A trade secret is proprietary technology or know-how that contributes to the success of a business. It is considered intellectual property but unlike patents and copyrights is not specifically protected by law.
The best known example is the Coca-Cola formula, a unique recipe that has been successfully protected for over a century. But other information can include key customer lists, techniques used to make or market a product, etc.
As employees move from one employer to another, few secrets remain secret for long. Where new technology is involved a patent is safer choice in that the law specifically protects the invention. However, others point out that the life of a patent is only 17 to 20 years and throughout that period, your invention is published and available to the public and to competitors. A properly protected trade secret can be kept proprietary for decades or centuries.
Where a secret formula is involved, the most common technique to protect the formula is to prepare a series of concentrates, usually at different locations, and then supply them to downstream users with code names. Hence, Coca-Cola bottlers received Coca-Cola syrup, and the makers of Coca-Cola syrup probably receive one or more concentrates that are combined to make the syrup. This way, few employees need to know what ingredients go into the finished product. They know only their part of the formula.
Still if the secret leaks out, it can be difficult to protect in court. The burden of proof is on the owner of the trade secret. How does he know that his formula is being used unless he has access to the production facilities where it is made? If it was reverse engineered or developed independently, is that a violation?
Related Fool Articles
Recent Mentions on Fool.com
- How the Sale of Treasury Stocks Affects Shareholder Equity
- 400 Billion Reasons to Buy Baidu Inc (ADR)
- Key Questions for Walt Disney Co as Subscriber Losses at ESPN Accelerate
- Why Shares of Kayne Anderson MLP Investment Co. Dropped Today
- Is It Too Late to Invest in Amazon.com Inc.?
- Apple, Inc. Stock Could Deliver Big Gains in 2016. Here's Why.