Oops! I forgot to protect my Trade Secrets…
Trade secrets are the often overlooked “fourth” category of intellectual property asset even though the digital economy is driven by trade secrets, more so than any other type of IP. What I mean by “overlooked” is both that their value is not recognized or realized the way it should be, and that they are not protected the way they should be. It is quite shocking when you realize this fact; but I have some thoughts about why this is the case and explore those in a moment.
US companies are making a noticeable shift away from patents in favor of trade secrets for several reasons, the most significant of which are a) the USPTO has made it harder to get patent protection, especially in the areas of software code and business processes, and b) there is now finally robust federal protection around the protection of trade secrets with the passing of the Defend Trade Secrets Act in 2016. Yet most organizations, even public companies that have to disclose their financials, do not capture and track the value of their trade secrets. Though you may find a generic category of Intangible Assets or Goodwill on the balance sheet, these are not nearly detailed enough to become meaningful in an enterprise risk management program. Which means that companies are failing at the first two steps of the risk management process; identification and quantification.
Without those steps as the foundation, you cannot effectively move to the next steps which are about prevention/mitigation and risk transfer. This is not to suggest that companies do nothing to prevent access to their “crown jewels”, because of course the assets that are easily recognized as such will have a lot of attention paid to their secrecy and protection. But in many cases, it is a scattershot approach.
So…why do companies spend millions of dollars and dedicate teams of people to protecting and insuring their tangible assets, when in today’s economy they may be worth a fraction of the value of their trade secrets? Some observations:
Trade secrets are not protected by the official receipt of a certificate or tangible piece of paper granting such protection; and there is no “application” process that results in either acceptance or rejection as validation;
Trade secrets typically are home-grown – except for those acquired through acquisition or merger – and the value increases incrementally over a period of time, years in some cases, allowing for that value to sneak up on you if a formal process is not in place to identify and value those assets. And until recently the value of those assets has seemed very subjective and therefore difficult to support.
Multiple individuals or divisions within a company may have knowledge about the status, location, value, stage of development, and protection of these assets, making that information harder to capture. The knowledge about and responsibility for protection of trade secrets often lies with multiple people such as legal, IT, engineering, operations, and risk management.
Many in the corporate leadership ranks are unaware that you can even put a defensible (backed by accounting standards and validated in court proceedings) value on trade secret assets in the absence of an M&A transaction.
The insurance industry, particularly the cyber market, has grappled with how to address this risk and provide meaningful capacity; but the perceived subjectivity of the valuation, challenges in proving the loss, and other impediments have prevented discussions from getting anywhere.
We believe we have solved the problems in the development of Crown JewelSM Protector, a front to back suite of risk management and insurance solutions that brings together a consortium of experts to assist any organization through trade secret risk management and insurance procurement process.
Please browse our website for more information at www.tradesecretinsurance.com.
