Trade secrets are intellectual property (IP) rights on confidential information which may be sold or licensed
In general, to qualify as a trade secret, the information must be commercially valuable because it is secret, be known only to a limited group of persons
Trade Secret examples
1) formulas
2) patterns
3) compilations
4) programs
5) devices
6) methods
7) techniques
8) processes
9) customer lists
10) manufacturing processes
11) for eg recipe for Coca-Cola and the formula for WD-40
Trade secret Value
The economic value of the trade secret information can be actual or potential
Trade secret Importance
Trade secret protect confidential business information that generally provides a competitive edge to its owner
A patent is a 20-year exclusive monopoly on the right to make, use and sell a qualifying invention
This legal monopoly is considered a reward for the time and effort expended in creating the invention
Trade secrets may also include items that a person or company has not chosen to patent yet, such as a new plant hybrid or mechanical invention
Famous Trade secrtes
1) the Google Search Algorithms
2) Kentucky fried chicken 3) Coca-Cola
4) Lena Blackburn’s Baseball Rubbing Mud
5) New York Times Bestseller list
6) Listerine
7) WD-40
8) Twinkies
9) Krispy Kreme Doughnuts
10) McDonald’s Big Mac special sauce
Anything that gives you an advantage against a competitor is highly valuable and worth protecting like trade secret
Legality of trade secret
The quality of confidence highlights that trade secret are a legal concept
However, so long as the owner of the trade secret can prove that reasonable efforts have been made to keep the information confidential, the information remains a trade secret and generally remains legally protected
Trade secret protection
A trade secret can be protected indefinitely as long as the secret is commercially valuable
Trade secrets value derives from the fact that it is secret
The owner take reasonable precautions to maintain its secrecy
Trade secret infringement
It is called Misappropriation
It occurs when someone improperly acquires a trade secret or improperly discloses or uses a trade secret without consent or with having reason to know that knowledge of the trade secret was acquired through a mistake or accident
Trade secret protection tips
1) identify what needs protection
2) label documents that contain protected information
3) monitor where information is stored
4) secure computers
5) maintain secrecy with outside vendors
Trade secret advantages
1) involves no registration cost
2) trade secret protection does not require disclosure or registration unlike patent which can become public information afterwards
3) trade secret protection is not limited in time like patent only lasts for twenty years
4) trade secrets have immediate effect, unlike patent which may take a few years to be granted
Trade secret disadvantages
1) not available in all countries
2) costs for registration
3) shorter protection than patents
4) not available for all kinds of inventions
5) often not an effective tool for product inventions
6) limited remedies are available
7) not easily enforceable
8) can be patented by others
Trade secret expiry
Trade secret have the possibility of continuing on indefinitely
Trade secrets may be easier to maintain and do not require renewals or licenses
Trade secret management
1) assign ownership of trade secret management process to someone senior in the organization
2) have a trade secret policy and associated procedures in place
3) utilize confidentiality agreements
4) ensure that all employees are aware of this trade secret Policy
5) determine which information type should be deemed as trade secrets within organization and the qualifying criteria
6) identify all trade secrtes
7) classify these trade secrets in terms of the nature of secret, the date created, responsible persons, trade secret value to business
8) determine administrative, technical and legal measures that are needed to properly protect each trade secret
9) ensure for for purpose access control measures are in place
10) address IP issues in interviews
11) develop contract provision and working mechanism in relationships with outside business partners
12) conduct regular trade secret audits
Trade secret audits
1) a proper trade secret audit should involve people with business, technical and legal skills and competencies, knowledge and experience, given the unique nature of trade secrtes
2) findings of these regular trade secret audits should be reported to and discussed with senior management in the organization
Trade secret essentials
1) it must be original
2) it must be commercially valuable information
3) not in the public area
4) the subject of reasonable efforts to maintain it confidential
Trade secret theft
It occurs when a person uses confidential business information without authorization
Trade secret can be protected by intellectual property or unfair competition laws
Trade secret valuation techniques
1) Income approach – it measures the value of the IP by reference to the present value of the economic benefits expected to be received over the remaining life of IP
2) Market approach – based on what other purchasers in the market have paid for assets that can be considered reasonably similar to those being valued
3) Cost approach – it measures the value of a IP based on the cost Invested in building the IP, or it’s replacement or reproduction cost
4) Discounted cost flow – DCF analyses use free cash flow projections and discounts them, using a required annual rate, to arrive at present value estimates
DCF analysis is a method of valuing a trade secret using the concept of time value of money
All future cash flows associated with the trade secret are estimated and discounted by using cost of capital to give their present values
Time Value of Money (TVM)
It is the concept that money you have now is worth more than the identical sum in the future due to its potential earning capacity
Money can earn interest
Any amount of money is worth more the sooner it is received
Earning Capacity
It means a person’s capability or power to acquire money by contributing a person’s talent, skills, training and experience
It is also called as earning power
Trade secret valuation requirements
1) management information purpose
2) strategic planning
3) value reporting
4) accounting purpose
5) liquidation purpose
6) to support a legal transaction
7) licensing
8) litigation supports
9) dispute resolution
10) taxation planning and compliance
11) fund raising purposes
Transfer prising
It is the price which is paid for goods or services transferred from one unit of an organization to its other units situated in different countries
Requirements of trade secret valuation
1) transperancy – qualification of the valuation inputs, assumptions, risks, sensitivity analysis and disclosure
2) Validity – valid inputs and assumptions as of the value date
3) Reliability – if a valuation is repeated, it should reliably give a comparable and reconciable result
4) Sufficiency – valuations should be based on sufficient data and analysis to form a reliable conclusion
5) Objectivity – the appraiser should conduct the valuation free from any forms of biased judgement
6) various financial and legal parameters – when performing a monetary IP valuation, various financial and legal parameters should be taken into account
