• David Strawn

Board of Director Responsibility to Protect Trade Secrets


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In 2017 the firm Baker McKenzie published a well-researched brochure entitled “The Board Ultimatum: Protect and Preserve –the Rising Importance of Safe Guarding Trade Secrets (the “Baker McKenzie Report”)[1]


This Baker McKenzie Report revealed, what was noted by its authors, as disturbing news, regarding the protection of an organizations “Trade Secrets”, noting that although nearly half of the 400 senior executives in the survey conducted by Baker McKenzie in preparing the Baker McKenzie Report said their trade secrets are more important than their patents and trademarks - less than one-third of companies have taken basic measures to protect their trade secrets despite the growing awareness of their importance; noting further that:

Unlike patents and other forms of intellectual property, it’s much more difficult, if not impossible, to put the genie back in the bottle once a trade secret has become public. That makes it even more crucial for board-level executives to better understand the threats and manage those risks by taking action.


WHY UNDERSTAND THE THREATS AND MANAGE THE RISK


The response to this question, by a conscientious director, seems obvious: to protect the organization and its various stakeholders a director, has undertaken the duty to represent (both morally and as defined by law). But consider also, that courts have considered “Trade Secrets” like any other corporate asset, as noted in the Baker McKenzie Report, in many cases representing a significant store of value for the organization, value that, if lost or destroyed through disclosure, mistaken or intentional, may result in:


not only substantial negative economic impact to the organization but potential “Personal Liability” of the Board of Directors, based upon legal theories where their actions are shown to fail the “business judgment rule” and constitute a breach of duties of care and/or loyalty.[2]


TRADE SECRET RISKS FOR COMPANY DIRECTORS


As noted above, directors may be personally liable for breach of their duties of care and/or loyalty, and where their actions fail the business judgment rule.[3] Common claims seeking to hold directors personally liable include:


  • A failure to perform appropriate due diligence when making an acquisition. Misrepresentations regarding the financial health of the organization.


  • Misstatements or omissions regarding potential future performance.


  • Careless management strategy that causes bankruptcy.


  • Breach of duties under applicable securities or other statutory laws.

  • Conflicts of interest.


All of these risks can arise as the result of director’s inadequate management of secret asset or possibly even failing to adopt and implement adequate pre-hire practices and procedures[4].


If a company becomes insolvent or (if public) has a declining share price, company directors may find themselves personally liable if a court finds that they failed to engage in or require from those they supervised reasonable trade secret asset management.


If only to protect their own personal liability, company directors should become more concerned about and seek to implement proper trade secret asset management measures.


SUGGESTED MEASURES


One observation made in the Baker McKenzie Report is that measures taken to address the potential risks associated with loss of Trade Secrets varies with each organization, but must involve the development and deployment of at least two effective measures including: (i) identifying and prioritizing - by value to the organization - the organization’s Trade Secrets and (ii) educating the organization’s workforce regarding what Trade Secrets are and why they are important to the organization and how to protect them. Clearly these are in addition to cyber-security and other measures, including surveillance that may be used to monitor the means to misappropriate an organization’s Trade Secrets.


The Baker McKenzie Report provides an interesting case study of a German firm -SCHOTT AG - in which innovation, along with the quality of its ideas, has kept the German company in business for more than 130 years. It’s also what has motivated the company to safeguard its inventions.


The SCHOTT AG case is interesting, as the firm is limited under Germany’s strict privacy and data protection laws, making it nearly impossible for SCHOTT to protect its trade secrets by monitoring employees using surveillance technologies and therefore requiring it to rely upon the actual source of all trade secret misappropriation: The Human Factor.

As communicated by Mr. Christoph Dahl, compliance counsel at SCHOTT:


Most of our businesses are highly innovative, so there has always been some sense of the importance of protecting our trade secrets and intellectual property in those areas.

One challenge, however, was identifying the company’s trade secrets and prioritizing which ones were among the most valuable. “There are different views on what’s important and what’s not according to who you speak to, the business they’re in and the length of time they’ve worked here,” Dahl says. To compile an inventory, the SCHOTT compliance office set out to identify the company’s top trade secrets across each of its seven main business units — those critical business processes that distinguish its products from competitors and could hurt the company if they ever became public.


A second challenge was ensuring that all of its 15,000 employees understand what trade secrets are, why they are important and how to protect them. Given Germany’s strict privacy and data protection laws, it’s nearly impossible for SCHOTT to protect its trade secrets by monitoring employees using surveillance technologies. So it’s had to rely heavily on education. “Part of the problem for us, as a large international company, was communicating to all the staff,” Dahl says. “It is important that the message gets across.”

To spread the message, the compliance office has been running an awareness campaign for more than two years to provide on-site and web-based training and issue guidelines and policies. It’s an ongoing, intensive process that evolves along with SCHOTT’s trade secrets and other innovations. And it appears to be making a difference.


“Our people are now thinking much more about these issues and asking the right sort of questions,” Dahl says. “They are taking it seriously.”


AN INDISPENSABLE TOOL TO ADDRESS THE SOURCE OF ALL TRADE SECRET LOSS - THE HUMAN FACTOR



Realizing the limits of currently available Advanced Security Systems, including surveillance, The BAR Group team developed a unique cutting edge course designed to inoculate an organization against potential insider threat by addressing the source of all trade secret loss - the Human Factor. As suggested by the Baker McKenzie Report and emphasized in the SCHOTT study, our Insider Threat Awareness Training course provides each potential member and each existing member of the workforce a thorough understanding of: (i) the nature of trade secrets (including tangible and intangible); (ii) the laws protecting trade secrets (covering all forms of misappropriation, including memorization); and (iii) the consequences resulting from violation of these laws, including both the civil and criminal consequences (emphasizing the potential severe consequences for violation of these laws).



To verify this understanding, our Insider Threat Awareness Training program includes computer generated, recorded and archived, testing, designed: to verify the understanding of these concepts by an organization’s pre-hire candidates, before hiring, and work force members; providing an organization evidence of such understanding - evidence that can later be used in defense of a third party liability law suit and if enforcement is required.


We suggest that, it is important to provide this Insider Threat Awareness Training during the entire employment cycle including: pre-hire, recurring at scheduled intervals, incident reporting and investigation and upon termination/exit.


With this proven and archived understanding, not only are members your organization’s workforce empowered:




To avoid engaging in unintended misappropriation of the organization’s or a third-party’s trade secrets or inadvertent participation in an “Association” determined to be engaged in misappropriation of trade secrets.





To act as an advocate for an organization, confronting others who may be inadvertently or advertently considering or actually engaged in acts constituting misappropriation of trade secrets.


To assist in identifying and reporting possible plots or schemes they observe undertaken by co-workers or third-parties to misappropriate an organization’s trade secrets;




But members of the organization’s Board of Directors are capable of establishing that they have taken reasonable measures to avoid personal liability by assuring that both pre-hires along with existing work force members are fully aware of the nature of the information he or she possesses, as a possible trade secret, and the consequences resulting from a loss of the organization’s trade secrets.


ABOUT THE BAR GROUP



The BAR Group, L.L.C. (the “BAR Group”) is comprised a uniquely qualified group of retired law enforcement and business professionals that have developed and currently teach a cutting edge course (Unlocking the Truth) providing attendees skills in identifying deception during a non-confrontational interview, based on observed human behaviors.


Upon becoming aware of the far reaching and devastating consequences resulting from misappropriation of Trade Secrets, members of the BAR Group realized that they possessed unique expertise that could be applied to assist in addressing the Trade Secret misappropriation threat facing industry.

Employing their understanding of human behavior and the functioning of the human mind, members of The BAR Group set about reviewing reported Trade Secret misappropriation cases, and reviewed the ever increasing suggested solutions, the predominance of which, they discovered, address Trade Secret misappropriation through adoption and implementation of various Advanced Security Systems and devices. e.g. data encryption systems, internet monitoring systems, key and password protected access systems, user monitoring and reporting systems and strategic surveillance systems, to name a few.




Following such review, The BAR Group members realized that, although many of these Advanced Security Systems provided solutions addressing the MEANS by which Trade Secrets are misappropriated, they failed to target the actual source of trade secret misappropriation – the HUMAN FACTOR.




Based on this understanding, members of the The BAR Group have developed the Insider Threat Awareness Training program designed to inoculate an organization, as part of a trade secret protection program, through education, supported by an archived testing feature to document a pre-hire candidate’s and a workforce member’s knowledge regarding trade secrets and the consequences resulting from violation of existing laws.


We Invite You to Explore How Your Organization May Benefit From Our Insider Threat Awareness Training program by viewing a short video.



Footnotes

[1] https://www.bakermckenzie.com/-/media/files/insight/publications/2017/trade-secrets


[2] While the precise outlines of company directors’ obligations differ from country to country and by entity type, generally speaking, all directors must: (i) Exercise their duties as would a reasonable and prudent person (the “duty of care”) and Act in good faith for the benefit of the company and its shareholders (the “duty of loyalty”).


Business Judgment Rule:

Since it is easy to criticize but hard to really know if a director is really acting with good faith or loyalty, the so-called “business judgment rule” protects directors from personal liability if they acted: (i) on an informed basis, (ii) in good faith; and (iii) in the honest belief that the action they took or decision the made was in the best interests of the company. So, if a director is: (i) not “grossly negligent” in their duties; (ii) stayed informed of the facts relevant to their responsibilities; (iii) acted in good faith; and (iv) acted in the best interests of the company, the director will be protected from personal liability for actions that harmed the business and led it to bankruptcy or other civil (and possibly criminal liability).


[3] Director’s Duties with Respect to IP: Generally, courts treat IP assets like any other corporate asset, which means directors must approach IP with the same due care as they would any other asset. Such IP related duties for directors may include: (i) Being informed of the value of their IP assets; (ii) ensuring implementation of necessary best practices and internal controls to protect company IP assets (iii) Refrain from misappropriating IP and ensuring the company not misappropriate or utilize misappropriated IP. IP here includes patents, trademarks, copyright, designs, and trade secrets.


[4] See Molon Motor and Coil Corp. v. Nidec Motor Corp, Case No. 16 C 03545 (N.D. Ill. May 11, 2017), in which a company was found liable for misappropriation of a competitor’s trade secrets as a result of hiring one of the competitors employees who engaged in misappropriation of his former employer’s trade secrets in anticipation of taking the new position.

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