Trade secrets are more important, and trade secret litigation is more common: 7 questions to ask yourself about protecting your company

by DLA Piper
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DLA Piper

In today's business environment, trade secrets have become much more important, and trade secret litigation much more common. The trade secret environment we are living in is very different from that of ten years ago, or even five years ago.

First, a bit of background. Disclosing confidential technology generally prevents its future protection as a trade secret, but for many decades the tradeoff − describe your secret and in exchange, obtain a patent − was generally regarded as worthwhile.

From the late 1980s, when the United States Court of Appeals for the Federal Circuit was created, through the mid-2000s, legal and business trends made patenting an attractive proposition for tech companies. Rapidly advancing technology, ever-increasing damages awards, ready availability of permanent injunctions against infringers, and tough standards for invalidating patents made patent IP valuable and an attractive investment.

Since the mid-2000s, however, the pendulum has definitely swung back. Technological advancement has slowed in some sectors and investment is generally down. The US courts have chipped away at many protections. Not surprisingly, budgets for in-house patent departments have tightened and companies have become more selective about what they choose to patent. The result has been that ever more technical information is being kept as a trade secret, to be exploited by the business but not revealed to the public.

This trend comes at the same time that two other significant trends are in full flow. The first of these is the rise in trade secret theft. Companies' confidential information is under direct attack from those both inside and outside the company who wish to steal, sell or otherwise exploit it for their own benefit. Trolling, foreign and domestic hacking, employees departing with computer drives of information, broken joint ventures leading to technology disputes, and high-profile trade secret theft are all typical, and common, events.

In 2014, the Center for Responsible Enterprise and Trade (CREATe.org) estimated that losses from trade secret theft across advanced industrial economies could be as much as 1 to 3 percent of GDP – this implies a loss to trade secret theft of $200-600 billion per year in the US alone.

Meanwhile, a third trend is also coming to the fore: more flexible US enforcement of trade secret rights against thieves and infringers. In the 2011 ruling in TianRui Group Co. v. U.S. International Trade Commission, the trade-secret owner, Amsted Industries, obtained an exclusion order blocking products made by a Chinese former business partner which had misappropriated Amsted's trade secrets in China. Subsequent ITC investigations have reinforced the availability and power of ITC actions to provide remedies for international trade secret theft. More recently, after many years of consideration and deliberation, the US Congress passed the 2016 Defend Trade Secrets Act, which gives private litigants a private cause of action in federal court to remedy trade secret theft. Adopting much of the Uniform Trade Secrets Act, the DTSA also incorporates entirely new procedures for ex parte seizures of infringing goods and protections for whistleblowers.

These three long-term trends (reduction in patenting and corresponding increase in keeping technical information secret; ease and frequency of trade secret theft; and better and more venues for trade secret litigation) make the identification, protection and enforcement of trade secret rights more critical than ever.

What do you need to be considering to protect your company in this environment? Here are seven questions to ask.

1. Do you know what your trade secrets are, who has them, where they are kept and what they are worth? Your company gets breached by a departing employee, a former joint venture partner or an industrial hacker. You want to sue. The first question you may have to ask: what is the trade secret you are suing on? Many companies may not even be certain. We all know that some trade secrets – the secret formula for Coke or Kentucky Fried Chicken – are easy to identify as such. But others may be obscure, or they may exist only at the subsidiary or even factory level: the specific settings for a piece of industrial machinery that just happens to make a company's production more efficient or less expensive; the specific shape of an internal component that just happens to maximize output and lower cost, or how to find that shape. If management and the legal department do not know what these secrets are, or how much they are worth, how can they know what's subject to theft? To better answer this question, in a number of companies, management has set up trade secret audits to identify, categorize and often value trade secrets.

2. How are your trade secrets protected? The definition of a trade secret, in many countries, includes a requirement that the secret's owner has taken "reasonable steps" to keep it confidential. Thus, the second question in any trade secret case is: was the alleged trade secret subject to "reasonable measures to keep such information secret?" Many companies have some protections in place: password access to company networks, key cards, non-disclosure agreements. In determining how your secrets are protected, you should ask such questions as: are these measures reasonable? Are they always applied? Do third parties have access to the networks? Do third parties have access to keycard-protected space? Are valuable secrets kept in segmented need-to-know portions of the network, or are they widely available to all employees? These questions matter, not only because they will be important in litigation if your trade secrets are stolen, but because responding to them with effective protections may well keep your trade secrets from being stolen in the first place.

3. Are your secrets really yours, or do they belong to your business partners? We have seen a number of highly contentious disputes arise when joint ventures and similar business partnerships are dissolved. Your legal department may do a crackerjack job of documenting such deals (and who owns what), but the same might not be true of the legal department in the subsidiary you acquired overseas five years ago. Furthermore, in a well documented deal, upon dissolution of the joint relationship, it may turn out that the ownership of trade secrets you thought were yours is joint – or worse, belong to the other party. In a poorly-documented deal, it may be unclear who owns contributed or even jointly-developed trade secrets – or it may never have been considered in the first place.

4. Are your employees putting you at risk of a trade secrets case? Much of the discussion above has centered on protecting your company's own trade secrets. But what of those secrets owned by your business partners, customers, vendors and competitors? And what happens when an employee betrays your confidential information, or that of your vendors? In some industries, chat rooms on the dark web are used by engineers to trade away secrets and designs anonymously, or to obtain other parties' trade secrets for the company's benefit. We are also aware of situations in which a company's employee has claimed credit for ideas or developments actually contributed by a vendor, supplier or business partner. While the company must be vigilant about protecting its own valuable trade secret technology, even the most respectable company must also take steps to protect itself from trade secret entanglements into which its own employees may draw it.

5. You experience a trade secrets breach. What are the first things you should be thinking about? Ideally, the first thing we hope you will think is: what does my response plan say? We strongly recommend that, well before any problems arise, companies put in place a high-risk contingency plan that includes clear action steps and identifies the team that will handle this high-priority issue. That plan would set out the careful preservation of evidence of the trade secret, your ownership of it, its misappropriation and your past efforts to keep it secret. With or without a plan, should a breach occur, you will need to consider whether you can resolve the situation through negotiation, and, if not, whether preliminary relief (such as the new federal ex parte seizure order, or a preliminary injunction) will be required; whether you will need to conduct an internal investigation into possible corporate or employee misconduct; and whether outside enforcement agencies should be involved. Your trade secrets litigator should be regarded as an integral part of your first-response team because such secrets, once gone, have a very limited window for recovery.

6. Do you have an established go-to legal relationship you can count on in a pinch? When a trade secret breach is discovered, companies often turn first to their patent or corporate lawyers – who typically have little experience with high-profile, high-technology trade secret matters. If possible, well before running into trouble, the company should look into establishing a relationship with an experienced IP trial lawyer who is familiar with trade secret litigation.

7. What can you expect in trade secret litigation? The specifics of trade secret litigation vary widely by venue. Your case may involve anything from US federal court to the state courts, the International Trade Commission, foreign and domestic arbitration or even foreign courts. Moreover, trade secret litigation tends to be the most intrusive of IP litigation, prying into highly sensitive aspects of both the plaintiff's and the defendant's internal business structure and operations. And trade secret cases tend to be hard fought and to come with deep tradeoffs between the company's business operations and the litigation strategy itself.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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