Science and society

Entrepreneurship and IP Part III: Trade secrets

August 20, 2016

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Trade secret can be of any commercially valuable information that gives your business a competitive advantage as it is not known to your competitor or public. It could be a formula, physical device, survey method, idea, recipe (e.g., recipe for Coca-Cola), business plan, pattern, advertising or sales strategy, distribution method, document tracking process, consumer profile, manufacturing process or a little tweak involved in the process, computer algorithm (e.g. Google’s search engine), compilation of information (customer list, suppliers list etc.), financial information, that helps the owner gain a competitive advantage in market place.

Trade secret may have a combination of information available in public domain and information unique to the company. And compilation of such information provides a significant advantage to the owner.

How to protect trade secret?

Typically speaking, for trade secret protection, no registration or no government grant is required. You simply need to maintain secrecy of the information. However, few countries (e.g., US & EU) have formal legislation for trade secret registration. World Trade Organization (WTO) recognizes protection of trade secrets. Member states of WTO and counties that are party to the Agreement on Trade Related Aspects of Intellectual-Property Rights (TRIPS) are obliged to provide trade secret protection. Protection lasts as long as the information is kept confidential. Simply saying information as trade secret will not help, you need to take substantial and reasonable measure to keep the information confidential. Once the information is made available to public or if someone discovers from an independent source, the trade secret protection ends.

Challenges of start-ups:

Trade secret policies differ greatly in an established company and in early stage start-ups. Many start- ups and SMEs (Small and Medium-sized Enterprises) exclusively use trade secret to protect their Intellectual Property (IP). Start-ups have challenges in terms of space – many of them operate from incubation centre, accelerator, shared office space etc. However, they should have some policy documents for trade secret identification and protection. Start-ups should at least address the following:

1) Identifying your Trade secret

Every business has some set of information that can be categorized as trade secret. First, you should identify such information. Take a through look of your company’s asset. It would be very difficult to prove later that a particular category of information is trade secret if you do not have a hard copy document or electronic format stating the same.

2) Maintenance of Trade secret

Once you have identified your trade secrets, you need to set up policies and procedures to protect them. Trade secrets are considered as the most valuable asset for start-ups. You can consider the following measures to protect your trade secret:

Signing non-disclosure agreements (NDA) with your third party development partners and manufacturers. NDA is a contractual agreement between you and the recipient of the information.
Signing trade secret assignment with employees, independent contractors and consultants. Writing them down makes it clear to the employee and others that these set of information are trade secrets & they should take effort to keep confidential.
Marking documents as confidential, password protection, limiting distribution of password & access to priority documents.
Locking important folders and listing who can access the information.
Reporting periodic status of the trade secret information. During the process of growth & operation some information might lose the status of trade secret e.g., product launch, patent filing etc. Regular auditing of information is required for appropriate maintenance of trade secrets.
Marking emails, attachments etc. as trade secret/private/confidential, specific guidelines for document sharing provision and email usage.
Having physical security, locks and limited access to the area/systems having confidential information.
You must have clear policies as how you handle visitors coming into your space. Your employees should know what information can/cannot be shared, and also not accessing confidential documents/ keeping off desk in the vicinity when the visitors are around. As the company grows, the policies and procedures expand and will become more robust.

3) Patents or trade secret

For start- ups, filing patents may be too expensive but the technology may be entitled for patent protection. In some cases, you can choose ‘trade secret’ as an alternate mode of protection. Furthermore, patent law requires complete disclosure of your invention in patent application in return for obtaining a 20 year monopoly. Some information/technology that you have developed might be of high value but not appropriate for patent protection. And you may also lose trade secret rights for such information by public disclosure in the process of patent filing. In addition, it might just be a gift to your competitor, as the information could easily be available to them.

If the trade secret is about an innovative product, others may reverse engineer and then entitled to manufacture and use the product. You need to know that, unlike patent law, trade secret does not protect against independent discovery of the information. The decision of keeping information as trade secret or filing a patent depends on technology, valuation, business consideration and evaluation of relative benefits of patent and trade secret.

4) Employee awareness about trade secrets

Notify your employees about the category of information that are trade secret and routinely remind them.

Your trade secret policy should start to roll on immediately, when an employee comes on board and remain until she/he leaves the company. Employees coming on board can also ‘contaminate’ trade secret information from earlier employer(s), that should not happen. When employees leave, remind them about the non-disclosure documents they had signed and ensure that critical information do not leave with them. It is their duty to maintain the confidentiality of trade secret information of the employer for specified period of time (as mentioned in the trade secret agreement) even after their employment.

5) Trade secrets and misappropriation

When a trade secret is leaked out, unauthorized use of such information by persons/competitors/third parties other than the owner is regarded as an unfair practice and violation of the trade secret. In case of misappropriation, you need to show by record to substantiate, that the said piece of information is trade secret and you took adequate measure to protect the information.

The court will look into following while establishing misappropriation of trade secrets,

The information was confidential to company.
The information was of commercial value, and use of such information in an improper way results in financial damage to the company.
Company took reasonable efforts to keep the information as secret through agreements, trade secret policy and procedures.

Conclusion:

Trade secret is considered as one of the important form of Intellectual Property rights protection for start-ups. Value lies in information what works for your company, as well as what did not work and not spending resource what did not work. Documentation of such wealth of information (not known to your competitor) over time adds tremendous value to your company.

In case of industries, where employee attrition is very high, special measure should be taken. You should maintain record that you developed specific technologies or strategies independently of your competitor. It will create a good defence in the long term protection of your company’s IP assets.

Finally, do not loose valuable intellectual property rights, just because you did not consider entering into a non-disclosure agreement, data encryption, training employees, marking documents as confidential, password protection of accounts, documenting trade secret policies due to lack of time or so. Trade secrets are extremely valuable, but that value can instantly vanish, if not maintained adequately.

References: 1, 2, 3, 4

Image source: Author

This post is the third in the series of articles on “Entrepreneurship and IP”.

Link to the First part of the series: “Entrepreneurship and IP Part-I: Starting up right”https://sciwri.club/?p=871

Link to the Second part of the series: “Entrepreneurship and IP Part II: Patent strategy and business value” https://sciwri.club/?p=1174

Disclaimer: The materials in the blog are solely for the purposes of informing, assisting and educating the readers and are not in any way a substitute for professional opinion or advice. They do not constitute legal advice or legal opinion or solicitation.

Dr. Lipika Sahoo, Founder & CEO of Lifeintelect Consultancy Pvt. Ltd., a registered Indian Patent and Trademark Agent having 16 years of experience in academia and industry. She holds a PhD from Indian Institute of Science (IISc). She holds triple masters; MSc from Sambalpur University; PGDIPR from National Law School of India University (NLSIU); PGCBM from Xavier Institute of management (XIMB); and advanced certifications from World Intellectual Property Organization (WIPO) in Patents and Patent Drafting.

lipika@lifeintelect.com| https://in.linkedin.com/in/lipikasahoo|

News: The Author will be conducting a workshop in IIM, Bangalore on IP & Entrepreneurship for start-ups & entrepreneurs associated with IIM ecosystem.