Intellectual Property: The Trade Secret Secret

In the last two columns, we have discussed four basic methods for protecting intellectual property rights in software products: trade secret, patent, copyright, and trademark.

While each of these legal mechanisms has distinct advantages and disadvantages, which method to use is dictated by the nature of the product and the channels through which it is marketed. Software companies can often use different types of protection in sequence, or sometimes concurrently, to protect different aspects of software.

The first step in developing a software protection strategy is to determine precisely what to protect; there are many different aspects of a product, each of which may be worthy of protection. The goodwill and marketplace recognition of product trademarks and packaging may also add value and merit protection.

This issue's column will examine trade secret protection. Subsequent issues will address patents, copyrights, trademarks, and combinations.

Trade secret protection entails, as one would expect, keeping technology secret; the technology is protected in the sense that, if the competition doesn't know about the technology, it can't copy it. The technology is protected as long as it is not known to the relevant public. This means a trade secret is of potentially infinite duration.

However, improvident disclosure can quickly destroy a trade secret. As a practical matter, trade secret rights are enforceable only under an express (e.g. a licensee) or implied (e.g. certain employees) contractual obligation to maintain the software in confidence, restrict its use, or have obtained access to the trade secret improperly (e.g. industrial espionage).

Trade secret rights offer no protection whatsoever against another company that independently develops the technology, and possibly obtains exclusive proprietary rights to it. Nor does it protect against someone copying or "reverse engineering" (analyzing and extracting information from) the technology - if it is obtained legally - and the copier is not under any express or implied contractual obligation not to use it.

To maintain trade secret status, a company must restrict access to its software and impose an obligation of confidentiality on anyone who has access to the trade secret. For aspects of software marketed to others, a licensing program is typically used to enforce the trade secret. Basically, the customer is permitted to use the trade secret under a license agreement which expressly obligates the user not to disclose it and to take various precautions to ensure the trade secret status of the software is not jeopardized.

Of course, certain aspects of a marketable software product are totally unsuited for trade-secret protection. Any information or technology that must be disclosed to the public in order to market the product - or which is part of a product that is sold to the public and can be reverse-engineered - simply cannot be maintained as a trade secret.

A trade-secret protection scheme requires end-users to sign a license agreement binding the user to confidentiality. This is particularly true in an international context. Obviously, this makes trade secret protection impractical for mass-marketed software.

Some companies have attempted to avoid this problem through the use of shrink-wrap licenses. These printed statements, which purport to be license agreements, are contained within packaging for software or displayed on packaging under the shrink-wrap. A legend is placed on the package that purports to make opening it an acceptance of the terms of the license document. Such shrink-wrap licenses have not been effective to impose any obligation of confidentiality on the purchaser. The shrink-wrap license can, however, effectively limit warranties if sufficiently conspicuous.

Also, in many instances, even where the relevant particulars of a software development can effectively be kept secret, merely keeping the development secret does not adequately protect a company's investment in developing the software. The competition may be so intense that even with reverse engineering precluded, it is a virtual certainty the software will be independently developed by others within a short time.

This is particularly true when there is a great deal of personnel movement between competitors. In other cases, it is simply not commercially feasible to keep certain aspects of the software secret from users. Customers may require access to the software for archive or back-up copies, updating, maintenance, debugging, and so forth. Contractual limitations on software use can, however, be imposed, even in those circumstances.

Michael A. Lechter, a member of the law firm of Meyer, Hendricks, Victor, Osborn & Maledon, P.A. in Phoenix, Ariz., has specialized in intellectual property law for more than 20 years. E-mail him at

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