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In a commercial and industrial world, trade secrets play a vital role by providing a competitive advantage to a company that possesses certain unique knowledge in terms of production. Trade secrets are not only valuable information but also a form of intellectual property (Trade Secrets and Nondisclosure Agreements, 2009).
In this regard, it is crucial to highlight that there is a certain distinction in the ways of the protection of intellectual property, specifically in a patent and trade secret form (Daizadeh et al., 2002). These types are different and conflicting to a considerable degree. Patents apply to inventions and have a limited period of exclusivity, during which the invention is granted a complete disclosure. It presupposes that no one can produce, use, or sell the above-mentioned invention until this period lasts. Meanwhile, a trade secret has no time limits and can exist forever being descended from one generation to another. The protection of such confidential information is the responsibility of the company.
Nonetheless, taking precautions does not stop competitors from trying to discover the trade secret while replicating the product. In this case, the law does not protect the organization and its invention. Therefore, choosing an appropriate measure for protecting confidential information that grants an economic advantage is of vital significance. The overall success and prosperity of the company may depend upon this decision (Daizadeh et al., 2002).
Even though the legal protection of trade secrets is far from complete, numerous organizations choose it for secrecy and duration. This paper focuses on the advantages and disadvantages of a trade secret as a way to protect crucial and confidential information. Furthermore, it discusses certain strategies for maintaining the effectiveness of its protection.
The Nature of Trade Secrets
For the information to become a trade secret, it must comply with three formalities, namely its unavailability, value, and protection. Firstly, the information should be unavailable or one that is not generally known to the public. If it is possible to find the information in an open-source, then it is not a trade secret. Secondly, there should be an actual or potential economic value whereas the information should provide the company with an advantage in the market compared with competitors who lack this information. Finally, trade secrets require a delicate approach based on necessary protection measures that guarantee its secrecy.
Moreover, it is essential to emphasize that trade secrets can exist in the form of ideas and concepts because there are no specific requirements for them to be in the written form (Trade Secrets and Nondisclosure Agreements, 2009).
The term “trade secret” is often used for the confidential information associated with industrial or commercial activity. However, it should not be public knowledge or property. Trade secrets can be in the form of a sketch, plan, or formula created by someone. The intellectual work of this person resulted in a product, which can only be recreated by following the same steps and using the same materials. This process makes the product unique, thus, the information regarding its production becomes valuable and confidential.
According to Verma (1998), a trade secret differs from the concept of confidential information in a certain way. First, the sphere of its application is business or trade. Moreover, the revelation of a trade secret to competitors may result in substantial losses for its owner; therefore, there is a need to hide the information. The company that possesses a trade secret is in charge of preserving it and avoiding its spread. Furthermore, a trade secret may be a tool, device, or process implemented in the operation of the business. In this respect, confidential information can be solely the set of secret data.
As mentioned earlier, a trade secret must be inaccessible to the company’s competitors. However, it does not mean that the idea should be novel instead of being efficient. Trade secrets are vital for their owners whereas they allow the organization to have an economic advantage over other participants in the market. Therefore, in case of the disclosure or recreation of this confidential information, such a trade secret loses its protection and becomes subject to free competition. Unlike patents whose owners possess the exclusivity of rights during their tenure, trade secrets are more vulnerable. If some accidents or legal means of third parties disclose or uncover the information, the law does not provide any remedy (Verma, 1998).
In this sense, a trade secret is something unusual, which is also not easily available to others. It is a wide concept involving discovery or a method of business conduct. A trade secret can even be an innovative idea worth a patent; however, the company management may decide not to apply for it. Since novelty is not required, the term relates to the process of technology application rather than creativity. Thus, the practical implementation of techniques rests on the experience and skills leading to the creation of an effective method, which becomes a trade secret of the organization (Daizadeh et al., 2002).
According to Verma (1998), all trade secrets can be categorized into two essential groups, namely technical and business secrets. Technical trade secrets are involved in the process of production and may include ideas, sketches, designs, or formulas. Meanwhile, business secrets predominantly consist of confidential data, such as statistics, projects, lists of customers and sources of supply, strategies, and expansion plans. This information provides a company with a competitive economic advantage.
Strategies to Avoid the Loss of Trade Secrets
To avoid the loss of trade secrets, the company management needs to take certain steps. In particular, the organization should educate employees, secure confidential information, and conduct interviews with workers who are voluntary or involuntarily leaving the company. It is crucial to follow these recommendations as they contribute towards the effective protection of trade secrets.
According to Elliott (2007), educating employees, as a significant means of avoiding the loss of trade secrets, should take place regularly. New workers should receive a detailed explanation of the company’s policy on confidential aspects. Furthermore, this orientation should be supported by reminding of the key moments during regular meetings of the team. In terms of the organization’s policy, there should be a constant assessment of the performance of its staff members.
The identification of confidential information is the primary task of the company management. Moreover, there is a need for the acknowledgment that workers fully understand and accept the confidentiality policy of the organization. This document highlights the significance of the shared information while also being a legal formality.
Furthermore, accurately treating confidential information is pivotal for the company and its employees. The public discussion or displaying of such information is forbidden. Staff members are not allowed to make copies of the information because the company management should approve its electronic use or transfer in the first place. By the way, the implementation of encryption can contribute vastly towards the safety of trade secrets. Some steps may seem obvious, for example, clearing the desk, keeping files under password protection, and documents locked. Nevertheless, it is the duty of the administration to emphasize the significance of such simple, yet effective means of maintaining confidentiality.
These procedures also include a thorough analysis of staff members who have access to confidential information. On this point, there should be regular monitoring of employees’ performance, computers, or other devices. Thus, such a procedure may prevent or at least detect in time an unauthorized transmission of files. Workers need to be aware of the consequences that follow a disclosure of a trade secret or any improper use of confidential information.
Furthermore, there is a need for a specific approach towards dealing with a trade secret or any other confidential information. For instance, there should be a certain procedure when employees are working with classified materials or data. In case of using notebooks in work, they should be labeled, tracked, and carefully secured. Signing in and out is a convenient way to monitor the employees’ attendance and use of certain materials (Merges, Menell, & Lemley, 2012).
Moreover, it is impossible to imagine the modern world without the Internet or social networks, which results in the constant leaking of information. Therefore, it requires all the participants of the process to take preventive measures ensuring that communication is safe and does not harm the company by revealing its trade secret.
Also, it is crucial to note that there can be legal protection of confidential information in case its secrecy is safeguarded accordingly. If the company management ignores the necessity to implement procedures meant to protect trade secrets, then the legal protection under the respective law is lost. Furthermore, investors expect the organization to maintain the confidentiality policy. In case the company is being sold, there should be a warranty that trade secrets are under solid protection. Thus, any organization needs to make trade secret protection a part of its culture (Trade Secrets and Nondisclosure Agreements, 2009).
In this context, the amount of reasonable measures used to safeguard confidential information depends on the circumstances. Various companies have distinctive strategies to guarantee the appropriate level of secrecy. However, the core technologies that provide a substantial competitive advantage should be of pivotal significance. Similarly, the need for strict safeguarding procedures in small organizations is lesser to a considerable degree, especially when compared with large companies with numerous employees. Even though there are many techniques applied in protecting a trade secret, some common features can be distinguished.
Nonetheless, it is the decision of the company management whether to implement a certain set of security and confidentiality measures. This choice depends on the character and sphere of business because not every organization needs each of the following measures to be applied.
There is an effective formal confidentiality procedure described in Trade Secrets and Nondisclosure Agreements (2009). It is convenient to assign a single person the task of monitoring and controlling the company’s policy in terms of trade secret protection. Such a measure contributes towards the increased level of responsibility and, subsequently, better compliance with the established safety regulations. In case the organization enlists many workers, there is a need to assign such a specialist to each division. Consequently, it will facilitate the overall coordination and provide consistent feedback on the company’s policy.
According to Elliott (2007), the determination of the place of storage of the information and people who have access to it is the first step in securing confidential information. The policy of dividing and keeping separately the information regarding a trade secret will augment its level of unavailability. In case it is impossible, only a few people should know the trade secret in all its entity. For instance, only two Coca-Cola employees possess knowledge of the secret formula. The information used by other workers is incomplete and insufficient to try to recreate the popular drink.
Meanwhile, a bank vault serves as a place of secure storage of the documents related to this trade secret. Thus, the measures applied by Coca-Cola may seem overly protective, but they prove to be effective, as the above-mentioned formula has remained a secret for more than a hundred years. Moreover, it is useful to distinguish other efficient procedures that can be followed to guarantee the protection of a trade secret.
It is essential to control the access to confidential information within the company at all levels. All the computers need to be secured with passwords, which should be changed frequently. Those departing employees must be altered instantly. In case the level of confidentiality is high, there is a need to consider biometric protective measures.
Moreover, each company should have a valid system of security level access to avoid any breaches. In the information age, it is difficult to imagine a computer without access to the Internet. Thus, the administration should apply proper measures, such as firewalls and intrusion detection systems.
Also, hiring a specialist to detect any vulnerability using hacking can contribute towards the improvement of the security system to a considerable degree. Furthermore, encryption should be applied at all times.
Moreover, physical access control should not be ignored either. Monitoring the entrance and exit is a pivotal procedure. In case the company is large, employees and visitors should have badges that allow identifying their owners. Also, certain guidelines are essential in terms of the storage of any confidential information (Trade Secrets and Nondisclosure Agreements, 2009).
Elliott (2007) emphasizes that there is a critical need to conduct specific interviews with workers who are leaving the company either voluntarily or involuntarily. Consequently, such a policy may detect or prevent a potential trade secret theft. The purpose of such interviews is to emphasize the significance of the company’s confidential information. They stress the necessity to return in time all items that belong to the organization. Moreover, each departing employee should receive a thorough reminding of the consequences that may follow in case of non-compliance with the company’s policy or any disclosure of trade secrets. Furthermore, it is useful to sign an acknowledgment of the organization’s confidentiality policy before hiring a new staff member and firing the previous one.
Significance of Protecting Trade Secrets
As mentioned earlier, in a modern business world, trade secrets play a crucial economic role, providing certain companies with substantial advantages over their competitors. Keeping the confidential information in secret allows focusing on the development of the incremental technology innovation without the necessity to adjust the latter to the standards of the patent law. Furthermore, trade secrets can be the only way of keeping useful data out of reach of the organization’s rivals in the market.
On this matter, rights in trade secrets can last longer than patents and enjoy protection. One of the essential benefits is that they can be exploited in many countries. The technology involved in an invention is not always patented. Changes in technology occasionally result in inventions that do not fit into old categories of the patentable subject matter or cannot meet other requirements of patentability. The reason for this is the limited use of patent protection; otherwise, it may not permit adequate protection under the patent law.
In this regard, the technological change can be incompatible with the procedural mechanisms of the patent law. By the time the patent is obtained, the technology can result in being outmoded. A crucial improvement over the existing technology can take place, which makes the patent useless. The potential economic use can also be short-termed. Also, patent protection involves several difficulties for scientific discoveries, which are of paramount significance. Therefore, it is essential to protect them by trade secrets.
There are numerous situations when keeping confidential information in the form of trade secrets is feasible. Several technologies may hardly fall within the traditional patent category; in this case, trade secrets are helpful to a considerable degree.
Nonetheless, technological changes can also make copying and production much cheaper, quicker, and, in some cases, harder to detect. Therefore, a substantial part of economically potential technology, especially new and high ones, such as biotechnology and computer programs, is kept in the form of trade secrets. Their economic value is comparable to patents not only in terms of the investment required for obtaining them but also the competitive advantages they give to its owner. Hence, it is not surprising that trade secrets have become a crucial element in the technology transfer process. They are valuable revenue generators for the owners of the companies. On this point, an unpatented technology plays a vital role in contemporary economic activity when compared to the patented one.
The core of trade secrets is technical and commercial knowledge, which is not publicly available. Nevertheless, this information is necessary for the manufacture of a product, the implementation of a process, or the rendering of services. The company that possesses such knowledge also has a competitive advantage over its rivals.
According to Verma (1998), a trade secret may consist of the complementary information obtained through the exploitation of patented technology. The latter allows more efficient use of the patented product or process while not being patentable itself. However, it is only valuable until the company is the sole owner of the confidential information. The exclusivity is of paramount significance in this regard. Therefore, the industry continues to rely on trade secret protection in a world full of fast-changing technologies.
Furthermore, trade secrets hold the key in the protection of new technologies, namely biotechnology, microchips, computer programs, computer-aided designs, and other information-based endeavors. All of the above-mentioned spheres are more prone to reverse engineering whereas the manufactured products are usually distributed in the open market. In fact, it even makes the classic trade-secret protection have a doubtful efficacy.
Thus, some companies can find themselves in a position when their original product is ignored because the counterpart has recreated the idea and sells it at a substantially lower price. The quality of the substitute product, in this case, is out of the question.
In this sense, one may consider the protection of trade secrets conducive for further research and the development of technology. Moreover, it is a significant factor in attracting foreign investments. Business ventures also consider it when deciding about their foreign locations. Verma (1998) emphasizes that without trade secret protection, the spread of technology through licensing would be discouraged.
In general, the industrial property law and trade secrets, in particular, provide an incentive for the innovation and the development of new technologies by granting certain exclusionary rights concerning that technology. When it comes to trade secrets, the exclusionary rights result from the rules that prevent third parties from having an access to the secret technology without the owner’s authorization. Thus, the technology would have a market value by excluding the third parties. Without such protection, there would be no above-mentioned value.
Nevertheless, there are some disadvantages in keeping confidential information as a trade secret. It is unavailable for competitors and the public as long as a disclosure does not take place. However, it leads to an accumulation of high technology by a small number of companies. Consequently, it results in a concentration of economic power, which implies risks for the free competition in the market. The law on trade secrets contributes towards the protection of confidential information or knowledge unless they are released to the public or part of the public domain. Moreover, the requirement of novelty in this regard is lacking (Daizadeh et al., 2002).
It is of vital significance that trade secrets protect the invention and its details. In some cases, an investor may decide to keep his invention in the form of a trade secret in preference to patent it, which gives the protection only for a limited period. Thus, there is no limitation in time for trade secrets. It will be protected by de facto circumstances beyond the control of the owner of the secret. The owner can prevent third parties from having any access to that confidential information, but cannot prevent them from developing independently or trying to recreate the product. Consequently, it leads to the disappearance of secrecy. Therefore, a trade secret can be characterized as a monopoly in fact.
Furthermore, the contractual protection of trade secrets is limited to the parties to the contract and does not affect third parties that act in good faith. In the case of patents, in the absence of a license, no one can legally exploit a patent. However, in the case of trade secrets, the potential inventors may develop the technology themselves or acquire it from other sources (Verma, 1998).
Unfortunately, the technology held as a trade secret cannot become the source of new developments by others. Scientific and technological discoveries and inventions often depend on the already existing knowledge. Moreover, many economically pivotal research developments can be conceptualized on the already existing and cost-effective technologies. Nonetheless, trade secrets hold back this knowledge from those engaged in intellectual pursuits. In this respect, patents possess comparative virtues of the intermediate disclosure for the society to build upon the already found solutions; meanwhile, the production of knowledge in trade secrets is lost to the society.
Therefore, it leads to the increase in costs necessary for the research and development of technologies for both researchers and society. In the meantime, the sought solutions can be already found but are subject to trade secrets, eliminating the possibility for others to use this knowledge and indulge in further developments. In its turn, it contributes towards the emergence of duplicated researches, along with conflicting with the university research policies that stress early and free dissemination of the research results.
There is also an adverse effect on consumers since the effective protection of a trade secret minimizes a potential theft or recreation of the product. Hence, customers are to pay instead of looking for a substantially cheaper alternative. The circumstances would end up causing a situation of technological dependency on a few companies that possess trade secrets. The reason for this is that confidential information cannot become the source of new developments. Those few companies can force their competitors out of the market due to their substantial economic advantage.
According to Elliott (2007), trade secrets are essential in protecting a technology, research, or methodology that is not ready for further commercial exploitation and development.
In conclusion, there are two different and conflicting manners of protecting intellectual property, namely a patent and trade secret. Both have their advantages and disadvantages, although the latter can last forever unless the disclosure of the company’s confidential information. In terms of the law, it is difficult to protect the trade secret that has leaked. Therefore, it is advisable to apply a set of various protective measures that will safeguard the trade secret efficiently.
The choice of the strategy to implement depends on many factors, mainly the size of the company, the degree of required secrecy, and the sphere of business. Hence, it is critical to focus on safeguarding a trade secret on all levels. Assigning a specific person the task to be in charge of maintaining the company’s confidentiality can help in protecting its trade secret. Employees should acknowledge the significance of non-disclosure by signing respective agreements upon joining the team and when departing as well. A critical consideration should be given to monitoring the working space, especially computers, devices, and even notebooks. All these precautions and protective measures are critical in terms of guaranteeing an appropriate level of confidentiality.