Assessing the Value of Trade Secrets (Part 2 of Trade Secret Series)November 11, 2015

Filewrapper® previously introduced a new series of blog postings on the value and role of trade secrets, along with strategies to ensure protection. Before diving into best practices for protection this post provides an outline of the value trade secrets can provide to a company or to a particular technology.  Often a value assessment goes hand-in-hand with justifying the creation and protection of trade secrets to enhance an intellectual property portfolio. Of course it is extremely difficult to place a dollar value on your trade secret(s), however, consideration of the information outlined below will aid in one’s assessment of the value a particular trade secret can provide to a company or to a particular technology.  In the event one needs the specific dollar value for a trade secret, an overview of valuation methods are provided.

In the US, the Uniform Trade Secrets Act (UTSA) defines trade secrets as “information, including a formula, pattern, compilation, program device, method, technique, or process, that: (1) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”This legislative definition itself hints to the value assessment of a trade secret – requiring there to be “actual or potential”economic value. This somewhat puts the cart before the horse in assessing value of a trade secret since we know it must have value (or potential value) to qualify as a trade secret in the first instance.

However, we need not make this more difficult than it is. Going back to the definition of a trade secret we are given guidance or useful factors to determine whether information or a technology rises to the level of providing such an “economic value, actual or potential.”The Restatement of Torts sets forth the following factors to assess whether information provides such value and is therefore a trade secret (although not adopted by all 50 states at the present time):

  1. To what extent is the information is known outside of the business?
  2. To what extent is it known by the employees and others involved in the business?
  3. To what extent have / are measures taken to guard the secrecy of the information?
  4. To what extent can the information be attributed to bring value to the business and to competitors?
  5. What amount of effort or money was / is expended in developing the information?
  6. Could the information be acquired or duplicated by others with ease or difficulty?

If one is able to answer these inquiries in a manner that suggests the information or technology has remained under ‚¬Ëœwraps’ within the company (i.e. not known outside the business), is only known by those employees integral to the development and maintaining of the secret, and there are securities in place to keep such information or technology under ‚¬Ëœwraps’, then you are on a good start to having a valuable trade secret. In sum, the better protected the trade secret is the more valuable it should be.

The next phase in assessing value is understanding how the information or technology can be utilized by the business to derive value. This goes hand-in-hand with understanding and utilizing the trade secret in a way that brings competitive (preferably financial) advantage over competitors who do not have access to the same information or technology. Examples of how value can be derived from trade secrets include: those that act as barriers to market entry for reasons of revenue generation or commercial profits; providing cost savings (e.g. operating cost reduction for a technology that creates increased operating margins); or those that result in a faster market adoption of a technology.

Finally, the value assessment reaches its greatest heights when the information or technology is difficult to reverse engineer or duplicate by your competitors. The less intuitive the information or technology is will make it more difficult for your competitors to ‚¬Ëœcatch-up’ and be on equal playing field with you and your trade secret information or technology.

There are companies in the business of providing valuation of intellectual property, including placing estimated dollar values on trade secrets. Such valuation companies are known to employ standard methods for valuation on trade secrets just like any other asset. For example, the income method of valuation looks to net present value of the predicted future income from the asset. A market method of valuation looks at market based transactions involving similar assets (although these can be most difficult to identify for trade secrets). Further, a cost method of valuation looks at the cost to create the trade secret or replace the trade secret with a similar asset. Regardless of the method of valuation, one thing is clear, trade secrets are an intellectual property asset capable of bringing substantial value to a company or to a particular technology.

Stay tuned for the upcoming Filewrapper® postings on this series where we will next address the interplay between trade secrets and patents and then dive into exemplary protection schemes for trade secrets.

← Return to Filewrapper

Stay in Touch

Receive the latest news and updates from us and our attorneys.

Sign Up