While the laws governing trade secrets differ slightly from country-to-country, common among nearly all these laws is that a trade secret is any information that is:
- Not generally known to the relevant business circles or to the public. The information should also not be readily accessible.
- Confers some sort of economic benefit on its owner. This benefit must derive specifically from the fact that it is not generally known, and not just from the value of the information itself. It must have commercial value because it is a secret. Commercial value encompasses potential as well as actual value.
- It must have been subject to reasonable steps by the rightful holder of the information to keep it secret. What is reasonable can vary depending on the specific circumstances.
A trade secret continues for as long as the information is maintained as a trade secret. However, information may no longer be considered a trade secret once it becomes easily accessible, is no longer properly protected or has no commercial value.
Trade Secrets Need People to Exist
Leaving aside the question of permitted subject matter for trade secrets, one of the most important differences between trade secrets and other forms of registered, intellectual property like patents is that patents – once granted – exist independently of their creators until a court or government agency finds the patent invalid over prior art.
Trade secrets by contrast, can only come into existence and can only continue to exist for as long as its creators and custodians take “reasonable measures” to keep them secret.
In other words, an issued patent can continue to sit on the proverbial shelf, but failing to treat trade secrets with the proper care will cause them to die.
While certain aspects of trade secret care within organizations can be automated, for the vast majority tasks associated with proper trade secret asset management those tasks must be conducted by people. Moreover, for at least those employees with access to trade secrets, these tasks are not occasional but must be performed every single day.
These tasks include:
- maintaining secrecy of the information
- controlling access to the information
- keeping the appropriate administrative, legal and technical protection mechanisms in place around the information.
Without properly trained employees, whose training begins upon employment and continues through and post-departure, even the best conceived trade secret asset management scheme will fail.
Responsibility for trade secrets within an organization
Responsibility for all forms of IP asset management typically – and should – fall on the intellectual property or legal department. For trade secrets, however, without cooperation by the entire organization any trade secret management scheme conceived by the IP or legal department is doomed to fail.
In most organizations only the Human Resources (HR) Department has the scope and ability to implement and manage a comprehensive policy covering all employees and their day-to-day activities.
The role of HR
HR management involves developing and administering programs that are designed to increase the effectiveness of an organization or business. It includes the entire spectrum of creating, managing, and cultivating the employer-employee relationship.
HR also has a crucial role to play with respect to trade secret asset management.
1. HR must properly manage the recruitment and on-boarding procedures to make sure that reasonable steps are being taken to avoid newly hired employees bringing trade secrets of a prior employer with them.
2. HR must properly manage employee contracts to ensure that the IP provisions and confidentiality clauses are in alignment with the relevant national trade secrets laws (e.g. The Defend Trade Secrets Act in the USA, The EU Directive on Trade Secrets across Europe, Anti Unfair Competition Law in China, etc.).
3. HR must properly manage subcontractor agreements (specifically the IP provisions and confidentiality clauses) with any independent contractors working within the organization.
4. HR must properly manage the employee termination and exit processing procedures to ensure that appropriate protocols are in place to secure the return of confidential and trade secret information.
5. HR must properly manage fiduciary training for the C-Suite Executives and Senior Managers of the organization to ensure it includes a section on trade secrets and their duties and responsibilities.
6. HR also should participate to some degree in the trade secret portfolio management review process as most HR departments are likely to create and develop their own trade secrets.
The challenges of companies with outsourced HR
A Professional Employer Organization (PEO) is a co-employment alternative for small businesses that want to offer human resources (HR), payroll, and employee benefits – similar to what larger companies provide.
The rapid growth of PEOs in the United States in particular, where they account for 15% of organizations with 10 to 99 employees, presents an important challenge and opportunity.
Given the key role that the HR function plays with trade secrets, when the function is outsourced, it is important to ensure that such outsourcing does not endanger an organization’s trade secrets.
We have found that most SMEs do not have adequate trade secret asset management programs. Often this is because SMEs are struggling to focus on the daily challenges of turning a profit and do not have the resources or expertise to oversee sophisticated legal and HR planning.
Thus, when an SME turns to a PEO trade secrets can provide an additional – and significant – value add to the PEO’s client.
PEOs have the scale and sophistication to work with qualified legal and IP professionals to develop and implement trade secret policies for their customers that meet or exceed best practices as a cost efficient part of their offerings.
The importance of trade secrets has increased dramatically since the passage of the Federal Defend Trade Secrets Act in May 2016; the EU Directive on Trade Secrets in Europe passed in June 2016 and enacted by member states in June 2018; as well as the enhancements to the Anti-Unfair Competition Law in China, first in Jan 2018 and then more recently in April 2019.
One obvious impact has been the increase in reported trade secret misappropriation cases. We believe that proper trade secret asset management can help avoid or at least significantly mitigate the risks of trade secret loss.
Interestingly, a significant percentage of trade secret litigation cases involve theft by employees (individual contributors; middle managers; executives). As a result, we believe that trade secret asset management is clearly a HR issue or at the very least HR need to be an integral part of the process.
David L. Cohen is President of Kidon IP Corporation, a US-based company specializing in IP deal making, IP services and IP consulting.
Donal O’Connell is IPEG consultant and Managing Director of Chawton Innovation Services Ltd, a UK based company focused on IP education, IP consultancy and IP software solutions (including a trade secret asset management solution).