Trade Secrets
Hi everyone! Brandon and I were talking about things IP law might not cover. While chatting we started thinking about things like secret recipes or processes, and stumbled upon trade secrets as a branch of IP law. Looking further into it, we realized that this is both an important type of Intellectual Property for many commercial ventures, and an underdeveloped area of Canadian IP law in need of some reform. Since trade secrets are not covered in this class, here is a post outlining what they are, how they capture things not protected by other IP protections, and issues with enforcement in Canada.
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While the areas of Copyright, Trademark, and Patent provide protections to creative works, public goodwill and inventions, each of these categories have strict eligibility requirements. For example, copyright protections don’t cover facts and process, trademarks are only meant to be a mark used to distinguish a person’s goods or services from others in the marketplace, and patents are limited to novel inventions within a defined set of categories. Given the narrow scope of these categories, important information may be left unprotected or may be in need of additional protection. What protections are given to Coca-Cola’s secret recipe? How can Penn and Teller protect their magic tricks?
Trade secret protections offer individuals and corporations the ability to retain and control confidential information that has commercial value, even if it does not qualify for other types of IP protection. Like passing off, trade secret law is rooted in the common law and has no governing statutes in Canada. To qualify as a trade secret, it must be determined whether: (1) the information has commercial value; (2) the information is secret; and (3) the information has been subject to reasonable measures by the business to ensure that it remains secret (Gov’t of Canada: “what is a trade secret”). When courts hear cases dealing with trade secret law, they may also consider:
- the measures taken to maintain secrecy;
- the value of the information;
- the cost in money or time of creating or developing the information;
- the ease with which the information could be acquired or developed by others independently;
- the degree to which the owner regards and treats the information as confidential;
- the degree to which the recipient regards and treats the information as confidential;
- whether the recipient ought to have known that the information was confidential; and
- whether misuse of the information resulted in detriment to the owner. (ibid)
Trade Secret Enforcement and Issues
Once the information in question becomes publicly available, it is no longer a trade secret. Furthermore, if a competitor is wrongly using a trade secret, it is imperative to prevent them from penetrating the market and eroding market share. Therefore, in many cases, corporations are looking to prevent damage through the wrongful disclosure or use of a trade secret by seeking urgent injunctive relief.
There is no single cause of action for protection of trade secrets. Instead, there are a number of ways of enforcing and protecting them, depending on the circumstances of each case. In the employment context, often confidentiality agreements are signed to protect trade secrets. There are also situations, like that of a company’s director, where a fiduciary duty can prevent wrongful disclosure of confidential information.
- Breach of Confidence
Outside of these types of scenarios, there also exists a more blanket cause of action called breach of confidence, however it is unclear what type of cause of action this is, and some courts have gone to suggest it is sui generis. As stated in Cadbury Schweppes Inc. v. FBI Foods Ltd., ““whether a breach of confidence in a particular case has a contractual, tortious, proprietary or trust flavour goes to the appropriateness of a particular equitable remedy but does not limit the court’s jurisdiction to grant it.” (Cadbury at para 26).
To have a valid breach of confidence claim, as affirmed by the Supreme Court of Canada in Lac Minerals Ltd. v. International Corona Resources Ltd., the elements of a breach of confidence action are:
- the information must have a necessary quality of confidence about it;
- the circumstances under which the information was imparted must give rise to an obligation of confidence; and
- the defendant must have made unauthorized use of the information. (Mccarthy)
The biggest issue with this test is the second step. What exactly creates an obligation of confidence? With regards to current and former employees, courts have affirmed this obligation if the confidentiality of the information was communicated to the employee, either explicitly or implicitly by context (see e.g. Pat’s Off-Road Transport v. Campbell, 2010 ABQB 443, 2010 CarswellAlta 1354; Coco v. A.N. Clark (Eng), [1969] R.P.C. 41). However, there lacks clarity about the breadth of application of this cause of action, particularly with respect to third parties accessing trade secrets (e.g.through hacking and phishing).
- Trade Secret Law and Hacking
In an increasingly digital world with increasing cybersecurity risk, what protections are in place to protect trade secrets from third parties? Could you argue that the circumstances of hacking into a company’s database would give rise to an obligation of confidence?
In the criminal context, section 391 (1) of the criminal code states that:
“Everyone commits an offence who, by deceit, falsehood or other fraudulent means, knowingly obtains a trade secret or communicates or makes available a trade secret.”
This section, along with the provision for intercepting electronic transmissions (s.184(1)), capture hacking in a criminal law context. However, while these prohibitions serve to deter and punish those who fraudulently obtain access to trade secrets, it is not clear to what extent someone can recover for the damages these actions cause.
- Espionage: Corporate and Economic
A common issue with respect to trade secrets is espionage. There are two kinds; competitive corporate spying where one company tries to get information on a competitor, and economic espionage where a foreign entity seeks to gain corporate trade secret information through espionage. Given the lack of clarity in the Breach of confidence claim, it is unclear if an obligation of confidence arises in circumstances where a corporation lawfully obtains the trade secrets of a competitor.
In the international context, corporate and economic espionage has increasingly become a concern in recent years. The FBI estimates that US companies suffer a loss of $100 billion dollars per year due to economic and corporate espionage. Both domestic laws and international agreements have attempted to address this issue.
In 2017, the Canadian government signed a “no hacking” agreement with China to protect trade secrets. Furthermore, the Security of Information Act of Canada is also meant to protect information from foreign entities. S 19(1) of the act states:
19 (1) Every person commits an offence who, at the direction of, for the benefit of or in association with a foreign economic entity, fraudulently and without colour of right and to the detriment of Canada’s economic interests, international relations or national defence or national security
(a) communicates a trade secret to another person, group or organization; or
(b) obtains, retains, alters or destroys a trade secret.
The U.S similarly has the Economic Espionage Act. In 2018, the FBI highlighted that “China, Russia, and Iran stand out as three of the most capable and active cyber actors tied to economic espionage and the potential theft of U.S. trade secrets and proprietary information”. These problems, and cybersecurity in general, will only increase in impact over time. As cyber risks continue to increase, more will need to be done to ensure the protection of Canadian corporations and their confidential information.
- Federal and Provincial Courts
Another issue with trade secret law in Canada has to do with the separation between Federal and Provincial Courts. Copyright, trademark and patents are all under the jurisdiction of the Federal Courts. On the other hand, breach of confidence, as well as the other available civil claims for trade secret protections, are only argued in Provincial Superior Courts, as the Federal Court does not benefit from an inherent jurisdiction that would allow it to deal with these issues (see e.g. Netbored Inc v Avery Holdings Inc, 2005 FC 490). Since trade secrets can operate in conjunction with patent and copyright, it’s possible that someone might try to advance claims in either copyright or patent as well as trade secrets (e.g., stolen source code for a software company could be copyright AND trade secret). Not only does this create the issue of potentially having to litigate the issues separately, but there are several advantages to the Federal Court system that trade secrets could benefit from. Trying a copyright or patent issue under the Federal Court has the benefits of getting an experienced judge in the field, Canada-wide remedies, and (in the case of complex IP cases) getting to trial within two years.
Solutions and Protocols
A key aspect of protecting trade secrets is the efforts to keep the information secret. Many secret recipes are only communicated to select employees at the company; Magicians make significant attempts to keep their tricks secret, and have communally created a set of IP norms that protect tricks without the need of the law. In the corporate context, ensuring adherence to cybersecurity best practices and encryption can help protect sensitive information. The first line of defense in protecting trade secrets is to control the information and ensure it does not fall into the wrong hands in the first place.
As stated before, Canadian trade secret law is not governed by statute. The US, on the other hand, has both the Uniform Trade Secrets Act (1979), Defend Trade Secrets Act (2016). Canada could greatly benefit from creating a statutory regime for trade secrets, and there has been a recent push towards the passing of a Federal Canada Trade Secrets Act (Dentons).
Creating a federal statute would provide clarity, an opportunity for the legislature to advance the law and could harmonize trade secret law with other IP protections by bringing trade secret causes of action into the Federal Court’s jurisdiction.
Trade secrets are a powerful tool for protecting innovation in crucially important and emerging Canadian sectors, such as AI, agricultural sciences, and aerospace. Many jurisdictions are codifying trade secret laws, and this is an important next step to trade secret protection in Canada. (Dentons). The legislature has shown a willingness to tackle this issue with the addition of s 391 to the criminal code. However, the criminal code does not offer the same protections as civil cause of actions and the opportunity for urgent injunctive relief. Until the ambiguities and issues in trade secret law are addressed, either through its harmonization into a comprehensive statute or by other means, this area of the law will continue to be an area of IP that presents unique protections and challenges in its enforcement.
Sources:
https://www.mccarthy.ca/en/insights/blogs/techlex/canadas-secret-trade-secret-protection-laws
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1005564
https://www.thecanadianencyclopedia.ca/en/article/corporate-espionage-is-big-business
Communications Law