Using trade secrets to sustain a competitive advantage in the United States

1. 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 can be protected as trade secrets.
2. An idea or process is considered a trade secret if 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 (18 U.S.C. § 1839).
3. A trade secret can be tangible or intangible, and can be stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.
   
   

   Example 1: Good examples of trade secrets are recipes of certain well-known U.S. soda and fried chicken companies, a business plan, salaries, a machine learning algorithm etc. Data sets whether raw, derived or transformed can also be considered trade secrets.

4. Trade secrets are as valuable and potentially more valuable than patents if they are properly managed and catalogued.
5. The owner must be able to prove they have taken reasonable measures to keep such information secret. Therefore, access should be limited and strong cybersecurity must be implemented to avoid a leak.
6. In the United States (US), the Defend Trade Secrets Act was signed in 2016 giving federal jurisdiction to trade secret misappropriation disputes.
7. Companies can now defend their misappropriation at the state level with pre-existing UTSA or at the federal level (or both because of loopholes). Since the act was signed, 68% of the cases were ruled in favor of the plaintiff, 52% were awarded damages for a total of $3B with the largest award to date being $100M.
   
   

   Example 2: The inventor of Listerine licensed the trade secret formula to Lambert Pharmaceuticals. Lambert (now Pfizer) made royalty payments to the inventor's family for over 70 years, even though the formula was revealed during that time. Pfizer tried to stop payments after paying over $22 million for a formula that was no longer secret. It sued, saying it was no longer responsible for licensing fees. The court ruled that the contract did not stipulate that payments could be stopped if the trade secret was legitimately discovered by others, especially since Pfizer had acquired the formula when it was still secret and derived competitive advantage from it. However, anyone who has access to the revealed secrets can sell the product without paying royalties.

   Example 3: A jury awarded Zest Labs and Ecoark $60 million in compensatory damages and another $55 million in exemplary damages on the claim of breach and misappropriation of trade secrets against Walmart. Ecoark sued Walmart in August 2018 after Walmart filed two patents based on technology to improve the freshness of produce. Ecoark claimed it shared information with Walmart between 2014 and 2017 during a pilot of Zest Labs (a subsidiary of Ecoark). The plaintiffs claimed Walmart stole their technology that prolongs the shelf life of produce.

Key considerations for Canadian companies:

• Trade secrets can provide several advantages. So long as they remain secret and properly managed, they provide worldwide protection and there is very little involved aside from (cyber)security measures. The term of protection never expires, unless the trade secret is made public (intentionally or accidentally). Trade secrets will provide value if they are properly catalogued and can provide licensing revenue with no expiration.
• By comparison, a patent application must describe the invention in such a way that it can be reproduced by someone 'skilled in the art'. A patent application filed in the US is published after 18 months, meaning it will be publically available worldwide and free to use in any countries that the patent owner did not file for protection. Also, obtaining an issued patent in the US only can cost anywhere between $15K-$120K (each). The protection afforded by an issued patent expires after 20 years at which point the technology is free for all to use.
• Reverse engineering is not illegal. If a product is acquired legally it can be reversed engineered and all the trade secrets it contains can be published and used freely. Several companies specialize in reverse engineering. By comparison, anything patented or patent pending will be protected in the countries where protection was applied for, regardless of how the information is obtained.
• Trade secrets become a useful tool when the inventions are executed on a secure cloud server. If someone was to access the code to attempt reverse engineering, it would be an illegal act that could be prosecuted in court.
• According to Natalie Giroux, President at Stratford Intellectual Property, "it is important to consider whether trade secrets can provide adequate protection before applying for a patent application."
  
  

  Example 4: A SAAS company sells to consumers worldwide a unique Internet of Things (IoT) hardware to monitor temperature. The IoT device has unique technology to recharge a battery while it is being used. The device transmits temperature data to a secure cloud server for processing and the transmission is done using an innovative data transmission protocol. The cloud server executes an artificial intelligence algorithm that processes the data to generate derived and transformed data and sends a summary report to an application used by the consumer. This is a typical SAAS model. In this case, the innovation in the IoT devices and the transmission protocol must be protected by patents as they could be legally reverse engineered. However, the artificial intelligence algorithms running on the cloud server would benefit from being kept as trade secrets, allowing the company to preserve a competitive advantage on the way the data is processed and the unique summary it provides.

Additional information:

• For information about IP protection in the US, please see the Canadian Intellectual Property Office's publication on Doing business abroad: Protecting your IP in the United States.
• For more material relating to the export of goods to the US, please see the Doing Business in the United States page
• For more information on going global with your IP, visit Canada.ca/export-ip.