Trade Secret Use Increases; Stringent Protection Seen Encouraging Innovation

Trade secrets have gained the favour of a growing number of companies, according to speakers at a side event held in the margins of last week’s World Trade Organization intellectual property committee meeting. Organised by the European Union, Japan, and the United States, the side event explored the reasons why companies choose to protect their innovations through trade secrets.

The side event [pdf] took place alongside the second day of the 8-9 November WTO Council for Trade-Related Aspects on Intellectual Property Rights (TRIPS).

Douglas Lippoldt, economist and co-author of several studies produced by the Organisation for Economic Co-operation and Development (OECD), and senior trade economist, director, at HSBC, said a number of countries have increased the stringency of the protection of trade secrets.

Trade secrets are very relevant to many types of products and processes and provide a form of protection that is automatic if certain conditions are met, he said. No registration of trade secrets is necessary and they are very accessible for small and medium-sized enterprises, he added.

Article 39 of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) provides protection of trade secrets and defines them as something that is secret, has commercial value, and “has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.”

However, it is a short article and does not specify the type of systems that need to be put into place in order to provide adequate protection to trade secrets, he said.

As a result, countries have very different interpretations and approaches used to protect trade secrets, Lippoldt said.

Trade secrets are incentives to continue to innovate, he said, as they are vulnerable and are not protected against reverse engineering or learning to do the same thing by independent efforts.

“This keeps the right holders on their toes, they have an incentive to come up with the next innovation, because somebody could be at their heels, reverse engineering,” said Lippoldt.

Their duration is only valid for as long as the information is secret, which is an incentive for further innovation.

The fact that there is no need to register and the protection is available without pre- registration makes it a very widely used form of IP, he said. Although because of the very nature of trade secrets it cannot be empirically proven, there is probably more value locked up in trade secrets than other type of intellectual property, he added.

The cost of the theft of trade secrets is quite substantial and could be in the realm of hundreds of billions of US dollars, he said.

Governments recognising the importance of trade secrets have pushed legislation going beyond TRIPS, he said, citing the 2016 European Union Directive on trade secrets (Directive (EU) 2016/943 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure, and the US Defend Trade Secrets Act of 2016.

Regional trade agreements also sometimes include trade secrets articles, such as the Trans-Pacific Partnership (TPP), said Lippoldt.

Article 18.78 of the TPP chapter on intellectual property [pdf] provides for criminal procedures and penalties for certain trade secret infringements, such as the fraudulent disclosure, or alternatively the unauthorised and wilful disclosure, of a trade secret, including by means of a computer system.

According to an OECD study co-authored by Lippoldt, trade secret protection has increased both in OECD countries and non-OECD countries, but a gap remains and there are significant variations on the effectiveness of the protection.

From 1990 to 2010, according to Lippoldt and to the same study, at a high level of statistical confidence, there was a tight association between innovation inputs and protection of trade secrets. He added that one percent increase in the stringency of trade secrets is associated with about 0.5 percent increase per capita expenditure on research and development.

Increase in the stringency of trade secrets protection also positively impacts foreign direct investment, he said.

Countries around the world are agreeing on terms for dealing with trade secrets among themselves, he said, asking if it would be possible to consolidate those agreements and at the WTO to have a plurilateral agreement, which would bring those countries together and establish global norms to prevent further dispersion in the handling of trade secrets.

It would provide a better alignment, which in turn would provide better possibilities to have technology transfer by a market-driven mechanism, he said.

Trade Secrets on the Rise, Theft too, WIPO Says

Lien Verbauwhede, senior program officer, Small and Medium-sized Enterprises and Entrepreneurship Support Division at the World Intellectual Property Organization, said trade secrets are gaining more and more importance in the protection of innovation, in particular for small companies.

Many patentable innovations are not patented, she said, and even in high tech innovations only a small fraction of innovative companies use patents.

Companies are increasingly seeking alternative mechanisms such as trade secrets, said Verbauwhede, adding that different mechanisms can and are usually combined.

Trade secret theft is a growing problem, she said, and billions of US dollars are lost through that theft. This expansion of the problem is due to different factors, such as more espionage, economies using different types of employees on a short-time basis, and employees being increasingly mobile.

Trade secret protection requires active knowledge management, she said, adding that companies need to realise that despite the fact that there are no registration fees for trade secrets, they need to put measures in place to protect their trade secrets, such as internal policies with confidentiality agreements and technical protection measures. The protection of trade secrets remains uncertain and difficult, she said.

GE Agrees: High Economic Value in Trade Secrets

Thaddeus Burns, senior counsel for intellectual property at General Electrics, said GE’s patent portfolio includes some 40,000 patents and the cost of maintaining those patents is very high. However, there is probably more economic value tied to trade secrets in all companies, he said, “and for GE it is the case.”

Confidentiality agreements clarify that the invention belongs to the company, he said. Trade secrets need to be protected in a safe digital vault, which is a challenge in a digital environment, he added.

Trade secrets can be used when patent protection is not available, and they require no patent attorney, no filing, and no maintaining of the portfolio. In a fast-moving technology environment, patent pendency can be an issue, he said, which can push companies to opt for trade secrets.

Burns said GE values employee mobility as it is very important and underlined that the EU and the US legislations on trade secrets does not restrict employee mobility and there is very clear protection in both laws for whistleblowers.

During the questions and answers, an audience member asked whether WIPO should facilitate discussions on trade secrets and their protection.

Verbauwhede answered that so far WIPO member states have not been ready to engage on a discussion on a potential international instrument on trade secrets. The Small and Medium-sized Entreprises and Entrepreneurship Support Division at WIPO is currently producing a publication for SMEs that would deal with practical measures to protect trade secrets for small enterprises in developing countries, she said.

 

Image Credits: Catherine Saez