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Security and privacy: storing trade secrets in the cloud - bad idea?

Cybersecurity and the security of the data in the cloud is a hot topic. The number of companies hacked and the magnitude of losses have been growing at an alarming rate. Earlier this year, an international hacking ring stole as much as $1 billion from over 100 banks in 30 countries in what may be the biggest banking breach ever, and personal information for four million current and former federal employees was stolen when hackers breached the U.S. government's computer networks.

What about your company's trade secrets? Are they next? In the "old days" the protection of trade secrets was a simple as locking up your company's code or formula in a safe or a secure, access-restricted area. But in today's connected world, where data is often stored on networks designed to be accessed remotely and shared by many employees, "locking up" confidential information while allowing access to those with need-to-know is not as simple.

Should you store trade secrets in the cloud? If you do, what are the risks? Do the advantages of the cloud outweigh the risks to your trade secrets and other data?

The short answer is "it depends." To change that answer to one more favorable and certain, companies must take an active role in managing their cloud computing usage. How to best to use cloud services is not a "one size, fits all" solution.

Know Your Trade Secrets
A surprisingly small number of people have little idea of what constitutes a trade secret. With the exceptions of New York and Massachusetts, every state has adopted a version of the Uniform Trade Secrets Act (UTSA), which defines a "trade secret" as information that (1) "derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use"; and (2) is "the subject of efforts that are reasonable under the circumstances to maintain its secrecy." UTSA § 1 (1990).

In general, a trade secret can be any information not known outside the company that provides a business with a competitive advantage. The formula for Coca-Cola is one good example, but product designs, algorithms, computer source code, and customer lists are others. You need to identify what "trade secrets" you want to protect before you can adequately protect them. Meet regularly with your managers and key employees to understand what is being worked on, what ideas and information are being generated, and what might qualify for protection. Develop guidelines for employees to protect different types of information, and conduct regular audits to ensure employees are following the guidelines. Mark or otherwise document your trade secrets. Require all company employees and contractors to sign agreements to keep confidential and not disclose trade secrets. As a practical matter, having an established program in place to identify, document, mark, and limit access to trade secrets is the cornerstone of good trade secrets practices. Written trade secret policy, and written documentation of the company's efforts to protect the trade secrets, will be useful later when attempting to prove the information qualifies as a trade secret.

Take Reasonable Efforts to Maintain Secrecy
All proprietary information are not trade secrets, but proprietary information that is the subject of "reasonable efforts" to maintain their secrecy are. Whether your trade secrets will remain valuable assets will hinge on the efforts your company takes to protect them, and whether such efforts are "reasonable." A big question is, and will continue to be, whether storing trade secrets on a third-party network or server, and expecting that the data remain confidential in today's world of daily hacking episodes, is "reasonable."

Even before the days of cloud computing, trade secrets were stored on computers, either on servers in private networks or hard drives used to back-up storage of the company's most important data, physical access to which was tightly controlled. And the servers and networks were often company owned and operated, so there was no handing over of data to a third party. If data was stored at a third party, physical access to the data was tightly controlled. What makes today's environment so different and challenging is that with cloud computing, companies are using hardware and software resources outside their four walls, and sharing these resources with other companies. Further, today's business world demands that employees (and often customers or clients) have access to the data from remote locations within the network. Under these circumstances, can it be "reasonable" to store trade secrets in the cloud, and expect that they remain protected? Unfortunately, this question remains unanswered as the law relating to cloud computing is in its infancy. Even in cases not involving cloud computing, such determinations are often fact-dependent. With such little certainty, what should prudent companies do?

Choose Your Cloud Service Provider Wisely and Mind the Service Agreement
Long-established principles of trade secret law likely will apply to cloud-based computing of today. That is, the degree to which a company can prove that its efforts to protect its trade secrets are reasonable will focus largely on three factors: the company's choice of service provider, the terms of the cloud service agreement, and the company's own actions to keep the trade secrets confidential. In the early years of cloud services, agreements were often formulaic and there was little discussion over terms. Today, the terms of use of the largest and most established cloud storage providers, like Amazon, Google, Microsoft, and Dropbox, all have fairly standard terms that generally favor the cloud service provider. For example, the standard agreements lack any guarantees about data privacy or security, and liability for data breach is often limited to the value of a month or year of service, which may not adequately account for your company's risk.

If your needs demand more than what these standard agreements provide, you might consider using a specialty vendor that will negotiate the terms of the agreement. Many of the specialty vendors have more flexibility both in the types of services they offer and the terms of agreement. As the market grows, more cloud service providers are entering the market and competing by offering low prices. But do you want the lowest cost provider in charge of handling some of your company's most important assets, your proprietary data, your connectivity, and your trade secrets? Best to look for a cloud service provider that has been around awhile and has established a reputation for professional handling of data. Chances are better that they have also learned from previous mistakes or insufficiencies and have improved their infrastructure. Established companies are also more likely to have the financial stability and assets to handle loss, should one occur. Companies eager to get your business should compete by offering more robust services and more security measures. As with anything else, these will not come without a cost.

Before signing on the dotted line with any cloud services provider, carefully read the cloud service agreement and understand what it covers and what it does not. Here are some of the key terms to which to pay attention:

1. Confidentiality
Under the third-party doctrine of trade secret law, data disclosed to a third party loses protection, unless the receiving party has a duty of confidentiality. If you intend to store trade secrets in the cloud, make sure the written cloud service agreement explicitly makes the third-party cloud service provider aware that it is handling trade secret information and, before any disclosure occurs, obtains its agreement to handle the information confidentially. If the cloud service provider refuses, determine which information you are not willing to risk and do not store that information in the cloud.

Make sure that care is taken to delete all confidential information and trade secrets if or when you leave the provider. While some may argue it is technically too difficult or impossible to delete all copies of electronic material, mandatory deletion of data should be included in the cloud service agreement. Again, if there is any information you would worry about not being completely deleted, think twice about storing that information in the cloud.

2. Security and Access
No due diligence would be complete without questioning the cloud service provider about the level and type of security that the cloud service provider will provide for your data. What are the physical controls? How does the provider monitor account access and intrusion detection, and what type of measures are taken upon intrusion detection? Does the provider do penetration testing and will it share the results? What are the plans for data back-up and recovery? Does the provider use a key management program and, if so, who holds the keys? Does the cloud service provider subcontract any storage or services? If so, what controls do they use and what does their agreement look like.

Your information is only as secure as the provider's securities policies. If no one in your company has a good understanding of these technologies, consider hiring a consultant to review the agreement and your data needs to see if the measures are adequate. Prudent companies will review their cloud service provider's policies periodically and at least annually, because the notion of "reasonable" security and access policies is likely to change with time and technological advances.

Studies show that the weakest link is often not at the cloud service provider, but within your own company. More breaches occur because of password mismanagement, loss, or theft by company employees than most other breaches. Hackers know this and focus efforts on the weakest link - the users. Focusing on good internal corporate security policies will help lower risk. Use company-wide security policies to protect all levels of information, including limiting access to your most important trade secrets to only those with a need to know. Implement smartphone and social network policies in employment agreements to prevent employees from unknowingly storing company data in unauthorized cloud.

3. Location of Data
Where's the data stored when it's "in the cloud"? If you are a multi-national company, you need to know that many countries have much stricter policies on data privacy than the United States and require that the data of their citizens be handled with even greater care. Some companies are handling these differences by handling all data in compliance with the toughest requirements to which their data is subject. Others are handling the differing requirements by requiring certain data be stored at certain data centers.

Ask candidate cloud service providers if they can and will commit to storing and processing data in specific jurisdictions, and whether they will make a contractual commitment to obey local privacy requirements on behalf of their customers. The largest cloud service providers have data centers in various regions and can specify which region or data center has your data. Knowing where your data is hosted is important for other reasons too. What are the laws regarding disclosure of your information? What is the trade secret law governing employees in the region where your data is stored? What is your recourse if the provider's employee steals your information? Tread carefully if your data is housed outside the United States and the provider is unwilling to make any (or limited) guarantees about its security.

4. Liability in the Event of Data Loss or Breach
While both providers and customers may want a contract that places liability wholly on the other party, this is unrealistic. In practice, the amount of liability that your cloud service provider will assume will be proportional to the value of the service they are providing. The liability the provider assumes should be enough to keep the cloud service provider on its toes. With the pressure to keep prices low, some cloud vendors may offer low-cost services, with low levels of liability, and these services may be sufficient for some purposes. But only you know how valuable the data is that you are asking them to store for you. No one would pay $4.99 to someone to safeguard a $12M diamond, and reasonably expect that they would guarantee the full $12M value should the diamond be lost. If your data is your company's "crown jewel," you shouldn't either.

Another question to ask is whether the cloud service provider have cyber-risk insurance? Policies for cyber risk, however, are often quite costly and not yet the norm. Whether such a policy makes sense for either a provider (or a company) will often depend on such factors as the size and scope of the business, and the sensitivity of the data collected and/or stored, or handled on behalf of customers. Companies that are able to secure a cyber-liability policy will have been subjected to substantial vetting by the insurance underwriters, which typically includes producing a disaster response plan, details of the provider's security and access protocols, and a risk management assessment of its networks, assets, and employees. Therefore knowing that a cloud provider has such a policy (and what amount of coverage) may provide at least some comfort that at least the insurer believes the provider is a risk worth taking and be useful in deciding which provider to choose. Choosing a provider that has met the risk assessment of an independent third party may also be a useful fact when establishing that your company took "reasonable" efforts to protect its data.

Due Diligence Is Key
Although it may seem that hackers can get access to anything at any time, the actual percentage of information accessed is relatively low. With proper precautions taken by cloud service providers, and your own due diligence in choosing a cloud service provider, your risk can be further lowered. But cloud services are not "one size fits all"; there is no standard template. Everyone has different issues. Breaches will happen and are unavoidable. It is important to pick the right vendor that solves the majority of your concerns for your business environment and works with you to mitigate and remediate problems that occur as quickly as possible.

Consider this - who is likely to protect your data better? Does your company have the resources to handle your data better and still provide the remote access that many companies need? Cloud service providers know that security breaches could spell death for their company, and hire the best and the brightest to stay ahead of challenges. The most "reasonable" decision you may make is to entrust your data to professionals.

More Stories By Linda Thayer

Linda Thayer focuses her practice on patent litigation and administrative trial procedures before the Patent Trial and Appeal Board (PTAB) to request review of the patentability of issued patents outside of litigation, including post-grant review, inter partes review, and review of covered business method (CBM) patents. She also advises clients on worldwide patent portfolio development, management, licensing, and sales.

More Stories By Ming-Tao Yang

Ming-Tao Yang focuses on litigating and defending against patent infringement actions in various forums, including the U.S. International Trade Commission; the federal district courts for the Northern, Central, and Southern Districts of California, the Eastern District of Texas, and the Western District of Washington; and the Court of Appeals for the Federal Circuit. He counsels clients frequently on issues relating to patent enforcement, pre-litigation investigations, patent prosecution, and license negotiations.

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