11 Trade Secret

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Trade Secret



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PART 1PART 1

WHAT ARE TRADE WHAT ARE TRADESECRETS ?SECRETS ?



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What are trade secrets? What are trade secrets?

can qualify as a trade secretp entitled to legal protection

Confidential information not generally known Derives independent economic

value , actual or potential Gives the holder competitive edge Involves reasonable efforts to

maintain its secrecy



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Cotton Dyeing TechniqueCotton Dyeing Technique

� 5th century BC: Greek historianHerodotus marveled at quality ofIndian cotton.

� Textile trade: cotton, silk, woventextiles. The beauty, brilliance, colorrange and fastness of Indian fabrics

was held in high esteem.

� India managed to keep the techniqueof cotton dyeing a secret from the

world until the 17th century.



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A trade secret can relate todifferent types of

information

Technical and Scientific Information

Financial Information

Commercial Information

Negative Informationin some laws

Trade Secret



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� Technical and scientific information:

² Product information� technical composition of a product (e.g. paint)

� technical data about product performance

� product design information

² Manufacture information� manufacturing methods and processes (e.g. weaving technique,

technology for new fiber having significant tensile properties)

� production costs, refinery processes, raw materials

� specialized machinery

² Know-how necessary to perform aparticular operation (e.g. how to dye with natural dyes)



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� Technical and scientific info (contd.):

² Designs, drawings, patterns, motifs

² Test data, laboratory notebooks

² Computer codes



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� Commercial information:

² Customer list

² Business plan

² Marketing strategy

² Supplier arrangements

² Customer buying preferences and

requirements

² Consumer profiles

² Sales methods



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� Financial information:

² Internal cost structure

² Pricing information

² Salary and compensation plans

² Price lists



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�N

egative information:

² Details of failed efforts to remedyproblems in the manufacture of certain

products

² Dead-ends in research (e.g. waterproof)

² Unsuccessful attempts to interestcustomers in purchasing a product



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Exampl . 1Exampl . 1

� Decades ago, oca-Cola decided to

keep its soft dri k f or mula a secr et

� e f or mula is only known to a f ew

people wit in t e company

� Kept in t e ault of a bank in Atlanta

� Those who know the secr et f or mula

have signed non-disclosur e

agr eements

� It is r umor ed that they ar e not allowed to tr avel together

� If it had patented its f or mula, the whole

world would be making Coca-Cola



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Example no. 2Example no. 2

� Patent for tud d tub

coupli g y t (th y

br ick hold tog th r)

� But: Tod y th p t t h v

long xpired nd the

comp ny tr ies h r d to keepout competitors by using

designs, tr ademarks nd

copyright



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Legal requirementsLegal requirements:: What can be protected as a What can be protected as a

trade secret?trade secret?



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� Three essential legal requirements:

1.The information must be secret

2.It must have commercial value because it·ssecret

3.Owner must have taken reasonable stepsto keep it secret



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1. The information must be secret

� ´Not generally known among or readilyaccessible to persons within the circles that

normally deal with this kind of informationµ

� Price list on your website is no trade secret



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2. It must have commercial value because it·ssecret

� Confers some economic benefit to the holder

� Not easy to know exact value of trade secretbecause it is a secret



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3. Owner must have taken reasonablesteps to keep it secret

� Under most trade secret regimes: trade secret is

not deemed to exist unless its holder takesreasonable steps to maintain its secrecy

� ¶Reasonable·p case by case

� Importance of proper TS management program



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� Only protection against improperlyacquiring, disclosing or using :

²People who are automatically bound by dutyof confidentiality (incl. employees)

² People who have signed non-disclosureagreement

² People who acquire a trade secret throughimproper means (such as theft, industrial espionage,bribery)

Legal rightsLegal rights::



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�Some people cannot be stoppedfrom using information undertrade secret law:

² People who discover the secretindependently, without usingillegal means or violatingagreements or state law

² People who discover throughreverse engineering



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Reverse Engineering :

Taking apart an objectto see how it works

in order to duplicate or

enhance the object



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ExamplesExamples

Zipper

Lycra



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Enforcement:Enforcement:

What can you do if someone What can you do if someonesteals or improperly disclosessteals or improperly discloses

your trade secret?your trade secret?



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Trade secret protection may be based on...

² Contract law

� When there is an agreement to protect the TS² NDA/CA

� Where a confidential relationship exists² Attorney, employee

² Principle of tort / unfair competition

� Misappropriation by competitors who have nocontractual relationship

² Theft, espionage, subversion of employees



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² Criminal laws» e.g. for an employee to steal trade secrets from a

company

� theft, electronic espionage, invasion of privacy, etc.

� circumvention of technical protection systems

² Specific trade secret laws� USA: Uniform Trade Secrets Act; Economic

Espionage Act



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Remedies

1. Order to stop the misuse

2. Monetary damages� actual damages caused as a result of the misuse (lost profits)

� amount by which defendant unjustly benefited from the

misappropriation (unjust enrichment)

3. Seizure order� can be obtained in civil actions to search the defendant's

premises in order to obtain the evidence to establish the theft oftrade secrets at trial

4. Precautionary impoundment� of the articles that include misused trade secrets, or the products

based on the misuse



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To establish violation, the ownermust be able to show :

² Infringement provides competitive

advantage

² Reasonable steps to maintain secret

² Information obtained, used ordisclosed in violation of the honestcommercial practices (misuse)



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Protection in IndiaProtection in India

� Under Indian common law and British precedents,there is protection for trade secrets

� All remedies are available:

² injunctive relief, damages, accounting of profits, andthe return of all property containing the TSinformation

² A seizure order can be obtained in civil actions tosearch the defendant's premises in order to obtain the

evidence to establish the theft of trade secrets at trial.

� Apart from the common law, India has notadopted any civil or criminal statutes or lawsrelating to trade secrets.



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PART 2PART 2

BUSINESS STRATEGIESBUSINESS STRATEGIESTO HANDLE & PROTECTTO HANDLE & PROTECT

TRADE SECRETSTRADE SECRETS



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Loss of trade secretsLoss of trade secrets --

a growing problema growing problem (1)(1)

� Why is this occurring?

² Way we do business today (increased use of

contractors, temporary workers, out-sourcing)

² Declining employee loyalty, more job changes

² Organized crime : discovered money to bemade in stealing high-tech IP

² Storage facilities (CD-ROM, floppies, etc)

² Expanding use of wireless technology



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Loss of trade secretsLoss of trade secrets --a growing problema growing problem (2)(2)

� Examples of outside threats

² Burglaries by professional criminals

targeting specific technology

² Attempted network attacks (hacks)

² Laptop computer theft: source code, productdesigns, marketing plans, customer lists

² Inducing employees to reveal TS (Apple case)

² Corporate spies



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Loss of trade secretsLoss of trade secrets --a growing problema growing problem (3)(3)

� Examples of inside threats

² 80% of information crimes < employees,

contractors, trusted insiders!

² Malicious destruction/erasure of R&D data bydisgruntled employee

² Theft by departing employee (e.g. of businessplans)

² Ignorance



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� With sufficient effort or through illegal acts,

competitors can usually obtain your tradesecrets.

� So long as you demonstrate reasonable

effortsp

information remains a trade secretand is legally protected as such.

� Conversely, if no reasonable effortp risklosing the trade secret, even if the

information is obtained by competitorsillegally.



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What can be done? What can be done?

qq

10 basic protection strategies10 basic protection strategies



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1.1. Identify trade secretsIdentify trade secrets

Considerations in determining whether information is a TS:

² Is it known outside the company?

² Is it widely known by employees andothers involved within the company?

² Have measures been taken to guard itssecrecy?



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Prioritize:

² What is the value of the information for yourcompany?

² What is the potential value for yourcompetitors?

² How much effort/money spent in collecting

or developing it?² How difficult would it be for others to

acquire, collect or duplicate it?



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2. Develop a protection policy2. Develop a protection policy

Advantages of a written policy:

² Clarity (how to identify and protect)

² How to reveal (in-house or to outsiders)

² Demonstrates commitment to protection

p important in litigation



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3.3. Educate employeesEducate employees

² Prevent inadvertent disclosure(ignorance)

² New employees :

� Brief on protection expectations early

�NDA/NCA/non-solicitation clauses

� Obligations towards former employer!

² Departing employees :� Exit interview, letter to new employer, treat

fairly & compensate reasonably for patentwork, further limit access to data



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² Educate and train:

� Copy of policy, intranet, periodic training & audit,etc. Make known that disclosure of a TS mayresult in termination and/or legal action

� Clear communication + repetition

² TS protection must be part of the enterpriseculture

� Every employee must contribute to maintain thesecurity environment (e.g. anonymous security hotline)

² Monitor compliance, prosecute violators (in a

consistent manner)



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4.4. Restrict accessRestrict access

to only those persons havinga

need to know

the information

p Both paper and computer

p Computer system should limit each

employee¶s access to information actually

required for his job



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5. Mark documents5. Mark documents

² Help employees recognizetrade secretsp prevents

inadvertent disclosure

² Uniform system of marking documents

�paper based

�electronic (e.g. ¶confidential· button on

standard email screen)



WARNING WARNING::This document contains tradeThis document contains trade

secret information of Liensecret information of LienVerbauwhede. UnauthorizedVerbauwhede. Unauthorized

disclosure is strictly prohibiteddisclosure is strictly prohibitedand may result in serious legaland may result in serious legal

consequences.consequences.

WARNING WARNING::This document contains tradeThis document contains trade

secret information of Liensecret information of LienVerbauwhede. UnauthorizedVerbauwhede. Unauthorized

disclosure is strictly prohibiteddisclosure is strictly prohibitedand may result in serious legaland may result in serious legal

consequences.consequences.



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Put markers

ConfidentialTop secret

Password

Use proprietary notices



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6. Physically isolate and protect6. Physically isolate and protect

² Separate locked depository

² Access control�

authorization� log of access: person, document reviewed

� biometric palm readers

² Surveillance of depository/company

premises� guards, surveillance cameras

² Shredding



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7. Maintain computer secrecy7. Maintain computer secrecy

² Secure online transactions, intranet, website

² Authorization (password), access control

² Mark confidential or secret (legend pop, or before andafter access to sensitive information)

² Physically isolate and lock: computer tapes,discs, other storage media

² No external drives and USB ports

² Monitor remote access to servers

² Firewalls, anti-virus software,encryption



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8. Restrict public access to8. Restrict public access to

facilitiesfacilities² Log and visitor·s pass

² Accompany visitor

² Sometimes NDA/CA² Visible to anyone walking through a

company·s premises� type of machinery, layout, physical handling of work

in progress, etc

² Overheard conversations

² Documents left in plain view

² Unattended waste baskets



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9. Third parties9. Third parties

² Sharing for exploitation

² Consultants, financial advisors, computerprogrammers, website host, designers,subcontractors, joint ventures, etc.

Know the recipient

Disclose least amount of info necessary

Confidentiality agreement, non-disclosureagreement



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10. Unsolicited submissions10. Unsolicited submissions

² Unsolicited suggestions, inventions, ideas

² Beware, esp. if relate to ideas/inventions thatyour company is presently developing

² Often: claim that unsolicited information wasstolen

Notify submitter that your company will notenter into confidentiality relationship

Request submitter to sign acknowledgementthat your company is not obligated to use theinformation and owes no duty ofconfidentiality



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PART 3PART 3

PROTECTING INVENTIONS:PROTECTING INVENTIONS:

TRADE SECRETSTRADE SECRETSOR PATENTS?OR PATENTS?



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IntroductionIntroduction

� Certain types of inventions may be

protectable under patent + trade secretlaw.

� However, not under both.



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Choice between patent protection andtrade secret protection is a

LEGAL and BUSINESS

decision



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Legal ConsiderationsLegal Considerations



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nor istr tion ostsbut: cstst k scr t

canlast longer -but: limit t c mic lif

-uncr t inlif spn: l k ut isirr m i bl

no isclosur e-but:pr ctic lneedt discl se

- if leak ut: TSl st

Tr ade ecr ets

f eesr egistr ati n+maintenance

li itedinti e-gener all : max20

-but: can beinvalided

disclosur e-publicati n18maf ter f iling

- if Pnotallowed:noTS

atents



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Lar ge subjectmatter Protection of vir tuallyanything

maintained in secret byabusiness

that givescompetitive advantage

Onlypr otection against

impr oper acquir ement/use

Mor e difficult to enf or ce-somecountr ies:nolaws

-ability to safeguar d T dur ing litigation

Tr ade ecr ets

Subjectmatter limited:- Requirements:new, non obvious,usef ul

- cope: patent claim

Right to excludemonopoly topreventothers from

exploiting theinvention

"Power tool"

Patents



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Business and MarketplaceBusiness and Marketplace

ConsiderationsConsiderations



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1. Market life of the subject matter1. Market life of the subject matter

Some products have commercial life of only afew months

Patent typically takes 25m to be issuedpPatent protection may not exist until aftermarket life of the product has expired

m TS allows immediate commercial use



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2. Difficulty of maintaining the2. Difficulty of maintaining thesubject matter secretsubject matter secret

² Time, willingness and funds to:� Develop internal policies

� Implement protection program� Initiate immediate legal action to protect trade secrets from

disclosure (preliminary injunction)

² Risk of disclosure b number of persons needing access to the TS

� Employees

� Need for investors

� External contractors



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3. Likelihood of subject matter3. Likelihood of subject matterbeing reverse engineeredbeing reverse engineered

� Easy to control RE?

² Products widely sold to consumersp difficult to prevent RE

p P

² Products sold to limited number of personsp control, e.g.license agreement which forbids RE and requires licensee tomaintain the technology secretp TS

� Difficult/expensive to do RE?² Secret b manufacturing method or formulap difficultp TS

² Secret embodied in productp easy (e.g. raw material)p P



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Example no. 1Example no. 1� Decades ago, Coca-Cola decided to keep

its soft drink formula a secret

� The formula is only know to a fewpeople within the company

� Kept in the vault of a bank in Atlanta

� Those who know the secret formula havesigned non-disclosure agreements

� It is rumored that they are not allowed totravel together

� If it had patented its formula, the wholeworld would be making Coca-Cola



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� In the past, you could not buy Coca-

Cola in India, because Indian lawrequired that trade secret informationbe disclosed

� In 1991, India changed its laws, andCoca-Cola can now be sold in thecountry



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Examples no. 2Examples no. 2

� Secret techniquefor jeans washing

� Secret textileweavingtechniques forsaris

� Content of dyemixtures



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4. Likelihood of subject matter4. Likelihood of subject matterbeing independently developedbeing independently developed

� Complexity of invention

� Number of competitors working in the field

� Potential payoff for achieving market success

² e.g. drug that cures cancer

� Alternative option: defensive publication



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5. Type of subject matter5. Type of subject matter

² New basic technology

� ´pioneer patentµ

� many licensees: allows to set low licensing feespcompetitors have no incentive to risk patent litigation

² Minor improvement in well-developed field

� P will be narrowly construed

� easy to invent around

�or: competitors likely to use preexisting technology

² Protectable in all countries?

� in some countries not patentable?

� too costly to protect in all countries?

Example Invention for putting



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Example - Invention for puttinga permanent image on a piece of

apparel

� Condé System Inc. producesDyeTrans Wearables� by

using a patented process totreat fabric so it capturesphotographic-qualityartwork and text in thefabric rather than on the

surface of the fabric.

� The fabric remains soft andabsorbent with less pile than

cotton or cotton blends andresists wrinkling andshrinkage.

Source:

http://www.corporatelogo.com/articles/031feat3.html



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� Potential long market life

� Potential many licensees

� Would be difficult to keep secret² many licensees

² risk for reverse engineering

Patent: only 20y,but exclusive rights



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TS v PatentTS v Patent -- ConclusionsConclusions

� The choice between trade secret andpatent protection for an invention is

irrevocable.

� Therefore: carefully consider all

relevant advantages and disadvantagesfrom each choice both from legal andbusiness viewpoint.



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Cont«Cont«

� Patent and trade secrets are oftencomplementary to each other:

² Patent applicants generally keep inventions secret until thepatent application is published by the patent office.

² A lot of valuable know-how on how to exploit a patentedinvention successfully is often kept as a trade secret.

² Some businesses disclose their trade secret to ensure that noone else is able to patent it (defensive publication).



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Remember...Remember...

TS: No registration, but 3 requirements forlegal protection

No need for absolute secrecy, but¶reasonable measures·

Developing and maintaining TS program< good business practice to prevent

< legal requirement to enforce TS protection



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Only legal protection against dishonest

acquisition/disclosure/use

Consider alternative protection

Get legal advice, whenever useful



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Case Studies

� The Story of the Bridgport Loom.

� The story of NRB Textiles & Johnston

Industries.� Motorola vs integrated circuit systems (ICS )

� Walmart vs Amazon.com

� Color span vs sentinel imaging

C St d 1 Th St f



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Case Study 1 -- The Story ofthe Bridgport Loom...

� 1811: James Lowell vacation in Scotland

� In fact, Lowell was a spy

� Water powered weaving machine.

Performed work done by hundreds ofartisans. Allowed British to commandworld textile trade. American cotton had tobe shipped to England where it was woveninto cloth, and then resold to American

merchants.



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Case study 2 -- The story of NRBTextiles & Johnston Industries«

� NRB + Johnston lawsuit: Competitor paid 2 consultants (posingas research student + Swiss investor) $500,000 for info oncustomers, suppliers, and manufacturing operations of 9 textilecompanies.

� Used stolen information to lure customers away after firstreducing prices.

� Also introduced a fabric very similar to one manufactured by Johnston and then marketed it to Johnston's customers.

C t d 3 M t l



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Case study 3 - Motorola vs

Integrated Circuit System

� Motorola in July 1999 , filed a lawsuit against ICSand several managers who left Motorola whileworking in its Timing solutions operation to set up anew ICS operation.

� Motorola·s complaint was that ICS did this to gainaccess to Motorola·s business and technical tradesecrets and that the managers who left had breached

duties and misappropriated trade secrets .� Though ICS and the former motorola managers

denied allegations , a settlement was reached onmarch 2000.

A th ttl t



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As per the settlement:

� Motorola agreed to dismiss the lawsuit

in exchange for defendants agreementto make an undisclosed monetarypayment .

� ICS Refrain from using or disclosingmotorola confidential information andfor limited time periods to refrain fromusing certain design technologies .

� Restrict further hiring and solicitationof motorola employees

� Grant motorola certain rights to usecertain ICS intellectual property .



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Case study 4 - Walmart vsAmazon .com

� Walmart had filed a suit in a US courtagainst Amazon.com claiming that

Amazon was attracting executives andemployees of Walmart , together withtheir consultants , to access the tradesecrets of walmart .

� The case was settled in 1999 .

A h l



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As per the settlement:

� Amazon agreed to re-assign some of its

employees where their knowledge ofwalmart operations would not be used.

� Limits were also placed on the projetcsto which walmart workers are involvedin amazon·s operations .



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Case study 5 - Colorspan

vs Sentinel Imaging� This dealt with a case on infringement of

trade secrets , in which color span wasawarded $ 2.2 million in damages in a 1997

judgement .� Colorspan alleged that Sentinel had stolen

part of its market of consumables for its wideformat inkjet printers by hiring two former

colorspan employees who imparted tradesecrets and customer information.