UNIDO-WIPO National Seminar Managing IP of SMEs in the High-Technologies Park Minsk, Belarus, January 23-25, 2007

The Importance of Trade Secrets for Software Companies Lien Verbauwhede Koglin Consultant, SMEs Division World Intellectual Property Organization (WIPO)

Do-it-yourself form of IP What are trade secrets? Do-it-yourself form of IP Idea: By keeping valuable information secret, you can prevent competitors from learning about and using it and thereby enjoy a competitive advantage in the marketplace.

General principles: Information that has commercial value and that has been scrupulously kept confidential will be considered a trade secret (TS). Owner will be entitled to court relief against those who have stolen or divulged it in an illegal manner.

This Presentation 1. What information qualifies as a TS? 2. What makes something a TS? 3. When can you get court relief? 4. How are TS lost or stolen? 5. How to protect your TS? 6. May TS be sold? 7. How is TS protection enforced? 8. If you have the choice: TS or patent? 9. What to bear in mind if you sign CA?

Question 1 WHAT KIND OF INFORMATION QUALIFIES AS A TRADE SECRET ?

Provides competitive advantage Potential to make money TRADE SECRET Provides competitive advantage Potential to make money Kept confidential

TRADE SECRET Technical & scientific information Financial information Negative information Commercial information

Typical examples in the software industry Computer technology hardware + software (esp. source code) whether < patent or copyright protection algorithms, formulas, data flow charts, specific procedures that are implemented in the software or website Software design documents Technical data about product performance Software development agreements Pending patent applications

Business plans & strategies New product names Financial projections Marketing plans, unpublished promotional material Cost & pricing information Sales data Customer lists Info re: new business opportunities Personnel performance

When do you have legal protection? Question 2 WHAT MAKES SOMETHING A TRADE SECRET ? When do you have legal protection?

Three essential legal requirements: 1. The information must be secret 2. It must have commercial value because it’s secret 3. Owner must have taken reasonable steps to keep it secret

1. Secret “not generally known among or easily accessible to persons within the circles that normally deal with this kind of information” What is ‘generally known’ in the software industry? matters of common knowledge information you find at library, online database, trade journals, patent information, etc price list on website graphics & object code of software application you sell off-the-shelf

1. Secret Not required that be known only by one person e.g. based on supplier relationship, joint development agreement, due diligence investigation, etc. If you license software which has limited distribution  possible to protect object code by contractual means

2. Commercial value Must confer some economic benefit on the holder This benefit must derive specifically from the fact that it is not generally known (not just from the value of the information itself) How to demonstrate: benefits derived from use costs of developing the TS licensing offers; etc. actual or potential

3. Reasonable steps Under most TS regimes, you cannot have a TS unless you have taken reasonable precautions to keep the information confidential ‘Reasonable’  case by case reasonable security procedures Non-disclosure agreements (NDA) such that the information could be obtained by others only through improper means Importance of proper TS management program

Caution: Who owns the TS? TS (e.g. new technology or software) developed by employee … TS developed by external contractor To avoid disputes: WRITTEN AGREEMENT + ASSIGN in advance all trade secrets developed during employment or commission

Question 3 WHEN CAN YOU GET COURT RELIEF ?

COURT RELIEF if: TS + “THEFT” Courts will only grant relief if someone has improperly acquired, disclosed or used the information Only theft if wrongful !

What is typically considered wrongful? 1. Duty of trust implied or imposed by law e.g., employees, directors, lawyers 2. Confidentiality agreement or NDA e.g., employees, suppliers, consultants, financial advisors 3. Industrial espionage, theft, bribery, hacking

What is lawful?  Discovery of the secret by fair and honest means 1. Independent creation without using illegal means or violating agreements or law  patent TS protection provides no exclusivity !

What is lawful? 2. Reverse engineering Common practice among software companies: studying competitors' products to make software that can interoperate with the software being studied to make a product that will compete with it E.g. decompile object code to reveal its structure and figure out the interface specifications for interoperability purposes E.g. look at a program's input and outputs

2. Reverse engineering Solution: contractually forbid reverse engineering (in software license agreement) Technological protection measures BUT! Legality in question Inconsistent with copyright or antitrust laws?

Question 4 HOW ARE TRADE SECRETS LOST OR STOLEN ?

A Growing Problem. Why Does It Occur? Way we do business today (increased use of contractors, temporary workers, out-sourcing) Declining employee loyalty: more job changes Organized crime : discovered the money to be made in stealing high tech IP Storage facilities (DVD, external memories, keys) Expanding use of wireless technology

Examples Reverse engineering, independent discovery Improper licensing Burglaries by professional criminals targeting specific technology Network attacks (hacking) Laptop computer theft Inducing employees to reveal TS

80% of trade secret loss departing or disgruntled employees < employees, contractors, trusted insiders! departing or disgruntled employees intentional (malicious) inevitable (knowledge acquired) by ignorance

Case Coca-Cola Trade Secret Trial Prosecutors say a former Coca-Cola secretary took confidential documents from the beverage giant and samples of products that hadn't been launched with the aim of selling them to rival Pepsi Faces up to 10 years in prison if convicted of conspiracy. AP Business, January 15, 2006

Case Company accused of misappropriating TS from an inventor Inventor of new design for vacuum cleaner presented design to vacuum cleaner manufacturer. Signed NDA covering the design. Manufacturer obtained patent on the design one year after the inventor disclosed the design to them, and made estimated sale profits of $100,000,000. 2004: lawsuit settled. Company paid $30,000,000 to inventor.

Case High-Tech Company vs. Employee Technical manager (employee) of high-tech company X resigned  Went to work for another high-tech company Y Departing employee used and disclosed TS Company X filed suit against departing employee Court order: Departing employee prevented from performing work for his new employer (Y) in connection with any product that competes with X’s products.

Question 5 HOW TO PROTECT YOUR TRADE SECRETS?

1. Identify trade secrets Accurate record keeping is important.

Factors to determine if information is a TS Is it known outside the company? Is it widely known by employees and others involved within the company? Have measures been taken to guard its secrecy? What is the value of the information for your company? What is the potential value for your competitors? How much effort/money spent in developing it? How difficult would it be for others to acquire, collect of duplicate it?

2. Develop a protection policy Advantages of a written policy: Clarity (how to identify and protect) How to reveal (in-house or to outsiders) Demonstrates commitment to protection  important in litigation

Monitor compliance, prosecute violators Educate and train: Clear communication and repetition Copy of policy, intranet, periodic training & audit, etc. Make known that disclosure of a TS may result in termination and/or legal action Monitor compliance, prosecute violators

to only those persons having a 3. Restrict access to only those persons having a need to know the information  computer system should limit each employee’s access to data actually utilized or needed for a transaction

4. Mark documents Help employees recognize TS  prevents inadvertent disclosure Uniform system of marking documents paper based electronic (e.g. ‘confidential’ button on standard email screen)

5. Physically isolate and protect Separate locked depository Authorization Access control log of access: person, document reviewed biometric palm readers Surveillance of depository/company premises guards, surveillance cameras Shredding Oversight; audit trail

6. Restrict public access to facilities Log and visitor’s pass Accompany visitor Sometimes NDA/CA Visible to anyone walking through a company’s premises type of machinery, layout, physical handling of work in progress, etc Overheard conversations Documents left in plain view Unattended waste baskets

7. Maintain computer secrecy Secure online transactions, intranet, website Password; access control Mark confidential or secret (legend pop, or before and after sensitive information) Physically isolate and lock: computer tapes, discs, other storage media No external drives and USB ports Monitor remote access to servers Firewalls; anti-virus software; encryption

8. Measures for employees 1. New employees Brief on protection expectations early Obligations towards former employer! Assign all rights to inventions developed in the course of employment NDA/CA Non-compete provision Reqts Limits

2. Current employees 3. Departing employees Prevent inadvertent disclosure (ignorance) Train and educate NDA for particular task 3. Departing employees further limit access to data exit interview letter to new employer treat fairly & compensate reasonably for patent work

9. Measures for third parties Sharing for exploitation Consultants, financial advisors, computer programmers, website host, designers, subcontractors, joint ventures, etc. Confidentiality agreement, NDA Limit access on need-to-know basis

Question 6 MAY TRADE SECRETS BE SOLD OR LICENSED?

SALE LICENSE Most TS sales occur as part of the sale of the business e.g. in combination with patent license e.g. software license for highly specialized program Advantage: additional revenues Disadvantage: risk of disclosure (potential loss) In some countries, restrictions

TS Licensing Definition of the secret subject matter Permitted use what is to be kept confidential? marked as such or broad clause? Permitted use disclosure to employees, professional advisors? modification of technology? Precautions to be taken Exclusions

TS Licensing Duration of secrecy obligations Royalties Sanctions Should not be subject to alternative dispute resolution

In case of license for patent + related TS: TS Licensing Can licensee be obligated to continue paying TS royalties even if the information has entered the public domain? In case of license for patent + related TS: Can licensee be obligated to continue paying TS royalties when patent expires or is invalidated?

TS Licensing Mass-marketed software: Possible to negotiate NDA with every end-user? Software Escrow: A viable alternative to source code license?

What can you do if someone steals or improperly discloses your TS? Question 7 HOW IS TRADE SECRET PROTECTION ENFORCED? What can you do if someone steals or improperly discloses your TS?

TS protection may be based on... 1. Contract law When there is an agreement to protect the TS NDA/CA anti-reverse engineering clause Where a confidential relationship exists attorney, employee, independent contractors 2. Principle of tort / unfair competition Misappropriation by competitors who have no contractual relationship theft, espionage, subversion of employees

4. Specific trade secret laws 3. Criminal laws e.g. for an employee to steal trade secrets from a company e.g. unauthorized access to computers theft, electronic espionage, invasion of privacy, etc. circumvention of technical protection systems 4. Specific trade secret laws US: Uniform Trade Secrets Act; Economic Espionage Act

Relevant laws in Belarus Law of the Republic of Belarus on Opposition to Monopolistic Activities and Competition Development www.belgospatent.org/russian/docs/konkur.doc Civil Code, art 140 Trade Secret is information which has a value, unknown and unaccessible for third parties. Criminal Code, art 254, 255 Administrative Code, art 22.13 Art 10 of the Paris Convention

Remedies 1. Order to stop the mise 2. Monetary damages actual damages caused as a result of the misuse (lost profits) amount by which defendant unjustly benefited from the misappropriation (unjust enrichment) 3. Seizure order can be obtained in civil actions to search the defendant's premises in order to obtain the evidence to establish the theft of TS at trial 4. Precautionary impoundment of the articles that include misused TS, or the products that resulted of misusing

To establish violation, the owner must be able to show : infringement provides competitive advantage reasonable steps to maintain secret information obtained, used or disclosed in violation of the honest commercial practices (misuse)

Question 8 PROTECTING INVENTIONS: TRADE SECRETS OR PATENTS?

What is difference between TS and Patent?

Things to bear in mind 1. ANY innovative idea should be kept as a secret in the beginning to preserve option of patenting (or industrial design) at later stage

Strategic business decision INNOVATIVE IDEA Secret ! Initially Later stage Not patentable patentable patent TS Strategic business decision TS © ID TS Part of the idea

Things to bear in mind (if patentable) 2. Choice between patent or TS must be made both from legal and business perspectives (if patentable)

Patentable idea Y N N TS Y N N Def.publ N Y N Y P Y © Mark Sokoloff Public disclosure necessary? Easy to RI, independ. discover? Technology changing rapidly? Y N N TS Y N N Licensing opportunity? Revenue potential > IP costs? New area of technology? Def.publ N Y N Y P Y

Things to bear in mind 3. If you apply for a patent, only give up what is necessary The decision to apply for a patent does not necessarily require giving up all of one’s TS! However, patent application must contain : enough to enable skilled person to practice the invention the best mode known to the applicant for practicing the invention (Software P in USA: required to disclose source code?)

INNOVATIVE IDEA inventions on A, B, C TS B TS P A B C Applying for patent on C may not require giving up TS on A & B

Things to bear in mind 4. If you apply for a patent, your TS may still be protected for a while In most countries: only publication after 18m. You may withdraw application any time < publication In USA: possible to request non-publication of the patent application until the patent is issued

Things to bear in mind 5. Once patent published  TS lost in ALL COUNTRIES patent documents “easily accessible” to public if patent application published and later rejected  you lose both patent and TS rights some technology (e.g. software) may be patentable in USA but not in Belarus or Europe …

Question 9 WHAT TO BEAR IN MIND IF YOU SIGN A CONFIDENTIALITY AGREEMENT FOR A CLIENT ?

“Developer may be given access to Client’s confidential information while working for Client. Developer agrees not to use or disclose such information except as directed by Client.”

Software or web developers who work for clients asking to sign CA  Insist on CA that is : - reasonable in scope - defines precisely what information you must keep confidential - limited in time (max. 5 years) - exceptions

TRADE SECRETS FOR SOFTWARE COMPANIES CONCLUSIONS

TS protection for Software: TS protection for financial, commercial & (secret) technical information: develop effective internal TS program to maintain trade secret status TS protection for Software: restrict access impose obligation of confidentiality to anyone who has access

Certain aspects of software cannot be maintained as a trade secret information or technology that must be disclosed to the public in order to market the product information or technology which is part of a product sold to the public and can be reverse-engineered mass-marketed software where competition is so intense, that very likely to be independently developed by others within short time if great deal of personnel movement between competitors if customers require access to software for archive, back-up, updating, maintenance, debugging, etc.

Alternative or additional protection for software: make reverse engineering difficult (compiled code) technological protection measures copyright protection software patents Be careful about signing confidentiality agreements

The Importance of Trade Secrets for Software Companies Thank You! Lien.verbauwhede@wipo.int www.wipo.int/sme

Remember... TS: No registration, but 3 requirements for legal protection No need for absolute secrecy, but ‘reasonable measures’ Developing and maintaining TS program < good business practice to prevent < legal requirement to enforce TS protection

Remember... TS: Only legal protection against dishonest acquisition/disclosure/use You can sue someone who violated your TS, but that often doesn’t save the TS Consider alternative protection

Remember... The choice between TS and patent protection for an invention is irrevocable Therefore: carefully consider all relevant advantages and disadvantages from each choice both from legal and business viewpoint

Remember... Patent and TS are often complementary to each other: Patent applicants generally keep inventions secret until the patent application is published by the patent office. A lot of valuable know-how on how to exploit a patented invention successfully is often kept as a trade secret. Some businesses disclose their trade secret to ensure that no one else is able to patent it (defensive publication).