Topics covered in this Part:
Goals of trade secret protection
The roles of trade secret protection in the modern economy and in innovation
National policies and strategies relating to trade secret protection
Protecting knowledge and know-how through confidentiality is very old. There are many examples in world history where the rulers, or persons who had lawful control over the information at that time, strategically used secrecy to create and maintain their economic gains – sericulture techniques, cotton-dyeing processes, glassmaking techniques, to name a few.
Some examples of how valuable business information was protected in ancient times reveal the essential nature of human business relationships. In Hammurabi’s Code of Laws from 1754 BCE, it is ruled that if an artisan has undertaken to rear a child and teaches him his craft, he cannot be demanded back. However, if he has not taught the child his craft, this adopted son may return to his father’s house.
While these historical anecdotes give us a few insights into the use of trade secrets, our interest lies in understanding the roles of trade secrets in the modern innovation ecosystem, which is very different from Hammurabi’s time in many ways. Part II therefore highlights the high-level goals of the trade secret systems and their evolving roles in the modern economy, before looking into the specificities of the trade secret systems and their use, articulated in the subsequent Parts of the Guide.
1. High-level goals of trade secret protection
It could be said that struggles between those who want to control their valuable information through secrecy, on the one hand, and those who attempt to find them, on the other hand, have been found everywhere since ancient times. That might be the reason why the conceptual understanding of the protection of trade secrets has gradually been woven into distinct local social norms and law, in different ways. The national basis of trade secret protection currently ranges from relational obligations (contracts, employer–employee relationship, fiduciary duty of confidentiality etc.), property rights, unfair competition, or fairness and equity.
Nevertheless, it is possible to find general high-level goals of trade secret protection regardless of the national legal traditions and normative premises – why do we protect this particular species of confidential information?
Promote fair competition
In countries with market economy systems, fair competition between enterprises is considered as the essential means for satisfying the supply and demand of the economy, which also serves theinterests of consumers and society as a whole.
Competition is one of the main driving forces of innovation. Since trade secrets are particularly vulnerable to misappropriation by others, protection of trade secrets against unlawful acquisition, use or disclosure suppresses anti-competitive business behaviors and aims to promote innovation through fair competition.
Improve efficiency of the innovation ecosystem
Protection of trade secrets aims to improve the overall efficiency of the innovation ecosystem. The need to keep information confidential in creating and maintaining competitive advantages continues to exist in modern times. Appropriate trade secret protection will lead both innovators and their competitors to invest in innovation activities as such in a more efficient manner.
For innovators, the availability of appropriate trade secret protection may reduce the need to invest in inefficient or costly behaviors, such as hiring only family members or confining all workers in an isolated island, as we know from history. It may also encourage competitors to invest in improving their capacity and competitiveness through lawful means, instead of spending their resources on bribery, espionage and other improper means of acquiring information.
Promote creation of commercially valuable information
For realization of commercial success, successful R&D alone is often not sufficient. Knowledge and know-how relating to developing and manufacturing products as well as marketing, sale and distribution of the products are necessary. In many service sectors, knowledge and know-how underpin the quality, cost and other factors that improve satisfaction of customers, which in turn differentiate a service provider from its competitors.
Trade secret protection aims to promote creation of a wide range of commercially valuable information that is important for businesses to generate revenue and maintain a competitive edge.
Seeing the above, the patent system and trade secret system have overlapping high-level goals. A fundamental difference between the two systems, i.e., a patent system based on public disclosure and a trade secret system based on confidentiality, does not conflict with sharing a common goal of supporting innovation and creativity for the benefit of the society. They simply try to achieve it in significantly different ways, in a complementary manner (see also Part III: Basics of trade secret protection, in particular, Section 3).
2. Evolving strategic roles of trade secrets in the modern economy
In this section, we will look at the roles of trade secret systems in the modern economy and innovation systems, characterized by globalization, speed, connectivity and a mix of open/closed business models.
2.1 Additional tool to navigate a globalized marketplace
In a globalized marketplace, businesses face intense competition from both domestic and international competitors. Trade secret protection provides certain safeguards in case of leakage or misappropriation of valuable confidential information.
As seen above, commercially valuable information for businesses is much broader than advanced technological information. Thus, trade secret protection provides a level playing field for market players in all sectors of all sizes, including the service sector and small local businesses.
2.2 Staying ahead of competitors
The rapid pace of technological advancements, coupled with the higher speed of information communicated among businesses and customers, has led to increased focus on protection of trade secrets to stay ahead of the competition.
Particularly in some sectors that sell products with a shorter lifecycle and a rapid shift in customers’ preferences, launching products underpinned by trade secret protection ahead of competitors can provide a significant competitive advantage.
2.3 Supporting strategic partnerships and controlled diffusion of knowledge/know-how
Strategic partnerships and collaborations with other entities can be crucial for businesses to expand their reach and grow. In many instances, creation and delivery of products and services are the result of efforts of several independent operators and long value chains. To enhance the efficiency of collaboration through cross-fertilization of knowledge and know-how, sharing of confidential technical, business or commercial information with the partners may become important for both parties. Successful exchange of trade secret information held by collaborating partners and effective management of trade secret information generated by such collaboration are key to open innovation models that has been embraced by increasing numbers of organizations (see Part VI: Trade secrets in collaborative innovation).
While it may sound counterintuitive, trade secret protection may result in more knowledge diffusion through controlled sharing of knowledge than without such protection. Legal protection against misappropriation of trade secret information and legal remedies in case of the misappropriation can generate sufficient confidence and trust that are required by trade secret holders to share their vulnerable sensitive information with other parties, usually under certain conditions and subject to confidentiality agreements.
Relatedly, trade secret protection plays an important role in the diffusion of knowledge and know-how in the context of employment through, for example, an employer sharing trade secret information with certain employees. As it may entail conflicting interests of the holder of the trade secret information and the recipient of the information, national trade secret systems usually seek to find a balance between the two.
2.4 Filling a gap in the IP system and other mechanisms
It is widely recognized that IP is a tool that can facilitate innovation. Leveraging a patent system for extra normal return on investment is a general strategy for technology innovators. Other forms of IP also provide competitive advantages to businesses. However, they fall short of appropriately protecting information that derives its commercial value through secrecy.
One common mechanism to protect such confidential information is a contract to maintain confidentiality. However, contracts do not apply to people outside the contractual relationship, and thus cannot offer legal protection against misappropriation carried out by them through, for example, cyberattack or espionage.
Trade secrets fill these gaps, complementing these other mechanisms to safeguard the commercial value created by trade secret holders. They also provide opportunities for businesses to diversify their IP portfolios and protect a broader range of intellectual assets.
In practice, national economy is supported by various players: different industry and service sectors and entities with different levels of economic size and available resources. They utilize different ways of creating commercial value and financial income. Trade secrets can be relevant to all, due to the broad scope of information they can cover.
It is well known that a variety of appropriation mechanisms, which interact with each other in different ways, are employed case-by-case by businesses to protect their innovation. Accordingly, while no generalization is appropriate, some research papers suggest that trade secrets are one of the most important appropriation mechanisms in some sectors - sometimes higher preference is given to trade secrets than patents in certain circumstances.
3. Trade secrets and economic growth: national strategies
Due to the confidential nature of trade secrets, in general, it is not easy to evaluate the effect of trade secret protection on innovation or economic growth based on sufficient data. That said, the assessment made by the Organisation for Economic Co-operation and Development (OECD) showed that there is a positive and statistically significant relationship between the strength of trade secret protection in an economy and that economy’s key indicators of innovation and international economic flows in investment and trade. With a caveat that the positive relationship, drawn from a specific sample during a specific time and a specific range of variation, does not necessarily show causality and stated that ever stronger rights and remedies would not yield similar results, the report concluded that adequately protecting trade secrets may be an appropriate policy for strengthening certain aspects of economic performance.
From the perspective of national policies, the keyword found in the above conclusion appears to be an “adequate protection,” i.e., an adequate national trade secret system that will achieve the high-level goals discussed at the beginning of this Part. Three aspects may be highlighted in this regard.
3.1 Synergies with other IP
First, in designing a national legal framework for trade secret protection, synergies with other forms of IP as well as other related areasof legal order (such as contracts, employees’ rights and rights to information) may be considered. Since a trade secret system can potentially fill a gap in other laws and how they are used by local innovators, a trade secret law can complement them to assist local innovators to build their competitiveness, and therefore this may form part of the needs assessment.
Similar to other forms of IP, a holistic perspective is necessary to seek a balance among the interests of various market players, bearing in mind a wide range of information that can be protected by trade secrets.
For example, in accordance with the Unfair Competition Prevention and Trade Secret Protection Act of the Republic of Korea, the Commissioner of the Korean Intellectual Property Office (KIPO), in consultation with other relevant central administrative agencies, established the first Basic Plan for the Prevention of Unfair Competition and the Protection of Trade Secrets in 2021. The Basic Plan, which will be prepared every five years, aims to establish a foundation for innovation and enhance national competitiveness by strengthening the protection of trade secrets. Based on the Basic Plan, the Commission is also mandated to set and implement a yearly Action Plan, carried out by relevant central administrative agencies.
Likewise, although trade secret protection is not a mainstream subject in all national IP strategies, some countries also address trade secrets in conjunction with other forms of intellectual property, identifying the shortcomings in the implementation of trade secret law(1)National Intellectual Property Strategy of the Philippines 2020–2025. https://www.ipophil.gov.ph/national-intellectual-property-strategy-nips/. or addressing trade secret protection as an important area for further development.(2)National Intellectual Property Strategy of Brazil, Decree No. 10.886 of December 7, 2021. https://www.in.gov.br/web/dou/-/decreto-n-10.886-de-7-de-dezembro-de-2021-365433440.
3.2 Availability of remedies
Second, practical availability of remediesin case of misappropriation is one of the essential elements in a trade secret system. Many of the positive roles of trade secrets in innovation are set on the premise that trade secret holders have confidence and trust in the trade secret system, which includes the possibility of effective legal action against misappropriation. Beyond the legal framework, legal professionals, such as local attorneys and judges play an important role in applying the law to concrete cases.
3.3 Management of trade secrets
Third, trade secret protection necessitates active engagement of the trade secret holdersin managing and maintaining the secrecy of the information so that it continues to be eligible to enjoy protection. In other words, to effectively protect their trade secrets, businesses need certain understanding about identification, management and protection of their trade secrets. Accordingly, some national authorities publish handbooks and guides that contain practical information for businesses, particularly for small and medium-sized enterprises (SMEs). They focus on how local businesses can use the trade secret system and benefit from it.(3)For example, Handbook for Protection of Confidential Information - Improving Corporate Value, Ministry of Economy, Trade and Industry (METI) of Japan, Last updated in February 2024. https://www.meti.go.jp/policy/economy/chizai/chiteki/pdf/handbook/full.pdf (in Japanese). An English webpage of METI covering information relating to the Unfair Competition Prevention Act.
As part of the Singapore IP Strategy 2030, the Intellectual Property Office of Singapore (IPOS) undertook a Study on the Protection and Management of Trade Secrets in Singapore in 2021 to gain a deeper understanding of Singapore’s trade secret regime vis-à-vis other comparable economies. The study also sought to find out the level of knowledge and ability of enterprises in Singapore to protect and manage their trade secrets, and how they might be supported, especially in the era of rapid technological advances.
The study found that most enterprises recognized the importance of trade secrets for their business growth, with about 75 percent of enterprises considering trade secrets to be the most important to their business. However, about half of all enterprises were not familiar with Singapore’s trade secret regime, and about 2 in 5 enterprises did not use any trade secret-related services. Most enterprises indicated that more can be done to support enterprises, including raising awareness of the importance of trade secrets and increasing the accessibility of trade secret-related services.
Accordingly, the Trade Secret Enterprise GuideTrade Secrets Enterprise Guide was commissioned by IPOS and published in 2022. The Guide is meant to serve as an introductory and practical reference for enterprises and includes non-exhaustive examples of available trade secret tools and services that enterprises may tap into.
Source: Trade Secrets Enterprise Guide, (IPOS), 2022, available at: https://www.ipos.gov.sg/docs/default-source/resources-library/trade-secrets/trade-secrets-guide.pdf
A well-designed trade secret system can play a strategic role in strengthening competitiveness of local businesses in a fair competition setting. Understanding the high-level goals of the trade secret system and impacts of trade secrets on local businesses is a starting point for policy makers to effectively leverage this unique form of protection and strengthen national competitiveness in an increasingly interconnected world.