How to protect trade secrets in manufacturing, and how can blockchain technology help this?
In the first part of this article, we explained what a trade secret is, why it needs to be protected, and described the challenges of IP protection in the era of emerging technologies.
Trade secret protection includes three main steps. Protective measures can be of administrative, legal, and technical nature.
Administrative measures are about introducing a trade secret policy, training employees about trade secrets, onboarding interviews to remind them not to take trade secrets from previous employers, exit interviews to tell employees that have obligations not to take any trade secrets with them.
Legal measures include provisions about confidential information in employment contracts, non-disclosure agreements with subcontractors, suppliers, customers, and other third parties.
Technical measures may vary from cybersecurity systems, encryption, blockchain technology to access control solutions, etc. It becomes especially important when trade secrets need to be shared with a third party, so there should be tools confirming that confidential information was transferred to another party and ensuring that it was not shared with anyone else.
The laws protecting Intellectual property are strengthening and entailing even criminal responsibility. This means the offender who has infringed the IP rights, intentionally or unintentionally, may go to prison. Just imagine that right now, somebody is in jail because of trade secret theft.
Meanwhile, the digital era increases communication intensity. Trade secrets are circulating inside a company and between companies, so each of the entities at some moment shares their trade secrets and simultaneously possesses the trade secrets of their customer or a partner. And it is challenging to track these digital threads.
How technology can solve the challenges of the digital era?
Then, if the IP law does not provide protection that a trade secret needs, would then technology help with that? Technologies like AI and Blockchain have been already mentioned by EU authorities in the plans to change some of the laws, so these technologies are on their radar.
In general, digital assets’ protection is less natural to a human, and it is more complicated because it is less physical. While one can put a valuable physical asset in a safe to secure it, protection of digital assets requires specific actions connected with IT knowledge to make sure that technological preparations are in place. In the digital era, we store sensitive files in Google Drive or in iCloud, and if your PC/MacBook is stolen, someone will get access to them unless they are encrypted.
From a technological point of view, blockchain can add a lot of value to the traditional IP system.
Blockchain is good at storing specific data, providing access control, verifying events that have happened, signing legal contracts between parties, so this technology will massively influence how trade secrets are protected. This may bring great benefit to different sectors, for example, manufacturing and engineering, which is developing rapidly, and industrial designs are shared massively during the collaboration process, and even more so with the growth of Additive Manufacturing (aka 3D printing).
Timestamping and tracking can help to establish proof of existence and ownership
Let’s take a look at the example from the engineering and manufacturing industries. Engineers and industrial designers use Computer-Aided Design software to create designs. Every product in the world begins its life as a digital file created in this kind of software. This CAD file has to be shared with partners, freelancers, manufacturers in order to become a physical product. And here pops the issue of preserving the ownership of the design.
Blockchain can allow the industrial design owner to establish proof of existence, possession, and ownership of the trade secret by timestamping and tracking it. With this industry-leading secure technology, the creator or an owner can generate a digital fingerprint of a design file that keeps a record of when and what was created and who is the file owner. And if the creator and the owner of a trade secret are different persons, blockchain can help here as well by attributing ownership through the established working contract.
For example, an engineering company owner has a team of engineers developing computer-aided designs according to the client’s order. In this case, the design creator is an engineer, but according to an employment agreement, the design belongs to the company owner. In this case, blockchain can keep this data inside the design file, wherever the file goes.
3D printing is expediting design data sharing and increasing the issue of data ownership. Being able to prove that you did or didn’t do something is directly related to your liability as a business. Being able to ensure quality and certify processes is also something that blockchain is beneficial for.
Moreover, blockchain can track all file versions: when they were created, what was changed, and by whom. This leads to another important benefit of the technology: tracking who and when had access to a specific design file will create incontestable evidence of the possible trade secret misappropriation to prove both the fact and who the bad actor was. Thus the plaintiff may provide this evidence to the court and significantly strengthen his position in the trade secret case.
File encryption can prevent unauthorized access to a secret file
But what is more important is not only to remedy the trade secret misappropriation but to prevent it. And this is where technology has massive advantages. It can provide encryption of the sensitive files and establish access control to a trade secret owner. This means, for example, an encrypted design file may be sent to the wrong recipient by email or taken by a malicious person, but it will not be accessible, and the trade secret will not be exposed. The owner can manage access to a design file and provide it only to authorized parties.
Smart contracts is a transparent and fast way of making agreements
Blockchain can also add value to a transparent way of making agreements with each other. For example, when you share all your trade secrets with another party in a collaborative working process, you need to ensure that if the other party has the same trade secret as you do and knows it, they will not come after you for theft. So how do you prove that you already had it?
Consensus mechanisms and the governance models of blockchain will influence how we collaborate by having independent parties verify those trade secrets. Then, of course, you can have a legal contract stating the rules of handling the secret that parties had access to, while all the parties still have the right to develop their trade secrets. This kind of transparency would change the rules in the cooperation process involving trade secrets.
A lot of companies turn to legal contracts, like NDAs, for the illusion of safety and protection of their trade secrets. However, NDAs don’t work in China, and signing them can do more harm than not signing anything at all. Still, a lot of contracts are signed. However, it’s hard to trace if they are being honored, as, in fact, NDAs cannot embrace all the persons who eventually receive access to sensitive information.
Besides, NDAs are expensive to enforce. It can cost tons of money and time.
Smart contracts can be used for signing non-disclosure agreements. The companies and independent specialists use NDAs to secure their confidential information legally. However, the problem with digital files is that users often share them with a broader scope of people than mentioned in the NDA. And in fact, there is no control over where the file goes and who gets access to it.
Smart contracts are programs stored on a blockchain that run when predetermined conditions are met. They automate the execution of an agreement so that all participants can be immediately certain of the outcome without an intermediary’s involvement or time loss. This means that smart contract-based non-disclosure agreements can be automatically signed by parties who agreed to share the file. And the technology allows the signing of an NDA with EACH person for EACH shared sensitive file. Thus, the file owner is legally protected, and the file user is legally responsible.
What’s more important, the implementation of smart contracts may dramatically save time for non-disclosure agreements negotiations between the parties who share the trade secrets. Nowadays, this process may take up to six months, with each external vendor or an outsourced specialist.
Smart contracts would significantly increase efficiency in supply chains, for example, in manufacturing. Let’s go back to the example with an engineering company. Imagine the client orders a company to design and manufacture a machine or a device. The company designs it and needs to send the drawings to external vendors in China to produce the parts. That’s where things become complicated. Lawyers with knowledge of Chinese IP and contract law need to be involved, lots of different China-specific contracts need to be signed, and still, the atmosphere of mistrust does not vanish. And why would it, if none of these methods aim to prevent IP theft but rather “threaten to enforce the right ‘’ once the theft has occurred.
In China, blockchain-based IP registrations are already accepted as evidence in internet courts. Making blockchain-based evidence and legal smart contracts easily enforceable in the courts of law in Europe is the next step.
Independent creation and prior user rights
Another point to be taken into account is that trade secrets do not prevent independent creation. This means when two parties independently develop the same trade secret and come to the same conclusion, they have the same right to this trade secret. Trade secret law protects one against theft or misappropriation but not from someone else creating the same idea, unlike a patent when the one who registers the asset first gets exclusive right for it.
Technology can also help both parties to prove innocence because independent inventions can be mistaken for misappropriation. Thus if one party did not commit IP infringement, they have tools to prove it. On the other hand, if the infringement had taken place, the claimant party would have tools to evidence it.
Let’s take a look at the prior user rights use case where technology can help. Say, Company A creates an invention and decides to keep it as a trade secret. At the same time, company B creates a similar invention and decides to patent it. After some time, company A discovers that company B has been using this invention and sues them. So how could company A prove they made this invention independently a long time ago?
Blockchain technology could help here by recording the date of creation of a design file with this invention and logging each subsequent change like information about who and when had access to the file, what was changed etc., and this evidence could be stored for an unlimited period of time without any possibility of fraud. It must be noted here that this metadata containing personal information of persons who had access to a trade secret can be GDPR compliant, so even that should not be a problem preventing businesses from utilizing the new technology.
Blockchain allows for secure licensing of the Intellectual Property product
Technology can not only provide the actual IP protection of the file and safeguard the data but also allow for the licensing (or sale) of the intellectual property to multiple parties.
Legal smart contracts that are both machine and human-readable can take care of licensing and contracting in an automated fashion. Creating technologically advanced smart (digital) contracts that are legally binding will lower upfront costs for businesses while ensuring continuity.
Lower costs will lead to a more accessible playing field for SMEs and strengthen the European intellectual property position globally.
For example, automating CAD data sharing and embedding security and traceability into new business models that are based on design licensing will increase productivity in manufacturing and engineering. This would lead to more competition, iterative design, and therefore better quality and lower prices.
The whole potential of the technology, including its implementation in the IP sector, is yet to be discovered by the manufacturing industry at large.
Adopting new approaches to old practices will encourage new business models to appear, R&D to go faster, as there is no need to wait for the patent to be granted, more collaborators can be involved, and, therefore, more value created.