Alongside the traditional forms of registerable intellectual property managed by intellectual property offices, patents, trademarks, copyright and industrial designs (and integrated circuit topographies), one of the most valuable forms of intellectual property for many businesses is trade secrets.
Trade secrets encompass almost anything of a confidential nature that can provide a competitive advantage. Trade secrets include know how, processes, customer/supplier lists, formulas, processes and methods. Trade secrets are not registered with any government authorities but can be maintained indefinitely.
To be preserved, trade secrets have to be kept confidential, This is typically done through a combination of physical, technological and legal means. A gate or locked door can keep intruders or visitors from accessing confidential parts of a facility. Password protection and encryption can limit access to digital information to a small set of users. Non-disclosure agreements (NDA) with employees and contractors can impose obligations to respect the confidentiality of information. A trade secret is usually required to be:
- Confidential or a secret, in that it is not generally known in the industrial or readily accessible.
- Have value because it is secret.
- Be subject to reasonable steps to keep it confidential by the owner.
Answering basic questions about trade secrets can often be difficult for many businesses. What trade secrets do I have? How valuable are these trade secrets to my business? What steps am I taking and should I take to maintain these trade secrets?
Often measures taken to protect trade secrets are ad hoc and not systematically analyzed or enforced. For example, some, but not all, contractors may have confidentiality clauses in their contracts. One facility I heard about, had visitors sign in and out at reception to control access, but the company founder enjoyed touring visitors through the facility, which included a walk past the confidential projects under development to reach the products available for sale.
Identifying and analyzing trade secrets can also be an important part of the due diligence of a corporate transaction, such as for an investment, purchase, or merger. A search of the intellectual property office records won’t reveal what trade secrets may exist.
Patents vs Trade Secrets
An important question often faced when a business has developed something new is whether to file a patent for the innovation or whether it should be maintained as a trade secret.
Patents can generally be obtained for new and inventive innovations, and provide a period of protection during which the patent can be enforced, typically 20 years from the application filing date. An important quid pro quo for a patent, is the disclosure of the details of the innovation sufficient that a person skilled in the art can take advantage of the invention.
Once a patent application is published, typically 18 months after filing, whether the patent is granted or not, anyone can read the details, learn and make improvements. As noted in a decision in late 2017, “’having chosen to obtain patent protection, [the plaintiff] forfeited any right to claim a trade secret” (Rowland v. Stephan, 2017 ONSC 7276 at 11).
Some patents, particularly those directed to manufacturing processes, can be difficult to enforce because there may not be a straightforward way to determine how a competitor is manufacturing a product within the walls of their facility. An unenforceable patent may have limited or no value to a company.
On the other hand, if an innovation is readily apparent or can be reversed engineered once on the market, trade secret protection may have little value. In addition, companies may want to advertise certain innovations at trade shows or in client pitches in order to drum up business. Requiring an NDA prior to any pitch may not be practical if trade secrets were the primary intended mode of protection.
In Canada, a tort of breach of confidence may be asserted if someone misuses confidential information communicated to them in confidence. This may be done in addition to or in parallel with allegations of breach of contract if an NDA, or contract is also involved. Trade secrets cases typically arise in the provincial superior courts on issues of employees leaving for competitors, a break down in a contractual relation or applications over handling of private information encompassed within responses under various freedom of information legislation.
Private arbitration of disputes between contractual parties may be very appealing if trade secrets are at issue, to avoid unnecessary disclosure of the confidential information in the course of litigation in the courts.
In the United States, since 2016, the Defend Trade Secrets Act has provided a federal cause of action for misappropriating trade secrets, in addition to state causes of action. Proceedings under the DTSA can seek injunctions and can apply in some circumstances to extraterritorial activities.
To Protect or Not
Identifying and protecting trade secrets can be very expensive and disruptive, or can be relatively straight forward, depending on the nature of the business and trade secret. It worthwhile identifying why a trade secret is being maintained (or should be protected), to determine what level of cost and effort is worth protecting it and what trade-offs are being made with regards to patent protection, or marketing opportunities.
Even though not registered or even be publicly identifiable, trade secrets can provide enormous value and competitive advantage, and must not be overlooked.