Brand Enforcement / 04.26.2019

The Secret Value of a Trade Secret Audit

By David Posteraro

brand enforcementOur earlier post, “Trade Secrets in Business Transactions,” focused on the role of lawyers, accountants and businesses in evaluating a target company’s valuable trade secrets. But generally, companies often underestimate both the significance of their trade secrets in their overall intellectual property (IP) portfolio and the ongoing day-to-day value trade secrets can bring. Sadly, it is often only when faced with a loss of the secret that companies pay attention; it may then be too late.

Properly identifying and valuing trade secrets is critical for many compliance and business purposes, including tax and accounting requirements, NDAs, licensing and other commercial transactions, finance and litigation/dispute resolution.

A trade secret audit, independently or as part of an overall IP Audit, should be a regular part of a company’s IP strategy; a well-conducted trade secret audit should provide a complete picture of the trade secret portfolio, ensure compliance for maintaining trade secret rights, identify and take corrective action concerning potential risks, and enable management to make informed commercial decisions concerning NDAs, licensing arrangements and other commercial transactions.

Moreover, because of changes in the IP law landscape such as the recent Supreme Court decision in Fourth Estate Public Benefit Corp. v. Wall-Street.com, and as technology and the disruptive threats to security change and proliferate, a regular Trade Secret Audit is no longer a luxury but a necessity.

Changes in IP Law

The Defend Trade Secrets Act (DTSA), the Leahy-Smith America Invents Act (AIA) and changes in EU and other national laws are rapidly changing the landscape of trade secret protection. Last year’s Trade Secret Litigation Report revealed that, after years of hovering around 900 cases per year, trade secret case filings increased sharply in 2017 to 1,134 cases (a gain of more than 30% over 2016) on the heels of the passing of the DTSA.

And, as noted in an earlier article, China updated its Anti-Unfair Competition Law on January 1, 2018, which provided a broader trade secrets definition more in line with international norms, as well as increased fines for violation.

Similarly, in Europe, the EU Directive on trade secrets was enacted across all member states on June 9, 2018. The directive standardizes national laws in EU member countries concerning trade secret misappropriation, and significantly allows reverse engineering and parallel innovation.

In addition, many governments are addressing IP rights in their tax policies. For example, recent U.S. tax reform lowers the corporate tax rate, encouraging repatriation of IP back to the U.S., and also introduced new concepts for taxing income derived from intangibles.

Changes in Technology

Cloud-based technologies may make it easier to reverse engineer or copy. In the past, this supported an argument for protecting those technologies with a patent instead of trade secrets. However, faced with the prohibitive costs of patent procurement, enforcement, maintenance and insurance, coupled with the short life-span of technological innovations, many cloud-based technology innovators are choosing to use trade secrets to protect aspects of their innovations that do not have to be publicly disclosed.

Cybercrime

Hacking, phishing and other cyber attacks are threats not only to personal information but may compromise industrial, manufacturing and service-based business trade secrets as well.

Outsourcing

Outsourcing innovation to independent contractors has become more common as R&D costs rise, and innovators are less willing to chain themselves to an enterprise. With this approach, companies use various agreements addressing confidential information and IP ownership to receive and accept information, ideas and technology from outside the company to augment and, in some cases, supplant the company’s own R&D. This can accelerate the company’s development life cycle but also raises legal obligations and risks from shared trade secrets.

Benefits of the Trade Secret Audit

Protecting your trade secrets requires diligence. An open door, either figuratively or literally, can risk the loss of valuable information to a competitor or loss of a company’s competitive advantage. At the conclusion of the Trade Secret Audit, the company should identify vulnerabilities and establish best practices, including employee education, a written trade secret policy and a robust trade secret process that includes access controls, protection mechanisms and standard non-negotiable provisions in agreements as well as a trade secret management system.

KJK can assist in developing, planning, implementing and overseeing your Trade Secret Audit. For more information, please contact David Posteraro, Co-Chair of the firm’s Brand Enforcement Practice Group, at drp@kjk.com or 216.736.7218.

 

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