What is a trade secret?
In my book, Chapter 12 is devoted to trade secret misappropriation. A trade secret is any information that has an independent economic value from others not knowing it. Because of this, the owner keeps the trade secret confidential. There is a lot more to know about how to determine the value and how to keep it confidential. While I was waiting to give a talk, I heard attorney Mark Halligan’s presentation on trade secrets.
He emphasized that:
– A decade or two ago, tangible assets made up 80% of companies’ gross value and intangible assets made up 20%. Now, the bulk of companies’ gross value is intangible assets.
– Foreign spies are spending billions to steal trade secrets from United States companies, so they must be valuable.
– Most companies fail to spend time to identify their trade secrets, ensure that they are protecting them or appraise their value.
Identify Your Trade Secrets
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 confidential customer lists to be a trade secret. But, many judges have difficulty comprehending the breadth of the definition of trade secrets.
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. If the company creates lists and claims after the employee leaves, they risk the court viewing them as self-serving.
There are two reasons for not doing this. First, is the time and expense. It probably takes one to three 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 Halligan 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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