Keeping trade secrets: the big questions

With businesses losing huge sums through theft of trade secrets, Dr. Emily O’Neill — a former FTSE110 in-house counsel and now UK head for a leading international litigation funding company — answers important questions that in-house lawyers should consider to protect their organisations' valuable information.
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1. Why is there a new focus on trade secrets in business and the media?

The primary reason is a result of the increasing value of intangible assets as a proportion of total business assets. These can be trade secrets, or other confidential information such as business strategies and customer lists.

As business information is more valuable than ever, theft of trade secrets is now estimated to cost business between 1-3% of national GDP in developed economies. £280 billion of secret information is reported as being stolen by cyber criminals each year.

Additionally, there is a greater need to exploit the value of intellectual property in a time of economic uncertainty where traditional forms of finance may be harder to secure. SMEs may need to leverage their IP as collateral for raising debt finance.

However, in-house counsel with smaller budgets need to streamline the way in which trade secret processes and training are implemented.

Some companies may decide to protect their intellectual property by retaining it as a trade secret rather than allocating budgets to patent prosecution on the belief that trade secrets are a lower cost option.

2. How good are companies at managing their confidential information?

Businesses vary widely in the maturity of their information management systems and processes. Corporations need to have an adequate handle on the volume of trade secrets in their possession, a comprehensive understanding of what protection is in place using appropriate tools and strategies to support that process.

Some executives within organisations admit their own lack of understanding of how many trade secrets their company has received from third parties, and what is done with them.

A recent survey we conducted with Chawton IP Solutions, confirmed that 73% of respondents did not possess a formal trade secret policy and 56% did not have a documented process for handling trade secrets. Alarmingly, nearly 88% confessed to not having any access to a system or tool to support trade secret management. 

3. What are the typical trade secrets that companies have?

Trade secrets are the core information or technology that a business uses to generate revenue. Examples of trade secrets include scientific processes, formulas, blueprints, algorithms, raw or processed data, software and manufacturing processes.

However, valuable business information extends beyond trade secrets, it’s helpful to think about the bigger picture so that thorough safeguarding strategies can be put in place.

This broader category of valuable business information includes customer lists, financial information, market research studies, internal costing, and pricing information.

Ultimately, building a competitive edge between a company and its competitors differs between industries. The types of trade secrets maintained by corporations to increase their competitive advantage is often reflective of existing barriers to entry, in addition to legislative and technological landscapes.

4. Why are in-house lawyers key to maintaining trade secret value within their business?

With any trade secret, limiting the disclosure of information plays an important role in its inherent value. In-house lawyers are defenders of such vital information, and we work to implement and maintain safeguarding measures through IP security strategies.

These can include consistent use of template non-disclosure agreements (NDAs) and processes to manage record keeping and training.

In-house lawyers are key to taking a holistic approach to protect valuable business information and coordinate work with other departments. For example, working with IT to ensure that cybersecurity management is robust, or sales to control what information is disclosed to customers.

As part of a robust protection strategy, an in-house lawyer will create policies that maintain trade secrets. By implementing reasonable steps to safeguard valuable information, rights are retained, making it possible to take legal enforcement if those rights are breached.

5. How do in-house lawyers safeguard their company’s trade secrets?

A robust trade secrets policy has many components, which help to support broader business planning, IP strategy, and data compliance objectives. They can include:

  • a rolling method for identifying information that is valuable and should be kept as a trade secret (as opposed to other forms of IP)
  • proper supply chain management, such as standard confidentiality clauses and non-compete provisions
  • identifying trade secret information obtained from third parties, isolating it, and limiting access and use in accordance with the agreement
  • robust document management, including classifying documents, establishing permission levels, recording access, encryption and physical protection
  • training all employees on appropriate measures to identify and keep valuable business information safe
  • a periodic policy review cycle, as it’s imperative for businesses to review their protocols on a regular basis and ensure continued alignment with business goals

6. What are the reasonable steps that companies must take to retain value of their trade secrets?

As part of my role at Deminor, I test companies that want to bring an action for trade secret theft, on whether they can demonstrate that ‘reasonable measures’ have been taken to protect trade secrets.

As an in-house counsel, implementation of ‘reasonable measures’ had to compete with all the other legal and compliance work that was part of my day-to-day.

Ensuring that you can tangibly demonstrate that your company has implemented robust policies that maintain the business’s greatest competitive advantage is the goal. Although this cannot guarantee protection, it will help to minimise risk and further increase your likelihood of successfully safeguarding that information when risks crystallise.

7. Is an NDA enough to do this?

The simple answer is no. An NDA is a starting point but is not effective as a standalone tool.

For example, in the recent case of L’Oréal v Olaplex, one of the key aspects of the ruling was that there was too much ambiguity within the standard language of the NDA. This – combined with the fact that the alleged trade secrets were not clearly defined and described – meant that even where references were made to categories of ‘trade secrets’, the Court deemed them too broad to be enforced.

Trade secrets, by definition, lose ‘trade secret status’ if they become generally known, or are readily accessible by proper means.

While the L’Oréal case focuses on only a narrow selection of the issues that may emerge when trade secret protection goes wrong, it does highlight that an NDA should not be considered as the standalone method of protecting trade secrets.

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