Trade Secrets Clause

TL;DR: A trade secrets clause contractually protects information that derives independent economic value from secrecy and is subject to reasonable measures to keep it confidential. It overlaps with general confidentiality provisions but operates under a distinct statutory framework (the federal Defend Trade Secrets Act and the state-adopted Uniform Trade Secrets Act) that provides injunctive relief, exemplary damages up to two times actual loss, attorneys' fees, and in rare cases ex parte civil seizure under 18 U.S.C. Section 1836(b)(2). Drafting failures (missing whistleblower notice, weak reasonable-measures recital, ambiguous identification) cost prevailing plaintiffs their fee shifting and double damages.

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What Is a Trade Secrets Clause?

A trade secrets clause is a contractual provision that identifies information as a trade secret, allocates obligations to maintain its secrecy, and preserves the disclosing party's statutory remedies under federal and state trade secret law. Unlike a generic confidentiality clause, which can survive on contract law alone, a trade secrets clause is engineered to satisfy the statutory definition so that the disclosing party retains access to the enhanced remedies in the Defend Trade Secrets Act of 2016 (DTSA, 18 U.S.C. Section 1836) and the Uniform Trade Secrets Act (UTSA), adopted in 48 states (New York and Massachusetts use common law and their own statutes - New York General Business Law Section 380 and the Massachusetts statute at G.L. c. 93 Section 42).

The statutory definition is consistent across DTSA and UTSA and has three elements. First, the information must not be generally known or readily ascertainable through proper means. Second, it must derive independent economic value, actual or potential, from its secrecy. Third, the owner must have taken reasonable measures to keep the information secret. The third element is where most plaintiffs lose. Courts treat the contract as one of the reasonable measures, so a properly drafted trade secrets clause is both a protective covenant and trial evidence.

Trade secrets sit alongside patents, copyrights, and trademarks as one of the four pillars of intellectual property, with a different economic profile. Patent protection requires public disclosure for a 20-year monopoly. Trade secret protection lasts as long as the information remains secret, can cover subject matter that is not patentable (customer lists, negative know-how, internal processes), and avoids the cost of prosecution. The trade-off is that trade secret rights evaporate the moment the information becomes public.

In contracts, the trade secrets clause typically appears within or alongside a confidentiality section or as a standalone provision in employment, contractor, joint venture, M&A, supply, and licensing agreements. It works in tandem with operational controls (access restrictions, marking, training, exit interviews, IT segmentation) that constitute the "reasonable measures" on the operational side.

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Why It Matters

• Statutory damages are uniquely powerful: DTSA and UTSA both authorize recovery of actual loss, the defendant's unjust enrichment, and a reasonable royalty in lieu of those measures. For willful and malicious misappropriation, courts can award exemplary damages up to two times the compensatory award and attorneys' fees to the prevailing party (18 U.S.C. Section 1836(b)(3)(C)-(D)). Few commercial causes of action carry this combination.
• Federal court jurisdiction: DTSA created original federal jurisdiction for trade secret claims involving products or services used in interstate or foreign commerce, ending the prior need to bolt a federal hook (RICO, Computer Fraud and Abuse Act) onto a state-law misappropriation claim.
• Ex parte civil seizure: In extraordinary circumstances, DTSA permits a court to order ex parte seizure of property necessary to prevent the propagation or dissemination of a trade secret (18 U.S.C. Section 1836(b)(2)). The remedy is rare but powerful when an employee leaves with a hard drive over a weekend.
• Whistleblower notice forfeits remedies if missing: DTSA Section 1833(b) provides immunity for individuals who disclose a trade secret in confidence to a government official or attorney to report a suspected violation of law. Employers must give notice of this immunity in any agreement with an employee, contractor, or consultant entered or updated after May 11, 2016. Failure to include the notice forfeits exemplary damages and attorneys' fees against that individual under DTSA. The remedy loss is automatic and uncurable.
• Reasonable measures are factual and contract-driven: Courts examine whether the plaintiff actually treated the information as a secret. The Seventh Circuit's analysis in Rockwell Graphic Systems v. DEV Industries, 925 F.2d 174 (7th Cir. 1991) established that reasonable measures are a question of fact judged against the nature of the secret and the cost of protection. The clause supplies the contractual half of that record.
• Non-compete narrowing has elevated trade secret reliance: The FTC's 2024 non-compete rule was vacated in Ryan v. FTC (N.D. Tex.), but state-level bans (California, Minnesota, North Dakota, Oklahoma) and limits (Massachusetts, Washington, Illinois) have shifted employer protection toward trade secret enforcement and tailored non-solicitation. The trade secrets clause is now the primary line of defense in employment portability disputes.

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Key Elements of a Well-Drafted Trade Secrets Clause

1. Definition tracking the statute: Define "Trade Secrets" using language mirroring the DTSA and UTSA elements - information not generally known or readily ascertainable, deriving independent economic value from secrecy, subject to reasonable measures to maintain secrecy. Statutory language preserves the statutory cause of action and avoids the argument that the contract created a lesser, contract-only category.
2. Identification mechanism: Specify how trade secrets are identified - by marking, by category, by reference to schedules, or by post-disclosure notification. Avoid requiring written marking for every disclosure if the realistic operational practice is oral or visual (lab walkthroughs, code reviews, customer site visits). Courts have rejected misappropriation claims when the plaintiff failed to follow its own marking protocol.
3. Reasonable measures recital: Include a representation by the disclosing party describing the measures it employs - access controls, NDAs with employees and contractors, training, IT segmentation, document marking, exit procedures, visitor logs, physical security. This recital becomes trial evidence and signals the expected standard of care.
4. Restrictions on use, disclosure, and reverse engineering: Prohibit use other than for the permitted purpose, disclosure outside a defined need-to-know group, and reverse engineering of products embodying trade secrets. Reverse engineering is a defense to misappropriation if the product was lawfully acquired, so the contract must explicitly remove that defense.
5. Whistleblower immunity notice (DTSA Section 1833(b)): Include the verbatim or substantially equivalent notice of immunity for confidential disclosure to government officials or attorneys to report suspected violations of law, and for use in retaliation lawsuits filed under seal. Cross-reference an employee handbook policy if used in employment agreements; confirm the notice covers contractors and consultants.
6. Return or destruction obligation: Require return or certified destruction at termination, expiration, or on demand. Address derivative materials (notes, summaries, AI prompts and outputs trained or generated from the trade secrets) and electronically stored information across personal devices and cloud accounts.
7. Survival and duration: Trade secret obligations should survive termination for as long as the information qualifies as a trade secret. Avoid a fixed term (such as five years), even when confidential information has a shorter shelf life. A fixed-term clause has been used by defendants to argue the parties agreed the information would lose protection at term end, defeating both the contractual and statutory claim.
8. Remedies acknowledgment and equitable relief: Acknowledge monetary damages may be inadequate and preserve the right to injunctive relief without posting bond beyond a nominal amount. Preserve all remedies at law and equity, including statutory remedies under DTSA and UTSA, and reserve the right to ex parte seizure under 18 U.S.C. Section 1836(b)(2) in appropriate cases.

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Market Position & Benchmarks

Where Does Your Clause Fall?

• Disclosing-Party-Favorable: Broad definition tracking statutory language plus a non-exhaustive list of categories. No marking requirement. Indefinite survival. Express acknowledgment of irreparable harm and waiver of bond. Restrictions on reverse engineering, derivative use, and AI training. Flow-down obligations to all employees, contractors, and affiliates of the receiving party. Audit rights and breach notification within 24 to 48 hours.
• Market Standard: Statutory definition with a reasonable identification mechanism (marking when feasible, post-disclosure notification when not). Survival for as long as the information qualifies as a trade secret. Reasonable equitable relief carve-out without bond waiver. Standard return-or-destroy obligation with certification. Mutual whistleblower notice. Reverse engineering restricted only as to materials covered by the contract.
• Receiving-Party-Favorable: Narrow definition limited to information marked "Trade Secret" in writing at or before disclosure. Carve-outs for information independently developed, lawfully received from a third party, or in the public domain. Time-limited survival (three to five years). Standard of care limited to the receiving party's standard for its own confidential information of like importance. No restriction on reverse engineering. Right to retain copies for legal hold or regulatory compliance.

Market Data

• Federal trade secret filings under DTSA grew from approximately 860 in 2017 to over 1,400 in 2023, with median time to disposition around 12 months (Lex Machina Trade Secret Litigation Report, 2024).
• Across reported DTSA and UTSA verdicts from 2018 to 2024, the median compensatory award was approximately $7.5 million and exemplary damages were awarded in roughly 30 percent of plaintiff wins (Stout Trade Secret Litigation Survey, 2024).
• Whistleblower notice compliance audits at Fortune 500 employers showed approximately 35 percent of in-force contractor and consulting agreements lacked DTSA Section 1833(b) notice as of 2023, exposing employers to forfeiture of exemplary damages and fee shifting (Seyfarth Trade Secrets Year in Review, 2024).
• The Waymo v. Uber autonomous vehicle litigation settled in February 2018 for approximately $245 million in Uber equity, the largest publicly disclosed trade secret settlement of the decade, after the case reached a jury trial in the Northern District of California.
• Approximately 60 percent of trade secret cases in federal court involve a former employee defendant, and approximately 40 percent involve a current or former business partner (Lex Machina, 2024).
• Reasonable royalty awards under DTSA and UTSA averaged 8 to 12 percent of accused product revenue in benchmarked verdicts from 2019 to 2023, with the rate driven by the hypothetical license analysis under the Georgia-Pacific factors (PwC Trade Secret Damages Survey, 2023).

Sample Language by Position

Disclosing-Party-Favorable: "'Trade Secrets' means all information of Discloser, in any form and whether or not marked, that (i) is not generally known or readily ascertainable by proper means, (ii) derives independent economic value from such secrecy, and (iii) is the subject of reasonable measures by Discloser to maintain its secrecy, including source code, algorithms, training data, model weights, processes, formulas, customer and supplier lists and pricing, and negative know-how. Recipient shall not use, disclose, copy, reverse engineer, or use to train any machine learning model any Trade Secrets, except as required to perform under this Agreement and only by personnel with a need to know who are bound by written confidentiality obligations. Recipient consents to injunctive relief, including ex parte relief under 18 U.S.C. Section 1836(b)(2) in appropriate cases, without the posting of bond beyond a nominal amount. Obligations shall survive for so long as the information qualifies as a trade secret under applicable law."

Market Standard: "Each Party (as 'Discloser') may disclose information that constitutes a trade secret under the Defend Trade Secrets Act, 18 U.S.C. Section 1836 et seq., and applicable state law ('Trade Secrets'). Recipient shall use Trade Secrets solely for the Permitted Purpose, shall limit access to personnel with a need to know who are bound by written confidentiality obligations, and shall protect Trade Secrets using at least the same degree of care it uses for its own trade secrets of like importance, but no less than a reasonable degree of care. Upon termination, Recipient shall return or destroy all materials embodying Trade Secrets and certify in writing. Obligations shall continue for so long as the information qualifies as a trade secret."

Receiving-Party-Favorable: "'Trade Secrets' means information of Discloser that (a) is identified in writing as a 'Trade Secret' at or within thirty (30) days after disclosure, (b) qualifies as a trade secret under applicable law, and (c) is not subject to any of the standard exceptions set forth in Section X (independent development, public domain, lawful third-party receipt, or required disclosure). Recipient's obligations with respect to Trade Secrets shall continue for five (5) years after disclosure or for so long as the information qualifies as a trade secret under applicable law, whichever is shorter. Nothing in this Agreement shall restrict Recipient from independently developing similar information or from reverse engineering products lawfully acquired in the marketplace."

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Example Clause Language

The following examples show trade secrets provisions tailored to common contracting contexts. The DTSA Section 1833(b) whistleblower notice is set out separately because it is required content rather than negotiable language.

Employment Agreement (with DTSA Section 1833(b) notice): "Employee acknowledges access to Trade Secrets of Company, including source code, algorithms, machine learning models and training data, customer and prospect lists, pricing, business plans, and manufacturing know-how. Employee shall hold all Trade Secrets in strict confidence, shall use them solely for the benefit of Company in authorized duties, and shall not disclose or use them for any other person or entity, during or after employment, for so long as the information qualifies as a trade secret. Notice of Immunity Under 18 U.S.C. Section 1833(b): An individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that (a) is made in confidence to a federal, state, or local government official or to an attorney, and (b) is made solely for the purpose of reporting or investigating a suspected violation of law; or is made in a complaint or other document filed in a lawsuit, if such filing is made under seal. An individual who files a lawsuit for retaliation may disclose the trade secret to the individual's attorney and use it in the proceeding, if any document containing the trade secret is filed under seal and is not otherwise disclosed except pursuant to court order."

Vendor and Supplier Agreement: "Supplier acknowledges that information disclosed by Customer in connection with the Services, including specifications, source code, manufacturing processes, formulas, and customer data, constitutes Trade Secrets of Customer. Supplier shall (i) limit access to personnel with a need to know who are bound by written confidentiality obligations, (ii) not reverse engineer, decompile, or disassemble any Trade Secret materials, (iii) not use any Trade Secret to train, fine-tune, or otherwise improve any artificial intelligence model, (iv) maintain reasonable physical, technical, and administrative safeguards, and (v) notify Customer in writing within forty-eight (48) hours of any actual or suspected unauthorized access, use, or disclosure. Obligations shall survive termination for so long as the information qualifies as a trade secret."

Joint Venture Agreement: "Each Party may disclose Trade Secrets in furtherance of the JV Purpose. Trade Secrets shall be marked where reasonably practicable, and oral or visual disclosures shall be identified within thirty (30) days in a written summary. Each Party shall use the other Party's Trade Secrets solely for the JV Purpose, shall not commingle them with its own activities outside the JV Purpose, and shall implement the joint information security plan in Schedule X. The Parties acknowledge that the obligations in this Section, together with the controls in Schedule X, are intended to constitute reasonable measures under the Defend Trade Secrets Act and applicable state law."

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Common Contract Types

• Employment agreements: The trade secrets clause is the foundation of post-employment IP protection, particularly where non-competes are restricted. The DTSA Section 1833(b) whistleblower notice is required content for employment agreements entered or updated after May 11, 2016.
• Independent contractor and consulting agreements: Contractors are within the scope of the DTSA whistleblower notice requirement. The clause should also address ownership of derivative work product (notes, prototypes, AI prompts and outputs) generated using the trade secrets.
• Mutual or unilateral NDAs: Standalone NDAs frequently conflate confidential information and trade secrets. A well-drafted NDA distinguishes the two - confidential information has a fixed survival term and broader carve-outs; trade secrets continue indefinitely and track the statutory definition.
• M&A purchase agreements: Seller representations about trade secret protection (operational measures, in-force NDAs, employee assignment agreements) are diligenced extensively. Disclosure schedules identify material trade secrets and known threats to secrecy.
• Joint venture and collaboration agreements: Co-development arrangements require careful identification of contributed trade secrets, restrictions on commingling, and post-JV use. Joint trade secret ownership is avoided in favor of background and foreground IP definitions parallel to the IP clause.
• Manufacturing and supply agreements: Contract manufacturers receive process know-how, tooling specifications, and bills of materials that frequently qualify as trade secrets. Restrict use beyond the customer's purposes and prohibit reverse engineering of customer-supplied designs.
• License and SaaS agreements: Source code, algorithms, model weights, and configuration know-how are commonly trade secrets of the licensor. The clause works alongside the license grant to define what the licensee can do with trade-secret-bearing materials.
• Beta and evaluation agreements: Pre-release software and hardware exposures are high-risk events. Short-form trade secret protection paired with a specific use restriction (evaluation only, no benchmarking, no reverse engineering) is standard.

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Negotiation Playbook

Key Drafting Notes

• Always include the DTSA Section 1833(b) notice in any agreement with an individual: The notice is required for employees, contractors, and consultants. Failure forfeits exemplary damages and attorneys' fees under DTSA against that individual. Incorporation by reference to a posted policy is permitted, but verbatim text in the contract is safer.
• Build a reasonable measures record inside the contract: Plaintiffs win and lose on the reasonable measures element, and the contract is direct evidence. Recite the operational controls (access restrictions, training, IT segmentation, marking, exit procedures) and require the receiving party to maintain comparable controls.
• Address AI training and inference explicitly: The fastest growing category of trade secret risk is the use of confidential materials in prompts to third-party LLMs and the training of internal models on protected data. Restrict use of trade secrets in prompts, training data, fine-tuning, embeddings, and retrieval-augmented generation systems unless contractually permitted.
• Avoid fixed-term survival for trade secrets: A three- or five-year survival term is appropriate for general confidential information but risks defeating both the contractual and statutory trade secret claim. Bifurcate confidential information and trade secrets with separate survival terms.
• Plan for ex parte seizure scenarios: The 18 U.S.C. Section 1836(b)(2) seizure remedy is rare but powerful. The contract should consent to expedited and ex parte relief and waive procedural objections that would defeat seizure where the statutory standard is met.
• Coordinate with non-compete and non-solicitation provisions: Where a non-compete is restricted or unavailable (California, Minnesota, North Dakota, Oklahoma, parts of Massachusetts, Washington, Illinois), the trade secrets clause and a tailored non-solicitation must do the work. Treat inevitable disclosure cautiously - accepted in Illinois and Pennsylvania, rejected in California under Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443 (2002).

Common Pitfalls

• Missing DTSA whistleblower notice: The most common and most expensive drafting failure. Forfeiture of exemplary damages (up to two times compensatory) and attorneys' fees is automatic and uncurable. Audit all employee, contractor, and consulting agreements entered or updated after May 11, 2016.
• Marking requirement that operational reality cannot satisfy: A clause requiring written marking of every disclosure is unenforceable if disclosures occur orally during code reviews, walkthroughs of manufacturing lines, or via shared drives without per-file marking. Defendants exploit the gap to argue the plaintiff did not follow its own protocol.
• Conflating trade secrets with confidential information: Treating both categories identically (same survival, same carve-outs, same remedies) sacrifices the statutory remedies that distinguish trade secrets. Define both categories separately and apply different terms.
• Weak reasonable measures recital: A clause that says only "the parties shall keep information confidential" without describing operational controls leaves the plaintiff with no contractual evidence to satisfy the reasonable measures element.
• Improper reliance on inevitable disclosure: PepsiCo v. Redmond, 54 F.3d 1262 (7th Cir. 1995) permits a court to enjoin a former employee's new employment based on inevitable use of trade secrets, but California and several other jurisdictions reject the doctrine. Drafting that depends on inevitable disclosure for protection in California will fail.
• No restrictions on reverse engineering: Reverse engineering of lawfully acquired products is a defense to misappropriation under both UTSA and DTSA. The contract must explicitly restrict reverse engineering of materials embodying trade secrets to remove the defense.

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Jurisdiction Notes

• U.S.: Trade secret protection is governed by the federal Defend Trade Secrets Act, 18 U.S.C. Section 1836 et seq. (2016), which created a federal civil cause of action with original federal jurisdiction. The Uniform Trade Secrets Act has been adopted in 48 states; New York applies common law misappropriation (and General Business Law Section 380 for related deceptive practices), and Massachusetts has its own statute at G.L. c. 93 Section 42. Reasonable measures is a fact question; leading authority includes Rockwell Graphic Systems v. DEV Industries, 925 F.2d 174 (7th Cir. 1991) and E.I. duPont deNemours v. Christopher, 431 F.2d 1012 (5th Cir. 1970), which held that aerial photography of a plant under construction can be improper means. The inevitable disclosure doctrine from PepsiCo v. Redmond, 54 F.3d 1262 (7th Cir. 1995) is accepted in some jurisdictions (Illinois, Pennsylvania) and rejected in others (California rejects it under Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443 (2002)). Recent significant litigation includes Waymo v. Uber (autonomous vehicles, settled 2018 for approximately $245 million in Uber equity), ZeniMax v. Oculus ($500 million jury verdict reduced post-trial), and Motorola Solutions v. Hytera (radio technology, multibillion-dollar verdict).
• U.K.: Trade secret protection in England and Wales sits at the intersection of equitable confidence (the Coco v. A.N. Clark (Engineers) Ltd [1969] RPC 41 framework) and the Trade Secrets (Enforcement, etc.) Regulations 2018, which implemented EU Directive 2016/943 and continue in force as retained EU law. Remedies include injunctions, damages, account of profits, and orders for delivery up. There is no direct equivalent of DTSA ex parte seizure, but search orders (formerly Anton Piller orders) provide a comparable extraordinary remedy.
• Other: The EU Trade Secrets Directive 2016/943 establishes a harmonized minimum standard across member states with a definition substantially identical to UTSA and DTSA. Germany enacted the Geschaftsgeheimnisgesetz (GeschGehG) in 2019; France implemented through the Code de commerce. Japan protects trade secrets under the Unfair Competition Prevention Act, and China under the Anti-Unfair Competition Law (amended in 2019 to strengthen damages). Cross-border matters frequently require parallel proceedings, and choice-of-law and choice-of-forum provisions should anticipate the posture.

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Related Clauses

• Confidentiality Clause - Confidentiality clauses cover a broader category of information than trade secrets, typically with a fixed survival term and contract-only remedies. The trade secrets clause should be drafted as a distinct sub-section to preserve statutory remedies for the narrower category.
• Intellectual Property Clause - Trade secrets sit alongside patents, copyrights, and trademarks in the IP allocation framework. The IP clause assigns ownership of created IP, while the trade secrets clause governs protection of the secrecy that gives unpatented IP its commercial value.
• Work for Hire - Work-for-hire and assignment provisions vest copyright and patent rights in the commissioning party, but trade secret rights depend on continued secrecy rather than statutory authorship. They work in tandem in employment and contractor agreements.
• Non-Compete Clause - Non-competes and trade secret protection are alternative and complementary post-employment safeguards. As non-compete enforceability has narrowed (FTC rule vacated in Ryan v. FTC, plus state-level bans and limits), employers have shifted weight to trade secret enforcement and tailored non-solicitation.
• Non-Solicitation Clause - Customer and employee non-solicitation provisions are often the principal post-employment restriction in jurisdictions hostile to non-competes, and they depend on customer and employee identity information that is frequently a protected trade secret.
• Restrictive Covenant - Restrictive covenants (non-compete, non-solicitation, non-disclosure, non-circumvention) operate as overlapping protections. Trade secret protection is the statutory baseline that survives even when contractual covenants are unenforceable or expired.
• Non-Circumvention Clause - Non-circumvention provisions protect business relationships and deal opportunities, often relying on counterparty identities that qualify as trade secrets when properly protected.

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This glossary entry is provided for informational and educational purposes only. It does not constitute legal advice, and no attorney-client relationship is formed by reading this content. Consult qualified legal counsel for advice on specific contract matters.