Michael D. Moberly May 19, 2010
A company’s trade secrets and proprietary information are intangible assets because they provide both objective and subjective value. Objective value in the sense that they are directly related to the continuity of a company and subjective value in the sense that their value follows-flows from its nature.
And, when 65+% of most company’s value, sources of revenue, ‘building blocks’ for future wealth creation and sustainability lie in intangible assets, as they do today, it’s prudent for management teams and boards to have operational clarity about (a.) their decision to delare certain information assets as trade secrets, (b.) the requisites of trade secrecy, and (c.) recognize that designating a particular information asset as a trade secret is a strategic business decision, not solely a tactical legal process.
The intent of this post is not to convey trade secrecy as an extraordinarily complex, cumbersome, or burdensome process, rather, to provide management teams and boards with:
1. Relevant insights, perspectives, considerations, and equally important, options regarding decisions to declare – not declare certain information assets as a trade secret.
2. Important and necessary context for describing the (adverse) economic and competitive advantage impact to a company if a particular trade secret were lost, stolen, misappropriated, or compromised, etc.
In engagement conversations with management teams and boards about trade secrets and trade secrecy, often, the first items on my agenda are to thoroughly discuss – bring clarity to (a.) the six requisites to trade secrecy, and (b.) the absolute necessity for a company to be consistent, in their practices and procedures in meeting those requisites. In other words, describe to them what’s required operationally and procedurally, for a company (on a enterprise wide basis) to ‘keep secrets secret’!
The second items on my discussion agenda with management teams and boards about trade secrets, equally important as the first in my judgment, is the actual value of the trade secret. My rationale for assigning 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:
1. The indeterminate protection of proprietary information – trade secret assets is an increasingly challenging, but never-the-less essential undertaking for companies today.
2. 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 it have been facilitated, enabled, or fully executed by a trusted employee (insider) is on, what may experts believe to be, an irreversible rise.
3. If the holder of trade secret is unable to build a legally persuasive, objective, and replicable case for (a.) the value of a stolen/misappropriated trade secret, and (b.) the consistency in which they met/followed the requisites to trade secrecy, then the assets’ trade secrecy status, when challenged or disputed, may not be conferred by a court if there are legal actions filed and litigation.
In this regard, the following are aspects of trade secret value and valuation that management teams and boards should find relevant, prudent, and beneficial to (a.) anticipate, (b.) consider, (c.) monitor, and (d.) prepare objective responses in advance, e.g.,
1. Does the trade secret have multiple and/or separable components, i.e., it consists 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 an individual operation, business unit, technique, and/or method related to conducting-operating the business?
3. Does the existance of a trade secret add to the knowledge-competency of a single employee or particular group of employees? If so, the resulting/subsequent intellectual capital those employees create and use/apply in their work (through the use of that trade secret) should be acknowledged and valued.
4. What would happen, in an organizational criticality context, if a trade secret were to literally disappear tommorrow? Could the company continue to function profitably? If so, for how long? Or, would significant and adverse operational difficultes/impacts and economic-competitive advantage hemorrhaging commence immediately and rapidly contribute to a ‘shut-down’ of the company?
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. Respecting the reality that maintaining certain information assets in a trade secret status requires time, resources, and money, is there a specific (observable, meaurable) point when a trade secret either becomes obsolete or its value (permanently) depreciates to a level that it is no longer prudent to retain its trade secrecy status and allow it to enter the public domain.
7. Have the transactions and/or litigation by competitors or other industry sector firms in which there’s been a trade secret loss, misappropriation, and/or compromised been suffiently studied relative to identifying a basis-framework for approximating comparable trade secret value? If so, would the market for this particular information (trade secret) asset be considred active in the context of elevating validity to the value a company has assigned to one of its comparable trade secrets?
8. Does each information asset a company has declared to be a trade secret have independant 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’ for acquiring – re-acquiring a particular trade secret asset?
To be sure, the above are not intended to represent an exhustive list of issues or questions for management teams and boards about their decision to declare – not declare certain information assets as trade secrets.
Admittely, and for multiple reasons, there remain some arguable challenges when trying to objectively calculate and assign value to a trade secret. One of which is that trade secrets are sometimes used in multiple ways within the same firm, and thus may exhibit higher value in one business unit compared to another business unit.
Hopefully, a memorable ‘bottom line’ to this post about trade secrets, is that management teams and boards must be able to demonstrate the consistent use-application of the trade secret in a manner in which the company obtains either economic or competitive advantage value!
I welcome your comments and suggestions.