Ask an IP litigator: IP management in your supply chain

Andrew Bernstein (00:05): Hi everyone. I'm Andrew Bernstein and I'm with my colleague, Ed Fan, and we are here to talk about IP management in your supply chain. IP is usually patents, copyrights and trademarks, and although those things are all very important. Today we're going to talk about something a little different, which is how to manage information that is not covered by any of those legislated IP protections.

Andrew Bernstein (00:30): Ed, do you want to talk about the mysterious world of confidential information and how it relates to supply chain management?

Ed Fan (00:36): Sure thing. And thanks, Andrew. So confidential information sometimes also called “trade secrets”. It's really its own unique form of IP. For instance, if you have a patent, you have to disclose your invention. You publish it in a patent application, and you ask the government for a limited period of exclusivity that you get to keep even though everybody knows what's in your patent.

Confidential information is almost the exact opposite. You keep your information a secret, and you don't tell the world about it, but you don't have to ask the government for permission to keep it to yourself. The classic example is the Coca-Cola formula. It has no patent, but as long as Coke keeps it a secret, it’s theirs to keep forever. They can keep it and use it as they wish.

The problem comes up, though, is when you need to subcontract manufacturing of your goods, or you need other suppliers that you need to work with. For instance, if you have a complex supply chain like automobile airplanes, you still have to disclose some of that information to your suppliers. So the question here is, “Well, how do you manage that and how do you control that?”

Andrew Bernstein (01:35): The typical way to manage confidential information is by contract. You have a contract manufacturing agreement or a supplier agreement, and those agreements have very specific stipulations that say, “The following information is confidential and shall be treated by the supplier as confidential who will maintain it in confidence.” And that can be something like the Coke formula or your herbs and spices in your KFC formula.

But it can also be, for lack of a better term, “know-how”. Manufacturing anything at scale is a feat of engineering. And although you might have a perfectly scoped design, you don't necessarily know how to turn that into a 3D object. So, that kind of know how tends to be provided to a contract manufacturer and included as confidential information.

The real problem arises when the recipient of confidential information goes on to develop their own know-how. They take the IP holder’s process, and they improve it by making it more efficient or less costly. So Ed, do you do when that happens?

Ed Fan (02:34): It's actually very similar to what you mentioned, Andrew. You continue to deal with it by contract, and really the question is to think about it early and have that discussion with your supplier. You can include all of this in your agreements. The agreements could say, “All IP that existed before the agreement started, stays with the owners of the parties that owned it.”

You can also have those agreements say, “Any new IP that is developed becomes the property of, usually in the case of these situations, the licensor or the customer who contracted with the supplier.” This can be many things, as Andrew mentioned, it doesn't have to be just patented rights of the inventions. It can cover a lot of things and engineering.

It can cover things like data sets, drawings, engineering tolerances, things that developed in process that you come up with during that process. As the customer, you could demand the supplier and manufacturer hand that over to you and only use it for your own purposes. And these are the types of terms you would want to include as part of your supply agreements.

And in addition to just saying, well, ownership, one of the things you want to talk about as part of your agreements is to understand that, well, you need to be realistic about your supplier relationships. You can't just say, “Here, supplier, I gave you this IP, it's mine. And by the time when you're done with me, you need to empty your head of all my IP.”

You can’t really do that, not really practical. But what you might want to do is have contracts, stipulations that say, “You, supplier, you can only use the IP from me for servicing me. You can’t use it for other contractors.”

But if you somehow use it for outside those purposes, then this is where somebody like Andrew might come in and say, “Well, Andrew, we have a supplier that has gone rogue. What do you do? Even though I've marked all my confidential information, my information is confidential. I could do contract provisions. But, you know, the supplier has gone rogue and we're not entirely sure what they've done with it.” What happens then, Andrew?

Andrew Bernstein (04:29): Well, I think in those circumstances you'd want to do a few different things. So, the first, of course, is you want to make sure that you are marking your IP as your IP and very confidential. You're going to want to make sure that you have audit provisions. So, that will be to ensure that you can inspect a supplier’s premises, make sure that your IP and confidential information is being properly treated, properly stored, properly separated, potentially from other information restricted to those employees who actually need to see it and need to know it.

And it's those kinds of rights in agreements that help a customer, or an IP owner protect their IP, even against somebody who they have no real reason to think will misuse it. But you want to make sure that you have those rights in case of a dispute. Now, the flip side of this, of course, is what do you do when you're the supplier?

What do you do when you're the holder of the IP and you want to set yourself up to ensure that you're not unintentionally breaching terms that require you to keep confidential information confidential. So, there's three tips that we have for you. The most important, I would say is keep track of information. You have to understand what information is yours to use and what information has limitations on it.

If you don't have some kind of inventory or database of that kind of information, it's very, very easy to mix or co-mingle the information. And then all of a sudden, you're getting a letter from a litigator saying you're breaching your obligations under the agreement. Number two is employee education. The people who are deploying the know-how on the front lines probably aren't the same people who are keeping track of the contracts.

So, it's your job as an employer to educate them and make sure that they understand what their obligations are. And then #3, you know, I don't know a better way to put this, but don't be too cute about your obligations. You know, we've talked about the kind of degree to which everything leaves kind of an imprint or a shadow in the modern digital era.

And the chances are if you're using information in a way that you're not supposed to be using it, it's going to be discernable by, you know, the kinds of tools that can be used to look at people's computers, etc. So, that's it in terms of how do we treat IP and how do we protect it in our supply chain.

On behalf of Ed and I, thanks for watching.

Confidential information is a unique form of intellectual property that is protected by keeping it a secret. What happens when you need to subcontract the manufacturing of your goods and, in order to do this, you have to disclose this information?

In this video, Andrew Bernstein and Ed Fan share how you can continue to protect your confidential information, including:

  • clauses and audit provisions in manufacturing and supplier contracts
  • key internal steps to take to avoid data breaches

Click here to see other videos in this series.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

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