Compliance: trade secrets now open door to liability.

Recent changes in federal law have created new ground rules for corporate trade secrets, meaning that CEOs and CFOS are now open to personal liability, warns attorney R. Mark Halligan, who specializes in trade secrets law. A partner in the Chicago law firm of Welsh & Katz, Halligan terms the new rules a "sea change in the law" and a "wake-up call to Corporate America."

Because of the Sarbanes-Oxley Act, companies may no longer treat trade secrets as an amorphous intellectual property right, Halligan cautions. The Act sets new duties of disclosure and governance, which now require publicly traded companies to identify, protect, set a value on and report trade secrets as a class of assets.

Under the Act, trade secrets must be reflected in quarterly and annual reports--which the CEO and CFO must personally certify--and the company must document and certify both the internal control structure and procedures for financial reporting and controls. Of critical importance to officers, the Act imposes civil and criminal penalties for violations.

Halligan lists a series of prudent practices for complying with Sarbanes-Oxley:

* Identify trade secrets by using both a systematic procedure and a classification scheme (because information assets can range from notes on a blackboard to a secret formula locked in a safe);

* Implement security measures and internal controls to protect trade secrets by:

- limiting access to a need-to-know basis

- defining different levels of access through password protection

- using tracking systems to control and monitor the distribution of trade secrets after initial access, and to ensure that companies obtain executed non-disclosure agreements from third parties before revealing trade secrets (or risk forfeiting and losing them);

* Set the value of trade secret assets based on the net present value of expected future cash flows to be derived from the competitive advantages conferred by the asset (a value that will be zero, Halligan notes, without reasonable measures to protect the asset); and

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* Implement adequate internal controls to assure notice to management and timely reporting of material changes or losses related to trade secrets.

Halligan urges officers, directors and top managers to involve themselves actively with trade secret management and security to avoid both civil and criminal liability, as well as shareholder derivative suits for breach of the fiduciary duty to protect intellectual property assets.