Trade secret misappropriation is a serious risk to companies across all sectors. Corporate value is often bound up with assets such as databases and software code, but the growing mobility of employees and the rise in remote working make it much harder to keep control of sensitive Intellectual Property (IP).
Every company with trade secrets needs to have a strategy for managing them and dealing with leaks when they occur. Yet, given the fact trade secrets are not a registerable form of IP like trademarks and patents, owners need to know how best to protect these assets themselves and be aware of what recourse is available to them should they need it.
As quiet as a mouse: What is a trade secret?
What can be protected as trade secrets (sometimes known as confidential information) varies from jurisdiction to jurisdiction. Following Article 39 of the TRIPs Agreement, however, trade secrets generally cover information that is not commonly known or readily accessible, has commercial value because it is undisclosed and has been subject to reasonable steps to keep it hidden. Famous examples of valuable trade secrets include the Coca-Cola formula and the Google search algorithm.
Unlike a patent, a trade secret is not granted by an IP office, and so it is incumbent upon the owner to take all steps necessary to keep the privileged information out of the public sphere. Also, the fact there is no registering office to resolve disputes means cases of trade secret misappropriation are heard before civil courts, with the potential for criminal charges in more grievous instances.
Trade secrets and patents each have their own sets of advantages and shortcomings. Deciding which is more relevant for a lucrative business innovation comes down to a variety of considerations, including licensing potential, likelihood of competitor replication and cost.
The loss of trade secrets affects every sector, from pharmaceuticals to finance. Recent high-profile cases include:
- In October 2023, pharmaceutical company Novartis took legal action in the United States, alleging that a former employee in Egypt transferred 10,000 files to his personal email and later joined competitor Takeda. The case was later withdrawn.
- Biopharma company HDT Bio sued Indian company Emcure Pharmaceuticals "alleging theft of trade secrets" relating to research on a self-amplifying RNA vaccine for COVID-19. U.S. District Judge James Robart dismissed the case without prejudice in December 2023.
- Valeo sued Nvidia, claiming that engineer Mohammad Moniruzzaman, who used to work for Valeo, disclosed "stolen source code" during a videoconference attended by representatives of both companies.
- In another U.S. lawsuit, RVassets has taken action against ED&F Man Capital Markets (now part of Marex) over software for options trading.
Trade secrets disputes can become long and bitter – as in the spats between X and Meta or between Tesla and Rivian – and can even result in criminal actions. To take an example, a Chinese man was recently arrested in Japan on suspicion of stealing trade secrets from Alps Alpine.
However, in this area of IP, more than most others, litigation does not always deliver a satisfying outcome. By the time a case comes to court, the damage may have already been done; the victim of the trade secret misappropriation might not be able to reassert full control over the information, and depending on the extent of any disclosure, a competitive advantage could be lost.
Not letting the cat out of the bag
The best strategy to maintain trade secret confidentiality is to have robust policies and procedures in place, uphold communication and use practical tools to manage employee access and tackle problems as soon as they arise. This requires collaboration across different corporate functions – including IT, human resources and legal – and strong leadership from management that emphasizes the importance of trade secrets and the consequences of their trafficking.
When trade secrets concern national security or key economic advantages, attempting to acquire and pass them on could amount to espionage. In November 2022, a Chinese intelligence officer was sentenced to 20 years in a U.S. federal prison for such crimes.
company will have to identify where its risks lie and how best to address them, bearing in mind factors such as the sectors it operates in, location, corporate evolution (particularly mergers, demergers and acquisitions) and competitors.
To guide businesses through this process, here are 10 tips that can be applied across different industries:
- Contracts and terms of employment: Company policy on trade secrets should be prominent in each employee's standard contract, with the consequences of breaching it made clear. If possible, there should be specific references to what constitutes corporate trade secrets so that there can be no doubt about what is covered.
- Onboarding: New employees should be informed about the corporate trade secrets policy and procedures for securing sensitive information, including in the contexts of remote working, use of personal devices and participation in public-facing events or webinars. This should also take place whenever a new company is acquired.
- Adaptive approach: Employees responsible for particularly valuable or sensitive data (such as engineers and software developers) should be provided with tailored policies that apply to them, with extra security measures if appropriate.
- Training: It is unrealistic to expect employees to remember all the information shared in their contracts. Regular training and refresher courses should be provided either in person or online. This could include tests that can be modified for various job roles.
- Departures: It is essential that employees leaving the company (including retirements, resignations and redundancies) are reminded of their obligations regarding trade secrets and that all sensitive assets are recovered. These could include databases, logins, passwords and software code, as well as hardware. This process should take place before the employee officially departs the organization as it may be harder to communicate with them after the fact.
Artificial intelligence (AI) technology has made phishing scams an even greater threat for organizations of all sizes. Besides more convincing email attacks, the voice of a senior staff member can now be imitated to deceive the most honest employee into revealing crucial data.
- IT policies: In addition to covering trade secrets in employee contracts, company policies should address the protection of trade secrets in IT systems and the proper use of those systems.
- IT enforcement: Where possible, and balancing respect for privacy, companies should take steps to identify potential trade secret breaches. This could include monitoring employees' use of secured computer equipment and other key devices and blocking unauthorized access.
- External partners: Close working contracts with external parties, including suppliers, licensees / licensors and joint venture partners, should include detailed and agreed definitions of trade secrets and provisions for protecting them.
- Communications: It may be helpful to mention trade secrets in annual stakeholder / shareholder reports, highlighting their worth to the company and the action being taken to ensure their preservation.
- Legal: The legal department should coordinate all of the above to make sure that measures comply with the law in each jurisdiction the company operates. They should also be immediately informed of any possible risks identified and any suspected breaches so that appropriate action can be taken before it is too late. If everything works perfectly, the legal department will never need to initiate litigation or contact law enforcement.
While corporate espionage does occur, most trade secret misappropriation is due to former employees walking out of the office door with valuable information, whether in naïve ignorance or with nefarious intent.
The bad news is this means that any large company has thousands of potential holes in its defenses. But the good news is that a combination of awareness, education, clear rules and constant monitoring can significantly reduce the risk of losing some of your most precious assets and seeing them delivered into a competitor's hands.
Dennemeyer's global network of IP legal experts can help you devise a scheme to keep your valuable trade secrets from prying eyes. From consultation to contracts, letters to litigation, we have services and specialists ready for any secret mission.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
