KEEPING COCA COLA’S SECRET FORMULA SECRET

Arguably, most people on the planet have drunk a trade secret without realising it. The recipe for Coca Cola Classic is the go-to example cited by lawyers to WIPR Insights of a trade secret. Founded in the late 19th century, Coca Cola’s success in keeping its recipe secret is celebrated as the basis for the company becoming the largest beverage manufacturer and distributor in the world.

Inevitably, Coca Cola has been the subject of attempts to steal its secret formulas. In May 2007, Joya Williams, an executive assistant at Coca Cola, was convicted in a jury trial in the Atlanta division of the Northern District Court of Georgia for attempting to sell Coca Cola’s “highly classified information” to rival Pepsico for US$1.5 million.

Williams reported to Javier Sánchez-Lamelas, global brand director of Coca-Cola, giving her access, as she wrote in a sales letter on Coca Cola letterhead to Pepsico executives, to: “...information that’s all classified and extremely confidential, that only a handful of the top execs at my company have seen. I can even provide actual products and packaging of certain products that no eye has seen, outside of maybe five top execs.”

Notwithstanding the “cola wars” rivalry between the two companies, Pepsico sent the letter to Coca Cola, who informed the FBI. Williams was covertly filmed rifling through a Coca Cola filing cabinet, taking classified documents and putting a vial of a new formula drink in her brown Armani handbag.

Williams was sentenced to eight years in federal prison. Commenting on the sentence, US District Judge J Owen Forrester said: “This is the kind of offence that cannot be tolerated in our society.”

In a statement to employees after the arrests, Edward Neville Isdell, chief executive of Coca-Cola, promised the company would tighten its security. “I have directed a thorough review of our information-protection policies, procedures and practices to ensure we continue to rigorously safeguard our intellectual capital.”

David Nahmias, United States attorney for the Northern District of Georgia, praised Pepsico for doing the right thing: “They did so because trade secrets are important to everybody in the business community. They realise that if their trade secrets are violated, they all suffer, the market suffers and the community suffers.”

Nahmias said PepsiCo had acted as a “good corporate citizen”, but that it could have been legally liable if it had tried to buy the trade secrets.

TRADE SECRETS: HISTORY AND GEOPOLITICS

In an article in this supplement, “Geopolitics: USA inc v Made in China 2025”, WIPR Insights publisher Peter Scott sets out how China and its nationals have become the controversial subject of multiple trade secrets proceedings in the US and in other countries.

“Made in China 2025” is a 2015 national strategic plan aimed at developing the People’s Republic of China from the “world’s factory” to the leading global powerhouse in high-tech industries such as robotics, aviation, and new energy vehicles. Some international observers have interpreted this policy as giving a green light for China to aggressively acquire global IP.

A June 2018, White House Office of Trade and Manufacturing Policy report on “How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World”, documented “the two major strategies and various acts, policies, and practices Chinese industrial policy uses in seeking to acquire the intellectual property and technologies of the world and to capture the emerging high-technology industries that will drive future economic growth”.

A 2021 Department of Justice update on the US government’s China Initiative reported, “about 80% of all economic espionage prosecutions brought by the US Department of Justice (DOJ) allege conduct that would benefit the Chinese state, and there is at least some nexus to China in around 60% of all trade secret theft cases”.

Rising economic and political powers have always “acquired” industrial secrets to help them on their way. In the late 18th century, the newly independent US offered bounties for textile workers to smuggle loom designs from the great British cotton mills. Boston merchant Francis Cabot Lowell, an importer of British cloth, toured British cotton mills in 1811.

Cabot Lowell used his memory of the British designs to form his own power textile weaving machine, improving the designs and patenting his version. The British mills had been built in part to specifications once pilfered from Italian silk spinners. That industry, in turn, would not have existed without silkworm eggs spirited out centuries before from China. Plus ça change!

If patent filing is an informative measure then the Made in China policy is bearing fruit. In 2021 China was the world’s leading filer of patents at 1,585,663—up 5.9% on 2020. The US was a distant second at 591,473 trending downwards by 1% compared to 2020.

PROTECTING TRADE SECRETS IN AN ERA OF ALGORITHMS

Matt Hervey is head of artificial intelligence law at Gowling WLG, based in London. He says the impact of technology has changed how companies protect their intellectual property. “As the nature of business has moved from traditional manufacturing to data driven and, more recently, AI, the protection of data, algorithms and the outputs of AI has become more pressing. In the digital age, trade secrets are becoming the de facto form of protection for data and AI, often supplanting patent protection.”

“Open secrets? Guarding value in the intangible economy”, a report commissioned by CMS and written by The Economist Intelligence Unit, elaborates on this theme: “Half a century ago a company’s value was overwhelmingly derived from its physical capital—the assembly lines and buildings it owned, and the products it made. Today’s firms are built on intangible capital, with assets in the form of software algorithms, brand, customer data, business plans, engineering specifications, product formulas and organisational capital accounting for as much as 90% of the S&P 500’s total assets—up from just 17% in 1975.”

The report continues: “Privileged access and secrecy are inherent to the value of many of these assets, making them by definition “trade secrets”. Whether or not firms identify them as such, these assets are vulnerable to employee leaks, competitor theft and cyberattacks—risks that continue to grow as more business is conducted online and across borders, and as more employees work remotely. Yearly, the cost of trade secret theft reaches up to US$1.7 trillion.”

Hervey and his partner, IP litigator Huw Evans, have long dealt with the enforcement of trade secrets in the arena of algorithmic trading. Hervey describes the classic scenario: “When a quant leaves a hedge fund their knowledge of the trading strategy, algorithms and software platform could have a lot of value to a competitor. The hedge fund would assert confidential information, trade secrets, restrictive covenants and any other arguable ancillary complaints, such as the theft of a memory stick."

Now the firm’s clients across all sectors are increasingly looking for ways to protect data, algorithms and strategies. As Hervey explains: "Massive investments in autonomous driving have already produced at least one massive dispute centred on trade secrets. We also have clients in life sciences retooling their IP strategies to protect data, AI and AI insights via trade secrets, contractual and practical measures. This requires a change in mindset at board level and the implementation of training, policies, new agreements, registers of secrets and security measures. Some in-house IP teams still have a struggle to convince boards of the urgency and importance of investing in protecting trade secrets."

Sarah Speight writes on artificial intelligence and trade secrets in an article in this supplement. Muireann Bolger writes on the trade secrets litigation game and Sarah Speight also writes on the closed world of trade secrets arbitration.