Using Trade Secret Protection to Build Shareholder Value

Every executive has heard about trade secrets, usually through a reference to the Coca-Cola formula or the Google search algorithm. Many companies, however, fail to capture the trade secrets in their own organizations. By deliberately identifying and protecting trade secrets, companies can increase profits and shareholder value.

Understanding the Value of Trade Secrets
Trade secret laws protect information that: (1) derives independent economic value from not being generally known or readily ascertainable; and (2) is the subject of reasonable efforts to maintain secrecy. Examples include formulas, manufacturing processes and customer lists.

A 2014 study by CREATE.org and PricewaterhouseCoopers estimates losses from trade secret theft at between 1 and 3 percent of GDP.  With 2016 GDP topping $18.5 trillion, trade secret misappropriation might have cost U.S. companies over $500 billion last year. In the self-driving car dispute between Waymo and Uber, attorneys recently disclosed a damages theory valuing a single trade secret at $2.6 billion.

Aside from the inherent value of the information, some companies leverage trade secrets in their branding. For example, Kentucky Fried Chicken advertises that its Original Recipe contains a “secret blend of 11 herbs & spices.”

“To benefit from trade secret laws, companies should limit the number of employees and business partners who have access to the information, and require those that do to sign non-disclosure agreements.”

Identifying, Protecting and Enforcing Trade Secrets
To protect trade secrets, the company first must identify them. Traditional invention harvesting involves interviewing developers. This is generally done with an eye toward patent protection, but in some circumstances, trade secret protection may be better. For example, while patents generally have a 20-year term, trade secrets can theoretically last forever. Coca-Cola still benefits from trade secret protection in its formula more than 130 years after it was created. Moreover, some valuable intangible assets, like customer lists, are not patentable.

In addition to invention harvesting, executives and management teams should analyze differentiators that provide value over competitors. It could be a unique way of predicting employee performance based on particular metrics, or perhaps a manufacturing method that produces a higher quality product at a lower cost.  These differentiators might also be trade secrets.

But not all differentiators are good candidates for trade secret protection. Reverse engineering and independent development are defenses to a charge of trade secret misappropriation. If a competitor can easily reverse engineer the information, it may be better to consider patent protection. And, of course, secrecy is the hallmark of a trade secret. To benefit from trade secret laws, companies should limit the number of employees and business partners who have access to the information, and require those that do to sign non-disclosure agreements.

Once the company has identified and protected its trade secrets, it should proactively enforce them. For example, if an employee leaves to work for a competitor, monitor the competitor’s activities for any indication that the former employee wrongly disclosed a trade secret. Federal and state laws provide strong enforcement tools and remedies for misappropriation.

Intentional and strategic trade secret protection can be a valuable part of any company’s growth strategy. Not every trade secret will generate urban legends like Mrs. Fields cookies or Dr. Pepper, but all companies can build shareholder value by identifying and protecting their trade secrets.