US$600 billion & rising: Confidential Information & Trade Secret Theft

Confidential Information Loss

It is estimated by the US IP Commission that intellectual property or intangible asset theft costs the US economy between US$225 and US$600 billion annually – with China being pointed to as the main perpetrator.

To put this into perspective, this equates to around FOUR times the value of gold is mined globally per annum (approximately 3200 tons) being stolen every year. Think about that for a moment: that is equivalent of 1,286 semi-trucks of gold being stolen every single year – do you think someone would notice? If you had that much gold – do you think you would protect it?

While the scale of intellectual property theft from the US is at the upper end of the scale, this is an issue that almost every country – and company – is grappling with as we shift increasingly to a knowledge-based economy.

A growing concern – and a criminal offense

For this reason, we are seeing more legislation enacted as Governments have recognised the impact the theft of these intangible assets pose to their respective economies.  This includes the U.S. passing The Defend Trade Secrets Act in 2016, allowing the owner of a trade secret to sue in federal court when its trade secrets have been misappropriated; the EU Directive on the Protection of Trade Secrets; the Australian Government amending its ‘foreign interference and theft of trade secrets offences’; and more recently the New Zealand Government making it a criminal offense to ‘take, obtain, or copy trade secrets with intent to obtain any pecuniary advantage or to cause loss to any other person’.

In short in jurisdictions such as the United States, Australia and New Zealand you can no go to prison for stealing valuable confidential information.

And companies are taking advantage of these legislative initiatives to protect their assets. Over the last few months alone, we have seen Huawei sue California semiconductor designer CNEX Labs Inc, with a countersuit also being filed against Huawei; a New Zealand architect accused of stealing trade secrets from his previous employer; and McAfee filing a lawsuit against three former staff members over an alleged conspiracy to steal trade secrets for the benefit of their new employer.

Interestingly, in some of these cases part of the defense has been that the defendant did not understand that what they were taking was a “trade secret”.  However, ignorance of the law is no defense so boards, management teams and employees all need to step up to understand the rules around these critical but frequently undervalued, underappreciated and poorly managed assets.

Protecting your assets

With so much at stake, it is surprising that many companies are failing to put the right systems and processes in place to protect their trade secrets and confidential information. But the good news is, it is possible to take steps to minimize the theft or leakage of these assets.

First up, companies need to identify what intangible assets they own and their value. If this is not done, then it’s unlikely you’ll understand what assets are truly critical and what are not. Once you put a price tag on something then people tend to pay far more attention to its potential theft or loss.

Once you’ve identified which assets are most important to you, you should define which assets are should be classified as trade secrets, confidential information and general data/information. At this point, you will be able to then take steps to ensure that these don’t leak outside of the company. What particular steps you take will depend upon the nature of the asset itself, but are likely to include:

  1. Instituting policies and processes to proactively protect and monitor key trade secrets, know-how and critical confidential information;

  2. Ensuring ownership of these assets is asserted and that information is only shared with stakeholders on a “need-to-know” basis; and

  3. Educating employees on the importance and value of confidential information as a strategic asset for the company.

By working through this process, companies can look to mitigate the risks around the loss of trade secrets and confidential information before it has a significant negative impact on the business. If the loss of valuable trade secrets and confidential information is not enough of a motivator directors should consider the following: directors have a fiduciary obligation to generate a return on, and manage risks to, all company assets. Failing to manage valuable trade secrets and confidential information could well give rise to liability for failing to fulfill directorial responsibilities – we predict a major rise in law suits against directors over these issues.

The key message is clear: confidential information and trade secrets are among the most valuable assets in your business. They are your “gold” and just like real, physical gold you should not leave them unprotected. Failing to identify, value protect and manage them is like leaving the door to the bank vault wide open.

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