Trade secret vs confidential information vs proprietary data

What makes information a trade secret?#

Information is a trade secret when it derives economic value from not being generally known, or readily ascertainable by proper means, and its owner takes reasonable measures to keep it secret. In the US, that test comes from the federal Defend Trade Secrets Act of 2016, codified at 18 U.S.C. 1839(3), and from state laws, most of which follow the Uniform Trade Secrets Act.

The test is practical, not formal. There is no registration and no fixed term; protection lasts as long as the secrecy and the protective measures do. Typical candidates in operating companies include pricing and quoting logic, process parameters, supplier terms, and customer lists combined with buying history.

Reasonable measures are the part a company controls. Federal prosecutors' guidance describes them as reasonable under the circumstances rather than absolute, with examples such as telling employees what is secret, limiting access on a need-to-know basis, requiring confidentiality agreements and locking documents away. Courts look at what the company actually did, not only at what its policies said.

One detail often missed: under the Defend Trade Secrets Act, an employer that leaves the whistleblower immunity notice out of employee, contractor or consultant agreements governing confidential information may lose exemplary damages and attorney fees against that person. Check the templates before relying on them in a rights review.

What counts as confidential information?#

Confidential information is information a contract requires the receiving party to protect, whether or not it would qualify as a trade secret. Nondisclosure agreements, employment agreements, customer contracts and vendor terms each define it, often broadly.

Definitions usually come with standard exclusions: information already public, already known to the recipient, independently developed or received from a third party without restriction. The protection runs only against the people who signed; a stranger who obtains the information is not bound by your NDA.

Confidential information also flows in. Your records likely hold customers' and suppliers' confidential information under contracts that limit how you may use it, and those limits still apply when you license.

What does proprietary data mean?#

Proprietary data means data a company owns or controls and treats as its own; it is a business description, not a legal category. A proprietary dataset can contain trade secrets, confidential information, copyrighted text and plain facts at the same time.

The label is useful for strategy, because it separates your records from public or purchased data. It does little in a dispute. If records are misused, the claims available depend on which legal categories the content actually falls into and which contracts apply.

The three labels compared#

The three labels differ in where protection comes from, how it is lost and what licensing does to it. The table summarizes the general position; outcomes depend on the facts and the governing law.

Which operational records fall under which label?#

Operational records rarely fall under one label as a whole, because the same system often holds all three. The sorting has to happen at the level of record families and fields, not systems.

For a field the list does not settle, ask the questions in the table in order and stop where the answer decides the label. Run the test field by field in systems that mix customer, supplier and internal content, such as an ERP or a shared drive.

• 1Quoting rules, margin targets and price books in the ERP: often trade secret candidates; exclude or generalize them before licensing.
• 2Process parameters, recipes and machine settings in the MES: frequently trade secrets and usually excluded.
• 3Customer drawings, specifications and contract terms: the customer's confidential information; licensing depends on its consent.
• 4Nonconformance reports, corrective actions and maintenance logs: proprietary records that may embed secret values; mask the values and license the reasoning.
• 5Support tickets and internal discussions: proprietary, sometimes containing customer confidential details that preparation removes.

How licensing can put trade secrets at risk#

Licensing puts trade secrets at risk when the license or the agreements around it loosen secrecy. The common gaps are terms that let information slip out from under the confidentiality obligations without anyone noticing.

Watch for residuals clauses that let the recipient use what its people remember, permitted-use definitions broad enough to cover redistribution, missing deletion obligations, and no limits on model outputs that could reproduce source text. Each one weakens the argument that you took reasonable measures.

The safest approach is usually to keep the most sensitive secrets out of the package entirely. A buyer training a model on how quality problems get diagnosed rarely needs the exact parameters that make your process better than a competitor's.

Illustrative: a coatings manufacturer keeps its formulas out#

Illustrative: a fictional industrial coatings manufacturer runs SAP Business One for orders, a QMS for nonconformance reports and corrective actions, and a lab system that stores batch formulas and cure settings. It wants to license its quality history.

Counsel classifies the formulas and cure settings as trade secrets and excludes them. Customer specifications attached to orders are customer confidential information and are excluded too. The nonconformance narratives, root-cause discussions and corrective actions are licensed with formula references and parameter values masked, under a license that bars redistribution and requires deletion at term end.

The package keeps what makes the records useful, which is how engineers reasoned through defects, while the information that gives the company its edge never leaves the building.

How SourceX handles secrets and confidential material#

SourceX handles trade secrets and confidential material in two steps of the SourceX five-step transaction. In Rights, the review flags trade secret candidates and confidential information that belongs to customers or suppliers; in Preparation, those fields are removed or masked before the supplier approves the package.

Permitted use and licensing rights for each package are written into the SourceX Evidence Packet, so the exclusions and the confidentiality terms sit in one document that the supplier, its counsel and the buyer all read.