Trade secrets allow businesses to obtain a commercial advantage over competitors which do not know or cannot use the secret. However, the secret must be managed carefully to avoid loss of rights. Trade secrets need not be significant innovations, just new and unknown with at least a minimal degree of skill required from the secret’s owner to be obtained. A newly developed process or formulation for a product that is unknown is often sufficient for a trade secret to exist. For example, in Cadbury Schweppes Inc v FBI Foods Ltd (1999 83 CPR (3d) 289 SCC) the specific proportion of clam juice, seasoning and tomato juice used in Clamato was considered a protectable trade secret, despite the fact that the label listed all of the basic ingredients (though the spices were not specified). Further, the Clamato brand owners did not pioneer the mixing of tomato juice and clam broth with spices – this combination was disclosed in a cookbook at least 10 years before the first sales of Clamato in 1966 – and as Clamato was a trade secret, the owners were able to prevent its misuse by a former business partner.
It is good practice for companies to document the existence and origins of trade secrets, which must be definable and clear. Further, to ensure effective enforcement, trade secret rights must be provable. Factors that can prove the existence of a trade secret include:
- whether information relating to it is generally known in the relevant industry;
- cost and difficulty of initial development;
- ease of acquisition by others;
- protection used to maintain the confidentiality of secret information inside and outside the business; and
- commercial value.
In a case involving a company that shared mining and land data with a potential partner, while there was no written confidentiality agreement, the relationship between the companies created an obligation of confidence and a fiduciary duty. The evidence also showed that such information was typically shared on a confidential basis. The company that received the information could not use it for its own purposes in order to make a business decision to acquire land that was the subject of the data.
Duration and loss of rights
Trade secret protection lasts for as long as the information remains a secret (ie, trade secrets are lost when secret information becomes public knowledge). However, secrets are not easily kept – particularly if competitors can reverse engineer the product, which they are free to do if no relationship between the companies exists. Former employees and business partners also pose a significant risk.
Business and R&D practices to protect trade secrets
The following practices are useful to protect a trade secret:
- maintain secure records of the trade secret, including:
- its development history;
- its location; and
- its accessibility (ie, identify any employees or commercial partners with whom the secret was shared);
- clearly identify and categorise the trade secret, including its commercial importance;
- weigh the competative advantages to using the patent or trade secret (or both);
- use confidentiality agreements and company policies;
- provide effective training for employees, consultants and business partners;
- ensure that ownership of any improvement generated by employees and consultants using the trade secret is documented;
- consider using non-competition and non-solicitation clauses as an additional layer of protection to confidentiality clauses;
- mark documents as 'confidential' (and copyright, if appropriate);
- use physical and electronic security to limit access (eg, filing cabinets and passwords);
- do not disclose confidential information;
- conduct exit interviews when confidential relationships end in order to reinforce confidentiality and ensure that any confidential information is returned to the company; and
- avoid unnecessarily receiving confidential information from other companies to prevent any research programmes from becoming tainted.
Enforcing trade secret rights
On discovering a potential breach of confidence, the trade secret owner should promptly take enforcement action. An injunction can be requested from a court in order to prevent initial disclosure or further misuse of the trade secret (see Cadbury Schweppes). In Canada it is difficult to get an injunction because the courts require proof, among other things, that in the absence of an injunction, irreparable harm will occur for which money is insufficient compensation (see RJR MacDonald Inc v Canada (AG) 1994 1 SCR 311, 111 DLR (4th) 385). However, it is often easier to show irreparable harm to get an injunction in a trade secret case than in IP cases involving patents or trademarks.
If a trade secret is lost due to misappropriation, the misappropriator may be liable to pay damages to the trade secret owner for its losses. Canadian courts take a flexible approach to compensating for losses due to trade secret misappropriation. Typical remedies available for a breach of confidence are damages (ie, monetary compensation for losses) or an accounting of profits (ie, a monetary award based on the extra profits earned by a competitor from misuse of the information). The plaintiff can generally elect between damages and an accounting of profits.
This article first appeared in IAM. For further information please visit www.IAM-media.com.