July 2021
Natural Products Consulting
Have you ever heard of Walter Liew? He is currently serving a 15-year prison sentence for stealing trade secrets. A federal jury found him guilty of stealing DuPont’s trade secret to chloride-route titanium dioxide, a white pigment. DuPont sells billions of dollars per year of this pigment for use in a variety of products, including in the food and beverage industry.
The titanium dioxide pigment is used by Nabisco®to produce one of the world’s most recognizable cookies — the Oreo®. The white pigment helps create the smooth center filling’s pristine white color, and stealing it cost Mr. Liew his freedom.
Mr. Liew’s story illustrates just how valuable trade secrets can be. Theft of trade secrets costs the United States’ economy more than $500 billion annually.[i] These valuable secrets, big or small, can have a real impact on any business owner in any industry, including the food and beverage industry. If they are protected, trade secrets can, for example, serve as a cornerstone of business for industry giants — like Coca-Cola®and Kentucky Fried Chicken®— but if a secret is spilled, what could have been a major competitive advantage can vanish in an instant.
The following section discusses what trade secrets are and how to protect them, gives some examples of successful trade secrets in the food and beverage industry, and explains how companies can strike a balance between trade secrets and other forms of intellectual property.
To reap the millions, or billions, of dollars companies can make if they take advantage of trade secrets, companies need to understand what constitutes a “trade secret.” The legal definition of a trade secret is “information that has either actual or potential independent economic value by virtue of not being generally known,” “has value to others who cannot legitimately obtain the information,” and “is subject to reasonable efforts to maintain its secrecy.”[ii] Boiling this somewhat complicated legal definition down to a simpler idea, a trade secret is essentially protected information that is valuable as a secret and is not generally known or easily discovered.
Basically, a trade secret must in fact be a secret. It cannot be known to the world or others in the industry. This would defeat the purpose of a trade secret, which is to allow a company to derive value from keeping the information secret. Thus, it follows that the information that is secret must not be easily reverse-engineered because that would also defeat the nature of the information as private. The secret also needs to be worth something. It must have value. Something that is private information but does not give a company a competitive edge or any economic value does not qualify as a trade secret. However, the amount of value does not need to be astronomical. It can be any small piece of information that benefits the company competitively, which, if taken, would negatively impact its ability to compete in the marketplace.
Both the federal and state governments have recognized the importance and value a trade secret can have to a company, so they have enacted laws to protect trade secrets, such as the Defend Trade Secrets Act (“DTSA”) and Uniform Trade Secrets Act (“UTSA”). Under these laws, if a company takes certain steps to protect its trade secrets, then there are penalties for stealing the secrets. The key is that a company must take steps to protect the information it considers a trade secret. This protection, or the lack thereof, can range from only one person knowing a secret that is never written down or discussed with anyone, to full public disclosure of the secret.
Publicly disclosing or discussing a trade secret, for example, through an article or patent application, destroys a company’s ability to protect the trade secret. But how much protection is necessary for a company to enforce its trade secret rights? A trade secret owner is required to show that reasonable efforts were taken to protect the confidentiality of the secret. But “reasonable efforts” means different things in different situations. While the standard is somewhat difficult to define, it is vital to enforcing trade secret rights. After the DTSA was passed, trade secret cases increased, but about 14% of those cases were dismissed early because trade secret owners were unable to show that they protected their secrets through reasonable efforts. These cases are evidence of just how important this “maintaining secrecy” requirement is for trade secrets.[iii]
With a “reasonableness” standard guiding the protection question, there are no hard and fast rules about what measures will be sufficient to protect a trade secret. For example, when determining if a company’s efforts to maintain the secrecy of its trade secrets were reasonable, a court may consider the size and sophistication of the company. Every case is different and depends on the particular facts involved, however, a good place for companies to start is with confidentiality agreements, non-disclosure agreements, and limiting employee access to trade secret information to the extent possible. The more robust the protection of the trade secret is in relation to these areas, the more reasonable the efforts will be considered. Other good practices include documenting security measures, limiting access to the information to those who must have it for their role in the company, training employees properly on trade secret laws, implementing protection policies, maintaining diligent confidential record logs, and marking all confidential information as such.
When people think of examples of trade secrets, two of the most well-known trade secrets that come to mind are those of companies in the food and beverage industry. These famous trade secrets are the Coca-Cola®secret formula and Colonel Sander’s recipe for KFC®’s fried chicken.
Coca-Cola®’s secret formula may be one of the most well-known “unknowns” of all time. Without this legendary trade secret, the soda giant may never have become one of the world’s foremost beverage leaders. It has certainly contributed to Coca-Cola®’s immense success, and still continues to help generate billions in yearly revenue. According to Coca-Cola®, the formula has only ever been written down one time, in 1919, over one-hundred years ago. And before that, it was passed down only by word of mouth. For almost 80 years, the single piece of paper containing the recipe was locked inside of a bank vault in Atlanta, but it was recently transferred to the Coca-Cola®museum where it remains today in a high security vault. Getting into the vault to access one of the world’s most guarded trade secrets requires passing through multiple security measures, including a numerical code pad and a palm scanner. In addition to that single 1919 written version, only two Coca-Cola®executives know the formula at any given time. And because of the formula’s importance to the company, the names and positions of these two people are never publicly revealed. All that is known about these two individuals is that, like the president and the vice president of the United States, they are not permitted by the company to fly on the same plane. While many claim to have discovered the recipe, the evidence remains inconclusive, and Coca Cola vehemently denies anyone successfully replicated the secret formula.
Another great example that shows the success that trade secrets can bring for the food and beverage industry is evidenced by the worldwide fast-food chain, KFC®. One of the fried chicken company’s trade secrets protects the original recipe that uses 11 herbs and spices to coat the chicken before it is pressure fried. Supposedly, these 11 ingredients are found in most kitchens. But even with access to what makes KFC®so delicious on the shelves of every home, no one has successfully copied the fast-food chain’s secret. Like the Coca-Cola®secret formula, KFC®’s 11 herbs and spices are locked away in a vault. Locking the original Colonel Sander’s signed recipe away is not the only measure that KFC®takes to protect this valuable trade secret. The company also ensures that the 11-ingredient mixture is assembled by two different companies. And while a select few of the company’s executives know the ingredients, the head chef, who has been with KFC®for 20 years, is not even privy to the information. This secret recipe has allowed KFC®not only to remain a major player in the industry, but the trade secret also provides an effective marketing strategy based on its mystery and the innate curiosity of the company’s customers.
Almost everyone in the world knows the stories of these two industry titans’ infamous trade secrets. But lesser-known trade secrets also help companies in this industry drive revenues. For example, Chartreuse, a French liquor, uses a combination of 132 herbal extracts to create its green color and its sweet taste. This combination of herbs is based on a recipe from 1605, which has since then only ever been known by two Carthusian monks at any given time. Another long-held trade secret is the recipe for Twinkies®, a popular sweet treat, that was partially exposed in a novel called “Twinkie, Deconstructed,” which ultimately led to the discovery that the combination of this buttery pastry with its sweet cream in the middle was made at least in part with petroleum and limestone. And Bimbo Bakeries®, the parent company of the makers of Thomas’®English Muffins, was able to get a court to ban a former executive from working for Hostess®by showing he stole the secret to making the unique English muffin’s “Nooks and Crannies.”
The point of these examples is to show that whether you are one of the foremost trade secret holders in the world, or whether you use them simply as part of a larger IP strategy, they can hold great value, and they have helped make many companies very successful by creating a competitive advantage and providing a unique marketing position.
As discussed above, trade secrets can have tremendous value, but the laws designed to protect them are not necessarily as robust as other areas of intellectual property, namely patents. However, more robust protections, such as patents, are usually limited in time.
While both patents and trade secrets can be economically important to businesses, there are certain factors that a company should consider before deciding which forms of intellectual property to use to protect a certain asset. One factor is how long the company believes they need protection on the asset. Because while trade secrets have an infinite duration, once lost, they are gone forever. On the other hand, patents protect inventions for a specified period, a term of 20 years, and the inventions are protected in full for the duration of that term as long as the patent is valid. This means that during those 20 years, patent owners get a “monopoly” on their invention, with the right to exclude all others from making, using, selling, or offering to sell the invention in the United States.
Another factor that companies should consider is how much time and money they can expend to achieve the desired protection. Obtaining a patent may require more work on the front end than obtaining a trade secret, because in exchange for the robust right to exclude, the government expects an inventor to publicly disclose the invention by filing an application for a patent with the U.S. Patent and Trademark Office (“USPTO”). After that public disclosure, others in the industry should be able to make and use the invention that is covered by the patent upon expiration. Patents are a bargained-for exchange — an inventor (or the inventor’s employer) discloses the invention, including how to make and use it, to the public in exchange for a 20-year “monopoly” on the invention.
Trade secrets, on the other hand, are different both in policy and in practice. For example, because the protection offered by trade secrets is less robust than that offered by patents, trade secrets need not be disclosed and, in fact, are lost upon disclosure. Because trade secret protection attaches automatically without any government involvement, it is usually much less expensive to obtain than a patent. There are costs in procuring a patent which are paid when an inventor or company applies for and prosecutes the patent at the USPTO, and there are also periodic maintenance fees that must be paid to keep the patent in force. While there is no analogous application procedure or payment required to obtain trade secrets, there are certainly costs associated with “maintaining” information as a trade secret. As discussed above, companies must take reasonable efforts to protect their trade secrets, and whether this means implementing security systems or drafting NDAs and confidentiality agreements, it all costs money, and because trade secrets, unlike patents, can exist indefinitely, those costs can recur indefinitely as well.
A third factor to consider in determining which form of intellectual property should be used to protect a company’s asset is the ability or difficulty in enforcing the intellectual property right. Arguably, a patent is easier to enforce than, for example, a trade secret, because if a competitor’s product, process, or method falls within the limits of a valid patent’s claims, and the competitor makes, uses, sells, offers to sell, or imports a product covered by the valid patent, they are infringing the patent, and the patent owner can sue them to enforce their exclusionary right.
Trade secrets are arguably more difficult to enforce. To enforce a trade secret, the owner must not only prove that a trade secret exists, but they must also prove that the trade secret was misappropriated. Misappropriation occurs when someone gets access to the trade secret through improper means or improperly discloses or uses the information. Unfortunately, what this realistically means for trade secret owners is that they have no protection against a competitor who discovers the secret through fair and honest means, such as independent invention, legitimate reverse-engineering, or even accidental disclosure by the original trade secret owner. Thus, trade secrets, unlike patents, require some type of “bad act” for the trade secret owner to have the ability to enforce the trade secret protection. As discussed above, patent enforcement is typically a simpler process, since any competing product, process, or method that is covered by a valid patent is infringing, regardless of whether it was stolen or developed through independent means or reverse-engineered. And, as mentioned above, misappropriation is not the only thing that trade secret owners must prove to enforce their rights. They must also prove a negative — that no one else knew of the trade secret — and that they took reasonable steps to protect their trade secret. The bottom line is that enforcing trade secrets can be complex, which may lessen the appeal of trade secrets for some companies. However, despite the difficulties that can surround enforcing trade secrets, their advantages, such as their infinite duration, can prove very valuable in the right circumstances.
A fourth factor to consider in determining which IP to use to protect an asset is the type of asset or information. For example, patents can cover only certain subject matter areas — processes, machines, manufacture, or composition of matter. Some inventions or discoveries, like natural ingredients or methods of doing business, are hard or impossible to protect with a patent. This is where trade secrets might be a good alternative to patent protection, because trade secrets do not have the same subject-matter limits. Trade secrets can protect almost any information that derives competitive value for a company, and thus they can protect broader types of information compared to patents.
Ideally, in a strong intellectual property portfolio, patents and trade secrets, with copyrights and trademarks, are all used to protect a company’s assets, based on the needs of the company. If companies strive to use all forms of intellectual property together, the likelihood of success for their overall intellectual property strategy is greater and can translate to more success for the company.
Obtaining and enforcing trade secrets may be complicated, but trade secrets can provide priceless protection of a company’s assets when used in the right situations. Food and beverage industry giants Coca-Cola®and KFC®are brilliant examples of companies who have used trade secrets in highly successful ways. However, for trade secrets to be used effectively, companies must identify them and take steps to protect them. If they are protected and used properly, trade secrets can be one of the most effective and valuable assets in a company’s IP toolbox.
[i] Paul Wiseman, Counterfeiters, Hackers Cost US Up to $600 Billion a Year, AP News (Feb. 27, 2017), https://apnews.com/article/2234bddc68c14ba18d4d403442187c59.
[ii] Trade Secret Policy, U.S. Patent and Trademark Office, https://www.uspto.gov/ip-policy/trade-secret-policy#:~:text=A%20trade%20secret%3A,efforts%20to%20maintain%20its%20secrecy (last viewed Mar. 3, 2021).
[iii] See Charles Ramsey Company, Inc. v. Fabtech-NY LLC, No. 1:18-CV-0546 (LEG/CFH), 2020 WL 352614 (N.D.N.Y. Jan. 21, 2020); Bison Advisors LLC v. Kessler, No. 14-3121(DSD/SER), 2016 WL 4361517 (D. Minn. Aug. 12, 2016).
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