Part III: Basics of trade secret protection

Topics covered in this Part:

• What trade secrets are

• Legal frameworks for trade secret protection

• Trade secrets and patents

• Using trade secrets in business (essentials)

This Part provides basic outlines of trade secret protection, focusing on the essential building blocks of trade secret systems. Reflecting the legal traditions of each country, national trade secret laws show differences in certain key areas. However, to provide a general overview of various trade secret systems, Part III particularly highlights the common areas in the national and regional trade secret systems, with references to international treaties, where appropriate.

For the country-by-country information, reference is made to the “Overview of Trade Secret Systems in Certain Countries and Regions” ⁽¹⁾https://www.wipo.int/tradesecrets/en/. and the Annex to this Guide, containing a list of reference materials relating to national/regional trade secret systems.

1. What are trade secrets?

1.1 Trade secrets in 150 words

In general, trade secrets are confidential information, which is:

• not generally known among, or accessible to, the persons in the relevant business sector (“secrecy”)

• commercially valuable because it is secret, and

• subject to reasonable steps taken by the rightful holder of the information to keep it secret, such as the use of confidentiality agreements for business partners.

Oftentimes, they are key components of an IP portfolio that strengthen the business’s competitive edge. Like other IP assets, they may be sold or licensed.

In principle, unauthorized acquisition, use or disclosure of a trade secret by others in a manner contrary to honest commercial practices is considered misappropriation of the trade secret.

If trade secret misappropriation happens, the trade secret holder can seek various legal remedies.

No registration is necessary to obtain trade secret protection. As long as the information qualifies as a trade secret, it is protected indefinitely.

Figure 1. Trade secret protection

1.2 What kinds of information may be protected as trade secrets?

Patents protect inventions; industrial designs protect aesthetic designs; and trademarks protect signs or combination(s) of signs. In essence, trade secret protection applies to confidential “information,” which can include technical and scientific information, business and commercial information as well as financial information. Basically, not only technical and scientific data and findings but also all kinds of ideas, strategies, data, know-how, techniques, methods of doing something etc. in the business and commercial sphere can be boiled down to “information,” which we generate in our daily activities.

Therefore, practically, any information can be protected by trade secrets so long as it is “secret,” has a commercial value because of the secrecy and is subject to reasonable steps taken to maintain secrecy. As long as these three criteria are met, a trade secret may also be made up of a combination of elements, each of which by itself is publicly known, but where the combination, which is kept secret, provides a competitive advantage, such as a secret process to produce a particular mixture of known chemicals.

Consequently, trade secrets are used in all sectors: not only in manufacturing or technology enterprises that offer products but also in those sectors that offer services, such as restaurants (e.g., recipes), garages (e.g., technique to wash and polish cars) and shops (e.g., customized advertising methods to keep customers’ attention). As a tool to gain and maintain a competitive advantage vis-à-vis competitors, trade secrets are relevant to businesses of all sizes. In playing an important role in the innovation cycle from R&D to commercialization, universities and research institutions also started to pay attention to trade secret systems. Part VI: Trade secrets in collaborative innovation focuses on the role of trade secrets in collaborative innovation.

Valuable information can be stored in a mental memory and if necessary, be shared with others orally. In general, this mentally stored information can qualify as trade secrets. However, in today’s business settings, much information is expressed in the form of texts, figures, drawings, charts, chemical formulae, diagrams, software code etc. and memorized on tangible media, not only in a written format but also in audio and video formats. In today’s working environment, valuable information is predominantly stored in digital form, which gives rise to particular challenges for trade secret protection. Such issues relating to digital trade secrets are discussed in Part VII: Trade secrets and digital objects. Part IV: Trade secret management also addresses information technology (IT) security measures for trade secret protection.

In addition, what can be seemingly useless information, such as failed efforts to control adverse reactions of a particular substance to be used as a medicine or to overcome certain side effects or unsuccessful attempts to interest customers in purchasing a product, can be valuable trade secrets. Such information about failures (“negative” information) may also have a competitive value, because once competitors know that information, they can save time, effort and resources by not having to try the same.

1.3 How are trade secrets protected at national and international levels?

Unlike patents, and similar to copyright, trade secrets are protected without registration, that is, trade secret protection does not require procedural formalities and examination by national administrations. Therefore, trade secrets can be immediately protected in any countries where they meet the conditions for protection in these countries. While the great majority of countries apply the three conditions as illustrated in Figure 1, whether a particular piece of information qualifies as a trade secret or not in a certain country depends on the applicable national law of that country.

At the national level, trade secrets are protected by common law and/or statute. In some countries, trade secrets are primarily protected by the law of confidence, while in some other countries, they are regulated under laws that prevent unfair competition or specific trade secret laws. In the United States of America, each state has its own state law regarding trade secrets, while at the federal level, there is also a federal law that allows a trade secret holder to file a trade secret misappropriation claim in federal court.

In addition, since confidentiality agreements (or clauses) and non-disclosure agreements (NDAs) are usually effective measures to maintain trade secret information in secrecy, contract law is also relevant to trade secret protection. Furthermore, employment law is related to handling of trade secret information in the employer–employee relationship. Although some countries have a long history of full-fledged national trade secret systems, many others have started shaping their national systems relatively recently, compared with other types of IPRs.

At the regional level, national laws of the member states of the European Union (EU) relating to trade secrets shall comply with the EU trade secret directive. ⁽²⁾Directive (EU) 2016/943 of the European Parliament and of the Council of June 8, 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure. https://eur-lex.europa.eu/eli/dir/2016/943/oj.

At the international level, the history of normative developments on trade secrets had a sketchy record until the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) ⁽³⁾https://www.wto.org/english/tratop_e/trips_e/trips_e.htm. , which binds all Members of the World Trade Organization (WTO) (see below).

Although it is not an international agreement that comprehensively covers rules relating to trade secrets, there are important principles that are generally accepted in many national laws.

• To enjoy trade secret protection, the above mentioned three criteria (i.e., secrecy, commercial value because of the secrecy, and reasonable steps taken by trade secret holders to maintain secrecy) must be complied with (see section 2.1 for the criteria to be met).

• Trade secrets can be protected for an unlimited period of time, unless they cease to meet the criteria for trade secret protection.

• Trade secret holders can seek protection only where unauthorized disclosure, acquisition or use of their trade secrets is made in a manner contrary to honest commercial practice. In other words, they do not enjoy the type of “exclusive rights” that are generally available for other categories of IP. This will be discussed in the next section.

Modern trade secret laws are built on the TRIPS Agreement, which sets the minimum level of protection that WTO Members must implement. Therefore, in the subsequent Section, references to the relevant provisions of the TRIPS Agreement are added to assist readers. However, since Section 2 provides a general, non-exhaustive description of national/regional legal frameworks, references to the provisions of the TRIPS Agreement does not suggest any interpretation of the provisions concerned.

2. Legal frameworks for trade secret protection

2.1 Criteria for trade secret protection

Understanding of the three criteria that must be met for trade secret protection is important for trade secret holders because:

• businesses can avoid a mistaken assumption that the information they possess is a trade secret and spend their resources to maintain its secrecy

• it helps businesses to make informed decisions about the best way to protect their valuable information (for example, seeking patent protection)

• since there is no registration of trade secrets and no presumption of its validity, in a case where trade secrets are misappropriated, trade secret holders must prove that the information they possess meets these three criteria.

“Secrecy”

The first criterion is the “secrecy” of the information. ⁽⁴⁾See Article 39.2(a) of the TRIPS Agreement. In general, information is considered secret if it is:

• not generally known or readily accessible

• within the circles that normally deal with this kind of information.

The “secrecy” element of trade secret law does not mean absolute secrecy - where only one person knows the information. In fact, the criterion of “secrecy” can be met if more than one person legitimately holds the same information (for example, they created the information independently) and guard it as confidential.

Or, as another example, if confidential information is shared with a business partner (or a limited number of business partners) under a confidentiality agreement prohibiting disclosure of that information, it is still “secret” information in the context of trade secret law.

It is also possible that even if the information pertaining to components of a body are publicly available, secrecy of the information covered by the body as a whole is still intact. For example, if source code is openly accessible and used by a company to develop other programs for other operating platforms, it is possible that the other programs can be considered “secret.” The decisive point would be whether someone working in the field could readily access the newly developed program, not the initial source code. Similar consideration can be applied to assembly of components and configuration of systems.

Table 2 shows some examples of information that can be considered secret or, on the contrary, considered known or readily accessible.

As a logical consequence of this criterion, if trade secret information becomes known (published) or readily accessible to those working in the field, it may no longer be protected by trade secret law. For example, valuable technological information protected by trade secrets can be outdated at some point and generally known to those working in the same technology sector. Or, a competitor may create the same valuable information independently and publish it. In both cases, the trade secret information becomes “generally known,” and the trade secret protection ends.

Finally, to those who are patent experts, it should be noted that the “secrecy” required for trade secret protection must not be confused with the notion of “novelty,” “prior art” or a “person skilled in the art” in patent law. The “secrecy” required in trade secret law is distinct from these notions in patent law.

How to prove the “secrecy” (or non-secrecy) of information in litigation is discussed in Part V: Trade secrets in litigation, in particular, in Section 4.2.

Commercial value due to “secrecy”

The second criterion is that information must have commercial value because it is secret. ⁽⁵⁾See Article 39.2(b) of the TRIPS Agreement. Information can only constitute a trade secret if it has commercial value, which usually brings some competitive advantage to its holder. This advantage must derive from the “secrecy” of the information and not from other reasons, such as quality, completeness or relevance of the information.

The requirement of commercial value of information and competitive advantage for businesses does not necessarily mean that the information as such directly brings income to the holder of the information.

• “Negative information” (see 1.2) might have commercial value vis-à-vis its competitors.

• In some instances, the fact that competitors or consumers may perceive the information as valuable because of its secrecy may be sufficient to give its holder a competitive advantage.

Similarly, whether the information was obtained after extensive research incurring tremendous cost is not important for meeting this criterion.

Generally, the commercial value can be actual or potential. To demonstrate the latter, there must be some reasonable expectation of commercial or economic value in the future due to secrecy. Thus, practically, information acquired during an R&D process may also possess potential commercial value, even if its future success is uncertain.

Some examples of information that can be considered fulfilling (or not fulfilling) the criteria of commercial value due to secrecy are listed in Table 3.

With changes in market conditions or in business strategies and directions, trade secret information can lose its commercial value for the trade secret holder, and hence its protection. For example, there is no trade secret protection for software code that can no longer be executed in a working system and provides no other value to the trade secret holder.

How to prove in litigation that the information possesses commercial value due to secrecy is addressed in Part V: Trade secrets in litigation.

Reasonable steps

As a third element, to obtain trade secret protection, the holder of the information must take reasonable steps under the circumstances to keep the information secret. ⁽⁶⁾See Article 39.2(c) of the TRIPS Agreement. In other words, trade secret holders need to take such reasonable steps to obtain and maintain trade secret protection. 

To maintain secrecy of trade secret information, in general, trade secret holders are expected to take reasonable security measures, such as controlling access to facility and introducing IT security measures like firewalls and passwords. If they share the trade secret information with others (for example, an employer with its employees, or a research company with a collaborator), they are also expected to take measures to prevent the recipients of the information from disclosing it, such as through systematic conclusion of confidentiality agreements or NDAs.

What steps are considered reasonable depends on the circumstances of each case. The factors that may be taken into account include:

• the company size

• the type of information

• the economic value of the information for the company

• the estimated duration of time the value will persist (for example, high investment for installing security measure may be not appropriate if the commercial value of the information will not persist very long)

• the risk of theft/misappropriation versus the cost of mitigating such risk (for example, extremely sophisticated security measures may increase safety of the information, but may increase cost and decrease flexible internal work processes and work efficiency).

Following these factors, a start-up will generally not be expected to take the same secrecy measures as established resourceful companies that can afford higher investment in their security systems. However, the more important the secret information is for the company, the more effort generally needs to be put into maintaining its secrecy. Therefore, it is possible that a smaller company needs to put more effort in security measures of particularly important information than a bigger company for less important information.

In practice, simple measures such as raising awareness and continuous training of employees on trade secret matters, allowing access to trade secret information only when a person has a “need to know,” setting physical access barriers, using anti-virus programs and firewalls, as well as including confidentiality and non-disclosure clauses in contracts often prove to be reasonable for maintaining the secrecy of trade secret information. However, as discussed above, the reasonable level of sophistication should be determined on a case-by-case basis.

In addition, what can be considered as reasonable steps to maintain secrecy may change over time, also reflecting developments in the external environment, such as the rise of teleworking and development of digital technologies.

In a way, since trade secrets derive their value from secrecy, it is in the interest of trade secret holders to take measures to maintain secrecy of the information and properly manage their trade secrets in an efficient and effective manner. How to do this – a topic of internal trade secret protection policies and trade secret management – is discussed in detail in Part IV: Trade secret management.

2.2 What are the protections that trade secret holders may enjoy?

Trade secret protection does not grant exclusive rights on the protected information, but regulates the behavior of parties and prevents others from engaging in wrongful conduct that is against honest commercial practice. In essence, when unauthorized third parties acquire, disclose or use trade secret information with unlawful, improper, dishonest or unfair means, it is deemed misappropriation of trade secrets.

Specifically, trade secret holders, who can be natural or legal persons, shall have the possibility of preventing their trade secrets from being

• disclosed to others

• acquired by others, or

• used by others

without the holder’s consent in a manner contrary to honest commercial practices. ⁽⁷⁾See Article 39.2 of the TRIPS Agreement.

In other words, if an individual or a legal entity caries out the above actions the trade secret holder can file lawsuits against these actions (i.e., against trade secret misappropriation).

What is meant by “a manner contrary to honest commercial practices” depends on the applicable national or regional laws. Article 39, footnote 10 of the TRIPS Agreement, however, provides a useful clarification regarding the scope of practices that are “contrary to honest commercial practices.” They are, at least:

• practices such as breach of contract, breach of confidence and inducement to breach, and

• acquisition of trade secrets by third parties who knew, or were grossly negligent in failing to know, that such practices were involved in the acquisition.

From the above, first, trade secret protection covers not only the misappropriation by persons with confidentiality relationships (e.g., contracts) but also misappropriation of confidential information by third parties outside such relationships.

Second, as to third parties, trade secret misappropriation includes acquisition of trade secrets by a third party who knew, or was grossly negligent in failing to know, that practices contrary to honest commercial practices were involved in the acquisition of the information. Conversely, if a third party acquires the trade secret information without knowing, or without gross negligence, that the information is a misappropriated trade secret (i.e., acquisition of a trade secret by a good-faith recipient), their acquisition of the misappropriated trade secret is usually not considered as trade secret misappropriation.

Example of trade secrets acquired and used by third parties

Let’s imagine the situation where an employee (Mr. A) acquired a trade secret of his employer (Company X) to carry out a research project (Px) that is expected to contribute to significant improvement of Company X’s products. The valid employment contract concluded between Mr. A and Company X stipulates Mr. A’s obligation to keep the trade secrets of Company X confidential beyond the termination of the employment contract.

Mr. A left Company X and was hired by a competitor, Company Y. Wanting to impress his new employer, Mr. A disclosed the trade secret information of Company X to Company Y.

Did Mr. A misappropriate the trade secret?

Mr. A was bound by a contractual confidentiality obligation. Thus, his disclosure of the trade secret was in a manner contrary to honest commercial practices, and was misappropriation of the trade secret.

Did Company Y misappropriate the trade secret?

The answer may depend on the specific situation of the case.

• If Company Y knew that Mr. A misappropriated trade secret of Company X, the acquisition of this information by Company Y is also trade secret misappropriation.

• Similarly, if Company Y was grossly negligent in failing to know that the information acquired from Mr. A is a misappropriated trade secret, the acquisition of this information by Company Y is also trade secret misappropriation.

  For example, Mr. A openly told Company Y that he had acquired the trade secrets of Company X relating to Project Px, although he did not tell the exact content of the trade secrets. In addition, without hiding his hostility to Company X, Mr. A was very keen on working on Company Y’s similar research project (Py). Knowing them all, Company Y assigned Mr. A to work on the project Py, without paying any attention to the risk of Mr. A using the trade secrets of its competitor. In such a case, if Company Y ultimately acquired the trade secrets of Company X from Mr. A through his activities in Project Py, most likely, Company Y should have known that the acquisition of the information involved the misappropriated trade secret of Company X. ⁽⁸⁾Company Y could have taken measures to prevent Mr. A from disclosing and using the trade secrets of Company X (and any other competitors), by, for example, using an on-boarding form that requires Mr. A to confirm his compliance with his confidentiality obligation with Company X (and others), as well as clearly instructing Mr. A to not to contaminate Company Y with trade secrets of Company X (and others).

• However, if Company Y could not have known that Mr. A was disclosing and using the trade secret of Company X (for example, Mr. A concealed his professional profile and lied to Company Y), Company Y may be deemed a good-faith recipient of the trade secret information. In that case, acquisition of the trade secret by Company Y is not misappropriation of the trade secret of Company X.

Information, particularly valuable information, travels easily. Sometimes, the origin of the information is lost through transmissions or intentionally deleted. It is not always easy to trace the transmission of the information from one person to another. In some countries, therefore, use or disclosure of the trade secrets by a good-faith recipient could be considered trade secret misappropriation under certain circumstances. ⁽⁹⁾The country specific information is available in the “Overview of Trade Secret Systems in Certain Countries and Regions”, available at: https://www.wipo.int/tradesecrets/en/. For example:

• In some countries, once the good-faith recipients know (or should have known) of the previous misappropriation relating to the acquired information, the use or disclosure of information is no longer lawful.

• As a variant, in some countries, while the above principle applies, if the good-faith recipients acquired the information through a business transaction (such as a license), they are allowed to use or disclose the information within that transaction, for example, the execution of that license, regardless of their knowledge of previous misappropriation.

• As another variant, good-faith recipients are allowed to continue using the trade secret information, if they can show that it would be prejudicial to stop using the information, subject to a reasonable royalty set by the court.

• In some other countries, use or disclosure of the acquired trade secret information by good-faith recipients is allowed, regardless of their knowledge of previous misappropriation.

In some other countries, use or disclosure of the acquired trade secret information by good-faith recipients is allowed, regardless of their knowledge of previous misappropriation.

When their trade secrets are misappropriated, trade secret holders must initiate actions to stop the misappropriation and seek remedies. This topic is addressed in detail in 2.4 below, and in Part V: Trade secrets in litigation.

2.3 Exceptions and limitation to trade secret protection

While improper, dishonest or unlawful acquisition, use or disclosure of trade secret information by unauthorized third parties is prohibited in principle, there are several exceptions to this principle. In addition, trade secret protection may be also limited in special relationships, typically, employer-employee relationships, to strike a balance between the interests of these two parties. The exceptions and limitations to trade secret protection vary among the jurisdictions. ⁽¹⁰⁾The country specific information is available in the “Overview of Trade Secret Systems in Certain Countries and Regions.” https://www.wipo.int/tradesecrets/en/. Some of them are listed below.

• Independent discovery

Trade secret information does not cover independent discovery or development of the same information by a third party.

• Reverse engineering

In general, trade secret protection does not extend to acquiring trade secret information through reverse engineering, i.e., from examining a product placed in the market by disassembling, inspecting and analyzing the product to understand its mechanism, components, compositions etc. Note that, in some countries, a contract (for example, a purchase agreement) may forbid the recipient of the product to carry out reverse engineering.

• Employee's skills and experiences

Freedom to choose an occupation may set boundaries to trade secret protection. Employers’ interests in trade secret protection beyond the employment period of their employees, and the mobility of employees, need to find a proper balance. Oftentimes, national contract law and labor law also regulate these issues. Depending on the national laws, employees’ obligation to not disclose the employer’s trade secret may be implied in the duty of loyalty of the employees.

Commonly, employers use contractual instruments, such as NDAs and confidentiality clauses, to control the use and disclosure of their trade secrets by employees. A non-compete agreement that restricts the possibility of an employee to compete with his/her employer even after the termination of the employment may prevent the employee from working with competitors after their departure. While it might reduce the risk of trade secret leakages, due to its highly restrictive nature, many jurisdictions prohibit non-compete agreements in principle, or their enforceability is subject to varied conditions and limitations, depending on the applicable national law. ⁽¹¹⁾Global Guide on Confidential Information, Trade Secrets and Post-Termination Restrictions, 2023, Bird & Bird. https://www.twobirds.com/en/insights/2023/global/global-guide-on-confidential-information.

While certain restrictions on employees’ use or disclosure of their employer’s trade secrets are generally accepted in many countries, it is also widely understood that employees may use, in their post-employment activities, general knowledge, skills and experience that they acquired from the normal course of work with the (former) employer.

The issues relating to contractual agreements between employers and employees are addressed in Part IV: Trade secret management, Section 2.3.

• Public interest and national security

The basic notion that trade secret protection should not undermine the public interest is reflected in statutory law or case law of some countries.

However, it is a complex question, since public disclosure of trade secret information means that information is no longer eligible for legal trade secret protection. In this regard, the English court emphasized the difference between what may be of interest to the public versus what is in the public interest to make the trade secret known. ⁽¹²⁾Lion Laboratories Ltd v Evans [1985] QB 526, 537 (Stephenson LJ) citing Lord Wilberforce in British SteelCorporation v Granada Television Ltd [1981] AC 1096, 1168.

Similarly, trade secret protection may be limited for the protection of essential national security interests, provided that the conditions in Article 73 of the TRIPS Agreement are met.

• Whistleblowing

Relatedly, in some countries, trade secret protection does not extend to disclosure of trade secret information for revealing misconduct, wrongdoing or illegal activity. The exact scope of this exception depends on the applicable national laws.

To defend against misappropriation claims brought by trade secret holders, the alleged misappropriator may counterargue that their actions fall within the exceptions and limitations to the protection and thus are lawful acts under the applicable law. This issue is further addressed in Part V: Trade secrets in litigation, Section 5.2.

2.4 Trade secret enforcement

Overview

Even with the highest security standards, misappropriation of trade secrets by an employee, a business partner or an external entity can take place. Trade secret law provides a framework for trade secret holders to take legal action to seek remedies for misappropriation.

Due to the characteristics of trade secrets, there are several challenges that trade secret holders could encounter in trade secret enforcement.

• Since there is no authority registering trade secrets, the trade secret holder must prove that they own a “valid,” protectable trade secret, and the defendant misappropriated that trade secret.

• Due to the confidential nature of trade secrets, collecting evidence of misappropriation is difficult. If the defendant is using the misappropriated trade secret, it is most likely that such use is kept confidential. 

• If disclosure of the misappropriated trade secret has been made, or is likely to happen, the trade secret holder needs to take immediate action to prevent further disclosure to other parties. Once the trade secret is generally known to others in the relevant industry/service, its value to the holder will be lost.

• With a view to the transparency of court proceedings, trade secret information submitted to courts may be subject to public disclosure, depending on the applicable national law (see Part V: Trade secrets in litigation, Section 6 regarding preservation of trade secrets during court proceedings).

• National/regional trade secret laws particularly vary in the area of enforcement, reflecting differences in general procedural laws and legal traditions.

As an alternative to litigation, trade secret disputes may be settled amicably through direct negotiations between the parties or alternative dispute resolution (ADR) mechanisms, such as arbitration and mediation. Such consensual processes and amicable settlement of disputes are often desirable for commercial disputes, where preservation of future business relationships can be of high importance for both parties. At the same time, ADR mechanisms have their limitations. Thus, the best option for seeking remedies depends on the specificity of each case (see more on the ADR mechanisms in Part V: Trade secrets in litigation, Section 3.4).

More detailed information on trade secret enforcement is found in Part V: Trade secrets in litigation, which discusses, among other things, what practical steps can be taken by trade secret holders to enforce their trade secrets, what kind of remedies are available, who sues whom, how defendants may defend from misappropriation claims, handling of trade secrets in court proceedings, and cross-border issues.

Civil proceedings and remedies

Since the TRIPS Agreement addresses protection of undisclosed information as one of the types of intellectual property rights, Part III of the Agreement, “Enforcement of Intellectual Property Rights,” also covers trade secrets. Accordingly, trade secret laws of many jurisdictions take into account the provisions of the TRIPS Agreement. The following paragraphs list the enforcement measures that are most relevant to trade secrets and are found in many jurisdictions.

Request for evidence held by the other party

Upon request by a party, courts may order the other party to produce the evidence it holds. A requesting party generally needs to present reasonably available evidence sufficient to support its trade secret misappropriation claims and has to specify evidence lying in the control of the opposing party which is relevant to substantiation of its claims. Courts may also set, in appropriate cases, conditions that are necessary to protect confidentiality of the information held by the other party. ⁽¹³⁾See Article 43 of the TRIPS Agreement.

In common law countries, pre-trial discovery is widely used for the parties to have mutual access to all relevant facts. In civil law countries, in general, evidence held by others may be obtained in a more limited form.

Safeguards of confidentiality in judicial proceedings

The important principle of transparency of court proceedings is often anchored in national constitutions. In trade secret misappropriation cases, however, open court proceedings could mean that trade secret holders may lose trade secret protection by seeking judicial remedies against misappropriation. A proper balance needs to be found for the delivery of justice. ⁽¹⁴⁾See Article 42 of the TRIPS Agreement.

Such safeguards may be important not only for protecting the trade secret of the plaintiff (trade secret holder) but also for the protection of defendant’s (alleged misappropriator’s) trade secret. For instance, in order to rebut the alleged misappropriation, the defendant may need to show that it also “owns” the same trade secret information that was developed independently.

Safeguards to protect confidentiality in the court proceedings depend on each jurisdiction. Commonly used measures include:

• exclusion of the public from the proceedings or in camera proceedings

• access to the sensitive information restricted to a limited number of participants (confidentiality clubs)

• publication of a redacted version of judgment, excluding the trade secret information.

National procedure laws

The procedural provisions regarding trade secret enforcement often refer to the general civil procedure law of the country concerned. In some jurisdictions, specialized courts have exclusive jurisdiction for trade secret misappropriation cases. Similar to other legal claims, in general, trade secret holders must take legal actions against misappropriation within a limited time period, often ranging between three to six years from the moment the holder knew or should have known of the misappropriation.

Provisional measures

Especially in trade secret misappropriation cases, trade secret holders seek provisional measures against the alleged misappropriator at the beginning of the case. Such quick action is often considered important for preserving the secrecy of the misappropriated trade secrets and the evidence held by the misappropriator. ⁽¹⁵⁾See Article 50 of the TRIPS Agreement.

Specifically, the plaintiff seeks a prompt court order to:

• prevent trade secret misappropriation from occurring, and in particular prevent entry into the channels of commerce in their jurisdiction of goods, including imported goods immediately after customs clearance; and/or

• preserve relevant evidence in regard to the alleged misappropriation.

In some instances, the effectiveness of provisional measures can be greatly compromised if a prior notice of the court order is given to the defendant. Thus, in especially urgent situations, such as where any delay in provisional measures is likely to cause irreparable harm to the trade secret holder, or where there is a demonstrable risk of evidence being destroyed, the judicial authority may grant an ex parte provisional measure without prior hearing of the defendant, if appropriate.

In ensuring a fair trial and justice for both parties, the judicial authorities usually require applicants for provisional measures to submit certain information or evidence. The applicant may also be required to provide a security, or equivalent assurance, to protect the defendant and to prevent abuse. There is usually a mechanism for review of the preliminary decision and if applicable, compensation to the defendant for any injury caused.

With a view to the temporary nature of the provisional measures, trade secret holders are usually required to start proceedings on the merits within a certain time period.

Remedies

Injunctions

The judicial authorities may order trade secret misappropriators to prohibit further acts of unlawful acquisition, use or disclosure of the trade secrets. Importation of products that result from trade secret misappropriation may also be prohibited. ⁽¹⁶⁾See Article 44.1 of the TRIPS Agreement.

As explained in Subsection 2.2, above, whether a third party’s use or disclosure of trade secrets that he/she acquired in good faith amount to unlawful act or not varies among different jurisdictions. Consequently, availability of injunctions in this regard depends on the applicable law.

Damages

The judicial authorities may order the trade secret misappropriator to pay damages adequate o compensate the injury the trade secret holder has suffered because of the misappropriation. ⁽¹⁷⁾See Article 45.1 of the TRIPS Agreement. Courts may calculate the damages based on the profits made by the defendant, the plaintiff’s injury (for example, loss of sales) or a reasonable royalty, depending on what is provided for under the applicable law.

The judicial authorities may also order either the plaintiff or defendant to recover expenses, including appropriate attorney's fees. ⁽¹⁸⁾See Article 45.2 of the TRIPS Agreement.

Moreover, in some jurisdictions, punitive damages or treble damages are granted against a deliberate misappropriator who has behaved in a particularly daring manner.

Similar to the availability of injunctive relief, availability of damages against unauthorized use or disclosure of the trade secret by a good-faith third party depends on whether such act by the good-faith third party is excluded from the liability or not in the applicable law.

Other remedies

In addition to the above, courts generally provide other remedies against trade secret misappropriation, taking into account the proportionality between the seriousness of the misappropriation and the remedies ordered as well as the interests of third parties. ⁽¹⁹⁾See Article 46 of the TRIPS Agreement. They often include:

• destruction, or return to the trade secret holder, of any documents, materials or digital files containing trade secret information

• destruction of the products resulting from use of misappropriated trade secrets or removal of these products from the market

• destruction or removal of equipment used, or predominantly used, to manufacture the above products.

Criminal proceedings and sanctions

Many national laws provide for criminal sanctions in trade secret misappropriation cases. ⁽²⁰⁾Article 61 of the TRIPS Agreement only obliges Members of the WTO to provide for criminal procedures and penalties in cases of willful trademark counterfeiting or copyright piracy on a commercial scale, but leaves open the possibility of WTO members to criminalize other cases of infringement, especially committed willfully and on a commercial scale. The applicability of criminal sanctions to trade secret misappropriation is often limited to the most serious acts. The level of penalty usually depends on the severity of the misappropriation.

Even in cases where the applicable law does not apply penalties for trade secret misappropriation as such, oftentimes trade secret misappropriation is carried out with means that likely have criminal relevance, such as theft, fraud, coercion, electronic intrusion etc.

Depending on the applicable law, criminal proceedings can be initiated ex officio (i.e., on the initiative of the prosecuting authority) or at the request of the trade secret holder, or both. In some countries, the theft of trade secrets is only prosecuted upon request, notwithstanding that the prosecution authorities could, under the law, act ex officio.

3. Trade secrets or patents?

Trade secrets can be important intangible assets for business growth. They have many advantages compared to patents, but at the same time, their protection is more vulnerable compared to patents. Therefore, businesses usually use trade secret systems and patent systems in a complementary manner.

To illustrate the commonalities and differences between patents and trade secrets, Table 4 compares the main aspects of a patent system and a trade secret system.

3.1 Evaluating the appropriate type of protection

Listing these differences is not difficult. But answering the core question “How to choose which protection is better for me?” can be complicated.

For example, since trade secret protection is available without official registration, no administrative fees and/or fees for an attorney (or an expert, if allowed under the applicable law) to prepare and file an application are required. There is no need to wait for patent grant by the authority. On the other hand, as there are no such administrative procedures involved, trade secret holders must prove that they are indeed a legitimate holder of a protectable trade secret when they bring trade secret misappropriation claims to courts.

Similarly, in contrast to patent systems, trade secret systems do not require publication of valuable information by the authorities. However, trade secret systems do require trade secret holders themselves to be responsible for taking appropriate measures to maintain secrecy of the information concerned. These examples simply suggest that which protection is better for a specific piece of information depends on many factors, and ultimately, on both legal requirements under the applicable law and business objectives/resources of each organization.

From the outset, if your invention is not patentable, it may be protected as trade secrets in the form of confidential “information,” provided that it meets the criteria for trade secret protection (see the left column of Table 5, below). Firstly, since patent systems primarily protect technical features of inventions, they do not protect innovation that is purely of a business or commercial nature (e.g., a customer list). In addition, usually, patent laws specify certain inventions that cannot obtain patent protection. Secondly, inventions must meet the patentability requirements under the applicable patent law. Even if these requirements are not met (e.g., lack of inventive step), they might meet the criteria for trade secret protection.

When the invention meets the patentability criteria as well as the criteria for trade secret protection, a choice may need to be made between the two (see the right column of Table 5). Taking into account the advantages and disadvantages of both systems, several factors can be considered in making such a choice.

Nature of the invention

In general, information that can be easily acquired from the product put on the market would be difficult to protect under trade secret protection. However, process inventions (e.g., how to manufacture that product) may be carried out within the premises of the company that created it, making it possible to protect them as trade secrets.

Whether it is product- or process-related information, if third parties can discover it through reverse engineering, eventually trade secret information will be known to others and the protection ends. However, that does not mean that it should be protected by a patent, particularly where the lifespan of the product is short and “the first company in the market” (the so-called lead time advantage) is the most important element that determines the company’s business success. In general, from the preparation and filing of a patent application to patent grant may take a few years.

Competitiveness

In general, if there is a likelihood of competitors being able to create the same invention independently, patent protection that enables patentees to prevent any third parties from making, using or selling the same invention would be more attractive than trade secret protection.

Expected lifespan of the product

If the lifespan of the product is expected to be longer than the term of patent protection, trade secret protection might offer a longer period of protection as long as the protected invention can be maintained secret, and it continues to have a commercial value due to its secrecy) during that period. At the same time, in practice, trade secret protection may be attractive only when it can be reasonably assumed that no competitors would be able to create the same invention independently, or no reverse engineering would reveal the confidential information.

Cost of procuring, maintaining and enforcing protection

As explained earlier, while there are no filing, grant and maintenance fees for administrative registration, trade secret holders need to take appropriate measures to maintain the information as a secret. In general, patent litigation can be expensive. However, seeking enforcement of trade secret rights before courts can be also complex. In particular, trade secret holders may face challenges in collecting evidence and proving misappropriation of trade secrets.

Opportunity cost

In many countries, patent applications are published before the results of patent examination are known. If a patent application is rejected after publication, it is no longer possible to seek trade secret protection on the information contained in that application.

Need to obtain exclusive patent rights?

In some instances, the advantages gained from the exclusive patent rights may outweigh many benefits of trade secret protection. The possibility of preventing any third party from exploiting the invention can be considered extremely important for the competitive advantage of the business in some circumstances. This could be the case where, for example, the invention was created with high R&D cost and involves a foundational technology that would be expected to be used by others for many years.

Patent protection and trade secret protection are not always an alternative choice. In certain circumstances, these two protection mechanisms are used concurrently. Indeed, until a patent application is filed, an invention must be kept secret in order to avoid the invention becoming part of the prior art. In addition, it is often possible to file a patent application while holding as a secret information that is closely related to the claimed invention. In this sense, patent and trade secret protection may be viewed as complementary.

If the patent applicant maintains secrecy of the information about the invention even after the patent filing, trade secret protection continues until the publication of the patent application. Once it is published, its content will be generally known to the relevant circles and the trade secret protection will end.

4. Leveraging trade secrets in businesses

4.1 Importance of trade secret management

One of the peculiar features of trade secret protection is that trade secret holders need to take full control of their valuable information. Consequently, regardless of their sector or business model, trade secret holders should properly manage their trade secrets to maintain and strategically exploit those assets.

A trade secret management program that is well adapted to the trade secret holder’s needs is essential. While it may include various steps, measures and processes, a high-level concept can be described as follows.

Figure 2. Trade secret management

1. Identify the most competitively valuable information in the business.

2. Identify the risks and impacts of any unauthorized acquisition, misuse, or accidental disclosure of the selected trade secrets, and of possible contamination by secrets of others.

3. Identify and apply risk reduction measures that are reasonable in relation to the value of the information, the level of risk and the cost of implementing various measures.
   For example, these measures may include:

   education of employees about identification and handling of trade secret information

   designation and periodical review of employees who “need to know” the trade secrets and restriction of access to only those employees

   physical and technological access restrictions

   limiting and monitoring public access to facilities that house trade secrets

   marking documents containing trade secrets as “secret” or “confidential”

   implementing computer system protections, such as passwords and firewalls

   securing confidentiality/non-disclosure agreements with relevant employees and outsiders who may get access to trade secrets.

4. Monitor and react to trade secret misappropriation and leakage.

In considering these four steps, there are several points that can be highlighted.

Management of your trade secrets and trade secrets of others

While protecting the company’s trade secrets from leakage or external misappropriation risks is an important issue, how to avoid liability for misusing third parties’ trade secret protection is an equally important concern for trade secret management.

Even if the company does not expect, or does not wish, to receive others’ trade secret information, it can enter into the company’s knowledge system via, for example, new employees, or through consultancy services. Once received without being noticed, it can spread very quickly and could be used widely in the company. Since new knowledge will be built gradually on existing knowledge, it will become difficult to separate and remove the trade secrets of others. In addition, receiving other’s trade secrets via licensing agreements usually requires the recipient to take measures to maintain the secrecy of the information, as stipulated in the relevant agreements.

Reportedly, the higher risks for trade secret management are around employees changing jobs

Oftentimes, employers and departing employees have conflicting interests. Employers wish to prevent competitively sensitive information from being passed on to new employers, while employees wish to use their knowledge and skills to advance their career at the new employers or to start their own business. It can sometimes be difficult to separate these two classes of information, and the potential for misunderstanding can be quite high.

Beyond the legal framework set by trade secret law, labor law, antitrust law and contract law for example, experts often suggest that trade secret holders take operational precautionary measures, such as training and educational programs for employees, exit interviews with departing employees and monitoring any “signs” that might indicate potential trade secret misappropriation immediately before and after the employees’ departure.

Conversely, new employees, particularly those involved in management and research, may unintentionally - and beyond the awareness of the new employer - use the trade secret information of their former employers to perform their new duties. Precautionary measures by new employers may include asking the new employees, as part of the on-boarding process, to confirm their commitment to not use or disclose former employers’ trade secrets.

Another high-risk situation arises when trade secrets are shared with business partners, such as vendors, collaborative partners, and external consultants

Non-disclosure agreements and contracts with confidentiality clauses can be a very important tool to regulate handling of trade secret information in business collaborations.

For trade secret holders, monitoring the recipients’ compliance with contractual terms may help them to address any potential issues at an early stage. The recipients of trade secrets, on their part, should be aware that receiving others’ trade secrets usually brings new legal obligations as well as the risks of tainting their own information assets.

Furthermore, since the business relationship may change with time, reviewing and updating agreements should be in the interest of both parties. When trade secrets are shared in the context of collaborative research, it is important for both parties to carefully define the rights of each regarding the newly created work, including jointly created trade secret information.

4.2 Strategic exploitation of trade secrets

Similar to other intellectual property assets, trade secret holders may:

• use the trade secret information exclusively by themselves, or

• allow certain use of trade secrets by certain parties under the control of the trade secret holder.

Usually, the aim of maintaining and exploiting trade secrets is to improve business efficiency and quality of products or services, with a view to attaining greater commercial success. To that end, trade secret information may be shared with, for example:

• business partners for collaborative R&D, marketing, and other projects

• local manufacturers of the company’s products in foreign countries

• franchisees pursuant to franchise agreements

• external contactors conducting outsourced business processes

• external business or other consultants who provide advisory services.

The licensing conditions, such as the degree of authorized use of the trade secret (including after termination of the license) and the terms of payment, are agreed between the parties on a case-by-case basis.

In addition, legitimate control over the trade secret information may be transferred to another party against payment or any other conditions that may be agreed between them.

Furthermore, depending on the applicable national law, trade secrets may be recognized as collateral for raising capital from private or public institutions. They may be included in the company’s accounting, contributing to its overall corporate value, or may be covered by a tax relief measure that aims to support innovation activities.

For the strategic exploitation of trade secrets, the following two points can be highlighted.

1. Constant adjustment of trade secret exploitation strategy with changing business goals and needs. Compared with other IP, trade secrets are very flexible assets – trade secret information can evolve together with daily business activities, and so can the scope of trade secret protection. The value of trade secrets is also affected by external factors, such as market trends and technological development. Therefore, the strategic exploitation of trade secrets is a dynamic concept that should evolve together with the organization’s business goals.

2. Exploitation strategy within and beyond the trade secret system. Trade secrets can be used alone, shared with others or assigned to others. Particularly in the technology sector, trade secrets are part of the IP portfolio that, as a whole, is aimed at creating competitive advantage. Thus, trade secret strategy can be considered in conjunction with other IP rights. Section 3 of this Part already discussed different features of patents and trade secrets. With respect to software, in addition to patents, copyright protection may also be a possible protection measure. Both legal factors and business factors are relevant to maximize the value of trade secrets for commercial success.

Part IV: Trade secret management of this Guide navigates the reader through practical questions about trade secret management. In addition, Part VI: Trade secrets in collaborative innovation and Part VII: Trade secrets and digital objects address the potential of trade secrets to advance collaborative innovation and protection of digital technologies.