Trade secrets in the wild (Part 2): The reporting problem

In Part I, former Katonomist, Dr. Nicola Searle, looked at the challenges to investment in cybersecurity, here. She now considers how you can legislate when you can’t see the forest or the trees?

Trade secrets are secret. While innovation policies have happily expanded and harmonised the protection of trade secrets (e.g. in 2016, the American DTSA and the EU Directive), actual evidence of trade secrets, in an era of evidence-based policy, is scant. This disjunction between the structures of harmonization and paucity of evidence means that governments are left developing trade secret policy with limited insights into what is happening in practice. Still not convinced? Read on.

The first rule of the Trade Secret Club is: Do Not Talk about the Trade Secret Club. Companies are often reluctant to discuss their secrets with researchers or policymakers for fear of compromising their protection, lest they lose control over the secret. This causes a long-term, persistent problem in economic policymaking, as governments seek to protect that which is not readily cognizable.

This state of affairs reminds this blogger of the ‘I-know-it-when-I-see-it’ approach, which involves a lot of hand-waving and suggestions of a precision that is otherwise lacking. ‘Trust me’ on my trade secrets is not a good enough argument from policy stakeholders.

But the picture is more muddled: even if trade secret theft/misappropriation occurs, firms may not want to compound the damage by reporting the loss. The immediate fall out from dealing with such breaches includes mitigation, investigation and legal costs. However, the more insidious damage comes from the potential for long-term strategic loss of compromised IP and reputational damage. Moreover, acknowledging the mere existence of a trade secret can convey valuable information to competitors about a company’s activities.

One upshot of the foregoing is that trade secrets can be, and are often, discussed in a sufficiently abstract context to limit potential adverse effects from disclosure. In legal disputes, courts are bound to ensure that the trade secret protection is not compromised during the course of the dispute. Governments, too, have a duty to protect confidential information. However, I am reliably informed that companies rarely go on the record about acts of misappropriation, even when lobbying governments for policy changes with respect to the subject matter of the trade secrets.

In the case of research, ethical considerations bind researchers to maintain confidential information and anonymous respondents. Lawyers are famous for being risk adverse, and the benefits from their clients participating in research can seem too amorphous for an individual firm. (A gung-ho post-doc version of me mistakenly thought computer games companies would flock to her survey in the interest of influencing their regulatory environment. They did not.)

The lack of reporting or making public information about trade secret misappropriation and ensuing loss creates a vicious circle. Firms will tend to under-report the incidence of trade secret loss, which leads governments to underestimate the impact of such damage. This underestimation causes the inefficient allocation of enforcement resources and the creation of policy tools that fail to adequately mitigate the impact of such loss.

In this environment, would-be trade secret misappropriators, if not outright thieves, knowing that the probability of being caught is lower, are thereby emboldened to further target a firm’s trade secrets. This in turn leads to further losses, even as firms continue to under-report. In effect, a deleterious, self-feeding loop is created, leading to further damage and harm. The figure here illustrates the issue.

The Under-Reporting Loop: Trade Secrets

That said, there is room for lobbying to effect policy changes even without full and transparent reporting to authorities. Copyright is a good example. High quality evidence for copyright policy is scant, due to a combination of measurement difficulties and rightsholders’ resistance to share their good quality and commercially valuable data.

Instead, successful lobbying, based largely on anecdotal evidence and somewhat subjective surveys, has nevertheless resulted in a steady increase in the strength and scope of copyright law (an example of which is the analysis of UK lobbying on performance rights, here). Whether the resulting changes are appropriate is a different story – the lack of evidence means it is hard to know.

As with most governmental interventions, there are unintended consequences beyond the act of conferring protection for trade secrets. Mere accusations of trade secret theft can ruin reputations. (At least one person accused of criminal trade secret theft in the U.S. committed suicide.)

Trade secrecy can also be used to limit transparency. For instance, trade secrecy has been used as a reason to prevent criminal defendants from assessing algorithms that directly impact their sentencing (per an MIT Technology Review article). Under-reporting can exacerbate these unintended consequences, as the few reports that do come through may not represent the whole picture.

The consequence of all of the foregoing is that, despite policymaking operating largely in an evidence vacuum, trade secrets disputes are growing, and rather quickly. If American litigation trends are anything to go by, trade secrets litigation increased at 14% annually from 2002-2012, and 1,400 cases in federal courts were filed in 2019, and efforts to further expand trade secrecy protection continue. Will this turn out to be all sound and fury, or is it just the tip of the trade secret iceberg?