How To Safeguard Trade Secrets: Think ROI

By Pamela Passman

Amid intensifying competition in the global economy, companies rely more heavily than ever on the advantages of trade secrets. This critical proprietary information includes, for example, market research, product plans, unique formulas and manufacturing methods, computer code and customer data — knowledge that companies build through years of hard work, experience and investment.

Unfortunately, as trade secrets grow more valuable, they increasingly become vulnerable to theft, due to the digitization of information, increases in cyber attacks and weak rule of law in many regions. In a newly published report, we estimate that losses attributable to theft of trade secrets run between 1 and 3 percent of GDP in the United States and other advanced industrialized economies.

“Economic Impact of Trade Secret Theft: A framework for companies to safeguard trade secrets and mitigate potential threats,” by the Center for Responsible Enterprise and Trade (CREATe) and PriceWaterhouseCoopers, estimates the magnitude of the problem, analyzes the threat from a variety of perpetrators, and projects how regulation, security measures and innovation may evolve in light of the threat.

Practical Measures for Protection

For individual companies, this big-picture view is useful for thinking clearly about the problem of trade secret theft, and – importantly – what can be done about it.

And this is critical: Companies that rely on proprietary information to compete cannot afford to wait for the laws to catch up; they must invest in their own protection. The report offers enterprises a five-step framework for assessing their trade secrets and vulnerabilities and putting in place key safeguards:

• Create an inventory. With the involvement of leadership and all divisions, make a comprehensive list of proprietary information that gives the company its edge. Is it a product prototype, information on potential mergers and acquisitions, customer lists and data, a unique manufacturing process?
• Assess the threat: In the unique industry and locations where the company has operations, offices and business partners, consider what kind of trade secret would be most coveted. How and by whom have others in this market been attacked?
• Rank the value of assets and their exposure: Which trade secrets, if compromised, would have the biggest impact on the operations and performance of the business?
• Analyze the economic impact: If compromised, what would be the economic loss of the trade secret? The framework provides a way to account for direct losses of profit and market share and weigh indirect impacts, like damage to reputation or customer loyalty that could affect the long-term success of the business.
• Enhance security: What can the company do to enhance its ability to secure assets? Taking into account the insights and priorities from its evaluation, the company is in a position to make rational investments to secure its trade secrets portfolio.

Find the Vulnerabilities Before Someone Else Does

The advantage of undertaking this proactive and thorough process is that it can prevent intentional theft, draw attention to theft that may have gone unnoticed and help catch inadvertent leaks of valuable information. The effort can avert the damage and the need for a costly legal battle after the fact.

Protections for trade secrets and other intellectual property, much like quality control measures, can and should be built into already existing management systems, and shared – or contractually required – with business partners and contractors throughout the supply network.

Shifting Landscape

In different industries and geographical locations, the threat will vary, and companies need to look at how the threat aligns with their vulnerabilities.

The report explores some of the primary perpetrators of trade secret theft, and areas where they are most active. Malicious insiders, competing companies, nation states, “hacktivists” and transnational organized crime have different means and motivations for targeting company information – ranging from pure profit to military advantage or political goals.

In part, opportunities for theft are proliferating with the technology – smart phones, laptops, and tablets that employees use for work often provide inroads to company secrets.

But companies need to consider other factors, such as the increased mobility of the professional workforce. Given a growing number of people with highly sought-after technical skills who have international career options, more employees may see opportunities to profit from exposing sensitive corporate information to competitors or foreign governments.

A large portion of the trade secret theft cases handled by the US Department of Justice involve competing companies, sometimes with the support of a foreign government. The approach sometimes includes recruiting a disgruntled employee of the targeted company to steal trade secrets or sensitive corporate data. The motivator may include bribery, extortion, or the promise of a new job.

A single company insider motivated to steal trade secrets can do enormous damage, as illustrated by a case involving a senior research chemist who worked for DuPont. The US prosecuted Chinese national Hong Meng in 2010 for passing the chemical company’s proprietary research in the area of Organic Light Emitting Diodes (OLED) to Peking University. DuPont valued the loss of the trade secrets at $400 million.

Hong was sentenced to 14 months in federal prison, a stiff penalty that sent “a powerful message that theft of intellectual property is a serious offense,” according to an FBI statement on the case. But for DuPont, the damage was done. The FBI noted the “absolute need” for companies to take a proactive stance in safeguarding their intellectual assets.

“This conviction underscores the vigilance US companies must place on protecting their trade secrets,” said Richard McFeely, special agent in charge. “It is an absolute necessity in today’s times that our nations’ businesses adopt a proactive posture of maintaining active firewalls and other computer security measures, robust employee awareness briefings as to where the company is vulnerable and promptly report suspected unauthorized exfiltration of company information to the FBI.”

This threat continues to evolve, as do legal efforts to address the problem.

The United States government has been tightening laws around trade secrets. The

European Union, meanwhile, is working towards unifying trade secret laws across its 28 member nations under a recent directive, after a two-year study determined that the current patchwork of laws was undermining investment and innovation.

Asian Battleground

Last year, Taiwan revised its Trade Secrets Act to introduce criminal liability and increase civil penalties for violations. With this change, offenders face prison terms of up to 10 years for the theft and transfer of trade secrets to another country and fines of up to around US$1.7 million. In an early test of the amended law, Taiwanese prosecutors indicted the chief designer and five employees at electronics firm HTC for transferring crucial trade secrets to China and for breach of trust.

This case is just one of many cases in Asia, where intense competition is driving up the value of trade secrets and the resulting battles over them.

But even in jurisdictions that have adopted robust trade secret laws, enforcement may lag. If the penalties handed out by the courts are not serious enough to compensate for the losses caused by the crime, companies may not bother to pursue a legal remedy.

In Russia, for instance, a study showed 5% of Russian companies surveyed chose to take legal action for trade secret theft, though 90% reported that they had suffered from this crime. This outcome suggests little confidence in the legal remedy despite the country’s adoption of several laws related to trade secrets.

While it is certainly worthwhile to track the evolution of the legal landscape, particularly for companies that operate across multiple nations, the change is taking place slowly, and the outcome uncertain.

For the foreseeable future, it will be essential for companies to view trade secrets as critical assets, and invest in their protection.

As a long-term benefit, what the private sector learns through companies taking careful stock of their trade secrets and vulnerabilities can help inform lawmakers and trade negotiators working to build a global marketplace where innovation and investment are not stymied by the risk of theft.

Pamela Passman is President and CEO of the Center for Responsible Enterprise and Trade (CREATe.org), a non-profit organization working with companies to protect intellectual property and prevent corruption in global supply chains. Previously, Passman was the Corporate Vice President and Deputy General Counsel, Global Corporate and Regulatory Affairs, Microsoft Corporation. Prior to her 15 years at Microsoft, Ms. Passman practiced law with Covington & Burling in Washington, DC and Nagashima & Ohno in Tokyo, Japan.