How to protect your trade secret

From the secret ingredient in your kitchen’s star product to a unique processing system developed through intensive research – keeping schtum is key to preventing rival businesses profiting from your hard work.

But the rise of the digital age has created plenty of extra challenges when it comes to protecting your business’s competitive advantage.

For example, Colonel Sanders’ original handwritten blend of herbs and spices is physically kept in a safe in Kentucky and manufactured in two halves to avoid divulging the recipe –  and it is rumoured that when KFC updates its security systems, the recipe is temporarily moved to a secure location in an armoured car.

Overkill? Perhaps not. For any size of business, the loss of trade secrets can cause serious financial and reputational damage to a company, explains Kevin O’Brien, intellectual property expert at Baker McKenzie LLP.

“It can be devastating,” he said, “not only because the information is stolen, which is bad enough, but because of the negative publicity. For public companies, it can have reporting consequences. It can have third-party liability exposures.”

Here’s how you can keep your business’s top secrets, just that:

  • Identify whether it’s a secret or a patent

What constitutes a trade secret? “You register a trademark, a patent or a copyright, and the same is not true with a trade secret,” said David Shluger, senior multiline underwriter with Zurich North America.

“Its very nature is that it’s secret, so if you registered it, that would eliminate that inherent protection. So the real protection for a trade secret is the fact that it’s secret, and risk management really does come down to how well you can protect it.”

Mr Shluger said executives should identify how well the information is known outside of the business, how many employees know the information, what steps are being taken to safeguard it, and whether it has commercial value.

  • Look inwards

When identifying risks, don’t assume the information is most valuable to outsiders. Kevin O’Brien said that 80% of trade secret thefts involve present or former employees, vendors or customers.

For example, Coca-Cola’s recipe is kept a trade secret rather than patented, which would have led to the disclosure of the ingredients. In 2006, an employee and two accomplices stole the recipe and attempted to sell it to Pepsi, who blew the whistle.

Where possible, limit the amount of employees who have access to all components of the information.

  • Cyber risks

The likelihood is that your trade secret is stored on a computer. In today’s world, that makes it vulnerable to cyber attacks. Methods such as encryption, multi-layered password protection and even storing the data on an external hard drive protected with physical security can all help to prevent hackers accessing the information remotely.

  • Know the law

English law is flexible around the protection of trade secrets. They are not classed as property, and there is no criminal sanction against disclosure or use, although when trade secrets have been improperly acquired, disclosed or used, the case may be treated as part of the law of equity.

English courts are able to penalise the deliberate theft or use of a trade secret, provided the claimant can demonstrate the information’s secrecy and value.

June 2016 saw the introduction of the EU Trade Secrets Directive, which aims to stop the unlawful use of misappropriated trade secrets, remove goods manufactured using stolen secrets from the market, and provide compensation for damages.

EU countries must bring the Directive into force by 9th June 2018, although Brexit makes it unclear whether the UK will follow suit.

Whatever you design, manufacture or provide, protect your confidential information with good cyber security practices and back up your actions with cyber liability insurance from the Chartered brokers at Hine Insurance.

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