Top secret: refining trade secrets protection

November 2020  |  FEATURE  |  INTELLECTUAL PROPERTY

Financier Worldwide Magazine

November 2020 Issue

Trade secrets can represent the jewel in the crown for a business, the difference between standing toe to toe with a competitor and besting them. For some, there are simply no circumstances in which trade secrets should be divulged.

Be it R&D data, process know-how, technology, computer programmes, databases, formulae, recipes, market analyses, business relationships, pricing methods, purchasing practices, personnel information, office techniques, financial information, business planning, customer lists or supplier details, trade secrets need to be guarded at all costs.

In its ‘Trade secrets: An efficient tool for competitiveness’ fact sheet, the European IPR Helpdesk defines a trade secret as confidential information in the context of business, commerce or trade. In order for a given piece of information to be classified as a trade secret, it has to meet three requirements. First, it is a secret in the sense that it is not known or readily accessible to a wide circle of persons. Second, it has commercial value because it is secret. And third, it has been subject to reasonable steps, by the person lawfully in control of the information, to keep it secret.

“Companies of all types acknowledge the importance of trade secrets to their businesses,” says Donal O’Connell, a consultant at IPEG Consultancy. “However, many privately admit that they have no idea how many trade secrets they have, which ones are important, or how any of them are protected.”

According to Mr O’Connell, in order to protect trade secrets, companies need to: (i) understand the environment in which the company is operating from a secrecy perspective; (ii) identify information which may warrant being treated as a trade secret; (iii) evaluate information, classify it and determine who has access to it; (iv) put appropriate administrative, legal and technical protection mechanisms in place; and (v) regularly check that information still warrants being treated as a trade secret.

The importance of protecting trade secrets has been highlighted in recent years by a wave of legislation which has served to make the issue a mainstay on the corporate agenda across the globe. Such legislation includes the 2016 US Defend Trade Secrets Act, the 2018 EU Trade Secrets Directive and the inclusion of trade secrets as part of China’s 2018 revisions to its Anti Unfair Competition Law, among others.

“Historically, trade secrets’ significance has been underappreciated, but that situation is changing fast,” suggests Mr O’Connell. “There are various forces at play increasing the importance of trade secrets. Changes in eligibility requirements and enforcement mechanisms of patent laws around the world, especially those in the US – and especially as they relate to software and business methods – make trade secrets an attractive mechanism for protecting a company’s competitive advantage.”

In the UK, steps have been taken to beef up trade secrets protection. “The Trade Secrets Regulations 2018 integrated the EU Trade Secrets Directive into UK legislation,” says Rebecca Swindells, a partner at Jones Day. “While this did not greatly impact upon the pre-existing UK common law of confidence, it did introduce a clear definition of trade secrets as well as specify the reasonable steps test. Having exceptional cyber security and information policies may not, for example, suffice where the first two limbs of the test are not satisfied.”

In Australia, unlike other jurisdictions, there is no common law or statutory cause of action directed specifically at the protection of trade secrets. “Instead, trade secrets are protected through the equitable doctrine of ‘breach of confidence’ and, where an appropriate clause exists, breach of contract,” explains Nina Fitzgerald, a partner at Ashurst. “The key challenge for the protection of trade secrets is ensuring that appropriate systems and mechanisms are in place to maintain the confidentiality of proprietary information.”

Developing a strategy

While advanced technologies certainly help companies to innovate, on the flip side, they also serve to expand the range of trade secrets threat vectors they need to guard against, including malicious insiders, organised crime, foreign intelligence services, competitors or hacktivists. To mitigate, or even eradicate, these threats, a wide-ranging strategy is essential.

“A strategy will need to cover a variety of bases – some contractual – to keep employees and third parties bound to clear and, importantly, enforceable restrictions on what they can do with confidential information,” says Ms Swindells. “There are also practical considerations, including cyber security and access logging, as well as more simple measures, such as limiting access to data on a need-to-know basis.

“Even with a combination of measures, companies also need to consider how they might detect and quickly react to a misappropriation of trade secrets,” she continues. “Strategies therefore need to pincer from both sides: building sufficient firewalls to lower the risk of misappropriation, and tracking and acting on breaches as much as possible.”

In the experience of Severin de Wit, a consultant at IPEG Consultancy, to be effective, a strategy for protecting trade secrets needs to be underpinned by key factors. First, a corporate culture that makes the protection of intellectual property (IP), particularly trade secrets, a crucial part of the business. Second, an awareness that trade secrets protection should not be left to the legal or IP department, but should be on anyone’s mind, no matter what responsibilities an employee has. Third, a clear process that allows employees to identify trade secrets and treat them as a valuable asset. Finally, a sophisticated trade secrets recordal and management system.

Once these elements are in place, a strategy can then be formalised as specific policies that provide sufficient information about the nature of the threat and the risk that it poses. “This information will provide employees with context and empower staff to identify weaknesses – current or potential – in company systems not expressly contemplated in extant policies or training,” says Ms Fitzgerald. “A policy should also identify who should be notified regarding any risk factors identified and reporting should be encouraged through company training and culture.”

Trade secrets amid COVID-19

Adding further difficulty to the already challenging task of protecting trade secrets is the disruption caused by the coronavirus (COVID-19) pandemic. This seismic event has forced companies to drastically rethink their protection provision, particularly those businesses with a lax attitude toward confidentiality issues.

“When businesses worldwide were suddenly forced to implement mass, remote-working arrangements, protection of trade secrets will not have been top of mind for many,” suggests Ms Swindells. “Unless businesses already had in place a robust security infrastructure and effective policies for protecting, monitoring and enforcing their trade secrets, COVID-19 will have increased the risk of misappropriation and loss of protection of their trade secrets.”

Indeed, the sudden impact of COVID-19 has undoubtedly upped the risk ante, with employees working remotely requiring a fast-track education in trade secrets protection. “In these circumstances, companies should provide training which makes clear that the stringent protections in place in the workplace continue to apply at home,” says Ms Fitzgerald. “If it is not feasible to protect the information in the same manner in a remote working environment, revised policies and practices should be created with consideration given to limiting access to highly confidential information to select employees or to those in the office.”

Furthermore, notes Ms Fitzgerald, widespread stand-downs and layoffs from the consequential economic downturn make companies more vulnerable to leaking trade secrets. “If proprietary information is misappropriated, a fast-acting company may seek an injunction to prevent disclosure of that information, as well as damages for any losses suffered or an account of any profits. However, if the information has already been made public, it will not be protected going forward.”

As they lead the search for a COVID-19 vaccine, large biotech and pharmaceutical companies are in the vanguard of companies whose trade secrets protection regimes are under severe pressure due to the pandemic. “Such companies will no doubt have trade secrets protection programmes in place as one aspect of their internal IP processes,” says Mr de Wit. “Cyber criminals – whether competitors or state actors – are working overtime trying to steal trade secrets, so we would not be surprised, given the commercial and political importance of finding a vaccine against COVID-19, that many of the companies being targeted are reinforcing their trade secret protective wall.”

Evolving threat vectors

As the unprecedented COVID-19 pandemic has amply demonstrated, the world is awash with a multitude of threats, many of which are unknown. Therefore, as threat vectors emerge and evolve, companies will need to regularly review and update their trade secret protection policies.

“More and more companies are starting to take trade secrets seriously,” observes Mr O’Connell. “Trade secrets laws have been strengthened and we may see further strengthening. Trade secrets are also being shared more thanks to companies embracing open or collaborative forms of innovation, the threat of which is perhaps not yet fully appreciated.”

Moreover, companies’ increased reliance on data and computerisation means that the protection of trade secrets will continue to be a challenging endeavour. “The quick evolution of threat vectors means that companies must review and update internal policies on a regular basis,” suggests Ms Fitzgerald. “In addition, staff should be trained on new threats as they become apparent to avoid inadvertent loss of trade secrets.”

So, with many trade secrets existing only in digital form, protection efforts can only really be as robust as the technology safeguarding it. “The way in which trade secrets are kept secret may need to evolve, particularly if remote working is here to stay,” points out Ms Swindells. “It is not quite as simple as locking the secret recipe in the vault anymore; companies need to assess continuously what vulnerabilities may arise, and how to address them pre-emptively.”

© Financier Worldwide

BY

Fraser Tennant