Be aware of this trade secret valuation paradox

BVWireIssue #155-1
August 5, 2015

One of the reasons a trade secret has value is because it’s secret—only a limited number of people have access to it. If a trade secret is stolen, litigation can be triggered. But the trade secret can be disclosed during the litigation, so doesn’t the existence of the litigation itself impact the valuation? It could, but the parties involved are aware of this phenomenon.

Under wraps: A number of different precautions are used to prevent the disclosure of the trade secret during litigation, according to attorney Barry Werbin (Herrick, Feinstein LLP). For example, a protective order can limit access to the information to just the attorneys. Also, the information can be submitted to the court “under seal,” and the court, after looking at it, can redact the sensitive information before releasing it to the public.

Most of the time, valuators are dealing with trade secrets in a litigation context, so valuation tools are being used to calculate economic damages, points out Craig Jacobson (GlassRatner Advisory & Capital Group LLC). In general, this is designed to put the parties in the position they would have been in “but for” the alleged wrongful act.

What to do: In a valuation engagement involving a trade secret, the analyst should investigate any prior litigation to see whether any disclosures could have increased the risk of impairment.

Werbin and Jacobson recently conducted a BVR webinar, Current Trends in Trade Secret Valuation and Damages.

Extra: A bipartisan group of leaders in the U.S. Senate and House of Representatives have introduced a bill that would protect valuable intellectual property and close a loophole in U.S. law by creating the first federal private right of action for the theft of trade secrets. The Defend Trade Secrets Act is aimed at preventing hundreds of billions of dollars in losses every year in the U.S. due to theft of corporate trade secrets.

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