Trade Secrets: Truth or Illusion?

In early July 2006, three Coca Cola^® employees were accused of trying to sell classified documents about a new Coke product to Pepsi^®. According to the police, the trade secrets contained in the documents are considered by some to be as sensitive as government data.

Coca Cola isn't alone. Many companies believe they have confidential trade secrets. Kentucky Fried Chicken (KFC^®) protects its secret fried chicken recipe by mixing herbs and spices at two different locations. Only a handful of people know Mrs. Fields^® covert cookie recipe. But what, exactly, makes a trade secret…well, secret?

Trade Secret Defined

According to Wikipedia.org, a trade secret is "a formula, practice, process, design, instrument, pattern or compilation of information used by a business to obtain an advantage over competitors within the same industry or profession." In the United States, trade secrets are protected partially by contract law and partially by state law. Although some jurisdictions refer to trade secrets as "confidential information," others don't.

A trade secret is not protected by law in the same way as a trademark or patent. A trade secret is only protected until the secret is disclosed. As soon as the secret information is revealed to someone on the outside, that third party can't be punished for using the secret information to their advantage. Therefore, the best way a company can protect its trade secrets is by preventing employees from revealing those secrets in the first place. Companies typically do this by having their employees sign non-disclosure agreements.

Company Loyalty

But what happens when, like in the Coke scenario, an employee breaks the rules and whispers the company's trade secrets to a rival for financial gain? Some say that once a company's secrets are exposed, that business becomes extremely vulnerable and may have a very difficult time surviving in its market. For example, if Pepsi had the necessary secret recipes to make soft drinks that taste just like Coke's, what would keep Coke customers from switching to Pepsi?

No Secrets

Then again, others say the idea of a trade secret is actually somewhat of a fairy tale, and that customer loyalty to a particular brand is what really makes a company successful. For example, John Sicher of Beverage Digest recently told NBC, "Anybody with a small amount of money and access to a high-tech chemistry lab could go in and do an analysis of Coke or Pepsi, break it down and replicate it. The real power of Coke is the trademark and the brand."

Whether or not these trade secrets are truth or illusion, many companies are thinking about how they can more staunchly protect their secrets. After all, no one wants to see their business go flat.

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