Valuation of Trade Secrets

7 minute read
20 September 2017

In a series of articles devoted to trade secrets, Gowling WLG professionals share their knowledge to help you understand and manage trade secrets to use them as tools for competitiveness. This is the third of four articles that will make up the preamble for our upcoming conference on October 24.

We hope to enlighten you on:

  • Items that may be subject to protection under trade secret law;
  • The benefits that trade secrets bring compared to other forms of intellectual property; and
  • The long-term competitive advantage that the protection of trade secrets can provide.

Since we described trade secrets in the previous article, distinguishing them from patents and copyrights, we will now focus on the value that they can represent for your company. In order to consider their impact, we will look at two examples from the news before dealing with the valuation of trade secrets.

Trade secrets in the news

1. Telesocial Inc. v. Orange SA

This is a case that is still before the San Francisco courts in the United States. The public documents relating to this case report that Telesocial Inc., a young start-up company in California, developed an application in 2012 that would let users place and receive phone calls through certain social networks. These documents also reveal that Orange SA, a large French telecommunication company, was in talks with Telesocial to buy the technology and deploy it on some social networks. Talks stopped in summer 2012 when Telesocial raised the price too high for Orange.

Telesocial alleges that Orange accessed the software interface after the breakdown of the negotiations on several occasions between August and September 2012. In November 2012, Orange launched its own application allowing users of certain social networks to communicate via a social network interface. Telesocial claims that Orange stole its trade secrets in order to launch its own application. The trial currently under way is expected to determine whether Orange stole trade secrets from Telesocial and, if so, what compensation would be applicable.

Telesocial estimates that it sustained US $60 million in damages. It is interesting to note that Telesocial's estimate is actually lower than the €850,000 (approximately US $1 million) that previous documents suggest Orange was offering. This suggests that perhaps the start-up company wanted to go to trial.

2. Uber v. Waymo

Again, this is an American case from San Francisco. It should be noted that Waymo is a division within the Google company that focuses on the development of a self-driving car. The documents filed in the court record tell us that Anthony Levandowski was an engineer working for Google in the design and production of autonomous cars. He resigned in January 2016 before forming a start-up "Otto" for the autonomous truck market. Otto was subsequently acquired by Uber for approximately US $680 million.

In the public documents, Google says it discovered in fall 2016 that Levandowski had downloaded about 14,000 confidential documents before leaving Google. According to Google, these documents contained technical details of its laser technology that enables vehicles to detect and avoid obstacles.

Waymo, alleging that Uber stole its trade secrets, launched legal proceedings against Uber. Uber defended itself by claiming that although Levandowski had indeed stolen Waymo's trade secrets, Uber did not use them or benefit from the theft. Uber claims that all the necessary steps were taken at the time of the acquisition of Otto so that any trade secrets from Google were not divulged to Uber. Less progress has been made in this case than the first, but it is a safe bet that large sums of money will be incurred by the parties.

Much remains to be done in each of these cases, and it will be interesting to follow their evolution. No doubt both will serve as future case studies from which we will learn about maximizing the value of trade secrets, minimizing the associated risks and better anticipating the consequences of a disclosure or theft of trade secrets. In light of these examples, one can recognize the importance of protecting trade secrets.

Valuation of trade secrets

The direct and indirect cost implications of unintentional disclosures and theft of trade secrets remain difficult to quantify. Each case is unique and the consequences vary according to several criteria, especially the sector of activity relating to the trade secrets in question. However, from a qualitative point of view, the following potential impacts should be recognized:

  • The negative impact on your company's reputation;
  • The loss of time due to disruptions caused by the disclosure of the trade secret;
  • The direct or indirect loss of customers as a result of the theft of a trade secret;
  • The reactive cost associated with implementing regulatory actions within your company; and
  • The cost of proceedings and litigation.

The economic consequences can be so disastrous that some companies go bankrupt, especially start-ups and small- to medium-sized businesses. The value of your trade secrets should not be overlooked. A study by the US firm Baker McKenzie was published in 2017 titled "The Board Ultimatum: Protect and Preserve, The Rising importance of Safeguarding Trade Secrets". This book highlights the fact that theft of trade secrets is becoming more common. Indeed, 20% of the 404 companies surveyed by Baker McKenzie claimed that they had already been victims of trade secret theft. The sectors most affected seem to be healthcare (33%), followed by production industries (18%) and information and communication technologies (17%).

Research published in 2014 by PwC and the Center for Responsible Enterprise and Trade (US) estimated the value of stolen trade secrets in the United States at between 1% and 3% of gross domestic product, or $200 to $550 billion a year.

Of course, these examples focus on the negative consequences of involuntary disclosure or theft. You will no doubt realize that there is also an obvious competitive advantage to your company's exclusive use of your trade secrets. In this regard, ensuring the perpetuity of your company's trade secrets through adequate protective measures remains essential.

Protection of trade secrets

Measures to protect trade secrets must be implemented in a conscious and proactive manner. In the best cases, any sensitive information at a company is treated as a trade secret until proven otherwise. Of course, it is possible to add specific protective measures when the value of the secret has been confirmed. This systematic approach will ultimately prevent the loss of trade secrets through negligence or inadvertence.

It is vital to understand that the protection of trade secrets takes place long before disputes arise. It is therefore appropriate to identify potential perpetrators of theft or involuntary disclosure in order to establish preventive means. Sources of risk include:

  • Current and former employees (as in the Waymo and Uber cases);
  • Suppliers, consultants and third parties that do business with your company (such as the Telesocial v. Orange case);
  • Computer piracy; and
  • Cyber​espionage or cybercrime funded by states or interest groups.

In our next article, we will tackle the strategic aspects of protecting trade secrets and discuss steps that can be taken to protect trade secrets beyond a simple confidentiality agreement.

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