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Matt Dunning

Trade secrets, confidential data are often poorly protected at mid-market firms

Employees pose greatest risk to company-specific intellectual property

March 16, 2014 - 6:00am



Mid-market companies often safeguard their federally registered intellectual property such as patents, trademarks and copyrighted materials, but fail to protect their often equally valuable trade secrets and confidential corporate information.

The emphasis on registered intellectual properties, particularly those directly driving revenue, among small and midsize firms is hardly surprising, given their substantial development and maintenance costs and the rising frequency of federal infringement lawsuits, several intellectual property attorneys and risk management experts say.

Unfortunately, experts noted, that focus often comes at the expense of efforts to protect the wide range of valuable trade secrets and confidential corporate information that can be every bit as critical to smaller companies.

“It might not be as sexy a topic as big, headline-grabbing issues like patent and copyright infringement, but trade secrets and other types of confidential information are often the most important intellectual assets that a mid-market company has,” said Wayne Sobon, president of the Arlington, Va.-based American Intellectual Property Law Association.

Most states define trade secrets as technical information that provides an actual or potential economic advantage over competitors, including formulas, recipes or design patterns, as well as manufacturing or service processes or techniques. Confidential information includes sensitive, nontechnical data pertinent to a company's business strategy and operations, such as financial records, employment contract terms, compensation structures, internal market research and customer lists.

In civil suits alleging theft of trade secrets or confidential information, U.S. courts have defaulted to the definitions in state versions of the Uniform Trade Secrets Act, a template law developed in 1979 by a nonprofit trade group and adopted by 47 states. While federal law does not protect ownership of trade secrets in the same way as registered trademarks and patents, companies may be able bring civil lawsuits for trade secret misappropriation against individuals or competitors — depending on the specifics of the case — under federal laws that include the Economic Espionage Act and the Computer Fraud and Abuse Act.

“If companies aren't tracking ... intellectual property, and many smaller companies likely are not, there's a good chance that those materials are being appropriated or shared by other entities, which ultimately dilutes their value,” said Michael Born, a Kansas City, Mo.-based vice president of Lockton Cos. L.L.C.'s global technology and privacy practice.

In both instances, companies' ability to assert their legal right to exclusive control of trade secrets or confidential information depends primarily on reasonable measures being taken to prevent it from being disseminated.

Many small and mid-market companies recognize that they have “quite a bit of valuable proprietary information, but they do tend to be a little lax in protecting that information,” said Adam Bialek, a New York-based partner and chair of Wilson Elser Moskowitz Edelman & Dicker L.L.P.'s intellectual property group.

While the long-term cost of losing exclusive ownership or use of a trade secret can be difficult to estimate, the cost of going to court to protect it is more concrete.

The median cost of litigating a trade secret misappropriation lawsuit posted double-digit gains in 2013, outpacing the growth rate for patent, trademark and copyright infringement lawsuits, according American Intellectual Property Law Association data.

Studies show the greatest potential threat to the security of a company's trade secrets and confidential information is its own workforce. In an analysis of 358 trade secret misappropriation suits tried in state appeals courts from 1995 through 2009, attorneys at Los Angeles-based O'Melveny & Myers L.L.P. found that 78% of the defendants were current or former employees. Twenty percent of the cases targeted third-party contractors and service providers.

Experts said there are several steps small and midsize companies can take to prevent misappropriation of trade secrets and confidential information. To start, companies should include in all employment and contracting agreements information security policies that have nondisclosure clauses on sensitive or proprietary information.

Companies also should provide regular employee training.

“Even if you only do it once a year, it's well worth it,” said Jura Zibas, a New York-based partner at Wilson Elser. “Reminding your workforce about company policies regarding intellectual property and their obligations as employees will help foster a culture of responsibility for protecting that information.”

Another measure that experts said can reduce the risk of trade secret misappropriation or theft is naming an internal point person to identify, collect, catalog and monitor all written materials, media files and other documents produced for internal use. Additionally, companies should limit dissemination of potentially valuable information on a need-to-know basis, experts said.

 



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