United States: The Increasing Importance Of Trade Secrets And Trade Secret Asset Management Explained

As a special feature of our blog—guest postings by experts, clients, and other professionals—please enjoy this blog entry from Donal O'Connell, Managing Director of Chawton Innovation Services Ltd.

The Neglected Step-Child of IP

Trade secrets have, up until recently, been somewhat ignored. When I started to pay attention to trade secrets, some of my colleagues and contacts probably thought that I was mad.

After all, trade secrets were not included in many IP educational sessions. The subject rarely came up at IP conferences and seminars. This form of IP was not addressed by most IP Law Firms, even so called full service IP Law Firms. It clearly was not in the 'job spec' of many in-house IP Managers or Chief IP Officers.

The Growing Importance of Trade Secrets

With hindsight, I am really pleased that I did spend considerable time and energy over the past few years exploring the world of trade secrets and trade secret asset management as this form of IP has been transformed during that time period.

Trade secrets are no longer the neglected step-child of IP.

Why? What happened to raise the profile of trade secrets?

I suggest that it was not one thing but rather a combination of a number of factors that has enhanced the importance of trade secrets.

Law Changes

Trade secret laws have changed dramatically in key jurisdictions in recent years.

Japan's Unfair Competition Prevention Act had a major update on January 1, 2016, following 5 incremental changes since 2003. The USA's Defend Trade Secrets Act was signed into law on May 11, 2016. The EU Directive on Trade Secrets was passed on June 8, 2016, and enacted by member states on June 9, 2018, (although a few countries were late doing so). China's Anti Unfair Competition Law was updated on January 1, 2018, and then again on April 23, 2019.

Increased Litigation

The number of trade secret disputes are increasing. Trade secret misappropriation litigation is mostly a U.S. issue but not exclusively so.

The 2017 Trends in Trade Secret Litigation Report by Stout on U.S. trade secret litigation at both state and federal level reveals some insightful data.

  • 25% of all cases originated in the industrial sector.
  • 46% of trade secret cases involved multiple forms of trade secrets.
  • IT, consumer discretionary, and healthcare saw major increases in cases.
  • Trade secrets related to computer software, computer technology, customer information, pricing information, supplier relationships, and designs/blueprints made up significant percentage of cases.
  • Plaintiffs received favorable decisions 69% of the time. Defendants/counter-claimants 24%, with 7% of cases split.
  • Damages awarded in 52% of federal cases. Top 5 cases were each over $100 million.

The Taxman

There is growing interest in intangible assets including trade secrets by the tax authorities.

The OECD BEPS Guidelines include trade secrets as an intangible asset requiring proper management. Much of the EU's Anti Tax Avoidance Directive (ATAD) enacted on January 1, 2019, relates to intangibles including trade secrets. Patent Box Tax Regimes in a number of jurisdictions now allow trade secrets as qualifying IP. The U.S. government is encouraging U.S. companies to repatriate their IP back to the U.S. by lowering tax rates for royalties received from all forms of IP to be materially less than the rate on ordinary corporate income.

The International Accounting Standards Board standard 38 (IAS 38) defines an intangible asset as: "an identifiable non-monetary asset without physical substance." IAS 38 specifies the three critical attributes of an intangible asset to be:

  • identifiable
  • control (power to obtain benefits from the asset)
  • future economic benefits (such as revenues or reduced future costs)

IAS 38 contains examples of intangible assets such as customer lists, copyright, patents, and franchise agreements. Trade secrets qualify as far as IAS 38 is concerned, provided that three attributes above are satisfied.

IP Reform

In recent times, we have witnessed minor and major changes to patent law, especially in the U.S. In the U.S., we have seen many changes in recent times, including:

  • First to file
  • Validity challenges of issued patents
  • Changes to the submission of prior art by 3rd party
  • Markings
  • Restrictions on where companies may file patent cases
  • More cases reaching the Supreme Court
  • Disputes about eligibility

The implications of this IP reform are as follows. It is harder to get patents. More inventions are considered patent-ineligible. More inventions are considered obvious in view of prior art. It is easier to challenge patent validity. Many patents are eliminated at the USPTO via IPR. Many patents are eliminated through litigation in federal court. It is harder to prove infringement. Many patent infringement suits are thrown out of court early: With a motion to dismiss under 12(b)(6), the case does not even get into the courthouse.

As a result, some companies that previously may have gone down the patent route are opting to go down the trade secret route instead.

Open Innovation

Traditionally, internal innovation was the paradigm under which most firms operated, with most innovative companies keeping their discoveries highly secret and no attempt made to assimilate information from outside their own R&D labs. This was driven by the belief that: "the smart people in our field work for us". However, in recent years the world has seen major advances in technology and society which have facilitated the diffusion of information. Companies have also begun to realize that "not all the smart people work for us and that we need to work with smart people inside and outside our company".

Open innovation can take many forms. It can include working with universities, cooperating closely with key suppliers and vendors, collaborating with application developers, content providers, technology house and design houses, working with various communities including 'open' communities, innovation networks, standardization bodies as well as customers and end-users. It can of course involve collaboration with start-ups, SMEs and MNEs.

At first glance, it may sound strange to have open innovation and trade secrets mentioned in the same sentence. However, companies and organizations that embrace collaborative or open forms of innovation face a significant risk of having their trade secrets misappropriated. Collaborative or open forms of innovation by their very nature involve the sharing of IP, and in many instances this IP is in the form of valuable business confidential information (i.e. trade secrets).

For reference, just look at the number of trade secret misappropriation court cases involving former collaboration partners.

The Nature of Employment

Organizational loyalty is a general term and denotes a person's commitment and attachment to the place they work. Long gone are the days when an employee joined a company after leaving school and stayed with that company until retiring. These days, people expect to move around across numerous companies over their working career. The generation of young millennials now in the work place clearly have a different set of expectations compared to older generations about their careers.

In a nomadic world, one of the casualties is a decreasing sense of loyalty to a particular organization. If loyalty is defined as being faithful to a company, then there seems to be a certain amount of disloyalty in the workplace these days. The recent global recession has also had an adverse impact on such loyalty as loyalty is a two way street.

Have you ever done this on your last day of employment? Taken a USB memory stick, plugged it into your computer and accessed various documents (e.g. process diagrams, supplier info, client data, source code, market data, etc.) on the shared drive on the network of the company?

Cybercrime

The cyber criminals are really only interested in one particular form of IP, namely trade secrets. The cyber criminals are after any trade secrets that can be harvested and monetized. They are not seeking to steal what is on the menu in the company canteen. They do not want to know what color paint is on the wall of the offices of the CEO. They are not after information which has already been put into the public domain by the company.

Rather, these cyber criminals are after the trade secrets of the company, the confidential business information which provides an enterprise with a competitive edge.

The cyber criminals leverage a variety of different approaches and techniques to identify the vulnerabilities in the IT network of the company and then attack.

The cyber criminals may leverage back-doors into the IT network. They may try a denial-of-service attack or even a direct-access attack. They may try eavesdropping, spoofing, and even tampering directly with the IT network of the company. The cyber criminals may use privilege escalation, phishing, click-jacking or social engineering techniques. In some cases, they create a false environment of stealing non-pertinent data, diverting the attention of incident responders only to exfiltrate trade secret data residing elsewhere on the network.

Regardless of what, where and how they attack, they are after the trade secrets of the company.

Technology Changes

Technology is changing.

Futurists of the 1950s and '60s predicted that by the 2000s, flying cars, meal pills, time travel, and robots would be a part of our everyday lives.

Today, we live in a world dominated by live streaming, smartphones, and social networks. Technologies like self-driving vehicles and robot assistants are under development or are already out in the marketplace.

One clear trend in technology is towards software, algorithms, and cloud-based solutions. The importance of data (both raw and processed) has increased dramatically. In the pharma and biotech world, we have seen the emergence of biosimiliars.

I suggest that much of the innovations in many of these new technology areas lend themselves more to being protected as a trade secret rather than registered forms of IP such as patents.

Trade Wars

A trade war is an economic conflict resulting from extreme protectionism in which states raise or create tariffs or other trade barriers against each other in response to trade barriers created by the other party.

The U.S. and China are locked in a bitter trade battle. U.S. President Donald Trump has complained about China's trading practices since before he took office in 2016. The U.S. launched an investigation into Chinese trade policies in 2017. It imposed tariffs on billions of dollars worth of Chinese products in 2018, and Beijing retaliated in kind. Both countries agreed to halt new trade tariffs in December 2018 to allow for talks. But hope for a deal faded, and further tit-for-tat tariffs were imposed.

One key aspect of this trade war is IP and allegations of IP theft.

"China national charged with stealing trade secrets" – U.S. Justice Department

"Chinese battery expert is charged with stealing trade secrets from US employer, as he prepared to join mainland firm" – South China Morning Post

"US charges Chinese companies with stealing trade secrets" – The Guardian

"Supreme Court Declines to Hear Chinese Trade Secret Theft Case" – Law360

"Why Trump tariffs on China not stopping theft of trade secrets" – USA Today

"China accused by US and allies of 'massive hacking campaign to steal trade secrets and technologies'" – South China Morning Post

These are just some of the headlines pulled from various publications during December 2018, all linking China and trade secret theft together.

Getting the Basics Right

For all of the reasons outlined above, companies need to take trade secret asset management seriously. Unfortunately, many companies are poor when it comes to trade secret asset management.

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 they have, which ones 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 their company protects them, or if they even bother to return or destroy them once the collaboration ends.

  • Trade secrets are poorly managed.
  • Education is not happening.
  • There is a lack of ownership.
  • Documentation is poor.
  • Protection mechanisms are poor or non-existent.
  • There is a lack of any classification of such assets.
  • Details on whether trade secrets have been shared is often missing.
  • Trade secrets not properly addressed in agreements & contracts.
  • There is no information sharing between the legal / IP function and the Accounts / Tax function.
  • There is no audit trail.

Nearly everyone acknowledges the importance of trade secrets while doing very little to protect them or even making a simple list. It's like knowing you have a Rembrandt in your attic and not bothering to have it appraised, insured, or even protected from rodents and birds.

Good Practice

Those exceptional companies who have this mastered tend to have the following things in place:

  • Education of employees about trade secrets
  • A robust trade secret policy
  • Fit for purpose trade secret process & procedures
  • A system to underpin that process
  • Good quality trade secret metadata
  • Trade secret governance

The importance of educating employees about trade secrets cannot be stated enough. It is a self-enlightening process. It is crucial to the overall development of the individual participant and the company or organization at large. Trade secret education provides the participant with knowledge about the world of trade secrets and enables informed decisions to be made.

A corporate trade secret policy is a formal declaration of the guiding principles and procedures by which the organization will operate, typically established by its board of directors, a senior management policy committee, or by the legal / IP function within the organization

A trade secret process can be seen as an agreement to do certain things in a certain way and the larger the organization, the greater the need for agreements on ways of working. The trade secret process is like the memory of the organization, and without such a process, a lot of effort can be wasted, and the same mistakes can be repeated.

If a company only has one or two trade secrets, then they probably do not require any trade secret asset management system. However, if the number of trade secrets in a company is more than a handful; if they are sharing their trade secrets with others; if other entities are entrusting their trade secrets to the company; if the company has any direct or indirect links with entities in the US (given the growing issue with trade secret litigation there); if the company has trade secrets located across diverse EU member states (given the EU Directive on Trade Secrets being enacted in June 2018), if the company is doing any business in China (for the reasons outlined above); and/or if the company is conducting any IP due diligence exercises due to some corporate event (e.g. M&A, JV, Investment Round, etc.), then a trade secret asset management system is absolutely required.

Metadata is a set of data that describes and gives information about other data. Metadata is simply data that describes other data. Meta is a prefix that in most information technology usages means 'an underlying definition or description'. Some mistakenly believe that because trade secrets are not registered, then the concept of trade secret metadata may not apply. Others mistakenly believe that because trade secrets are meant to be kept secret, then no metadata should exist.

Governance is the act of governing. It relates to decisions that define expectations, grant power, or verify performance. In the case of a business, governance relates to consistent management, cohesive policies, proper guidance, well defined processes, KPIs and metrics, and decision-rights for a given area of responsibility. Trade secret governance is simply about defining the 'rules' for those involved in trade secret asset management within the organization.

The first and last items listed, namely education and governance, are like bookends keeping everything else in order.

We would argue that trade secret metadata is key. Without trade secret data, you have no trade secret information. Without trade secret information, you have no trade secret knowledge.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Practice Guides
by Mondaq Advice Centers
Relevancy Powered by MondaqAI
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions