You’ve Decided to Conduct a Trade Secret Audit. Now What? Part 2

You’ve Decided to Conduct a Trade Secret Audit. Now What? Part 2 by David L. Cohen{5:35 minutes to read}  We all know what a ‘trade secret’ is, but legally speaking let’s be clear. And how about a ‘trade secret audit’? It’s probably safe to say it’s a review of all policies, procedures, and agreements in place surrounding a company’s trade secrets, to ensure they are in accordance with current best practices, in order to legally protect company intellectual property (IP) and assets.

There are five key areas of focus that a company performing a trade-secret audit must consider as they navigate this crucial undertaking. The following article outlines the five areas in full detail.

#1: Identify Trade Secrets and Metadata

To get started, a company must identify all working trade secrets within the organization. Once this is done, the metadata for each of those trade secrets must be identified including the following: the creation date; the creators; the physical location of the trade secret; the legal owner of the trade secret; the person(s) responsible for managing the trade secret; the persons with authorized access; the protection mechanisms in place to protect the trade secrets – both contractual (nondisclosure and employment agreements, etc.) and physical; whether any third parties have accessed the secret and under what conditions; and many others.  

#2: Review of Agreements

The second area of focus requires a thoughtful review of all agreements relevant to the company’s trade secrets. The agreements and relevant sections within agreements will include: non-disclosure agreements; non-compete agreement and intellectual property (patent, trademark, copyright and knowhow) clauses; intellectual property assignment provisions in employment or contractor agreements; remedy provisions in any of the above identified agreements as well as remedy provisions in any agreement for breach of confidentiality; and agreements governing the treatment of a third party’s confidential information by the company — as well as the company’s treatment of a third party’s confidential agreement (e.g., in the case of an OEM arrangement).  

These agreements must be reviewed and modified to ensure they comply with best practices as developed through relevant case law and statutory changes (e.g., with all Defense of Trade Secrets Act notice requirements). One challenging task in this area of focus is being able to identify situations where there should be an agreement to cover a particular trade secret “situation” but none exists, and then drafting the “missing” agreement(s) and getting the necessary parties to enter into it.

#3: Employee Policies and Procedures

The third area concerns the company’s policies and procedures regarding employees. It entails drafting, reviewing/updating a company’s trade secret document preservation policy and procedures (including any relevant forms). It also requires a review of all relevant human resources policies and procedures, and employee manuals and training that may impact trade secret policies.

Finally, it requires human resources training on trade secret protection to ensure compliance with relevant policies and practices during recruitment and hiring; during employment departure processes and exit interviews; and the treatment of former employees’ workspaces, laptops, mobile devices, and the like.

#4: Tools to Promote Protection

The fourth area relates to the use and implementation of objective tools to promote trade secret protection. This can include a forensic audit of all electronic security policies and protocols. It may include the design and implementation of appropriate physical and electronic security measures to protect trade secrets and ensure compliance with all the processes discussed above. Finally, it may include the use of a trade secret tracking tool like Hazel to ensure uniform, trade secret metadata collection and reporting.

#5: Monetization
When a trade secret portfolio is organized and well understood, the first step towards monetization is valuation. Evaluating trade secrets in a vacuum is always challenging, but the answers to the following questions will go a long way to assigning a non-speculative value to the trade secret:

  •          How much will it cost to replace the trade secret if it were lost/had to be recovered?
  •          What is the cost to create it?
  •          What is the future anticipated income and present value associated to it?
  •          What is the cost to maintain it?
  •          What is the marketplace value of similar trade secrets?
  •          What is the market value of the company without it?  
  •          What are the economic benefits of the asset?

Although the task of conducting a trade secret audit seems arduous, it is absolutely crucial to the legal protection of company assets and intellectual property.  Once questions like these are answered it becomes possible to consider active monetization such patent boxes regimes (https://www.jetro.go.jp/ext_images/world/europe/ip/pdf/european_patent_box_regimes_en.pdf ), or collateralization (http://melwanichan.com/resources/how-to-use-trade-secrets-as-collateral-for-a-loan/)

For more information, contact me.

David L. Cohen

David L. Cohen, Esq.

David L. Cohen, P.C. – Kidon IP
123 West 93rd Street
New York, NY 10025
dl.cohen.pc@kidonip.com
(917) 596-1974

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