United States: Don't Spill Your Trade Secrets: Protecting Your Competitive Advantage In The Food And Beverage Industry (Part 1 Of 2)

In the race to get new products to market, food and beverage businesses sometimes neglect their critically important intangible assets — their valuable trade secrets. Through advance planning and diligence, businesses in that industry can avoid losing the competitive advantage afforded to them by this proprietary information.

Famous Food & Beverage Trade Secrets. Some food and beverage companies have been very successful in protecting their trade secrets and capitalizing on them. One of the most valuable trade secrets in history is the formula for Coca-Cola. The drink was invented in 1886 and the recipe was passed down by word of mouth until 1919, when it was first written down. At that time, a group of investors took out a loan to purchase the company and the formula was provided as collateral. The written formula was locked in a bank until it was moved into a purpose-built vault, with a palm scanner, a numerical code pad and enormous steel door. According to Coca-Cola, only two senior executives, bound by non-disclosure agreements (NDAs), know the formula at any given time. Neither these executives' names nor positions have ever been released. Over the years, some have claimed to have cracked the original formula. However, none have been confirmed as the official formula and Coca-Cola's formula remains a well-guarded and valued trade secret.

Another example is Kentucky Fried Chicken's (KFC's) original recipe, developed by its founder Colonel Harlan Sanders. KFC's original recipe is locked in a 770-pound high-tech safe, within a vault with two feet thick concrete walls. Additionally, portions of the recipe are locked away in safe deposit boxes at undisclosed locations as backup. Further, KFC outsources production of the seasoning to two different suppliers, subject to NDAs, with each supplier only having access to and producing half of the recipe. The two halves are then combined together by KFC to create the recipe. Its contents are so well guarded that only a few undisclosed employees actually know the ingredients. In other words, the recipe is not disclosed in its entirety to anyone not employed by KFC. KFC acknowledges that it periodically hears from people who claim they have a copy of the original recipe. Most famously, Sanders' nephew, Joe Ledington, claimed he was in possession of an old scrapbook that had belonged to Ledington's aunt Claudia, the Colonel's second wife. Ledington initially claimed the scrapbook contained the recipe. Later, when he was contacted to confirm the story, Ledington said he couldn't say "for sure" whether this was the recipe. However, the secret was out, and multiple outlets, who had cooked the recipe, declared it to be the real thing. Thus, the original recipe may have lost its status as a trade secret.

McDonald's famous special sauce is an example of a recipe that no longer enjoys trade secret status. Originally, McDonald's protected its special sauce recipe so vigorously that McDonald's actually ended up losing track of the original recipe. This forced McDonald's to change the recipe for the special sauce for a few years. McDonald's eventually recovered the recipe from an outside company that had produced the special sauce for McDonald's years earlier. However, when McDonald's posted a tutorial video on YouTube showing consumers how McDonald's makes its hamburgers (including how to make the special sauce), the special sauce lost its trade secret protection. Once a trade secret is lost, you cannot get it back. It is akin to the notion of trying to "get a cat back in the bag" or "unringing a bell".

Trade Secret: Yes or No? Businesses in the food and beverage industry should be vigilant in protecting their trade secrets. The first step in that process is understanding what a trade secret is. Although trade secret law varies across jurisdictions, generally a trade secret is (1) information (2) that derives economic value from being kept secret and (3) is the subject of reasonable efforts to maintains its secrecy. In other words, it is secret information that gives a business a competitive advantage, which competitors would love to get their hands on.

If the public has access to the information, it is not a trade secret. Examples of such non-trade secret information include: specially packaging a beverage in a way that customers will always recognize that a particular business is the product's source; or ingredients identified on packaging.

Also, information that is readily ascertainable is not trade secret (e.g., your product's ingredients are not a trade secret if your competitor can take your product to a lab and easily determine the ingredients). On the other hand, when information is theoretically, but not readily ascertainable, it may potentially constitute a trade secret. For example, if a formula could be discovered in theory, but it would take years and be very expensive, or require improper means (such as industrial espionage or inducing breach of a NDA), that formula still may be protectible as a trade secret.

Just because some portion of the information is readily ascertainable, other related information may be protectible as a trade secret. For example, while a formula may be composed of ingredients that are readily ascertainable, the ingredients proportions and the manufacturing process could still be trade secrets.

Although there are no categories of information that are automatically considered trade secrets, there are categories that could potentially be trade secrets (if their secrecy gives the holder a competitive advantage and the holder protects their secrecy). For the Food and Beverage Industry the following categories are particularly important areas in potentially gaining a competitive advantage:

  1. Product formulas/recipes to the extent that the information is not readily ascertainable. See the above discussion of famous trade secret recipes in the food and beverage industry.
  2. Manufacturing/processing methods and techniques. Some hypothetical examples include: the process to make a food product have a particular texture; the method to reflect photographic images on a cake; the technique to produce a new color pigment that is digestible; or the process for making a chemically produced flavor that simulates a natural flavor or lasts longer; or a method to de-bone fish more quickly and accurately.
  3. Technology used in a business even it does not relate to the preparation of the food or beverage (e.g., hypothetical examples include: technology for processing credit cards; technology underlying a food delivery app). This category is especially important given that the Food and Beverage industry (like other industries) has been become increasingly driven by technology. Even if an invention is not subject to patent protection, it may be protectible as a trade secret and the company may be benefit by protecting it as a trade secret.
  4. Advertising/marketing/business plans and strategies and research. Strategies and plans may not be trade secrets once publicly implemented (e.g., a marketing campaign becomes public upon implementation). However, related behind-the-scenes plans, strategies, and research can be trade secrets (e.g., although a competitor may steal your marketing campaign once it is implemented, the "head start" you obtain by keeping it under wraps until it is launched may give you a competitive advantage).
  5. Concepts and designs (e.g., a future design for your packaging, store or restaurant or comparable great ideas such as serving art-inspired desserts in a café in an art museum). While concepts and designs lose trade secret status once made public, they can enjoy trade secret status before then – giving their holders a "head start" competitive advantage in the marketplace.
  6. Vendors/Suppliers and Customer Lists. Many businesses compile information about their important vendors or suppliers and customers. This data may take many years and a significant amount of effort and expense to create.
  7. Pricing/cost/profit information and payment terms (financial data). Businesses often jealously guard their financial data for a variety of reasons. For example, if a competitor knew what price you were commanding from an important customer, the competitor might use knowledge of your price to cut its own price to lure the customer away.

Additionally, keep in mind that even negative research (i.e., what does not work) can be an important trade secret. Failing to protect the secrecy of your failed efforts could allow competitors to piggy-back off your hard work (over years and at tremendous expense), and avoid going down the same wrong path based on your experience. Those savings could permit your competitor to charge less and, in turn, draw your customers away.

In our next post, we'll discuss how to protect your secrets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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