The Dirty Little Secret about Trade Secrets

March 4, 2014
Manufacturers do not fully understand the trade secrets they have created and their relative competitive value, do not systematically track and monitor their trade secrets, and overlook potential trade secrets and proprietary information that are not “technological” but provide a definite competitive advantage.

American companies lose an estimated $150 billion to trade secret theft each year. Much more is lost due to plain carelessness. Innovation has always been the key to beating the competition but today’s manufacturing industry requires increasingly rapid generation of trade secrets and technology. However, the speed of technical innovation also creates ever increasing risks that these valuable assets will be lost to the competition, intentionally or unintentionally. With one click of the mouse or the insertion of a flash drive, an employee (or soon-to-be-former employee) can destroy the competitive advantage that a company has spent vast sums of money, as well as blood, sweat and tears, to develop.

Unfortunately, while much emphasis is placed upon the creation of trade secrets and technological innovations, not enough attention has been paid to the blocking and tackling needed to protect them. Companies do not fully understand the trade secrets they have created and their relative competitive value, do not systematically track and monitor their trade secrets, and overlook potential trade secrets and proprietary information that are not “technological” but provide a definite competitive advantage.

First, perhaps surprisingly, companies sometimes do not fully know what they have created and the relative value of these trade secrets. One of the most famous examples of this mistake is when Xerox provided Steve Jobs and Apple too much access to its Palo Alto Research Center. As is chronicled in the Jobs biography, while some of the scientists at Xerox knew the value of what was being disclosed, and were horrified that the transfer of technology was occurring, the executives did not appreciate the significance of the disclosed technology.

While the magnitude of this mistake was unique, this is not an isolated tale. Many manufacturers do not have a full understanding of what has been created and its relative value, and this makes it difficult, if not impossible, to protect it. The identification of such information is vital in the protection process and starts with talking to another one of your most valuable assets: your employees. Next-generation manufacturers need to be in constant contact with their key employees regarding the ever changing developments in today’s manufacturing. Keeping an open dialog with key employees can allow manufacturers to keep up-to-date on emerging issues and enable them to identify key information.

A Trade Secret Audit

In addition to day-to-day communications, the conversation with your employees should include a more formalized audit process that helps identify potential trade secrets, the security measures already in place to protect them, and the potential additional safeguards to address vulnerabilities. A trade secret audit should include the following steps:

1) consult with trade secret counsel;

2) identify the key employees who may know the information, techniques, or processes that give the company its competitive advantage;

3) teach employees what is a trade secret and what is important to identify and protect;

4) ask the employees identified to submit a list of all the ideas, information, techniques and processes that they personally know of that might give the company an edge over the competition;

5) consolidate the lists into a single list of potential trade secrets by date, department, format, and production or service line;

6) analyze the listed information to determine what is or is not an actual trade secret;

7) create an inventory of trade secrets;

8) appraise the value of the trade secrets; and

9) determine and apply the right level of security and  protection. Trade secret audits allow employers to analyze their information and separate the wheat from the chaff.

Trade secret law requires the implementation of processes to protect such information before you can ask a court for help. Do not assume that all of your key employees will know what constitutes a trade secret and thus, is in need of additional security measures. While they may not know what technically constitutes a trade secret, they will likely know what information they use on a daily basis to make your company successful and what information is the most valuable because it is not known to your competitors. Next-generation manufacturers need to take full advantage of the knowledge and experience of their key employees who are on the frontlines.

While an initial audit will provide a starting point to your protection efforts, the audit is not a one-time fix. Your processes and techniques are not static and neither should be your efforts to protect them. Periodic audits should be scheduled on a regular basis and the informal conversations with your key employees should be ongoing. This continuing process can also help you identify which security measures are working and which need to be adjusted to provide you with the best protection. The same continuous improvement analysis used in your next-generation manufacturing needs to be applied to your protection processes as well. Do not assume that the protections you put in place will fit for every situation.

Methodically Tracking Trade Secrets

Next-generation manufacturers need to methodically track trade secrets. In the absence of a tracking system, the valuable modifications that are inevitably made to the initially identified trade secret may be lost. While idea A may be important, idea A-1, A-2 and A-3 may be true difference makers and the most valuable to your company. Again, the speed of innovation requires the implementation of a systematic tracking process.

Especially in today’s transitory employment environment, you cannot rely upon “institutional knowledge” possessed by a few employees. Without a tracking process, a key employee could depart, leaving a company scrambling to understand its trade secrets and ill-prepared to challenge the misappropriation of such secrets. Included in the tracking measures is implementation of a centralized and secure database where employees can upload trade secrets and other confidential information. Password protection and only “need to know” access should be used to secure the database.

Additionally, limits should be placed on the ability to download information from the database. While the ease by which employees can upload information to the database will increase the likelihood that they will actually do so, you want to make it very difficult to download information from the database for all but a small number of employees. You want to avoid your employees being able to download large files without your knowledge.

For example, in 2010, a couple in Michigan was charged with stealing more than $40 million in trade secrets from General Motors. The wife, a former GM employee, downloaded confidential information to an external hard-drive and then e-mailed the information to her husband using the company’s e-mail system.

A tracking system will also increase the efficacy and efficiency of subsequent audits as you won’t have to reinvent the wheel every time you conduct an audit. In addition to keeping track of your valuable information, a tracking system can also help in identifying which employees are tied to the information. Linking employees with key information will not only assist with succession planning, but it will aid in your protection process, especially when those employees leave to go to a competitor.

If you know that the departing employee is tied to a key piece of information that would be very valuable to his/her new employer, you will be in a better position to determine if further action is necessary to prevent the disclosure of such information, through litigation or otherwise. If litigation is necessary, the greater connection you can establish between your valuable information and an employee who leaves to perform the same job at a competitor, the more likely you will be able to successfully argue that the employee will inevitably disclose such information at his/her new employer (or will do so intentionally).

Don't Focus Only on R&D

The audit and protection process for your trade secrets should not be solely focused on your company’s research and development (R&D) department. Companies often misunderstand the proprietary value of information outside of the technological arena. For example, pricing, cost and profit information can be just as valuable and even “softer” information, such as a customer’s preferences, can be essential to competitive success.

Even personnel-related information can be confidential and valuable. For example, your competitor would certainly be interested in the strategic and technological information possessed by each employee, as well as what factors/enticements could cause a key employee to leave. While this information may not rise to the level of a trade secret, it is often worthy of protection. Further, your IT architecture and information flow management likely provide you with an edge that would benefit from appropriate security measures.

While R&D gets the most attention regarding confidential information/trade secrets and will provide the bulk of the trade secrets you need to protect, forgetting about your other departments that are dealing with your next-generation manufacturing processes on a daily basis and the potential improvements for same misses valuable information that can slip through the cracks if not protected. A company’s manufacturing processes may be proprietary and confidential. It is important to keep in mind that the trial and error that occurs in R&D also occurs on the manufacturing floor on a daily basis as well as other areas of your business. What works and what does not work (which can be just as important as what actually works) for your frontline workers can prove valuable for your competitive advantage and needs to be accounted for and protected.

In the relentless pursuit of innovation, far too many manufacturers pay insufficient attention to fully assessing and understanding what has been created and its concomitant value. This mistake is compounded by failing to implement measures to monitor and protect these trade secrets. This can all lead to a manufacturer failing to reap the full reward of a brilliant idea. To avoid this sad result, the investment in innovation must be backed up with methodical processes to assess, track and protect it.

John Birmingham is a partner in international law firm Foley & Lardner’s Detroit office and a leader of the firm’s Legal Innovation Hub for NextGen Manufacturers, which counsels manufacturers on the unique issues facing the industry as technology and manufacturing continue to converge. Michael Groebe is senior counsel in the firm’s Detroit office, where he advises clients on employment law.

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