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Why We Need a Canada Trade Secrets Act

To address the growing problem of trade secret theft hurting Canadian businesses and innovators, the federal government needs to consider a major legislative reform to its existing IP laws. It is time to start thinking about passing a federal Canada Trade Secrets Act.

The idea of a legislative answer to the problem of trade secret theft in Canada is not new. The Alberta Law Reform Institute proposed model legislation in 1986. The Uniform Law Conference of Canada did the same in 1987. Although these early model laws were for adoption by the provinces, they could easily be tweaked for adoption by the federal government.

In Canada, the problem is not a lack of proposals for a model law. Rather, the reluctance to pass a federal Canada Trade Secrets Act stems from a lack of clarity about the rationale for such legislation. To address this lack of clarity, here I lay out seven reasons why we need a federal Canada Trade Secrets Act.

1. To Build On Canada’s Track Record Of Weak Enforcement Of IP Crimes

IP legal protections, like most laws, are only as effective as their enforcement, and Canada has a poor track record on the enforcement of IP theft. Although Canada has long had a criminal law against trade secret theft when it is “for the benefit of or in association with a foreign economic entity,” it has never used this law to prosecute trade secret theft.

When Canada passed another criminal law in March 2020 to criminalize theft of trade secrets by anyone—not merely those acting on behalf of or in association with a foreign economic entity—there was little reason to hope it would actually be enforced.

This has created a rather strange dichotomy of late between our national security rhetoric and our prosecutorial reality. Even as the Canadian national security establishment intones that economic espionage such as IP theft is “the greatest threat to our prosperity and national interest,” the government rarely prosecutes it. The online government tools for reporting such crimes are also in a disheartening state.

The Public Prosecution Service of Canada (PPSC) devotes limited resources to IP theft. The PPSC does not have a section devoted to prosecuting IP theft, unlike many peer countries, nor any single attorney working with a specific job mandate to address such theft. Likewise, the Ministry of Innovation, Science, and Industry, which oversees a $5 billion budget for research and development, disclosed in an access to information request that no records exist in the form of “[d]ocuments provided to the Minister … concerning the protection of Canadian intellectual property from foreign actors.”

Yet the stories of Canadian companies being victims of commercially-driven IP theft are legion. To give just two high-profile examples, last summer Bloomberg reported on the Chinese hacking of Nortel that precipitated the fall of the company and the rise of Huawei. In 2018, Bombardier Aerospace suffered alleged theft committed by Mitsubishi’s jet division.

Unfortunately, the above actors were unable to turn to a Canada Trade Secrets Act to enforce their rights. Allowing private actors to do so would go far in making up for the government’s weak enforcement track record when it comes to IP theft. The government should give private actors the tools to accomplish enforcement by themselves.

2. To Fulfill International Treaty Obligations

Under CUSMA, signatory countries must establish minimum civil law protections for trade secrets. Arguably, Canadian civil laws do not meet CUSMA’s requirements. For example, CUSMA requires parties to “provide civil judicial procedures for any person lawfully in control of a trade secret to prevent, and obtain redress for, the misappropriation of the trade secret by any other person.” Under CUSMA, “misappropriation” is defined as “acquisition, use, or disclosure of a trade secret in a manner contrary to honest commercial practices,” including, “at least the breach of contract, breach of confidence, and inducement to breach, and includes the acquisition of undisclosed information by third parties that knew, or were grossly negligent in failing to know, that those practices were involved in the acquisition.”

Notably, the main Canadian law used to protect trade secrets—the breach of confidence—does not provide a civil judicial procedure to anyone who has their trade secrets misappropriated by any other person, as CUSMA requires. Rather, it does so in the context of relationships of confidence; it is relationally specific. While it applies, quite suitably, in situations where a departing employee steals trade secrets from an employer, it does not easily apply to cases of industrial espionage and unlawful acquisition between parties with no relationship.

The Alberta Law Reform Institute highlighted this problem in its 1986 proposed model law, when it noted there is “no clear industrial espionage tort or its functional analogue” in Canadian law. Without a contract at hand, apart from the breach of confidence, Canadian businesses must turn to other instruments like unjust enrichment (although the remedies for unjust enrichment would not appear to meet the “preventing” requirement under CUSMA.) Otherwise, Canadian businesses invoke imprecise torts like the tort of interference with economic relations—a tort whose scope, the Supreme Court of Canada has admitted, “is unsettled and needs clarification.” The unpredictability of these instruments leaves much to be desired.

For Canada, having a Canada Trade Secrets Act viewed as robust by the U.S. is also important in a practical way. If Canada wants to be seen as a credible ally—and not a figure on the U.S. Trade Representative’s Section 301 “watchlist” of countries with poor IP laws and enforcement, as it currently is—it needs to understand American attitudes about trade secrets, and it must provide adequate enforcement measures.

Generally speaking, international legal trends are moving towards more protection for trade secrets, not less. In a sign of the times, NAFTA mentioned trade secrets 10 times, while CUSMA did so 33 times. Following the signature of CUSMA, the United States Trade Representative bragged the treaty brought about the strongest standards for the protection of trade secrets of any trade agreement it had ever negotiated. Canada would do well to get in line with this trend with a Canada Trade Secrets Act.

Passing a Canada Trade Secrets Act would not only send a clear message about IP enforcement to the Americans, it would fill an important gap in our law and encourage cooperation from international jurisdictions when Canadians seek to defend their rights involving theft that occurs abroad.

3. To Achieve Uniformity By Providing A National Standard

Canadian common law and civil law take very different doctrinal approaches to trade secret theft. In common law courts, protection derives mainly from the breach of confidence, which is intertwined with and inspired by fiduciary obligations. Quebec’s civil law, however, does not recognize fiduciary obligations. Instead, it relies on its traditional liability instruments and refers to duties of good faith and employee loyalty.

Providing substantive coherency by establishing uniform law is not merely a theoretical issue. Creating a federal law would provide federal courts jurisdiction over these disputes, which they do not currently have. The lack of federal jurisdiction has been disadvantageous for victims, since parties experiencing trade secret theft often suffer patent infringement at the same time. These victims may want to litigate their trade secret and patent claims together, since doing so might be less costly than bifurcating proceedings or choosing one court over the other. This predicament is one our system puts parties in too often. Federal judges also have experience in other intellectual property matters, and may be better suited to resolving disputes regarding trade secret theft.

In addition to these substantive issues, the opportunity to create uniform procedural standards is enticing. Creating standards regarding the requisite pleading requirements and offering consistency with the issuance of protective orders and confidentiality orders would remove some of the uncertainty involved in litigating trade secrets in superior courts. The superior courts have shown their inclination to impose hard catch-22s on victims. For example, courts should not be putting litigants in the catch-22 position where they deny protection from disclosure during litigation (by not granting a confidentiality order) and then penalize the same party for not sufficiently disclosing trade secrets during litigation (because no confidentiality order was in place.) Uniform procedural standards would help avoid these situations.

4. To Emphasize Regulation of Subject Matter Over Regulation of Workers

Laws designed to protect trade secrets should protect trade secrets. Unfortunately, many of our laws governing trade secrets do not actually do that. Instead, they regulate workers by permitting employers to resort to restrictive covenants in the employment setting—the catchall term for non-competes, non-solicitation agreements, and non-disclosure agreements, which are often known as restraints on trade in the common law. Doing so has been appalling for workers.

Courts have long pushed back against the enforceability of restrictive covenants in the employment setting, including those that invoke a justification of protecting trade secrets. For example, Canadian courts have rejected the notion of “inevitable disclosure” (i.e., the idea that employees should be restrained from working for an employer when it is inevitable they will disclose trade secrets).

Now some provincial governments are pushing back, too. On October 25, 2021, Ontario announced it would be banning non-compete agreements. On November 17, 2021, PEI announced it would restrict non-disclosure agreements in certain contexts. These moves reflect a shift towards empowering workers and protecting the mobility of employees.

While these legislative reforms should be celebrated for protecting workers, protection for trade secrets must remain available to businesses as a means of protecting their IP against theft. The digital revolution and ease of moving information around requires enhanced protection for hard-earned and sensitive IP that derives value from being secret and is subject to reasonable efforts to maintain its secrecy.

5. To Provide Predictability For Canadian Businesses In Transnational Digital Economy

One of the realities of trade secret theft occurring today is its transnational character. The breach of confidence was not developed to address transnational cyber theft. It was intended to address pastoral disputes between employees and employers. Today, international commercial espionage has become rampant, with a raft of technology making it easier and easier to facilitate theft.

A Canada Trade Secrets Act explicitly addressing the transnational character of trade secret theft—and recognizing misappropriation that occurs beyond Canadian borders as harming Canadian actors—would be a helpful assist to Canadian victims. Currently, victims have to demonstrate, as an additional procedural hurdle, that any such extraterritorial theft has a real and substantial connection to a Canadian jurisdiction.

Statutory trade secret laws elsewhere address this reality head on. For example, the recitals in the EU Directive on the protection of trade secrets address the misuse of trade secrets abroad to produce goods that are then imported into EU member countries. The UK’s recent statutory amendment to the breach of confidence does the same. Likewise, U.S. federal courts regularly use that country’s Defend Trade Secrets Act to allow claims based on misappropriation occurring abroad. A Canada Trade Secrets Act should acknowledge the international nature of this problem and empower Canadian parties to litigate such matters here in Canada for theft occurring abroad where the harm is felt in Canada.

The transnational reality of the problem of trade secret theft is also a helpful basis for justifying the federal government’s action in this area. While federalism questions are challenging in the Canadian context for this topic, as I discuss in greater detail in a recent UBC Law Review article, they are not insurmountable.

As previously noted, Canada is obligated to provide minimum civil judicial procedures regarding trade secrets misappropriation under CUSMA. Although there is no freestanding federal treaty implementation power, trade secret theft’s transnational character makes it qualitatively different from matters of provincial concern. In the recent Reference re Greenhouse Gas Pollution Pricing Act (2021) decision, the Supreme Court noted that international treaties may indicate qualitative difference from matters of provincial concern. Further, given the rhetoric coming from our national security branches that economic espionage and IP theft is an existential concern, a federal Canada Trade Secrets Act would seem certainly to engage the “national concern” branch of the POGG source of federal law-making authority.

While the Supreme Court of Canada swatted away a federal attempt to prohibit conduct contrary to “honest industrial or commercial usage in Canada” in 1976, the language of the statute in question was also fatally vague. A Canada Trade Secrets Act more clearly delineating remedial mechanisms, and involving a clear interprovincial and international dimension (as the high-profile examples listed at the start of this article showed), changes the calculus.

6. To Address The Unfair Evidentiary Burden Of The Breach Of Confidence

At common law, the breach of confidence requires proving there is “an unauthorized use of the information to the detriment of the party communicating it.” This evidentiary burden is unfairly high. When compared with the laws in the United States, it is downright disadvantageous. The American Uniform Trade Secrets Act and the Defend Trade Secrets Act utilize a standard of “misappropriation” that is more apt. Misappropriation is defined in those statutes, among other things, as “acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means.” As for “improper means,” this includes “bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.” This definition gets rid of the need for a preexisting relationship and captures trade secret theft in a more accurate way.

7. To Encourage The Right Kind Of Litigation

Many practitioners note that there is “nothing wrong” with the breach of confidence in its current from. I do not disagree with the view that judges have done a good job of updating and enforcing the breach of confidence, which has proven useful in new situations like confronting the problem of revenge porn. However, as R. G. Hammond noted in the 1980s when he advocated for reform in Canada, “judges are not responsible for the health of the system as a whole.” Absent an agreement between the parties, “law should recognize, by means of statute, a duty to respect trade secrets in specified situations.”

Just because there is no Canada Trade Secrets Act today does not mean that parties do not need or not want one. In fact, I argue that litigation over the theft of trade secrets will follow the enactment of such a law, as occurred after the Defend Trade Secrets Act was enacted when it became the principal vehicle for protecting trade secrets in federal court in the U.S. Today, such litigation is not occurring in Canada because parties do not have the tools to get into court. This is far from comforting to victims of trade secret theft.

It should be incumbent on policymakers to do more than just adopt the attitudes of the staunchest defendants of the breach of confidence (“if it ain’t broke, don’t fix it”), and to provide tools that empower Canadian businesses, entrepreneurs, and innovators to protect their trade secrets. As I noted in a recent Toronto Star piece, this is something the Canadian Intellectual Property Institute has already advocated for before in its submission regarding the Canada’s National Intellectual Property Strategy.

Conclusion

Canadian businesses, entrepreneurs, and innovators need a Canada Trade Secrets Act to protect their intangible assets because the current legal framework is insufficient. Other common law jurisdictions are already codifying their law in this area. For example, the EU Directive on trade secrets led the UK, which gave us the breach of confidence, to update its law with a statute. Further ideas as to what a model law might look like are available in the legislative responses of other federal jurisdictions.

Canada needs a statutory solution because it needs laws that explicitly recognize and protect information that derives value from being generally secret and is subject to efforts by companies to maintain that secrecy. In particular, our law needs to address the problem of commercially-driven industrial espionage where no pre-existing relationship exists—and to provide private actors the tools to remediate it. Replacing the current legal framework with a statutory law is a good way to start.

A version of these remarks was delivered at AIPPI Canada on November 25, 2021. AIPPI Canada is the Canadian chapter of the Association Internationale pour la Protection de la Propriété Intellectuelle, an organization devoted to developing and improving intellectual property laws.

Matt Malone, Research Associate
Centre for Law, Technology and Society at the University of Ottawa
@MattMaloneCA

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