Contrary to popular belief — especially among business owners — trade secrets are not only found in top secret, highly-secure research labs. Rather, almost every business possesses trade secrets, regardless of whether the business is small, medium or large.
A trade secret is anything that is:
Not generally known or readily accessible to the relevant business circles or to the public;
Gives some sort of potential or actual economic benefit to its owner where the benefit derives from the fact that the thing is not generally known, and not just from the value of the thing itself; and
Is subject to “reasonable steps,” depending on the specific circumstances, to keep it secret.
Historically, trade secrets, if even considered, were treated as an afterthought. If there was some sort of non-disclosure agreement on file somewhere, companies were satisfied and turned their attention to patents, copyrights, and designs.
This attitude is changing for a number of reasons.
First, the law is changing:
The Defend Trade Secrets Act was passed in the USA in May 2016.
The EU Directive on Trade Secrets will be enacted by member states on June 9, 2018.
China explicitly included trade secrets in its 2018 revisions to the Anti Unfair Competition Law.
Second, changes in eligibility requirements and enforcement mechanisms in patent laws around the world, but especially those in the Unites States — and especially as they relate to software and business methods — make trade secrets an attractive mechanism to protect a company’s competitive advantages.
Third, with the increased use of cloud-based and licensing-based business models, across multiple industries, many businesses prefer a “black box” approach to the company’s technology more suitable to trade secrets than the disclosure-in-exchange-for-limited-monopoly approach of patents. [Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 481 (1974).
Fourth, cyber-criminals — whether competitors or State actors — are working overtime trying to steal trade secrets from organizations.
Fifth, more and more companies are embracing open and outsourced innovation models, which necessarily requires sharing and collaborating on trade secrets with others.
Sixth, changes in employment models are leading to a highly mobile and transitory workforce where companies now have increased risk that their employees will walk out the door with their valuable trade secrets.
Seventh, there is growing interest in trade secrets by the tax authorities:
OECD BEPS Guidelines now include trade secrets as an intangible asset requiring proper management.
Patent Box Tax Regimes in a number of jurisdictions are now allowing trade secrets as qualifying IP.
The US Government is encouraging US companies to repatriate their IP back to the US by lowering tax rates for royalties received from all forms of IP to be materially less than the rate on ordinary corporate income.
Eighth, pending trade wars with China are linked by some to trade secret theft concerns.
Last, but not least, we are seeing increased trade secret litigation especially for US companies, but not exclusively so.
Increased litigation:
There have been a number of high-profile trade secret misappropriation cases in recent times. It is most interesting to see the diversity of the companies involved, the different types of trade secrets in dispute and the damages being awarded. It is also intriguing to see who has stolen or been accused of stealing the trade secrets.
The recent report by Stout on trade secret litigation in the United States at both State and Federal levels makes great reading.[1] It is an excellent report, full of insightful facts and figures.
Disclosure of Trade Secrets as the Price for Litigation:
One of the biggest challenges when a trade secret owner’s secrets have been stolen is deciding whether to pursue litigation. Protecting trade secrets from any disclosure during litigation is a difficult, if not impossible task. During litigation, plaintiffs have an obligation to disclosure trade secrets with “specificity.” Some states, like California, require the disclosure when filing suit; but for all states, the disclosure must be at some point before trial.
One reason for the specificity requirement is to prevent a plaintiff from using trade secret litigation to conduct competitive intelligence through the guise of discovery. But more importantly, unless a plaintiff can articulate its putative trade secrets in a very concrete way, there is no way to test whether the information meets the three requirements for trade secrecy. Moreover, the inability or unwillingness to identify specific trade secrets may also signal that the plaintiff has not taken reasonable precautions to secure its secrets.
Different jurisdictions may require the disclosure at different points during suit, some at the pleadings, some in an initial “claim construction-like” procedure, and others during regular discovery. Also, different jurisdictions and even different judges may offer differing levels of protection for the disclosed trade secrets. But rest assured, there will be some disclosure of plaintiff’s secrets — if only to the defendant’s outside counsel under a robust, court-imposed protective order. The question we will discuss next time is: how much?
Aside: With the EU Directive on Trade Secrets, where necessary, confidentiality of trade secrets will be preserved during the course of and after the legal proceedings.
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