Outsourced Manufacturing and Trade Secrets: Internal Controls

Outsourced Manufacturing and Trade Secrets: Internal Controls by David L. CohenWhen a company, for the soundest of business reasons, is exploring placing its crown jewels, its intellectual assets, in the hands of a third party, proper internal controls are vital.

A company’s internal controls may help to ensure proper:

  • Vetting and selection of the prospective manufacturer during the due diligence process.
  • Negotiation of the outsourced manufacturing relationship.
  • Management of the outsourced manufacturing transaction and relationship with the manufacturer.

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Outsourced Manufacturing and Trade Secrets: Risks & Benefits

Outsourced Manufacturing and Trade Secrets: Risks & Benefits by David L. CohenNearly all manufacturing processes involve a significant number of intellectual assets. These assets may include registered intellectual property (designs, patents, copyrights, or trademarks) or unregistered trade secrets, know-how, confidential information, or other intangibles. Read more

Outsourced Manufacturing and Trade Secrets: Outsourced Manufacturing

Outsourced Manufacturing and Trade Secrets: Outsourced Manufacturing by David L. Cohen

There are two common categories of outsourced manufacturing: toll manufacturing and contract manufacturing. While both these manufacturing options have distinct and clear characteristics, their strategic advantage is their ability to provide customers with valuable ways to save both time and capital on their product line development. Read more

Outsourced Manufacturing and Trade Secrets: An Economic Overview

Since the beginning of the industrial age, companies have outsourced part of the manufacturing process to third-party providers. In the twentieth century, as manufacturing processes became more complex and distribution more global, this trend accelerated.

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Trade Secret Theft in China

trade-secret-theft-in-china

By David Cohen & Donal O’Connell

The headlines:

“China national charged with stealing trade secrets” – U.S. Justice Department

“Chinese battery expert is charged with stealing trade secrets from US employer, as he prepared to join mainland firm” – South China Morning Post

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Using IP to Access Funding

Very interesting study from the UK Intellectual Property Office and the British Business Bank about using IPR (at least in part) as collateral for business loans.

Very odd, however, is that there is NO mention of trade secrets at all.  Which is quite surprising actually.  While analyzing trade secrets usage as collateral is (understandably) more challenging that for registered IPR, not to even mention it seems like a major flaw in the study.

Regardless, the conclusion seems promising and there is a lot of data included in the annexes to review.

Although there remain significant challenges to the
development of a sustainable commercial IP-backed loan
product, the lower rates of default and loss amongst
IP-rich firms suggests lenders could at least lower the
cost of lending to IP-rich firms, stimulating demand for
debt in this segment. Likewise there are opportunities to
stimulate the supply of finance by supporting the use of
intangible assets as collateral

https://www.british-business-bank.co.uk/wp-content/uploads/2018/10/502-IP-Report_singles.pdf

More on trade secret and company director liability

Donal O’Connell and I recently posted an article on trade secrets and director liability.   https://kidonip.com/news/company-directors-duties/

A great piece published by Columbia University Law School earlier this year http://clsbluesky.law.columbia.edu/2018/04/04/wachtell-lipton-discusses-risk-management-and-the-board-of-directors/  provides a good summary of the many issues related to risk management and the board of directors.

Another piece  https://pomerantzlawfirm.com/publications/2018/2/8/recent-derivative-actions-highlight-directors-obligation-to-monitor-and-prevent-employee-misconduct discusses a recent case In re Wells Fargo & Company Shareholder Derivative Litigation where the court refused to dismiss a shareholder derivative action against the board of directors holding that the numerous allegations of “red flags” of which the board was aware regarding the practices of the company bolstered the conclusion that the director defendants consciously disregarded their fiduciary duties to the company. http://www.wlrk.com/docs/InreWellFargoOrderonMotiontoDismissenteredMay42017.pdf

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Company Director’s​ Duties With Respect to Trade Secret Asset Management

Trade secret’s new found prominence:

As we both have written previously, the changing nature of technology, product development and sales, and the patent enforcement landscape, have given trade secrets a new-found prominence.

Trade secrets are now becoming a much more significant part of a company’s value. As a result, trade secret asset management is becoming (and if not, it should become) a regular part of company board discussions and review.

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Trade Secrets: What Are They Worth?

Owners of intellectual property are often rightfully curious as to the value of their IP. Anyone who has tried to assign a value to patents outside of a litigation context and in the absence of robust licensing market for similar patents knows very well how challenging it is. Figuring out the value of trade secrets, on the other hand, is not (always) as hard.  This is because what most trade secrets “are” on an ontological level are more readily ascertainable that patents. What is in the bills of materials; who are on the customer list; the process for connecting the machinery; the history and results of failed experiments; and last year’s profit margins are all knowable by a company in a way that the scope of a patent is not.[1] Because of this fact, it is much easier for a company to correlate a particular trade secret to the value-add that the trade secret brings to the company’s business. Moreover, whether a trade secret is in fact a protectable right is much more in the hands of the rights-owner that a patent. Patents, globally, have a high invalidation rate from third party prior art,[2] whereas whether trade secrets are generally invalidated only when the owner did adequately protect the trade secret as a secret.

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Trade Secret Audits – Why Bother?

What is a trade secret audit and why get one? At first blush an audit sounds expensive, distracting and unnecessary. Let’s face it, we live in the age of the long tail. Over the past few years, things people would have given a remote chance of coming to pass seem to be happening on a regular basis. What’s more, the pace of change and disruption in business and in the personal world is so great, it is almost impossible to keep up. It seems that whatever you are doing today will have to be radically altered very soon. With all this change most of us are running just to stay in place – so any distraction from the daily chores of simply keeping up needs a powerful justification. I would argue however, that the frenetic pace of business life is precisely why audits are so important. Just as mindfulness is rightly understood as being key to a centered life, trade secret audits are essential to continued success as a business.

A trade secret is anything that has economic value (e.g., gives you a competitive advantage in the marketplace) because it is kept secret. Understood that way, it should be evident that regular stock-taking of a company’s competitive advantages comprises a necessary component of good business practices. Thoughtful companies will utilize these corporate self-assessments – of which trade secret (and more broadly IP) audits are a necessary component – to understand their true growth drivers, both current and anticipated. With the assessments in hand companies can take any actions necessary to better protect and cultivate those growth drivers. The assessments allow companies to proactively course-correct their trajectory in a way that maximize how they utilize their identified competitive advantages.

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