ORIENTATION PROGRAM ON INTELLECTUAL PROPERTY FOR MANAGEMENT STUDENTS OF INDIAN INSTITUTE OF MANAGEMENT (IIPM)

Geneva, Switzerland, 2006

Keeping Confidence: Putting into Place a Trade Secret Protection Program

Lien Koglin Verbauwhede

Consultant, SMEs Division World Intellectual Property Organization (WIPO)

This Presentation

•

PART 1 - Outline

– Definition – Legal requirements – Legal rights – Enforcement •

PART 2 - Proper Management of Trade Secrets

– Protection strategies for trade secrets •

PART 3 - Trade Secret or Patent?

– Legal considerations – Business considerations

PART 1 WHAT ARE TRADE SECRETS ?

Definition: What are trade secrets?

which provides an enterprise with a competitive edge any confidential information

can qualify as a trade secret  entitled to legal protection

Typically, a company will have confidential information ...

•

Which may be protected by other types of IP

– application for protection foreseen in the near future – no application foreseen •

Which doesn’t qualify for protection under other types of IP

A trade secret can relate to different types of information

Trade Secret

Technical and Scientific Information Financial Information Commercial Information Negative Information

in some laws

•

Technical and scientific information:

–

product information

• technical composition of a product: medicine, paint, beverage • technical data about product performance • product design information –

manufacture information

• manufacturing methods and processes (weaving technique, device process) • production costs, refinery processes, raw materials • specialized machinery –

know-how necessary to perform a particular operation

•

Technical and scientific info (contd.):

–

designs, drawings, patterns, motifs

–

test data, laboratory notebooks

–

computer codes

•

Commercial information:

–

customer list

–

business plan

–

marketing strategy

–

supplier arrangements

–

customer buying preferences and requirements

–

consumer profiles

–

sales methods

•

Financial information:

–

internal cost structure

–

pricing information

–

salary and compensation plans

–

price lists

•

Negative information:

–

details of failed efforts to remedy problems in the manufacture of certain products

–

dead-ends in research

–

unsuccessful attempts to interest customers in purchasing a product

Legal requirements: What can be protected as a trade secret?

•

Three essential legal requirements

: 1. The information must be

secret

2. It must have

commercial value

it’s secret because 3. Owner must have taken

reasonable steps

to keep it secret

1. The information must be secret

• “not generally known among or readily accessible to persons within the circles that normally deal with this kind of information” • price list on your website is no trade secret • wheel technique for pottery is no trade secret • no absolute requirement  NDA/CA – e.g. based on supplier relationship, joint development agreement, due diligence investigation, etc.

2. It must have commercial value it’s secret because

• confers some economic benefit to the holder • this benefit must derive

specifically

from the fact that it is not generally known, not just from the value of the information itself • actual or potential • not easy to know exact value of trade secret because it is a secret

3. Owner must have taken reasonable steps to keep it secret

• under most trade secret regimes, a TS is not deemed to exist unless its holder takes reasonable steps to maintain its secrecy • ‘reasonable’  case by case • importance of proper TS management program

Legal rights: What kind of protection do you have under the law?

Legal rights:

•

Only protection against improperly acquiring, disclosing or using

: – people who are automatically bound by duty of confidentiality (incl. employees) – people who have signed non-disclosure agreement – people who acquire a trade secret through improper means (such as theft, industrial espionage, bribery)

•

Some people cannot be stopped from using information under trade secret law:

– people who discover the secret

independently

, without using illegal means or violating agreements or state law – people who discover through

reverse engineering

Reverse engineering is taking apart an object to see how it works in order to duplicate or enhance the object

Example no. 1

• •

Decades ago, Coca-Cola decided to keep its soft drink formula a secret The formula is only know to a few people within the company

• • • •

Kept in the vault of a bank in Atlanta Those who know the secret formula have signed non-disclosure agreements It is rumored that they are not allowed to travel together If it had patented its formula, the whole world would be making Coca-Cola

Example no. 2

•

Patent

for stud and tube coupling system (the way bricks hold together) • But: Today the patents have long expired and the company tries hard to keep out competitors by using

designs , trademarks

and

copyright

Enforcement: What can you do if someone steals or improperly discloses your trade secret?

Trade secret protection may be based on...

–

Contract law

• when there is an agreement to protect the TS – NDA/CA – anti-reverse engineering clause (enforceability debated) • where a confidential relationship exists – attorney, employee –

Principle of tort / unfair competition

• misappropriation by competitors who have no contractual relationship – theft, espionage, subversion of employees

–

Criminal laws

• e.g. for an employee to steal trade secrets from a company • theft, electronic espionage, invasion of privacy, etc.

• circumvention of technical protection systems –

Specific trade secret laws

• US: Uniform Trade Secrets Act; Economic Espionage Act

Remedies

1.

Order to

stop

the misusing 2.

Monetary damages

• actual damages caused as a result of the misuse (lost profits) • amount by which defendant unjustly benefited from the misappropriation (unjust enrichment) 3.

4.

Seizure order

• can be obtained in civil actions to search the defendant's premises in order to obtain the evidence to establish the theft of trade secrets at trial

Precautionary impoundment

• of the articles that include misused trade secrets, or the products that resulted of misusing

To establish violation, the owner must be able to show

: – infringement provides

competitive advantage

–

reasonable steps

to maintain secret – information obtained, used or disclosed in violation of the honest commercial practices (

misuse

)

PART 2 BUSINESS STRATEGIES TO HANDLE & PROTECT TRADE SECRETS

Loss of trade secrets a growing problem

(1)

•

Why is this occurring?

– way we do business today (increased use of contractors, temporary workers, out-sourcing) – declining employee loyalty, more job changes – organized crime : discovered the money to be made in stealing high tech IP – storage facilities (CD-ROM, floppies, etc) – expanding use of wireless technology

Loss of trade secrets a growing problem

(2)

•

Examples of outside threats

– burglaries by professional criminals targeting specific technology – attempted network attacks (hacks) – laptop computer theft: source code, product designs, marketing plans, customer lists – inducing employees to reveal TS (Apple case) – corporate spies

Loss of trade secrets a growing problem

(3)

•

Examples of inside threats

–

80% of information crimes < employees, contractors, trusted insiders!

– malicious destruction/erasure of R&D data by avenging employee – theft by former employee of business plans – ignorance

What can be done?



9 basic protection strategies

1. Identify trade secrets

Considerations in determining whether information is a trade secret:

– Is it known outside the company?

– Is it widely known by employees and others involved within the company?

– Have measures been taken to guard its secrecy?

– What is the value of the information for your company?

– What is the potential value for your competitors? – How much effort/money spent in collecting or developing it?

– How difficult would it be for others to acquire, collect of duplicate it?

2. Develop a protection policy

Advantages of a written policy:

– Clarity (how to identify and protect) – How to reveal (in-house or to outsiders) – Demonstrates commitment to protection  important in litigation

–

Educate and train

: • Copy of policy, intranet, periodic training & audit, etc. Make known that disclosure of a TS may result in termination and/or legal action • Clear communication and repetition –

TS protection must be part of the enterprise culture

• Transform every employee into a potential security officer • Every employee must contribute to maintain the security environment (e.g. anonymous security hotline) –

Monitor

compliance, prosecute violators

4. Restrict access

to only those persons having a

need to know

the information

 computer system should limit each employee’s access to data actually utilized or needed for a transaction

5. Mark documents

–

Help employees recognize trade secrets

 prevents inadvertent disclosure –

Uniform system of marking documents

• paper based • electronic (e.g. ‘confidential’ button on standard email screen)

3. Educate employees

–

Prevent inadvertent disclosure

(ignorance) –

Employment contract

: • Brief on protection expectations early • NDA/CA/NCA • obligations towards former employer!

–

Departing employees

: • exit interview, letter to new employer, treat fairly & compensate reasonably for patent work, further limit access to data

6. Physically isolate and protect

–

Separate locked depository

–

Authorization

–

Access control

• log of access: person, document reviewed • biometric palm readers –

Surveillance of depository/company premises

• guards, surveillance cameras –

Shredding

–

Oversight; audit trail

7. Maintain computer secrecy

– Secure online transactions, intranet, website – Authorization (password); access control – Mark confidential or secret (legend pop, or before and after sensitive information) – Physically isolate and lock: computer tapes, discs, other storage media – No external drives and USB ports – Monitor remote access to servers – Firewalls; anti-virus software; encryption

8. Restrict public access to facilities

– Log and visitor’s pass – Accompany visitor – Sometimes NDA/CA – Visible to anyone walking through a company’s premises • type of machinery, layout, physical handling of work in progress, etc – Overheard conversations – Documents left in plain view – Unattended waste baskets

9. Third parties

– Sharing for exploitation – Consultants, financial advisors, computer programmers, website host, designers, subcontractors, joint ventures, etc.

–

Confidentiality agreement, non disclosure agreement

–

Limit access on need-to-know basis

PART 3 PROTECTING INVENTIONS: TRADE SECRETS OR PATENTS?

Introduction

• Certain types of inventions may be protectable under patent + trade secret law.

• However, not under both.

Choice between patent protection and trade secret protection is a

LEGAL

and

BUSINESS

decision

Legal Considerations

Trade Secrets no registration costs

but: costs to keep secret

can last longer

- but: limited to economic life - uncertain lifespan: leak out is irremediable

no disclosure

- but: practical need to disclose - if leak out: TS lost

Patents fees

registration + maintenance

limited in time

- generally: max 20y - but: can be invalided

disclosure

- publication 18m after filing - if P not allowed: no TS

Trade Secrets Large subject matter

Protection of virtually anything maintained in secret by a business that gives competitive advantage

Only protection against improper acquirement/use More difficult to enforce

- some countries: no laws - ability to safeguard TS during litigation

Patents Subject matter limited:

- Requirements: new, non obvious, useful - Scope: patent claim

Exclusive rights

monopoly to exploit the invention

"Power tool"

Business and Marketplace Considerations

1. Market life of the subject matter

Some products have commercial life of only a few months Patent typically takes 25m to be issued  Patent protection may not exist until after market life of the product has expired  TS allows immediate commercial use

2. Difficulty of maintaining the subject matter secret

–

Time, willingness and funds

to: • develop internal policies • implement protection program • initiate immediate legal action to protect trade secrets from disclosure (preliminary injunction) – Risk of disclosure 

number of persons needing access to the TS

• employees • need for investors • external contractors

3. Likelihood of subject matter being reverse engineered

•

Easy to control RE?

– Products widely sold to consumers   P difficult to prevent RE – Products sold to limited number of persons  control, e.g. license agreement which forbids RE and requires licensee to maintain the technology secret  TS •

Difficult/expensive to do RE?

– Secret  manufacturing method or formula  – Secret embodied in product  difficult  easy (e.g. cleaning fluid) TS  P

4. Likelihood of subject matter being independently developed

•

Complexity of invention

•

Number of competitors working in the field

•

Potential payoff for achieving market success

– e.g. drug that cures cancer •

Alternative option: defensive publication

5. Type of subject matter

–

New basic technology

• “pioneer patent” • many licensees: allows to set low licensing fees  competitors have no incentive to risk patent litigation –

Minor improvement in well-developed field

• P will be narrowly construed • easy to invent around • or: competitors likely to use preexisting technology –

Protectable in all countries?

• in some countries not patentable?

• too costly to protect in all countries?

Conclusion

• The choice between trade secret and patent protection for an invention is

irrevocable

• Therefore: carefully consider all relevant advantages and disadvantages from each choice both from

legal

and

business

viewpoint

Conclusion

• Patent and trade secrets are often

complementary

to each other: – Patent applicants generally keep inventions

secret until

patent application is

published

by the patent office.

the – A lot of valuable

know-how on how to exploit

a patented invention successfully is often kept as a trade secret.

– Some businesses disclose their trade secret to ensure that no one else is able to patent it (

defensive publication

).

Remember...



TS: No registration, but 3 requirements for legal protection



No need for absolute secrecy, but ‘ reasonable measures’



Developing and maintaining TS program < good business practice to prevent < legal requirement to enforce TS protection



Only legal protection against dishonest acquisition/disclosure/use



Consider alternative protection

Thank You!

WIPO’s website for SMEs : www.wipo.int/sme