Trade secrets can confer powerful competitive advantages

Trade secrets can confer powerful competitive advantages

New knowledge, invention, know-how and ways of doing things can provide a business with a competitive advantage so long as others don't discover them.

Recently, I was an expert witness in a trade secret trial in the natural products industry. I was called by the plaintiff to defend the legitimacy of their trade secrets against theft and misappropriation.

My client had developed and owned trade secrets that were providing a competitive advantage in the marketplace. They had developed natural products that, because of their unique ingredients, could not be produced on traditional manufacturing equipment. To protect the integrity of their formulations, they had modified traditional equipment and developed specialized manufacturing processes that allowed them to take their products successfully to market.

Like many natural product companies today, the rise in the use of increasingly specialized ingredients and manufacturing processes necessitated the modification of manufacturing equipment. Products that are vegan, wheat-free, gluten-free or use new substances may not run well in traditional manufacturing operations.

In my client's case, their success was so great that they needed to engage a contract packer, and to ensure the co-packer's success, they loaned them proprietary machinery and disclosed their secret manufacturing processes to them under a non-disclosure agreement.

The co-packer, apparently seeing their opportunity to provide services that other natural products co-packers couldn't provide, advertised their new capability to their customers. They quickly attracted multiple specialty product clients before my client discovered the situation. When confronted by my client, the co-packer scoffed at my client's exclusive claims to their proprietary inventions and processes, suggesting that my client's trade secret rights were too intangible to amount to anything.

Under the law, when an inventor or innovator designates the fruits of their labors as a trade secret, and protects them as such, that confers important legal rights on the owner of that knowledge. Further, when an owner discloses their secret knowledge to a third party for specific purposes, and does so under a non-disclosure agreement, use or misappropriation of that knowledge for other purposes is illegal. Trade secret theft or infringement is actionable under the law.

Interestingly, during the trial it became clear that the parties misappropriating the trade secrets at issue possessed a cavalier attitude – suggesting that no one could own such invention and know-how as was claimed (improvement to equipment and the development of manufacturing processes) and that, being nothing special, everyone already knew what was being claimed as secret.

During my testimony, I explained the law of trade secrets to the court, and pointed out that the defendant had adopted my client's trade secrets and thereby had obtained a "specialty manufacturing" competitive advantage in the world of co-packing, and that thus my client's trade secrets were apparently something of great value that all other co-packers were not practicing.

New knowledge, invention, know-how and ways of doing things can provide a business with a competitive advantage so long as others don't discover them. As companies deploy ever-specialized ingredients, new formulations, and re-engineer existing manufacturing equipment or processes and thereby gain a competitive advantage in the marketplace, these proprietary elements can be protected under contracts and as intellectual property laws.

During the trial, much to the chagrin of the defendant's counsel, the judge frequently turned to me, asking her own questions as to the law of trade secrets. I answered her under oath, and in the end she ruled to uphold the proprietary nature of my client's modified manufacturing equipment and the specialized manufacturing processes. She ordered the defendant to cease using any of my client's trade secrets, and to pay substantial monetary damages and my client's court costs and attorney's fees.

Many corporations fail to recognize that in the ordinary running of their business they inevitably develop new knowledge that has strategic value and can provide them with a competitive advantage if they protect it as a trade secret. All companies working with specialized ingredients, products that are difficult to produce, or that require multiple forms of certification – as is the trend in the natural products industry ­– may overlook their opportunity to protect their knowledge and gain a competitive advantage in the marketplace. Formulations, ways of handling raw materials, modifications to manufacturing equipment or processes often go unrecognized as trade secrets.

The trade secret is a checkmate strategy for those companies that have attended to protecting their proprietary knowledge and know-how.

Lindsay Moore, Ph.D., is CEO of KLM, a management consultation firm in Boulder, Colo., and co-author of Intellectual Capital in Enterprise Success: Strategy Revisited, published by Wiley.

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