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Trade Secrets: Protecting Your Key Assets

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:

  1. 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.
  2. 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?
  3. 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.
  4. 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.
  5. 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.

19 comments on “Trade Secrets: Protecting Your Key Assets

  1. Hailey Lynne McKeefry
    June 23, 2014

    Thanks for pointing to real business examples–it really brings it home. Any organization could be the victim of IP theft–and every organization needs to at leaset consider the ramifications of it. So much innovation goes on at small organizations that there's probably no such thing as flying under the radar…do you agree?

  2. ahdand
    June 24, 2014

    @Hailey: Yes indeed you cannot stop them completely. Its something which cannot be blocked 100%. You have to mitigate it as much as possible

  3. prabhakar_deosthali
    June 24, 2014

    Protecting the trade secrets  is a very tricky issue especially for small companies as eventhough they may have policies to protect their trade secrets , thye may not have the resources to enforce th complaince of the same.

    So even if they know that their partners ( employees, suppliers etc) are leaking some sentive information, they cannot do much about it. In fact many a small companies encourage such espionage on other comapnies to get the competition information.

  4. Daniel
    June 24, 2014

    “Protecting the trade secrets  is a very tricky issue especially for small companies as eventhough they may have policies to protect their trade secrets , thye may not have the resources to enforce th complaince of the same.”

    You are right Prabhakar. When secrete or technology gets productized, there are many ways to tear down the product and to know even the pin points with that. so protecting such things are very difficult. Patenting the best way but it's a time consuming process which can take up to 5 years.

  5. Hailey Lynne McKeefry
    June 24, 2014

    Electronic communication has made trading information around veyr easily. I believe there's a lot of data leakage too that is quite innocent, but can still harm the organization.  For this second type, awareness training can be useful. Also adding a line to every job description like “The person in this role will proactively safeguard the intillectual property of the organizatoin.” People do better when they see something as part of thier specific role.

  6. Hailey Lynne McKeefry
    June 24, 2014

    @Jacob, patents can be expensive too. Do the math:

    • Lawyer and legal fees: $5000 to $15,000
    • filing fee for a basic utility patent is $330, which is in addition to a $540 utility patent search fee and a $220 examination fee, plus patent maintenance fees of $980 after three years.
    • Time: ???

    International patents cost even more. I read a statistic that 97 percent of products never make back the money invested in the patent. that's sobering right?

     

  7. Daniel
    June 25, 2014

    Hailey, you are right about the cost and time factor. But other than this how we can protect the IP Rights?

  8. Daniel
    June 25, 2014

    “Electronic communication has made trading information around veyr easily. I believe there's a lot of data leakage too that is quite innocent, but can still harm the organization. “

    Hailey, since the info's are available in net, anybody can use it in other countries without the knowledge of authors or inventors. Unless and until, it's registered somewhere, there cannot be any valid claim over it.

  9. Hailey Lynne McKeefry
    June 25, 2014

    @Jacob, I'm not sure we have a  better way yet. It's an interesting statistic though.

  10. Taimoor Zubar
    June 26, 2014

    @Craig: Interesting post. Given the rate at which companies are looking to outsource their business processes to other countries, the challenges of IP protection have multiplied. A large number of copyright infringement incidents are happening in countries like China where the parent company has no control and the local laws are not so well-developed to cater to this issue. How would you suggest a global company deal with it?

  11. Taimoor Zubar
    June 26, 2014

    “In fact many a small companies encourage such espionage on other comapnies to get the competition information.”

    @prabhakar: I've seen that happening myself and I don't think putting up restrictions is really a way to deal with it. From what I think, the only way to ensure your employees do not end up spilling information is to educate them and make them realize the consequences of it on the company. Of course you have to ensure that your employees are happy and loyal and that they don't feel the need to partner with the competitors.

  12. Craig Moss
    June 26, 2014

    @TaimoorZ: Thanks for your comment – that is a great question. We are proponents of working with key suppliers to first assess current business processes in place for IP protection; and then work to improve the management systems in place for IP protection – for example, having IP protection policies, then associated procedures and records to support those policies. This is just one example, there is also training, monitoring and other steps companies can take. You might be interested in my EBN Online post about a recent Stanford report that talks about how companies can apply a capability building approach to IP protection, as it has been done in areas of labor and the environment. In our pilot program, we found that many Chinese companies are keen to show that they take IP protection seriously to global customers, but also for protecting IP that they are developing.

  13. Hailey Lynne McKeefry
    June 26, 2014

    @Craig, i imagine too that if electronics industry leaders start making a concerted effort to create and apply these policies that it would decrease the amount of IP theft rather substantially over time. Many small drops eventually fill the bucket.

  14. Daniel
    June 27, 2014

    “I'm not sure we have a  better way yet. It's an interesting statistic though.”

    Hailey, If you don't want to file patent, I think there is NO  way other than hiding the IPR from public; which is of No use.

  15. Daniel
    June 27, 2014

    “In our pilot program, we found that many Chinese companies are keen to show that they take IP protection seriously to global customers, but also for protecting IP that they are developing.”

    Craig, Chinese people's are good in protecting their IP rights and foe stealing others IPs.

  16. Taimoor Zubar
    June 28, 2014

    “In our pilot program, we found that many Chinese companies are keen to show that they take IP protection seriously to global customers, but also for protecting IP that they are developing.”

    @Craig: I spent 6 months in China last year as part of an exchange program and I did attend a lot of seminars on IP protection in China. The Chinese authorities and the business community has realized the importance of it and how important it is for them to implement copyright laws for long-term sustaibility. However, what I felt was that their approach was very much short-term oriented. They were looking for quick measures to resolve the issue rather than looking at the problem in more detail and having long-term sustainable solutions.

  17. Eldredge
    June 28, 2014

    I read a statistic that 97 percent of products never make back the money invested in the patent. that's sobering right?

    @Hailey,

       That is a sobering statisitic. Some possible reasons may include:

    1) Inventor did not have the funding/know-how or fotitude to pursue marketing of his/her product. If you think the patent is expensive……

    2) Inventor simply wanted bragging rights to a patent (subset of above?)

    3) Many patents are extensions or improvments of a product that already has some functionality covered in a previous patent.

    4) Many large companies develop large patent portfolios in areas of technology to allow them to engage in negotiating cross-licensing. These patents hold value for the company, but I suspect many of them never provide 'payback' in the product maretplace.

  18. Eldredge
    June 28, 2014

    Identify the company's intellectual assets by conducting a strategic assessment of trade secrets .

    Many companies spend a great deal of time identifying patentable ideas, and often provide incentive programs to employees that contribute. Often, identification of a trade secret is given equal value to that of a patentable idea. I have heard of at least one company that values a trade secret higher than a patent, to encourage employees to diligently idenify them.

  19. Craig Moss
    July 1, 2014

    There are a lot of interesting threads to this conversation. Identifying and protecting trade secrets should be a critical part of any company's IP protection stragegy. In today's world of contract manufacturing and collaborative development, this is more and more difficult – but also more important. The legal approach to trade secret protection is one important component, but this needs to be supplemented by using a management system approach. Companies need to find a way to embed IP protection in their business operations and make it a proactive effort. The legal/contract approach tends to be reactive. In the real world IP infringement can happen through intentional acts, but too often it is the result of poor management, a lack of awareness and sloppy IP protection practices. Companies can proactively prevent IP infringement and trade secret leakage through better management systems. Think of the overall improvements in quality over the past 30 years based on management systems. Also, the companies that develop strong IP protection management systems will definitely gain a competitive advantage in the global economy in attracting customers and investors. Customers will feel more comfortable that their trade secrets and IP will be protected. Investors will feel more comfortable that the company can protect their own valuable trade secrets. I believe this is true for companies from the US, China, Germany, India or anywhere else. 

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