Protecting trade secrets: HR professionals are key lines of defense when it comes to protecting information that provides your business with a competitive advantage

HR Magazine, May, 2004 by Michael Barrier

In September 1997, Victor Lee, a research scientist for Avery Dennison Inc., a Pasadena. Calif.-based manufacturer of office supplies and adhesives, went to a hotel in Westlake, Ohio, to meet P.Y. Yang, the owner of a Taiwanese company called Four Pillars. Lee handed Yang confidential documents, including an Avery patent application related to a new adhesive product.

Lee emphasized that the information was the confidential property of Avery Dennison. Yang responded by tearing the "confidential" stamps off the papers.

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Lee had been conducting meetings like this for eight years, providing Yang with a stream of proprietary information from Avery Dennison. But the 1997 meeting was their last. Lee's industrial espionage had been detected, and his meeting with Yang was a sting operation, videotaped by the FBI. Yang was subsequently convicted in federal court of violating the Economic Espionage Act of 1996.

While Lee did not profit greatly from selling this highly valuable information--his annual "consulting" fee amounted to $25,000--the cost to Avery Dennison was far greater. The company lost trade secrets worth $200 million, estimates Steven B. Fink, a security consultant who worked with the business during the crisis provoked by Lee's espionage.

Because it involved one of the first prosecutions under the Economic Espionage Act, this case received more attention than many cases involving the theft of trade secrets. Such thefts are, however, a chronic, everyday worry for businesses of all kinds.

For example, Kforce, a specialty staffing company based in Tampa, Fla., has been going to court three to six times a year to ask for injunctions against competitors and former employees. "In the specialty staffing business, customer information can be very valuable," says William S. Josey, the company's general counsel. "Customer contact information, customer history and job order information, the makeup of a customer's business--this is information that may not be generally available."

Protecting such information is "especially tricky" in a business like Kforce's, Josey continues, "where your employees must have access to this information to do their jobs. But when they're no longer your employees, the information could be valuable to a competitor. Companies spend enormous sums of money to develop these databases, and it's very tempting for a competitor without those resources--for example, a startup--to get this data the easy way, by misappropriating it."

The damage from such thefts can be difficult to measure, but its dimensions appear to be enormous. In the most recent data available, the American Society for Industrial Security (ASIS) estimates that, during the 12-month period from July 2000 through June 2001, 138 companies that responded to the organization's survey lost a total of $59 billion, most of it in lost revenues and legal fees. Of these companies, 40 percent had lost proprietary information, about half in research and development. Customer lists and financial data also were targets.

The ASIS survey focused on the Fortune 1,000, but Fink, who is president of Los Angeles-based Lexicon Communications Corp., says these "are not the companies that are targeted most by economic espionage. It's the mid-level companies. Most of the thefts of trade secrets are done by competitors, or people working for competitors, and there are more competitors of medium-size companies than there are of Fortune 1,000 companies."

Regardless of the dollars involved, Fink says, "if you steal the right trade secret from the right company, you're going to put that company out of business. The only relevant question is, how much loss can a company sustain?"

Statutory Help

Protection of trade secrets from misappropriation by employees or competitors has long been established under common law. The Uniform Trade Secrets Act, now adopted (sometimes with modifications) by 45 states, embodies and strengthens those common-law protections.

The Economic Espionage Act goes even further by providing for criminal sanctions, but prosecutions under that statute have been rare, and some of the sentences imposed under the act have been remarkably light.

Corporate secrets can take many forms, but to qualify as legally protected trade secrets, they generally must have the following essential characteristics:

First, a trade secret must truly be secret--that is, not something generally known or ascertainable through legal means. If a company claims that a former employee has stolen a trade secret by taking its customer list, but its marketing department has posted a list of those customers on the Internet, no court is likely to be sympathetic. Likewise, anything that has been copyrighted or patented does not qualify as a trade secret, even when it qualifies for legal protection on other grounds, because it has already been made public.

Second, a trade secret must have real economic value or bestow a competitive advantage. The "shelf life" of a trade secret can be critically important in such determinations. Some trade secrets hold their value for many years--the secret formula for Coca-Cola is perhaps the most famous example--but others lose their value very quickly. A high-tech firm's current strategic plan may very well qualify as a trade secret, but its plan from 1996, even if it is kept secret, may have no value at all.