Trade secrets, a unique and often elusive aspect of corporate IP, stand apart from copyrightable content and patents. Their very essence demands concealment from prying eyes while being shared among those who need creative access. This unique nature of trade secrets makes them a fascinating and intriguing aspect of corporate strategy.
At the same time, these proprietary information, processes, or formulas are not just the backbone of innovation and market differentiation but also a unique source of pride and responsibility. They make Coca-Cola taste unique, Tesla engines powerful, and WD-40 so effective.
However, the evolving threat landscape and increasing regulatory demands make it more crucial than ever for businesses to manage their trade secrets through regular audits proactively. Failure to do so can expose a company to legal and financial risks. Evalueserve IP and R&D and Peerdweb have formed a strategic partnership to conduct IP audits in response to these challenges. Peerdweb’s revolutionary blockchain-based SaaS platform is set to transform trade secret management, enabling enforceable and auditable processes and ensuring your business is fully equipped to handle these modern challenges. This article will explore these risks and underscore the importance of finding gaps to improve trade secret management by conducting regular audits.
Understanding the Critical Role of Trade Secrets
First, let’s examine the landscape of trade secrets and how they function.
Definition of Trade Secrets
Trade secrets encompass confidential business information that gives a company a competitive advantage.
This can include anything from product formulas and manufacturing processes to customer lists and marketing strategies. Unlike patents, trade secrets are not publicly disclosed, making their protection critical to maintaining a business’s unique market position.
They also cannot be patented because they tend not to constitute a sufficiently distinct innovation. No matter how unique your granny’s chicken soup recipe may taste, it is chicken soup.
The Growing Threat Landscape
The importance of trade secret protection has grown in parallel with the increasing complexity of today’s threat landscape.
Cyber threats are more sophisticated, employee mobility is higher than ever, and regulatory changes continue to evolve, particularly in trade secrets; where less legal protection is available, it’s vital to remain vigilant.
These factors heighten the risks of inadequate protection and underscore the need for regular trade secret audits to identify and address management gaps. Yet, despite these growing threats, many businesses overlook this critical aspect of risk management.
Let’s turn to the top five risks in trade secret management and examine how to mitigate these risks.
Risk 1: Exposure to Legal Liabilities
Trade secrets must be protected with non-disclosure agreements and other legal mechanisms. Failure to do so can result in theft or the accidental infringement of others’ trade secrets.
The three main types of legal liability are as follows:
Non-Compliance with Legal Requirements
Poor trade secret management can lead to non-compliance with regulations. Companies must take reasonable steps to protect their trade secrets in many jurisdictions.
In the US, such requirements differ from state to state. Failure to manage trade secrets and address vulnerabilities can result in legal repercussions, including penalties for non-compliance.
Increased Litigation Risk
When trade secrets are not adequately protected, companies become more vulnerable to legal challenges. One classic example is Tesla’s recent lawsuit against an ex-supplier regarding its proprietary EV battery design.
Numerous cases have involved businesses facing costly lawsuits due to the mismanagement or theft of trade secrets. With a regular audit, gaps in protection can be noticed, exposing the company to potential litigation.
Cost of Legal Defense
Defending against lawsuits related to trade secret mismanagement can be a significant financial burden.
Legal costs can quickly escalate, draining resources that could otherwise be invested in growth and innovation. Best trade practices secret management help identify and mitigate risks before they lead to expensive legal battles.
Risk 2: Financial Loss Due to Trade Secret Theft-A Looming Threat
Inadequately managing and protecting trade secrets can lead to severe financial losses, failure to generate revenue and legal repercussions.
Economic Impact
The financial consequences of trade secret theft can be devastating. Companies may suffer significant revenue loss, diminished market share, and even bankruptcy in severe cases.
Regular audits help ensure that critical information is adequately protected, reducing the likelihood of such financial damage.
Examples of High-Profile Trade Secret Breaches
Several high-profile cases have revealed significant financial losses stemming from poor trade secret management, which could have been identified and mitigated through proper trade secret audits. Here are just two of them:
Waymo vs. Uber (2017)
Waymo, a subsidiary of Alphabet Inc., sued Uber in 2017, alleging that Uber had stolen trade secrets related to its self-driving car technology through former Waymo engineer Anthony Levandowski.
Before his departure, Levandowski copied over 14,000 confidential files and started his own company, which Uber had acquired. The case was resolved in 2018 when Uber agreed to provide Waymo with $245 million in equity as part of the settlement.
This lawsuit resulted in financial loss, disrupted Uber’s autonomous vehicle program, and damaged its reputation.
Syntel vs. TriZetto (2023)
TriZetto Group sued Syntel for misappropriating trade secrets related to its healthcare software, Facets.
Syntel allegedly used these secrets to develop competing products, resulting in an initial $284 million damages award for TriZetto. However, the Second Circuit later overturned this verdict, ruling that the damages were unjustified as TriZetto’s trade secrets hadn’t significantly lost value.
Despite reducing financial penalties, the case highlighted the strategic risks of trade secret theft and the complexities of enforcing trade secret rights.
Impact on Shareholder Value
Trade secret losses can directly affect a company’s valuation and investor confidence. When sensitive information is compromised, the market often reacts negatively, leading to a drop in stock prices and reduced shareholder value. Regular audits are essential to maintaining investor confidence and protecting shareholder interests.
When sensitive information is compromised, the market often reacts negatively, leading to a drop in stock prices and reduced shareholder value. Regular audits are essential to maintaining investor confidence and protecting shareholder interests.
Risk 3: Competitive Disadvantage
When a company mismanages its trade secrets, the knock-on effects are a loss of competitiveness and reduced innovation.
Erosion of Competitive Edge
One crucial reason for maintaining strong trade secret management is to protect a company’s competitive edge, which can be effectively safeguarded and identified through regular trade secret audits.
When trade secrets are inadequately protected, competitors can gain access to valuable information, neutralizing the advantages that the secrets provide.
Impact on Innovation
Innovation is the lifeblood of any successful business. However, innovation can be stifled if trade secrets are not adequately protected.
Competitors may use stolen information to outmaneuver the original creator, leading to lost opportunities and diminished market leadership.
Case Studies
Industries ranging from technology to pharmaceuticals have seen companies suffer significant competitive disadvantages due to trade secret leaks.
In these cases, failure to conduct regular audits allowed critical information to fall into the hands of competitors, resulting in a loss of market leadership.
Here are two examples:
1. Kodak (2011)
Kodak‘s failure to protect its digital imaging technology led to competitors like Sony and Canon surpassing them, contributing to Kodak’s decline. Their mismanagement of trade secrets and late transition to digital cameras caused them to lose market dominance.
2. Micron vs United Microelectronics Corp. (UMC) (2018)
In 2018, two of Micron’s former employees allegedly stole trade secrets related to DRAM chip technology. They shared them with a Taiwanese semiconductor manufacturer, weakening Micron’s competitive edge and resulting in legal action and strategic losses.
Risk 4: Damage to Reputation and Brand Trust
Another knock-on effect of the mishandling of trade secrets is the gradual diminishment of a company’s reputation and trust in its brands.
Public Perception
A breach of trade secrets can severely damage a company’s reputation. Customers, partners, and the market may lose trust in the company’s ability to protect its critical information, leading to lost business and damaged relationships.
Long-Term Reputation Damage
The effects of a trade secret breach can linger long after the initial incident. Companies may need to help to rebuild their reputation and regain their stakeholders’ trust. Regular audits are essential for solid trade secret management, helping to identify potential risks that could harm the company’s reputation and brand trust.
For example, the SolarWinds breach in 2020, caused by a supply chain attack, exposed sensitive information from numerous clients, including government agencies.
The mishandling of security protocols and trade secrets led to significant reputational damage and loss of competitive trust in the cybersecurity market.
Crisis Management Costs
Managing a public relations crisis following a trade secret breach can be costly and time-consuming.
Companies may need to invest in extensive PR campaigns and legal counsel to mitigate the damage, further straining resources. Regular audits help avoid such crises by identifying and addressing vulnerabilities before exploitation.
Risk 5: Internal Risks and Employee Turnover
The final risks of poor trade secret auditing we must discuss are those that the public and competitors may never see: the negative impact on staff morale and motivation.
Insider Threats
Current and former employees with access to trade secrets pose a significant risk. Insider threats can lead to the unauthorized disclosure of sensitive information, causing substantial harm to the company.
Regular audits help identify potential insider threats and implement measures to mitigate them.
Employee Morale and Retention
A company failing to protect its trade secrets can decrease employee morale.
Essential personnel may feel insecure about the company’s future and choose to leave, resulting in increased turnover and loss of valuable talent. Regular audits demonstrate a commitment to protecting the company’s assets, helping to maintain employee morale and retention.
Training and Awareness
Regular training and internal audits are needed to mitigate insider risks. Employees must understand the importance of trade secret protection and their role in safeguarding this critical information.
Mitigating the Risks: The Case for Regular Trade Secret Audits
There are several reasons why a company should institute a regular audit process to protect its trademarks and minimize associated risks.
Proactive Risk Management
Conducting regular trade secret audits is a proactive approach to risk management.
Companies can significantly reduce the risks of trade secret mismanagement by proactively identifying and addressing vulnerabilities before they can be exploited.
Developing a Comprehensive Audit Plan
An effective trade secret audit plan should include a thorough review of all processes, technologies, and personnel involved in handling sensitive information. Conducting regular audits is a crucial step to mitigate all potential risks.
Role of Technology in Audits
Modern tools, technologies, and human IP consultancy expertise can enhance the trade secret audit process.
Evalueserve recently worked with a global technology leader known for innovation to catalog, manage, and protect its IP assets. We used an AI-powered algorithmic process to streamline the company’s IP library and enhance its competitive edge.
Utilizing advanced data protection solutions, cybersecurity measures, and employee monitoring tools can enhance the identification and resolution of potential threats, thereby increasing the efficiency and effectiveness of audits.
Prioritizing Trade Secret Protection
The risks of skipping trade secret audits are significant and wide-ranging, from legal liabilities and financial losses to competitive disadvantages and damage to reputation. These risks can profoundly impact a company’s long-term success and viability.
Proper trade secret management involves protecting these valuable assets through legal means like non-disclosure agreements and systematic and proactive approaches such as regular audits. Safeguarding trade secrets through diligent auditing is a business imperative. Companies prioritizing trade secret protection will be better positioned to thrive in today’s competitive and evolving business environment.
Businesses must prioritize regular trade secret audits as a critical component of an enterprise’s risk management strategy. This approach allows them to safeguard their IP assets, preserve their competitive advantage, and secure long-term success.
