Michael D. Moberly May 2, 2012
At a time when 65+% of most company’s value, sources of revenue, and ‘building blocks’ for growth and sustainability evolve directly from intangible assets, it’s prudent for management teams and boards should be very clear about the…
- decision process to declare particular information assets as trade secrets
- six requisites of trade secrecy that must be maintained and monitored, and
- designation of particular information assets as trade secrets, constitutes a strategic business decision, not solely a tactical legal process.
It’s important to recognize that an organization’s trade secrets and proprietary information are intangible assets, plain and simple! They provide both objective and subjective value.
- Objective value in the sense that they are directly related to the continuity of a company, i.e., how trade secrets and/or proprietary information contributes to a particular process, procedure, and/or operation, and
- Subjective value in the sense that their value follows-flows from its nature, i.e., the ability to retain the information assets in a secret and/or proprietary state.
So, my intent here is not to portray trade secrecy as being an extraordinarily complex, cumbersome, or burdensome process, rather, to provide management teams and boards with:
1. important considerations and options regarding decisions to declare or not declare particular information assets as a trade secret.
2. context regarding the adverse and often time cascading economic and competitive advantage affects if/when a company’s trade secrets or proprietary information (assets) are compromised, stolen, or misappropriated, etc.
In conversations with management teams and boards about trade secrets and trade secrecy, the first items on my agenda are to thoroughly discuss and ensure there’s clarity about the…
- six requisites to trade secrecy, and
- absolute necessity for a company to be consistent with respect to their practices and procedures in meeting those requisites, i.e., what’s required operationally and procedurally, for a company (on an enterprise wide basis) to ‘keep secrets secret’!
The second, but equally important item on my discussion agenda about trade secrecy is addressing the contributory value of a trade secret. My rationale for attaching such significance to information (trade secret) asset value-valuation is that numerous and respected studies and surveys, as well as anecdotal experiences, clearly conclude that:
- The indeterminate protection of proprietary information – trade secret assets is an increasingly challenging, but never-the-less essential undertaking for companies today.
- The probability that a company will experience a breach, theft, compromise, or misappropriation of one or more of its trade secret assets and that it will have been facilitated, enabled, or fully executed by a trusted employee (insider) is on, what many experts believe, and I agree, an irreversible upward curve.
- If the holder of trade secret is unable to build a strong and legally persuasive case when it’s challenged or disputed, regarding:a. the value of the stolen, misappropriated, or compromised trade secret (information asset)
b. the consistency in which the holder met and followed the well-established requisites of trade secrecy,
it’s probable then that the assets’ trade secrecy status may not be conferred by a court!
What follows are specific aspects of trade secret value, valuation, and trade secrecy status that management teams and boards should find relevant insofar as sustaining trade secrecy and recognizing key and inevitable questions that will be posed when/if challenged, e.g.,
1. Does the trade secret have multiple and/or separable components, i.e., does it consist of a specific formula in addition to a specific process to operationalize that formula? If so, what would the value of the trade secret be if separated on a piecemeal basis?
2. Does the trade secret deliver and/or enhance the value of an entire enterprise/company or to a specific operation, business unit, technique, and/or method related to conducting-operating the business?
3. Does the existence of a trade secret add to the knowledge-competency of a single employee or particular group of employees? If so, is the resulting-subsequent intellectual capital those employees create and presumably apply in their work acknowledged and valued?
4. What would happen, in a criticality context, if a trade secret were to literally disappear tomorrow? Could the company continue to function profitably? If so for how long? Or, would the loss be so significant and adverse in terms of economic and competitive advantage hemorrhaging that the company would have to cease operation?
5. What level of economic-competitive advantage benefit can a company objectively expect (project) from declaring a particular information asset as a trade secret? Is the value of a trade secret indeterminately sustainable, or does it fluctuate – change over time? If so, what is the range and frequency of such fluctuations?
6. Maintaining certain information assets in a trade secret status requires time and resources. But, is there a specific (observable, measurable) point when a trade secret becomes obsolete or its contributory value depreciates to a level that there is no business necessity to retain its trade secrecy status and therefore allow it to enter the public domain?
7. Have there been a sufficient number of transactions and/or litigations in the industry sector, i.e., a trade secret loss, misappropriation, and/or compromise to identify an objective and replicable framework for assessing trade secret value? If so, would the market for this particular information (trade secret) asset be considered active in the context of giving validity to the value a company has assigned to a comparable (stolen, compromised, misappropriated) trade secret?
8. Does each information asset a company has declared to be a trade secret have independent economic value that can be directly attributed to it ‘being kept secret’?
9. If a trade secret were stolen, misappropriated, or otherwise compromised, what would its ‘re-development value’ be, assuming it could be re-developed? Can the management team and board attach a price to the process necessary to re-develop a particular trade secret asset?
To be sure, the above questions and underlying issues are not intended to be exhaustive list relative to management teams, c-suites, and boards’ decision to declare – not declare certain information assets as trade secrets.
Admittedly, and for multiple reasons, there remain numerous challenges and difficulties when trying to objectively establish (calculate, assign) value to a trade secret. One of which is that trade secrets can often be used/applied in multiple ways within the same firm, and thus may exhibit higher contributory value for one business unit compared to another business unit.
Hopefully, a memorable ‘bottom line’ to this post will be that management teams, c-suites, and boards must consistently meet the six requisites to trade secrecy in order for a particular information asset to sustain its trade secrecy status!
