Why Manufacturers Must Learn How to Keep Secrets

Trade secrets are essential to a company’s market differentiation and competitive advantage. And a company can’t survive if it doesn’t maintain tight controls on these secrets.

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Shawn FoxShawn Fox

If your head of research and development tells you he’s leaving to work for your top competitor, it’s a disappointment. But if he takes blueprints for your soon-to-be-released next-generation bulldozer engine with him, it’s a catastrophe.

Though this scenario may seem far-fetched, the number of legal cases dealing with the theft of trade secrets is growing in the United States. In 2017, the number of trade secrets cases increased by 30 percent, according to IP litigation research company Lex Machina.

It’s no secret that trade secrets are a critical component of manufacturers’ operations. They include everything from an OEM’s research and development processes to an equipment manufacturer’s proprietary technology to an electronics manufacturer’s supplier relationships. Keeping these pieces of valuable proprietary information within company walls is crucial to protecting a competitive advantage.

The reality of today is that this essential data and information in manufacturing operations is at risk. In addition to the risk of employees and officers misappropriating trade secrets, manufacturers face risks from outside the company:

  • Vendors/Suppliers/Customers/Competitors: If a manufacturer doesn’t strictly control access to all areas of its IT systems, vendors may be able to access important information such as designs or customer lists. Then, the manufacturer is at the mercy of the vendor’s internal controls and cybersecurity protocols.
  • Cybercriminals: Cyber intrusions are a growing risk in today’s business environment. Hackers can capitalize on any vulnerability in a manufacturer’s IT system to steal and profit from company secrets.

Any successful manufacturing operation will have information that would be valuable to competitors and/or criminals. Given these threats, manufacturers must prioritize the protection of their trade secrets. And while well-written non-disclosure agreements are useful, they usually aren’t enough.

Clearly Define Trade Secrets

Unlike officially registered pieces of intellectual property (e.g., those protected by patents, copyrights, or trademarks), trade secrets can apply to a wide array of activities, such as manufacturing processes, as well as tangible items like technology. During litigation, a manufacturer must be able to prove that it identifies its trade secrets. So, manufacturers should work with legal counsel to scrutinize their operations and clearly define the items that fall under the trade secrets umbrella.

There are some obvious trade secrets like blueprints for a new product, a chemical formula, or software developed in-house. However, processes such as testing procedures can also be characterized as trade secrets. Further, manufacturers can consider “negative information,” or information related to products or formulas the company has scrapped, to be trade secrets.

Additionally, a company may not think information like customer databases or lists would provide terribly valuable competitive insight. However, a manufacturer has likely spent years segmenting and fine-tuning those lists. This unique knowledge that is built into the customer list can make it a trade secret.

Secure the Premises

While few conduct daily operations in anticipation of a lawsuit, it helps to be proactive when it comes to protecting intellectual property. During litigation, a company must be able to prove that it has taken steps to protect its secrets. Information that a company makes publicly available—intentionally or unintentionally—can never be considered a trade secret. So, manufacturers should improve IT security and take reasonable measures to identify and protect their trade secrets, as well as the rest of their valuable data and information.

Unfortunately, manufacturers are ripe targets for cybercriminals today. Manufacturers have historically not been subject to the rigorous security regulations that apply to industries like finance and health care. As a result, many manufacturers deprioritize IT security. As hackers deploy techniques such as ransomware and electronic payment fraud to make quick money, they are targeting the most vulnerable companies. Often, that means manufacturers.

A manufacturer must prioritize data security through employee training, security patches, improved remote access controls and more. Additionally, it’s recommended that companies engage a cybersecurity expert to conduct regular vulnerability scanning and penetration testing to stay in front of emerging threats.

Build a Strong Team

If a trade secrets dispute leads to litigation, manufacturers will need to quantify the financial impact of the misappropriation. Assessing and determining financial damages from stolen trade secrets can be complex and there are many ways to measure these damages. So, it’s important to partner with a damages expert who has manufacturing industry expertise, as well as experience testifying in state and federal court, to conduct a damages analysis.

The damages analyses will focus on the manufacturer’s actual loss damages and profits (making the plaintiff whole) and unjust enrichment (measuring the defendant’s financial profits, gains, and benefits).

A manufacturer must also work closely during litigation with legal counsel and, in the event of a data breach, forensic security personnel. With a robust team in place, a manufacturer will be well-equipped to contest misappropriation of trade secrets and receive appropriate financial compensation for lost profits.

Know How to Keep Secrets

Trade secrets are essential to a company’s market differentiation and competitive advantage. And a company can’t survive if it doesn’t maintain tight controls on these secrets. Manufacturing leaders must, therefore, work to understand what secrets they have and proactively protect them—while being prepared to act quickly through litigation to combat theft. This assertive approach to protecting intellectual property and proprietary information is key to maintaining competitiveness in today’s evolving manufacturing industry.

Shawn Fox, CPA, ABV, CFA, ASA, is a national managing director of professional services firm Sikich’s forensic and valuation services practice.

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