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Trade secret risks a challenge in evolving cyber age

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Protecting trade secrets has become more challenging in the cyber age, analysts say, and the loss of trade secrets can cause serious — sometimes permanent — damage to a company.

Kevin O’Brien, Washington-based partner and chairman of the North America intellectual property practice group for Baker McKenzie L.L.P., said “there’s a whole spectrum of bad consequences when trade secrets are stolen.”

“It can be devastating,” he said, “not only because the information is stolen, which is bad enough, but because of the negative publicity. For public companies, it can have reporting consequences. It can have third-party liability exposures.”

Mr. O’Brien said that 80% of trade secret thefts involve present or former employees, vendors or customers.

“The cyber attack or the hack — the purely external invasion — is relatively remote,” he said. “If you take that into account and focus on prevention, you’re going to be a long way to having an effective program.”

David Shluger, senior multiline underwriter with Zurich North America in New York, said companies today more than ever are relying on intellectual property, unlike in the past when they dealt primarily with tangible property.

“You register a trademark, a patent or a copyright, and the same is not true with a trade secret,” he said. “Its very nature is that it’s secret, so if you registered it, that would eliminate that inherent protection. So the real protection for a trade secret is the fact that it’s secret, and risk management really does come down to how well you can protect it.”

In trying to determine what constitutes a trade secret, Mr. Shluger said executives should figure out how well certain information is known outside their business, how many employees know the information, what steps are being taken to safeguard the information, and does it have commercial value.

“You have to really understand your business model,” said Amar Sarwal, vice president and chief legal strategist with the Association of Corporate Counsel in Washington, “what information drives the success of that model, and protect that information. If you do lose that information, it’s going to undermine your business.”

Mr. O’Brien said that trade secret litigation has increased, partially because the laws and the remedies for trade secret misappropriation have been strengthened.

“Federal courts have now become available to trade secret misappropriation,” he said, “and also the dangers and the risks have increased because there is so much data that can be stolen so quickly that a company is at greater risk than ever before.”

A Baker McKenzie report, “The Rising Importance of Safeguarding Secrets,” said judges in U.S. district and state appellate courts issued rulings in 325 trade secrets cases in 2015, roughly three times the number of judgments in 2005, according to research by Chicago-based Willamette Management Associates.

Despite their importance, Mr. Sarwal said “trade secrets are like the stepchild of intellectual property.” 

“People don’t think about them as much,” he said. “They certainly don’t collect within their company what the trade secret portfolio really is. Folks don’t do that as well as they should and so you start thinking about a trade secret issue when the employee has left or it’s been hacked, which is way too late. You need to be much more proactive.”

The Baker McKenzie report found that less than one-third of companies surveyed had taken basic measures to protect their trade secrets — despite the growing awareness of their importance. 

The study said the enactment last year of two “game-changing pieces of legislation” — the
U.S. Defend Trade Secrets Act and the European Union’s Trade Secrets Directive — seek to create a uniform approach to trade secret protection and enforcement within the U.S. and
among EU member states.

If the worst should happen and a trade secret does go public, analysts recommend a team response involving the legal, risk management, sales, and other divisions.

“You may seek an injunction to try to prevent whoever has stolen that secret from using it commercially,” Mr. Shluger said. “Sales and marketing may develop another approach to proactively get out to the customers and prospects to protect market share.”

On the risk management side, Mr. Shluger recommends that companies determine if additional secrets are being disclosed.

“The new trade secret act that came along last May not only has preliminary injunctions, but ex parte seizure remedies,” Mr. O’Brien said. “So if you are quick enough and you can identify the information has not been spread, that it’s not been lost, that it’s still under the possession of the misappropriator, then you can get a judicial order to seize all of the equipment that would be housing that trade secret — in other words, contain it.”