概要
In this episode of Reasonable Measures, Chris Buntel welcomes longtime colleague レイ・ミラー, Partner at DLAパイパー and Chair of the Life Sciences practice, to discuss the evolving role of trade secrets in mergers and acquisitions. While patents once dominated due diligence, the conversation highlights how know how, key employees, and trade secrets now often carry more value than formal IP rights. Chris and Ray reflect on past transactions where the real “magic” was not in patents but in the undocumented processes and expertise held by individuals.
They explore practical considerations for both buyers and sellers, including policies, trade secret inventories, employee retention, and regulatory interactions. The discussion also touches on the increasing risks of disclosure through government transparency, the rise of trade secret only transactions in areas like AI, and how organizations consistently underestimate the number and importance of their trade secrets.
Takeaways
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Trade secrets are now a central asset class in M&A. Buyers expect clear policies, procedures, and documentation beyond just patents.
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Key employees often embody the most valuable IP. Retaining them can be as critical as acquiring patents.
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Manufacturing know how, customer relationships, and regulatory strategies can hold equal or greater value than technical trade secrets.
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Transparency initiatives by regulators such as the FDA raise new risks of inadvertent trade secret disclosure.
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Companies consistently underestimate their trade secrets. An audit or inventory often reveals far more assets than expected.
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Preparedness adds value in deals. Having policies, privilege logs, and clear protections in place reassures acquirers and smooths the transaction process.
Transcript
Chris (00:10)
So this is Reasonable Measures podcast number 18, which is amazing that we’re up that high. And today is kind of special. Instead of Tim and I chit chatting about the latest and greatest in trade secrets, I have Ray Miller, who’s a partner at DLA Piper, a chair of their life science practice and a friend and colleague of mine for what, 20 or 21 years now. It’s kind of scary.
Raymond Miller (00:37)
Yeah, 20 plus years for sure. Yeah, 20 plus years. So glad to be here.
Chris (00:42)
Well, it’s great to have you here. It’s good to get a different perspective on how trade secrets fit into people’s practice. As a general framework, we’re talking about M&A, because I’m really curious about what kind of trends you’ve seen, Ray, in terms of M&A. Do people care about trade secrets? Is it becoming a real valued asset class when you’re negotiating an M&A? And just what kind of trends are you seeing?
Raymond Miller (01:13)
Yeah, it is definitely becoming a real asset class. And when you get into these transactions, traditionally, people would ask you whether you had trade secrets, you would say yes, and that would be the end of the inquiry, right? But it’s really kind of expanded beyond that. People are digging into what are the policies and procedures that you have in place? How are you protecting your key assets? It gets into discussions on key employees. So in an M&A transaction, we’re both patent lawyers by training.
And 15 or 20 years ago, all we would focus on are the patents and the patent claims and freedom to operate. And that’s kind of completely transitioned where there’s this balanced approach. Of course, people are thinking about patents, but recognizing that as we’re entering this era where it’s a knowledge-based economy, how are you protecting your trade secrets and how are you making sure that your key employees are there? And if they do depart, have they taken anything that’s of value?
Chris (02:13)
Well, 20 years ago, when you and I first met, I was working at the molecular products part of the metrogen. And yeah, we were doing a lot of M&A, especially on the nanocrystal portfolio. And we kind of knew that there were trade secrets there, but I don’t think we even called them trade secrets. It was more like witchcraft about how you get these processes to work. And, you know, in hindsight, 20 years later—
Raymond Miller (02:23)
Yeah. Yeah.
Chris (02:41)
Yeah, we were rolling in trade secrets and we just didn’t know and we weren’t paying attention.
Raymond Miller (02:46)
Well, it’s interesting. You know, you take the Molecular Probes as an example. I could probably still find the due diligence reports that we did back then, and they were very, very patent heavy. You know, if you remember, there were certain inventors that we were following. The names would come back to me if I thought about it. But in reality, those patent portfolios didn’t turn out to be the value. I mean, how you made a quantum dot to actually being able to do it was the real value.
And those didn’t come into play. You know, the economic value of the quantum dots didn’t really mature for 15 or 20 years after we were looking at the acquisitions. So the patents were, for the most part, old and cold. Of course, we built portfolios around the improvements, but what people were buying back then, what Invitrogen was acquiring, what Molecular Probes was acquiring in a lot of ways, was the know how and the trade secrets.
Chris (03:47)
And those are really the people. We found this with a couple of the later acquisitions where it was really a couple of key employees that you were buying for a lot of money. And they were the only people who had the magic dust that they could sprinkle on the bottles and get the magic to happen.
You could read all four corners of the patents and not be able to replicate some of those results that these scientists and engineers could do in their sleep. Again, it’s kind of funny thinking back how many trade secrets we had that we really didn’t pay a lot of attention to and certainly didn’t assign value like we would if we were doing it today.
Raymond Miller (04:22)
Yeah, absolutely. And it’s funny because, you know, I can follow, I think I was representing BioCrystal and then CrystalPlex, and that became part of Mojo Vision. And all along the way the trade secrets became more and more prominent.
And I won’t name the individual, but there was an individual at Molecular Probes who ended up at one of the key companies. And it really was because he was the only guy that could ultimately make the quantum dot. So it was very cool. If you think about it, what we were thinking about as being important was freedom to operate. Those patents that we looked at didn’t matter because those things didn’t come to market for 15 years later. And then the second consideration was how big was our patent portfolio. What we really should have been thinking about is how do we document and how do we make sure that the trade secrets stay with the entities.
Chris (05:34)
Well, and nowadays, if you had a client come to you on either side of an M&A, what advice are you giving them on how to handle key employees and to make sure that those valuable trade secrets don’t get laid off or demoralized or just leave the company?
Raymond Miller (05:52)
Yeah. So it’s both the entrance and the exit interview, and sort of reminding those employees and reminding their next employer of the value of our trade secrets. We really appreciate the contributions that employee X has made, but we want you to recognize that it was involved in these key programs. And so we’ve gotten to that point where on occasion, if it becomes a key employee who has moved to another company, we remind that company that we have no issue with the fact that he went there, but just make sure that they understand the broad categories of areas that we consider important to us.
Chris (06:35)
And if you’re representing the acquiring company, how do you help them first identify who the key employees are, and then also make sure that they’re retained as part of the integration? And we always joked that acquisition is easy and integration is hard. And I think a lot of times that’s true.
Raymond Miller (06:54)
Yeah, absolutely. It’s interesting. Where we start generally is we will start with the patent portfolio to see who the key contributors are to the patent portfolio from a historical perspective and then follow those people forward. We have companies where truly the only value, and they have considerable value, are the trade secrets and the employees that are associated with them.
It’s become a much bigger issue. And you’re seeing on diligence programs for big companies, for big pharma companies, that they’re now aware of the trade secret issues. Before, you wouldn’t get those questions. They wouldn’t ask us to look into the key employees. They wouldn’t ask us to track them. And I think what has happened is a couple of these guys have gotten burnt, because they didn’t retain or integrate the key employee. And then all of a sudden, key employee is at company Y and they’re creating something entirely competitive.
Chris (08:06)
And do you find a lot of the trade secrets are in the manufacturing? So not so much in the R&D, but more scale up and pilot plans going to full scale manufacturing. It’s a lot different making a metric ton versus 10 grams.
Raymond Miller (08:23)
It is. And I will tell you the one thing I notice about myself is I tend to gravitate towards the technical trade secrets. You know, those are comfortable for me, as a chemist or an engineer on our team. But I always have to sort of step back and really ask, are there other trade secrets here that normally don’t come into my consideration, like key customer relationships and supply chain relationships.
Chris (08:35)
Yeah, me too.
Raymond Miller (08:52)
And those can be just as valuable as the technical. I think you and I, because of our science background, tend to hold up the technical trade secrets. So yeah, I’m always looking for the manufacturing. But I’ll give you an example where it’s come onto my radar: the interaction with the FDA on the life science companies. How are you interacting with the FDA?
What are the testing guidelines that you’re laying out for your clinical trials? We’ve had an increased effort partly because of the sort of radical transparency that the FDA has decided to release CRL letters, partly in response to that. But we’ve seen a much deeper dive into making sure that they keep information confidential that is designated as such. They understand that it is a trade secret or confidential to the company.
Chris (09:56)
Well, and that goes back to the Vandal litigation that Nicole and I talked on. I think it was an IHC CLE maybe a year ago or so, but it was really an interesting idea that a government agency could potentially release trade secrets. Historically, people didn’t worry about that.
Raymond Miller (10:14)
Well, the Vandal litigation and then this decision by the FDA recently, through the Trump administration, to become radically transparent, right? Which is great, except if you think about it, they use this to ameliorate our concern over trade secrets. They basically go in and black out areas of sensitive information.
But if you think about AI being designed to be the program that’s going to predict what the next word is, it really has an impact. Disclosing the entire context but blacking out the key numbers might not be enough to protect the trade secret. So it’s interesting to see that happen.
Chris (11:08)
And have you seen any M&As involving trade secrets where there’s just no patents at all?
Raymond Miller (11:15)
Absolutely. So I wouldn’t say no patents on the ones that I’ve been involved with, but the patents are more window dressing, right? They’re an accoutrement to the real value of the company. We have a company that is based on how they manipulate a herd of cattle. And based on the genetic manipulations all the way through the way that they maintain the cattle is really the value.
Now we have patents that are directed to the products that come from this company, no question. But if you’re gonna ask me where the real value lies, it’s really in the trade secrets.
Chris (12:15)
And I think especially with software and AI and all of these fast moving technologies, we’ll start to see licenses that are purely trade secrets, an M&A where all the value is in trade secrets and maybe there’ll be no patents at all. It’ll be interesting to watch.
Raymond Miller (12:31)
That’s right. I do think that’s coming. I do think that’s coming. Now the other place I’ve seen it obviously is if, you know, I’ve been in this debate with a guy within my firm, Paul Stedman, who’s a litigator. And he’s right — trade secrets are not property, right? It’s a tort that is required for you to enforce whatever rights you have in the trade secret, which means misappropriation.
So this concept of treating it as a piece of property is a convenience for us because sure, we can create a privilege log of all of our trade secrets. We can treat them differently. But if a tort doesn’t occur, it doesn’t have any real inherent value. So it’s kind of interesting. I think ultimately, trade secrets may have the majority of the value, an algorithm as an example. The trade secret is the real value, but what it produces is also valuable. That comes into sort of a branding issue or trademark and copyright associated with it. So the way I perceive it is the real foundation of your IP is the trade secret, and the property rights that you and I have spent our whole career developing is a result of that know how and the trade secrets.
Chris (14:16)
And I think that it’s easy for us to say, it’s another type of IP, just like patents, trademarks, and copyrights that all have the traditional infringement model or landmine model where someone copies or infringes your IP and they step on the landmine. But trade secrets really are a whole different animal. And it’s much more like theft than stepping on a landmine.
Raymond Miller (14:33)
Right. Yeah. Yeah. And I mean, think about it. You and I as patent lawyers for years have told our people that if you’re going to go into a discussion and you’re going to disclose information, you need to mark your bills. Now, the way we would typically do that is we would file a provisional application, right? But the same thing has to be done as it relates to trade secrets.
Because the purpose of us marking our bills and filing a provisional application going into that relationship is so that we can identify what we brought to it. That doesn’t mean we’re gonna mature those rights into actual patent rights. And so what we brought to the table, to the extent that was a trade secret or confidential information and is maintained that way, has to be associated with our trademark policy, the confidentiality agreements associated with the exchange of that information, the way we educate internally.
So it’s kind of interesting because when you and Tim started this process, I, like most patent attorneys, sort of thought about trade secrets as a complementary aspect of patents, but not really the focus of the value. More and more in this knowledge economy, and how quickly things get developed and how slow it is to get a patent and how immediate relief is required, trade secrets have become much more important.
Chris (16:20)
Yeah, I think also our bias is to think about technology because of our education and history and track record. But all those business trade secrets that some IP people will say are kind of boring or soft trade secrets are more often litigated. So they’re not sexy and flashy, but things like customer relationships, vendors, pricing models, pricing algorithms, even M&A strategy, going back to M&A again, those can be wildly valuable trade secrets, even though they have nothing to do with technology.
Certainly for me, that was kind of a mental adjustment that I had to make to start thinking of these. Because five or 10 or 20 years ago, if you said, do you care about customer lists? I’d be like, of course not. They’re not patentable. You can’t trademark them. I’m not interested.
Raymond Miller (16:51)
Absolutely. Yeah, yeah. Right.
Chris (17:17)
But now I realize those assets are actually stolen very often and they can have tremendous value for the client.
Raymond Miller (17:23)
Yeah, you’re absolutely right. There’s a real disconnect in legal departments, particularly outside the US. Inside the US, you largely have legal departments from a technical perspective, where those guys went to law school and they know sort of the broader concepts of tort and misappropriation and things like that. But in many companies that have roots outside the US, their legal department is focused on that, but their patent department is focused only on the technical issues.
So I have found it a little challenging because my connections typically in big companies outside the US are rooted either in the technical arm of the company or they’re rooted in the patent arm of the company, which that’s not their job to think about trade secrets, just like it wasn’t our job 20 years ago to think about trade secrets. So that’s been an interesting aspect to integrate those two thought processes, that it is important to protect the trade secret.
Chris (18:31)
That’s right.
Raymond Miller (18:48)
And that’s ingrained in the patent system and in technical systems because when we went to grad school, we kept notebooks, right? And those notebooks went on a shelf somewhere. And that wasn’t really for public consumption, it was really for the lab’s benefit. But that’s not the way the legal departments would normally function. So it’s been a bit of a disconnect trying to connect those two.
I actually think that with the introduction of AI into the legal field and the importance and the timelines associated with trade secrets versus patents, once those two concepts merge, you’re gonna see an explosion in the value of the trade secrets. There’s gonna become registries, all of the things that we’ve talked about that are the enhancements of trade secret. Right now we’re just trying to get people to do the basics.
Because we’re really not doing the basics, and you see it. I’ve seen it in M&A transactions where people are just blown away when they ask the trade secret questions, kind of trying to stump me. Do you have trade secrets? Well, of course we do. Could you identify them? Well, of course I can.
Chris (19:48)
That’s right. Yeah, nothing fancy. Yes, we can.
Raymond Miller (20:13)
Do you want to see my privilege log of my categorized trade secrets? I’m happy to share that with you. And they don’t know what to say, and then it becomes a check the box issue. Which, in an M&A transaction, as much as you and I like to be the center of attention, what we want our patents and our trade secrets to be is check the box. Let’s move on to the really important thing, which is the commercial aspects of the company. Pretty interesting.
Chris (20:44)
Well, if you have clients either on the acquiring or acquiree side, what kind of general advice would you give them about trade secrets, or what can they do to make the M&A process more valuable if they’re being acquired or just go more smoothly?
Raymond Miller (21:02)
Yeah, so immediately put a policy in place, right? Depending on how close you are to the transaction, let’s do an inventory. Tangibly has helped me because I can start on the technical side where the first place that I’ll create trade secrets are those patent applications that I decided not to proceed with, right? So now I have a documented trade secret that’s written up and maybe in provisional format, but we never then went forward. So I already have a trade secret record.
So doing that inventory at the outset, and then the interrogation of the company to figure out where are the trade secrets within the company, let’s identify them. There are some really cool aspects to what you guys do with the X-ray as an example, looking at your own patents and identifying things that aren’t there. So those are probably good categories to start thinking about why didn’t you include them, and let’s get a little detail to that.
So create that inventory, that privilege log as I refer to it, because I’m not gonna disclose the trade secrets to the acquirer until we get into a position where that’s appropriate. But it becomes policy and audit. And if I have enough time, education. Right, if I’m approaching an M&A, I probably don’t get to the education part, frankly. I gotta have that policy in place, because that’s always a question on M&A. How do you handle your trade secrets? We typically do handle them the appropriate way, and there typically is some form of policy. But let’s make sure that we have a policy that we can hand over so they can check that box. And then let’s do that audit so we can identify those things that are important.
It definitively adds value to the transaction.
Chris (23:04)
Yeah, I think however many trade secrets you think you have, it’s actually five or 10 times more. Everyone always underestimates. No one ever overestimates how many they have. If you think you have five, you probably have 20.
Raymond Miller (23:10)
You have exponentially more. That’s right. Yeah. That’s right, that’s exactly right. And I mean, it’s a good exercise for you to understand where your value is. The other thing it does as you go into those transactions is keeps people mindful of the fact they don’t need to disclose all of their trade secrets. They need to identify them generally.
But they don’t — I mean, when you get in these M&A transactions, it’s amazing to me how much people want to talk about how smart they are. Really, what the acquirer wants to know is, have you taken the steps to protect your trade secrets? Can you identify them? Can I identify them? And if I agree that they’re valuable, can I make sure that they will retain their value? Whether that’s through following employees, retaining employees, maybe morphing it into a patent, whatever. But that’s really what they’re thinking about.
Chris (24:18)
Yeah. And we see the same thing with NDAs, which is admittedly a whole nother podcast topic. Once the NDA is signed, people are like, yay, I disclose everything and convince everyone how brilliant I am. That’s like the last thing.
Raymond Miller (24:23)
Yeah, it is. Yeah, exactly. Exactly. Absolutely.
Chris (24:35)
Well, this has been great. I appreciate taking your time and getting your perspective. And as you can tell, we’re all excited about trade secrets and glad to have you part of the journey with us.
Raymond Miller (24:46)
Yeah, I think you guys are on the front end of a transition and a transformation. Just the time, if you think about it from that perspective, the time that it takes now to get and enforce a patent. I mean, there are technologies that have emerged, been exploited, valued, and went away in the time that it would take for that stuff to happen, right?
Chris (25:13)
Much less, totally.
Raymond Miller (25:16)
So yeah, it’s pretty cool. So I’m excited to be here.
Chris (25:21)
Awesome. We’ll talk soon. Thanks for it.
Raymond Miller (25:23)
Alright buddy, take care.
