The Era of Relying on Trade Secrets to Protect Confidential Information has Passed

Dr. Victoria Longshaw

Businesses need to protect their Intellectual Property and Know-How to survive. Such Intellectual Property ranges from confidential customer details to high-level technical expertise, methods and product information.

There are two ways in which to prevent competitors from accessing Intellectual Property: (1) by maintaining Trade Secrets; or (2) by securing a monopoly through obtaining Patents and/or Registered Designs.

A Trade Secret is any confidential business information that provides an enterprise with a competitive edge [1]. When deciding on how to protect their Intellectual Property, many businesses choose to keep Trade Secrets by default. They are perceived as requiring little upfront cost since paid employees are relied upon to keep information confidential. For example, The Coca-Cola Company claims to have kept its formula secret for over 130 years by only letting a small group of senior executives know parts of the formula at any given time.

In contrast, Patents and Registered Designs are often regarded as costly liabilities rather than assets. Media reports of Patent Court battles discourage would-be Patent and/or Registered Design owners from pursuing Rights that they do not intend to enforce.

However, contrary to popular belief, maintaining a Trade Secret can be a complex and costly exercise. Each piece of information needing protection must be identified, labelled, and its storage constantly monitored. Access to that information must be restricted, and adequate security established for both physical and electronic files. Additionally, non-disclosure clauses must be incorporated into all Employment, Contractor, Consultant and Vendor/Supplier Agreements. This incurs costs.

Importantly, Trade Secret protection only lasts for as long as the information is kept confidential. Once it is made public, Trade Secret protection ends. Unfortunately, it is only when a Trade Secret has been disclosed, that many businesses find they cannot prove to a Court, when seeking to recover damages, that sufficient steps were taken to protect the Trade Secret from disclosure.

Even well-resourced multinational corporates are struggling to protect their Confidential Information in the digital age. With the steady increase in digital commerce, cybersecurity threats and data breaches have become commonplace. This is particularly the case in the Asia-Pacific region, which is one of the fastest growing regions for digital innovation and commerce. In the top six ASEAN countries, digital commerce is projected to increase from US$5 billion in 2015 to US$90 billion by 2025 [2]. The average loss caused to a business due to a data breach has now passed the US$1 million mark.

However, despite the exponential increase in malware and Trojan software, the biggest cyber security threat that organisations face today is the human factor: 52% of data leakage in organisations worldwide is caused by employees or ex-employees, either through theft or accidental disclosure [3]. This means that not only must organisations defend their Confidential Intellectual Property from external acquisition by competitors, but they must guard it internally from misappropriation by their own employees, the very personnel that are relied upon to keep Trade Secrets secure.

The easiest way in which a competitor can gain access to a Trade Secret is by poaching employees. Once in possession of secret information, a competitor could file Patent or Design Applications for that information, claiming it as their own. The genuine owner may need to defend themselves against a Cease and Desist Letter, attempting to stop them from using their own technology. It is difficult and expensive to prove that a secret invention was stolen.

At Houlihan², we think outside the square. When cleverly deployed, the role of Patents and Registered Designs expands beyond the traditional concept of obtaining a commercial monopoly for licensing/enforcement purposes. In the digital age, Patents and Registered Designs also serve as pre-emptive disclosures of selected information, as protection against data leakage and theft. Provided that Applications for Patents or Registered Designs are filed for relevant information before any disclosure or data leakage, the subsequent Intellectual Property Rights will hopefully not be affected by Trade Secret theft or data breach.

References
[1] https://www.wipo.int/sme/en/ip_business/trade_secrets/trade_secrets.htm
[2] “The Monetary Authority of Singapore’s 2018 special report on the digital economy”, published in the Straits Times, 7 May 2018
[3] Expert Opinion from Mr Stephan Neumeier, Managing Dir of Kaspersky Lab Asia Pacific: “Exclusive-expert shares insights on the changing cyber security landscape in the Asia-Pacific region”, published on www.opengaveasia.com on 18 July 2018