In this jointly authored article from Emil Haldorson and Henrik Rosén from Konsert, Kin Wah Chow and Jing Wang Winter from Rouse, and Landy Jiang and Terry Lu from Lusheng Law Firm, they explore the trends that impact the current trade secrecy landscape and share their perspective on the requirements that this places on companies. Our authors have drawn on their experiences from supporting clients across industries to exemplify how companies can understand the level and type of secrecy management that is appropriate for them, and how to tie together the measures to make it work in practice. We explore three key considerations for designing an effective trade secret program:
Figure 1: Key considerations for designing an effective trade secret program
Tougher trade secret litigation: While the surge in US trade secrecy litigation after the introduction of the Defend Trade Secrets Act has shown signs of plateauing, the number of high-profile, high-damages cases has risen – and it should be assumed that many conflicts are resolved in arbitration, to maintain secrecy. Companies must anticipate what this means for their operations.
Increased adoption of generative AI to boost creativity and productivity is driving changes in how companies govern and value trade secrecy.
The post-pandemic labor landscape has led to major shifts in how we work, which has also led to shifts in how we generate, track and handle secrecy.
The importance of trade secrets will differ from company to company. A company’s trade secret strategy and program needs to be tailored to what we refer to as the control regime that fits their business requirements best. Determining a company’s control regime involves assessing the relative importance of a trade secret versus a registered IP control scheme as an effective means to control a company’s most valuable intellectual assets. To do so, a range factors related to a company’s business operations and the industry/sector in which they operate, needs to be considered.
Figure 2: Guiding factors impacting the control regime
How companies position themselves in the control regime assessment will have significant implications on the design and implementation of a trade secret program. As an example, determining the types of intellectual assets that constitute the most important trade secrets and the typical duration of their lifecycle will dictate what volume of trade secrets that needs to be management – 10s, 100s, or 1000s? Further, determining where trade secrets are stored will help determine the largest sources of trade secret risk, thereby informing what protective measures that need to be put into place – employee mobilization, partner risks, corporate espionage, cyber security threats?
Trade secret laws exhibit similarities across jurisdictions, primarily in relation to the criteria to have ‘reasonable protective measures’ in place to safeguard trade secrets. Legislation does however not define what the required specific measures are to be able to call them reasonable.
We have encountered several companies stating to have their trade secrets fully under control based by virtue of having a corporate policy in place. In our experience, however, a trade secret policy alone is generally insufficient to demonstrate that ‘reasonable measures are in place’ in a litigation case, nor is it enough to establish a strong corporate culture around the importance of trade secrets. Instead, a robust trade secrecy program needs to consider a wider range of elements. At its core, it should include three fundamental sets of measures; Capture; Protect and Enforce/Defend.
Figure 3: Core Trade secret measures
Trade secrets should be identified, assessed and documented as early as possible after creation or upon receipt from others, and be kept up to date across their lifecycle. Many businesses struggle with this. According to the Deloitte IP 360 Survey, 29% of respondents do not “actively capture” trade secrets, while an additional 14% do not have a standardized process for identifying them.
A successful and consistent trade secret capture requires:
Figure 4 - Example Trade secret system
While it is not necessary, a corporate IP department wishing to take trade secrecy seriously could invest in a trade secret management system, corresponding to or integrated with the company intellectual property management system. Figure 4 provides an illustrative example of a trade secret system dashboard, prepared by Rouse. While the exact contents of a trade secret management system may differ, it should include features which support corporate IP departments to communicate the business value of the trade secret portfolio to top management. It should also help to mobilize IP departments to execute the trade secret program measures across the business, which – depending on the system maturity of each company – could include APIs and automated workflows with complementary HR systems and IT infrastructure.
The second fundamental pillar in a trade secret program are the set of measures required to continuously protect intellectual assets. Such measures should partly ensure that the duty of ‘reasonable measures to protect’ is met in accordance with legislation as well as proactively prevent trade secret misappropriation from occurring in the first place. Typically, the suite of protective measures includes a multi-pronged strategy encompassing technical, organizational, and legal tools.
The exact set of measures to apply to any single trade secret in any given business situation will inherently vary. It may also be pertinent to adopt a tiered approach where are set of ‘basic’ measures are applied to the bulk of the trade secret portfolio, while an additional set of (usually more invasive) measures are applied to trade secrets of particular importance and value. Here, the importance of a trade secret categorization scheme comes into play, where different categories may have certain protective measures (automatically) prescribed to them.
Even the best-prepared protective defenses preventing trade secret leakage from happening in the first place, must be paired with the capacity to enforcing against misappropriation. This starts with establishing procedures for monitoring the most common risks of trade secret theft for the company, be that employee leakage, industrial espionage and business partner leakage or cyber security attacks.
When a breach occurs, successful enforcement hinges on robust legal readiness and swift incident response. While recent changes in legislation, such as the amended Anti-Unfair Competition Law (Article 9) in China, has shifted some evidential burden to defendants, a challenge for plaintiffs in trade secret enforcement is gathering sufficient evidence.
With reference to Figure 5, companies generally need to perform a range of investigate measures to build a convincing court case, spanning confirming of the existence of the trade secret, proving that reasonable protective measures have been put in place and an infringing act was made despite these measures, quantifying reasonable compensation for the misappropriation.
Figure 5 - Trade secret investigation measures
In terms of enforcement, trade secret owners in China have three venues available to them: civil, administrative, or criminal proceedings. In most cases, the rights holder pursues civil litigation to stop misappropriation and seek damages. However, when the trade secret in question is a technical secret of significant economic value, a combined strategy of criminal and civil remedies is often employed. This is because the police has the strongest capabilities to gather robust evidence, which is admissible in civil proceedings to support the claims. The local market regulatory authority has the discretion to impose fines of up to 500 million RMB against infringers but cannot award damages to rights holders. Therefore, administrative proceedings serve as an alternative means to secure additional evidence when the infringing actions are not severe enough to warrant criminal proceedings.
Civil litigation for trade secret misappropriation typically falls under the jurisdiction of the basic level of court in the location of the infringement and the defendant's domicile. However, if the case involves technical secrets, it levels up to the intermediate people's court. Since trade secret leakage often occurs on the site of the rights holder, the secret owner can opt to file their case at the court in their domicile for convenience. In the civil proceedings involving technical secrets, the court usually appoints a technical officer with expertise in the relevant field to assist in examining the technical facts. Both parties may also engage experts to participate in the court hearing and provide insights on technical matters. Additionally, requesting judicial appraisal on critical technical issues is a common litigation strategy if necessary.
Figure 6: Key considerations for designing an effective trade secret program
For any trade secret program to operate efficiently, our experience is that three enabling capabilities are required, acting in tandem to provide robust secrecy protection that does not hinder information sharing and day-to-day work.
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In this article, we explored trends driving the importance of trade secret and explored key considerations for designing an effective trade secrets program aligned with specific business requirements. In any knowledge-intensive company, the key first step is to explore the business need for trade secrecy and assess whether current practices are robust enough to meet such needs. Since the key to effective trade secret management lies in prevention, companies benefit from taking a proactive approach to strengthening its trade secrecy capabilities.
Authors: Emil Haldorson, Landy Jiang, Henrik Rosén, Kin Wah Chow, Jing Wang Winter, Terry Lu
