As part of our Thought Leaders series, Mewburn Ellis Partner and Head of Legal Services Sean Jauss explores trade secrets and how they can be a value-adding asset to a business.
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In recent years there have been significant improvements in the law governing trade secrets. This has made them more viable as a means of protecting technical innovations where patent protection is either not possible or commercially unattractive.
There is no registration process required to protect a trade secret. But you will need to be able to show that the rights exist. If they do, then those rights can be enforced against a person who has acquired the trade secret unlawfully or is in breach of a confidentiality agreement or any other duty not to disclose the trade secret. Successful enforcement allows you to recover non-punitive compensatory damages or an account of profits, to be granted injunctions, and to be granted orders for delivery up or destruction of infringing goods or other corrective or declaratory measures. These are powerful remedies and, therefore, trade secrets can be a value-adding asset to a business.
Is your information a trade secret?
For information to qualify as a trade secret:
- it must secret in the sense that it is not generally known to people who normally deal with the kind of information; and
- it must have commercial value because it is secret; and
- it must be subject to reasonable efforts to keep it secret.
Commercial value and reasonable efforts
The value of trade secrets is important in a commercial transaction (to establish a price) and in litigation (to establish damages). Value is critically linked to being able to say what the secret is and then to show that you have taken reasonable efforts to protect it. The requirement to use reasonable efforts to keep your information secret is wrapped up in the logic of commercial value: if you do not take reasonable efforts then the information cannot have any commercial value to you. There is no European case law yet on what amounts to reasonable efforts. But there has been substantial US case law on what “reasonable measures” need to be taken. Examples include the following:
- Having suitable internal management and employment policies in place to protect your trade secrets.
- Identifying trade secrets and documenting them. For example, conducting an audit to identify and catalogue existing trade secrets and adapting your invention disclosure process to provide a mechanism for identifying new non-patentable innovations and a route for protecting for them via trade secrets.
- Implementing protective measures over access to, and storage of, trade secrets, including proper labelling (including meta-data), physically securing hard copies, and using passwords or encryptions for digital data. Measures should also limit the individuals in the business who have access to the trade secrets to those who need to know them, for example through a gated information hierarchy that limits access according to a secrecy classification system.
- Ensuring that staff who have access to the information are identified and are aware of the existence of any trade secrets, and that there are appropriate contractual provisions in place (for example, through director, employment, or contractor agreements). You should also use entry and exit interviews to identify vicarious liability risks and to remind leavers of their ongoing obligations of confidence.
- Disclosing trade secrets to third parties warily. You need to ensure that any trade secrets are not inadvertently or recklessly disclosed as part of a commercial transaction, site visit, marketing programme, etc. Disclose only what you must and do so only with trusted counterparts. Always use non-disclosure agreements (NDAs) and log each of these. When the arrangement is over, you should request return of your information and certification from the counterparty of compliance with the request.
- Having procedures for what to do if you become aware that a secret has been misappropriated or unlawful disclosure is threatened. You should consider having a decision matrix that allows quick action. Not preventing a threatened disclosure, or failing to act on a misappropriation within a reasonable period of time, can undermine future enforcement of your rights.
Deploying your rights
The value of trade secrets comes from being able to successfully enforce those rights against a third party, or from being able to commercially exploit them through making and selling products or through licensing deals or in determining the IP component of the capital value of the company. But unlocking that value requires you:
- to be able to define what the secret actually is (as an asset);
- to be able to demonstrate that it is and remains secret; and
- to show how it adds value of the company and the steps the company takes to protect that value;
- that you control the information (usually due to a contract).
This is not easy. It takes a high level of awareness and care on behalf of the company. Facts and evidence are essential. In our view, following the good practice examples required to meet the “reasonable efforts” test described above is an excellent foundation. For those starting out on the trade secret journey, a good first step is assessing where you are in relation to good practice with an audit coupled with a willingness to address any deficiencies identified.
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