Demystifying Trade Secrets
What is a Trade Secret?
A trade secret is any information used in commerce that the owner has taken reasonable measures to keep secret, from which the owner derives independent economic value and such information not being readily ascertainable by the public. Such trade secrets are afforded legal protection against theft as long as the owner continues to derive commercial value from it (as opposed to patents which usually only provide up to 20 years of protection).
18 U.S.C. § 1832: Theft of Trade Secrets a) Whoever, with intent to convert a trade secret, that is related to a product or service used in or intended for use in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will, injure any owner of that trade secret, knowingly — (1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains such information; (2) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys such information; (3) receives, buys, or possesses such information, knowing the same to have been stolen or appropriated, obtained, or converted without authorization; (4) attempts to commit any offense described in paragraphs (1) through (3); or (5) conspires with one or more other persons to commit any offense described in paragraphs (1) through (3), and one or more of such persons do any act to effect the object of the conspiracy, shall, except as provided in subsection (b), be fined under this title or imprisoned not more than 10 years, or both.
b) Any organization that commits any offense described in subsection (a) shall be fined not more than the greater of $5,000,000 or 3 times the value of the stolen trade secret to the organization, including expenses for research and design and other costs of reproducing the trade secret that the organization has thereby avoided.
A company with a commercially valuable invention/information must face the decision as to whether to keep the invention a secret or whether to seek a patent (or other forms of intellectual property protection) on it. Assuming the invention contains a commercial value and is not general industry knowledge, here is a methodology we frequently follow while advising clients on such a decision:
Categorize all such inventions as being one of the following two types (we call this the Subject Matter Test):
TYPE 1: Processes, formulae, methods and other intangible information such as customer lists, pricing, vendors and contracts that are not otherwise patentable under U.S.C. §101
TYPE 2: Processes, methods, systems, apparatus and compositions of matter that are patentable under U.S.C §101.
Categorize all such inventions as being one of the following two types (we call this the Discoverability Test):
TYPE A: Information that can be seen or learnt from end-use of the product, or easy reverse engineering of the product, such as fluid mixtures, designs, devices, articles of manufacture, client-facing functionalities, user interfaces and documentation.
TYPE B: Information that is not publicly accessible (for example, through reverse engineering or in publicly available documentation) such as secretly maintained recipes, customer lists, new formulae or server-side software.
Using these two tests, each individual invention or information can be classified as:
TYPE 1A: Information that is unpatentable as well as easily ascertainable. Such information is best protected by copyright (for example, the company can publish technical research papers to at least claim authorship and to contribute to the general state of the art).
TYPE 1B: Information that is unpatentable but hard to determine from public documents, product use or reverse engineering. Such information is best protected by trade secrets. Trade secrets do not need to be registered with the government, but the company bears the burden of accurately defining the secret and actively protecting its secrecy.
TYPE 2A: Information that is patentable and easily ascertainable from public documents, product use or reverse engineering. Such information is best protected using patents, assuming the commercial value derivable from the information exceeds the cost of obtaining and maintaining a patent (in the US, for example, a patent can cost upwards of $20,000 over its lifetime just to obtain and maintain). If the commercial value derivable from the information does not justify the cost of patenting, the information is best protected using copyrights — that is the company publish research papers that not only establish authorship and contribute to the general state of the art, but also preclude others from later obtaining a patent over the same invention.
TYPE 2B: Information that is patentable but not ascertainable from public documents, product use or reverse engineering. Such information can be protected using both patents and trade secrets, and the decision depends on the commercial value derivable from the information (explained for TYPE 2A) as well as strategic importance of the information in light of the company’s competitors. A patent by definition discloses the invention to the public to an extent that anyone with ordinary skill in the art would be able to practice the invention by reading the patent and without undue experimentation. Competitors for example, may use the patent to build similar (yet sufficiently different) products once the patent application is published (typically 18 months after application filing). What’s more, competitors are free to build identical products and derive commercial value without owing any royalties in the time between publication of an application and successful grant. And if the application is not ultimately granted (due to non-payment of fees or prior art), you’ve just given away your secret for competitors to freely use. Keeping the invention as a trade secret in these cases is a more prudent approach.
Yet, patents remain the most preferred route for most companies with TYPE 2B inventions. Patents in general around the world are affordable a stronger protection (for instance emerging market countries may not even recognize trade secret misappropriation as a valid civil claim for relief, while the alternative recourse like corporate espionage, cyber-crime and theft may be much more difficult to investigate and prove).
Further, patents can be licensed to competitors in exchange for royalties, or even bought and sold as assets — which although possible, is rather difficult with trade secrets.
Patents also provide protection against independent development of the secret by competitors while trade secrets must be actually stolen from you in order for a court to award you protection. For example, if you competitor stumbles upon (or even derives through reverse engineering) your secret invention, without actually stealing your documents or hiring your former employees who had access to such secrets, you would have no claim for relief. However, if you have a patent on such an invention, you could still sue the competitor for royalties and damages.
How Do I Protect My Trade Secrets?
Copperpod follows and proposes to clients a 4-pronged DM2 model of trade secret management:
- DEFINE commercially valuable trade secrets owned by the company, the date of origination, creators as well as employees and vendors that have been given access to individual trade secrets. This may be implemented as an intellectual asset management database maintained by the in-house counsel.
- MARK documents that contain trade secret information providing ample notice to a recipient of the confidential nature of the document.
- DISSEMINATE to all current and new employees and vendors the nature and importance of trade secrets that will be disclosed to them, and insert trade secret provisions in contracts.
- MONITOR continuously the activities and association of current and former employees and vendors with competitors
Based on trade secret misappropriation cases filed over the last 10 years, 40% of cases dealt with former employees taking trade secrets with them over to their new employers while 25% of cases dealt with suppliers, consultants and vendors misusing trade secrets disclosed to them in due course of business. Interestingly, cyber-criminals and hackers constituted only 15% of trade secret theft, while the remaining 20% were attributable to actions by current employees at companies where the theft occurred. These numbers highlight the need for not just technical solutions (effective most against cyber-criminals and hackers) but also (and even more so) legal and procedural solutions to protecting trade secrets before, during and after the secrets are willingly disclosed to employees and vendors.
While laws around trade secrets in the US and around the world may not yet be as mature as those around patents, with the Defend Trade Secrets Act of 2016 (DTSA) which brought trade secrets under civil and criminal federal law in addition to trade secrets being protected under state law, and weakening of patent protections over the last five years, trade secrets are now becoming an increasingly important means for companies to protect their intellectual property.
Copperpod helps companies protect their competitive advantage through trade secrets, and trade secrets through technology. Contact us to find out if you have trade secrets that might be at risk.