In a knowledge-based economy, a significant portion of a company's value resides in its intellectual property ("IP") or intangible assets. While a lot of attention is given to patents and trademarks, for many technology companies, a significant portion of their intellectual property (and, therefore, their business value) resides in their trade secrets and institutional know-how. If properly understood and managed, when it comes time for a company to establish technology licensing arrangements, seek financing or position the company for sale, trade secrets can prove to be valuable IP assets.
Most Canadian technology companies do not have policies or procedures in place to manage their trade secrets. This is completely understandable given that Canada does not have any mechanisms in place, or administrative bodies, to register trade secrets. However, this lack of public infrastructure surrounding trade secrets should not be interpreted to mean that trade secrets lack commercial value. To the contrary, when a company has decided that its business strategy will include leveraging IP assets via some sort of commercial transaction (either licensing, franchising, partnering or selling their IP to an interested party), a company's trade secrets should not be left behind.
What is a trade secret? There is no statutory definition in Canada for a trade secret. However, in simple terms, courts generally view trade secrets to be any type of confidential business or technical information that provides economic value, actual or potential, as a result of it being kept confidential. If the unauthorized disclosure of such information would likely cause damage to the owner, or cause some sort of loss of competitive advantage, that information can most likely be considered a trade secret.
Examples of trade secrets include customer lists, product recipes (such as the Coca Cola recipe), manufacturing processes (such as the Cadbury secret), manufacturing specifications, market research studies, supplier lists, R&D data (including information about what didn't work during the R&D process), software algorithms, etc. For information to be considered a trade secret, there should be some sort of formal management process in place that demonstrates that steps have been taken to keep the information confidential. If a "trade secret" is readily available to everyone that visits or works at the company, it would usually be difficult to have a court agree that the information is a trade secret.
There is also some confusion regarding the relationship between patents and trade secrets. Many people consider that a new innovation should be protected either by patent or trade secret. However, in reality, a new innovation often results in one or more inventions that can be covered by patents as well as information that can form the basis for trade secrets. In other words, these two forms of intellectual property can go hand-in-hand to provide more complete legal protection and in some cases, increase the commercial value of a product or service.
As a practical example, consider a new innovation relating to a soft drink. This new soft drink is carbonated with both micro carbonation bubbles and extra-large carbonation bubbles. Together, these two different sizes of carbonation bubbles provide a pleasurable fizzy feeling in a consumer's mouth. A patent may be obtained to cover the broad concept of a carbonated beverage that includes multiple sized carbonation bubbles. However, there is other information surrounding this innovation that can form the basis for trade secrets. For example, the actual recipe for the soft drink, the types of machines that are used to carbonate the beverage, the suppliers of the machines and soft drink ingredients and the R&D trial-and-error information that led to a good balance between flavoring and carbonation could all be valuable trade secrets. In certain circumstances, even aspects of the manufacturing process could form the basis for trade secrets.
Once a company has decided (or realized) that it has valuable trade secrets and know-how, it may be prudent for the company to more actively manage those assets. The first step should be to assess and catalogue all of the trade secrets that are considered to be valuable. This may be referred to as performing a trade secret audit.
What is a trade secret audit and when should it be conducted? A trade secret audit is the process of identifying and recording any confidential information that could have technical or business value to a company. The goal of a trade secret audit is to ensure that a company's management has a clear understanding of all the intellectual property assets under their stewardship, which includes trade secrets, such that they can be effectively and proactively managed.
Managing a company's trade secrets may simply mean generating and maintaining a catalogue or inventory of a company's trade secrets for defensive reasons. Employees may inadvertently be careless with information if they are unaware of its value to the company. Once trade secrets have been identified and catalogued, there is a greater awareness of their value, and procedures can be put in place to increase the care with which the trade secrets are handled. With greater awareness and more formal procedures in place, there is a reduced risk that these valuable trade secrets will inadvertently be leaked. Conducting the trade secret audit can thus be an easy way to improve the security of a company's trade secrets.
However, in another context, managing trade secrets may mean leveraging these IP assets in a commercial transaction when the time comes. For example, when a company is in the process of establishing technology licensing arrangements with commercial partners, seeking financing or positioning the company for sale, it makes sense to have a good idea of what trade secrets belong to the company. In this context, a trade secret audit helps to provide a clear understanding of what confidential information could be valuable to a potential commercial partner.
Performing a trade secret audit can be time consuming and laborious work. It often requires the collaboration and buy-in of people in all sectors of the company, including marketing, sales and R&D. Therefore, it may not be necessary or even advisable to perform a trade secret audit until a company has decided that there is a clear business rationale for better managing its trade secrets, whether it is for defensive reasons or for reasons relating to a potential transaction. However, once there is a clear business rationale, it then makes sense to perform a trade secret audit so that these often forgotten IP assets can be effectively managed.
Trade secrets in technology licensing relationships. For many companies, establishing strategic partnerships and technology licensing arrangements with other companies (often bigger companies) is essential for the growth of their business and revenues. When these types of business arrangements are on the horizon, it is important for a company's management to have a clear understanding of all the company's IP assets, including trade secrets, as a future business partner may be willing to pay a premium for access to these trade secrets.
Referring back to the example of the innovative soft drink, let's assume that this soft drink is manufactured by a small regional manufacturer, SmallCo, which supplies the soft drink to restaurants and convenience stores in its local market. After a few years, a multi-national soft drink company, BigCo, approaches SmallCo to incorporate the innovative, multi-size carbonation technology into BigCo's entire global product line. Obviously, a technology licensing arrangement will be required.
This licensing arrangement can be structured in a variety of different ways. It will most likely include a license to any of SmallCo's patented technology that will be required for BigCo to add the multi-size carbonation technology to its product line. However, if SmallCo has a clear understanding of its trade secrets and can package these trade secrets in a way that is of value to BigCo, then the technology licensing arrangement can also include a license to these trade secrets, presumably for a premium. For example, SmallCo may include a license to its secret soft-drink recipe.
There is some chance that BigCo may not be interested in SmallCo's secret recipe. Instead, BigCo may simply wish to use the multi-size carbonation technology for its existing soft-drink flavors. In this case, SmallCo may license its know-how or trade secrets surrounding the process for manufacturing its soft drinks. This may include everything from how the manufacturing line is set up, to the timing between process steps, to the manner in which the soft drink is packaged to avoid degradation of the smaller carbonation bubbles. While this information may not be patented, it may nevertheless be extremely valuable to BigCo. Therefore, BigCo may also wish to acquire this working knowledge of how to actually implement the patented multi-size carbonation technology that it is trying to license, so as to reduce the normal hiccups that occur when incorporating a new technology into a product line.
By providing BigCo with a license not only to patented technology, but also to trade secrets, SmallCo is likely providing greater value to BigCo. This may allow SmallCo to fetch a greater amount in the licensing agreement.
Like patents, trade secrets are a form of intellectual property that can be licensed and/or sold. While trade secrets are not always at the forefront of every manager's mind, in the right context (such as a technology licensing or sale arrangement), trade secrets can be leveraged to derive greater value from a company's IP assets.
Emma Start, Montreal
The preceding is intended as a timely update on Canadian intellectual property and technology law. The content is informational only and does not constitute legal or professional advice. To obtain such advice, please communicate with our offices directly.