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Jennifer Brant: Protecting Trade Secrets to Stimulate Knowledge Flows

As part of a debugging project, an employee of an Indian company, Geometric Ltd., was given access to software source code owned by SolidWorks, a U.S.-based client of the firm.

 

After leaving Geometric, the employee was caught trying to sell the software code to SolidWorks’ competitors. Because Indian law does not recognize the misappropriation of trade secrets, it was not possible to sue the individual. Since the source code belonged to SolidWorks — not Geometric — he technically had not stolen from his employer.

A rare case of getting away with trade secret theft? Hardly. While researching a recent paper published by the International Chamber of Commerce, “Trade Secrets: Tools for Innovation and Collaboration,” Sebastian Lohse and I encountered myriad, colorful stories of trade secret theft such as the above example from the Center for Responsible Enterprise and Trade (CREATe). In many cases, there was simply no way for the affected firm to take legal action against the misappropriator, due to inadequate legal protections where the theft took place.

Today, R&D and production networks are globally dispersed, and information is stored digitally, creating multiple vulnerabilities. Physical security measures, at a firm’s headquarters or elsewhere, are no longer adequate to protect confidential business information. Better laws are needed to protect a firm’s know-how and other confidential information, globally.

Innovative companies are increasingly vulnerable to theft of their confidential information.  Against this background, recent efforts by some governments to crack down on trade secret theft are critically important.

Yet protection for know-how has lagged behind that provided to patentable subject matter, even though tacit knowledge has been estimated to represent as much as 70 percent of the value of intellectual assets of a firm. And once a trade secret has been disclosed, its value is virtually destroyed, despite the many years of trial and error it took to develop.

Like patents, trade secrets provide important incentives for innovation and investments in risky R&D ventures. Both tools facilitate sharing of technology and know-how by providing additional security for the owner should a competitor misappropriate proprietary knowledge. In practice, trade secrets effectively complement the patent system. Trade secrets are used to protect tacit knowledge required for the implementation of a patented invention, and technology transfer frequently involves licensing of both patents and trade secrets.

Trade secrets may be an especially attractive tool for innovative small and medium-size enterprises (SMEs) since, unlike patents, they require no registration — and thus no government fees or other formalities in most jurisdictions. While the optimal strategy would be to combine patents and trade secret protection, smaller firms tend to have limited expertise with formal intellectual property rights, which can be complex and costly.

Trade secret laws facilitate the diffusion of valuable knowledge that would otherwise remain secret. Without appropriate safeguards, once knowledge is exchanged between parties, there are few disincentives against using that knowledge for commercial benefit.  At the same time, external cooperation — called “open innovation” — is an increasingly important feature of firms’ innovation strategies, enabling them to accelerate technology development by combining expertise and resources. Without protection for their ideas, business partners may withhold information because they fear creating a new competitor.

By providing additional security, trade secret protection makes it less risky to share knowledge with partners, minimizing incentives for hoarding. Deficient trade secret protection, in contrast, makes it more likely that firms will closely guard their know-how and over-invest in securing confidentiality and secrecy. This wastes resources and generates missed opportunities for individual firms, as well as for the broader economy.

At the global level, our research revealed the negative impact that inadequate and fragmented trade secret protection can have on cross-border R&D, investments and collaborative work. Collaboration and geographically distributed R&D — both of which are central to firms’ innovation strategies today — provide crucial channels for global knowledge and technology flows, as well as opportunities for new actors to participate in global innovation networks. When innovative firms do not feel secure sharing their know-how with potential partners abroad due to inadequate trade secret protection, opportunities are lost for sharing. They miss the opportunity to upgrade the knowledge base of both partners, their respective economies and workforces — and to expand the technological frontier itself.

The fragmentation and inadequacy of trade secret protection frameworks creates major challenges for industry, given the globalized nature of doing business and the prevalence of open innovation today. First and foremost, firms must take steps to safeguard their trade secrets. In addition, convergence of trade secret legislation across jurisdictions could provide legal certainty to innovators, enhancing knowledge flows and cross-border R&D investments. Policy makers in the United States and European Union have recently taken important steps to improve the protection of trade secrets, and action will be needed in other countries, as well.

In our paper, we recommend specific actions at the national as well as international level to improve the protection of business confidential information, especially for small and medium-size firms, including:

  • Enact modern trade secret laws domestically;
  • Address trade secrets systematically in trade agreements, as part of efforts to harmonize protections across jurisdictions; and
  • Institute outreach and training programs to support SMEs in using trade secrets as part of their intellectual asset management strategies.

With the right protection for trade secrets, innovative businesses can provide considerable stimulus for innovation, growth and job creation.

Jennifer Brant is the Director of Innovation Insights, a cross-sectoral industry initiative that promotes enabling policies for technology diffusion.

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