1. UNIDO-WIPO National Seminar
Managing IP of SMEs
in the High-Technologies Park Minsk, Belarus, January 23-25, 2007

2. The Importance of Trade Secrets for Software Companies
Lien Verbauwhede Koglin
Consultant, SMEs Division
World Intellectual Property Organization (WIPO)

3. Do-it-yourself form of IP
What are trade secrets?
Do-it-yourself form of IP
Idea: By keeping valuable information secret, you can prevent competitors from learning about and using it and thereby enjoy a competitive advantage in the marketplace.

4. General principles:
Information that has commercial value and that has been scrupulously kept confidential will be considered a trade secret (TS).
Owner will be entitled to court relief against those who have stolen or divulged it in an illegal manner.

5. This Presentation 1. What information qualifies as a TS?
2. What makes something a TS?
3. When can you get court relief?
4. How are TS lost or stolen?
5. How to protect your TS?
6. May TS be sold?
7. How is TS protection enforced?
8. If you have the choice: TS or patent?
9. What to bear in mind if you sign CA?

6. Question 1 WHAT KIND OF INFORMATION QUALIFIES AS A TRADE SECRET ?

7. Provides competitive advantage Potential to make money
TRADE
SECRET
Provides competitive advantage
Potential to make money
Kept confidential

8. TRADE SECRET Technical & scientific information Financial information
Negative information
Commercial information

9. Typical examples in the software industry
Computer technology
hardware + software (esp. source code)
whether < patent or copyright protection
algorithms, formulas, data flow charts, specific procedures that are implemented in the software or website
Software design documents
Technical data about product performance
Software development agreements
Pending patent applications

10. Business plans & strategies
New product names
Financial projections
Marketing plans, unpublished promotional material
Cost & pricing information
Sales data
Customer lists
Info re: new business opportunities
Personnel performance

11. When do you have legal protection?
Question 2 WHAT MAKES SOMETHING A TRADE SECRET ?
When do you have legal protection?

12. Three essential legal requirements:
1. The information must be secret
2. It must have commercial value because it’s secret
3. Owner must have taken reasonable steps to keep it secret

13. 1. Secret
“not generally known among or easily accessible to persons within the circles that normally deal with this kind of information”
What is ‘generally known’ in the software industry?
matters of common knowledge
information you find at library, online database, trade journals, patent information, etc
price list on website
graphics & object code of software application you sell off-the-shelf

14. 1. Secret Not required that be known only by one person
e.g. based on supplier relationship, joint development agreement, due diligence investigation, etc.
If you license software which has limited distribution  possible to protect object code by contractual means

15. 2. Commercial value Must confer some economic benefit on the holder
This benefit must derive specifically from the fact that it is not generally known (not just from the value of the information itself)
How to demonstrate:
benefits derived from use
costs of developing the TS
licensing offers; etc.
actual or potential

16. 3. Reasonable steps
Under most TS regimes, you cannot have a TS unless you have taken reasonable precautions to keep the information confidential
‘Reasonable’  case by case
reasonable security procedures
Non-disclosure agreements (NDA)
such that the information could be obtained
by others only through improper means
Importance of proper TS management program

17. Caution: Who owns the TS?
TS (e.g. new technology or software) developed by employee …
TS developed by external contractor
To avoid disputes:
WRITTEN AGREEMENT +
ASSIGN
in advance all trade secrets developed during employment or commission

18. Question 3 WHEN CAN YOU GET COURT RELIEF ?

19. COURT RELIEF if: TS + “THEFT”
Courts will only grant relief if someone has improperly acquired, disclosed or used the information
Only theft if wrongful !

20. What is typically considered wrongful?
1. Duty of trust
implied or imposed by law
e.g., employees, directors, lawyers
2. Confidentiality agreement or NDA
e.g., employees, suppliers, consultants, financial advisors
3. Industrial espionage, theft, bribery, hacking

21. What is lawful?  Discovery of the secret by fair and honest means
1. Independent creation
without using illegal means or violating agreements or law
 patent
TS protection provides no exclusivity !

22. What is lawful? 2. Reverse engineering
Common practice among software companies: studying competitors' products
to make software that can interoperate with the software being studied
to make a product that will compete with it
E.g. decompile object code to reveal its structure and figure out the interface specifications for interoperability purposes
E.g. look at a program's input and outputs

23. 2. Reverse engineering
Solution: contractually forbid reverse engineering (in software license agreement)
Technological protection measures
BUT! Legality in question
Inconsistent with copyright or antitrust laws?

24. Question 4 HOW ARE TRADE SECRETS LOST OR STOLEN ?

25. A Growing Problem. Why Does It Occur?
Way we do business today (increased use of contractors, temporary workers, out-sourcing)
Declining employee loyalty: more job changes
Organized crime : discovered the money to be made in stealing high tech IP
Storage facilities (DVD, external memories, keys)
Expanding use of wireless technology

26. Examples Reverse engineering, independent discovery Improper licensing
Burglaries by professional criminals targeting specific technology
Network attacks (hacking)
Laptop computer theft
Inducing employees to reveal TS

27. 80% of trade secret loss departing or disgruntled employees
< employees, contractors, trusted insiders!
departing or disgruntled employees
intentional (malicious)
inevitable (knowledge acquired)
by ignorance

28. Case Coca-Cola Trade Secret Trial
Prosecutors say a former Coca-Cola secretary took confidential documents from the beverage giant and samples of products that hadn't been launched with the aim of selling them to rival Pepsi
Faces up to 10 years in prison if convicted of conspiracy.
AP Business, January 15, 2006

29. Case Company accused of misappropriating TS from an inventor
Inventor of new design for vacuum cleaner presented design to vacuum cleaner manufacturer. Signed NDA covering the design.
Manufacturer obtained patent on the design one year after the inventor disclosed the design to them, and made estimated sale profits of $100,000,000.
2004: lawsuit settled. Company paid $30,000,000 to inventor.

30. Case High-Tech Company vs. Employee
Technical manager (employee) of high-tech company X resigned  Went to work for another high-tech company Y
Departing employee used and disclosed TS
Company X filed suit against departing employee
Court order: Departing employee prevented from performing work for his new employer (Y) in connection with any product that competes with X’s products.

31. Question 5 HOW TO PROTECT YOUR TRADE SECRETS?

32. 1. Identify trade secrets
Accurate record keeping is important.

33. Factors to determine if information is a TS
Is it known outside the company?
Is it widely known by employees and others involved within the company?
Have measures been taken to guard its secrecy?
What is the value of the information for your company?
What is the potential value for your competitors?
How much effort/money spent in developing it?
How difficult would it be for others to acquire, collect of duplicate it?

34. 2. Develop a protection policy
Advantages of a written policy:
Clarity (how to identify and protect)
How to reveal (in-house or to outsiders)
Demonstrates commitment to protection  important in litigation

35. Monitor compliance, prosecute violators
Educate and train:
Clear communication and repetition
Copy of policy, intranet, periodic training & audit, etc.
Make known that disclosure of a TS may result in termination and/or legal action
Monitor compliance, prosecute violators

36. to only those persons having a
3. Restrict access
to only those persons having a
need to know
the information
 computer system should limit each
employee’s access to data actually
utilized or needed for a transaction

37. 4. Mark documents Help employees recognize TS
 prevents inadvertent disclosure
Uniform system of marking documents
paper based
electronic (e.g. ‘confidential’ button on standard screen)

38. 5. Physically isolate and protect
Separate locked depository
Authorization
Access control
log of access: person, document reviewed
biometric palm readers
Surveillance of depository/company premises
guards, surveillance cameras
Shredding
Oversight; audit trail

39. 6. Restrict public access to facilities
Log and visitor’s pass
Accompany visitor
Sometimes NDA/CA
Visible to anyone walking through a company’s premises
type of machinery, layout, physical handling of work in progress, etc
Overheard conversations
Documents left in plain view
Unattended waste baskets

40. 7. Maintain computer secrecy
Secure online transactions, intranet, website
Password; access control
Mark confidential or secret (legend pop, or before and after sensitive information)
Physically isolate and lock: computer tapes, discs, other storage media
No external drives and USB ports
Monitor remote access to servers
Firewalls; anti-virus software; encryption

41. 8. Measures for employees
1. New employees
Brief on protection expectations early
Obligations towards former employer!
Assign all rights to inventions developed in the course of employment
NDA/CA
Non-compete provision
Reqts
Limits

42. 2. Current employees 3. Departing employees
Prevent inadvertent disclosure (ignorance)
Train and educate
NDA for particular task
3. Departing employees
further limit access to data
exit interview
letter to new employer
treat fairly & compensate reasonably for patent work

43. 9. Measures for third parties
Sharing for exploitation
Consultants, financial advisors, computer programmers, website host, designers, subcontractors, joint ventures, etc.
Confidentiality agreement, NDA
Limit access on need-to-know basis

44. Question 6 MAY TRADE SECRETS BE SOLD OR LICENSED?

45. SALE LICENSE Most TS sales occur as part of the sale of the business
e.g. in combination with patent license
e.g. software license for highly specialized program
Advantage: additional revenues
Disadvantage: risk of disclosure (potential loss)
In some countries, restrictions

46. TS Licensing Definition of the secret subject matter Permitted use
what is to be kept confidential?
marked as such or broad clause?
Permitted use
disclosure to employees, professional advisors?
modification of technology?
Precautions to be taken
Exclusions

47. TS Licensing Duration of secrecy obligations Royalties Sanctions
Should not be subject to alternative dispute resolution

48. In case of license for patent + related TS:
TS Licensing
Can licensee be obligated to continue paying TS royalties even if the information has entered the public domain?
In case of license for patent + related TS:
Can licensee be obligated to continue paying TS royalties when patent expires or is invalidated?

49. TS Licensing Mass-marketed software:
Possible to negotiate NDA with every end-user?
Software Escrow:
A viable alternative to source code license?

50. What can you do if someone steals or improperly discloses your TS?
Question 7 HOW IS TRADE SECRET PROTECTION ENFORCED?
What can you do if someone steals or improperly discloses your TS?

51. TS protection may be based on...
1. Contract law
When there is an agreement to protect the TS
NDA/CA
anti-reverse engineering clause
Where a confidential relationship exists
attorney, employee, independent contractors
2. Principle of tort / unfair competition
Misappropriation by competitors who have no contractual relationship
theft, espionage, subversion of employees

52. 4. Specific trade secret laws
3. Criminal laws
e.g. for an employee to steal trade secrets from a company
e.g. unauthorized access to computers
theft, electronic espionage, invasion of privacy, etc.
circumvention of technical protection systems
4. Specific trade secret laws
US: Uniform Trade Secrets Act; Economic Espionage Act

53. Relevant laws in Belarus
Law of the Republic of Belarus on Opposition to Monopolistic Activities and Competition Development
Civil Code, art 140
Trade Secret is information which has a value, unknown and unaccessible for third parties.
Criminal Code, art 254, 255
Administrative Code, art 22.13
Art 10 of the Paris Convention

54. Remedies 1. Order to stop the mise 2. Monetary damages
actual damages caused as a result of the misuse (lost profits)
amount by which defendant unjustly benefited from the misappropriation (unjust enrichment)
3. Seizure order
can be obtained in civil actions to search the defendant's premises in order to obtain the evidence to establish the theft of TS at trial
4. Precautionary impoundment
of the articles that include misused TS, or the products that resulted of misusing

55. To establish violation, the owner must be able to show :
infringement provides competitive advantage
reasonable steps to maintain secret
information obtained, used or disclosed in violation of the honest commercial practices (misuse)

56. Question 8 PROTECTING INVENTIONS: TRADE SECRETS OR PATENTS?

57. What is difference between TS and Patent?

60. Things to bear in mind
1. ANY innovative idea should be kept as a secret in the beginning
to preserve option of patenting (or industrial design) at later stage

61. Strategic business decision
INNOVATIVE IDEA
Secret !
Initially
Later stage
Not patentable
patentable
patent TS
Strategic business decision TS ID TS
Part of the idea

62. Things to bear in mind (if patentable)
2. Choice between patent or TS must be made both from legal and business perspectives
(if patentable)

63. Patentable idea Y N N TS Y N N Def.publ N Y N Y P Y © Mark Sokoloff
Public
disclosure
necessary?
Easy to RI,
independ.
discover?
Technology
changing
rapidly? Y N N TS Y N N
Licensing
opportunity?
Revenue
potential
> IP costs?
New
area of
technology?
Def.publ N Y N Y P Y

64. Things to bear in mind
3. If you apply for a patent, only give up what is necessary
The decision to apply for a patent does not necessarily require giving up all of one’s TS!
However, patent application must contain :
enough to enable skilled person to practice the invention
the best mode known to the applicant for practicing the invention
(Software P in USA: required to disclose source code?)

65. INNOVATIVE IDEA inventions on A, B, CTS B TS P A B C
Applying for patent on C may not require giving up TS on A & B

66. Things to bear in mind
4. If you apply for a patent, your TS may still be protected for a while
In most countries: only publication after 18m. You may withdraw application any time < publication
In USA: possible to request non-publication of the patent application until the patent is issued

67. Things to bear in mind
5. Once patent published  TS lost in ALL COUNTRIES
patent documents “easily accessible” to public
if patent application published and later rejected  you lose both patent and TS rights
some technology (e.g. software) may be patentable in USA but not in Belarus or Europe …

68. Question 9 WHAT TO BEAR IN MIND IF YOU SIGN A CONFIDENTIALITY AGREEMENT FOR A CLIENT ?

69. “Developer may be given access to Client’s confidential information while working for Client. Developer agrees not to use or disclose such information except as directed by Client.”

70. Software or web developers who work for clients asking to sign CA  Insist on CA that is :
- reasonable in scope
- defines precisely what information you must keep confidential
- limited in time (max. 5 years)
- exceptions

71. TRADE SECRETS FOR SOFTWARE COMPANIES CONCLUSIONS

72. TS protection for Software:
TS protection for financial, commercial & (secret) technical information:
develop effective internal TS program to maintain trade secret status
TS protection for Software:
restrict access
impose obligation of confidentiality to anyone who has access

73. Certain aspects of software cannot be maintained as a trade secret
information or technology that must be disclosed to the public in order to market the product
information or technology which is part of a product sold to the public and can be reverse-engineered
mass-marketed software
where competition is so intense, that very likely to be independently developed by others within short time
if great deal of personnel movement between competitors
if customers require access to software for archive, back-up, updating, maintenance, debugging, etc.

74. Alternative or additional protection for software:
make reverse engineering difficult (compiled code)
technological protection measures
copyright protection
software patents
Be careful about signing confidentiality agreements

75. The Importance of Trade Secrets for Software Companies
Thank You!

76. Remember...
TS: No registration, but 3 requirements for legal protection
No need for absolute secrecy, but ‘reasonable measures’
Developing and maintaining TS program
< good business practice to prevent
< legal requirement to enforce TS protection

77. Remember...
TS: Only legal protection against dishonest acquisition/disclosure/use
You can sue someone who violated your TS, but that often doesn’t save the TS
Consider alternative protection

78. Remember...
The choice between TS and patent protection for an invention is irrevocable
Therefore: carefully consider all relevant advantages and disadvantages from each choice both from legal and business viewpoint

79. Remember... Patent and TS are often complementary to each other:
Patent applicants generally keep inventions secret until the patent application is published by the patent office.
A lot of valuable know-how on how to exploit a patented invention successfully is often kept as a trade secret.
Some businesses disclose their trade secret to ensure that no one else is able to patent it (defensive publication).