not generally available to the public. If KFC’s secret recipe was readily available to its competitors, its fried chicken would not be distinctive and the value of that particular information would be diluted.

It must only be known to a limited amount of people. A trade secret is exactly that, a secret! It is therefore not possible for information to qualify as a trade secret if the information is common knowledge. An example is triple distilled whiskey. It is generally known which whisky brands are triple distilled and therefore this method would not qualify as a trade secret.

The proprietor must have taken reasonable steps to keep the information a secret. Intellectual Property law does not reward negligence. In order to enjoy the protection trade secrets, provide you must be able to show that you put measures in places to maintain the required confidentiality. This can be done by having security mechanisms for hardware and software office equipment, having confidentiality agreements in place for employees, current and potential business partners, investors and contractors and generally ensuring that all information is kept in a safe place. If adequate mechanisms are not put in place, the information will not qualify as a trade secret even if all other criteria are met.

What happens when trade secrets are disclosed and what remedies are available in this instance?

It is important to note that trade secret protection only lasts as long as the information remains a secret. Once disclosed the remedy would therefore be a claim for damages and depending on the extent of the disclosure an interdict restraining the person disclosing or using the information may be sought.

When potential trade secrets are disclosed or used by competitors it must first be determined whether the criteria of a trade secret have been met. If this is the case, it must be established whether the disclosure or use was unauthorised and made as a result of unfair business practices. Any claim for damages needs to be proven and therefore the wronged party needs to show how the competitors conduct hurt them financially. A reasonable royalty can also be claimed on the basis that a certain amount of money would have been earned by the wronged party if the competitor had paid a fee for a license to use the information. The basis of this damages claim would be unlawful competition.

In the case where an employee or former employee discloses a trade secret and a confidentiality clause has been inserted in their employment contract, this would constitute a breach of contract and the employee can be disciplined in accordance with that contract in addition to the remedies discussed above. The importance of confidentiality clauses in employment contracts must be emphasized again.

Conclusion

Innovation needs to be rewarded and therefore the regulation of trade secrets is an important topic in the area of business. Protecting valuable information is as important as coming up with the idea in the first place. The extra step of installing protective software, locking that office door and making your moves in silence could be central to the long-term growth of your company. In a competitive marketplace it is important to know if your advantage can be protected, how it can be protected and how not to lose that protection.

 

 

fasa-manual-ad-2021-750

Garth Kallis