Tokenization of Intellectual Property Rights — Part 3: Trade Secrets & Their Tokenization

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@esenEsen

Tech Lawyer - Jurist

In the last two posts, I tried to give information about IP rights in general and discussed patent rights and if they fit in tokenization. If this is the first time you check my page, I recommend you to check my last two articles: here and here .
In this article, I’ll talk about trade secrets and introduce a new discussion in the area. As you have read, patents and other industrial property rights are not so feasible for tokenization as there are a lot of friction in transfer of their ownership. This friction made me think about how to solve this problem. How could anyone buy and sell IP rights on a marketplace easily? What would be the right legal tool? This thinking journey in my mind led me to consider trade secrets as a potential solution.
So, let’s begin.

Trade Secrets

“A trade secret is a valuable piece of information for an enterprise that is treated as confidential and that gives that enterprise a competitive advantage”[1].
The EU Directive on trade secrets states that for information to be considered as a trade secret [2]:
1. It should not be generally known or readily accessible to persons within the circles that normally deal with the kind of information in question and,
2. It has commercial value because it is secret and,
3. Some reasonable measures are taken by the person to lawfully keep it secret.
*Be aware, these are cumulative conditions not “or” — all requirements should be met.
Trade secrets can cover any information regarding the business which is beyond the technical knowledge to commercial data such as information on customers and suppliers, business plans and market research and strategies. The scope of trade secrets is broader than intellectual property and therefore, trade secrets can be used as a complement or alternative to intellectual property.
Another reason to choose trade secret over patents would be that patents and intellectual property in general are subject to national laws. This creates differences regarding the scope of the protection and what is patentable in one country might not be fully patentable or even not patentable in another country. Any invention which is not patentable will stay as a trade secret of the company. In some cases, the inventor may want to protect the invention with a patent but also keep the business practices attached to it (which are not patentable) secret.
Trade secrets are especially important for SMEs because SMEs do not generally have big budgets for patent applications. They may also not choose to disclose their invention in a patent procedure to keep their competitive advantage.
Let’s talk about the advantages and disadvantages of trade secrets in a more structured way:

The Advantages of Trade Secrets

1. There is no need for a registration to protect trade secrets. Assignments of rights are not registered by a patent and trademark office.
2. In conjunction with no need of registry, trade secrets have no registration costs. There might be costs of administrative, technical, organizational and legal measures to keep trade secrets secret [3].
3. Trade secrets are easily transferable. It is possible to license trade secrets with a single licensing contract. Therefore, it would be right to say that trade secrets are more liquid than patents and cause less friction which make them suitable for tokenization.
4. Trade secret protection does not require disclosure. On the contrary, when trade secrets are disclosed, they are not secrets anymore and the protection ends.
5. Trade secret protection does not have a time limit. As long as a company keeps it secret, the protection can exceed 20 years [4]. The famous example is the formula of Coca-Cola [5]. The formula and its renewed version are a secret since 1891.
6. Trade secrets have immediate effect. To be granted a patent, one must wait for it at least 18 months.
7. Trade secrets have a broader scope than other forms of intellectual property. This gives us an opportunity to tokenize and trade other commercial elements that are not covered by patents but still useful for the targeted industry.

The Disadvantages of Trade Secrets

Trade secrets should be kept secret to be protected. Any disclosure would steal their commercial value. However, the legal protection of trade secrets is not as strict as other forms of intellectual property. In many countries, trade secrets are generally protected by unfair competition law. Unfair competition law bans unlawful acquisition, use and disclosure of secrets. Also, in Germany with the new law on trade secrets, trade secrets will be protected only if the owner has taken appropriate confidentiality measures [6]. With this risk of disclosure and legal obligation at hand, trade secrets require a contractual system which prevents their exploitation and gives the owner company full control over them.

The Tokenization of Trade Secrets

The advantages of trade secrets show that trade secrets are a better tool for tokenization. Especially with no registry procedure, trade secrets can be traded much faster and cheaper than patents. After the trade, they have an immediate effect for the right holder. Again, it is possible to trade non-patentable business practices, methods, algorithms with trade secret tokenization.
By creating tokens based on trade secrets, the collaboration which is required for an innovation might start much earlier and the development might get faster. This might also mean that a patentable innovation can be developed and made ready for a patent application much earlier. Partners in innovation, who are the users of the trade secret holding the token (this part is explained in the next section), can apply for a patent together as joint applicants and be joint owners of the patent when it is granted. This potential increase in joint ownership of patents can decrease the monopolistic structure and increase the dilution of patents in the relevant industry. A downside of such partnerships would be that one of the partners can file a patent application on its own before its partners. As many jurisdictions grant patents to the first applicant (First-to-file) and not to the inventor, greedy partners might have a chance to get a monopoly on the invention.
As seen, trade secrets offer easy ways for collaboration and even some economic incentives such as being joint applicant for a patent. However, the disadvantages in terms of competition should not be ignored when tokenizing them.

Smart Contract Structure for Trade Secret Licensing

Any SME would like to monetize its trade secret while keeping its property. For this reason, a trade secret licensing agreement is needed. Licensing agreement would give the creator the opportunity to keep all the rights attached to the trade secret and to grant the use of it to third parties and to the extent the company wishes. The company can revoke this license any time or limit its time. Therefore, the token should actually represent the license right instead of the trade secret itself.

Proof-of-Existence for Trade Secrets

In case of a use of a public blockchain, the content of smart contracts can be seen, even though they are hard to read and to understand for a non-developer. This level of transparency would jeopardize the protection of trade secrets.
An appropriate solution would be to certify the trade secret on the blockchain and create a proof-of-existence so that a reference to the documented trade secret can be made in the agreement by including the hash of the certificate.
Proof-of-Existence (or blockchain certification) helps the owner of the trade secret to prove that that particular secret is created on a particular day and time and to whom the secret belongs [7].
This way, the owner can claim ownership on the particular secret. Using proof-of-existence and referring to its hash in the smart contract of the license agreement would keep the content of the secret safe and secure.
However, this solution reminds of an old dilemma regarding trade secrets which is called the black box dilemma. “The trade-secret owner cannot “let the cat out of the bag,” and the potential licensee will not want to “buy a pig in a poke” [8]. As the licensor would not want to reveal the secret before the investment and the licensee would like to know its content before investing, a secrecy agreement (NDA) is concluded in traditional world [9]. This solution can be applied in addition to smart contracts.
Another advantage of proof-of-existence comes from time stamping. In the European Union, the Regulation on electronic identification and trust services for electronic transactions (eIDAS)[10] puts forward some standards on time stamping besides electronic signatures, seals, registered delivery services and website authentication [11]. Accordingly, the electronic time stamps are admissible as evidence in legal proceedings no matter if the time stamp is a qualified electronic time stamp or not.
From this point of view, the time stamping that blockchain provides should be admissible as evidence in legal proceedings. Italy’s law which came into force on February’19 also recognized the legal effectiveness of blockchain time stamping [12].
Again, for electronic documents, eIDAS regulation accepts the legal effects of such documents and make them admissible in legal proceedings. Having the possibility to have additional criteria about the reliability and integrity of the electronic documents, certification of trade secrets on the blockchain will probably be admissible in a court case should there is a litigation [13].

What Else Can Be Achieved with Trade Secrets Tokenization?

By way of tokenizing trade secrets (this time the secret itself not the right), one can collateralize it for an exchange of loan. Trade secret collateralization has already been known. However, this procedure might become easier with the tokenization. While keeping the ownership of the secret, one can use trade secret to get a loan. In case of a failure in payment, the token can be sold to the lender and depending on local laws and the token’s saleability on a secondary market, the token owner can sell the token and get some money back.

The Conclusion

Apparently, trade secrets have much to offer for tokenization compared to IP rights. Either for licensing or collateralization, I assume that trade secret usage will be considered more for this purpose in the future. Of course, this is the one way of setting things up.
Another way- as the one have been used for a long time- might be to establish a special purpose vehicle and assign IP rights to it, then tokenize them. This way sounds easier. However, the company still have to deal with the red tape that comes with IP rights.

REFERENCES:
[1] Donal O’Connell, ‘Trade Secrets • Intellectual Property Expert Group’ (Intellectual Property Expert Group) <https://www.ipeg.com/trade-secrets/> accessed 25 September 2019.
[2] DIRECTIVE (EU) 2016/943 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 8 June 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure 2016.
[3] O’Connell (n 17).
[4] ibid.
[5] ‘Coca-Cola Formula’ (En.wikipedia.org) <https://en.wikipedia.org/wiki/Coca-Cola_formula> accessed 7 October 2019.
[6] Urs Jakob Stelten, ‘German Bundestag Adopts New Law For The Protection Of Trade Secrets’ (HEUKING KÜHN LÜER WOJTEK, 2019) <https://www.heuking.de/en/news-events/articles/german-bundestag-adopts-new-law-for-the-protection-of-trade-secrets.html> accessed 7 October 2019
[7] George Kiknadze, ‘What Is Proof-Of-Existence And How Will It Help To Protect Intellectual Or Private Property’ <https://medium.com/@kiknaio/what-is-proof-of-existence-and-how-will-it-help-to-protect-intellectual-or-private-property-77aa97a3fbb1> accessed 7 October 2019.
[8] Karl F. Jorda, ‘Trade Secrets And Trade-Secret Licensing’ <http://www.iphandbook.org/handbook/ch11/p05/> accessed 30 September 2019.
[9] ibid.
[10] REGULATION (EU) No 910/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market and repealing Directive 1999/93/EC 2014.
[11] Jérémie Grandsenne, ‘E-Identity Workshop Report’ (EU Blockchain Observatory and Forum 2018) <https://www.eublockchainforum.eu/sites/default/files/reports/workshop_5_report_-_e-identity.pdf> accessed 9 October 2019.
[12] Alessandra Feller, ‘Italy’S Legal Recognition Of Blockchain-Based Timestamping’ <https://www.fintechlawblog.com/2019/04/italys-legal-recognition-of-blockchain-based-timestamping/> accessed 7 October 2019.
[13] 
Thibault Verbiest, ‘Registration On A Public Blockchain: A Legally Binding Proof?’ (Decentral Magazine, 2018) <https://en.decentral.news/registration-on-a-public-blockchain-a-legally-binding-proof/> accessed 9 October 2019.


Featured Photo by Kristina Flour on Unsplash

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