IP Clinic – 2. Trade Secrets

When sharing your trade secrets with others, just remember that NDAs are like confetti

 by Donal O’Connell, Managing Director, Chawton Innovation Services


Trade secrets:

Trade secrets constitute an important part of a company’s intellectual property portfolio. However, for any information to be considered a trade secret it must fulfill three criteria:

  • it must be secret (i.e. not public information)
  • it must provide an actual or potential economic advantage for the company
  • it must be actively protected (i.e. the company exercises reasonable measures to maintain it as a secret)

Some examples of trade-secret include scientific processes, formulas, product blueprints, algorithms, raw or processed data, software, manufacturing processes, customer lists, financial information, market research studies, internal costing and pricing information, etc.

No longer the neglected step-child of IP:

Trade secrets have been the neglected step-child of IP but that situation is fast changing. There are various forces at play helping to increase the importance of trade secrets.

Firstly, the law is changing.

  • The Defend Trade Secrets Act passed in the USA in May 2016
  • The EU Directive on Trade Secrets is enacted by member state on 9 June 2018
  • China explicitly included trade secrets in its 2018 revisions to the Anti Unfair Competition Law

Changes in the eligibility requirements and enforcement mechanisms of patent laws around the world, but especially those in the US – and especially as they relate to software and business methods, make trade secrets an attractive mechanism to protect a company’s competitive advantages.

Cyber-criminals – whether competitors or State actors – are working overtime in trying to steal trade secrets from organisations.

More and more companies are embracing open and outsourced innovation models which necessarily require sharing and collaborating on trade secrets with others.

Changes in employment models are leading to a highly mobile and transitory workforce where companies now have an increased risk that their employees will walk out the door with their valuable trade secrets.

Cyber-criminals are working overtime in trying to steal trade secrets from organisations.

There is growing interest in trade secrets by the tax authorities:

  • OECD BEPS Guidelines include trade secrets as an intangible asset requiring proper management
  • Patent Box Tax Regimes in a number of jurisdictions now allow trade secrets as qualifying IP
  • The US Government is encouraging US companies to repatriate their IP back to the US

Pending trade wars are linked by some to trade secret theft concerns.

Last but not least, we are seeing increased trade secret litigation especially for US companies, but not exclusively so.

Increased trade secret litigation:

There has indeed been a number of high profile “trade secrets misappropriation” cases in recent times. It is most interesting to see the diversity of the companies involved, the different types of trade secrets in dispute, and the damages being awarded. It is also intriguing to see who has stolen or been accused of stealing the trade secrets.

The recent report by Stout on trade secret litigation in the USA at both State and Federal level makes great reading. It is in my opinion an excellent report, full of insightful facts and figures.

Interestingly, we are not seeing that many North Korean hackers in court but rather in many cases entities much closer to home, such as suppliers, collaboration partners, and customers.

But why are we seeing more and more trade secret disputes involving companies and others in their eco-system?

It is also intriguing to see who has stolen or been accused of stealing the trade secrets.

No company is an island:

When English poet John Donne wrote his famous line “No man is an island,” almost 400 years ago, in many ways he was forecasting the future of business as it operates today. No company is an island. It may interact with universities, cooperate closely with key suppliers and vendors, collaborate with application developers, content providers, technology houses, and design houses. Plus they can also work with various communities including ‘open’ communities, innovation networks, Standardization Setting Bodies, as well as customers and end-users. It may also involve working with startups and VC-funded entities. No company is an island.

In most, if not all, of these business relationships listed above, the companies involved will pass trade secrets back and forth.

Legal framework between the parties:

A legal framework of some sort is usually put in place between the parties, with the first step usually being the signing of a Non-Disclosure Agreement (NDA). This is a relatively simple legal agreement between a company and a counter-party of that company to exchange information, for the purpose of a project, marketing campaign, R&D or sourcing, etc. Examples of information which can be protected by an NDA are business proposals, financial data, new ideas, etc. Under an NDA, the signer promises the recipient that he will not disclose certain information to any third parties, except under circumstances described within that contract.

Although NDAs are specifically mentioned here, this legal framework may include a Memorandum of Understanding, a Development Agreement, a Commercial Agreement, and more.

The problem:

Ideally, whatever legal framework is put in place should contain details of the standard by which the parties involved will handle the disclosed trade secrets provided to them by the other party. However, this is an aspect which is often overlooked by many companies.

Basically speaking, Party A divulges trade secrets to Party B which Party B is then expected to look after, care for, and protect. However, Party A often fails to ask Party B to explain their overall process for managing trade secrets and specifically how Party B will actually care for the trade secrets entrusted to them by Party A.

One simple question Party A should ask of Party B is for details on how Party B looks after its own trade secrets

Good practice:

One simple question Party A should ask of Party B is for details on how Party B looks after its own trade secrets. Perhaps it should delve a little deeper and ask a series of questions…

  1. Does the other party have a trade secret policy and associated procedures and does it extend to trade secrets entrusted to it by others?
  2. Does the other party provide education for its employees about the handling of trade secrets?
  3. How does the other party handle access and access control procedures to limit the number of people having access to trade secrets, including trade secrets entrusted to it by others?
  4. What are the various protection mechanisms the other party has in place to protect trade secrets, including trade secrets entrusted to it by others?
  5. Does the other party conduct any regular audits of its process to handle trade secrets and if so how are these actually conducted? What were the key findings from the last such audit conducted?
  6. Does the other party have a system or tool in use to underpin its process for handling trade secrets, including those trade secrets entrusted to it by others?
  7. What governance structure and process does the other party have in place regarding trade secret asset management?

“The ability to ask the right question is more than half the battle of finding the answer.” -Thomas J. Watson

Of course, asking these questions is only half the battle. Getting the answers back and satisfying yourself that these answer are a true reflection on how the other party manages trade secrets, including those trade secrets entrusted to it by others, is crucial.

Do not just depend on NDAs:

In today’s competitive market, companies need to be as innovative as possible to prosper in the business environment and to keep pace with progress. No company can achieve this in isolation. Instead the company must cooperate and collaborate with others.

To this end, the development and acquisition of useful information, some of it qualifying as trade secrets, is crucial to create and provide new and improved goods and services. Information about technology that makes a company’s product unique, prototypes, or a list of key clients or customers are just a few examples of such trade secrets. As many of these trade secrets can be of great commercial value and be of significant importance to the company concerned, its uncontrolled disclosure may potentially lead to serious consequences.

NDAs are often misunderstood or used in an incorrect manner.

Given that some of these trade secrets will be shared with others, it is therefore imperative that these others fully respect this information, and strive to keep this valuable information confidential. If such trade secrets are not properly respected, it may cause damage to the reputation of the company, adversely impact key business relationships and even cause the company to end up being sued in court.

Too many articles on the protection of trade secrets, if and when shared with others, focus on Non Disclosure Agreements. A simple Google search on ‘Trade Secrets and Non Disclosure Agreements’ returns over 4.5 millions search results.

NDAs are often misunderstood or used in an incorrect manner, which can have serious legal consequences. Besides which, the terms and conditions of NDAs are often times breached, without any apparent repercussions.

In my opinion, a company should not depend solely on NDAs as they are treated like confetti by many. Rather a company should conduct a proper ‘fit for purpose’ audit of the other party’s ability and willingness to care for those trade secrets entrusted to it by others.

Donal O’Connell is the Managing Director of Chawton Innovation Services, a firm which offers consultancy in the areas of innovation and intellectual property management, and also licenses a number of IP software solutions to clients. Previously he enjoyed a 21-year career at Nokia, where he had such roles as VP of R&D and a Director of IP.

He’s an Adjunct Professor at Imperial College Business School in London, teaching about IP management. He is also the author of two books, “Inside the Patent Factory” and “Harvesting External Innovation”, along with hundreds of papers which have been published in magazines, websites, and blogs around the world.