As we both have written previously, the changing nature of technology, product development and sales, and the patent enforcement landscape, have given trade secrets a new-found prominence. Trade secrets are now becoming a much more significant part of a company’s value. As a result, trade secret asset management is becoming (and if not, it should become) a regular part of company board discussions and review.
While the precise outlines of company directors’ obligations differ from country to country and by entity type, generally speaking, all directors must:
Business judgement rule
Since it is easy to criticize but hard to really know if a director is really acting with good faith or loyalty, the so-called “business judgment rule” protects directors from personal liability if they acted:
So, if a director is:
the director will be protected from personal liability for actions that harmed the business and led it to bankruptcy or other civil (and possibly criminal liability).
What does this have to do with trade secrets?
We have found that few companies properly manage their trade secrets. In fact, we believe many company’s sub-par practices put the continued existence of what the companies’ believe to be their trade secrets at significant risk.
This state of affairs should be a major concern of company boards – especially, where a significant store of value comes from information they believe to be trade secrets. This concern should arise not just out of concern for a company’s well-being – but to protect the directors’ own personal liability.
Director’s duties with respect to IP
Generally, courts treat IP assets like any other corporate asset, which means directors must approach IP with the same due care as they would any other asset.
Such IP related duties for directors may include:
IP here includes patents, trademarks, copyright, designs, and trade secrets.
Trade secrets from Neglect to Prominence
A trade secret is any information that is:
Broadly speaking, any confidential business information which provides an enterprise a competitive edge may be considered a trade secret.
While in the past the proper management of trade secrets may have been neglected, this is slowly but surely changing for a variety of reasons:
We are not the only ones who have noticed the increasing significance of trade secrets. For example, Forbes Magazine labelled the ‘Defend Trade Secrets Act’ as the biggest IP development in years.
Few Companies Manage Trade Secrets Well
Unfortunately, many companies are poor when it comes to trade secret asset management:
Recent reports such as the excellent Baker McKenzie report – “The Board Ultimatum – Preserve & Protect – The Rising Importance of Safeguarding Trade Secrets – 2017” highlight in our opinion a major disconnect between what companies say about trade secrets and trade secret asset management and what companies actually do about trade secrets and trade secret asset management.
Some Trade Secret Best practices
Those exceptional companies who have mastered trade secret asset management tend to have the following things in place
Trade secret risks for company directors
As noted above, directors may be personally liable for breach of their duties of care and/or loyalty, and where their actions fail the business judgment rule.
Common claims seeking to hold directors personally liable include:
We believe that all of these risks are impacted by trade secret asset management.
It is no exaggeration to say that nearly all businesses have trade secrets. Quite often they are material to the company’s value. Occasionally, trade secrets comprise the company’s crown jewels.
As a director it is, at least, negligent to fail to:
If a company becomes insolvent or (if public) has a declining share price, company directors may find themselves personally liable if a court finds that they failed to engage in or require from those they supervised reasonable trade secret asset management.
If only to protect their own liabilities, company directors should become more concerned about proper trade secret asset management.
Donal O’Connell, IPEG consultant and Chawton Innovation Services Limited and David Cohen, former Chief Legal and IP Officer at Vringo, Senior Counsel at NokiaIP lawyer at Skadden Arps and Lerner David.