What are your greatest trade secrets threats?

For many people, the term “trade secret theft” brings images of hackers and foreign espionage agents to mind. However, a recent report published by Stout Experts and made available here highlights three less glamorous but equally important trade secrets threats in the United States (US):

1) Cases involving former employees - Increasing employee mobility due to the Great Recession has led to an increased number of these types of trade secret cases:

    “Additionally, certain types of trade secret cases appear to have increased due in part to the notable employee turnover that occurred as a result of the Great Recession. Coupled with an increasingly service-based economy, strategic recruiting by competitors, and the ease of which information can be obtained and copied in an electronic environment – many cases pertaining to the theft of trade secrets emanate from the employee workplace.” [See, “Employee Mobility” on p. 9 of the Stout Report]

2)      Cases involving consultants or contractors: 

“[A] broader trend affecting multiple industries is the continued increase in matters related to the hiring of outside consultants. These are instances wherein a consultant advises a company on a specific proprietary project, then uses the information and trade secrets garnered from that project to consult with a completely unrelated company, often a direct competitor.” [See “Use of Outside Consultants” on p. 31 of the Stout Report]

3) Cases involving franchisors and franchisees - Two possible situations may arise:

a.       The franchisee leaves the franchised system and then sets up a competitor business to the franchisor.

b.       Alternatively, the franchisor terminates the franchisee, and the franchisee steals trade secrets. According to the Stout Report:

“Likewise, trade secret litigation has also increased in certain industries such as franchisor/franchisee disputes.” [See “Conclusions” p. 48 of the Stout Report]

“Recently a number of franchisors have aggressively pursued former franchisees relative to these issues, to protect their legitimate business interests. Frequently this has occurred in instances where the franchisee has opened or is pursuing opening a competing platform.” [See, “Trends in Trade Secret Claims” p. 28 of the Stout Report]

To address these problems, the following steps are suggested:

1. Create a database/register of trade secrets. This should also include a list of people who have access to the trade secrets. Furthermore, there should be steps in the IP policy explaining the steps necessary to share trade secrets with external parties such as franchisees, contractors and consultants. Existence of the trade secret will need to be proven in case of litigation. A service such as the International Knowledge Registry (IKR) provided by the International IP Commercialization Council (IIPCC) is useful for this purpose.
2. Clearly inform employees in their employment contracts and during onboarding sessions of the importance of trade secrets and their obligations to keep trade secrets confidential. Similarly, inform them of the approval and impending enforcement of the new Section 391 of the Canada Criminal Code, or the Defend Trade Secrets Act.
3. Clearly set out the obligations of franchisees, consultants and contractors in franchising and engagement agreements. To the extent possible, identify any trade secrets which will be shared with the franchisees, contractors and consultants.

Strengthening trade secret protection in Canada: Part 3

As I explained in Part 1, IP flight risk reduction comprises three steps:

1. Instituting an “IP aware” mindset within the company via an IP policy.
2. Securing the company’s trade secret ownership.
3. Running periodic mining or discovery sessions.

I previously explained how to implement steps 1 and 2 with regard to trade secrets in Part 1 and Part 2 respectively. In this blog post I will describe how to implement step 3.

As explained previously, good identification of trade secrets results in better tracking and securing of relevant trade secrets, and results in more complete coverage. Periodic IP mining or discovery sessions should be utilized to discover and document trade secrets created within the company. As explained in Part 1, the IP policy should identify the key people to implement the processes described above. It is best to establish a cross-functional team with representation from those who can ensure that trade secret protection policies are being followed. For example, the IP policy should recommend that the following people be included in IP mining/discovery sessions:

• the technical team(s),
• the cybersecurity/security team, and
• the IP team.

There are two possible sources of undiscovered trade secrets in an organization:

1. Trade secrets which have already been implemented but have not been recognized; and
2. New inventions, as all inventions begin as trade secrets before a decision is made to either patent or retain as trade secrets.

For each discovered trade secret, questions which need to be answered include:

• What is the trade secret? As explained in Part 1, a trade secret is defined as:

"any information that (a) is not generally known in the trade or business that uses or may use that information; (b) has economic value from not being generally known; and (c) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

So, to determine what the trade secret is, the organization needs to determine which information is not generally known and has economic value from not being generally known. In the case of an invention, an invention disclosure form should be filled as well.

• Who created the trade secret?
• When was the trade secret created?
• If the trade secret is/are associated with products, then which products are the trade secret associated with?
• What is the value of the trade secret to the organization?
• Whether the trade secret should remain as a trade secret or a patent should be filed.

Once the trade secret has been identified and the value to the organization has been determined, the following questions with regards to reasonable effort to maintain secrecy can be answered:

1. What level of protection should be set for the trade secret?
2. Who should have access to the trade secret?
3. How should temporary access on an “as-needed basis” be provided internally and externally?

All of the answers to the above questions should be entered along with the above information and tracked within a trade secret database or register. The register/database should also track:

• When access was granted internally or externally,
• Why access was granted internally or externally,
• To whom was access granted,
• How it was granted, for example, was it granted:
• Under a non-disclosure agreement?
• As part of a contracting engagement agreement?
• Within the context of a joint venture?
• As part of an ongoing patent application process?
• How long will access be granted for, and

The steps outlined above and in parts 1 and 2 together provide organizations with a framework to adequately protect trade secrets given the upcoming changes in Canadian trade secret laws.

Strengthening trade secret protection in Canada: Part 2

As I explained in Part 1, IP flight risk reduction comprises three steps:

1. Instituting an “IP aware” mindset within the company via an IP policy.
2. Securing the company’s trade secret ownership.
3. Running periodic mining or discovery sessions.

In this blog post I will describe how to implement step 2.

A necessary first step to protect trade secrets is adopting non-disclosure agreements (NDAs). An NDA prohibits an external party which receives trade secrets from disclosing the trade secrets. The NDA should place the onus on the receiving external party to ensure adequate protection of the trade secrets. As explained previously, performing due diligence ahead of releasing the trade secrets to ensure that the receiving party will adequately protect the trade secrets should be standard. Also, it should be standard to indicate in the trade secrets database or registry which trade secrets have been disclosed to the receiving party, when trade secrets are disclosed.

Employment agreements should have relevant clauses to ensure that trade secrets will be adequately protected. Employment agreements should have relevant confidentiality or non-disclosure clauses as explained previously. Since all inventions begin their lives as trade secrets, employment agreements should also have clauses requiring the employee to identify inventions that the employee created in the course of his/her employment. This includes clauses requiring the employee to:

• Promptly disclose all inventions that the employee has created during the course of his or her employment; and
• Participate in IP discovery or mining sessions where the employee discloses inventions created. This could include clauses requiring the employee to fill invention disclosure forms.

The employment agreement should also include express language clauses stating that the employee assigns to the company all applicable future rights to all IP, including trade secrets, created in the course of employment.

It is likely that the company will engage with a consultant/contractor to obtain services. The consultant/contractor may need to know trade secrets to provide these services. Prior to releasing the trade secret(s) to any consultant/contractor, performing due diligence to ensure that the consultant/contractor will adequately protect the trade secret(s) should be standard. As explained previously, similar to all other IP, services or engagement agreement between the organization and a consultant/contractor should specify that:

• the company retains ownership and control of all trade secrets developed during the engagement;
• the consultant/contractor agrees to maintain the confidentiality of any trade secrets which it is given access to;
• the consultant/contractor is responsible for ensuring that each of the consultant/contractor’s employees and any sub-contractors engaged on the project agree in writing to assign all rights to any trade secrets developed in the project; and
• the consultant/contractor is responsible for ensuring that each of the consultant/contractor’s employees and any sub-contractors engaged on the project agree in writing to maintain confidentiality of any trade secrets it is given access to or which are developed in the project.

Finally, it is important to be able to prove existence and ownership of the trade secret(s) in the case of litigation. One such way is by using an external third party registry called the Intellectual Knowledge Registry (IKR), which is administered by the International IP Commercialization Council. The IKR provides incontestable proof of existence (PoE) of electronic documents using a unique digital fingerprint created as part of the IKR. The fingerprint cannot be used to regenerate the actual document, which remains in the safekeeping of the company. The fingerprint is stored in a secure digital vault. Even if the vault is hacked, hackers cannot regenerate the actual documents. Already IIPCC has partnered with WIPO GREEN to offer this service. 

Strengthening trade secret protection in Canada: Part 1

On Mar 13, 2020 Bill C-4 on CUSMA (Canada-US-Mexico trade Agreement) received Royal Assent. The Criminal Code will now include new section 391 on trade secrets:

https://www.parl.ca/legisinfo/BillDetails.aspx?Language=E&billId=10615191

Under this new section, a trade secret is defined as:

"any information that (a) is not generally known in the trade or business that uses or may use that information; (b) has economic value from not being generally known; and (c) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

Two types of offences are outlined in section 391:

“(1) Everyone commits an offence who, by deceit, falsehood or other fraudulent means, knowingly obtains a trade secret or communicates or makes available a trade secret.

…

(2) Everyone commits an offence who knowingly obtains a trade secret or communicates or makes available a trade secret knowing that it was obtained by the commission of an offence under subsection (1).”

Under the new proposed section 391. anyone who commits an offence referred to in subsection (1) or (2) above is guilty of a criminal offence punishable by jail time up to 14 years.

This new development strengthens trade secret protection in Canada. With this in mind, companies should seek to improve their processes and practices to take advantage of this strengthened protection. 

Previously, I wrote blog posts on reducing IP flight risk, and trade secrets and cybersecurity. IP flight risk reduction comprises three steps:

(1) Instituting an “IP aware” mindset within the company via an IP policy.

(2) Securing the company’s trade secret ownership.

(3) Running periodic mining or discovery sessions.

In this blog post I will describe how to implement step 1. With regard to trade secrets, a company’s IP policy should firstly prompt the employee to proactively consider whether a valuable trade secret is being created.

The policy should then explain the processes necessary to identify and secure the trade secret. Good identification results in better tracking and securing of relevant trade secrets, and results in more complete coverage. The following questions should be part of the identification process:

a.       High-level description of the trade secret?

b.       Who created the trade secret?

c.       When was the trade secret?

d.       Which products is the trade secret associated with?

e.       What is the value of the trade secret to the organization?

Once the trade secret has been identified, it should also be entered within a database or register along with the above information for tracking purposes.

After identification, the trade secret needs to be secured. Firstly, the policy must describe how to prioritize trade secrets based on the value of the trade secret to the organization. Important trade secrets will require a higher level of protection.

Part of this process includes determining the level of access to the trade secret of parties internal and external to the organization. Internal access is regulated based on the value of the trade secret. For example, only certain people should have permanent access to the trade secret. Some may be given temporary access to the trade secret as needed.

With regard to external access, the first step is to determine whether access should even be granted to the trade secret. If it is granted, the IP policy should outline how external access should be granted, and how the granting of external access should be tracked. This includes:

-   Non-disclosure agreements and clauses which must be included in engagement agreements,

-   Due diligence to ensure that the external party will adequately protect the trade secret, and

-   Ongoing reviews of processes in place for keeping the trade secret confidential.

Finally, the IP policy should identify the key people for implementation of the processes described above. It is best to establish a cross-functional team with representation from those who can ensure that trade secret protection policies are being followed.

IP strategy during COVID-19: Deferral of expenses

The ongoing COVID-19 crisis has exacted a terrible toll on the world as a whole and on Canada. Many have suffered during this time. Many have lost their loved ones. Others are fighting for their lives, or have loved ones fighting for their lives. Medical personnel and essential services workers worldwide are bravely going forward every day to help society cope with and fight this disease.

Along with the personal toll, many others have been affected financially. Across the world people have lost jobs, lost income and lost their livelihoods as a result. This has led to financial uncertainty across the planet. It may be months or years before we return to some semblance of normality.

This difficult and deeply trying environment has impacted startups and small and medium enterprises (SMEs) as well. Revenue and funding have dried up for many startups and SMEs, leading to staff layoffs. Many are struggling and trying to work out what to do in these difficult times.

With all this going on, many are asking themselves the following question: What should we do with regard to our intellectual property (IP)? In this series of posts, I’m going to detail some useful strategies for startups

As I have said previously, IP strategy is tied to corporate strategy. A first step for the C-level executives in a startup or SME is for you to figure out what your corporate strategy is. Once you have figured out your corporate strategy, you can devise an IP strategy to fit with your corporate strategy. For example, are you looking to cut costs? Are you looking to grow your business during these times?

A good second step is to prioritize your IP portfolio, that is, assign a priority to IP assets based on which ones are vital to preserving or growing your core business. This involves determining the relevance and importance of the IP asset to your core business.

Once you have completed prioritization, then you can identify the necessary actions to take with respect to the IP portfolio. You may also need to identify constraints to taking these actions.

A major constraint during these times for many startups and SMEs is cash flow. If cash flow is an issue, you may want to consider the following steps:

•         Deferring cash outflows to the future;
•          Looking for discounts or reductions in costs of protecting IP assets;
•          Selling or licensing out lower priority IP assets to improve your cash position; and
•          Abandoning IP assets to reduce cash outflows.

In this blog post, I’m going to talk about deferral. There are various ways to defer IP-based cash outflows to the future. For example, instead of filing a full patent application, you can file a US provisional patent application. The filing fees are lower, and it gives you 12 months to decide whether to go ahead with filing and incurring the costs of a full patent application. It also allows you to add more material in a low-cost manner when you decide to go ahead with the full application.

Similarly, if you are interested in filing in several countries and these countries are Patent Cooperation Treaty (PCT) signatories, then you can file a PCT application first. This can give you at least 18 months of breathing space in most jurisdictions of importance. It also enables you to add more countries before the PCT application expires if you want to.

Certain countries also allow applicants to defer examination as necessary. For example, Canada allows a patent applicant to defer examination of a filed patent application for up to 4 years from the date of filing the Canadian application. This helps push the costs of responding to the Canadian IP Office (CIPO) well into the future. Similarly, Japan, China and South Korea also allow applicants to defer examination of their filed applications.

Some countries also allow you to extend the deadline to respond to an office action, and may charge an extension fee to do so. This is advantageous if, for example, you feel that there may be a delay in receiving cash flows.

Put Yourself in Someone Else’s Shoes: Using Patents to Improve Attractiveness and Value for Acquisition

Many C-level executives in startups and small medium enterprises (SMEs) often say: "Why bother with patents? They cost so much to get and they're so expensive to enforce. I've got no hope of enforcing my portfolio if a large company with deep pockets infringe."

In business it's often a good idea to put yourself in another party's shoes, for example, your customer or supplier. So, when I hear C-level executives say the above about patents, my advice is to put themselves in another party's shoes: That of a potential acquirer.

Their objections are partially correct. Patent filings can be expensive. While there are ways to potentially reduce costs, it can be expensive to enforce patents. However, for a potential acquirer, a good patent portfolio increases their company's attractiveness and value as an acquisition target or as a partner. Also, the value of the portfolio is likely to be many multiples of the cost to obtain and manage the portfolio.

An example of this occurred in December 2019, when Adaptiv Networks acquired LiveQoS. Adaptiv Networks CEO Bernard Breton stated that:

"The expertise we are getting from the LiveQoS engineers, along with the patents and technology places us as a technological leader in the SD-WAN space with 20 relevant SD-WAN patents”

Adaptiv also stated the following in a press release:

"The addition of a highly skilled and experienced team will enable Adaptiv Networks to improve its offering, accelerate its plans to better serve its valued customers, and pursue its plans for growth. In addition, the combined patent portfolio will form one of the most comprehensive in the SD-WAN space."

Here's another example: In May 2017, Cisco acquired AI startup Mindmeld. Cisco stated that part of the reason was the MindMeld patent portfolio: 

"With ten patent assets* to its name, MindMeld brings industry-coveted AI, software and engineering talent and expertise to further the evolution of Cisco's collaboration suite."

I also suggest that C-level executives put themselves in the shoes of a potential investor. Increased attractiveness and value as an acquisition target would likely make their startup/SME more attractive to investors. Doesn't that make fundraising easier?

But what about large companies infringing? Well, what if another large company with deep pockets finds the startup/SME’s technology and patent portfolio attractive? The other large company has the resources to enforce the patent portfolio. Additionally, knowing that one large company uses the patented technology will likely increase the attractiveness and value of the portfolio to the other large company. This is especially true in a patent-litigious field such as mobile technologies. Doesn't that make the startup or SME a target for acquisition by the other large company? 

So, if you're not sure whether or not to file for patent, the best course of action may be to put yourself in another person's shoes, in particular that of an acquirer or an investor. Putting yourself in another party’s shoes is great business practice, and practicing it with regard to patents could benefit you greatly!

Intellectual property (IP) issues for hiring employees

Hiring employees is important for scaling and growth. However there are IP issues related to hiring employees. Margot Davis, Junior Partner at Innovate LLP, and I co-authored a blog post on IP issues for hiring employees. This blog post is available at:

https://innovatellp.com/2019/12/02/intellectual-property-ip-issues-for-hiring-employees/