The law on trade secrets in the UK changed in 2018. However, many businesses, both small and large, still don’t have a basic grounding in trade secrets law – so our IP solicitors are here to explain the basics in our Trade Secrets FAQs.
Jump to individual trade secrets FAQs:
- Is a trade secret an intellectual property right?
- What is an example of a trade secret?
- How can trade secrets be protected under English law?
- How can trade secrets be valued?
- How long does trade secret protection last for?
- What are the implications of the new Trade Secrets (Enforcement) Regulations?
- What’s changed from the previous arrangements?
- Notable points on the new Trade Secrets Directive
- What are ‘reasonable steps’ to keep a trade secret confidential?
- What’s the difference between trade secrets and confidential information?
- What’s the difference between trade secrets and know-how?
- What’s the difference between trade secrets and NDAs?
- What’s the difference between trade secrets and undisclosed Information?
- What’s the difference between trade secrets and proprietary information?
- What’s the difference between trade secrets and restrictive covenants?
Is a trade secret an intellectual property right?
A trade secret is an intellectual property right but in contrast to registered intellectual property rights such as patent and trade marks, trade secrets are by definition not disclosed to the world at large. Trade secrets are used to protect information such as a process, method, invention, formula or anything else that gives a business an advantage over a competitor. There is no restriction as to the type of information that can constitute a trade secret provided that it is something that is extremely valuable and worth protecting.
What is an example of a trade secret?
The recipe and ingredients to Coca-Cola and secret ingredients to Kentucky Fried Chicken are among the most famous examples of a trade secret.
Because one of the ingredients may have been cocaine, Coca-Cola chose not to patent the recipe as this would have involved disclosing the ingredients and therefore the recipe is protected as a trade secret.
As for KFC, the secret ingredients for its original recipe were originally kept in Colonel Sanders’ head but he eventually wrote the recipe down and the original handwritten copy is in a safe in Kentucky. Only a limited number of employees know the recipe and they are bound by a confidentiality agreement.
How can trade secrets be protected under English law?
Trade secrets in the UK can be protected either through
- a common law action for breach of confidence; or
- a breach of contract action where an NDA exists or can be implied
A common law action for breach of confidence is based on the principle that a person cannot take unfair advantage of information received in confidence or prejudice the person giving the information.
Contrary to patents, trade secrets are protected without registration: that is, without any procedural formalities.
To qualify for protection in the UK through common law, the following elements need to be present to constitute breach of confidence:
- the information must have the necessary quality of confidence
- there must be an obligation of confidence – that is imposed by contract, implied by the circumstances of disclosure or implied due to the relationship between the parties (such as employer/employee)
- there must have been an unauthorised use of the information
(see below for the recent statutory definition for statutory protection, What’s changed from the previous arrangements?)
How can trade secrets be valued?
Trade secret valuation is a difficult task. Economic considerations in valuing a trade secret for selling or purchasing purposes include
- Demand/market: Expected demand for the products or services that embody the trade secret. Measuring value based on what other buyers in the market have paid for similar assets.
- Protection period: The expected period of protection in terms of the effect of the likelihood of being discovered.
- Substitutes: The existence or expected progress of adequate substitutes that could reduce or remove the competitive advantages provided by the trade secret.
- Investment spend/cost: The anticipated cost to develop or purchase and protect the trade secret. Measuring value based on the cost invested in creating the trade secret or its replacement or reproduction cost. This includes details such as the time taken to develop the trade secret, time taken to test it, labour costs involved, investment in physical capital (such as equipment, property and so on) plus other related expenses.
- Investment returns/Income: The additional economic benefits expected from using the trade secret such as increased sales, price premiums or cost reduction. For increased value and to compensate for the risk taken and time and money spent, these benefits should provide both a return of capital (that is recoupment of cost) and a return on capital (turning capital into profits). Measuring value by reference to the current value of the economic benefits expected to be received over the remaining life of the trade secret
How long does trade secret protection last for?
Trade secrets can in principle be protected for an unlimited period of time.
What are the implications of the new Trade Secrets (Enforcement) Regulations?
The Trade Secrets (Enforcement) Regulations implements the Trade Secrets Directive (2016/943/EU). The aim of the EU Directive was to synchronise protection and provide a common framework of standards for member states. As the Directive was already broadly reflected in UK case law relating to confidential information, the Regulations were designed to cover any gaps and provide additional clarification. Regulation 3 confirms that the existing UK law on confidential information will run in parallel with the rights conferred under the Directive.
The Regulations provide a new definition of trade secrets which focuses more on whether the information has been kept secret. This is to encourage UK businesses to review the processes they have in place to protect their trade secrets to prevent the misuse of trade secrets to avoid having to take expensive enforcement action after the event.
The Regulations also provide detailed provisions allowing for trade secret holders to enforce their rights through interim measures, injunctive relief and other remedies whilst setting a six-year limitation period in terms of bringing a claim.
What’s changed from the previous arrangements?
Before the Trade Secrets (Enforcement) Regulations 2018 came into force a party seeking to protect its trade secrets would have to rely on case law. The Regulations have created a new statutory claim for the misuse of trade secrets, which can be claimed in addition to a breach of confidence as established under existing case law. Therefore, claimants now have the opportunity to make two claims for such misuse – one statutory claim and one under common law.
The Regulations provide a statutory definition of a trade secret broadly as:
- information which is secret
- has commercial value because it is secret; and
- has been subject to reasonable steps (see below) to keep it secret
The definition of trade secret is narrower than the one that was developed by the courts with more of a focus on whether the information has been kept secret rather than its inherently secret nature. The added new requirement that information must have been subject to reasonable steps to keep it secret ensures that businesses must continue to use or put in place for the first time the usual commercial confidentiality processes.
Other changes mainly concern limitation periods (six-year limitation period to bring a claim), procedural issues for the courts when hearing cases in relation to trade secrets and certain remedies.
Notable points on the new Trade Secrets Directive
- Regulation 16 enables a court to order compensation as an alternative remedy under certain conditions – this option appears to protect innocent infringers
- Regulation 17 deals with the assessment of damages and includes moral prejudice as a concept – something which is not normally associated with trade secrets in the UK
- Regulations 10 and 18 respectively provide detailed provisions dealing with the preservation of the confidentiality of trade secrets during the course of court proceedings and the publication of court decisions
What are ‘reasonable steps’ to keep a trade secret confidential?
What is ‘reasonable’ will depend on the nature of the information such as for example its external value, uniqueness and form. However, suggested best practice steps that a business should take to protect its trade secrets are:
Education and understanding:
- Understand that trade secrets are valuable only as long as they are not disclosed
- Differentiate between confidential information and less sensitive information
- Understand the consequences of breach of confidentiality
- Limit access to confidential information only to those who need to know
- Provide training to employees and/or suppliers who are most likely to access confidential information and educate such staff about the need to maintain secrecy and how to handle information
- Understand that is not enough to mark a document as ‘confidential’.
NDAs and confidentiality agreements:
- Use a well-drafted NDA for key collaborative projects so that trade secrets are only ever disclosed under strict contractual obligations of confidence
- Consider whether to introduce confidentiality and usage provisions within relevant supplier and/or client contracts
- Ensure all employees sign confidentiality agreements.
- Introduce and implement policies and checks in place setting out how trade secrets are handled, managed and kept safe including new IT procedures ensuring that the information is encrypted or warnings appear before the information is sent externally
- Keep all IT security systems and technology up-to-date
- Establish physical and electronic security and confidentiality measures
- Designate a team who will have overall responsibility for the protection of trade secrets and keep a record of who has access to the confidential information.
- Conduct an audit and keep an accurate register of any trade secrets keeping the detail to a minimum)
- Create agreements, policies, procedures and records to establish and document protection
- Assess risks to identify and prioritise trade secret vulnerabilities
- Establish due diligence and ongoing third-party management procedures
- Continually improve policies and procedures.
What’s the difference between trade secrets and confidential information?
Confidential information is any kind of information that is regarded as confidential. It can be a compilation of information that has been collected through time and resources and has value without being inherently secret such as the financial records, marketing plans and customer lists of a business. The elements required to constitute a trade secret are more stringent and whilst confidential information can include trade secrets, it covers a wider scope. Find out more about confidential information in our advice post, Protecting different types of confidential commercial information: 5 key tips.
What’s the difference between trade secrets and know-how?
Unlike trade secrets, know how does not have the essential characteristic of being secret. Know how is the set of knowledge and activities developed by a party through experience and research (such as unpatented inventions, formulae, designs, drawings, procedures and methods) which is difficult for third parties to copy and which could assist a licensee of the know how to use it to a competitive advantage. It is an important economic asset which should be converted into a trade secret before it is sold and rights assigned to a third party. As such, know how can be said to precede other forms of intellectual property rights such as patents or trade secrets, which know how is often converted into.
What’s the difference between trade secrets and NDAs?
A non-disclosure agreement is a legally binding contract between parties that requires them to keep certain information confidential such as a trade secret. A trade secret is secret information which has commercial value and this secret information can be disclosed to a third party safely through the third party signing an NDA promising to maintain the confidentiality of the trade secret and not to disclose it to anyone else. An NDA is therefore a way or means to keep a trade secret confidential. Find out more in our NDAs FAQ or watch our video on NDAs.
What’s the difference between trade secrets and undisclosed Information?
Undisclosed information is referred to Article 39 of section 7 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) which World Trade Organisation (WTO) member states are obliged to protect under that agreement. The definition of ‘undisclosed information’ mirrors the definition in the Trade Secrets Directive (2016/943/EU) implemented by the Trade Secrets (Enforcement) Regulations in the UK. As such, undisclosed information is the same as a trade secret. However, there is one aspect of undisclosed information that follows different rules on trade secrecy. Confidential pharmaceutical or agrochemical test data in clinical trials must be protected against unfair commercial use and disclosure except when the disclosure is necessary to protect the public or unless steps are taken to ensure that the data is protected against unfair commercial use. Therefore, there is a full crossover between trade secrets and undisclosed information except for when it comes to confidential test data protection which contains a specific standard.
What’s the difference between trade secrets and proprietary information?
Proprietary Information means information of or relating to a proprietor or of or relating to property. Like confidential information, it may be information collected over a period of time without being inherently secret, such as financial data, and that the owner wishes to keep from becoming public knowledge. This information can include trade secrets but like confidential information has a broader spectrum. Proprietary information is specifically viewed as the owner’s property and by such virtue the recipient of proprietary information is normally duty bound from making unauthorised use of the information but otherwise is essentially the same as confidential information (that is, it can include trade secrets but it covers a wider scope).
What’s the difference between trade secrets and restrictive covenants?
Restrictive covenants are clauses usually used in employment agreements, although they can also be used in agreements with contactors to ensure that an employee or contractor keeps certain information confidential such as a trade secret. Restrictive covenants are therefore a contractual means to protect trade secrets both by informing employees and contractors that the information must be kept secret and by providing consequences if the secrecy is not maintained. For more information, see our Restrictive covenants in business agreements.