What’s all the fuss about trade secrets?

Motorola, Société Générale, Dyson, St. Jude Medical, Goldman Sachs. Each of these companies operates in quite different business sectors, but they’ve all recently made headlines for the same reason: trade secrets. Or, more specifically, for the theft of valuable company trade secrets, be it by way of former employees defecting to rival firms, paid moles or through complex cyber-attacks.

Over the past year, numerous juries have returned multi-million dollar verdicts in trade secret cases. In May 2012 a Utah jury awarded USA Power LLC $134 million (£83.1 million) for a joint venture partner’s misappropriation of trade secrets and unjust enrichment. In August 2012, Brocade Communications Systems, Inc. was awarded $112 million (£69.5 million) in a case involving patent infringement and trade secrets. In 2011, St. Jude Medical was awarded $2.3 billion (£1.4 billion) in damages against a Chinese company for theft of trade secrets. And earlier last year, two employees were arrested in separate cases of IP theft; one who stole hundreds of pages of source code from the New York branch of Société Générale, and one who stole high frequency trading code from Goldman Sachs.

That is not to mention the recent influx of cases accusing Chinese and South Korean companies of circumventing security measures in order to gain access to sensitive data. In August, a former Motorola employee was sentenced to four years in prison for stealing trade secrets worth millions of dollars and passing them on to a company affiliated with the Chinese military. And only last week, two new trade secret lawsuits were filed. One deals with the alleged theft of a Nippon Steel & Sumitomo Metal Corp. trade secret by South Korean rival Posco and a former Nippon Steel engineer who retired from the Japanese company about 20 years ago. The second concerns British tycoon Sir James Dyson, who sued the German company Bosch after having discovered a “mole” who was allegedly passing on confidential information to Bosch’s Chinese motor manufacturers.

But trade secrets go both ways, and the lack of transparency regarding other companies’ products has also been a recent cause for concern. A US congressional report published this past week claimed that using Chinese telecommunications companies’ products and services could threaten national security. According to the report, the Chinese regime has ordered its exporters to create opportunities to commit industrial espionage and electronic sabotage of “critical infrastructures in the United States and in other industrialized countries.” The report suggests that two Chinese companies, Huawei Technologies Co. Ltd. and ZTE Corp., incorporate parts into wireless networks, which allow the Chinese regime to covertly obtain trade secrets and other confidential information. This is particularly problematic as many companies are not being transparent about their links to the Chinese government, and the excessive protection of the trade secrets that allowed the products to function means discovery of the means of espionage would be difficult.

So why all the fuss over trade secrets? It’s because trade secrets often consist of information that may not be eligible for patent protection, but is nonetheless valuable and crucial to the company’s competitive advantage. And despite the various non-disclosure agreements and stringent security measures in place, trade secrets are particularly susceptible to theft because they are generally made available to a large number of people within the company. A trade secret describing a unique manufacturing process may need to be utilised by all the members of the production team that actually builds the device.

While the most effective way to prevent theft of trade secrets is to keep trade secrets under lock and key, literally or electronically, many businesses see this as commercially impractical or impossible. However, businesses can engage in reasonable efforts to maintain trade secret confidentiality without compromising vital business processes. The first step in any trade secret policy is to identify the data within a company’s business which demands additional levels of protection. The second step is to make sure that all relevant staff members are made aware of the sensitive nature of those particular trade secrets; after all, trade secrets have as much to do with a company’s culture and values as they do with company policy. Companies must clearly define expectations for any employee who has access to sensitive information, and should have employees sign non-disclosure agreements and seek permission before taking any information or materials off the premises, whether secret or not, as a minimum. They may also choose to limit the information which is capable of being downloaded or emailed in order to stem the flow of trade secret information through technological means. By making a concerted effort to implement a trade secret policy, and impressing its importance upon the company’s culture, a business will be much better placed to protect their competitive advantage.

Maintaining confidentiality and preventing trade secret theft is especially crucial in the UK and European context. Prosecutions in the US show that big firms and prosecutors are intent on cracking down on this kind of criminal activity, but in the UK and Europe, this becomes problematic as IP laws lag behind those which provide US firms with the necessary means of protecting themselves. While the UK certainly has copyright laws, there are currently no laws which specifically protect trade secrets or criminalise espionage. In European countries that do have laws relating to the protection of trade secrets, investigators are often inexperienced or underfunded. And, as with anything in the European context, when trade secret theft is committed across borders, additional challenges are created: piece-meal and inconsistent legal regimes, in particular, create difficulties in coordination between national law enforcement agencies.

IP, specifically in the form of trade secrets, can oftentimes be a company’s greatest asset, but without more stringent forms of protection and enforcement, its theft can also be the catalyst for a company’s downfall.

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