"Is the Risk of Critical Information Loss Keeping You Up at Night," InsideCounsel

May 10, 2016

Every business has heard of the horror stories: Employees resigning from their jobs to work for a competitor and taking extremely valuable proprietary company material on their way out; employees selling proprietary information for financial gain to domestic and international competitors; and employees passing proprietary information to other national interests. The potential nightmarish paths for loss of valuable proprietary company material are only limited by the human element involved. It has been our experience that in-house counsel will generally respond with a blank, nervous countenance to questions regarding the protection of their company’s proprietary information.

When asked, most in-house counsel will proudly note that their company has valuable proprietary information, and can expand in great detail on the depth of their respective patent and trademark intellectual property portfolios. But, when pressed with respect to confidential or trade secret information, the conversation typically stops at a bare recital that “they have trade secrets and they are protected.”

That very dearth of internal knowledge speaks volumes with respect to the potential for that company to suffer extensive and potentially business-ending losses of vital proprietary company materials.

The nature, protection and enforcement of a trade secret are distinct from other forms of intellectual property. A trade secret, which is often interchangeably referred to as “confidential information,” can be comprised of any type of information that is not generally known or reasonably ascertainable by others, and which provides a company an economic advantage over its competitors or customers. Once identified as a trade secret, one further requirement for maintenance of a trade secret is to ensure that reasonable measures are diligently taken to protect its confidentiality. Unlike other forms of intellectual property, once disclosed publicly, the trade secret ceases to exist.

Typical examples of trade secrets range from confidential invention disclosure forms, formulas, algorithms, manufacturing techniques and secret ingredients, to perhaps more “mundane” forms of intellectual property assets, such as pricing structures, databases and customer lists.

Trade secret law is primarily governed by state law, and offers protection from trade secret “misappropriation:” the unauthorized acquisition, use or disclosure of such trade secrets obtained by some improper means. Of course, the discovery of a trade secret by fair, lawful means, e.g., reverse engineering or independent development, is allowable and is non-actionable by the trade secret owner.

Companies have internal know-how and organizational knowledge that should be closely monitored in order to maximize a company’s potential to maintain its competitive advantage through the use of trade secrets. Know-how is knowledge and expertise that exists in the minds of a few key people in the organization, and is generally not captured in written form or widely shared across the entirety of the company. By its very nature, know-how in and of itself cannot be classified as a company asset, as a company doesn’t “own” the people within which the knowledge exists.

Noncodified know-how poses both short- and long-term risks to the company. The potential risks to the company if key employees who possess the know-how become ill or otherwise leave the company are often understated if the valuable proprietary information inherent in the know-how is not codified. By codifying know-how, it becomes an asset of the business, capable of being shared across the breadth of the company and utilized by any number of employees. Organizational knowledge is captured know-how, and can take the form of designs, technical specifications, best known methods, software code, or any other form of codified, captured information. The benefit of organizational knowledge, as opposed to know-how, is all relevant current and future employees will be able to refer back to the information at any time, allowing for smoother and more consistent business operations.

We all know the old maxim, “knowledge is power.” The first and oft-forgotten step in management and exploitation of confidential information is seemingly innocuous, but vital: companies must identify all of the critical intellectual property assets created, owned and utilized for revenue generation in order to produce a cohesive intellectual property strategy. When considering the various pieces of organizational knowledge and know-how within a company, it is necessary to ask, “What gives the company an advantage over its competitors; what makes the company great and different; and critically, what information would seriously undermine your company if it were to get into the hands of the competition?”

Only when that critical information has been delineated will the company be in a position to consider whether it warrants protection as a trade secret.

Executing a trade secret evaluation methodology can provide a first step in a larger, collective effort to improve trade secret protection, and to help companies to better appreciate the importance of proactive protection. The results of an evaluation allow for companies to better understand the relative value of their trade secrets, the harm that can result from any loss or theft and can help allow for the necessary allocation of internal company capital resources to ensure the long-term protection of the valuable proprietary company materials.

In the second and third installments in this series, we will detail specific recommendations for how companies can proactively protect trade secrets and other confidential information.

Reprinted with permission from the May 11, 2016, edition of the InsideCounsel© 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

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