Tag : trade secret

A process is an interrelated set of activities designed to transform inputs into outputs, which should accomplish your pre-defined business objectives. Processes should produce an output of value, they very often span across organizational and functional boundaries and they exist whether you choose to document them or not.

A process can be seen as an agreement to do certain things in a certain way and the larger your organization, the greater the need for agreements on ways of working. Your processes are the memory of your organization, and without them a lot of effort can be wasted, and the same mistakes can be repeated.

First class processes facilitate good communication between the information originator and the information receiver, because they help to set and manage expectations and the consistency of the information being given.

Processes must never be allowed to become static, because they are there to serve the organization and not vice versa. Ways and means to take identified improvements systematically into use should exist within your organization and well-established processes can be used as a tool to accomplish this aim.

Your processes define what and how tasks are done and by whom, to ensure repeatability. This is especially important as more in-house functions collaborate more with external entities, intermediaries, service providers, solution providers, etc. sometimes off-shore.

Processes also enable you to set performance criteria and measurement, which can be utilized when identifying the source or root-cause of any problems or excessive variation.

IP processes

Intellectual Property (IP) rights are valuable assets for any business, possibly among the most important that it possesses. It is therefore imperative that whatever IP processes are in use are fit for purpose and add some value to those using these processes.

IP processes perform many useful functions within an organization. They act as agreements and become part of the organization’s memory, ultimately ensuring the facilitation of good communication. IP processes can be an implementation tool, enabling improvements to take place and ensuring repeatability. The IP processes you put in place can also support a learning and developing organization.

Examples of IP processes include:

  • IP creation
  • IP portfolio management
  • IP enforcement
  • IP exploitation
  • IP risk management

If your organization and/or IP function is organized and operates in such a manner that it has very strong functional dimensions, there is a danger that the focus will be centered on internal functions to improve their function performance and not on the overall performance of the organization or on the IP function. This may lead to interfaces or check points being established, based on functional borders and requiring extra hand-offs and approvals. This in turn can limit your ability to manage the whole value chain and lead to sub-optimization of the overall organization.

An organization or IP function with a strong process focus will almost certainly have to be concentrated on business targets and the customer. It will also be one with good understanding of how IP adds value to the business.

IP process descriptions

An IP process description is basically a formal representation of the structure, activities, information flow, resources, behaviors, goals, and constraints of your IP function. This formal modelling of the IP function should facilitate the creation of enhanced understanding of the core activities, as well as the relations that extend across the boundaries of the function. Flow charts are easy-to-understand diagrams showing how steps in a process fit together and this makes them useful tools for communicating on how IP processes work and for clearly documenting how a particular task is done.

Furthermore, the act of mapping a process out, in flow chart format, helps you clarify your understanding of the IP process and assists you in identifying aspects of the process that can be improved. A flow chart can therefore be used to define and analyze processes, build a step-by-step picture of the process for analysis, aid discussion and communication and identify areas for improvement.

Trade Secrets

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 a 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.

Although trade secrets have been the neglected step-child of IP, this is slowly but surely changing for a variety of reasons:

  • Law changes (DTSA in USA; EU Directive on Trade Secret in Europe; Anti Unfair Competition Law in China)
  • Increased trade secret litigation particularly involving US companies but not exclusively so
  • Growing interest in trade secrets by the tax authorities (e.g. OECD BEPS Guidelines, Patent Box Tax Regimes including trade secrets as qualifying IP)
  • Cyber criminals trying to steal trade secrets
  • Companies embracing Open Innovation and sharing trade secrets with one another
  • The changing nature of employment
  • Pending trade wars which some link to trade secret theft

Trade secrets are a very important part of any IP portfolio. It is no exaggeration to say that virtually every business possesses trade secrets, regardless of whether the business is small, medium or large.

Trade secrets are an important, but oftentimes an invisible component of a company’s IP portfolio of assets. However, trade secrets can also be the crown jewels within the portfolio.

The process for managing trade secrets

Processes are not just reserved for registered forms of IP like patents and trademarks. I would argue that process thinking is even more critical when it comes to unregistered forms of IP like trade secrets, as there is no external entity like the Patent & Trademark Office holding the hand of the organization and keeping it on the straight and narrow.

I suggest that the trade secret asset management process at the very top level consists of the following key blocks or steps – context; identification; analysis; review; protection; and monitoring.

The key steps in that process

Context: Understanding the environment in which you are operating from a secrecy perspective.

Identification: Working to identify information within the organization which may warrant being treated as a trade secret, since the definition of a trade secret is very broad indeed.

Analysis: Evaluating the information, classifying it, determining who has access and who needs access going forward, etc.

Review: Deciding whether to go ahead and treat this information as a trade secret or not as the case may be. This as such is a business decision.

Protection: Putting the appropriate administrative, legal and technical protection mechanisms in place to ensure that the information has ‘reasonable’ protection in place going forward.

Monitoring: Sanity checking on a regular basis going forward that the information still warrants being treated as a trade secrets, that it is indeed being protected and is any other factors have changed as far as this trade secret is concerned.

The foundations

The strength of any process however lies in its foundations. The trade secret asset management process requires some good foundations, including …

  • trade secret education of employees
  • a fit for purpose trade secret policy
  • a robust trade secret system or tool that underpins the process
  • good quality trade secret metadata (as without data, an organization has not information, and without information, an organization has no knowledge)
  • trade secret governance

Final thoughts

In response to competitive pressures and ever-changing conditions, many IP function are fundamentally rethinking the way they do business. It is most important to be able to clearly link your IP function’s processes and organizational services to your business goals and objectives.

As IP functions strive to keep up with ever-changing customer demands and market needs, there is a growing demand for modelling and analysis of the IP function’s core processes, in order to capture the strategic relationships within the IP function itself and with external partners and players as well, so as to identify areas for improvement.

Given the growing importance of trade secrets, it is imperative that IP functions give some serious thought to their process for managing such assets.

Donal O’Connell, IPEG consultant

Author: 3 weeks ago

The enactment of the Defend Trade Secrets Act (DTSA) of 2016 in the United States creates a new paradigm and is a watershed event in intellectual property law. Former U.S. President Barack Obama signed the bill into law on May 11, 2016, and the DTSA now applies to any misappropriation that occurred on or after that date. A trade secret is any technical or nontechnical information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.

The law allows trade secret owners to file a civil action in a U.S. district court for relief for trade secret misappropriation related to a product or service in interstate or foreign commerce. The term “owner” is a defined statutory term. It means “the person or entity in whom or in which rightful legal or equitable title to, or license in, the trade secret is reposed,” according to the DTSA. Under the DTSA, in extraordinary circumstances, a trade secret owner can apply for and a court may grant an ex-parte seizure order (which allows property to be seized, such as a computer that a stolen trade secret might be saved on) to prevent a stolen trade secret from being disseminated if three conditions are met.

First, the owner must demonstrate, in a sworn affidavit or a verified complaint, that the ex-parte seizure order is necessary. The owner must then prove that a temporary restraining order is inadequate. Second, that immediate and irreparable injury will occur if the seizure is not ordered. Third, that the person the seizure would be ordered against has possession of the trade secret and property that is to be seized. Once the ex-parte seizure order is granted, the court must take custody of and secure the seized property and hold a seizure hearing within seven days. Individuals can also file a motion to have the seized material encrypted.

With this development in the law, trade secret assets are no longer stepchild intellectual property rights. Trade secret assets are now on the same playing field as patents, copyrights, and trademarks. The DTSA reinforces that a trade secret asset is a property asset by creating this new federal civil cause of action.

And there is no preemption. The U.S. district courts have original jurisdiction over a DTSA civil cause of action, which coexists with a private civil cause of action under the Uniform Trade Secrets Act (UTSA), which codified common law standards and remedies from the state level for trade secret misappropriation. It also coexists with criminal prosecutions under the Economic Espionage Act of 1996 (EEA), which makes it a federal crime to steal or misappropriate commercial trade secrets with the intention to benefit a foreign power.

And if the losses from a stolen or misappropriated trade secret are severe, both the board of directors and senior executives of the company will be charged with malfeasance, including the willful failure to take reasonable measures to protect the corporate trade secret assets from insider theft or foreign economic espionage.

What the DTSA Means

A trade secret asset must be managed like other property assets. However, trade secret asset management differs because it first requires the identification of the alleged trade secret asset. Because millions of bits of information within a company can qualify as proprietary trade secrets, classification and ranking trade secret assets is a critical exercise.

Most companies focus on the protection phase of trade secret asset management without first identifying and classifying their trade secrets. This approach is doomed to fail without a thorough analysis. Unless the company knows what it’s protecting, there can be no effective protection. And all three phases—identification, classification, and protection—must occur before an accurate valuation of trade secret assets can be determined.

EONA proofs

Additionally, information assets must be validated in a court of law as statutory trade secret assets. There is no public registry for trade secret assets. The courts require proof of existence, ownership, notice, and access (EONA).  The first element requires proof of existence of the trade secret asset. The litmus test for proving the existence of a trade secret has six factors: the extent to which the information is known outside the business; the extent to which the information is known inside the business; the extent of measures taken to guide the secrecy of the information; the value of the information to the business and to competitors; the amount of time, effort, and money expended to develop the information; and the ease or difficulty with which the information could be properly acquired or duplicated by others.

For proof of ownership, the plaintiff must show that it is the person or entity in whom or in which rightful legal or equitable title to, or license in, the trade secret is reposed. A misappropriator cannot be the owner of a trade secret. However, a person who independently develops or independently reverse engineers the trade secret can be the owner of the trade secret. Further, an employee (who has not been assigned his or her intellectual property rights in the trade secret asset) may also be the lawful owner—instead of the employer.

For proof of notice, the plaintiff must show that the defendants had actual, constructive, or implied notice of the alleged trade secret. A former employee may use his or her general knowledge, skills, and experience. However, a former employee may not disclose or use the trade secrets of the former employer. The former employer cannot claim that “everything we do is a trade secret.” The court will take judicial notice that there is both unprotected and protected (trade secret) information in every company. If the line is unclear, the court will draw the line in favor of the ex-employee.

For proof of access, the plaintiff must prove that the defendant had access to the alleged trade secret. If the evidence shows that the defendant never had direct or indirect access to the trade secret, and there is no conspiracy claim (involving coconspirators that had access to the trade secret), there cannot be misappropriation. This is because misappropriation requires proof of unauthorized acquisition, disclosure or use of the trade secret by the alleged trade secret thief.

Protection

The DTSA also requires that the trade secret owner take reasonable measures to protect the secrecy of trade secret assets. This is a much more challenging task today because trade secret assets are no longer at rest in a locked file cabinet in an engineer’s office. Today, trade secrets are in motion and in use via computer systems and networks with access points all over the world.

This presents a huge challenge. Companies must actively monitor the access and movement of critical trade secret assets throughout the corporate enterprise, or risk the serious consequences of forfeiting trade secret assets by failing to take the reasonable efforts necessary to protect these assets.

The Valspar economic espionage case in 2009 is a case in point. In this incident, a 52-year-old senior scientist, David Yen Lee, suddenly resigned from Valspar on March 19, 2009, and bought a one-way ticket to Shanghai, scheduled to leave on March 27. Fortunately for Valspar, a coworker discovered irregularities in Lee’s work computer. Upon further investigation, an unauthorized program called “Sync Toy” was uncovered in invisible Windows files. It showed that Lee downloaded 44 gigabytes of paint and coating formulas, product and raw material data, sales and cost data, and product development and test information.

The FBI was informed and brought in to investigate. The bureau raided Lee’s Arlington Heights apartment and recovered the stolen trade secret assets before Lee’s flight left for Shanghai. Valspar escaped a major disaster because of the alertness of one coworker who spotted irregularities on Lee’s work computer. Like most companies, Valspar’s security readiness was directed to protection against outside intrusions. However, there was little security in place to guard against trade secret theft by insiders and trusted employees.Valspar now faced the reality that a trusted employee could steal a vast amount of trade secrets due to access to computer data and files. The solution: Valspar set up an internal identification and classification system for trade secrets called the CPR (Classify, Protect, Report) model. Valspar now tracks the movement of all critical trade secret assets within the various computer environments with triggers that are activated if unauthorized activities are detected.

The reasonable measures necessary for the protection of trade secret assets continues to grow as the risk of sensitive data loss increases by various means: unauthorized uploading of trade secret assets to an insecure cloud or Web application; unauthorized email communications disclosing trade secret information; unauthorized acquisition of highly classified trade secret assets onto USB drives; and undetected incoming malware, phishing emails, and corrupted Web software all facilitating foreign economic espionage and theft of corporate trade secret assets.

Seizures

The DTSA provides powerful provisions for ex parte seizure orders, but companies cannot take advantage of these provisions unless effective trade secret asset management protocols are in place before the actual or threatened misappropriation occurs. A court can issue an ex parte seizure order, according to the DTSA, “in extraordinary circumstances” to “prevent the propagation or dissemination of the trade secret” or to “preserve evidence.” These circumstances exist when a trade secret thief is attempting to flee the country, if he or she is planning to disclose the trade secret to a third party, or if it can be shown that he or she will not comply with court orders.

The Valspar case is an excellent example of the necessity for ex parte seizure orders. However, the FBI will not always be there, and the window of time to protect against the loss of trade secret assets and destruction of the evidence will often be shorter than the eight-day period in the Valspar case. This is why a DTSA civil cause of action and an ex parte seizure order are so important to protect U.S. trade secret assets.

The protection of trade secret assets in these circumstances requires emergency actions. Once lost, a trade secret is lost forever. The DTSA requires that the plaintiff (the trade secret owner) file suit (with verified pleadings and affidavits filed under seal) and successfully obtain a DTSA ex parte seizure order before the defendants know the suit has been filed. Otherwise, without the element of surprise, the defendants—often with several clicks of a computer mouse—can transfer the trade secrets outside the country and destroy the evidence of trade secret theft by running data and file destruction software.

Therefore, to take advantage of the robust provision of the DTSA, the trade secret owner must be able to move faster than the trade secret thief. This will require a sea change since most companies have no internal trade secret asset management policies, practices, or procedures in place. Instead, most companies react after the fact by retaining outside counsel to investigate and litigate a long-gone trade secret.

The DTSA creates a new paradigm. If management waits until the trade secret theft occurs to identify what the trade secret is and investigate the evidence of misappropriation, the actual trade secret assets will be long gone before counsel can provide the U.S. district court with the proofs necessary to obtain an ex parte seizure order. The result: if the losses from the trade secret theft are severe, both the board of directors and senior executives of the company will be charged with malfeasance, including the willful failure to take reasonable measures to protect the corporate trade secret assets from insider theft or foreign economic espionage.

DTSA Application

What are the next steps in view of the DTSA? Every organization is different. There are no one-size-fits-all solutions. Each trade secret asset manager must audit existing approaches to protecting trade secret assets, the resource allocations within the organization, and any budgeting issues with protecting trade secrets. However, the catchphrase “we are working on it” will no longer provide adequate cover now that there is a federal civil cause of action specifically designed to protect the trade secret assets of 21st Century, new economy companies.

A fundamental first step should be the creation of an internal trade secret control committee (TSCC). The TSCC should be charged with the responsibility to adopt policies and procedures for the identification, classification, protection, and valuation of the company’s trade secret assets.  The next step should be the creation of an internal trade secret registry (TSR). This is a trade secret asset management system that can be deployed as a cloud-based solution, a corporate server, or a stand-alone work station.

The TSR should operate like a library card catalogue storing necessary trade secret asset information with hash codes and block chaining (a database that sequences bits of encrypted information—blocks—with a key that applies to the entire database) to ensure the authenticity of the data stored in the TSR and to meet the required evidentiary standards in a trade secret misappropriation lawsuit.

Another necessary step is trade secret asset classification, the foundation of a successful trade secret asset management program. This allows trade secret assets to be identified and ranked, so that the level of security matches the level of importance of the trade secret asset. There are now automated trade secret asset management tools available to assist companies with the classification and ranking of trade secret assets. Security, without identification and classification, is doomed to fail. In contrast, securing data after identification and classification of the trade secret assets makes it much easier for the internal security ecosystem to enforce trade secret protection policies and to prohibit unauthorized access, unauthorized disclosure, and unauthorized use.

Today, software tools can protect the company from mistakes that lead to the forfeiture of classified trade secret assets. If a user attempts to email a trade secret document to unauthorized recipients, the software program will immediately alert the user so the mistake can be corrected. Further, classified trade secret assets can be monitored. Administrators can track abnormal or risky behavior that otherwise cannot be tracked until the trade secret is compromised.

Developing a trade secret incident response plan (TSIRP) is another critical requirement. The flow of trade secret assets throughout the corporate enterprise should be tracked with built-in red flags, designed to trigger the TSIRP and activate a designated outside counsel SWAT team to proceed immediately to the courthouse to seek a DTSA ex parte seizure order (and other necessary relief) before the bad actors can destroy the evidence or transfer the stolen trade secret assets outside the court’s jurisdiction.

Employee Management

There are other best practices for trade secret assets now that companies are focusing on the various stages of identification, classification, protection, and valuation. Building a trade secret culture from the top down, with required training and compliance with TSCC policies, practices, and procedures, is at the top of the list. Companies must promote a trade secret culture by prompting employees and users to stop, think, and consider the business value of proprietary, internal information they are creating, handling, an reviewing. A major loss of trade secret assets can put the company out of business. Employees must understand that their jobs depend upon the identification, classification, and protection of the company’s trade secret assets. Onboarding procedures for new employees and offboarding procedures for departing employees are also very important.

The new employee interview process should include protections to prevent his or her former employer’s trade secrets from being exposed. This could include an inquiry to determine if the potential new employee is subject to post-employment restrictions with his or her former employer. If so, there should be a separate review by the company’s intellectual property counsel before the employee is hired.

Further, the new employee hiring process should include an investigation and certification by the new employee that no proprietary, trade secret information of any previous employer is being brought to the company or is being stored electronically in his or her personal email system or other electronic storage locations.

Finally, the prospective new employee should sign an employment agreement with patent and trade secret assignment provisions. He or she should also receive and review the company’s required trade secret policies and procedures. When an employee leaves the company, off-boarding procedures should include a mandatory trade secret exit interview. The interview should be conducted under strict procedures adopted by the TSCC, including execution of a trade secret acknowledgement at the conclusion of the interview certifying that all company devices, documents, and materials, including electronic copies, paper copies, and physical embodiments have been returned. It should also certify that all proprietary and confidential information, stored on any personal computer or mobile device, has been identified and preserved, returned, or deleted under the company’s instructions.

The enactment of the DTSA will usher in a new era. It requires trade secret owners to identify, classify, and protect trade secret assets as property assets. In time, the DTSA will become a precursor for new accounting systems that will provide valuations for trade secret property assets.

This development will unleash the reservoir of untapped intellectual property assets, which will fuel the growth of new economy companies in the Information Age.

by Mark Halligan, partner at FisherBroyles LLP, is recognized as one of the leading lawyers in trade secrets litigation in the United States by Legal 500 and Chambers USA: America’s Leading Lawyers for Business. He is an accomplished trial lawyer who focuses on intellectual property litigation and complex commercial litigation, including antitrust and licensing issues. He is also the lead author of the Defend Trade Secrets Act of 2016 Handbook and coauthor of Trade Secret Asset Management 2016: A Guide to Information Asset Management Including the Defend Trade Secrets Act of 2016.

 

Author: 5 months ago

The Defend Trade Secrets Act of 2016 (DTSA) created a uniform federal trade secret law on May 11, 2016, in addition to the existing state trade secret laws. The DTSA is important for non US companies because it provides a stronger enforcement mechanism, is applicable against foreign companies, and offers additional options in seizing competitors’ products on an expedited basis.

What Qualifies as Trade Secret under the Act

To bring an action for misappropriation under the Act, the information allegedly misappropriated must qualify as trade secrets. Trade secrets include confidential, protected information that has economic value. They are specifically defined as “all forms and types of financial, business, scientific, technical, economic, or engineering information … if (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value … from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.” 18 U.S.C. § 1839 (emphasis added).

Misappropriation of trade secrets, however, does not include information obtained from “reverse engineering, independent derivation, or any other lawful means of acquisition.” Id. Therefore, if a competitor independently develops a technology similar to your company’s trade secret, there is no misappropriation. Indeed, if that competitor also obtains a patent for the technology, it could sue your company for patent infringement for using the same technology. Accordingly, companies should develop a comprehensive strategy to manage both trade secrets and patents depending on various considerations, such as the technology at issue, how easily it can be developed or reverse-engineered, and the value and life span of the technology.

International Reach of the Act

Under the DTSA, “an owner of a trade secret that is misappropriated may bring a civil action … if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” 18 U.S.C. § 1836(b)(1). Thus, it is possible to bring an action for acts of trade secret misappropriation that occur outside the United States. For acts occurring outside the United States, an owner of the trade secret may sue under the DTSA only if (1) “the offender is … a citizen or permanent resident alien of the United States, or an organization organized under the laws of the United States or a State or political subdivision thereof” or (2) “an act in furtherance of the offense was committed in the United States.” 18 U.S.C. § 1837 (emphasis added).

Part (1) focuses on who is the offender. Under this part, a plaintiff may sue an offender if the offense occurred outside of the United States, but only if the offender “is a citizen or permanent resident alien of the United States” or the offending company is “organized under the laws of the United States or a State or political subdivision thereof.” Id.

But part (2) focuses on the offense, and under this part, a foreigner or foreign company, who would not have been liable under part (1), can be liable, if the foreigner or foreign company acted “in furtherance of the offense” in the United States. For example, if a foreign company sold products containing stolen trade secrets to a U.S. company, and the foreign company knows or has reason to know the trade secret was stolen, then the foreign company can be sued in the U.S. under the DTSA. 18 U.S.C. § 1839 (5)(A).

Under the DTSA, a non-US company can sue in the U.S. for trade secret misappropriation against any person or company that stole its trade secrets, even if the perpetrators are not based in the U.S., so long as the perpetrators sold products to the U.S. incorporating the stolen trade secrets, or committed any other acts in the U.S. to use or disclose the trade secret.

However, the DTSA’s international reach is not unlimited, because, as with every other legal action in the U.S., the court must have personal jurisdiction over the offender. Under the U.S. Constitution, a federal district court has personal jurisdiction over a defendant only if he or she has “sufficient minimum contacts” with the forum state where the complaint arises, such that the exercise of jurisdiction “will not offend traditional notions of fair play and substantial justice.” In other words, the defendant has to have certain contacts with the forum state, and such contacts can include, for example, selling products into the state, conducting business in the state, having agents or employees in the state, or directing sales and marketing activities to residents of the state.

III. Claims that Arise under the Patent Law and the DTSA can be Brought Together in a Federal Court

Trade secret actions at times accompany patent infringement actions. Before the DTSA was enacted, without diversity jurisdiction (e.g., when two foreign companies both are incorporated in the same state, often in California), in order to bring both patent infringement and trade secret misappropriation claims in a federal court, a plaintiff needed to show that the trade secret and the patent claims “derive from a common nucleus of fact.”

Under the DTSA, however, a plaintiff can bring both trade secret and patent claims in a single suit in a federal court without the need of showing the claims “derive from a common nucleus of fact.” Thus, the DTSA benefits plaintiffs who could not have met the “common nucleus of fact” requirement and allows them to bring both causes of action in the same case. This can help reduce the cost of litigating the different causes of action in different courts.

Bringing both patent and trade secret claims in the same court has an additional benefit—making it more difficult for a defendant to stay court proceedings in favor of an inter partes review (IPR) proceeding. IPRs are an often-used proceeding to challenge the validity of a patent at the United States Patent and Trademark Office (USPTO). A defendant may ask the court to stay an ongoing litigation pending the outcome of an IPR proceeding. By bringing a suit including both trade secret and patent infringement claims, a court is less likely to stay the litigation in favor of an IPR proceeding because the issues arising from the trade secret claims likely will not be affected by the IPR proceeding.

Ex Parte Seizure

An important aspect of the Act is that it makes ex parte seizures available “to prevent the propagation or dissemination of the trade secret,” but only in extraordinary circumstances. 18 U.S.C. § 1836. The plaintiff bears the burden of showing eight factual and legal requirements before the court can issue an ex parte seizure order. Id. In particular, the court must find the following: (1) another form of equitable relief would be inadequate; (2) an immediate and irreparable injury will occur if such seizure is not ordered; (3) the harm to the plaintiff outweighs the harm to the person whose property would be seized and substantially outweighs the harm to any third parties who may be harmed by such seizure; (4) the plaintiff is likely to succeed on the merits; (5) the person against whom seizure would be ordered has actual possession of the trade secret and the property to be seized; (6) the plaintiff describes the property to be seized with reasonable particularity; (7) the person against whom seizure would be ordered would destroy, move, hide, or otherwise make such matter inaccessible to the court, if the plaintiff were to proceed on notice to such person; and (8) the plaintiff has not publicized the requested seizure. See 18 U.S.C. § 1836. Because of these extensive requirements, many of which will be difficult to prove except in extreme cases of misappropriation, an ex parte seizure is unlikely to be ordered frequently.

In summary, the DTSA has potentially broad reach to foreign companies and persons, but the exact scope and effectiveness are yet to be tested. The Act can be beneficial to plaintiffs who otherwise could not have brought trade secret misappropriation claims in federal courts before, particularly when patent infringement claims are involved or if the defendants are companies outside of the U.S. At the same time, it may increase the risk that foreign companies will be called into courts in the United States, to defend themselves against allegations of trade secret misappropriation.

Therefore, as plaintiffs, non-US companies need to protect their proprietary and confidential information in a way that makes the DSTA a strong mechanism for enforcement when the need of protecting itself, protecting its customers, or deterring competitors’ misappropriation, arises. As possible defendants, non-US companies also need to be aware of such risks in hiring new employees, avoiding the use of confidential information of another party in developing technologies, and in formulating its patent and trade secret strategies.

Gary C. Ma and Howard Herr, Ph.D. – copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article was originally published in Commercial Times on September 13, 2016

 

Author: 8 months ago

Transfer pricing is probably the most important issue in international corporate taxation. In taxation and accounting, transfer pricing refers to the rules and methods for pricing transactions between enterprises under common ownership or control.

A transfer price is the price at which members of a group transact with each other, such as the trade of goods and services between group members. Transfer prices are used when individual group members of a larger multi-entity firm are treated and measured as separately run entities.

Transfer pricing also comes into play when the transaction between group members involves intangible assets. In other words, transfer pricing is not limited to just tangible assets.

With the growing importance of intangibles as the core value drivers within highly integrated value chains, understanding how to properly cope with intangibles in transfer pricing is one of the key challenges faced by tax practitioners.

Arm’s length principle:

Transfer pricing rules are based on the arm’s-length principle.

The arm’s length principle is the condition or the fact that the parties to a transaction are independent and on an equal footing. Such a transaction is known as an “arm’s-length transaction”.

The OECD and World Bank recommend intra-group pricing rules based on the arm’s-length principle, and almost all of the G20 countries have adopted similar measures through bilateral treaties and domestic legislation, regulations, or administrative practice.

Countries with transfer pricing legislation generally follow the OECD ‘Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations’ in most respects.

So, transfer prices between group members of a multinational enterprises should be established on a market value basis, i.e. reflect prices that independent parties would agree under similar conditions.

Transfer pricing is not a tax avoidance practice:

Although transfer pricing is sometimes inaccurately presented as a tax avoidance practice or technique, the term ‘transfer pricing’ refers to a set of substantive and administrative regulatory requirements imposed by governments on certain corporate taxpayers.

Identifying market prices:

For the majority of transactions, it is often difficult or impossible to identify market prices that can be directly utilized as transfer prices, simply because the economic conditions of the controlled transaction do not exactly match the conditions that can be observed on the market (i.e. for which sufficient data is available).

By conducting appropriate adjustment calculations, it will, however, in most case be feasible to find a price (or a range of prices) that are reasonably close (approximate) market prices and thus ensure an arm’s length allocation of profits.

As acknowledged by the OECD, however, transfer pricing is not an ‘exact science’ and transfer prices are routinely challenged by tax authorities in cases that have absolutely nothing to do with tax avoidance or aggressive tax planning.

The tax risks:

The tax risks resulting from these challenges are immediately proportionate with the degree of uncertainty (subjectivity) involved in determining transfer prices. Considering that intangibles are by definition highly idiosyncratic (i.e. comparables are scarce and adjustment calculations highly subjective), it is notoriously challenging to determine arm’s length prices for transactions featuring intangibles.

In order for taxpayers to stand a chance to minimize the related tax risks, it is a pre-condition to have a detailed internal data of the intangibles. In addition to the fundamental information on ownership and costs, the data should also include information on the functions performed by the related parties for the Development, Enhancement, Maintenance, Protection and Exploitation of the intangibles (so-called “DEMPE”-functions).

In view of the increasing importance of intangibles, it is no coincidence, that one of the main features of the 2017 revisions of the OECD ‘Transfer Pricing Guidelines resulting from the BEPS project was the introduction of the DEMPE concept as a measuring-rod for an arm’s length allocation resulting from the exploitation of intangibles.

Hence, aligning the applied transfer pricing with the intangibles utilized by a MNE, including trade secrets, should feature prominently on the to-do-lists of transfer pricing professionals post BEPS.

Transfer pricing and trade secrets:

Yes, transfer pricing also comes into play when the transaction between group members involves intangible assets such as trade secrets.

This should not be a surprise, as trade secrets may be among some of the most valuable assets within an organisation. Transfer pricing professionals may, however, be prone to underestimate the impact of trade secrets, due to the fact that they do not have a clear understanding of what qualifies as a trade secret.

The EU Directive on Trade Secrets defines a trade secret as information that:

  • is secret
  • has commercial value because it is secret
  • has been subject to reasonable steps to keep it secret

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 is a formula, practice, process, design, instrument, pattern, commercial method, or compilation of information which is not generally known or reasonably ascertainable by others, and by which a business can obtain an economic advantage over competitors or customers. The scope of trade secrets is virtually unlimited.

Examples of transfer pricing involving trade secrets:

There are many times when trade secrets have to be considered:

  • One group member may transfer its assets including its trade secrets to another group member (for example as part of the re-organisation of the business, in preparation for a spin-out, in preparation for a divestment, to support some JV activity by that other group member)
  • One group member may license its assets including its trade secrets to another group member (for example when those assets are needed by the other group member to support its activities, such as R&D or Operations)

The challenge for transfer pricing with trade secrets:

Unfortunately, most companies are unorganized when it comes to their trade secrets and their management of such assets.

  • Trade secrets are poorly managed
  • There is a lack of ownership
  • Documentation is poor.
  • Protection mechanisms are poor or non-existent.
  • There is a lack of any classification of such assets.
  • Details on whether trade secrets have been shared is often missing
  • Trade secrets not properly addressed in agreements & contracts
  • There is no audit trail.

Neglecting to implement processes for managing and accounting for trade secrets can be extremely costly for companies. Many organizations are failing to properly protect these valuable assets, and this failure is not unique to any one specific stage in the business life cycle.

This list below captures some of the typical trade secret incidents we see befall businesses:

  • A founding member leaves the company and takes some trade secrets with him and then establishes another competing start-up.
  • The company fails to understand that certain things should be kept secret and shares too much information with an external party.
  • A potential investor walks away after asking the company about their trade secret policy, processes and systems to properly protect such valuable assets.
  • A disgruntled employee leaves the company and takes some trade secrets with him, put onto a memory stick on his last day of employment.
  • A new starter joins the company but has stolen trade secrets from his previous employer, and shares that trade secret with his new colleagues
  • A supplier entrusted with one of the trade secrets of the company shares it with a competitor.
  • Cyber criminals hack the network of the company and steal some trade secrets. Cyber criminals are after the trade secrets of the company, the confidential business information which provides an enterprise with a competitive edge.
  • The company divests one part of the business but mistakenly gives away some trade secrets as well.
  • A collaboration partner accuses the company of stealing one its trade secrets, breaking the terms and conditions of the collaboration agreement.

In addition to these traditional trade secret incidents, tax risks are of increasing importance in a post-BEPS world. Lack of communications between the personnel designated to managing intangible, including trade secrets, and  the transfer pricing department further exacerbates these risk, as aligning transfer pricing with intangibles without the required internal data will prove to be a tricky exercise indeed.

Proper and professional management of trade secrets is required:

Trade secrets are an important, but an invisible component of a company’s intellectual property portfolio of assets. They can add tremendous business value, so they need to be properly and professionally managed, and looked after.

Trade secrets should already be on the agenda of any in-house Legal/IP function as well as on the agenda of any Legal/IP Firm advising organizations.

However as these are important assets with associated costs and value, they are more and more on the agenda of the in-house finance and tax function as well as on the agenda of any Accountancy and Tax Firm advising clients.

Good practice:

As stated earlier, many companies are poor when it comes to trade secret asset management. However, those exceptional companies who have this mastered tend to have the following 5 things in place:

  • A Trade Secret Policy
  • Education of Employees about Trade Secrets
  • Robust Fit for Purpose Trade Secret Process & Procedures
  • A System to Underpin that Process
  • Trade Secret Governance

Having these five things in place will simultaneously and without any additional effort help those involved with transfer pricing with addressing the challenges identified above.

Donal O’Connell is IPEG consultant and managing director of Chawton Innovation Services Ltd.  Oliver Treidler is managing director of TP&C GmbH. His company offers a wide range of transfer pricing services (http://www.tp-and-c.com/)

Author: 9 months ago

In June 2017 law firm Baker McKenzie published an highly relevant and interesting report: “The Board Ultimatum, Protect and Preserve. The Rising Importance of Safeguarding Trade Secrets“. Key findings of the survey:

  • Four out of five (82%) senior executives say their trade secrets are an important, if not essential, part of their business, while 60% say protecting their trade secrets is a board-level issue
  • One in five companies think or know they have had trade secrets stolen
  • But only one-third of companies maintain inventories of their trade secrets and have action plan for responding to trade secret theft
  • Theft by ex-employees and third-party suppliers are the biggest sources of anxiety among two-thirds of executives

For IPEG this is a good reason, together with the approaching date of June 2018 for the implementation of the EU Directive on Trade Secrets (officially named: “on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure”) to organize a

Workshop in The Netherlands in October 2017 outlining the main issues related to trade secrets, it’s importance and relevance for industries in various sectors as well as the introduction of the IPEG Trade Secret Management Tool developed by Donal O’Connell, IPEG consultant

Author: 10 months ago

In general terms, a case study is an account of an activity, event or problem that contains a real or hypothetical situation and includes the complexities one would encounter in the workplace. The IP Firm in this particular case study is an established and reputable IP Firm with offices in a number of jurisdictions. It employs almost one hundred attorneys and paralegals, and it has clients spread across a diverse range of industry sectors. This IP Firm has received a number of awards and accolades over the years. The IP Firm was anxious to deploy a range of new service offerings to its clients, and trade secret asset management was one selected, as it saw some new business opportunities here.

Trade secrets

A trade secret is defined as any information that is:

  • Not generally known
  • Confers some sort of economic benefit on its owner.
  • It must have been subject to reasonable steps to keep it secret.

Broadly speaking, any confidential business information which provides an enterprise a competitive edge may be considered a trade secret.

Trade secret asset management

Trade secret asset management is about the policies and procedure, processes and systems, education and governance defined and taken into use to help manage such assets. Trade secrets are fragile so they require some TLC. Simply deciding to keep something secret is not sufficient!

Trade secret asset management includes:

  • Awareness & education
  • Trade secret policy
  • Trade secret management process
  • Trade secret asset management system
  • Metadata
  • Access & access controls
  • Protection mechanisms
  • A culture of confidentiality with respect to trade secrets
  • Governance

Forces at play

The IP Firm recognized that there are a number of forces which together mean that trade secret asset management is now becoming a business critical issue, and one which companies must address.

These forces include – legislative developments; finance & tax developments; increased network security & cyber-crime concerns; IP reform in key jurisdictions; the growing importance of corporate governance; more and more companies embracing openness; and the changing nature of employment.

This IP Firm also recognized that almost all of their clients possess trade secrets but many are failing to properly manage such assets.

Trade secret asset management assessment

The IP Firm’s service offering begins with an audit or assessment of their operating company client.

Such an exercise is conducted in order to provide independent assurance that an organisation’s trade secret asset management, governance and internal control processes are robust, fit for purpose and operating effectively.

It is an evidence gathering process. The criteria include policies, procedures and requirements. Evidence includes records, factual statements, and other verifiable information. Findings evaluates evidence and compares and contrasts it against the criteria. Findings show those criteria that are being met (conformity) or those that are not being met (nonconformity). The exercise can also identify best practices or improvement opportunities.

The assessment criteria

The IP Firm developed a comprehensive assessment checklist. At a very top level, it consists of the following:

  • Awareness & education
  • Definition of trade secret in use
  • Qualification
  • Classification of trade secrets
  • Ownership of trade secret policy and procedures
  • Trade secret asset management process
  • Access & access controls
  • Protection mechanisms
  • Sharing trade secrets with 3rd parties
  • Entrusted with trade secrets belonging to 3rd parties
  • Valuation of trade secrets
  • Trade secret asset management system
  • Other metadata associated with trade secrets
  • Audits / audit trails
  • Governance

Much more details sit behind each of the items listed above.

Steps or phases in such an assessment

The IP Firm typically follows a six step process when conducting such an audit or assessment. They recognise that there is not one size fits all, so they are flexible and can adjust to suit the specific needs of the client.

  • Scoping of the audit / assessment
  • Request for information
  • Open meeting(s)
  • Field work
  • Drafting the report (findings & recommendations)
  • Closed meeting

Current status

The IP Firm reached out to a limited number of its operating company clients to inform them about this new service offering at the beginning of the summer of 2016, just after the Defend Trade Secrets Act was passed in the US and the EU Directive on Trade Secrets was passed in Europe.

A number of pilot projects were started with a handful of their clients in order for the IP Firm to stress test the service offering in a small-scale implementation. The IP Firm wished to prove the viability of this new service offering and to gather insights on various things such as their assessment methodology, the project phases, the skills and competencies of their team, the time taken to complete such assessments, the costs involved, their fees and fee structures, etc. etc. plus of course client reactions.

As this particular case study is still in its infancy and only recently been deployed by this particular IP Firm, I do not yet have much real data to share. However, it is a very interesting business development case study in my opinion, at a time when there is tremendous pressures on many IP Firms to be more creative and innovative and bring new service offerings to market.

Donal O’Connell, Intellectual Property Expert Group (Donal is the author of a special software program for managing trade secrets, please send inquiries to info@ipeg.com)

Author: 1 year ago