The Role of Trade Secrets in Innovation Policy

John R. Thomas
Visiting Scholar

Many businesses have developed proprietary information that provides a competitive advantage because it is not known to others. As the United States continues its shift to a knowledge- and service-based economy, the strength and competitiveness of domestic firms increasingly depends upon their know-how and intangible assets. Trade secrets are the form of intellectual property that protects this sort of confidential information. 

Trade secret law protects secret, valuable business information from misappropriation by others. Subject matter ranging from marketing data to manufacturing know-how may be protected under the trade secret laws. Trade secret status is not limited to a fixed number of years, but endures so long as the information is valuable and maintained as a secret. A trade secret is misappropriated when it has been obtained through the abuse of a confidential relationship or improper means of acquisition. 

A number of competing innovation policy concerns help shape the particular doctrines that comprise trade secret law. The availability of legal protection for trade secrets potentially promotes innovation, encourages firms to invest in employee development, and confirms standards of commercial ethics and morality. On the other hand, trade secret protection involves the suppression of information, which may hinder competition and the proper functioning of the marketplace. An overly robust trade secret law also could restrain employee mobility and promote investment in costly, but socially inefficient security measures. 

Trade secrets are primarily a matter of state law. In 1996, Congress enacted the Economic Espionage Act (EEA), a statute that criminalizes both "economic espionage" and the "theft of trade secrets." The EEA provides for substantial fines and imprisonment penalties, as well as criminal forfeiture of property and court orders preserving the confidentiality of trade secrets. Some commentators believe that few prosecutions have occurred under the EEA since its enactment and have deemed the legislation ineffective. 

Patents and trade secrets provide different intellectual property options for many new inventions. Inventors typically must choose (1) to maintain an invention as a trade secret, (2) to obtain a patent on the invention, or (3) allow the invention to enter the public domain. As a result, federal legislation or other developments that are perceived to alter the effectiveness of the patent system may make the trade secret more or less attractive to industry. 

Some commentators have encouraged Congress to supplement the EEA, which is a criminal statute, with civil federal trade secret legislation. They believe that this step would improve uniformity within the system. However, others believe that no compelling case has been made to federalize trade secret law. Other observers assert that the EEA should be amended to involve a private cause of action for economic espionage and trade secret misappropriation.


Date of Report: August 31, 2010
Number of Pages: 18
Order Number: R41391
Price: $29.95

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