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Trade Secret Protection

1. Trade Secret Defined

Using trade secrets companies potentially forever can protect information about their operations from faithless employees, industrial spies, venture partners and competitors. A trade secret is any information, not generally known, that gives an actual or potential commercial advantage to its owner and that has been maintained as a secret by its owner. To qualify as a trade secret, information does not have to meet any standards comparable to patent law's novelty standard or copyright law's originality standard. Trade secrets may include customer lists, methods of doing business, revenue forecasts, formulas, designs, minor improvements to known processes, and "negative knowledge" such as failed avenues of research. Anything of economic value can be protected anywhere in the world. A trade secret confided in Canada and wrongfully used in the USA may be protected if the Canadian confider sues in the USA. Unlike the USA, Canada has no Trade Secret Act and any protection available under common law only. Common law protection is volatile and can disappear despite the owner’s best efforts. Even the trade secret owner who properly guards his proprietary and confidential information can lose his trade secrets. Someone may learn the secret independently or may reverse-engineer it or the product that contains it. Departing employees may also use information that has become part of their general skills and knowledge.

2. Scope of Trade Secret Law

Canada

Trade secret law in Canada is granted at common law. Unlike the United States, Canada has no trade secret legislation. Under the common law, trade secret protection may be invoked against parties to a confidentiality agreement or against third parties by use of the tort of breach of confidence. This tort is founded on the equitable principle enunciated by Lord Denning of the British Court of Appeal in the case of Seager v. Copydex “that he who has received information in confidence shall not take unfair advantage of it. He must not make use of it o the prejudice of him who gave it without obtaining his consent”. To be successful in an action for breach of confidence a plaintiff has to establish several issues: (1) he must show that the information itself has the “necessary quality of confidence about it”, (2) he must show that the information has been provided to the person against whom the action is brought in circumstances that create or imply an obligation of confidence and (3) he must show that there has been unauthorized use of the information to his detriment.

The United States

Unlike United States patent, trademark, and copyright laws, which are all subject to federal law, trade secret protection is governed solely by state common law and statutory law. In most states, the Uniform Trade Secrets Act (UTSA), which has been adopted by forty-five states and the District of Columbia, applies. Chief among its goals is the encouragement of ethics in business relations, as well as intellectual property policy of encouraging invention by rewarding creators. Trade secret protection promotes the sharing of inventions that would otherwise not be available and protects the privacy interests of businesses from industrial espionage. International International agreements obligate the signatories to those agreements to provide trade secret protection under national laws, but do not mandate the protection to be afforded. These international agreements establish certain threshold levels of protection, while specifying measures that the national legislatures may choose to address at their discretion. Internationally a trade secret owner must comply with the laws of the countries in which trade secret protection is sought; there is no international treaty or convention that automatically affords protection to a Canadian trade secret owner.

3. Provisions of Trade Secret Law

Because Canada has no Trade Secret Act, there is no federal law for trade secret protection. Any Trade Secret protection is predicated upon common law.

Duration

Protection against unauthorized use or disclosure of trade secrets is prohibited for so long as the owner uses reasonable care to maintain the secrecy of the information and the information does not otherwise become generally known. Assuming these conditions continue to be met, trade secret protection can extend indefinitely.

Secrecy

To constitute a trade secret, the information need not be maintained in absolute secrecy. The law recognizes that some disclosure is necessary for the owner to obtain a return based on the value of the trade secret. Nonetheless, a reasonable element of secrecy must exist and the trade secret owner must take reasonable precautions to preserve the secrecy of that information. Efforts to preserve trade secrecy that courts have found reasonable have included dissemination of the information only on a " need-to-know" basis and the use of non-disclosure agreements, confidentiality markings and legends, and restricted access policies.

Acquisition of Trade Secret by Third Party

One party's trade secrets may be obtained by another party by proper or improper means. In the first instance, the law protects against the misappropriation of a trade secret by those to whom the secret has been disclosed pursuant to a duty of confidentiality arising under an express or implied contract or under a fiduciary or confidential relationship. In the second instance, the law does not define "improper means", but case law suggests that it includes illegal activities, fraud, and utilization of extraordinary means to overcome reasonable precautions to guard secrecy. Although trade secret law protects against misappropriation of information maintained as a trade secret by another party, it does not prohibit the independent development or proper discovery, including reverse engineering, of such information; as a result, different companies can have the same trade secret, as long as the information is not generally known in the industry.

4. Protection from Misappropriation

Misappropriation is the unauthorized use or disclosure of another's trade secret by someone who was under an express or implied duty of confidentiality or trust to the trade secret owner or who obtained the information through improper means. As a standard practice, trade secret owners should screen all documents before public dissemination, to avoid the inadvertent disclosure of trade secret information and also should audit trade secret information to maintain the integrity of trade secrets. Trade secrets may be misappropriated by employees of the trade secret owner or by third parties. In either event, the misappropriator may be enjoined and the trade secret owner may be awarded damages.

Employee or Licensee Under a Duty of Confidentiality

Individuals who were involved in developing of the trade secret, or had legitimate access to the information, pose the greatest risk of misappropriation. Employees and licensees have a fiduciary duty of confidentiality to the trade secret owner, which requires the employee or licensee to preserve the owner's trade secret information and prohibits the employee or licensee from using or disseminating that information without authorization, even after the relationship has terminated.

Trade Secret Policies

Trade secret owners may protect their trade secrets by instituting and enforcing a trade secret policy and by using non-compete, nondisclosure, exit interview forms (with employees) and non-disclosure agreements with licensees.

Because trade secret protection can be lost if the owner fails to take reasonable measures to preserve the secrecy of the information, trade secret owners should implement and enforce a trade secret program, including a written policy to be signed by all who are allowed access to the trade secret material. Such a trade secret program might require that all documents, computer program listings, tapes, disks, videos and other materials incorporating confidential business information be clearly labeled as confidential and proprietary. In addition, the program should require that such materials be stored in physically secure areas, such as a locked safe or file cabinet. Access to confidential information should be restricted to persons, whether employees, licensees, or employees of licensees, with a "need to know" the information in order to perform their obligations. It should also be the subject of written confidentiality agreements that identify the information as a trade secret and specify that the recipient is not authorized to make any use of the information other than in connection with the purpose for which the information is being disclosed. The trade secret owner might ensure that its agreements delineate the employee's or licensee's obligations regarding the owner's trade secrets, warn that any unauthorized access to or use of the owner's trade secrets may result in civil or criminal liability, and require that all employees or licensees assign all right, title and interest in and to the trade secrets they develop. Employers should also inform departing employees that they are legally obliged, both during and after their term of employment, to protect the employer's trade secrets, even if their employment agreement did not address the issue; employees might be asked to provide written confirmation of this information and assurance that they have not retained any of the employer's confidential information.

Internet Issues

In addition to the traditional threats to maintaining secrecy of trade secrets, the ubiquity of the Internet has raised unique threats to trade secrets. Trade secret owners who use the Internet, or who are connected to a computer with Internet links, should be careful to control intentional and inadvertent dissemination of sensitive information, whether transmitted by employees or enabled through an insecure intranet. There are several options available for reducing the risks of unauthorized transfers, disclosures and access. Data security in commercial transmission has also become an issue with the growth of electronic commerce. To prevent unauthorized electronic access to such commercial transactions, technologies such as firewalls and encryption have been developed. In addition, an increasing number of organizations are establishing Internet use policies explicitly restricting the use of trade secrets by employees and licensees alike. The development of federal and state laws prohibiting third party theft of trade secrets may also reduce the threat of such activity.

Non-compete Agreements

Non-compete agreements restrict an employee's professional mobility after the termination of employment. In considering them, courts balance the competing interests of employees, who wish to use their skill, knowledge, and expertise to change their employment at will, and employers, who wish to protect their commercially valuable proprietary information. Although courts generally disfavor non-compete agreements as a matter of public policy, the courts of many jurisdictions will enforce them if they can be shown to be reasonable and necessary. For example, they will be enforced if an employee had access to confidential information and the employee's services are demonstrably special, unique or necessary. Because they can function as a restraint of trade by circumscribing an individual's right to pursue employment in his chosen field, non-compete agreements, as a general rule, should be limited as to duration and geographic scope.

Non-disclosure Agreements

Non-disclosure agreements may be used between an employer and an employee, a company and its contractors and consultants, or between parties to a joint venture, and are of increasing importance as non-traditional business models, such as outsourcing, temporary employees, and virtual corporations, become more common. Although non-disclosure agreements are not regarded as prerequisites for proving that sufficient care was taken to preserve confidential information as a trade secret, at the very least they serve to confirm an obligation that the law would otherwise imply. Unlike non-compete agreements, non-disclosure agreements do not act as a restraint of trade because they merely affirmatively prohibit illegal activity, not circumscribe individual liberty and so do not have to be limited as to duration or geography.

Licensing Issues

Parties are free to contract with respect to a secret formula or trade secret in any manner that they determine to be in their best interests, including licensing the trade secret to a third-party. During the duration of the contract the trade secret may lose its secrecy and be disclosed in the public domain for whatever reason. However, absent contract language to the contrary, disclosure of a trade secret may not necessarily abrogate obligations under a contract. A person who acquires a secret formula or a trade secret through a valid and binding contract cannot escape from an obligation to which that person voluntary was bound simply because the secret is discovered by a third party or by the general public.