In today's global marketplace, intellectual property is critical to success. Trade secrets, in particular, are the new economy's gold. Thus companies with supply chains that traverse countries need to take action to address the threat of misappropriation.
Trade secrets include a wide array of competitive information such as unique applications of computer code, merger and acquisition plans, product prototypes and marketing strategies, customer lists, research data, manufacturing processes, and secret formulas. These intellectual assets, not covered by other protections, are earned through years of experience, investment in research, and elbow grease.
Trade secret loss, costing companies billions of dollars each year, happens in a variety of ways — being stolen or inadvertently leaked by a company employee, or accessed by competitors, governments, or organized crime through hacking or other means. The ease and efficiency brought about by the digital age has, unfortunately, also increased the risk of trade secret theft.
For the electronics industry, the risk of losing control of proprietary information not only threatens profits and jobs, but also — given the sector's role in critical military and government contracts — can compromise national security.
A few real-world examples reflect what is at stake:
- An ex-employee of an outsourcing vendor in India, Geometric Software Solutions Ltd., was caught trying to sell $50 million worth of software source code owned by Geometric client, US-based SolidWorks. Although the perpetrator was caught, he could not be effectively prosecuted under Indian law, and was instead charged with simple theft, and went on to continue his career as a programmer.
- Massachusetts-based American Superconductor (AMSC) lost the bulk of its business after its primary customer, China's Sinovel, paid an AMSC engineer to steal proprietary source code from a computer server in Austria. When Sinovel stopped making purchases, AMSC's stock price plummeted, slammed profits, and forced AMSC to cut jobs.
As outlined in a whitepaper by CREATe.org titled “Trade Secret Theft: Managing the Growing Threat in Supply Chains,” there are steps companies can and should take to address the risk of theft in their supply chains so they can benefit from the global marketplace without jeopardizing business-critical trade secrets:
- Identify the company's intellectual assets by conducting a strategic assessment of trade secrets . An accurate picture of these assets and their sensitivity lays a foundation for deciding what to share with partners, how to compartmentalize trade secrets among partners and through what vehicle — licensing, joint venture, sole proprietorship, etc.
- Get a holistic view of potential partners by including risk to trade secrets in the process of due diligence . Consider the partner's code of conduct, its track record, reputation and partnerships. Does it, for example, have ties to firms or governments that have a history of disregarding intellectual property rights?
- Use contracts to put in place enforceable audit rights and penalties . These documents can be very specific about confidential information, how it must be handled for the duration of the contract, and after termination — and how a breach will be handled. In many countries it makes sense to avoid litigation on trade secrets, and handle problems through confidential arbitration. Contracts can also include provisions requiring the third party to have their own IP protection policies, procedures, and training.
- Put in place personnel, physical, and technological measures to protect trade secrets , and engage with supply chain partners to ensure these measures are working effectively. This requires training, clear policies, and consistent implementation of policies.
- Take action to prevent trade secret disclosure by suppliers and their employees after the business relationship ends . Make sure confidential materials are returned, and clear non-disclosure expectations set, and watch out for red flags, such as employees who leave to work for a competing company.
Trade secret theft has become the focus of negotiations among governments and new national legislation. The European Commission, for instance, has proposed a new directive that more clearly defines trade secrets and would establish EU-wide rules to deal with unauthorized access, disclosure, and use of such material.
But as the regulatory landscape evolves, companies can benefit by acting independently and in collaboration with their industry partners to secure supply chains, making global trade less vulnerable and more profitable for all.