Aug 1, 1995
CAN YOU KEEP A TRADE SECRET?
by Gary Dunn

CAN YOU KEEP A TRADE SECRET?

"O divine art of sublety and secrecy! Through you we learn to be invisible, through you inaudible and hence we can hold the enemy's fate in our hands." Sun Tzu (6th-5th century B.C.), Chinese general. The Art of War, ch. 6, axiom 9 (c. 490 B.C.; ed. by James Clavell, 1981).


It's not exactly a battlefield out there, but all of us from time to time feel the pinch of increasing competition.

The strategies we rely on to protect our positions reflect the level of competition, and our sophistication in dealing with it. Economic barriers to competition are increasingly being augmented by claims of legal rights.

The approach of Western law has been to expand the concept of property rights to knowledge. The "creator" of the knowledge is bestowed with an exclusive right to use the knowledge for a fixed period of time. In return, the creator publicly discloses the knowledge. The rationale for giving this monopoly is simple -- when the property right expires, the information is available for public use.

Not surprisingly, this has translated into a blossoming awareness of knowledge based property rights, commonly referred to as intellectual property. Patent, copyright, trademark and industrial design laws are well known rights. But did you know that there is a fifth type - trade secrets?

One of the most famous trade secrets is the recipe for the soft drink "Coke". In the manufacturing and distribution business, trade secrets might include customer lists, mailing lists, business plans, drawings of devices, and internal business policies such as pricing and estimating.

To qualify as a trade secret, the information must have some value to the person possessing it, the information cannot be widely known, and some effort must be made to keep the information confidential.

The kinds of information that might be called trade secrets are virtually unlimited, and depend on one's business. As an aside, it remains to be decided if the source code of publicly distributed software qualifies for trade secret protection.

Trade secrets can also be protected by other forms of intellectual property rights. For example, obtaining a patent may be an alternative to relying on trade secret protection.

There are pros and cons to each choice. If you rely on keeping your knowledge secret, your protection would last as long as the information met the criteria of a trade secret. If you obtained a patent, the property right would expire in twenty years and your secrets would be published as part of the patent process.

Trade secret protection does not need a contract between parties to give rise to protection. The famous Canadian case of LAC Minerals v. Corona was decided on the basis that information given to LAC was disclosed on the understanding that it would be used only for the purpose of deciding if the two companies would jointly develop a proposed mine. When LAC acted on the information and obtained property which would later form part of the mine, Corona sued claiming ownership of the property. The Supreme Court of Canada awarded the property, which by now had been turned into a mine, to Corona provided that they paid LAC's development costs.

All of us at some point have been asked to sign a non-disclosure agreement. Should you be using one too? The answer is most emphatically yes.

All businesses have some information that would harm their competitive position if it became public knowledge.

Most compelling, if the knowledge is made public, it can never regain the status of a trade secret. For those businesses considering patent protection, a non-disclosure agreement is a must when disclosing information about the invention before the patent is granted.

Legal reasons aside, we can hardly expect employees to keep secrets if we do not coach them - and an agreement will serve to record their commitment in writing.

A management plan is a key component of a strategy to protect intellectual property rights. The first step in any plan is to identify what information is important to your business. If (1) identification is followed up with (2) an examination of how the information is stored, (3) who has access to it, (4) how is it marked as confidential, and (5) how is it used, you might well identify where remedial action is required.

Your employees are a key element in the planning process. Often they know more than anyone about the company's trade secrets.

Common outcomes of the planning process are restricting availability of information to a need to know basis, educating your employees regarding disclosure and centralized or controlled storage of information. The planning process can also help you become clear as to what information gives you a significant competitive advantage. Learning more about your business can never hurt!

A periodic review will help you ensure that your internal policies are in tune with your business.

Not surprisingly, your own organization is often the best source of information about your secrets. Consistently, businesses fail to identify information as confidential when disclosing it - and assume that a non-disclosure agreement is enough. But these very agreements usually require that the information be marked or otherwise identified.

Day to day business activities also give rise to many opportunities to unwittingly make secrets public knowledge. When you apply for a government grant, a loan, provide information to a manufacturer of your product, contract out research and development, or just provide plain old information to a prospective business partner, your secrets can be lost to you by becoming public knowledge. The careful use of a non-disclosure agreement might save the day.

Many areas of the United States have legislation dealing with trade secrets. Caution is advised when doing business in these areas to ensure that your non-disclosure agreement complies with local legislation. This is in addition to any agreement about what laws apply to the contract - an important point in this age of global commerce.

Returning to the home front, if an employee takes your secret information, you have remedies that are based in employment law. Most commonly, the remedy sought is to prevent the use of customer lists and other information that a sales person might take.

A non-disclosure agreement can expand the kinds of information that the employee is obligated to keep secret. These provisions can be incorporated in the employment agreement. And to increase the chances that the agreement is enforceable, the best time to obtain the agreement is during the hiring process.

In British Columbia, the Freedom of Information and Protection of Privacy Act obligates public bodies to disclose on request certain information. This can have unintended consequences if the information disclosed is about your business or technology. For example, if you are licensing technology from a university or other post secondary body, it may be possible for the public to obtain information about the technology.

Fortunately, there are exceptions to the rule in the legislation. It is a good idea to consider these exceptions carefully. Assuming you meet the tests, prudence suggests including a provision in your agreement with the public body acknowledging that the exceptions apply and the need for confidentiality.

And for every business, the challenge is to craft a protection strategy, within a budget, combining trade secret protection with other intellectual property rights.


Gary Dunn practises law in Vancouver in the areas of intellectual property, securities and licensing. He can be contacted at 604-739-7011 or at gary@dunn.com