THE CONCEPT OF TRADE SECRETS & ITS EFFECT ON ECONOMIC GROWTH.

Bett Rickcard Kipruto*

ABSTRACT

Trade secrets are a in the simplest of terms, secrets. A trade secret is an essential form of

intellectual property whose economic value is contingent upon remaining secret. A very common

example of this is the formula for Coca-Cola. This is a highly recognized trade secret. The use of

trade secrets has been seen in many other businesses. Virtually all businesses rely on their unique

and often invisible trade secrets-manufacturing processes, technologies, formulas, prototypes,

computer codes, techniques and other proprietary innovations. A majority of start-ups and small

businesses are built from the ground up on their trade secrets. Although trade secrets seem to

be of value on paper, there are few who argue that they add no value. These arguments are

backed by claims that trade secrets are parasitic, claims that “there is no law of trade secrets.”6

The basis for these claims is that trade secret misappropriation relies for the most part on

wrongdoing that is independent of any “trade secret law,” relying instead, for example, on a

breach of contract or trespass claim. For this reason, it has been termed as an endangered

species of intellectual property. This paper seeks to make an assessment of these arguments and

come up with a response. This will be by first highlighting the concept behind trade secrets and

whether it has had an impact on economic growth.

Key words: Trade Secrets, Economy, Regulation.

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INTRODUCTION

Trade secrets are complex and difficult to conclusively define.1 In simple terms, trade secrets are

intellectual property rights that seek to protect information the firm feels needs to be kept

confidential. The need to keep such information confidential is necessitated by the fact that such

information goes to the heart of the operations of this firm. For instance; if a trader has a secret

process of manufacture, this may be largely the basis of the profitableness of his business and so

must be guarded. In the use of this secret, as in other right, the law will protect the owner from

undue molestation and unfair competition. Generally speaking, it is used to protect any

confidential business information which provides an enterprise a competitive edge.2 They cover

manufacturing secrets and commercial secrets. The unauthorized use of such information by

persons other than the holder is regarded as an unfair practice and a violation of the trade secret.

Depending on the legal system, the protection of trade secrets forms part of the general concept

of protection against unfair competition or is based on specific provisions or case law on the

protection of confidential information. However, some scholars have argued that trade secrets

have become obsolete.3 These scholars claim that the function of trade secrets is better dispensed

where patents are used.4 There is also an issue as to whether trade secrets have become out

*Bett Rickcard Kipruto holds a Bachelors of Laws Degree (LLB) from Moi University and is currently a Post-Graduate
Diploma in Law student at the Kenya School of Law. He is also a Regional Representative (East Africa) with the
Afronomicslaw forum.
1
Lear Siegler, Inc. v. Ark ‘Ell Springs, Inc., 569 F.2d 286, 288 (5th Cir. 1979). Also, In re Bass, 113 S.W.3d, 735, 739 (Tex.
2003).
2
Moore, D. and Himma, K., “Intellectual Property”, Stanford Encyclopedia Of Philosophy, Edward N. Zalta, ed.,
(2011). Pg. 1 Available at SSRN: https://ssrn.com/abstract=1980917 Accessed 30th April 2020.
3
Lemley, Mark A. “The Surprising Virtues of Treating Trade Secrets as IP Rights.” Stanford Law Review, vol. 61, no.
2, 2008, pp. 311–353. Available: www.jstor.org/stable/40379687 . Accessed 30 April 2020.
4
Klein, M., “Endangered Species and Trade Secrets”, Natural Resources & Environment, Vol. 28, No. 3, WASTE
(Winter 2014), pp. 53, 55-56 Available at: https://www.jstor.org/stable/24426145 Accessed 30th April 2020.

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dated and hence have no impact on economic growth. This paper seeks to address these issues

and come up with a response on the same.

1. THE CONCEPT BEHIND TRADE SECRETS

A trade secret comprises information that provides a competitive advantage because it is not

known to others, and for which reasonable safeguards are maintained to protect its secrecy. It is

information that imparts value to its holder. Should information that constitutes as a trade secret

be leaked, it could have a major negative effect on the business. Information such as customer

lists, information received by an employee regarding business opportunities valuable to an

employer and information provided to an employee in confidence in the course and scope of his

employment could be identified as confidential.5

There are three requirements for information or an item to be regarded as a trade secret;

1.1. THIS MUST BE A SECRET

Article 39 of the TRIPS Agreement, provides that member states shall protect “undisclosed

information” against the unauthorized use “in a manner contrary to honest commercial practices”

as long as the information is: a secret in a sense that it is not generally known among or readily

accessible to persons that generally deal with the type of information. This means that the

information is not one which being divulged would injure plaintiff's character or affect the manner

in which he acts in general.6 As was held in Gartside,7"There can be no confidence which can be

relied on to restrain the disclosure of iniquity" and no employer can obtain the interposition of

the law to prevent disclosure by an employee of his improper practices.

5
Meter Systems Holdings Limited v Venter and Another 1993 (1) SA 409
6
Bristol v. Equitable Life Soc., 132 N. Y. 264.
7
Gartside v. Outram, 3 Jur. N. S. 39

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The need for confidentiality and to establish said confidentiality goes to the root of trade secrets.

If viewed as property, trade secret owners derive their rights from the confidential nature of the

information.8 This was highlighted in E.I. Du Pont De Nemours Powder Co. v. Masland.9 The case was

on a process of making methanol. The court held; that the word property as applied to trade-

marks and trade secrets is an unanalyzed expression of certain secondary consequences of the

primary fact that the law makes some rudimentary requirements of good faith. The property may

be denied but the confidence cannot be. Therefore the starting point for the present matter is

not property or due process of law, but that the defendant stood in confidential relations with

the plaintiffs, or one of themThis is due to the intangible nature of a trade secret, the extent of

the property right therein is defined by the extent to which the owner of the secret protects his

interest from disclosure to others. The information should not be that which is known to the

general public.10

1.2. THERE ARE REASONABLE STEPS TAKEN TO SAFEGUARD SECRECY

It is important to note that this component of trade secrets is important in assessing the impact

of trade secrets on economic growth. This element is a requirement of actual secrecy. Boone

argues that it captures the essence of trade secret protection.11 Secrecy need not be absolute.

Firms can share secret information with employees and others when necessary to exploit the

information's commercial value. This does not erode the value of the information as a trade

secret as there can be various safeguards to prevent subsequent disclosure to third parties.12 In

8
Ruckelshaus v. Monsanto Co., 467 U.S. 986
9
E.I. Du Pont De Nemours Powder Co. v. Masland, 244 U.S. 100 (1917).
10
Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) 65 RPC 203, 215.
11
Bone, Robert G. "A New Look at Trade Secret Law: Doctrine in Search of Justification." California Law Review
86, no. 2 (1998): 241-313.
12
Richey, P. Jerome, and Margaret J. Bosik. “Trade Secrets and Restrictive Covenants.” The Labor Lawyer, vol. 4,
no. 1, 1988, pp. 21–34. Available at: www.jstor.org/stable/40862348 Accessed 1 May 2020.

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order to safeguard secrets in a firm from being disclosed, the firm uses a variety of measures,

most of which involve contractual agreements.

These contracts are signed between the firm and the employee. The contract is meant to bind

the employee to non-disclosure.13 As is seen in es is that of Peabody v. Norfolk14 The court there

very aptly, we think, summarized the basis of protection for trade secrets : If one invents or

discovers and keeps secret a process of manufacture, whether a proper subject for a patent or

not, he has not, indeed, an exclusive right to it as against the public, or against those, who, in

good faith, acquire knowledge of it; but he has a property in it which a court of chancery will

protect against one who, in violation of contract and breach of confidence, undertakes to apply

it to his own use, or to disclose it to third persons.

In Sigma Chemical Co. v. Harris,15 the court held that information in product and vendor files was

a trade secret. Sigma was in the business of selling esoteric or fine chemicals to laboratories,

hospitals, and universities. Some of the information in Sigma's files, such as excerpts from

suppliers' catalogues and marketing materials, was publicly available. Sigma's protection of its files

included armed guards, color-coded identification badges, and work rules regarding the removal

of product and vendor files and the presence of visitors. Sigma only required restrictive covenants

and nondisclosure agreements from eighteen of the twenty -eight employees who had access to

the files. The court found, however, that such contracts were unnecessary with the remaining

employees who, because of their inexperienced backgrounds, could not threaten disclosure.

Sigma enforced restrictive covenants where necessary to protect the information in its files.

13
Leydig, C., “Protecting Trade Secrets When Employees Move.” The Business Lawyer, vol. 21, no. 2, 1966, pp. 325–
335. Available at: www.jstor.org/stable/40684070 Accessed 1st May 2020.
14
98 Mass. 452, 96 Am. Dec. 664 (1865).
15
794 F.2d 371 (8th Cir. 1986).

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This element of trade secrets does not require the complainant affirmatively prove that no one

else knew it. As was held in Pidot,16 the basis of recovery is breach of confidence and that it is not

necessary for plaintiffs to establish that their design was new and novel as to the entire world".

In addition, the very substantial precautions undertaken by plaintiff in handling its secret to

prevent its falling into the hands of any unauthorized person as well as the care with which even

authorized persons have been dealt should be shown. Such precautions, are treated by the

authorities as going a long way in the proof that a given thing is a trade secret.17 . even though it

found that as a matter of fact the alleged secret was not a secret because it was shown to be

generally known. Other cases have also pointed to the protective safeguards used by the plaintiff

as constituting strong evidence tending to show a legally protectible secret.18 When a plaintiff has

established the foregoing, it has done all that is reasonably possible in establishing prima facie that

it possessed trade secrets. It is then up to a defendant to show, if it can, that what plaintiff claims

as its secret could not be one because the same either was known generally in the industry or

was known independently to the defendant prior to the contract.

The employee can know of the secret in two ways; where the employee obtains knowledge of

the secret from his master, and where the employee discovers the secret in course of his service

of the employer.19 In both cases, if the employee is enjoined from imparting the secret, to a third

party the employee could be held liable for breach of contract in communicating it.20 An employee

is not alone restrained from the use of process of manufacture, but also from subsequent use to

advance his own business and to the injury of the employer's interests, of any confidential

16
Pidot v. Zenith Radio Corporation. 308 111. Add. 197 (1941)
17
Victor Chemical Works v. Iliff, 299 111. 532 (1921).
18
O. W. Thum Co. v. Tloczynski, 114 Mich. 149 (1897); L. M. Rabinowitz & Co., Inc. v. Dasher, 82 N. Y. S. 2d 431 (1948)
and Fairchild Engine and Airplane Coro. v. Cox. 50 N. Y. S. 2d 643 (1944)
19
Tchenguiz and Others v Imerman [2010] EWCA Civ 908.
20
Douglas and others v Hello! Ltd and others, [2005] EWCA Civ 595.

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information' which was received by him so that his employer's business might be advanced.

Consequently, it has been held that the use of a list of the employer's customers to send a circular

containing statements damaging his business was condemned.21

1.3. THE TRADE SECRET MUST HAVE COMMERCIAL VALUE BECAUSE IT

IS SECRET

Here, the trade secret has to confer some sort of financial benefit on its owner. This benefit must

derive specifically from the fact that it is not generally known, and not just from the value of the

information itself. It must have commercial value because it is a secret.22 Commercial value

encompasses potential as well as actual value. More importantly, the most successfully protected

secrets are likely to be process innovations that have the most value in the market; in addition,

the secrets that are most commercially valuable are those that offer the greatest efficiency

advantages to the holders.23 Those efficiency gains are likely to be transferred by the competitive

process to consumers in the long run. The basis of this requirement is the reasoning that it is

unfair to allow one to gain commercial advantage by freely confiscating another's work.24

2. EFFECT OF TRADE SECRETS ON ECONOMIC GROWTH

The implications of trade secrets in the economy vary depending on the sector. In some there

are positive effects (translates to growth) whereas in some they have negative effects. It is

important to note that due to their nature, the trade secrets have a number of advantages. First,

they are broad in scope, covering virtually any type of commercially valuable information that has

21
Simms v Conlon and Another [2008] 1 WLR 484.
22
Trade Secrets, IPEG Intellectual Property Expert Group Available at: https://www.ipeg.com/trade-secrets/
Accessed on 1st May 2020.
23
“Trade Secrets.” Laws of Creation, by Ronald A. Cass and Keith N. Hylton, Harvard University Press, Cambridge,
Massachusetts; London, England, 2013, pp. 76–96. JSTOR, www.jstor.org/stable/j.ctt2jbrhx.7 Accessed 1st May 2020.
24
Klitzke, Ramon A. “Trade Secrets: Important Quasi-Property Rights.” The Business Lawyer, vol. 41, no. 2, 1986,
pp. 555–570. Available at: www.jstor.org/stable/40686714 . Accessed 1st May 2020.

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been subject to reasonable measures to protect secrecy. They are also more of “do- it-yourself”

Intellectual Property right.25 Thus, firms can use contracts to maintain protections from inception

rather than waiting for the government review. Trade secret protections are flexible as well.

Firms need not file a new application to cover modifications to a trade secret, they simply

incorporate them into their existing protections.

When looking at specific sectors of the economy, the implications of trade secrets shall be looked

at on a case by case basis. The sectors are as follows:

2.1. EXTRACTIVES INDUSTRY

There are a great number of minerals mined all over the earth. One of the booming industries in

the mining sector is the fracing industry. Fracing is where natural gas is extracted from shales. In

this industry there is a widespread use of trade secrets to protect rights to chemical formulas

used in the process. In the USA there is established within its regulatory framework, provisions

that require key players in the mining sector to disclose certain information to the public. This

has been done in the USA through the Emergency Planning and Community Right-to-Know Act

(EPCRA) and the Safe Drinking Water Act (SDWA).26 The need for pubic participation in the

process has also led to the need for “publicization” on fracing chemicals used by the natural gas

mining companies. This required disclosure on the chemicals used in fracing in order to support

25
Linton, Katherine. "The importance of trade secrets: new directions in international trade policy making and
empirical research." J. Int'l Com. & Econ. (2016): pg. 3.
26
Press Release, Environmental. Protection . Agency, EPA Initiates Hydraulic Fracturing Study: Agency Seeks Input
from Science Advisory Board (March 18, 2010), Available at
http://yosemite.epa.gov/opa/admpress.nsf/e77fdd4f5afd88a3852576b3005a604f/ba591e ( Accessed on 1 May 2020).
e790c58d30852576ea004ee3ad!opendocument (on file with the Columbia Law Review).

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a comprehensive EPA study of the potential drinking water quality and public health impacts of

fracing.27

There are argument that support disclosure but only where it can be regulated.28 This disclosure

seeks to target the chemical composition of the chemicals used in fracing. These formula(s) are

protected as trade secrets by majority of the companies carrying out this activity. These

companies argue that such chemical formulas are protected under the statutes and pieces of

legislation. This is based on the fact that such formulas have economic value and reasonable efforts

have been taken to maintain the secrecy of these chemicals and their composition.

The need to keep these formulas a secret is based on the fact that the compositions and formulas

have varying effects. For instance, some reduce the friction of water as it flows through the

wellbore and fractures, while others control clay that forms in the shale and prevent it from

plugging the fractures, among other functions.29 That being said, companies that use a superior

proportion of chemicals within its fracing fluid to control clay formation in the shale, will likely

have lower costs and higher rates of gas production than a company with a less effective fluid.

Looking at the situation above, it is important to note that the natural gas mining companies have

benefited from the use of trade secrets. This is due to the fact that the firms have been able to

protect high quality formulas from competitors and hence have been able to stay ahead. However,

with the notable environmental concerns and health dangers caused by these chemicals there is

a need for regulation of the same chemicals. This will require a balance to be reached between

27
Wiseman H., Trade Secrets, Disclosure, and Dissent in a Fracturing Energy Revolution, Volume 111 Columbia Law
Review Sidebar 1 (2012), Available at: http://www.columbialawreview.org/assets/sidebar/volume/111/1_Wise
man.pdf. Last accessed on 1 May 2020.
28
As was noted in Huntley & Huntley, Inc. v. Borough Council of Oakmont, 964 A.2d 855, 865 (2009).
29
Supra note 27.

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the need to make profits and need to safeguard public interest through publication of the

compounds used.

2.2. PHARMACEUTICAL INDUSTRY

The manufacture of medicine is mainly “patent territory” and for good reason too. Unlike trade

secrets, patents have a time frame in which the patent owner enjoys exclusive use of the patent

and derives exclusive economic benefits from the patent. This makes it easier for pharmaceutical

companies to take advantage of the expiry of patent to make generic drugs out of the original

drug. The situation is different in terms of where drugs are protected under trade secrets. This

becomes more evident where biologics are put into consideration. Biologics are defined as

complex macromolecular therapeutics produced by living sources rather than through chemical

synthesis.30 The authors argue that biologics face steep competition. This is mainly from generic

drugs and small molecule drugs such as aspirin. Due to the low cost of production, small molecule

drugs and generic drugs are more favoured by manufacturers. They also state that biologics are

not frequently prescribed. In spite of this, returns from the biologics double those received from

small molecule drugs.31

Whereas both small molecule drugs and biologics are protected under patent, the rights to the

process of manufacture for biologics has, in most cases been protected as a trade secret. Their

process of manufacture is completely path dependent.32 That is, it follows a strict process or

“path” with several complex stages depending on the type of cell and drug. Being highly variable

30
Rai, Arti K., et al. "Pathways across the valley of death: novel intellectual property strategies for accelerated drug
discovery." Yale J. Health Policy L. & Ethics 8 (2008): 1.
31
Price, William N., Rai and Arti K., Manufacturing Barriers to Biologics Competition and Innovation. 101 Iowa L.
Rev. 1023 (2016); Duke Law School Public Law & Legal Theory Series No. 2015-20; Duke I&E Research Paper No.
15-2. Available at: https://ssrn.com/abstract=2594335 Last Accessed 2nd May 2020.
32
Marciano, Alain. "Brett M. Frischmann, Infrastructure: the social value of shared resources." (2014): 559-562.

Electronic copy available at: https://ssrn.com/abstract=4284367

there is inadequate analytical science. If there was adequate analytical technology, it would be

easier to produce the same product regardless of the process or methods used. Even where

there are bio similarities, these cannot detail the path taken to manufacture. A path only the

owner of the secret has knowledge of.

Biologics are used in many cases to treat diseases such as cancer, diabetes which are considered

serious illnesses. The drugs required for treatment are very expensive where there is only trade

secret protection. This is mainly due to the existence of fewer manufacturers. The manufacturers

have a choice to either enjoy rights to the drug for the patent period or keep it a secret. Where

protected under patent, there would be disclosure and on expiry of the patent, the generic drug

manufacturers may enjoy returns from the sale of such drugs.33 However, where the drugs are

protected as trade secrets, the rights are exclusive to the manufacturer. Thus, making the market

rigid and acts as a major barrier to biologics production and innovation.

2.3. ARTIFICIAL INTELLIGENCE (AI)

Patents are normally considered when it comes to innovations. Proof of this is seen where the

Kenyan law seeks to protect inventions under patents.34 Trade secrets are particularly suited to

technologies that are not capable of independent discovery or reverse engineering, technologies

that are rapidly replaced by new innovations, and technologies that cannot be described without

expending significant effort, all of which are especially prevalent in AI.35

33
Supra note 31.
34
Ojwang, J. B. "The protection of innovations and inventions in Kenya: the patent system." Kenya Journal of Sciences.
Series C, Humanities and Social Sciences 2.1 (1989): pp. 45-56.
35
Microsoft, The Future Computed: Artificial Intelligence and Its Role in Society (2018),
https://news.microsoft.com/uploads/2018/02/The-Future-Computed_2.8.18.pdf. Accessed

10

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The use of patents has been problematic in the past. There was hence need to shift to a better

mechanism. Trade secrets became the best fit. Although trade secrets promoted independent

development and cheaper costs, they were not immune to trade secret theft.36

In the USA example, this issue was a key concern in Congress. In enacting the DTSA, Congress

was predominantly inclined by reports that trade secret theft was reaching unprecedented levels,

primarily from current or former employees. There were reports of losses of hundreds of

millions of dollars to trillions of dollars, in addition to millions of U.S. jobs.37 A precise calculation

of the impact of trade secret theft is difficult to determine, as it is relatively anonymous and

difficult to detect; a company may not realize information has been stolen until years afterward.

Moreover, it is difficult to measure the economic value of information. Finally, even if a company

knows that a trade secret was stolen, accusing an employee, business partner, or competitor of

trade secret theft carries reputational and relational risks of its own.

Although trade secrets are protected internationally,38 there are issues as to the effectiveness

and enforcement of these laws. This is mainly in big emerging economies, such as China, India,

and Brazil.39 AI companies operate across international borders. This hinders a company’s ability

to protect its trade secrets may be significantly impacted by weak protection and enforcement

abroad.40

36
First, Henry, Trade Secrets and Antitrust Law, Law & Economics Research Paper Series Working Paper No. 11-
06, March 2011.
37
John Cannan, A (Mostly) Legislative History of the Defend Trade Secrets Act of 2016, 109 L. Libr. J. 363, 365
(2017).
38
Article 39 (TRIPS) Agreement.
39
Brian T. Yeh, Cong. Res. Serv., R43714, Protection of Trade Secrets: Overview of Current Law and Legislation
13–14 (2016), https://fas.org/sgp/crs/secrecy/R43714.pdf. (2 May 2020).
40
Jessica M. Meyers, Artificial Intelligence and Trade Secrets, American Bar Association, Available at:
https://www.americanbar.org/groups/intellectual_property_law/publications/landslide/2018-19/january-
february/artificial-intelligence-trade-secrets-webinar/ (Accessed on 2 May 2020).

11

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Most trade secrets are stolen by someone known to the company, often a current or former

employee. This is particularly relevant in the age of AI, where employees are moving between

companies at phenomenal rates. The nature of AI work is such that it requires employees with

specialized skills, often for which there is an ongoing shortage.41 With stiff competition for skilled

employees and frequent movement of employees between companies, it is important for

companies to ensure that these employees do not take with them confidential company

information. Equally important, companies need to deter new employees from using trade secrets

belonging to former employers.42

CONCLUSION

Trade secrets have played an important role in the protection of information, formulas and other

commercial information. Its nature prevents reverse engineering by competitors while promoting

independent development of products without external influences. Whereas they are criticized

for having a longer time frame and discouraging the sharing of information, trade secrets have

still led to the growth of economies. The impact on economic growth is nonetheless two-fold.

Where in some cases such as pharmaceuticals it seems to lead to a rigid market that discourages

competition among producers. In the field of AI and extractives (fracing), it has led companies

taking up the challenge of a rigid market and in taking advantage of independent to develop a

variety of innovations and come up with a variety of formulas and chemicals.

41
Dan L. Burk & Brett H. McDonnell, The Goldilocks Hypothesis: Balancing Intellectual Property Rights at the
Boundary of the Firm, 2007 U. Ill. L. Rev. 575, 592.
42
Ibid.

12

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