Section: COST CURMUDGEON
Companies are likely to hold more trade secrets than executives realize. The conventional way to protect technical secrets is, of course, patenting. But patents only last 20 years; patenting is time-consuming and expensive; and once patents are made public, clever competitors may be able to figure out ways to get around them, especially with the aid of "reverse engineering" (figuring out how something is made by carefully taking it apart). However, in today's fast-paced world, 20 years is not insignificant. And, patenting has gained added appeal now that proprietary business procedures can be patented.
Most companies try to protect trade secrets by requiring employees who become aware of the secrets to sign non-compete agreements. According to Steven Cooper, a partner in the NYC office of law firm Anderson Kill & Olick, these agreements suffer from several deficiencies.
Longevity is the main weakness. Former employees can't be enjoined forever from working for a competitor--or setting up a competing company. A well-known example is Ross Perot, who set up a competitor to Electronic Data Systems, the service organization he sold to General Motors for billions.
Actively Protect Secrets
Non-compete contracts or obtaining injunctions against revealing trade secrets lose effect if there is no history of active efforts to maintain trade secrets. In other words, a company can't expect much sympathy in court if it belatedly tries to protect trade secrets for the first time. Other factors in court proceedings are how much it costs to develop the trade secret, how critical it is to the company's success, and the ease or difficulty for a competitor to duplicate the secret.
Non-compete agreements are not recognized by many other nations, although Canada and the UK are closest to the US in recognizing and enforcing such agreements. That's why Avery Denison, the label maker, will have a tough time preventing Four Pillars, a Taiwanese competitor, from using the American company's proprietary adhesive in its labels.
Nevertheless, US manufacturers have obtained redress when they prove that foreign competitors stole their trade secrets. Volkswagen paid General Motors $100 million in 1997, for instance, in settlement of the latter's claim of misappropriation of trade secrets.
To enforce non-compete agreements, it's very important that all employees are aware that their employer takes such agreements seriously, says Cooper, under what's known legally as a Security & Retention Program. This means informing prospective employees that they will be required to sign a non-compete agreement as a condition of employment. At least once a year, all employees should be apprised in writing that these agreements must be respected. When employees are promoted they should be required to resign such agreements. Employees leaving the company must also be reminded that they have signed an agreement And, most important, if the company does try to enforce an agreement against a departed executive or his new employer, all employees should be informed of this action.
If an employee who knows the company's trade secrets joins a competitor, this outfit should be informed as quickly as possible in writing that the new hire is subject to a non-compete agreement. This key advice comes from Ted Fraumann, a 27-year veteran of the FBI who is now a manager with Deloitte & Touche's Dispute Consulting Practice.
Laptop Users Beware
What else can companies do to protect vital secrets beyond the enforcement of non-compete agreements? Fraumann warns against the storing of secrets, such as customer lists, in laptops or, even worse, carrying them around in brief cases. He tells of a visiting American executive who was entertained royally by his hosts in an un-named Far Eastern nation. During dinner, which stretched into the wee hours, his host's agents entered his hotel room and surreptitiously copied all the many vital files stored in his laptop.
How should employees be trained to avoid losses in this manner? Beyond encrypting vital files, an obvious deterrent is to transfer such files to a disk that is kept in one's pocket. Employees should also be warned not to discuss vital matters in public places, such as on board airliners. A competitor with sharp hearing might be sitting nearby.
Hotel rooms are not safe either. In some foreign nations, warns Fraumann, visiting American business executives are assigned to hotel rooms equipped with hidden microphones and bugged telephones. Now that the Cold War is over, foreign intelligence services have been redeployed to steal technical and business secrets. The French have been caught doing this big time.
Others to Worry About
Although present and former employees are most likely to reveal trade secrets, there are others to worry about, such as temporary employees, on-site contractors, vendors and suppliers including for-hire cleaning services, and the employees of partners in joint ventures. Security experts warn companies that rely on trade secrets to check the background of these others as carefully as prospective full-time employees.
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By Mel Mandell
Mandell is an international business writer and consultant based in New York.