The rising awareness of the importance of trade secrets is significant, but it’s only the initial stage of the process. The tricky issue with trade secrets is they are only protected as long as they are kept secret. The moment the information becomes public, anyone can use it, unlike patents and other types of intellectual property that can be recovered and enforced through injunctions.
“Increasing people’s understanding of the importance of trade secrets and their protection is an essential step in creating the right protections,” says David Lashway, co-chair of Baker McKenzie’s Global Cybersecurity Practice. “You cannot risk manage something you don’t know is at risk.”
One of the reasons companies often don’t put the appropriate level of time, energy and resources into managing the risk to trade secrets is because of their intangible, varied characteristics. How, for example, do you determine the value of a proprietary search algorithm?
“Most companies understand the need to protect their trade secrets but the big difference is identifying which of their trade secrets are of most value, and that varies from company to company,” says Kevin O’Brien, chair of Baker McKenzie’s North America Intellectual Property Practice.
This question of valuation still perplexes the IP industry, to the extent that there is no universally accepted model. Consor Intellectual Asset Management, a US-based consulting firm, argues that the most appropriate valuation model for trade secrets is the net present value of future cash flows, a method used to value companies, investments and corporate assets.
Nearly half of the corporate executives in our survey said their trade secrets are more important than their patents and trademarks. Even more (69%) said they foresee trade secret protection becoming more critical than safeguarding other types of intellectual property given the rapid pace of tech innovation.
Viewing trade secrets as assets that give companies a competitive advantage that should generate future cash flows, Consor argues that companies can calculate the value of their trade secrets by multiplying three factors: the total amount of future cash flow; the discounted basis of that future cash flow as a present value; and the probability of future cash flow occurring.
The reality, however, is that many companies won’t know the true value of their confidential information until it’s been stolen, which can have devastating consequences. If, for example, a company spends billions of dollars developing trade secrets only to have them taken by someone who uses them to bring the product to market first, it can destroy the company.
Short of destruction, companies that fall victim to trade secret theft can face other serious consequences, such as regulatory investigations into risk controls and data protection procedures and criminal investigations. They can also be subjected to shareholder and third-party lawsuits, such as claims filed by current and former employees whose confidential information has been hacked.
“For companies, the ripple effects go well beyond losing their trade secrets and competitive position in the market,” O’Brien says.
Most companies understand the need to protect their trade secrets but the big difference is identifying which of their trade secrets are of most value, and that varies from company to company.
Which of the following statements best describes your corporate view on trade secrets and IP protection?
Do you foresee trade secret protection as increasing in importance relative to other IP due to the advancement of technological innovation?
Where would you rank the importance of trade secrets relative to other IP for your company?
© 2019 Baker McKenzie