Trade Secrets – the hidden asset, until it isn’t: Part One
Article | December 30, 2022
Trade Secrets – the hidden asset, until it isn’t: Part One
Trade Secrets – the hidden asset, until it isn’t: Part One
This article is part one in a two-part series providing an overview of trade secrets. Please see part two here.
Introduction
Most, if not all, organisations unknowingly develop confidential information including trade secrets. Take, for example, a courier who learns that, at a particular time of day, it is best to take a certain route to avoid traffic. If this route is only known to the courier, this is a trade secret that offers them a commercial advantage of reduced travel time. Let’s now suppose the courier works as an employee: does the employer know that the courier has developed their own route to avoid traffic? Once the route is learnt by the employer, is it kept secret? This example is simplistic but it highlights how, without proper identification and management, an organisation can unknowingly own confidential information that has measurable value.
What is a trade secret?
The term “trade secret” can mean different things to different people, and this leads to confusion or uncertainty about the nature of trade secrets. The best definition of a trade secret is provided by the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, where a trade secret:
- must be secret – the information shouldn’t be readily available.
- must be reasonably protected – what is “reasonable” can vary depending on the specific circumstances.
- must derive value from its secrecy – includes potential and actual value.
This broad definition means that trade secrets are used for a wide variety of assets, probably more so than patents. For example, trade secret information can include:
- customer lists;
- commercial bids and contracts, and contractual terms;
- customer or supplier lists and related data;
- financial information and business planning;
- processes, know-how, and technology;
- information regarding internal business processes;
- manufacturing or production processes;
- chemical and mathematical formulae;
- source code;
- R&D programs including structure, management, inputs and outputs, and data; and
- business methods.
Trade secrets also include “negative” information, such as knowing what doesn’t work. For example, R&D programs often generate data on what doesn’t work such as failed experiments and prototypes. This negative information typically takes a long time to develop and at significant costs, and can be highly valuable. If a competitor obtained this information, it would provide them with a significant saving of R&D time and expenditure.
Because trade secrets do not require registration, they offer a highly flexible IP protection mechanism. And, unlike patents that have a fixed term of protection, trade secrets can theoretically last forever. However, a trade secret can lose its protection if it fails to remain secret, valuable, or be reasonably protected. Of these three, secrecy is the biggest threat to the loss of protection or at least a loss of the exclusivity of this protection. This can happen in a relatively benign manner, such as reverse-engineering or independent discovery, or in malicious circumstances such as misappropriation or theft. Once a trade secret loses secrecy, there are few to no options available to protect the trade secret.
Identification and management of trade secrets
Before a trade secret can be protected and managed, it first needs to be identified.
The term “unknown unknowns” springs to mind for organisations that pay little regard to trade secrets. As discussed in our article about inventors being too close to their invention, creators of trade secrets similarly are sometimes too close to appreciate their secrecy or value.
Identification of a trade secret requires a more in-depth view of an organisation, compared to other IP protection regimes such as patents. This is because trade secrets can often span across an entire organisation, whereas patents and the creation of inventions tend to sit within a silo of an organisation. How trade secrets are identified can also depend on the type of organisation, and what secrets are trying to be identified – for example, trade secrets concerning chemical process versus trade secrets concerning marketing.
Once a trade secret has been identified, it then needs to be managed to ensure that it remains a secret, its risk mitigated, and its value is fully leveraged by the organisation. Because a trade secret is an unregistered form of IP protection its management is not a “set and forget” approach, trade secret management requires continual review and care to ensure its secrecy and value is retained. And unlike other forms of IP management, trade secret management can involve a wide variety of personnel typically well beyond an IP department, especially for larger organisations.
In many respects, trade secrets, if properly managed, offer a significant commercial advantage compared to other forms of intangible asset protection. For example, a patent has a limited term of protection, and details of the invention described in the patent must be publicly disclosed. This means your competitor can: (i) learn about technology you’ve developed which may allow them to accelerate their R&D program; and (ii) use your technology once the patent has expired. This is not to say patents only offer limited protection – for many they are extremely valuable – but for information that is better to not disclose publicly, cannot be easily reverse engineered, and which may have a life longer than that provided by a patent, trade secrets may be a better option. Conversely, and rather ironically, information that has a commercial lifetime significantly shorter than the term of a patent, such as software, may be better protected with trade secrets.
Organisations can form internal structures that help to foster and protect trade secrets. For example, R&D divisions being siloed to prevent the flow of information. However, invention and innovation results from a flow of ideas. Paradoxically, it would seem, the use of trade secrets to protect IP within an organisation may undermine its ability to invent and innovate. This further emphasises how the development and protection of trade secrets is an ongoing process that needs to be balanced with competing commercial needs.
Trade secrets - a human management problem
An invention requires a human inventor, but a patent can exist independently of its inventors. This means that, in theory, an employer does not need to worry about an employee who is listed as an inventor on a patent from leaving an organisation (issues of employee value notwithstanding).
Trade secrets are similarly generated by people. However, a trade secret can only continue in existence provided its creators and caretakers take “reasonable measures” to keep it secret. This makes trade secrets, in part, a people management issue. While the rise of digital technology has automated many tasks, the majority of tasks associated with proper trade secret asset management must be conducted by people. These tasks must also be performed daily.
As mentioned above, trade secret management can involve a wide variety of personnel. In most organisations, only the People and Culture (PC) Department – also known as Human Resources – has the scope and capacity to oversee and manage policies covering employees in their day-to-day activities. This makes the PC Department vital in the management of trade secrets.
PC Departments should ensure that terminated employees return confidential information and trade secrets. Exit interviews can also be seen as an opportunity to harvest trade secret information. PC Departments tend to be responsible for training for C-Suite Executives, Senior Managers, and employees. A lot of the time, poor trade secret identification and management comes back to poor awareness through inadequate training. Conversely, PC Departments should be conscious of any third-party trade secrets that may be obtained during onboarded of new employees, especially those that have been poached from rival organisations. For example, an employer who employs a new employee who uses a third-party trade secret unbeknown to the employer can have ramifications for the employer.
Data shows that a significant percentage of trade secret litigation cases involve theft by employees (individual contributors; middle managers; executives). This makes the PC Department an essential part of trade secret management. For companies that outsource their PC Department, care is needed to ensure the delivered PC services cover the protection of trade secrets.
