As the cost and complexity of patent protection continue to rise, many businesses, especially small and medium-sized enterprises (SMEs), are turning to trade secrets as their preferred method of intellectual property (IP) protection.
But while this approach offers a more flexible and private way to secure valuable knowledge, it also exposes companies to a new set of legal and operational vulnerabilities.
That’s the warning from Maddi Brown (pictured), IP practice leader at CFC, who said her team is seeing a marked shift in how companies, particularly in fast-moving sectors like tech and artificial intelligence (AI), are safeguarding their core innovations.
“Trade secrets give companies an edge without requiring them to publish what makes their business tick,” Brown told Insurance Business. “But unlike patents, which are registered rights, trade secrets are only as strong as the controls you place around them. That’s where the exposure lies.”
The appeal of trade secrets is understandable. Patents are expensive to file and maintain, and they eventually expire, typically after 20 years. In contrast, trade secrets can, in theory, last indefinitely so long as they remain confidential.
Brown said that the shift is not limited to big tech players. Startups in sectors such as health tech, construction, and marketing are increasingly using trade secrets to protect AI algorithms, proprietary data processes, and software solutions, especially as they enter unfamiliar technology spaces.
“We’re seeing it crop up everywhere,” said Brown. “And as intangible assets become more central to business value, keeping them as trade secrets is a smart way to preserve market share and competitive edge. You can enter a market without revealing your core advantage and stay ahead longer.”
Yet this shift to secrecy comes with a catch. Because trade secrets are not registered, they are vulnerable to misappropriation through employee mobility.
According to Brown, approximately 60% of trade secret misappropriation cases in the US now involve departing employees. A 2021 survey of IP threats by the legal firm CMS found that nearly 48% of companies cited employee leaks as their top concern. Between 2016 and 2022, over a third of trade secret cases filed in US federal court involved former employees, and Brown said that number is climbing.
“You can do all the due diligence and risk management you want, but trade secrets aren’t registered rights, so if an employee moves to a competitor, that trade secret can go with them,” said Brown.
“Contracts should be tight, but they aren’t guarantees. Companies can still infringe. That’s why businesses need to think about insurance to protect against that risk and give them freedom to operate without fear of exposure.”
The legal framework surrounding trade secrets is murky, especially across borders. Because trade secrets rely on confidentiality rather than registration, enforcing them often comes down to proving a breach of contract. But this can be difficult to do in the absence of clear evidence or digital tracking.
This ambiguity has led to a sharp rise in lawsuits in 2024. In most cases, former employers allege that departing staff took proprietary information to a new company, triggering lengthy and costly legal disputes.
The threat to trade secrets isn’t only internal, according to the CFC leader. With remote work and digital collaboration now the norm, cyber breaches are also becoming a major source of IP exposure.
“There’s a domino effect,” Brown said. “A cyberattack leads to data theft, and that stolen data is then reused in a way that infringes on your IP rights.”
Brown emphasized that cyber insurance alone is not enough. Businesses need dedicated IP insurance in tandem with cyber coverage to fully protect intangible assets.
“Insurance solutions might not cover the initial theft – say, a cyber breach – but they do cover the resulting fallout,” she said. “So, if a cyberattack leads to stolen data that later infringes your IP, you’ll need both cyber insurance and IP insurance. They work together.”
For brokers, understanding this overlap between cyber, IP, and employment risk is critical.
Many businesses mistakenly assume that professional indemnity (PI) or errors and omissions policies cover IP risks, but Brown warns these often exclude trade secrets and patents.
“Even policies that advertise ‘IP cover’ may not be triggered by a trade secret misappropriation,” she said. “That’s a dangerous gap.”
CFC’s own IP insurance solution includes breach of contract coverage, both defense and pursuit, specifically designed to address trade secret exposures.
So, when should SMEs patent their innovations, and when should they keep them secret?
“That decision should always begin with a patent attorney,” Brown said. “But even legal experts can only give advice based on the snapshot they have at the time. They can’t offer a 100% guarantee you’re not infringing someone else’s IP.” This where insurance becomes a vital layer of protection.
Finally, Brown offered practical advice for SMEs looking to protect their trade secrets:
