ORIENTATION PROGRAM ON INTELLECTUAL PROPERTY

FOR MANAGEMENT STUDENTS OF INDIAN INSTITUTE OF MANAGEMENT (IIPM)

Geneva, Switzerland, 2007

The Importance of Trade Secrets for Businesses

Lien Verbauwhede KoglinConsultant, SMEs Division

World Intellectual Property Organization (WIPO)

• Idea: By keeping valuable information secret, you can prevent competitors from learning about and using it and thereby enjoy a competitive advantage in the marketplace.

What are trade What are trade secrets?secrets?

Do-it-yourself form of IP

General principles:

• Information that has commercial value and that has been scrupulously kept confidential will be considered a trade secret (TS).

• Owner will be entitled to court relief against those who have stolen or divulged it in an illegal manner.

This Presentation

1. What information qualifies as a TS?

2. What makes something a TS?

3. When can you get court relief?

4. How are TS lost or stolen?

5. How to protect your TS?

6. May TS be sold?

7. How is TS protection enforced?

QuestionQuestion 11

WHAT KIND OF INFORMATION WHAT KIND OF INFORMATION QUALIFIES AS A TRADE SECRET ?QUALIFIES AS A TRADE SECRET ?

TRADE SECRET

• Provides competitive advantage

• Potential to make money

Kept confidential

TRADE SECRET

Financial information

Technical & scientific

information

Commercialinformation

Negativeinformation

– Product information

• technical composition of a product (paint, medicine, beverage)

• technical data about product performance

• product design information

– Manufacture information

• manufacturing methods and processes (e.g. weaving technique) • production costs, refinery processes, raw materials

• specialized machinery

– Know-how necessary to perform a particular operation

ExamplesTechnical and scientific information

– Computer technology

• hardware + software (esp. source code)• whether < patent or copyright protection

• algorithms, formulas, data flow charts, specific procedures that are implemented in the software or website

• Software design documents

• Software development agreements

– Drawings, designs, motifs, patterns

– Laboratory notebooks

– Pending patent applications

– Customer lists

– Customer profiles, buying preferences, requirements

– Business plans and strategies

– New product names

– Supplier arrangements

– Sales methods

– Personnel performance

– Info re: new business opportunities

ExamplesCommercial information

– Financial projections

– Cost & pricing information

– Sales data, price lists

– Internal cost structure

– Salary and compensation plans

ExamplesFinancial information

– Details of failed efforts to remedy problems in the manufacture of certain products

– Dead-ends in research (e.g. waterproof)

– Unsuccessful attempts to interest customers in purchasing a product

ExamplesNegative information

QuestionQuestion 22

WHAT MAKES SOMETHING A WHAT MAKES SOMETHING A TRADE SECRET ?TRADE SECRET ?

When do you have When do you have legal protection?legal protection?

Three essential legal requirements:

1. The information must be secret

2. It must have commercial value because it’s secret

3. Owner must have taken reasonable steps to keep it secret

• What if many employees need to know?

• What if others need to know?

– suppliers, joint development agreement, due diligence investigation, etc.

• What if you want to license technology?

1. Secret

Required that be known only by one person?

• “not generally known among or easily accessible to persons within the circles that normally deal with this kind of information”

• What is ‘generally known’ ?

– matters of common knowledge

– information you find at library, online database, trade journals, patent information, etc

– price list on website

– graphics & object code of software application you sell off-the-shelf

1. Secret

• Not required that be known only by one person

– If you need to share

– If you license technology which has limited distribution

possible to protect confidential information by contractual

means

1. Secret

• Must confer some economic benefit on the holder

• This benefit must derive specifically from the fact that it is not generally known (not just from the value of the information itself)

• How to demonstrate: – benefits derived from use– costs of developing the TS – licensing offers, etc.– actual or potential

2. Commercial value

• Under most TS regimes, you cannot have a TS unless you have taken reasonable precautions to keep the information confidential

• ‘Reasonable’ case by case– reasonable security procedures– Non-disclosure agreements (NDA)– such that the information could be obtained

by others only through improper means

• Importance of proper TS management program

3. Reasonable steps

Caution: Who owns the TS?

• TS (e.g. new technology, brand, etc) developed by employee …

• TS developed by external contractor

To avoid disputes:

WRITTEN AGREEMENT +

ASSIGN in advance all trade secrets developed

during employment or commission

QuestionQuestion 33

WHEN CAN YOU GET COURT WHEN CAN YOU GET COURT RELIEF ?RELIEF ?

COURT RELIEF if: TS + “THEFT”

Courts will only grant relief if someone has improperly acquired, disclosed or used the information

Only theft if wrongful !

2. Confidentiality agreement or NDA

– e.g., employees, suppliers, consultants, financial advisors

What is typically considered wrongful?

1. Duty of trust

– implied or imposed by law

– e.g., employees, directors, lawyers

3. Industrial espionage, theft, bribery, hacking, eavesdropping

What is lawful? Discovery of the secret by fair and

honest means

1. Independent creation

– without using illegal means or violating agreements or law

patent

TS protection provides no exclusivity !

What is lawful?

2. Reverse engineering

– Take product apart and see how it ticks

– Common practice among software companies: studying competitors' products

• to make software that can interoperate with the software being studied

• to make a product that will compete with it

– E.g. decompile object code to reveal its structure and figure out the interface specifications for interoperability purposes

– E.g. look at a program's input and outputs

2. Reverse engineering

– Solution: contractually forbid reverse engineering (in software license agreement)

– Technological protection measures

BUT! Legality in question

• Inconsistent with copyright or antitrust laws?

QuestionQuestion 44

HOW ARE TRADE SECRETS LOST HOW ARE TRADE SECRETS LOST OR STOLEN ?OR STOLEN ?

A Growing Problem. A Growing Problem. Why Does It Occur?Why Does It Occur?

– Way we do business today: increased use of contractors, temporary workers, out-sourcing

– Declining employee loyalty: more job changes

– Organized crime: discovered the money to be made in stealing high tech IP

– Storage facilities: DVD, external memories, keys

– Expanding use of wireless technology: devices for interception of communication without consent

– Reverse engineering, independent discovery

– Improper licensing

– Burglaries by professional criminals targeting specific technology

– Network attacks (hacking)

– Laptop computer theft

– Inducing employees to reveal TS

ExamplesExamples

– departing or disgruntled employees

– intentional (malicious)

– inevitable (knowledge acquired)

– by ignorance

80% of trade secret loss

< employees, contractors, trusted insiders!

Case Coca-Cola Trade Secret Trial

• Prosecutors say a former Coca-Cola secretary took confidential documents from the beverage giant and samples of products that hadn't been launched with the aim of selling them to rival Pepsi

• Faces up to 10 years in prison if convicted of conspiracy.

AP Business, January 15, 2006

Case Company accused of misappropriating TS

from an inventor

• Inventor of new design for vacuum cleaner presented design to vacuum cleaner manufacturer. Signed NDA covering the design.

• Manufacturer obtained patent on the design one year after the inventor disclosed the design to them, and made estimated sale profits of $100,000,000.

• 2004: lawsuit settled. Company paid $30,000,000 to inventor.

Case High-Tech Company vs. Employee

• Technical manager (employee) of high-tech company X resigned Went to work for another high-tech company Y

• Departing employee used and disclosed TS

• Company X filed suit against departing employee

• Court order: Departing employee prevented from performing work for his new employer (Y) in connection with any product that competes with X’s products.

QuestionQuestion 55

HOW TO PROTECT HOW TO PROTECT YOUR TRADE SECRETS?YOUR TRADE SECRETS?

1. Identify trade secrets1. Identify trade secrets

• Accurate record keeping is important.

• Factors to determine if information is a TS

– Is it known outside the company?

– Is it widely known by employees and others involved within the company?

– Have measures been taken to guard its secrecy?

– What is the value of the information for your company?

– What is the potential value for your competitors?

– How much effort/money spent in developing it?

– How difficult would it be for others to acquire, collect of duplicate it?

2. Develop a protection policy2. Develop a protection policy

Advantages of a written policy:

– Clarity (how to identify and protect)

– How to reveal (in-house or to outsiders)

– Demonstrates commitment to protection important in litigation

– Educate and train:

• Clear communication and repetition

• Copy of policy, intranet, periodic training & audit, etc.

• Make known that disclosure of a TS may result in termination and/or legal action

– Monitor compliance, prosecute violators

3. 3. Restrict accessRestrict access

to only those persons having a

need to know

the information

computer system should limit each

employee’s access to data actually

utilized or needed for a transaction

4. Mark documents4. Mark documents

– Help employees recognize TS

prevents inadvertent disclosure

– Uniform system of marking documents

• paper based• electronic (e.g. ‘confidential’ button on

standard email screen)

5. Physically isolate and protect5. Physically isolate and protect

– Separate locked depository

– Authorization

– Access control

• log of access: person, document reviewed• biometric palm readers

– Surveillance of depository/company premises

• guards, surveillance cameras

– Shredding

– Oversight; audit trail

6. Restrict public access 6. Restrict public access to facilitiesto facilities

– Log and visitor’s pass

– Accompany visitor

– Sometimes NDA/CA

– Visible to anyone walking through a company’s premises

• type of machinery, layout, physical handling of work in progress, etc

– Overheard conversations

– Documents left in plain view

– Unattended waste baskets

7. Maintain computer secrecy7. Maintain computer secrecy

– Secure online transactions, intranet, website

– Password; access control

– Mark confidential or secret (legend pop, or before and after sensitive information)

– Physically isolate and lock: computer tapes, discs, other storage media

– No external drives and USB ports

– Monitor remote access to servers

– Firewalls; anti-virus software; encryption

8. Measures for employees8. Measures for employees

1. New employees

• Brief on protection expectations early

• Obligations towards former employer!• Assign all rights to inventions developed

in the course of employment

• NDA/CA

• Non-compete provision •Reqts

•Limits

2. Current employees

• Prevent inadvertent disclosure (ignorance)

• Train and educate• NDA for particular task

3. Departing employees

• further limit access to data• exit interview• letter to new employer• treat fairly & compensate reasonably

for patent work

Non-Competition Clauses(covenants not to compete)

in Labour Contracts

After employee leaves prior employer:

• May he work for competitor? • May he work in related job? • May he open a competing business?• Is covenant not to compete enforceable?

Freedom to work

Prohibition ofunfair

competition

Autonomyof individual

Freedom of contracts

Freedom of trade &

commerce

Right to

property- IP, TS

- investment

Protectionof competition

Right to property:- knowledge- experience

• Some jurisdictions: NC covenant binding if ‘reasonable’

– limited in time (Slovenia 2 y)

– limited in area

– limited in type of industry

– special compensation to be paid to employee for his obligation not to compete

• Some jurisdictions: in writing + payment

– Slovenia: implied in labor contract (no written contract required)

– Slovenia: employer must pay employee during the time he’s prevented from working

9. Measures for third parties9. Measures for third parties

– Sharing for exploitation

– Consultants, financial advisors, computer programmers, website host, designers, subcontractors, joint ventures, etc.

• Confidentiality agreement, NDA

• Limit access on need-to-know basis

QuestionQuestion 66

MAY TRADE SECRETS BE SOLD MAY TRADE SECRETS BE SOLD OR LICENSED?OR LICENSED?

• SALE

– Most TS sales occur as part of the sale of the business

• LICENSE

– e.g. in combination with patent license

– e.g. software license for highly specialized program

– Advantage: additional revenues

– Disadvantage: risk of disclosure (potential loss)

– In some countries, restrictions

TS Licensing

• Definition of the secret subject matter

– what is to be kept confidential?

– marked as such or broad clause?

• Permitted use

– disclosure to employees, professional advisors?

– modification of technology?

• Precautions to be taken

• Exclusions

TS Licensing

• Duration of secrecy obligations

• Royalties

• Sanctions

• Should not be subject to alternative dispute resolution

TS Licensing

Can licensee be obligated to continue paying TS royalties even if the information has entered the

public domain?

In case of license for patent + related TS:

Can licensee be obligated to continue paying TS royalties when patent expires or is invalidated?

TS Licensing

Mass-marketed technology

(e.g. software):

Possible to negotiate NDA with every end-user?

QuestionQuestion 77

HOW IS TRADE SECRET HOW IS TRADE SECRET PROTECTION ENFORCED?PROTECTION ENFORCED?

What can you do if What can you do if someone steals or someone steals or

improperly discloses improperly discloses your TS?your TS?

1. Contract law

• When there is an agreement to protect the TSNDA/CA

anti-reverse engineering clause

• Where a confidential relationship exists attorney, employee, independent contractors

2. Principle of tort / unfair competition

• Misappropriation by competitors who have no contractual relationship

theft, espionage, subversion of employees

TS protection may be based on...

3. Criminal laws

• e.g. for an employee to steal trade secrets from a company

• e.g. unauthorized access to computers• theft, electronic espionage, invasion of privacy, etc.• circumvention of technical protection systems

4. Specific trade secret laws

• US: Uniform Trade Secrets Act; Economic Espionage Act

• Law of June 10, 1993 on Companies (art 39-40)

– Define the term of business secrets and protection

• Law of April 1993 on Protection of Competition (art 13)

– General clause and provisions forbidding special acts governing disclosure of business secrets

• Employment Act (art 37-40)

• Employment Related Industrial Property Rights Act (art 7)

– employee must protect employer’s secrets

• Paris Convention (art 10bis) + TRIPs (art 39)

– unfair competition

Relevant laws in Slovenia

1. Order to stop the misuse

2. Monetary damages

• actual damages caused as a result of the misuse (lost profits)• amount by which defendant unjustly benefited from the misappropriation

(unjust enrichment)

3. Seizure order • can be obtained in civil actions to search the defendant's premises in order to

obtain the evidence to establish the theft of TS at trial

4. Precautionary impoundment • of the articles that include misused TS, or the products that resulted of

misusing

Remedies

To establish violation, the owner must be able to show :

– infringement provides competitive advantage

– reasonable steps to maintain secret

– information obtained, used or disclosed in violation of the honest commercial practices (misuse)

TRADE SECRETS FOR TRADE SECRETS FOR BUSINESSESBUSINESSES

CONCLUSIONSCONCLUSIONS

TS protection for financial, commercial & (secret) technical information:

develop effective internal TS program to maintain trade secret status

restrict access impose obligation of confidentiality to anyone

who has access

Certain aspects of business/products cannot be maintained as a trade secret

information or technology that must be disclosed to the public in order to market the product

information or technology which is part of a product sold to the public and can be reverse-engineered

mass-marketed technology or products where competition is so intense, that very likely to be

independently developed by others within short time if great deal of personnel movement between competitors

Alternative or additional protection for TS:

make reverse engineering difficult (compiled code) technological protection measures patents copyright protection

Be careful about signing confidentiality agreements and non-compete covenants

Thank You!

Lien.verbauwhede@wipo.int

www.wipo.int/sme

The Importance of Trade Secrets for Businesses