Using trade secret management to maximise competitive advantage

Taiwan Semiconductor Manufacturing Company’s approach to trade secrets goes far beyond IP protection to create value through enhanced competitiveness.

Love ceases to be a pleasure, when it ceases to be a secret.

Aphra Behn (1640-1689)

The statutory definition of a ‘trade secret’ specifies the owner’s unique intention and position to possess and use that secret exclusively without sharing it with others. The simple reason is that the trade secret owner wants to leverage its secrecy to sustain competitive advantages for as long as possible.

However, the real and strategic mission for trade secret management (TSM) is to manage the secret owner’s overall competitiveness rather than merely to manage its special intellectual property. To consider trade secrets only through the lens of IP management fails to take proper account of their importance and the fact that poor TSM will negatively affect a company’s competitiveness.

Systems synchronisation and synergy

TSM can be a company hub which is aligned with other operations or management systems to achieve the company’s ultimate goals. TSM provides a company’s in-house or outside counsel with a great opportunity to initiate robust synchronisation with the company’s other operations and management systems. However, before counsel embark on this journey, they need to identify the company’s trade secrets.

This task is not merely about reviewing the statutory requirements and definitions of trade secrets under the applicable laws. Counsel should go further to focus on and identify – at a strategic level – the company’s core competitiveness. A product design company’s core competitiveness may include creating designs which are easy to use, practical, multi-functional, fashion forward, elegant and cultured. By contrast, a product manufacturing company’s core competitiveness may include manufacturing excellence, quality control, timely delivery, cost efficiency and other factors. It is also important to look into the whole ecosystem in which the company is positioned, based on its role in the overall supply chain. This means that the company’s competitiveness needs to be weighed and examined from the point of view of the overall ecosystem, including upstream and downstream industries and segments. Counsel should look into these factors to precisely identify the company’s contemporary core competitiveness and trade secrets.

This task also needs to cover both the company’s existing and future positions. For example, a leading company in a specific industry will prioritise maintaining its leadership by keeping a sufficiently safe distance from its followers and raising a significant bar against newcomers. However, a company in a follower position will make every effort to catch up or even attempt to surpass the leader, while also raising the bar against its own competitors and newcomers. Therefore, a company will develop different competitive strategies in different stages – counsel need to identify the company’s then-current core competitiveness and trade secrets according to the path the company needs to take.

Document management

After identifying and prioritising the company’s competitive advantages and the corresponding trade secrets that make these advantages possible, counsel should establish a procedure and guidelines to record and inventory those trade secrets. This allows counsel to more accurately assess the company’s IP portfolio and to quickly locate trade secrets during investigation and litigation. The trade secrets should be recorded in sufficient detail and these records should be maintained in a secure storage area and be excluded from the company’s standard document retention policy.

Counsel can leverage robust IT systems to reinforce the efficiency of trade secret documentation. IT systems with sophisticated keyword search and data sorting functions can be used to efficiently locate and analyse trade secrets. By working with IT experts, data management of these crown jewels can be centralised.

Leveraging trade secret data for human resources

TSM can serve as a critical hub which is synchronised with the company’s other systems to create significant synergy for the company’s operations and growth. A company can develop its human resource strategy, including talent recruitment and sustenance strategies, by analysing the background of trade secret inventors recorded in the TSM system.

To illustrate, when an employee invents a certain trade secret, this contribution will be recorded in his or her personnel file. This data will then be aggregated and analysed to yield personal attributes which can be referenced by management to proactively target candidates with an increased likelihood of generating inventions which contribute to the company’s competitiveness.

If a trade secret inventor applies to resign from the company, the inventor’s supervisor can leverage the information and data in the TSM system to evaluate potential loss and risk from allowing him or her to leave. Such evaluation may allow the company to decide whether to use inducements to convince the inventor to change his or her mind and stay with the company.

Coordinating with patent and contract management teams

A close alignment between TSM and the company’s patent management system is crucial to ensuring that the company has a sound IP strategy which helps it to remain competitive. The company may decide to keep certain inventions as trade secrets rather than applying for patent protection, for various reasons:

  • The invention may present unique competitive advantages;
  • Proving patent infringement may be difficult; or
  • The special nature of the company’s business model may call for it.

However, the company may change its strategy and decide to file patent protection at a later date. To assist in developing the most suitable approach, it is critical to streamline communication between the TSM and patent management teams. The TSM system can be designed with a function to provide timely reminders to the managers of TSM and patent management to revisit the measures used to protect the innovation at issue. This ensures that the foregoing reminder is circulated before the innovation is disqualified for patent application under the relevant patent law.

A company may disclose its trade secrets to its suppliers and customers in the course of business. If it does so, it will also execute technology cooperation, collaboration agreements or joint development agreements with suppliers or customers which relate to ownership of inventions. TSM can be synchronised with a contract management system to trigger the related TSM actions and monitoring procedures for executed contracts, as elaborated below, to optimise the desired synergy.

Figure 1. Trade secret management

Monitoring and investigation – employees

Statistics show that the vast majority of incidents of trade secret theft – including 90% of US federal cases and 93% of US state cases – involved an employee or business partner. Since employees have the potential to leak company trade secrets, it is critical for companies to actively enforce policies prohibiting the unauthorised removal or disclosure of their trade secrets. A practical example is when an employee sends out emails containing company trade secrets to private or unauthorised third-party email accounts. Companies need to pay special attention to outbound emails with attachments. An enterprising employee with bad intentions could change file names to deliberately circumvent company scrutiny. For example, an email purportedly containing photos of the department’s recent holiday party could be used to conceal attachments containing images of the company’s recent R&D plans and critical inventions.

It is important for companies to conduct exit interviews as part of the employee separation procedure. This provides an opportunity for the company to remind the departing employee – and obtain his or her acknowledgement in writing – of confidentiality obligations which continue to survive after separation. It might also be worthwhile considering enhancing scrutiny of the departing employee’s activities and implementing preventive measures at an earlier stage (eg, as soon as the company learns that an employee is to leave the company).

On occasion, a company may discover that an employee has downloaded, printed or otherwise removed documents containing trade secrets immediately before separating from the company to join a competitor. The company can respond by sending formal notice to both the ex-employee and his or her new employer (the competitor) to notify both parties of the ex-employee’s misconduct and to formally warn against any use of the misappropriated trade secrets by this new employer in the future.

In addition to preventing the outbound leakage of trade secrets, it is necessary to implement procedures to avoid being contaminated by misappropriated trade secrets brought over by newly hired competitor employees. Upon recruiting a competitor employee, a company will normally require him or her to confirm in writing that he or she is not subject to any non-compete covenant or similar restriction, and that he or she will not disclose to the company or share with company employees any trade secrets belonging to his or her former employer or any other third party. It is important to have a clear policy prohibiting the employee’s supervisor from soliciting the employee for any competitor confidential information. Special attention should also be paid to invention disclosures submitted in patent applications by such newly hired employees, in order to prevent potential contamination disputes caused by the employee’s inadvertent misuse of his or her former employer’s trade secrets in the application.

Another manner in which employees may leak trade secrets is when they are solicited by expert networks or other third-party consulting firms to provide industry knowledge or technical expertise in exchange for attractive hourly consultation fees. Such engagements might well be merely general consultations or clarification of certain industrial information which does not require the employee to divulge company trade secrets. However, even if the firm does not directly solicit trade secrets during the consultation, it might be possible for an employee to inadvertently cross the line between discussing public knowledge and disclosing relevant trade secrets. Therefore, a company should consider paying appropriate attention to its employees’ involvement in such engagements.

Data linking trade secrets to personnel files can help to identify the team members with the most inventive track records and valuable know-how

Monitoring and investigating – business partners

During the course of business, a company may need to share certain trade secrets with its partners, such as suppliers and customers. To maintain secrecy, this is done under contractual confidentiality terms such as those set forth in non-disclosure agreements (NDAs). To better protect trade secrets disclosed under an NDA, the company should try to stipulate a period of confidentiality for as long as the trade secret retains value to the company, and if necessary for an indefinite confidentiality period. To reduce the risk of misuse or unauthorised disclosure, the NDA may further restrict access of certain trade secrets to specific named employees and condition the disclosure on implementing privilege controls and access logs.

It is critical for a company to establish criteria and procedures based on the characteristics of its business model to ensure that its business partners are complying with the NDA. The company may require the party receiving trade secrets to provide attendance records for meetings in which trade secrets are discussed to verify that all participants need to know the information and are on the authorised name list. The company can also audit the emails of the party receiving trade secrets, verifying that all email recipients of trade secrets are on the authorised name list. That said, a breach of the NDA does not necessarily constitute trade secret misappropriation, which will need to be further examined by the company in accordance with the specific requirements of trade secret law.

Business partners may enter into technology cooperation, collaboration or joint development agreements. Under such agreements, the parties will normally arrange specific rules on IP ownership for the intellectual property generated under the cooperation project (foreground intellectual property). The parties may agree to jointly own all foreground intellectual property or to divide ownership of it based upon each party’s core business. For example, the product design company might own the design-related intellectual property, while the product manufacturing company might own the manufacturing-related intellectual property.

As noted above, business partners can become a leakage channel for a company’s trade secrets. There’s an old US saying: “Love your neighbour, but don’t pull down your hedge.” In some cases, it even continues: “Add some poison ivy to the hedgerow to keep them honest.” It is important to monitor technology cooperation partners to ensure their full compliance with the agreed IP arrangement.

Manufacturing and other business partnerships should involve a continuous monitoring programme to lower the risk of misappropriation

Once these technology collaboration agreements are executed and filed in a contract management system, they should be automatically synchronised with the TSM system. System-to-system communication can be used to proactively trigger a continuous monitoring process by checking publicly available data to verify whether any company trade secret has been misappropriated or disclosed to the public. For example, the TSM system can be used to monitor whether the company’s trade secret has been quoted in a published article or used to file a patent application by a business partner without consent. It will be even more efficient to leverage customised artificial intelligence technology to consistently patrol the company’s internal data and external information to identify probable leakage or misappropriation of trade secrets.

It is also equally important to ensure that the company does not inappropriately misuse a partner’s trade secret in its own patent application or article publication. Therefore, the any monitoring system should cover both external and internal scrutiny. It will be more efficient if the contract management system is equipped with an alert function to remind the company to take appropriate actions to protect trade secrets upon the expiration or termination of the relevant agreement. For example, the company will need to take steps to ensure that its partner has completely returned or destroyed all of the company’s trade secrets after the expiration or termination of a particular agreement involving the exchange of trade secrets.

Further, the company may also want to add audit rights to its NDAs or technology cooperation agreements in order to enforce business partners’ compliance with their confidentiality obligations. A company should develop customised audit criteria and processes based on the specific nature and model of business engagement with its business partner. For example, if the concerned trade secrets involve manufacturing process technologies, then the audit should be conducted by experts from at least three professional fields: manufacturing process technologies, IT systems and law. It is critical to identify and verify the completeness of the audit scope to ensure that the trade secrets have been thoroughly purged from various IT systems relating to different manufacturing stages. If necessary and workable, the company may consider asking its partner to demonstrate its current manufacturing process to ensure that all of the company’s technologies have been purged from its systems.

During the audit process, the company should take care to avoid inadvertent access to trade secrets belonging to a competitor or to other third parties. If it is feasible and practical, the company might consider retaining a professional third party as auditor to conduct the audit, to help to avoid potential contamination.

In addition to implementing the aforementioned protection mechanisms, the company can implement corresponding policy and measures to manage the trade secrets disclosed by its customers or suppliers to prevent unauthorised leakage and misappropriation. A prudent measure would be to establish access privilege control and firewall protection to separate its trade secrets from those obtained from a customer or supplier.

Fortune Shieh
Associate general counsel, Taiwan Semiconductor Manufacturing Company

Taking action on misappropriation

TSM must also include a standard operating process to respond to and take immediate action against misappropriation or even suspicion of misappropriation. Professional experts will need to be assigned to deal with these issues. The ideal taskforce would include experts in law, information technology and technical fields related to the trade secret (eg, design or manufacturing technology expertise). In parallel, the company should take the necessary and appropriate preventative actions.

If the company is in a jurisdiction in which trade secret misappropriation is subject to criminal penalties in addition to civil liability, it can consider filing a criminal complaint. In these cases, it is important to draw an appropriate and professional boundary to prevent any internal investigation from interfering with the criminal investigation performed by the investigation officers of the state. The reason is that the company’s inappropriate internal investigation might inadvertently alert the suspect to destroy or conceal evidence. Meanwhile, the suspect may covertly damage the company’s TSM system for revenge.

Due to the fundamentally non-public nature of trade secrets, it is crucial that counsel provide necessary and sufficient materials and supporting evidence to assist judicial officers in conducting an efficient criminal investigation. This is equally important from both the offensive side and defensive side, since criminal investigations into trade secret misappropriation inevitably involve the need to balance the rights of the trade secret owner with those of the accused suspect. For example, in implementing a criminal search warrant, the data seized may include both the complainant’s trade secret at issue and the suspect’s independent trade secret. Counsel can play a key role in facilitating these processes under professional arrangements to ensure that the investigation can move forward with the appropriate scope and efficiency. Therefore, they should prepare all necessary data and materials along with clear and detailed explanations to assist the judicial officer’s criminal investigation. Practical experience indicates that counsel can significantly expedite the judicial officer’s investigation by providing thorough and well-prepared supporting evidence.

If the company is not equipped with sufficient and competent in-house counsel to handle these actions, it should consult with outside counsel to set up a feasible working process and guidelines in a timely manner.

Enhance competitiveness

The ultimate mission of TSM is to manage and enhance a company’s competitiveness. Therefore, any mechanism designed for TSM and every step taken by it will be for that purpose.

To accomplish its unique assignment, TSM needs to smartly synchronise and integrate its functions with those of the company’s other operational systems. The company’s competitiveness will be well managed and enhanced by optimising TSM’s synergy.

Trade secret valuation

Appraising the economic value of a company’s trade secrets in a timely manner, not long after the trade secret is invented, is necessary for thee company to collect supporting material and evidence to demonstrate the trade secret’s value in specific ways. Since misappropriation of a trade secret may occur decades after it was invented, the key evidence to prove its value may have been destroyed or the inventor may have left the company. For example, the costs and expenses of developing a trade secret can be used as a reference for appraising the value at issue. However, the documents recording these costs and expenses may have been destroyed under the company’s document retention policy. Meanwhile, the inventors of the trade secret may no longer be available or have sufficient memory to testify to the detailed process used to develop the trade secret and remember the necessary details if a dispute arises years later. Therefore, it is critical to appraise a trade secret’s value in a timely manner and make exceptions to the document retention policy to ensure that all supporting materials will be available when the company needs to demonstrate that value afterwards.

It is also important for the company to appraise the value of its trade secrets using other approaches, such as the potential income approach. Normally, a company will not license or authorise third parties to use its trade secrets. However, such a potential income approach will present a more vivid image of the trade secret’s value to the company. Again, it is vital to maintain supporting materials and documents to demonstrate trade secret value under such an approach, including evidence to demonstrate that the trade secret is also suitable for broader applications beyond the company’s current deployments. The company may pass over the critical pieces of evidence and later regret their unavailability when they are truly needed.

As intangible assets, the economic value of a company’s trade secrets needs to be appropriately measured during the M&A process. This means that TSM should be appropriately aligned with other asset management policies.

Action plan

Intellectual property is just one component of a good trade secret management system. Executives need to craft an approach that balances intellectual property, human resources, information technology, sales, client relationships and accounting. The following pointers can be helpful in doing this:

  • Do not think of trade secrets as a legal phenomenon – they are a business tool which underlines your company’s core competitiveness.
  • Not just your teams, but your systems should talk to each other – automatic reminders can keep you from missing deadlines for key decisions on whether to patent a technology.
  • Build regular audits into your business relationships which involve trade secrets: “Love your neighbour, but don’t pull down your hedge.”
  • A good system linking employees with trade secrets can be useful for HR management, even before employees seek to leave the company.
  • Use multiple methods to arrive at a valuation for each trade secret’s economic value.

 

Fortune Shieh is associate general counsel of Taiwan Semiconductor Manufacturing Company, Hsinchu, Taiwan

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