Keeping Trade Secrets Secret

Companies often make crucial mistakes when trying to protect trade secrets, sometimes relying on policies that actually lead to more information being divulged.

Companies are incurring enormous losses from the misappropriation of their trade secrets. In a 2002 survey of more than 130 firms, 40% reported actual or suspected losses of trade secrets, and the data suggest the actual figure might be significantly higher. The study, published by the American Society for Industrial Security, also estimated that the companies represented by the survey participants —the Fortune 1000 corporations and 600 additional small and medium-sized companies — were likely to have experienced trade-secret and other intellectual-property losses of more than $50 billion during the time period of the study, from July 1, 2000, to June 30, 2001.

To investigate how organizations can protect themselves against such losses, I conducted an in-depth study of two U.S. high-tech companies: a relatively small (about 125 employees) fast-growing startup and a large (more than 70,000 employees) diversified global corporation. The two organizations were very different not only in size but also in structure and culture. Despite their differences, the companies shared a number of challenges and problems in dealing with the protection of their trade secrets. Specifically, although some of the policies enacted at the two firms were effective, others made no difference and some were actually counterproductive. After a broad review of other research studies in the field, I believe that my findings are representative of the types of mistakes firms commonly make when trying to protect their trade secrets.

What Are Trade Secrets?

Many people have only a vague idea of what exactly constitutes a trade secret. By definition, trade secrets are one type of intellectual property (the other types are patents, trademarks and copyrights). For information to be considered a trade secret, it must meet certain legal standards. In the United States, the criteria are threefold: (1) the trade secret must contain information, such as a formula, pattern, method, technique or process, (2) the information must be valuable to the organization that owns it and that value must be derived, in whole or in part, from the exclusive possession of the information, and (3) the organization must make reasonable efforts to protect that information. Some of the most famous examples include the formula for Coca-Cola Classic and the recipe of 11 herbs and spices for Kentucky Fried Chicken. But trade secrets also can include seemingly mundane information, such as a company’s marketing strategy or its customer list.