Trade secret protection mechanism

Unlike patents, trade secrets are protected without registration, that is, trade secrets do not require formalities to protect them. Trade secrets can be protected for an unlimited period, unless they are discovered or legally acquired by others and disclosed to the public. For these reasons, trade secret protection may seem particularly attractive to some companies. However, there are certain conditions under which information is considered a trade secret. Compliance with these conditions may be more difficult and costly than it seems at first glance.

Trade secret protection requirements

In order for information to be protected as a trade secret, it must meet the following criteria. The information must be confidential (i.e., not generally known among circles that normally deal with the type of information in question, or not easily accessible). Absolute confidentiality is not required. For example, trade secrets may be held by multiple parties, as long as they are not known to other people working in the field. They must have actual or potential commercial value because they are secret. They must be subject to reasonable steps by the legitimate owner of the information to keep it secret (for example, through confidentiality agreements). While “reasonable” steps may depend on the circumstances of each case, marking confidential documents, placing physical and electronic restrictions on access to trade secret information, introducing a systematic monitoring system, and educating employees are measures taken to protect trade secrets.

Example

A company develops a process for manufacturing its products that allows it to produce its goods in a more cost-effective manner. This process provides the organization with a competitive advantage over its competitors. The organization in question may therefore value its know-how as a trade secret and not want competitors to learn of it. It ensures that only a limited number of people know the secret, and those who do know it know full well that it is secret. When dealing with third parties or licensing its know-how, the organization signs confidentiality agreements to ensure that all parties know that the confidential information should not be disclosed. The company must also take reasonable measures to maintain the confidentiality of the knowledge, such as putting in place access controls and security measures and establishing internal procedures for the systematic control and monitoring of trade secret information. In such circumstances, misappropriation of the information by a competitor or any third party would be considered a violation of the organization’s trade secrets. However, these measures will only be effective if the products cannot be easily “reverse engineered” by competitors.

Rights Conferred by Trade Secrets

In general, trade secrets protect the rights of their owners to prevent information lawfully within their control from being disclosed, acquired or used by others without their consent in a manner contrary to honest trade practices.

While the definition of such practices ultimately depends on the circumstances of each individual case, in general, unfair practices with respect to confidential information include industrial or commercial espionage, breach of contract, breach of confidence, and inducement to breach. They also include the use or disclosure of a trade secret by a third party who knew, or was grossly negligent in not knowing, that such practices were involved in obtaining the confidential information.

As a result, the use of a trade secret by a person who obtained such information in a legitimate business transaction without negligence is not considered unlawful. For example, a competitor may purchase a product, examine the construction or composition of the product and extract the secret knowledge contained in the product (so-called reverse engineering). Such an act does not violate trade secret protection.

Extent to which trade secrets can be sold and licensed

Trade secrets are proprietary rights and can be assigned or licensed to others. The holder of a trade secret has the right to authorize a third party to access and use the trade secret information.

However, due to the confidential nature of trade secret information, it is not always easy for others to determine whether the information in question meets the conditions for trade secret protection. Therefore, compared with patents, it is more difficult to transfer and license confidential information and resolve disputes that may arise. Since a potential licensee needs access to trade secret information to evaluate its value or usefulness, a non-disclosure or confidentiality agreement must be signed between the potential licensor and the licensee. Furthermore, in order to maintain the confidentiality of trade secret information, the licensee of the trade secret must require the licensee to take reasonable steps to maintain the confidentiality of such information.

Remedies for the owner of confidential information

Most countries provide for remedies in criminal, administrative, commercial and/or civil law, in particular tort law, contract law and specific legislation on unfair competition.

In general, the owner of a trade secret can recover damages from the person who has violated the trade secret for the economic injury suffered. The trade secret laws of some countries may also allow for the use of injunctions, requiring the cessation of the use of any products created through the use of trade secret information that are contrary to fair commercial practices. In some countries, in certain cases of trade secret infringement, criminal sanctions are available.

International legal framework for the protection of trade secrets

According to Article 10 bis of the Convention for the Protection of Industrial Property (Paris Convention), Member States are required to provide effective protection against unfair competition. However, the Paris Convention does not mention or define trade secrets beyond the general protection against any act contrary to fair commercial practices.

While the conditions for trade secret protection vary from country to country, some general standards of trade secret law are found in Article 39 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). According to that article, trade secret protection is available if the following conditions are met:

The information must be secret in the sense that it is not, as a body or in the precise composition of its components and assembly, generally known or readily accessible to persons within the circles that normally deal with the type of information in question;

It must have commercial value because it is secret; and

It must have been subject to steps that are reasonable under the circumstances, by the person lawfully in control of the information, to keep it secret.

WIPO Lex provides easy access to legislation on trade secrets from a wide range of countries and regions.

The need for confidentiality and trade secret protection

In countries with market economies, in both the developing and developed world, fair competition between enterprises is an essential means of meeting supply and demand in the economy, and serving the interests of consumers and society as a whole. Moreover, competition is one of the main driving forces of innovation. Unfair competition law, including trade secret law, is essential to ensure the fair functioning of the market and to encourage innovation by suppressing anti-competitive business behavior.

Advantages and disadvantages of trade secrets compared to patents

There are two types of trade secrets. On the one hand, trade secrets may relate to valuable information that does not meet the criteria for patentability, and therefore can only be protected as trade secrets. This may be the case for business information or manufacturing processes that are not innovative enough to be patented (although the latter may qualify for utility model protection). On the other hand, trade secrets may relate to inventions that meet the criteria for patentability, and therefore can be protected by patents. In this case, the company will face a choice: patent it or keep it as a trade secret.

Some advantages of trade secrets include:

Trade secret protection is unlimited in time (patents generally last for up to 20 years). It may last indefinitely as long as the secret is not disclosed to the public;

Trade secrets do not involve any registration costs (although keeping the information confidential can lead to high costs in certain cases);

Trade secrets have immediate effect;

Trade secret protection does not require compliance with formalities or public disclosure.

However, there are some tangible disadvantages to protecting confidential business information as a trade secret, especially when the information meets the criteria for patentability:

If the secret is embodied in an innovative product, others may be able to examine, dissect, and analyze it (i.e., “reverse engineer” it) and discover the secret and then be entitled to use it. Trade secret protection does not provide the exclusive right to exclude third parties from commercial use of it. Only patents and utility models can provide this type of protection.

A trade secret may be patented by someone else who developed the relevant information by legitimate means, for example, inventions developed independently by others.

Once the secret is revealed, anyone can access it and use it at will. The more people know about the trade secret, the more difficult it is to keep it secret. Trade secret protection is only effective against the unlawful acquisition, use, or disclosure of confidential information.

The secrecy of trade secrets is more difficult to enforce than a patent. Often, it is very difficult to prove that trade secrets have been infringed. The level of protection afforded to trade secrets varies widely from country to country, but is generally considered weak, especially when compared to the protection afforded by patents.

Due to their secret nature, trade secrets are more difficult to sell or license than patents.

While patents and trade secrets can be viewed as alternative means of protecting inventions, they are often complementary to each other. Trade secret law often complements patent law in the early stages of the innovation process by allowing inventors to work on their ideas until they become a patentable invention. Furthermore, valuable know-how on how to exploit a patented invention in the most commercially successful way is often kept as a trade secret.

Situations in which trade secret protection is beneficial

While the decision will have to be made on a case-by-case basis, in the following circumstances, it is advisable to consider trade secret protection:

When the subject matter being kept is so secret that it cannot be patented.

When there is a high likelihood that the information will remain secret for a long period of time. If the confidential information consists of a patentable invention, trade secret protection may be attractive if the secret can be kept secret for more than 20 years (the term of patent protection) and if others are unlikely to come up with the same invention in a legitimate way.

When a trade secret is not considered to be of great value, it may be considered worthy of a patent (although a utility model may be a good alternative in countries where utility model protection exists).

When the secret relates to a manufacturing process rather than a product, products are more likely to be reverse engineered.

Before a patent is filed and during the patent prosecution process until the patent application is published by the patent office (generally 18 months after the filing date or priority date).

However, it is important to bear in mind that trade secret protection can be difficult to enforce in most countries, that the conditions and scope of protection can vary greatly from country to country, and that significant and possibly costly efforts may be required to maintain secrecy. Furthermore, it should be borne in mind that once the secret is published, the protection ends. WIPO Lex provides easy access to national and regional legislation on patents, utility models, competition and undisclosed information (trade secrets).

Precautions to be taken by companies

Trade secrets are widely used by business people. In fact, many companies rely heavily on trade secrets to protect their intellectual property rights (although in many cases they may not realize that trade secrets are legally protected). Well-known examples include the formula for Coca Cola and the source codes for software. Therefore, it is important to ensure that organizations take all necessary measures to protect their trade secrets effectively. This includes:

First, considering whether the secret is patentable and, if so, whether it would not be better protected by a patent.

Second, ensuring that a limited number of people know the secret and that everyone who knows it is confidential. For example, these steps could include restricting access to premises, marking confidential documents, and securing IT.

Third, including confidentiality agreements in employee contracts. Under the law of many countries, employees owe confidentiality to their employer even without such agreements. In general, the duty to maintain confidentiality regarding the employer’s secrets remains, at least for a certain period of time, even after the employee leaves the job.

Fourth, sign confidentiality agreements with business partners whenever confidential information is disclosed.

Protection against the use of confidential information by employees or former employees

Businesses that maintain trade secrets are responsible for making every effort to maintain their confidentiality. Employees may be required to sign agreements that protect trade secrets. In particular, when contractors or employees leave, it is important to ensure that they will not compete with the business after they leave, in addition to signing a confidentiality agreement. These agreements are known as confidentiality, non-disclosure and non-compete agreements. If these agreements are violated, the employee may face penalties, in addition to damages to the company. However, it should be kept in mind that these contracts should not restrict the rights of the contractor or employees to earn a living.

The possibility that more than one person may have trade secret rights to the same information

It is possible that more than one person or entity may be able to claim rights to the same trade secrets over the same technology or commercial information if both developed that technology independently and both took reasonable steps to keep it secret, as long as the technology is not “generally known.”