Trade Secret Asset Management: The Defend Trade Secrets Act of 2016

By R. Mark Halligan, Partner, FisherBroyles, LLP

Posted: 7th February 2017 08:32

With passing the Defend Trade Secrets Act 2016 (DTSA), trade secret assets are no longer step-child intellectual property rights. Trade secret assets are now on the same playing field as patents, copyrights and trademarks with the creation of a federal civil cause of action for trade secret misappropriation. In addition, powerful trade secret protection tools are now available under the DTSA including ex parte seizure provisions.
 
The passage of the DTSA is a watershed event in intellectual property law. The full Senate passed the DTSA on 11 April 2016 (87-0). Thereafter, the House of Representatives passed the DTSA on 27 April 2016 (410-2). President Obama signed the bill into law on 11 May 2016 and the DTSA applies to any misappropriation for which an act occurs on or after 11 May 2016.
 
There is no preemption. The district courts of the United States have original jurisdiction over a DTSA civil cause of action but the DTSA cause of action will co-exist with a private civil cause of action under the Uniform Trade Secrets Act (UTSA) and criminal prosecutions under the Economic Espionage Act 1996 (EEA).
 
What does this mean for trade secret owners? It means you have powerful new tools available for protecting trade secret assets if you take four critical steps required for internal trade secret asset management: identification, classification, protection and valuation.
 
The most important step is the first step—identification—and this step is often skipped. Most companies start at the protection stage without the prior identification and classification of the trade secret assets. Protection measures (without knowing what “IT” is that is being protected) are therefore doomed to fail.
 
The modern definition of a trade secret encompasses any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others. The entire spectrum of technical and non-technical information can be protected as a trade secret—even negative know-how (“what doesn’t work”) is protectable as a trade secret.
 
The most effective way to identify corporate trade secrets is to use the SUBJECT-FORMAT-PRODUCT (“SFP”) protocol. Here are examples: R&D (Subject) Formula (Format) for Coke (Product); Sales (Subject) Forecast (Format) for Lawn Furniture (Product); Engineering (Subject) Specification (Format) for Transmissions (Product).
 
The “Subject” corresponds to the department or organisation within the company that created or uses the identified trade secret. The “Format” encompasses all the types and formats that capture or relate to the identified trade secret information such as processes, formulas, and test results. There are many possible formats. A manufacturing company could easily have over 200 formats. Finally, a trade secret must relate to a “Product” including an existing product, prototype product, or failed product.
 
The key take-away from the SFP categorisation system is that each trade secret aligns with only one SFP occupying a unique three-dimensional plane. This means the trade secret owner, after removing redundant entries, will have a complete organisation of all the trade secrets in the company or other enterprise.
 
The next step is classification. A company may have thousands or even millions of trade secret assets. Therefore, trade secret assets must be classified so the most valuable trade secret assets have the most security. The existence of a trade secret asset must be validated in court. The legal determination whether an alleged information asset qualifies as a statutory trade secret requires a six-factor analysis based on the original Restatement of Torts Section 757 (1939). The Six Factors are:
 
Factor 1:The extent to which the information is known outside the company (the more extensively the information is known outside the company, the less likely that it is a protectable trade secret);
Factor 2:The extent to which the information is known by employees and others involved inside the company (the greater the number of employees who know the information, the less likely it is a protectable trade secret);
Factor 3:The extent of measures taken by the company to guard the secrecy of the information (the greater the security measures, the more likely that it is a protectable trade secret);
Factor 4:The value of the information to the company and competitors (the greater the value of the information to the company and its competitors, the more likely that it is a protectable trade secret);
Factor 5:The amount of time, effort and money expended by the company in developing the information (the more time, effort and money expended in developing the information, the more likely that it is a protectable trade secret);
Factor 6:The ease or difficulty with which the information could be properly acquired or duplicated by others (the easier it is to duplicate the information, the less likely that it is a protectable trade secret).
 
Applying the six-factor test, internal trade secret assets can be ranked and scored. The highest-ranking information assets (like the Coca Cola formula) can now be matched with the highest security measures and information assets—at the other end of the spectrum — that receive a low score can be relegated to a lower level of security or be de-classified as a non-trade secret asset.
 
The third step is the protection of trade secret assets. Information assets identified (SFP) and classified (using the 6-Factor test) can now be properly protected. This means that highly-ranked trade secret assets will no longer be under-secured and low-ranking trade secret assets will not be over-secured. In most companies, this will translate into substantial cost savings because trade secret assets and security measures will now be properly aligned. There will be clear cost savings and a return on investment because strong trade secret assets will not be under-secured and weak trade secret assets will no longer be over-secured.
 
The fourth step is valuation of the trade secret asset. Once the first three steps have been completed, the valuation of trade secret assets will open new markets and trade secret assets will be treated just like physical assets including insurance, collateral, licensing and the sale of trade secret assets.
 
The enactment of the Defend Trade Secrets Act of 2016 opens a whole new vista in intellectual property law. The DTSA will provide trade secret owners with first-class protection for trade secret assets. However, there is no government registration system for trade secret assets unlike patents, copyrights and trademarks. Therefore, the trade secret owner must build an internal trade secret asset management system, with the policies and procedures for the identification, classification, protection and valuation of trade secret assets.
 
R. Mark Halligan is recognised as a one of the leading lawyers in trade secrets litigation in the United States by Legal 500 and he is recognised by Chambers USA: America’s Leading Lawyers for Business for his exceptional standing in intellectual property law. He is a partner at FisherBroyles LLP, and is an accomplished trial lawyer who focuses his practice on intellectual property litigation and complex commercial litigation, including antitrust and licensing issues.
 
Mr. Halligan has successfully represented both individuals and corporations as plaintiffs and defendants in federal and state courts throughout the United States. In recent years, Mr. Halligan has been at the forefront of international developments in intellectual property law and he is a recognised thought leader in the ever-growing area of trade secrets law having spoken worldwide to numerous organisations and corporations on the topic – most recently Practicing Law Institute (PLI), the Intellectual Property Law Association of Chicago (IPLAC); the 26th Annual Trade Secrets Seminar at the John Marshall Law School; the American Intellectual Property Law Association (AIPLA) 2015 Trade Secret Summit; the American Bar Association (ABA) Section of Litigation, 60th Annual Conference on Developments in Trade Secrets Law; the Symposium on Trade Secret Protection, United States Patent and Trademark Office—Global Intellectual Property Academy (GIPA) and several state bar associations. He has also written extensively on trade secrets law. Managing Intellectual Property has recognised Mr. Halligan as an “IP Star.”
 
Mr. Halligan has taught Advanced Trade Secrets Law at John Marshall Law School for 21 years. Mr. Halligan was a key resource for the Defend Trade Secrets Act of 1996 being the first to advocate a federal civil cause of action (without preemption) with ex parte seizure provisions in 2008. See R. Mark Halligan, Protection of U.S. Trade Secret Assets: Critical Amendments to the Economic Espionage Act 0f 1996, 7 J. Marshall Rev. Intell. Prop. L. 656 (2008).
 
Mr. Halligan is also the lead author of the Defend Trade Secrets Act of 2016 Handbook published by Wolters Kluwer in September 2016 ISBN 978-1-4548-8350-0.

Mr. Halligan can be contacted on +(312) 607-0102 or by email at rmark.halligan@fisherbroyles.com

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