Trade Secrets

The law of trade secrets could be traced to Roman law, whereas under such ancient legal system a competitor’s corruption of a slave to divulge his master’s commercial affairs was punished. The modern law evolved in England during the Industrial Revolution. In the United States, the first reported trade secret case dates back to 1837.

A trade secret is, in the general sense, any confidential information with commercial value, reasonably protected from disclosure by its rightful holder. It could be a formula, process, device or compilation of information used in a business, which bestows the owner an advantage over competitors. No registration requirement or any other formality is necessary in order to be protected by trade secret law.

The policy objectives behind the protection of trade secrets are the maintenance of ethical commercial standards and the encouragement of research and innovation. In the technology industry, trade secrets are particularly useful to protect a patentable invention during the application process, information not covered by the patent and information that is not patentable. Examples of the last mentioned are clients’ lists, advertisement campaigns and business strategies.

But, in spite of this seemingly simple definition, the doctrinal debate on the rationale of trade secrets protection is far from being over. At least, there are three major approaches to explain trade secret protection: the contractual obligation, the fiduciary relation, and the unjust enrichment and misappropriation theories. Which of those is the most accurate approach to trade secrets is beyond the scope of this work. Notwithstanding, a brief comment about their contours, and a concise exposure of the also unfinished debate about trade secret as property, would be helpful to understand the particular provisions of international trade secrets protection agreements and the different legal approaches followed by particular countries.

Theories

Contractual Obligation Theory

Simply stated, the duty not to divulge or use trade secrets ordinarily arises from a contractual relation between the right holder and the person with access to the confidential information. Confidentiality stems from the agreement, under the pacta sunt servanda doctrine, and needs nothing else to protect the information transmitted under its terms. In such theory, the wording of the agreement becomes critical, inasmuch as the protection depends on the confidential information protective clause inclusiveness.

Employment and trade secrets licensing contracts are likely to include a secrecy obligation (non-disclosure agreements). The former raises interesting conflicts between the trade secret owner’s rights and the employee’s rights to use technical knowledge acquired through working experience. Where to draw the line is a difficult task. The Second Circuit of the US Court of Appeals has noted that in trade secret cases the courts “[o]ften balance an employer’s right to proprietary information against the employee’s rights to use his or her knowledge, training and experience to gain a livelihood.” Some factors taken into account by US courts are the prior general knowledge and skills of the employee and the ability of the employer to isolate the trade secret information from such knowledge and skills.

Fiduciary Relation Theory

The fiduciary relation theory proposes that certain relations embrace an implied duty of secrecy. Thus, confidentiality of information does not depend on a prior agreement. The duty not to disclose the correspondent secret information, contrary to the contractual theory, has nothing to do with a concomitant pact, but with the confidence deposited by the trade secret owner on the receiver when the confidential information was entrusted. At the beginning, most common law jurisdictions based its trade secrets protection on the fiduciary relation theory. This theory also bears on the employer/employee relation because, when a non-disclosure agreement is not in effect, the information is deemed transfer under fiduciary duties, which include the duty of confidence.

Misappropriation Theory

The misappropriation approach propounds that trade secrets should not be obtained through improper means. Unlike a patent, a trade secret does not give the owner the exclusive right to use the confidential information. Therefore, a person is not legally precluded to use a trade secret, as long as the confidential information was acquired by no improper means. As it stands, the misappropriation theory emphasizes trade secrets as assets, recognizing in that sense the proprietary interests over the protected information.

Industrial espionage is one of the most common methods to misappropriate a trade secret. Reverse engineering and independent discovery, on the other hand, have been considered proper means to “discover” secret information.

Protection of property, confidentiality or from unfair competition

The “property” character of trade secrets is an unsettled issue. An American commentator in the area has characterized trade secrets as property. His assertion is founded in the “right of the owner of the trade secret to use and disclosed to others subject to restrictions on their use and disclosure.” In contrast, English law negates the property concept of trade secrets. As will be seen, trade secrets protection in England is based upon the law of confidentiality. Most civil law jurisdictions perceive the issue as one of unfair trading practices.

The property approach pursues the encouragement of creativity and inventiveness as a public interest matter, accomplished by giving creators and inventors proprietary interest over their work. Confidentiality, in contrast, does not ascribe proprietary interest to the information, but focuses on the relationship among the parties and the context in which the information was transmitted; as long as the context posits a relationship of confidence, the confidential information deserves protection from unauthorized usage. Lastly, the unfair competition appeals to commercial ethics preservation, denoting preoccupation over the commercial behavior among competitors.

Some Trade Secrets Economics

Economic analysis might support trade secrets protection. First of all, why use trade secret protection instead of a patent? An acquisition of a patent is a long and costly process that could undermine profitability. Contrarily, trade secrets protection economic implications are limited to the cost of keeping the information secret. Therefore, in many cases, an entrepreneur will be better off economically using trade secret protection instead of a patent.

The duration of protection is another economic factor bearing on the decision to use a patent or trade secret protection. Every patent regime grants protection for a limited time period, after which anyone can use the patented process at will. Trade secrets protection, differently, last as long as the information met the requirements. It could be perpetual. The formula for Coca-Cola is a well-known example of trade secret protection at its best; it has been protected through such regime for more than a century! Trade secret protection, however, contrary to patents protection, does not preclude competitors from using the information if it is obtained through proper means, as reverse engineering or independent discovery.

Another economic rationale of trade secret protection is that, in a capitalist society, creative efforts are valuable, because they are products of “creative labor”. To encourage those efforts, society needs to ascribe fruits of labor to the producing tree. That is why not only trade secrets, but also other intellectual property rights have deserved protection in order to make them valuable assets. To accomplish the goal, in many instances, IPRs grants “monopolies” over products of the mind, allowing the creator to recoup the money and efforts invested in the “switch on the light bulb” process.

In the Jurisdictions

INTRODUCTION TO THE LEGAL SYSTEM

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Sources of the national law in relation to the topic

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Case law

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TRADE SECRETS AS DEFINED BY STATUTE OR CASE LAW

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Introduction

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Definition by statute

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Information must be nonpublic

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Economic benefits and practicality

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Confidentiality measures

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Trade secrets and manufacturing, product technology and business information

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CRIMINAL LAWS AND TRADE SECRETS PROTECTION

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Criminal sanctions

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Administrative sanctions: Unfair competition law

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Obtaining trade secrets by improper means

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Divulging, using, or permitting others to use trade secrets obtained by improper means

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Breach of confidentiality agreements or requirements

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Third party liability

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Company law

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Enforcement agencies

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CIVIL LAW AND TRADE SECRETS PROTECTION

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Civil statutes

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Contract law

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Detailed discussion of the contract law

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General provisions

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Special provisions

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Supplemental provisions

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Employer-employee relations

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Remedies

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Injunctions, Evidence Preservation, and Property Preservation

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Injunctions: Damages

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GOVERNMENT REGULATIONS ON TRADE SECRET LICENSING AND COMMERCIALIZATION

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Technology transfer

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Technology transfer within the Government

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Employment inventions

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Commission agreements and cooperative developments

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Improvements

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Technology import and export

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Technology import

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Importation of restricted technology

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Importation of unrestricted technology

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Additional considerations

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Technology export: Restricted technology and Unrestricted technology

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Export of state secret technology

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Penalties for failure to comply

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Tax issues

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Limitation of liability and limited warranties

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Governing law

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Arbitration

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MAINTAINING CONFIDENTIALITY DURING AGENCY REVIEW AND LITIGATION

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Agency review

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Litigation

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STRATEGIES FOR ENFORCEMENT OF TRADE SECRET RIGHTS

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Investigation

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Direct negotiations

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Administrative and judicial enforcement

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Criminal enforcement

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Evidentiary requirements

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Recent trade secret cases

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ENFORCEMENT

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REMEDIES

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Civil remedies

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Criminal sanctions

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Administrative sanctions, where applicable

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Particular remedies in respect of circumvention of technical measures and rights-management information

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AVAILABLE PROCEDURES AND COURTS

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Civil proceedings

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Criminal proceedings

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Administrative proceedings

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JUDICIAL EXECUTION

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General rules

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Specific rules for copyright and related rights

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