Patents, trademarks, and copyrights often dominate intellectual property (IP) discussions. Legal mechanisms exist to protect these intangible assets, such as the protections provided by filing with the various global and local patent, trademark, and copyright offices.
Often overlooked, trade secrets and confidential information represent a unique category of IP assets. These intangible assets, including proprietary formulas, processes, methods, and confidential business information, hold a distinct value that can significantly impact a company's competitive edge and, in some cases, its ability to trade and sell its products.
However, despite their immense value, trade secrets and confidential information are often under-protected and exposed to potential loss. The owner's rights to keep them secret are not always enforceable, posing a significant risk. This article emphasizes the importance of these assets and provides strategies for their effective management and protection, focusing on the role of analysis and auditing.
The Importance of Trade Secrets and Confidential Information
As perhaps the most intangible of intangible assets, trade secrets and confidential information are hard to define. It could be anything from the recipe for Coca-Cola to complex manufacturing processes or an investment product pricing algorithm.
What distinguishes trade secrets from other business data?
Understanding the distinction between trade secrets and other business data is essential. For instance, the ingredients in a Subway sandwich or the sales techniques of a top rep are not trade secrets. These can be easily discovered or reverse-engineered, even if unique or unusual. On the other hand, trade secrets are information that derives independent economic value from not being generally known and is subject to reasonable efforts and measures to maintain secrecy.
The simple definitional test asks, “Would I give this information to a best friend who asked for it?” If the answer is a resounding “no!” you may be dealing with a trade secret.
Therefore, trade secrets are defined as information that derives independent economic value from not being generally known and is subject to reasonable efforts and measures to maintain secrecy.
The Risks of Neglect
Failure to adequately protect trade secrets and confidential information can lead to severe consequences, including financial loss, competitive disadvantage, and reputational damage. Worse, without robust processes, your likelihood of enforceability is reduced, meaning litigation is likely. So, do you lose the case or lose the trade secret?
Unlike patents, which expire after a set period, trade secrets can potentially provide indefinite protection—provided they remain widely undisclosed. You have undertaken the three questions to protect them.
- How can you effectively communicate to anyone with access that the information is a trade secret?
- How can you emphasize to your organization that the information is valuable?
- How can you demonstrate that you have taken reasonable measures to protect the trade secret through documented and auditable processes?
Robust protection mechanisms and processes are essential. For instance, when 70 Tesla employees left to join rival EV manufacturer Rivian Automotive, the former sued, alleging the theft of trade secrets, including details of its proprietary battery designs. After several attempts to stall the case, it is still ongoing.
The bitter rivalry between these two firms demonstrates the value of this class of trade secrets (EV battery technology). This is just one case in the rising annual litigation cases of trade secret breaches or infringements.
Litigation is also rapidly accelerating due to changes & upcoming changes in the US, EU & JP law surrounding employee NDAs, confidentiality & conflict of interest clauses. Even though the changes focused on the “ability to access support,” the opportunity to protect victims gives the thread to sensitive information leaks. You can read more here. The recent amendments to the Unfair Competition Prevention Act (Japan) strengthen the protection of trade secrets, including provisions for increased penalties for trade secret theft and expanded definitions of what constitutes a trade secret.
Auditing: The First Step Toward Protection
To protect your trade secrets, you need to be able to identify them and show that those who have access understand their obligations. You have a process that is communicated, known, and auditable. For this, you need a trade secret audit.
Why audit your trade secrets?
Auditing trade secrets and confidential information is essential for identifying and valuing these assets.
Regular annual audits help ensure all critical information is accounted for, correctly classified, and adequately protected. Moreover, audits will reveal gaps in current protection measures and processes and provide a roadmap for improvements.
The process should be carried out annually, just like a financial audit. Outlined risks and their impacts need to be understood, and the business needs to build a response to tackle areas of improvement agreed along with stakeholder ownership. This is a fundamental requirement for all General Counsels (GCs) and Heads of IP; without an audit, you unknowingly expose your organization to avoidable risks. In some organizations, such is the impact that such audits should be driven by the Chief Risk Officer (CRO) and the Chief Information Security Officer (CISO).
Components of a comprehensive audit
A thorough audit is essential to safeguard your organization’s trade secrets. This process involves the following steps based on critical questions asked before:
Communicate Trade Secret Status
Effectively inform all individuals with access that the information is classified as a trade secret. Catalog all trade secrets and confidential information to ensure comprehensive awareness and management. This ensures that its confidentiality and importance are clearly understood across the board.
Emphasize Information Value
Clearly articulate the significance and value of the trade secret to your organization. Assess the economic value of each asset to prioritize protection efforts based on their strategic importance. This helps underscore the critical nature of the information and aligns internal understanding of its strategic importance.
Implement and Communicate Protective Measures
Identify potential threats and vulnerabilities to mitigate risks proactively. Establish a robust process demonstrating that reasonable measures are in place to safeguard the trade secret. Ensure these protective actions are well-documented, communicated to relevant parties, and auditable to maintain rigorous oversight and compliance. This includes tracking access through intelligent NDAs, monitoring usage, assessing risks, and addressing potential breaches with the oversight of a dedicated legal steering team.
Once the risks are understood, you must implement a process that tracks access through smart NDAs and verification measures across the organization. This process involves tracking usage and assessing risks and potential breaches via a legal steering team.
Strengthening protection following rigorous auditing
Once you have completed your audit, you’ll understand the scope and urgency of protecting your trade secrets. Consulting with IP service providers, legal specialists, and trademark, copyright, and patent law experts can help ensure that some proprietary secrets are better protected through these established channels. The trade secrets that remain can be protected in various ways.
Developing a Protection Plan
After identifying and cataloging your trade secrets, developing a comprehensive protection plan is vital. This plan should outline measures to safeguard these assets, including physical security controls, cybersecurity protocols, NDAs, and employee training programs. This step aligns with the three core questions highlighted earlier:
- Communicating Trade Secret Status: Ensure all with access recognize the classification.
- Emphasizing Information Value: Convey the importance of each trade secret.
- Implementing Protective Measures: Set up and document protection processes.
Implementing Security Measures
A multi-faceted approach to security is crucial, encompassing physical, digital, and legal measures:
- Physical and Digital Security: Use secure storage solutions for physical documents and implement robust cybersecurity measures for digital information, including encryption and access controls. Regular security audits should be conducted to ensure that vulnerabilities are promptly addressed.
- Employee Training: Conduct regular training sessions to educate employees on maintaining confidentiality and recognizing potential security threats.
- Legal Safeguards: Implement non-disclosure agreements (NDAs) and other legal instruments to bind employees and third parties legally to confidentiality obligations.
Leveraging data analytics Blockchain and AI
Policing potential trade secret theft can be challenging. However, the latest data analytics systems, blockchain technology, and AI can help detect potential breaches or losses, enhancing the protection of trade secrets.
The Role of Data Analytics
Data analytics can be pivotal in protecting trade secrets and confidential information. By analyzing patterns and anomalies in data access and usage, companies can detect potential breaches early and take preventive action.
AI for Enhanced Protection
Artificial Intelligence (AI) can further bolster protection efforts through:
- Predictive Analysis: AI algorithms can predict potential security breaches by analyzing historical data and identifying risk factors.
- Automated Monitoring: AI-powered systems can continuously monitor network activity and flag suspicious behavior in real-time.
- Enhanced Authentication: AI can improve authentication processes, making it harder for unauthorized individuals to access sensitive information.
Blockchain Technology for Robust Trade Secret Audits
Blockchain technology offers a robust framework for improving the accuracy and security of trade secret audits. Its decentralized and tamper-proof nature ensures that it cannot be altered once a trade secret or confidential information is recorded.
Implementing blockchain in your trade secret management strategy strengthens protection and streamlines the audit process, continuously safeguarding your valuable IP assets against threats. Our partner, Peerdweb, can implement all these steps to ensure robust security.
Conclusion
Trade secrets and confidential information are invaluable IP assets warranting careful management and protection. Companies can safeguard these assets and maintain a competitive advantage through rigorous auditing and strategic use of security measures. AI-powered data analytics and blockchain technology provide additional layers of protection, ensuring that trade secrets remain secret and confidential information stays confidential. In an era where information is power, overlooking these assets is a risk that no company can afford to take.
