In the last three decades, international trade has increased by a factor of seven — but unfortunately, this advance has also ratcheted up the rate of trade secret theft, an impediment that costs corporations hundreds of billions of dollars a year.
That rate of growth has catapulted multinational commerce to such prominence that it now accounts for a third of all economic activity worldwide.
“The world is getting to be a smaller place at a remarkably fast pace,” says Joseph Ahmad, a principal in the Houston law firm Ahmad, Zavitsanos, Anaipakos, Alavi & Mensing. “When we were kids, there might have been a handful of companies that did a particular thing and probably most or all of those companies were in America.
“Nowadays, we’re seeing competition come from everywhere,” says Ahmad, who primarily represents business executives in trade secret cases and employment-related litigation. “The barriers to entry are rapidly declining, so now a lot of companies are facing competition from all over the world.”
Other factors driving the increased incidence of trade secret theft include large pockets of economic stagnation around the globe and the widespread conversion of analog business information to digital formats, which lends itself more readily to leaks and cyber attacks.
“In the last few years, there are a couple of key reasons why trade secret theft has grown,” says Pamela Passman, president and CEO of the Center for Responsible Enterprise & Trade, a nonprofit group whose mission is helping companies reduce counterfeiting, piracy and trade secret theft.
“One reason is the economic times we’re going through. People feel constrained, and they’re working under great financial pressure, so many people are cutting corners. Also, a great deal of companies’ information is becoming digitized and, therefore, more easily transferable.
“So instead of walking out of a place with stacks and stacks of papers, a person can walk out with a USB drive that has a huge amount of information on it.”
Increased cyber leaks and cyber attacks are also contributing to the problem, Passman says.
“There are some fairly aggressive third parties that have stepped up their activity in that area,” she says.
Ahmad agrees but points out that the lion’s share of trade secret misappropriation he encounters is a consequence of actions taken by a company’s employees or ex-employees.
“Of course, we do hear from time to time about individuals or organizations — especially overseas — who hack in to companies’ systems,” Ahmad says. “But, in my experience, that’s not a common occurrence. Most of the trade secret theft I see occurs via a current or former employee.”
That is why, Passman says, it’s essential to be straightforward with employees about your company’s policies regarding confidentiality, particularly as it pertains to trade secrets and other types of intellectual property.
“You have to be very clear with your own employees about your policies and about how serious you are about protecting your intellectual property,” Passman says. “Because that’s definitely where your greatest risk lies. And this is a critical issue both while those employees are at the company and after they leave the company.”
The labor market factor
Unemployment and sluggish job markets are also key factors contributing to the increased risk surrounding trade secret theft.
“Unfortunately, in this type of market, job seekers sometimes resort to extreme measures to gain the kind of edge they feel they need to get a job,” Ahmad says. “I’ve seen many new hires — whether consciously or subconsciously — come into a job with the belief that their value is increased if they can, as some of them would put it, ‘hit the ground running’ when they get on the job.
“In other words, they feel that with the help of their previous employer’s trade secret information, they can do a better job for their new employer. Sometimes this happens with the complicity of the new employer, but sometimes employees do it on their own, because they feel it makes them more marketable.”
What, then, are some practical strategies CEOs and their teams can employ to insulate their companies against the risk of having their trade secrets stolen? One of the important early steps executives can take is to enlist the help of a broad cross section of people in their organization to tackle the issue.
“First off, what I suggest is establishing a cross-group team of people to focus on protecting the company’s intellectual property,” Passman says. “This team should include somebody senior in the legal department, somebody senior in R&D, somebody from business development, somebody on the operations side, for example if they have a manufacturing division, and somebody responsible for procurement and the supply chain. It’s important to bring all these disciplines together and instruct them to establish some policies in this area, including trade secret policy.”
Another step that should be taken by companies that have significant intellectual property to protect is requiring employees to read and sign confidentiality agreements.
“The confidentiality agreement is first and foremost,” Ahmad says. “You have to make sure that every employee understands the significance of holding your company’s information confidential. All employees must be required to agree in writing they will do so.”
There are a number of items and types of information that companies can put into their employee confidentiality agreements to help protect their intellectual property.
One approach is to list or enumerate the company trade secrets and other types of information that are required to be held confidential. Another tactic is to include language stipulating that inventions and similar types of newly created information automatically become the confidential property of the employer.
“This helps the company in several ways,” Ahmad says. “First, you get to define what your trade secrets are and what information is expected to be held confidential and you get to formally notify the employee about it. This also enables you to make sure that whatever new intellectual property your employees develop will be the property of the company, and they will agree to hold that information confidential.”
Vetting third parties
Another area where companies seeking to protect their intellectual property need to be vigilant is conducting due diligence on third parties, such as suppliers and customers, as well as companies they may be seeking to acquire or merge with.
“For any key third parties that you’re going to be sharing your intellectual property with, it’s essential to conduct due diligence on them,” Passman says.
Due diligence encompasses activities such as research, interviews and online searches. A key part of the process is being alert to “red flags” — potential problem areas signaling that the third party may not be effective at helping co-protect the company’s sensitive information.
“Basically, you want to see if [the third party] has any red flags you need to be aware of,” Passman says. “For example, if they’ve been involved in different kinds of litigation, especially litigation involving intellectual property or trade secrets. And you’d want to explore and make sure you understand how they go about managing and protecting the intellectual property of the third parties that they in turn do business with as well.”
Regarding the employee confidentiality agreement, Ahmad says it’s unwise and potentially dangerous for a company to regard this process as a one-and-done deal. In other words, it’s insufficient to simply have employees read and sign the agreement and then file it away. Companies need to remind employees periodically about their confidentiality agreements and about the importance of keeping the company’s sensitive information private.
“Companies sometimes leave themselves vulnerable to trade secret theft loss if they approach these confidentiality agreements like a checklist,” Ahmad says. “By that I mean they can’t just have the employee read and sign the agreement, and then they knock it off their checklist and forget about it. The problem with doing this is you can be sure the employee will forget about it too.
“Many times, an employee will enter into a confidentiality agreement, and then they’ll work for the company for 10 or 20 years, and they’ll forget they even have the agreement. As a result, they don’t really respect the company’s trade secrets the way they should.”
Thus, it’s important to periodically remind employees about their confidentiality agreement — and even more important to underline that agreement’s significance when the person’s employment with the company ends.
“That’s probably the most critical aspect — how the matter is handled at the end of the employment relationship,” Ahmad says. “I’m often shocked at how many employees I see who have signed confidentiality agreements, and at the end of their employment, whether they resign or are terminated, they’re not even reminded that they have these agreements. Many of them don’t even know they have them.”
Business executives would be wise to take advantage of the employee exit interview because it represents their company’s last chance to underscore the imperative of keeping its trade secrets just that: secret.
“At the exit interview, employees must be required to sign and confirm that they understand their responsibilities in regard to keeping the company’s information confidential,” Ahmad says. “By doing that, you’re drilling in to the employee as they’re leaving the company — and presumably going to work for someone else, who just may be one of your competitors — that, ‘Hey, listen, this is serious. We take this matter very seriously.’”
How to reach: Ahmad, Zavitsanos, Anaipakos, Alavi & Mensing, www.azalaw.com; The Center for Responsible Enterprise & Trade, www.create.org