Trade secrets and software: secrecy over public right to exclude

As software systems become central to business innovation, trade secret law is crucial for protecting them. The need to protect software and algorithms presents unique challenges for businesses that have long relied on patent protection. The nature of software often requires different strategies to keep these competitive advantages secure.

Historically, patent protection has been seen as the gold standard for protecting a business’s intellectual property. Patents provide an absolute right to exclude anyone from using the patented technology for a specified period, depending on the country in which patent protection is obtained. In exchange for the absolute right to exclude, the business must make a public disclosure of the new innovation, allowing it to be freely used by all upon expiration of the patent term.

Recently, however, smart businesses are utilizing the protection of trade secrets instead of patents, especially for software and algorithms. This is a result of many factors, including, but not limited to, the rapid change in technology making the years-long process to obtain a patent unsuited to protect software and algorithms that may lose their cutting edge quicker and the need to publicly disclose the “secret sauce” to obtain a patent on software that has a more stable, long-term value to a business.

Generally speaking, a trade secret protects: i) information, ii) that has an economic value from not being generally known by others, and iii) is secret. Factors considered by courts in determining if something is a trade secret include: i) the value of the information to a business and its competitors; ii) the extent of knowledge of the information to those within a business and the actions taken to guard and limit its dissemination; iii) the amount of money spent in developing the information; and iv) the difficulty for others to obtain or create the information. Importantly, a trade secret is entitled to protection for as long as it remains secret.

Based on the above, the power of trade secrets for software and related algorithms is apparent. Businesses can control and monetize their software as long as it remains secret without ever letting their competitors in on the goods. In addition, early versions of the software, before it realizes a stable value, can be protected and used to build market value and consumer stickiness immediately.

The protection of trade secrets requires specialized strategies to maintain their secrecy. Initially, there must be a robust trade secret protection scheme designed to limit the unauthorized disclosure of trade secrets by disgruntled employees. This includes the use of restrictive covenants preventing the disclosure of specific tools and system information through employment contracts, the use of additional Non-Disclosure Agreements for specific projects, and designating algorithms and data sets as “confidential.” The underlying software should be restricted by password protection. Access should be granted only to those employees necessary to modify the underlying system. For extra security, modification access should be restricted to dedicated terminals not connected to the internet and a restricted internal network, if any, to the extent this is practicable. No external drives should be allowed to access the modification terminal. Businesses should also ensure the software cannot be copied and consider barring cell phones or other recording devices from access points to prevent screenshots of trade secret information.

Additionally, businesses must ensure that their customers do not have access to the source code and, preferably, only to the software output. The use of well-drafted license agreements and use agreements with non-disclosure language is paramount. These protections may seem draconian, but trade secrets only have value if they are secret. If software or an algorithm is publicly disclosed, the value is lost.

The give and take of trade secret protection for software is playing out in real-time in the Headlands Technology – Richard Ho dispute. In this dispute, Headlands accuses Ho of stealing its quantum source code and software models to set up a competing business while simultaneously providing the source code to a competitor. Headlands claims the stolen information was trade secrets worth tens of millions of dollars in profit per month. Ho disputes that Headlands is asserting information protected as a trade secret. Putting aside the merits of the respective claims and assuming Headlands’ source code and models are trade secrets, one can see the power of not publicly disclosing information in a patent application that generates eight figures of profit a month. The incentive to have robust internal procedures to maintain the secrecy of such information is also immense. Trade secrets for software are a delicate balancing act that can generate enormous profit for a business, but they can quickly evaporate under the wrong circumstances.

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