Trade Secrets: Importance in the Automotive Industry

One of the fastest evolving industries on the market is the automotive industry.?

With the rise of electric vehicles, artificial intelligence, autonomous vehicles and other technological advancements alike, the industry has been experiencing an increased risk of having their intellectual property stolen by their competitors.

As Trade Secrets are one of the best ways to protect fast-pased innovations, today I'll give you an overview of why they are an important tool in protecting your business assets from breaches of confidentiality and corporate espionage.?

But first, let's take a look at what is considered a trade secret.

1. What constitutes a trade secret?

Companies are commercial businesses.

That means, to make a profit, they have to sell certain goods or provide certain services.

The process of researching the market, to understand which products and services are in demand, as well as the process of developing a brand's business offering is paved with a lot of investigation, studying, hits and misses.

The information gathered along this way, whether technical, financial, or commercial, constitutes a trade secret.

Information that may be protected as a trade secret includes anything from a formula, a recipe, or a source code, to a design or a certain practice – as long as it meets 3 cumulative criteria:

1.??This information is not known to anybody outside of the circle that normally deals with this kind of information – In other words, the secret information is kept within the company and it is not licensed to anyone else.

2.???Because it is secret, this information brings economic benefits to its holder – The value of this information comes from its secret character and it should provide a company an actual competitive advantage on the market. The commercial value of the secret will likely depend on the utility it gives to those who wish to acquire it. In other words, the value will likely depend on the market demand.

3.???The holder of the trade secret has to take reasonable steps to keep it secret - This means that the company will have to take certain protective measures against the public disclosure of confidential information, such as signing specific agreements with employees and third parties (You can read more about these at the end of the article)

2. Why are Trade Secrets important in the automotive industry?

Electric vehicles. Automatic lift gates. Human-Machine Interfaces. Autonomous vehicles.

Cars using AI that makes them automatically light up in the dark and vehicles with biometric seat capabilities that enhance a driver's performance.

These are just some of the recent technological advancements that can be seen in the automotive industry – and one of the reasons why employees are jumping from one company in the industry to another.

With so many opportunities arising in the industry, and more and more automotive companies pairing up with tech companies, the need to protect the knowledge behind these developments as well as the risk of these trade secrets being taken without authorization is ever increasing.

3. Examples of trade secrets in the automotive industry

1.?????Stepneygate controversy

One of the most famous trade secret disputes in the automotive industry is tied to perhaps the most expensive sport in the world: Formula 1.

For those unfamiliar with the background of the sport, at a first sight, it appears to be a motor racing competition.

However, it is just as much – if not more - a “who can engineer and design a faster car” competition.

Now, let’s go back to 2007, when Ferrari and Michael Schumacher were considered the “Dream Team” in the sport and the “Spygate” controversy took place.

According to rumors, dissatisfied with Ferrari’s decision to promote Mario Almondo to a technical director, Nigel Stephney (who was a race technical manager of the Ferrari Team) decided to leave Ferrari and move to Honda.

As this decision was met with the team’s disapproval, Stephney started trading information about 2007 Ferrari’s F1 car with Mike Coughlan – a chief designer of their competitor’s car, McLaren.

This information included everything from the car’s design, engineering, testing, development, schematic drawings, photographs, technical measurement, budget sheets, planning materials, tire and pit stop strategies, and so much more.

This exchange of such secret information lasted for months and it resulted in McLaren being disqualified from the competition and being fined 100 million dollars.

2.?????Racing Point’s brake ducts

Another example coming from the Formula 1 world is the case of the 2020 Racing Point Team copying the brake ducts engineered by the 2019 Mercedes.

Namely, FIA – which is the governing body for auto racing events such as Formula 1 – has implemented a rule that says:

Teams can reverse engineer certain car parts based on the photographs of their exterior appearance. However, certain “Listed parts” that significantly impact the car’s velocity cannot be bought or taken from a third party or a competitor. Instead, they must be manufactured by the team’s own manufacturer, for their own use.

As Racing Point Team did not design the brake ducts themselves, and brake ducts were on the “Listed parts” list, Racing Point was penalized 400 thousand dollars.

4. When do trade secrets expire?

This is an important question, as it emphasizes the importance of trade secrets and the advantages they bring to the industry over patents.

While both can bring a company an advantage over their competitors in the industry, trade secrets don’t expire after 20 years.

In fact, trade secrets never expire, as long as their holder uses them and keeps them secret.

Apart from that, trade secrets are different from patents because they offer better protection for ever-changing technologies.

Why? Because obtaining a patent can take years, which is pointless in an industry that changes on a daily basis.

For example, in Formula 1, trade secrets are favored over patents because patenting a car design locks in an advantage that other teams cannot access.

As this sport's primary purpose is to entertain, they need as many teams competing in a race to make it worth the money invested in the sport.

If one team had an inaccessible advantage over all others, throughout many years, the sport would become predictable and dull.

If the sport is dull, the people won’t watch. If people aren’t watching, sponsors aren’t interested in investing. And if sponsors aren’t investing, the sport becomes unprofitable.

Lastly, Formula 1 is a world championship, and protecting a patent in each of the countries where the competition takes place would take a lot of time and cost a lot of money.

This is money that teams would rather put into the development of the car. And the time it takes for such extensive patent protection would make a team’s competitive advantage practically nonexistent.

5. Protecting trade secrets

There are different ways in which trade secrets and other confidential information can be protected.

Here’s an overview of them:

1.?????NDA’s (Non-disclosure agreements)

NDAs are a great way to get broader protection of confidential information.

These agreements are signed between persons who know a trade secret (for example, an employee working in a company in the automotive industry) and persons to whom the secret is disclosed.

Both parties are legally bound to keep this kind of information a secret.

NDAs should be specific. They should be clear about what constitutes confidential information and what doesn't - and they should include the steps that the parties need to take to avoid public disclosure of such information.

Apart from that, NDAs should cover the remedies to which the damaged party will be entitled, in case of a contract breach.

2.?????NCAs (Non-compete agreements)

NCAs are agreements, usually signed between the business and the employee (or an independent contractor).

These agreements prevent employees from working for competitors for a certain period after their employment in the company ends.

Why? Because they are a way to protect the interests of a business - and those interests are the knowledge, skills, a client list, and other valuable resources that employees can gain while working for the company.

NCAs should be tailored to protect confidential information and trade secrets in a certain geographical area where the company is doing business.

They should also be limited in time, as business interests are balanced against the personal interests of the employee - such as building a career or supporting a family.

3.?????Internal safety measures and procedures for the protection of trade secrets

Agreements are not the only way to protect trade secrets. Other reasonable measures can be taken to prevent the disclosure of confidential information to the general public.

These include:

·????????Labeling trade secret documentation as confidential

·????????Auditing trade secret information to check for weaknesses, such as unauthorized access or excess privileges.

·????????Protecting confidential information with Two-Factor Authentication and strong passwords

·????????Making the company's premises inaccessible to a wider public or anybody who's not a staff member

·????????Hiring security officers

·????????Training employees for safe handling of confidential information

Enjoyed learning about why Trade Secrets are useful for protecting confidential information in fast-paced industries, such as the Automotive industry?

Then I invite you to subscribe to my newsletter, because I’ve got more of these interpretations coming in the next couple of weeks, including some IP news and interesting cases from around the world.

The idea behind this newsletter is to share and simplify IP-related information across different industries, so if you want to share your opinion on this (or any related) topic, ask questions or even collaborate in the future, leave a comment?or?pick my brain about it through a private message.

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