What is a Trade Secret?

Trade secrets are the lifeblood of a business, the gears that keep it moving, the secret ingredient that sets it apart.

It should come as no surprise, then, that 82% of surveyed business leaders agreed that proprietary information was essential to their organization’s value. In today’s information economy, these leaders understand that trade secrets matter more than ever before.

You may know some of your trade secrets. But there could easily be millions of dollars more in unprotected value that you have not discovered. 

Additionally, even though trade secrets are a vital part of business value, their protections aren’t always clear cut. Trade secret law is broad and flexible, casting a protective net over a vast sea of business knowledge.

Understanding what qualifies as a trade secret—and what doesn’t—is the foundation for protecting and harnessing these core assets.

Table of Contents

• Defining trade secrets
• Anatomy of a trade secret
• What information qualifies as a trade secret?
• Reasonable protections for trade secrets
• Trade secrets and business value

Defining Trade Secrets

What exactly is a trade secret? Let me give you the full legal definition and then break it down in plain English.

Trade Secret

[T]he term “trade secret” means 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 if—

(A) the owner thereof has taken reasonable measures to keep such information secret; and

(B) 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.

That definition is a mouthful. It comes from a federal statute called the Defend Trade Secrets Act, and nearly every U.S. state has adopted a similar definition. This consistency provides a unified framework that businesses can rely on for protection and enforcement nationwide.

Anatomy of a Trade Secret

To simplify, for something to qualify as a trade secret, it needs to meet three criteria: it must be information, it must be subject to reasonable measures to keep it secret, and its secrecy must add competitive business value. Let’s discuss these in turn.

What Information Qualifies as a Trade Secret?

The first thing you need to understand is that trade secret law is extraordinarily broad in its reach, casting a protective net over a vast sea of business knowledge. It doesn’t protect just one class of assets. It protects information in any form.

Broad Information Domain Protection

What does “information” include? The law draws few, if any, lines around what may qualify. Its protections extend to financial, business, scientific, technical, economic, and engineering information. That’s pretty much every kind of information relevant to modern business.

Broad Information Type Coverage

The statute also lists many different types of information: patterns, plans, compilations, devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, and codes. From blueprints and industrial processes to market research and product formulas, there is virtually no limit to the forms protectable information can take.

The statute also says information can be tangible or intangible, and it can be stored in physical, electronic, graphic, photographic, or written form—or not stored anywhere at all. You may be surprised to learn that even if information exists only in someone’s mind, it still has the potential to be protected as a trade secret.

Why Reasonable Protections Matter

The next point to understand is that a trade secret must be kept, well, secret.

Simply possessing valuable information doesn’t automatically mean you have a trade secret. For it to qualify, you must take reasonable measures to maintain its secrecy.

Wait. Your information can’t be protected unless it’s protected? That may sound like a catch-22, but the logic is straightforward: The law offers remedies only to those who value their information enough to safeguard it themselves.

Unlike other forms of intellectual property, trade secrets have protection as part of their definition. Being protected is what makes information a secret. Sometimes when we speak of “trade secrets,” we’re really talking about information that could qualify but has not yet been made the subject of reasonable protective measures.

In short, protecting your valuable information is not simply good practice. It’s what transforms the information into a legally recognized, protectable trade secret.

Simply possessing valuable information doesn’t automatically make it a trade secret.

What Protections are “Reasonable”?

Now, you might be wondering what kinds of protections count as “reasonable.” This is quite literally the million-dollar question. The simple answer is: It depends.

Reasonableness is different in every situation. It depends on any number of factors, such as the nature of the information, the specific risk environment, and available resources. Protections can range from common-sense measures like passwords and locked file cabinets to advanced solutions like biometric entry controls and live security personnel. 

“Reasonable” doesn’t mean perfect; the law requires only sensible precautions tailored to your situation. Later, we’ll explore dozens of protective measures you can choose from for your business.

The flexible standard adds to the power of trade secrets. Just as trade secret law protects many different kinds of information, it also allows for many different ways to safeguard information. Businesses can choose measures that make sense for their specific situation.

Competitive Business Value

The third requirement for information to qualify as a trade secret is that it has competitive business value. The information needs to give your business a legitimate advantage in the marketplace—and this advantage must come from its being unknown to others.

To assess whether this standard is met, ask: What would happen if my biggest competitor were to acquire it? If the competitor would gain a business advantage that it couldn’t otherwise achieve—or could achieve only with great difficulty—the competitive value is clear.

A trade secret must give your business a legitimate advantage in the marketplace—and that advantage must come from its being unknown to others.

Take a routine string of software code. It may be confidential to your business, and you might have taken steps to keep it secret, but does keeping it secret truly give you an advantage? If others have other code that can perform the same function just as well, probably not.

On the other hand, if you develop unique code that enables you to do something your competitors can’t do—or to do things better, faster, or more cheaply than they do—it may qualify for trade secret protection.

Key Takeaway

Trade secrets protect a wide range of business information that provides competitive advantage, but you must take reasonable steps to keep it protected. Understanding these three requirements (information, protection, and competitive value) is the foundation for safeguarding what makes your business unique. The law can offer powerful protections if you’ve taken the right steps first. Continue learning with the next article in this series, What Trade Secrets are Not, which will help you understand what information falls outside the scope of trade secret protection.