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Companies Failing to Protect Their Trade Secrets

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Companies Failing to Protect Their Trade Secrets

3rd July 2017

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Driven by the furious pace of technological advancement, companies across industries are engaged in an unprecedented race to innovate. In turn, this rapid rate of innovation has caused trade secrets to become an increasingly preferred method of intellectual property protection, pushing the issue of trade secrets into corporate boardrooms. But is trade secret protection being tackled the way it should?

Key findings of survey:

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  • Four out of five (82%) senior executives say their trade secrets are an important, if not essential, part of their business, while 60% say protecting their trade secrets is a board-level issue
  • One in five companies think or know they have had trade secrets stolen
  • But only one-third of companies maintain inventories of their trade secrets and have action plan for responding to trade secret theft
  • Theft by ex-employees and third-party suppliers are the biggest sources of anxiety among two-thirds of executives


Driven by the furious pace of technological advancement, companies across industries are engaged in an unprecedented race to innovate. In turn, this rapid rate of innovation has caused trade secrets to become an increasingly preferred method of intellectual property protection, pushing the issue of trade secrets into corporate boardrooms. But is trade secret protection being tackled the way it should?

In a survey of over 400 senior executives across five industries by leading global law firm Baker McKenzie and Euromoney Institutional Investor Thought Leadership, the findings reveal that the vast majority of these executives place great importance on trade secrets. In fact, almost half (48%) of those executives said their trade secrets were more important than their patents and trademarks.

The attention that companies give to protecting their trade secrets can mean the difference between success and failure, which underscores why most of the executives in our survey said trade secrets play an important, if not essential, part in their corporate strategy. Nearly one-third ranked the issue among their top five concerns, reflecting the rise in value of trade secrets in our digital age.

"Throughout modern corporate history, some companies have gone to great lengths to safeguard their trade secrets. Colonel Sander’s handwritten original recipe for Kentucky Fried Chicken was famously kept locked in a safe at KFC Corporate headquarters. Today’s trade secrets are more susceptible to the threat of being hacked or downloaded, but they are of no less value to the companies that own them," says Paul Rawlinson, global chair of Baker McKenzie. "One of the more concerning survey findings was the fact that less than one-third of companies have taken basic measures to protect their trade secrets."

By industry, 46% of the financial services executives in the survey said they consider trade secrets essential to their corporate strategy – the highest of any sector, followed by industrials and ICT (both 41%). This compares with 27% among consumer goods and retail executives.

Disconnection between importance and protection

Despite the growing commercial power of trade secrets, many of those same executives admitted not taking basic steps to preserve them, reflecting a marked disconnect between the importance that corporate executives place on their trade secrets and the measures they are taking to protect them. In fact, only one in three companies maintain an inventory of their trade secrets and has an action plan for responding to trade secret theft.

These findings are worrying at a time when incidents of trade secret theft continue to rise, driven by the acceleration of innovation across global industry. Our survey also reveals that more than one-third of companies have suffered trade secret theft. The healthcare industry is by far the most targeted, with 33% of these executives reporting that they've suffered trade secret theft. Notably and somewhat surprisingly in light of recent hacker attacks, corporate leaders most fear theft by former employees and third-party suppliers.

"Given that trade secrets are no longer protected once they become public and companies have no legal recourse unless they can prove the information was both valuable and secret, the question is whether the corporate world should be doing more to manage this risk," says Kevin O'Brien, chair of Baker McKenzie's North America Intellectual Property Practice.

What companies need to do

The rising awareness of the importance of trade secrets is significant, but it's only the first step of the process. It's important that corporate leaders appreciate the magnitude of their responsibility.

“Most companies understand the need to protect their trade secrets but the big difference is identifying which of their trade secrets are of most value, and that varies from company to company,” Kevin O’Brien says.

The survey calls for companies to implement appropriate protective measures — from securing computer networks and monitoring employee electronic use to providing training, developing corporate policies, and requiring anyone who comes into contact with trade secrets to sign non-disclosure agreements.

Johan Botes, Partner and Head of the Employment and Compensation Practice at Baker McKenzie in Johannesburg notes, “In South Africa, one of the ways in which employers can protect their trade secrets is via agreements in restraint of trade or confidentiality agreements.

"Because of the restrictive effect a restraint of trade agreement will have on the economic rights of an employee, the courts will critically consider whether the employer has a valid interest worthy of protection through such an agreement. They  will look at the employer's business and the employee’s role in respect of the business. Where an employee never had any real exposure to the employer's trade secrets, a restraint of trade agreement may not be appropriate 

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"Restrictions imposed in a restraint of trade agreement should also be commensurate with the protection required. Overly long periods of restricted practices or areas may result in the agreement being unenforceable. Companies should also consider the additional protection that carefully drafted confidentiality or non-disclosure agreements offer. Such an agreement can supplement the employee’s common law duty to keep his employer’s confidential information secret,” he says.

 

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