This series of articles explores the effect of COVID-19-related disruption on start-ups’ management and monetisation of intellectual property (IP), giving practical guidance to start-ups to improve and preserve their position for the future.
In recent years, start-ups in the UK have made headlines for being acquired by tech giants for multi-million-pound sums. UK software and AI start-ups working in computer vision, natural language processing and deep learning in particular have grabbed attention for being bought, even at a very early stage, by Facebook, Microsoft, Apple, Amazon, and Google/Alphabet, while UK biotech start-ups have successfully won millions in series A investment rounds. In some cases, the start-ups have started to build a patent portfolio which piques interest and demonstrates the start-up has property and ideas that might be worth buying or funding. However, in most cases, it is likely that the value of the deal is based on more than just the patent portfolio and includes important but often overlooked intellectual property: know-how and trade secrets.
In this article, we look at what trade secrets and know-how are, and how the management of these IP rights may change while companies are operating under COVID-19 restrictions.
What’s stayed the same?
We understand that start-ups may need to conserve funds and make difficult choices to keep their business going during this difficult time. However, as know-how and trade secrets are unregistered IP rights that do not necessarily require an attorney’s involvement, managing these rights when start-ups are even more cost-constrained than usual is definitely possible.
Not everything has changed in the way start-ups should think about know-how and trade secrets.
Know-how is a type of intellectual property
Know-how is any form of practical knowledge or technical information necessary for accomplishing something. Know-how may include technical data, formulas, standards, technical specifications, raw materials, processes and methods associated with an invention, but which you generally do not want to reveal to the public as keeping it secret gives you a competitive advantage. For this reason, it is not something which is disclosed in a patent. Know-how is an unregistered form of intellectual property because the know-how is retained as confidential or near-confidential information within a company.
Know-how is an economic asset
Often when a start-up decides to license their IP to another party (e.g. to an OEM), the license agreement will include clauses concerning their patents as well as their know-how. This is because licensing the patent rights may not be enough for the licensee to use, exploit or manufacture the patented invention – the unpatented technical information, i.e. know-how, will be needed too. Thus, know-how is something that can be licensed too, which makes it commercially valuable to protect. Know-how is often what adds to the value of an acquisition deal. The tech giants realise that start-ups’ scientists and engineers have information and knowledge that not only enables the start-ups to produce their current product or service, but will likely result in further innovation.
Know-how is cheap to protect but may be costly to lose!
Know-how can be protected by a company fairly easily, as it simply requires the company to keep the know-how secret. Know-how should be documented and kept internal to the company. There are generally no restrictions on who can access the know-how internally. Partly due to the fact that know-how is not very well understood as a type of IP, companies can easily lose this economic asset. One very common way for know-how to be revealed is by its inclusion in a patent application that publishes – the know-how may have been provided to a patent attorney who unwittingly includes it in the patent application because there was nothing to indicate it was know-how. Another very common way to lose know-how is to lose where the know-how is stored, i.e. people! Many companies do not have procedures in place to manage know-how, and often it is employees who have the know-how in their heads. If the people leave the company for whatever reason, the know-how may be lost too if it was not properly documented.
Trade secrets provide protection for much longer than patents
Any confidential business information which provides a company with a competitive edge may be considered a trade secret. Commonly, trade secrets are manufacturing or industrial secrets, or commercial secrets. Trade secrets may encompass sales methods, distribution methods, manufacturing processes, consumer profiles, lists of suppliers and clients, etc. A famous example of a trade secret is the recipe for Coca-Cola – the company could have patented the recipe for the drink but this would have caused the ingredients to be disclosed to the public and their monopoly would only have lasted 20 years – by keeping the ingredients under wraps as a trade secret, the company’s market share has lasted for much longer.
Trade secrets are useful but risky
As mentioned above, trade secrets protect information indefinitely as long as the secret is not revealed to the public, and there because they are a type of unregistered IP, there are no registration costs involved. However, in order for the information to be considered a trade secret, you may be required to put systems and processes in place within your company in order to manage the trade secret, to restrict access to the trade secret to a limited set of people, and to monitor who accesses the trade secret. Trade secret law is less developed than patent law, varies significantly across countries, and some countries do not have trade secret law at all. This means theft of a trade secret is more difficult to enforce than a patent.
What actions can start-ups take now to protect their valuable information?
In many countries, COVID-19 has restricted movement and has resulted in people working from home. The drive to conserve cash and stretch budgets during this time means some companies may need to downsize their staff or place employees on furlough. Managing patents, know-how and trade secrets under these conditions may be a little more difficult, but there are some relatively straightforward actions start-ups can take:
Determine what you want to patent and what you need to keep secret
As the Coca-Cola story demonstrates, it is useful to determine at an early stage whether you want to patent your innovation or keep some or all of it secret.
Consider the patent route if the innovation or potential secret is patentable, and if a 20-year period of protection would be sufficient. In fast-moving fields, technology can be superseded quickly and the patent term may provide protection for the lifetime of the technology. If the potential secret could be reverse engineered when your product is on the market, patents may be more appropriate.
If you want to keep information secret, consider the level of secrecy required. For example, if the majority of engineers or scientists in your company need to know the information to do their jobs (and similarly, your competitors or commercial partners), then the information may be know-how. If the information has value to the business but does not need to be known widely within the company (or by your competitors or commercial partners), then the information may be a trade secret.
Document your know-how now
As mentioned above, know-how is often accidentally disclosed to the public within patent applications or may be lost when an employee leaves. The latter is particularly relevant at the moment – if company know-how is currently stored in your employees’ heads, then you are at risk of losing that information if an employee leaves or is on furlough. Documenting your know-how means you can easily check before a patent application is filed whether it contains any know-how. It also means you know what information you might need to provide to a licensee or commercial partner as part of a license agreement.
Review employment contracts
Take a look at the employment contracts of all your staff to ensure that they contain clauses on IP and in particular, know-how and trade secrets. If you determine you have or will have trade secrets, the contracts may need to include clauses that set out the disciplinary consequences of misuse. It may be a useful time to educate and train your employees about the importance of keeping information secret so that it can be properly protected (as patents, know-how or trade secrets) and commercially exploited by the company.
Start keeping records
Develop processes to mark documents as “confidential”, “confidential know-how”, and so on, and to track what information or document has been shared with third parties. Ideally, you should only share information with third parties if they have signed a confidentiality agreement. Keep a record of whether the third parties have signed a Non-Disclosure Agreement (NDA), what information can be shared under the NDA, and whether the agreement is indefinite or has an expiration date, and then consult this before you share any information with a third party.
Author: Parminder Lally, Senior Associate at Appleyard Lees IP LLP.