Trade Secrets

In my book, Handling the Business Emergency: Temporary Restraining Orders and Preliminary Injunctions (ABA 2009), Chapter 12 is devoted to trade secret misappropriation. A trade secret is any information - a formula, pattern, compilation, program, device, method, technique or process - that has independent economic value from not being generally known by others who could make money from its use or disclosure and which is kept confidential (using reasonable means) by the owner of the secret. There is a lot more to know about how to determine value and how to keep it confidential.

But while I was waiting to give a continuing legal education talk on how to keep secrets under the attorney client privilege, I heard a presentation (he called it an exhortation) by attorney Mark Halligan on trade secrets.

He emphasized that:

1. A decade or two ago, 80% of the gross value of companies was in tangible assets (equipment, inventory, furniture) and 20% consisted of intangible assets. Now those proportions are reversed.

2. Chinese and other foreign spies are spending billions to steal trade secrets from United States companies; they must be valuable.

3. Most companies fail to spend time to identify their trade secrets, ensure that they are protecting them or to appraise their value. He suggests identifying trade secrets, listing them by subject, format and product and then appraising their value. For litigation, I see the benefit. Most judges will readily consider customer lists based on non-public sources to be a trade secret if it is kept confidential, but have difficulty accepting or comprehending the breadth of the definition of trade secrets (what method, what process) contained in the statute. Consider the case when an employee has left a company and is charged with misappropriation of a trade secret. A pre-existing list of trade secrets generated before litigation makes it easier to convince a court that they exist and deserve protection. Lists and claims created after the employee leaves risk being seen as self-serving.

There are two reasons for not doing this. First is the time and expense. It probably takes 1-3 days for a company to identify its trade secrets, and most key employees (interpreting that phrase broadly) should be interviewed. Second is the tension between accounting/tax and litigation. In litigation, there is an incentive to highly value the trade secret so you can try to recover a lot of money from the trade secret thief. But for accounting and tax purposes, there may be an incentive to decrease the valuation. I asked Mark about that and he acknowledged the problem. 

I recommend that businesses consider these issues with their lawyers and accountants. An ounce of prevention is worth a pound of cure.

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