In today’s competitive business environment, employees can “make or break” an enterprise when it comes to trade secret protection. When used strategically, trade secrets often provide a significant competitive advantage in the market place, and can be central to the creation of a market niche which competitors may find difficult to penetrate.
Companies are very protective of their trade secrets and by successfully protecting them they strengthen other IP assets that they have; for example, when Coca-Cola protects its secret formula as a trade secret, by doing so it also strengthens its trademark. A case this year has highlighted again the importance of ensuring protection of confidential documents when involved in a legal dispute with a trade rival to protect trade secrets.
Luxottica Retail Australia Pty Ltd v Specsavers Pty Ltd (No 3)1
The case involved a dispute between Luxottica (the company which manages the OPSM brand) and its trade rival Specsavers.
Specsavers in February and March of 2010 ran an advertising campaign that compared its products and prices to OPSM’s. The Federal Court determined that the advertisements were misleading and deceptive under Section 52 of the Trade Practices Act2. The court declined to order corrective advertising on the basis that the passage of time had dissipated the effect of the advertisement3..The question of damages to be awarded was left for another application. This is the context in which this case arises.
Specifically, in support of its claim of damages OPSM had provided Specsavers legal representatives with certain evidence pursuant to a confidentiality regime, which had been imposed to supplement the ordinary obligation on parties in litigation not to use documents for any purpose extraneous to the litigation4.
The additional confidentiality regime prevented Specsavers’ lawyers from giving the evidence to Specsavers itself. This was in recognition that the ordinary obligation may be inadequate in some circumstances, particularly with regard to trade rivals. This case concerned an application by Specsavers to vary the terms of that confidentiality regime to allow Dr Stretch Kontelj, Specsavers’ in-house counsel and company secretary, access to material provided by Luxottica.
The general principles on use that can be made of material disclosed in litigation is laid down in the case of Mobil Oil Australia Ltd v Guina Developments Pty Ltd5 were:
- A party was not to use documents obtained by discovery for purposes extraneous to litigation. Hayne JA quoted Lord Keith of Kinkel in Home Office v Harman6:
“Discovery constitutes a very serious invasion of the privacy and confidentiality of a litigant’s affairs…the process should not be allowed to place upon the litigant any harsher or more oppressive burden than is strictly required for the purpose of securing that justice is done.”
- The fact that documents are confidential will not ordinarily be sufficient reason to deny inspection by the opposite party. The ordinary obligation will, in some cases, provide sufficient protection. However, his Honour recognized that in the case of trade rivals, other considerations arise. In particular he said that once documents are inspected by the principles of the trade rival:
“…confidentiality is destroyed once and for all…To say that the trade rival is bound not to use the documents except for the purpose of the action concerned is, in a case such as this, to impose upon that trade rival an obligation that is impossible of performance by him and impossible of enforcement by the party whose secrets have been revealed.”
- His Honour also said that in some cases, it would be appropriate to distinguish between the plaintiff, its officers, its legal advisers and experts. Orders of confidentiality can be made:
“…when doing so would strike a fair balance between the competing interests of the party seeking inspection and the party claiming confidentiality. No more specific rule can be laid down- each case will fall for determination according to its own facts.”
What the Judge was prepared to protect
This case provides an example of where the court has been prepared to order an additional level of protection for certain documents above that provided by the ordinary obligation not to use the material for purposes extraneous to litigation.
What will be protected?
From the report prepared by a forensic accountant, Justice Perram addressed which parts contained evidence which is of the character that should be protected. In particular, he said the following information was entitled to additional protection than that found usually:
- Figures in percentage terms describing the proportion of customer sales constituted by sales made on corporate accounts;
- The actual gross and net sales, and net sales by state and region;
- Market share data;
- The level of sales for private purchasers and corporate purchasers;
- An historical relationship between certain Medicare figures and sales;
- The theorised ‘churn rate’ of customers;
- Results of inquires by the company into stores with a variance of 30% between actual sales for the financial years 2009-2010;
- The raw data about sales;
- A comparison between sales of prescription glasses and lenses;
- Lost sales and profit data for the relevant period
- Calculations of lost future profits containing average selling price data, actual number of products sold and the customer rate of return; and
- Focus groups and survey reports demonstrating how consumers felt about the brand before and after seeing the advertisements
His Honour also pointed out what was not considered to need additional protection:
- Way in which a budget is prepared;
- Market share data going back to 2000, given the distance of time.
His Honour also mentioned that access to these documents which need additional protection could still be granted to specific Specsaver employees “if the risks attending a situation of trade rivalry may somehow otherwise be addressed.”
However the company secretary, Dr Kontelj, was not considered to be placed in that position as he would be attending board meetings and executive meetings. His Honour pointed out that Dr Kontelj has fiduciary obligations to the company – “armed with [the information] it is his duty to assist Specsavers board with the information. That he would bind himself not to do so does not dissipate the unavoidable conflict of interest.”
Trade secrets are particularly important IP assets. The main benefit of trade secrecy is that it can exist for as long as the information remains confidential, whereas patents and designs have a limited monopoly term. Even if the subject matter of a trade secret is patentable, simply keeping a trade secret confidential can sometimes be a better strategy.
Kentucky Fried Chicken, most commonly known as KFC, certainly seems to have identified and maintained the secrecy of one of its crucial trade secrets, Colonel Sanders’ handwritten recipe of 11 herbs and spices. The piece of paper containing the information had been moved only once, when it was placed in a locked briefcase handcuffed to a ‘security expert’ with a gun-toting guards and armored truck.
A big deal was made about the fact that the recipe was being moved which was great for marketing and exhibited a strong, although potentially over-the-top, effort in maintaining its trade secret.
Franchise owners do not need to go to such extremes to protect their trade secrets as shown in this case. Some very brief suggestions for protecting your trade secrets are:
- have an express and published policy for confidentiality of information and provide training to make the policy effective;
- require employees and persons having access to confidential information to sign confidentiality agreements;
- mark documents as "Confidential";
- avoid copying confidential documents (physically or electronically) unnecessarily;
- maintain a record of confidential documents (including copies) and information;
- warn employees and contractors, and explain the need to retain confidentiality, and the consequences of failure;
- maintain security, including physical possession and security, and electronic passwords, virus protection and other expedients such as separate databases and computers for sensitive information;
- implement a security incident reporting and response system;
- conduct audits of files of high risk employees or others, and random audits to ascertain compliance with any confidentiality policies and any information that has been disclosed electronically;
- check and be selective about information revealed to the public through marketing materials and trade shows etc;
- obtain specialist security or IT advice about the appropriate methods of protection;
- obtain legal advice and a review of documents and confidentiality agreements;7
- When in litigation, consider whether additional confidentiality regimes need to be put in place beyond the ordinary principles.
In Australia, the law regarding the protection of trade secrets and confidential information is prescribed by common law. This method of protection for trade and commercial secrets therefore needs to be managed by the entity wishing to keep something a secret. Courts have been prepared to allow parties to provide copies of sensitive documents with confidential information redacted8.
The courts and legal system are in place to protect trade secrets and as this case demonstrates there are ways to conduct legal disputes while simultaneously protecting confidential information.