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Show it in a patent, or lock it in a safe?

Traditional forms of intellectual property are key to maintaining a competitive edge, but there are instances where trade secret protection may result in stronger and longer lasting protection

That’s the message from a group of panellists at Managing IP’s China International Forum in Beijing on Wednesday.

One advantage of trade secrets is that it can protect information that may not qualify as traditional forms of intellectual property. Examples of technological information that qualify as trade secrets information include formulas, procedures for maintaining a product, and quality control and tolerance data. Commercial information such as customer lists and pricing costs may also qualify for trade secret protection.

One major concern with trade secret protection is the requirement that it be kept undisclosed. A common misconception according Michael Warnecke of Perkins Coie is that the trade secret has to be completely locked down in order to qualify for protection.

“Reasonable efforts to maintain the information’s secrecy are what’s required,” explained Warnecke. “You don’t need to keep everything in a vault where only one person can see it.”

Warnecke explained that in one matter in the United States, his client’s trade secrets consisted of drawings for parts of a printing press. The defendant argued that because his client had disclosed the drawings to its outside manufacturers, the trade secret had been disclosed.

However, the court disagreed, finding that through the use of procedures that limited disclosure to only necessary individuals and non-disclosure agreements, the plaintiff had taken the reasonable efforts required to keep the information protected as a trade secret.

The challenge for rights holders then is to devise a system that ensures the secrecy of the information that is often accessed during day-to-day operations. Tools crucial to protect trade secrets include non-disclosure agreements (NDAs) for employees as well as policies controlling access, such as keeping the information in a secure place and requiring necessary individuals to check out the trade secret documents when they need access.

In addition to these specific tools Ningling Wang of Finnegan in Shanghai suggests that companies should appoint a trade secrets compliance officer who oversees and develops an management policy for the information.

For companies with many employees or trade secrets, one important responsibility for the compliance officer is to keep track of which employees or third parties have signed NDAs covering which pieces of information; Wang warns that unless good records are kept, the company may reveal trade secret information to an outside party under the incorrect assumption that a NDA is in force.

Similarly, companies that work closely with outside partners need to keep good records of the owners of which pieces of trade secret information. Wang cautions that rights holders need to be wary of co-mingling of trade secrets between companies; because employees may not be constantly thinking about whether a particular schematic belongs to the company or an outside partner, there is a risk that the company may inadvertently disclose partner A’s trade secrets to partner B under the mistaken belief that the trade secret was the company’s.

Both Wang and Warnecke say that a company culture that reminds employees of the importance of trade secret protection is paramount. Entry and exit interviews should be conducted to inform employees of their responsibilities to keep information confidential, even after the employee leaves, as well as yearly reminders of the relevant policies. Similarly, clearly defined procedures controlling access to secret information are needed and will help impress the importance of trade secrets to the company’s success.

Despite the effort it requires to protect trade secrets, Warnecke says that there are situations where it is preferable to filing for a patent. He points to Coca-Cola, Saran Wrap, and Listerine mouthwash as examples where trade secrets allowed the rights owner to protect its formula for much longer than the protection period afforded by a patent.

"If a company has mostly long term employees and access to the secrets can be controlled, I often advise it that trade secret protection may be better than filing for a patent," Warnecke explained.

Strong trade secret policies are important even for start-ups and fledging companies. Xiao Zhang of Shenzhen Cowing Venture Capital Investment, points out that trade secret issues are especially important when a fledgling company is seeking funding.

For example, if a new company seeking a new round of funding and the newly hired sales director is accused of having stolen customer contact information from a previous employer, the controversy can scare away potential investors.

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