Trade Secrets: Now and in the Future

Trade secrets entail benefits and drawbacks for businesses. The Insight proposes a review of why such legal protection is and could be a popular tool for critical economic actors in the future.

In the world of the market economy, all companies try to stand out from the crowd of competitors, protecting their innovations and profitable information. Therefore, trade secrets “are viewed as increasingly important to economic and enterprise growth” not only for big companies but potentially also among small and medium enterprises and startups. The increased attention paid to trade secrets is caused, among other reasons, by the quick pace of digitalization. When information is stored digitally, the security of data may be at risk and the possibility of unintended disclosure may be quite high. In this light, trade secrets might help make information legally confidential.

In the EU, a Directive harmonizes and defines trade secrets as a form of intellectual property specifically designed to protect pieces of information, which are “secrets, have commercial value, and which require reasonable steps of keeping such information secret by the person lawfully in control of the information”. According to this definition, almost all sorts of information can become trade secrets. Although this type of protection is very important for the development of modern businesses, as it embodies the opportunity to “fence” know-how and strategic information within the company, there are also negative consequences.

In other words, trade secrets seem to play an ambiguous role in the context of the evolving and increasingly “smart” economy. This ambiguity will be briefly analyzed in this Insight.

A. Trade secret protection serves as an instrument to increase the level of competitiveness for companies and firms.

There are at least three main advantages of trade secrets in this regard:

1) Possibility of protecting unpatentable innovations

Not everything can be protected by way of patent law. According to the European Patent Convention, for instance, schemes, rules, and methods for performing mental acts, playing games or doing business, and programs for computers and presentations of information are, among others, excluded from patentability. Nevertheless, it might be highly valuable, if not necessary, for a company to protect some of these elements, ideally doing so without disclosing sensitive information and know-how to competitors. However, not all unpatentable subjects can be protected by trade secrets, as arises from the trade secrecy definition mentioned earlier. Trade secrets apply only to information that meets certain requirements, and not to all types of inventions. However, it is important to note that some valuable data such as business schemes and methods can be protected only by the trade secrets regime, and not by the patent one.

In this light, the so-called “negative” trade secrets should not to be underestimated Negative trade secrets refer to potentially any piece of information which describes unsuccessful research, attempts, strategies, or schemes, which do not function. Such information can be extremely useful for a company to avoid repetitive failures and prevent similar ones in the future.

2) Source of competitive advantage

The trade secret legal regime seems to be beneficial for large corporations which are popular and highly demanded on the market for their inventions. For example, one of the most famous trade secrets is the formula of Coca-Cola. The secret of the recipe provides the company with competitive advantage on the market. Nevertheless, small startups can also use secrecy regime as a stable defense strategy. To set up a trade secret regime a company needs to fulfil the quintessential requirements of secrecy, commercial value and being a subject to reasonable steps to keep information secret. This represents, in contrast with the burdensome and expensive procedures leading for example to patent protection, an easy, free of charge, convenient way to protect valuable information, free from bureaucratic red tape. However, the low cost of the trade secrets regime can also be put in doubt. Although there are no immediate direct costs to acquire protection, the company pursuing such business strategy would have to spend significant resources on “enforcing [the sought] secrecy, including detection of misappropriation and theft, and subsequent legal costs”. Moreover, trade secrecy is established only if reasonable steps to keep data secret have been taken; thus, a sufficient level of protection also requires prior expenditures.

3) Incentive towards internal investments

Trade secrecy regimes might incentivize firms to invest more in human capital, as the employees are contractually bound to keep the company’s secrets. Consequently, to retain such know-how not only de jure but also de facto, the employers are – or at least should be – incentivized to provide workers with comfortable working conditions to foster the trust within the company and the work environment.

B. A significant reliance on trade secrets can also entail downsides and a problematic impact for businesses and the economy as a whole.

There are three main reasons to argue this:

1) Potential collisions with data privacy and data accessibility

There is a wide range of nuances which need to be considered in the context of data accessibility and data privacy. Businesses and entrepreneurs have to strike a balance between these two concepts. On the one side, there is the protection of personal data, fundamentally enforceable in Europe under the GDPR, which guarantees individuals a “monopoly” on their privacy and data control. On the other side, there are legal obligations towards the idea of open data, the key strands of which are transparency and fair competition. This concept is mirrored, among others, in the EU PSI Directive, which sets up the goal of maximizing the access to information essential to the public sector.

Interestingly, some types of business data lie in-between those categories. Some commercially valuable information and resources cannot be fully referred to the types of data mentioned above, and some degree of legal uncertainty may arise. For instance, customers’ information could consist of neither personal data nor public sector information. Trade secrets often play a key role on such type of business data, potentially exacerbating the dilemma between privacy and data accessibility. One solution can lie in the ‘de-contextualization’ approach which means that the right to access data may be limited to the extent necessary for the (business) context of the use. Another solution was advanced by Professor Gianclaudio Malgieri who assumes that trade secrets might be considered “part of the ‘privacy area’ of legal persons”. This idea of “corporate privacy” is however restricted by Recital 14 GDPR, which specifies the non-applicability of GDPR to legal persons.

2) Obstacle to knowledge flows and innovation

Knowledge circulation is an engine of progress. Hence, limitations in the transfer and flow of ideas potentially hurt innovation. A stronger protection of trade secrets could be beneficial for already existing technologies, “yet reduces future innovation and creates” high entry barriers to innovators. Trade secrecy, as an instrument focused on the sole development of one company, potentially affects in a negative way the market competition and economy in general.

Adding to this point, a company may “prohibit a former employee from working for a competitor for a certain period of time”. In Europe, confidentiality and non-competition clauses are often included in employment contracts.This agreement is a guarantee for the company that their secret information, technologies and innovations will not be used by competitors after the end of employment contract with the former staff. Although this restriction cannot go further than it is reasonably necessary for protecting the interests of the employer, these restrictions limit the knowledge flows and capacity building of employees. Thus, the obstacle to the generation of innovative and enhanced capacity is not only affecting the market as a whole, but also individual employees.

3) Practical ineffectiveness of trade secrets and data leakages

Along with their immense potential, digitalization also brings threats to the economic and professional environments. The choice of protecting business information by means of trade secrets is inevitably affected by (if not even enhanced) the risks of hacker attacks and cyber leaks via corporate information systems. The precise extent of such risk is hard to assess, as companies are wary of admitting episodes of data leakage to avoid reputational loss. 

Several steps can be undertaken to mitigate the risk of trade secrets leakages. First of all, it is necessary to increase awareness about cyberattacks. Companies tend to underestimate the scale of the problem because of the ambiguous information about the volume of trade secrets leakages. Companies should pay attention to computer security systems, such as encoded storage mechanisms, anti-virus software, and multi-factor authentication for communication tools of employees. Improving the IT safety organizations, such as Security Operations Centers, which monitor extended IT infrastructures for signs of suspicious activity, can also be useful. In this context, it is crucial to train employees properly and to notify them about the ongoing IT monitoring activities, which should be limited to the cybersecurity purposes.

Nevertheless, not only cyberattacks can cause unintended disclosures. As mentioned above, the risk of trade secrets’ violations by employees or other actors within the company cannot be completely ruled out. One of the ways to reduce such risk in relation to  voluntary disclosure of trade secrets is to use non-disclosure agreements (NDA) obliging parties not to communicate sensitive information, which can be accessed during the work process, to third parties. If an employee breaks the NDA, the employer can demand recovery of financial damages and costs. Nevertheless, as the commercially valuable data is no longer confidential, the information can no longer qualify as a trade secret. In other words, we could say that the protection of a company’s trade secrets is fully built on the trust in its staff.

C. Does the trade secret regime have a promising future?

From an economic point of view, trade secrets might simplify business development schemes and strategies for entrepreneurs. It may represent the simplest way to achieve the maximum of IP protection and, in turn, the maximum enhancement of profits. Nevertheless, considering also the negative effects on innovation and knowledge flows, the potential clashes with data-centered regulations, and the comparative weakness of the legal regime to other types of protection, the benefits of trade secrecy remain controversial. If companies, building the future of our technologies, need to be aware of the risks and negative sides of trade secrets protection, its legal and economic relevance should not be underestimated.

The opinions expressed within the article are solely the author’s and do not reflect in any way the opinions and beliefs of WhatNext.Law or of its affiliates. See our Terms of Use for more information.

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