[The talk around big corporate law firms is that M&A activity has been buoyant in 2013 with large deal values in the pipeline. Intellectual property (IP) firms also report increases in IP filings, another barometer of economic activity and positive sentiment.]
This is the first in a series of regular observations on the state of IP within businesses in M&A transactions, which is also the subject of increasing interest. This note deals with the most nebulous of them all - trade secrets.
Trade secrets are those little nuggets of confidential information contained within a business that give it a competitive edge over competitors. They could be contained in customer lists, technical processes, price lists & tender prices, unpublished trade marks, computer software, business connections or knowhow.
Very rarely are these little nuggets documented or recorded as “trade secrets” yet undoubtedly they are valuable and sometimes even critical to business success. They form part of the goodwill of the business or intellectual property, if you like. But businesses tend to find them difficult to describe, retain, record and value.
There is evidence that their omnipresence is being recognised. The ex-national rugby coach once spoke, amusingly, of the “intellectual property” in his scrum unwittingly referring to their superior techniques or trade secrets. The Coca-Cola Company’s and Kentucky Fried Chicken’s secret recipes elevate trade secrets to a means of marketing the business and creating allure. Yet seldom are they, trade secrets, treated with anything more than disdain by most businesses.
It’s a shame really because trade secrets can be more valuable to a business than patents, for example. They have the ability to protect a business indefinitely, whereas patents expire. For some businesses, like those who rely on superior business methods or develop computer software where patent protection cannot, as a general rule, be sought, the little trade secret can be one of the few ways in which market share can be protected. And there is no cost to registering a trade secret which increases their attractiveness to SMEs.
Moreover, legal due diligences critically analyse trade secret protection which may have a direct impact on purchase price.
Managing trade secrets are not without their challenges though. For example, unlike registered patents, copyright, designs and trade marks, in the absence of strong contractual protection on employees and former employees, businesses frequently need to rely on an amoebic claim based unlawful competition to enforce them, the outcome of which can be difficult to predict or risk disclosure of the trade secret to do so.
We also live in an age where social media and collaboration have a profound effect on business and employees have more information about the business (and others) than in any other era. Protecting, documenting and valuing trade secrets is therefore much trickier than ever before but arguably so is their importance and strategic use. Engaging with experts has become necessary to properly protect and understand these little nuggets, Kentucky Fried or, as you like.