Undiscovered country – building a trade secret culture
While events outside the conventional IP world have conspired to raise the profile of trade secrets, neither corporations nor their legal advisers typically know how to handle them proactively
Trade secrets represent the undiscovered country of the IP world. Explorations into advanced trade secret protection are just now beginning, as many companies take their first steps towards developing a trade secret culture.
Do not be surprised if you have not the first clue how to initiate a corporate trade secret culture. You did not learn how to do this at university and neither did your favourite IP attorney. Trade secrets represent the last area of traditional intellectual property to fully develop and as a result, only a handful of professionals have any real hands-on experience.
This article explains why trade secrets are becoming so important and how you can initiate a trade secret culture at your company.
Not-so-secret state of trade secret protection
Nearly everyone in the IP profession acknowledges the importance of trade secrets, while doing little to protect or even list them. It is like knowing that you have a Rembrandt in your attic and not bothering to have it appraised, insured or even protected from rodents and birds.
Executives from companies of all types acknowledge the importance of trade secrets to their businesses, while privately admitting that their company has no idea how many trade secrets it owns, which are important or how any of them are protected. The same executives will also sheepishly admit that they have no idea how many trade secrets their company has received from third parties in various business ventures, how adequately it is protecting these or whether it even bothers to return or destroy them once the collaboration ends.
Most IP professionals acknowledge the importance of trade secrets while offering their clients no trade secret services beyond litigating stolen ones. Even though all companies have trade secrets, the area does not appear lucrative for most law firms because they are not losing business to competitors – which also have no trade secret offerings. Since no one learned trade secret protection at law school, law firms remain ignorant of where to place a trade secret practice group: trade secrets are not necessarily rooted in technical inventions, so there are readily apparent drawbacks to locating such a practice group within the patent department. So law firms collectively kick the trade secret can down the road in the hope that someone else will figure out what to do so that they can copy them.
The holes in the trade secret map do not end there. Pacer, the US federal litigation service, has no specific code for tracking trade secret litigations, unlike patents (830), copyrights (820) and trademarks (840). The academic community – from economists to legal scholars – has no benchmarks for measuring trade secrets. The authors recently spoke to a number of prominent academics who are desperate for trade secret data as they would like to begin writing scholarly articles on the subject, but have been put off by the amount of basic data collection they would need to carry out first.
However, there are signs that the trade secret glacier is melting. What might be a trickle now will almost certainly become a torrent over the next few years.
Strengthened trade secret laws worldwide
Within the past year, both the United States and the European Union have approved new laws to enhance trade secret protection. Former US President Barack Obama signed the Defend Trade Secrets Act into law on May 11 2016, while the European Union approved EU Directive 2016/943 on June 8 2016. These new trade secret laws mostly top off statutes that already existed. While they may not offer significantly stronger protection, they help to create a more serious environment for the protection of trade secrets.
Other countries have also begun modernising their trade secret laws. China, for example, has begun an effort to update its Anti-unfair Competition Law, which includes provisions governing trade secret misappropriation.
Companies have always faced the prospect of participating in trade secret cases in foreign courts. However, the growing seriousness of trade secret legal revisions increases the chances that they might be forced to defend themselves abroad. The recently passed US Defend Trade Secrets Act has a long reach – so long, in fact, that it should be as much of a concern to European, Chinese and Japanese companies as it is to US companies. This reach has been extended by tethering it to the US federal racketeering law.
So far, German, UK, Canadian and Chinese companies have already appeared in US courts as either defendants or plaintiffs. One of the first cases under the act was brought against a researcher at Monsanto, who was accused of stealing trade secrets for his new employer in China (Monsanto Co v Chen, Case 4:16-cv-876 (ED Mo)).
Trade secrets and changing tax laws
The global financial crisis of 2007 and 2008 prompted governments around the world to consider closing corporate tax havens as a means of boosting revenues. The Organisation for Economic Cooperation and Development (OECD) – a 35-member organisation of the world’s largest economies – took on the task of drafting a common set of regulations to close tax avoidance schemes used by multinational companies.
The OECD’s Guidelines for Base Erosion and Profit Shifting affect many areas of multinational IP practice with a call for genuinely arm’s-length negotiations for intercompany licensing agreements. Described by the OECD as “the most significant re-write of international tax rules in a century”, the new rules include 15 recommendations to stop profits being moved from high to low-tax jurisdictions and force firms to be transparent about where they generate income.
The guidelines, which are now being adopted into national laws, are likely to affect trade secrets much more than other areas of IP practice because they require multinational companies to identify trade secrets shared among their subsidiaries with a fair degree of specificity. Thus, if a company fails to identify its trade secrets as being important to the tax authorities, it may find it difficult subsequently to litigate the theft of those trade secrets – and vice versa.
In short, the guidelines’ accounting requirements alone might be enough to drag trade secret protection into the modern era.
Trade secrets represent a largely undiscovered territory whose broad outline is all that is known with certainty
Picture: Tom Ewing
What is a trade secret anyway?
A trade secret is a formula, practice, process, design, instrument, pattern, method or data compilation which is not generally known or readily ascertainable by others and through which a business can obtain an economic advantage over competitors. Some would argue that trade secrets are the crown jewels of any IP portfolio.
The scope of trade secrets is virtually unlimited. They include sales methods, distribution methods, consumer profiles, marketing plans, supplier lists, client details and manufacturing processes. Trade secrets can even protect negative know-how, such as the results of failed experiments.
A trade secret is therefore information that:
- is not generally known to the relevant business circles or the public;
- confers an economic benefit on its owner – this must derive specifically from the fact that it is not generally known and not just from the value of the information itself; and
- is subject to reasonable steps by its owner to keep it secret – what is ‘reasonable’ varies depending on the specific circumstances.
A trade secret continues for as long as the information remains secret. Independent creation by a third party can eliminate a trade secret’s commercial value.
Trade secrets require no government approval or registration, although costs may be associated with the administrative, technical or legal barriers that a company uses to protect its trade secrets.
Trade secret protection does not require public disclosure, unlike patent applications, which become public information even if no patent issues.
Trade secret protection is not limited in time, unlike patents, which last only for 20 years.
Trade secrets have immediate effect, unlike patents, which may take several years to be granted.
Benefits of active management
Companies that actively manage their valuable trade secrets enjoy significant advantages over competitors that ignore them. We review a few of these advantages before explaining how to begin the process of actively managing your trade secrets.
Not looking after trade secrets can be disastrous for both companies and their legal professionals. We are aware of one well-known multinational whose patent committee would take four decisions regarding an invention: patent, reject, publish or keep as a trade secret. However, if the patent committee selected the trade secret option, there were no additional process steps – nothing happened. This went on for years until the company’s general counsel accidentally revealed this practice (or lack thereof) during a board meeting. The news was not received well.
You probably do not want to be the general counsel who decided not to look after trade secrets, because you will probably be asked about them when the company realises that it has just lost an important one. The decision to protect something as a trade secret is not the end of the journey, but only the start.
Mitigating losses from theft
The Federal Bureau of Investigation (FBI) has produced a film – The Company Man: Protecting America’s Trade Secrets – which is available on YouTube and explains why companies should actively manage their trade secrets.
The film tells the story of a small company in Iowa with a novel glass insulation product which is protected as a trade secret. The company’s product has caught the attention of a foreign government, which sends two agents to obtain the information needed to manufacture the product by any means necessary.
The foreign agents determine which employees have access to the valuable secrets. One of the engineers they target is frustrated with his career and facing financial difficulties. The foreign agents offer him a considerable sum in exchange for handing over the trade secrets. The engineer seriously considers their proposition before deciding to report the plot to the company’s senior managers.
However, active trade secret management would have made the company even safer. If the engineer had not been so moral, a trade secret management tool could have served as a substitute for his virtue or lack thereof. When the company’s general counsel became aware that foreign agents were prowling around the company, she could have reviewed trade secret metadata to see which employees had access to these vital assets. After the engineer disclosed that he had been approached by foreign agents, the general counsel could have again reviewed the trade secret metadata to issue specific directives to the other employees with access to these vital trade secrets. Finally, with active trade secret management, the company could have parsed its trade secrets into pieces, such that the tantalising pieces shown to the foreign agents before their arrest would not have provided a complete picture of the company’s vital trade secrets.
FBI agents have expressed surprise that companies dismiss employees immediately if they suspect they have stolen a trade secret. It recommends that companies instead put the employee under surveillance so that the full scope of his or her actions can be determined. Active trade secret management systems support such monitoring, as they help to limit the damage when a company comes under attack from trade secret thieves.
Active trade secret management can help corporate cybersecurity by identifying information that deserves extra protection. Many cybersecurity efforts are geared towards protecting all files equally – everything from the cafeteria menu and the softball team roster to customer lists, product roadmaps and manufacturing secrets.
However, cybersecurity firms have begun asking their clients for corporate trade secret data so that they can direct extra protection to the most sensitive files. Unfortunately, many corporations cannot provide a list of their most valuable trade secrets because they have no active trade secret management. The following example can be useful for illustrating what cybersecurity firms have in mind.
Suppose there are two ranchers who both need to protect valuable livestock. The first builds a fence which stretches around his entire property. The fence is old and over time holes and gaps appear in it. The ranch hands cannot keep up with all the repair work. Some horses wander away; some are stolen. The first rancher persists in putting his security solely in a fence because “That’s what my daddy did and his daddy before him.”
The second rancher also has a fence around his entire property. However, he knows the fence’s limitations, so he takes an extra step. He analyses his herd and notes that most of the horses are not exceptionally valuable – nearly the entire value lies in his two Kentucky Derby winners. The rancher concludes that he should protect the two Kentucky Derby winners in a barn when they are not being exercised and make sure that an armed ranch hand is also nearby in case coyotes or horse thieves turn up.
A cybersecurity firm will not know which files are the Kentucky Derby winners requiring extra protection, unless their clients tell them. When corporations actively manage their trade secrets, they can provide valuable metadata to their cybersecurity specialists to enhance their protection.
Open innovation and employee mobility
Trade secret management requires finesse and flexibility in an era of open innovation and increased employee mobility.
Open innovation is a business collaboration paradigm in which firms use both internal and external ideas and paths to market to advance their product offerings. In other words, firms collaborate with other firms.
While it offers many benefits, the paradigm calls for extra attention when it comes to intellectual property. Open innovation can affect both patenting and trade secret protection. A trade secret management tool can track which corporate trade secrets have been shared externally, which have been received from others and which have been co-created with partners.
Many companies have no formalised system for tracking the trade secrets they receive from others. We are aware of one retailer which receives prototypes and plans from various companies. While the retailer’s junior managers know that they need to keep this information secret, they do not track it in a systematic fashion and senior management has almost no visibility into the process. This dangerous situation could be resolved through active trade secret management.
Sharing information with manufacturers
Many companies outsource their manufacturing to third parties. Such relationships require companies to share all sorts of information with their manufacturers, much of which comprises trade secrets.
Some multinationals do not systematically track the information that they have given to third parties. If companies fail to track the information they share, they cannot possibly hope to manage their trade secrets. We suspect that their primary form of security comprises a very broadly worded statement in a contract. We also suspect that many companies do not even label information handed over to their manufacturing partners as ‘secret’. This situation could be easily rectified by active trade secret management.
When employee Joe Bloggs leaves his company, the HR department will typically ask him to sign some very general agreements that relate to a number of matters, including trade secrets.
However, if the company employs a trade secret management system, it can then search the metadata for ‘Bloggs’ and discover the corporate trade secrets that he is known to have accessed. It can then provide extra counselling to Joe or additional agreements regarding these trade secrets. If the company knows that Bloggs is going to work for a competitor which might be interested in the very trade secrets that he possesses, the company can take additional steps, such as contacting the new employer.
The centuries-old trade secret practices of Carthusian monks can be readily adapted for the modern era
Picture: Tom Ewing
Establishing a trade secret culture one step at a time
The Carthusian monks, who have managed to keep the recipe for chartreuse liqueur secret for 300 years, have an established trade secret culture. At any one time, only two monks know the secret formula for manufacturing their famous liqueur. Modern trade secret protection amounts to a scaled-up version of what these monks have done for centuries and is extremely achievable for modern technology companies.
Establishing a trade secret culture should not be an onerous and overblown management exercise. Some general counsel, when confronted with the new realities of trade secrets, announce that classifying and registering all trade secrets is too much work and unrealistic.
We agree – which is why we do not advocate it.
An overnight change from no management of trade secrets to complete management would be a disaster for most companies. Moreover, such an approach would ignore opportunities for institutional learning and fine tuning systems to each company’s unique culture.
Simply deciding to keep valuable information secret is not enough. Trade secret management is about the policies, procedures, systems, education and governance needed to manage these valuable assets. Companies should move towards a trade secret culture through a series of reasoned steps, with ample opportunities for refinements.
To establish a trade secret culture, begin in one area, establish the practice and then expand to other functions. There are several good options when deciding where to start, although the selection depends on the needs of the company involved.
A company could start with a business unit, a particular product line, its R&D lab, the marketing department or its manufacturing function. If the company has a section that is believed to contain particularly valuable trade secrets, then this might be an excellent place to start.
Alternatively, a company could start with a particular class or category of trade secret. For example, given the rise of open innovation and outsourced manufacturing, a company could count the trade secrets that have been shared with third parties – these are often the most valuable.
Tracking trade secret metadata
Managing trade secrets without metadata is practically impossible. However, in our experience, once the appropriate high-quality metadata has been gathered, it becomes much easier for a company to track its trade secrets.
‘Metadata’ is data that describes and provides information about other data. Trade secret metadata is simply data about the trade secret, rather than the trade secret itself. It summarises basic information about trade secrets, which makes finding and managing them much easier.
C-suite executives are among those in a company who benefit from access to trade secret metadata – unsurprising, given that trade secrets are typically among a company’s most valuable assets. It can also be useful to share such metadata with the IT and security departments (given issues with cybersecurity), the HR department (given employee issues associated with trade secrets), the finance and accounts departments (given financial and tax issues associated with trade secrets), and the sourcing and procurement departments (given that many trade secrets are shared).
Examples of trade secret metadata include the following:
- the name or title of the trade secret;
- the date on which it was created;
- the person(s) who created it;
- its physical location;
- its legal owner;
- the person(s) responsible for managing it;
- the type of trade secret (eg, technical, operational, process or financial);
- the person(s) with authorised access to it;
- its importance to the business;
- any protection mechanisms in place; and
- whether the trade secret has been shared with a third party.
The authors have identified over 100 pieces of metadata which can be associated with trade secrets and we continue to add useful data points to this list.
Confronted with the changing world of trade secrets, some litigators argue that companies should not have too much information about their trade secrets because this might harm them during litigation. While the trade secret metadata tracked by companies should contain relevant and high-quality information, the authors suspect that a strategy of claiming that a trade secret is important in one place but not another will no longer work. Among other things, the newly restructured legal framework for trade secrets seems less accepting of the courtroom antics that litigants have attempted in the past. From now on, a given trade secret either is or is not important. Just as companies carefully craft their patent applications, their design registrations and their trademark applications, they should also exercise skill and professionalism in implementing a trade secret strategy.
A still from the FBI-produced movie The Company Man
Trade secret management systems
A trade secret management system helps companies to manage their trade secret processes by keeping track of corporate trade secret metadata and helping executives to determine an appropriate level of protection for each trade secret recorded. Systems can record who in an organisation is responsible for a given trade secret, who is responsible for protecting it and who has access to it. They can also help with corporate functions, such as tax and human resources – although it is still necessary to interview key employees about trade secrets and review the results with management. Unless an organisation has a handful of trade secrets only, a management system is essential for managing trade secrets efficiently and effectively.
Having a robust, fit-for-purpose trade secret policy, process and system, together with the associated metadata, helps a company to focus on its trade secrets. It also helps a company to have a structured conversation about trade secrets, which in turn allows it to focus on the most relevant information.
Companies should carefully select the person responsible for day-to-day management of their trade secrets. Many general counsel automatically select their in-house IP person; but such staff tend to see themselves as being responsible for patents and trademarks only, and have no extra resources for expanded duties. Selecting an owner to manage corporate trade secrets needs to be carefully thought through, as this will have a crucial relationship to where the company starts building its trade secret culture.
Trade secret management should not reside in a vacuum, disconnected from other activities within an organisation. Good trade secret management means having strong links with other organisational functions and their key processes or procedures, including the following departments:
- HR, given its role with employees;
- sourcing and procurement, given its role with key suppliers;
- technology licensing, given its role with key collaborative innovation partners;
- R&D, given that many trade secrets originate here;
- document management – an organisation’s technical document management process;
- legal, given the legal underpinning of trade secrets;
- intellectual property, given that an organisation’s trade secret activities and patenting activities should be in sync;
- information technology, given that many trade secrets are now in digital form and various technical solutions must be deployed to protect them from theft by, for example, hackers;
- finance, given that trade secrets are valuable assets and affect a business’s financial performance now or in the future;
- facilities, given its responsibility for the physical buildings occupied by the organisation and access and security issues; and
- corporate communications, as some organisations may wish to advertise and promote the fact that they possess important trade secrets.
Trade secret management varies greatly from company to company. However, good practice suggests that it might be advisable to assign ownership of trade secret management process to someone senior in the organisation and to have a trade secret policy and associated procedures in place. Confidentiality agreements can play a vital role, as can an awareness and education programme to ensure that all employees are aware of the company’s trade secret policy and associated procedures. Companies should:
- determine which types of information should be deemed as corporate trade secrets and their qualifying criteria;
- identify trade secrets across the organisation and mark these documents in the proper and professional manner; and
- classify trade secrets in terms of their nature, the date on which they were created and the responsible person(s).
It is crucial to determine the administrative, technical and legal measures needed to properly protect each trade secret, as the exact measures may differ. Ensure that fit-for-purpose access control measures are in place, and that IP issues in general and trade secret issues specifically are addressed in both entry and exit interviews for employees. Develop contractual provisions and working mechanisms in relationships with outside business partners to protect trade secrets and conduct regular trade secret audits.
Process and system
Whatever trade secret management process a company adopts must be fit for purpose and add value to those using it. The system should underpin the processes and systems, and track and synchronise the relevant metadata.
Processes are an organisation’s memory – without them, effort can be wasted by restarting procedures and processes from scratch and possibly repeating the same mistakes. A first-class trade secret process facilitates good communication between information originator and receiver, to help set and manage expectations and the consistency of the information provided.
A trade secret process defines what and how tasks are done and by whom, to ensure repeatability. This is vital given that a trade secret may originate in one part of the organisation, but be utilised in another part or even externally. The trade secret process also enables an organisation to set performance and measurement criteria, which can help to identify the origin or cause of any problems.
Trade secret audits
Taking a proactive, systematic approach to assessing trade secret assets, trade secret policies and associated procedures through regular audits can significantly boost a company’s value.
A proper audit should involve business, technical and legal skills and competencies, given the unique nature of trade secrets. The findings of these audits should be reviewed by the organisation’s senior managers.
Insuring trade secrets
A company cannot properly insure its valuable trade secrets until they have been identified and analysed. As more companies implement trade secret protection regimes, the ease of insuring these valuable corporate assets will improve.
A number of IP insurance providers now offer insurance products relating to trade secrets. These typically break down into three categories:
- defensive coverage, if the company is pursued for unlawfully disclosing or using a trade secret;
- coverage for pursuit or enforcement exposures, including contractual liabilities or disputes relating to trade secrets; and
- potential business interruption policies, which cover lost profits should a trade secret be lost or damaged.
This list illustrates how much easier it is for an underwriter to approve a policy when the subject has a trade secret management system in place.
Opportunities for external legal IP advisers
The emerging trade secret market presents a clear opportunity for creative and innovative legal and IP firms to provide appropriate services. However, right now, most of these service providers are sitting on their hands waiting for someone else to step up first.
Our survey of 100 law firms showed that only nine firms across the globe mentioned trade secrets as an active practice area – a missed opportunity.
Here are some of the services that practitioners could provide:
- educating companies on trade secrets and their management;
- helping companies to conduct interviews, surveys and data retention in order to ease the burden during the initial trade secret enumeration process;
- designing a robust, fit-for-purpose trade secret management process;
- configuring and installing a trade secret management tool;
- determining the appropriate level of protection (eg, administrative, technical and legal) around each trade secret;
- conducting regular audits and addressing any weaknesses found;
- articulating trade secret issues to C-suite executives;
- ensuring that trade secrets remain protected as the client embraces collaborative or open forms of innovation;
- aligning the client’s patenting, publishing and trade secret activities; and
- assisting the client with proper trade secret governance.
Final thoughts on establishing a trade secret culture
Trade secrets are a vital but invisible part of a company’s intangible assets. They can add tremendous business value, so they need to be properly and professionally managed.
Trade secrets should be on the agenda of every general counsel, law and IP firm. Legislation in this area looks likely to be strengthened further in key jurisdictions at a time when patents seem to be weakening.
Trade secrets can be the crown jewels in an organisation’s IP portfolio and have some clear advantages over other IP assets. However, trade secrets work only if they are managed properly and well looked after.
Proper and professional trade secret management requires a thorough understanding of this unique form of intellectual properly, a fit-for-purpose trade secret management process underpinned by a robust trade secret management system, plus good governance combined with regular audits.
A series of steps should be taken to ensure the roll-out of a world-class corporate trade secret management strategy:
- Select an initial area for trade secret management – this could be a business unit, a product line, the R&D lab, the marketing department, a manufacturing function, any definable unit believed to hold valuable trade secrets, trade secrets known to be shared with third parties or trade secrets received from third parties.
- Select the management team – the manager should have a relationship with the initial selected trade secret area, as well as adequate resources, including a close working relationship with in-house legal counsel.
- Prepare operating guidelines – the manager should prepare trade secret operating guidelines in close cooperation with in-house legal counsel. They should include a list of the initial set of metadata believed to be appropriate for managing trade secrets in the selected area.
- Select a management system – the chosen trade secret management tool should record metadata pertinent to the area and be sufficiently robust to serve the needs of the various corporate functions which will need to access and work with the trade secret metadata.
- Collect trade secret metadata – a team working under the manager’s supervision should survey the selected area to identify trade secrets and record the appropriate set of metadata.
- Vet the trade secret metadata – the manager should review the trade secrets for which metadata is being collected and possibly carry out follow-up work to verify that they are sufficiently significant and legally qualify as trade secrets. The metadata set should also be reviewed to verify that it is adequate for tracking and managing the trade secrets – additional metadata can be collected if necessary.
- Educate relevant parties on how to handle trade secrets and trade secret metadata – the various corporate functions which will access the metadata while performing their duties should be educated on how corporate trade secrets will function, including how to operate the management system.
- Expose relevant corporate departments to metadata – the manager can now put the metadata to work by providing the relevant departments with access to it. Depending on the nature of the trade secrets under scrutiny, these may include the following departments:
- sourcing and procurement;
- technology licensing;
- document management;
- intellectual property;
- information technology and security;
- facilities; and
- corporate communications.
- Conduct trade secret audits – after the trade secret management system has been running for a while, the manager should conduct an audit of the system and relevant processes to verify that it is being used appropriately.