Trade secrets constitute an important part of a company’s intellectual property portfolio and they are generally any practice or process not known outside of the company. Specifically, for the practice or process of a company to be considered a trade secret it must fulfill three criteria:
- it must be secret (i.e. not public information),
- it must provide an actual or potential economic advantage for the company,
- it must be actively protected (i.e. the company exercises reasonable measures to maintain it as a secret).
Some examples of trade-secret include scientific processes, formulas, product blueprints, algorithms, raw or processed data, software, manufacturing processes, customer lists, financial information, market research studies, internal costing and pricing information, etc.
A portfolio of trade secret assets within organizations
Trade secrets are a very important part of any intangible asset portfolio. It is no exaggeration to say that virtually every business possesses trade secrets, regardless of whether the business is small, medium or large. A trade secret portfolio is a collection of trade secrets owned by a single entity. A trade secret portfolio can be a significant part of a corporation’s overall value. A trade secret portfolio may contain tens, hundreds if not thousands of individual trade secrets.
The checklist of potential trade secrets listed in ‘Trade Secret Asset Management’ by Mark Halligan and Richard Weyand showcases the diversity of things that can qualify as a trade secret within an organization. The list is staggering.
The value of trade secrets
Any business professor will tell you that the value of companies has been shifting markedly from tangible assets, “bricks and mortar”, to intangible assets like intellectual property (IP) in recent years.
For instance, IP in its various forms is increasingly used as the basis of many business and commercial transactions. It is fundamental for company valuations (merger, acquisition, bankruptcy); negotiations (selling or licensing); dispute resolution (fair recovery and quantification of damages); fundraising (bank loans and raising capital); assisting in decision making (corporate strategy); and reporting (tax and accounting).
An intangible asset is an asset that lacks physical substance and includes patents, copyrights, franchises, goodwill, and trademarks. A trade secret is also an example of an intangible asset. The international accounting standard IAS 38 clearly indicates that trade secrets qualify as intangible assets. OECD BEPs also list trade secrets in their definition of IP. Trade secrets are an important, but oftentimes invisible component of a company’s IP portfolio of assets. However, trade secrets can also be the crown jewels within the portfolio.
The value distribution curve
Not all of the trade secrets within the portfolio of trade secrets within an organization will be of identical value to the business. Each trade secret will definitely have some value. If the value of any trade secret is zero, well then it is not a trade secret by definition.
A value distribution curve is a graph of the frequencies of different values of a variable in a statistical distribution.
Trade secret portfolio value distribution curve
What does the value distribution curve for the values of trade secrets in a trade secret portfolio resemble?
It is most unlikely that all of the trade secrets within an organization have a similar or identical value? Some will be of relatively low value, some will have relative medium value, while others will be of relatively high value. If we were to plot the value distribution on a chart or graph, what would it look like?
I suggest that the valuation curve is unlikely to resemble a narrow ‘bell curve’ centered around the mean. The ‘bell curve’ represents what statisticians call a “normal distribution.” A normal distribution is a sample with an arithmetic average and an equal distribution above and below average. This model assumes we have an equivalent number of trade secret assets above and below-average value, and that there will be a very small number of trade secrets two standard deviations above and below the average (mean).
Given that broad definition of trade secrets, I also suggest that it is also most unlikely that any value distribution curve is symmetric at the centre around the mean. There will most likely be some skewing of the curve either to the left or to the right.
Could the trade secret value distribution curve be a ‘power law‘ or ‘long tail‘ type curve? Such a distribution curve would indicate that trade secret values are not normally distributed. In this statistical model, there are a small number of high-value trade secrets, a broad swath of trade secrets that are of medium value, and a smaller number of trade secrets that are of relatively low value. It essentially accounts for a much wider variation in value among the sample.
Will the value distribution follow the 80/20 rule? The Pareto principle (also known as the 80/20 rule, the law of the vital few, or the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes. This would suggest that the real value of the trade secret portfolio sits within 20% of the assets in that portfolio.
Could the trade secret value distribution curve be U-shaped? A U-shaped distribution is a bi-modal distribution with frequencies that steadily fall and then steadily rise. There is a higher chance of a measurement being found at the extremes than in the center of the distribution.
Or given the broad nature of trade secrets, will any value distribution curve be completely ragged in nature, lacking any real logic, resembling the top of a mountain range?
I appreciate that this short paper poses more questions than provides any answers. I trust that it is of some interest and value to you. Any and all feedback is most welcome.