THE MAGAZINE

License to Steal

By Megan Gates

As thefts continue to occur, businesses are developing a new understanding of just how important trade secrets are to their brand and future success as a business in the era of globalization.

Shifting Focus

When most people think of a trade secret, they think of the secret sauce, or the special recipe that gives Coca-Cola its distinctive flavor. But a trade secret can be much more than that one special ingredient. According to the U.S. Economic Espionage Act (EEA), trade secrets are information that the owner has taken “reasonable measures” to keep secret and that “derives independent economic value, actual or potential, from not being generally known.”

For businesses, trade secrets can be specialized software, strategic data that they’ve collected, or analytics that businesses use to extract meaning and value out of strategic data, Martinez says. “In the business realm…your secret sauce really is your business processes, your practices,” he explains.

In the digital age, trade secret theft has become easier, and businesses are more vulnerable as trade secrets are stored on networks that can be breached. “You’re seeing more and more businesses dependent on computer systems, more and more business being done in computer systems, and more and more risks occurring because of accessibility,” Martinez explains.

This problem has grown as American companies send trade secrets offshore to their manufacturing plants overseas. Because of this, “your valuable trade secrets are sort of exposed to the potential risk of being compromised by a security breach,” Martinez says.

A recent report by CREATe.org cites International Trade Commission (ITC) estimates that the misappropriation of trade secrets in China costs the U.S. economy $1.1 billion in 2009. That amount is expected to have grown since then.

Previously, in the business world there was a lack of understanding of what trade secrets are and just how valuable they are to a business, says R. Mark Halligan, a partner at Nixon Peabody and a trial lawyer focused on intellectual property litigation. Over the past 25 years, companies have excelled at creating accounting systems for their tangible assets. However, Halligan says that the market value of S&P 500 companies has “deviated greatly” from their book value. This indicates that the physical and financial assets reflected on the company’s balance sheet are less than 20 percent of the true value of the company, leaving intangible assets unmeasured.

“We have absolutely no accounting system for intangible assets,” explains Halligan. “We have an accounting system for physical assets and every company can tell you every table they bought, every chair they bought, every pencil they bought, but they can’t tell you or provide any valuation on their intangible assets—when that’s 80 percent of the company.”

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