October 28, 2019
By Noel Courage
Staying a step ahead of competitors is key in innovative technology and life sciences industries. A minority of innovations are protected by patents, which provide a time limited monopoly to exploit an invention, in return for publicly disclosing it. Many advancements are kept as trade secrets, meaning they are not disclosed at all. Trade secrets can include either business information or technical information. The hallmarks of a trade secret are that (a) it is not generally known, (b) it has commercial value because it is secret, and (c) measures are taken to keep it secret.
This article provides a brief view of the Canadian landscape for trade secret protection, and potential for legislation to strengthen trade secret protection.
Former business partners
Business collaborations between two companies can be highly productive and profitable. They also present a risk for trade secret misappropriation. The Supreme Court of Canada recognized and enforced a trade secret in a case involving involving two companies that were former business collaborators1. Cadbury terminated a license to FBI Foods to make Clamato, the tomato/clam broth beverage. There was no express confidentiality clause in their agreement. After the business arrangement ended, the former licensee, FBI Foods, used its knowledge of the Clamato recipe to springboard ahead its own version of the tomato beverage (clam broth-free). The Clamato brand owners weren’t the first to mix tomato juice and clam broth with spices, but their own version of it was a protectable trace secret. FBI foods was held liable for damages for misappropriating the trade secret.
When employees leave a company, there is also a risk that they may take trade secrets with them. Courts have enforced trade secrets in situation where departing employees misappropriate information and take it to a competing business. In one example, a departing employee took trade secrets for commercial scale manufacturing of Hellman’s Mayonnaise to a private label manufacturer. The misappropriated information transformed the latter company’s product from soupy, runny mayo to nicely whipped mayo2. Again, the misappropriator was held liable.
Trade Secrets Matter More Now
Information has always been valuable, whether customer lists, manufacturing processes or secret formulas. There are fast-growing technologies and industries in our digital age that are based on information. For example, artificial intelligence is based on rapid, complex processing of information. The entire livelihood of a company may depend on its algorithms and computer code.
Information has also never been easier to misappropriate. Competitors, departing employees and hackers can steal gigabytes of information with a keystroke. Years of research can be readily pocketed on a flash drive or exported from company headquarters to a network intruder in a living room on the other side of the world.
Canada Compared to Other Regions
The Canadian courts have taken a flexible approach to trade secret enforcement. In Canada, the tort of breach of confidence arguably is available against any misuse of confidential information, even if not a trade secret. Flexible remedies may be used to put the trade secret owner in as good a position as it would have been but for the breach. Companies typically have a more realistic opportunity to get an interlocutory injunction in a trade secret case than in a patent infringement cases. This is a good basis from which to improve trade secret protection.
In English Canada, trade secrets protection has its roots in common law and equity, which is judge made law. No federal government or provincial government has codified its trade secret law in a statute. Codifying the law provides more certainty than case law. It also provides an opportunity to broaden and strengthen trade secret law as it exists in court cases. Gaps can be eliminated and new remedies created.
In the U.S., almost all states have adopted a version of the Uniform Trade Secrets Act (UTSA). Some states have additional trade secret laws beyond UTSA. There is also a relatively new federal Defend Trade Secrets Act of 20163 that provides right to sue in Federal Court4, which is particularly useful where the misappropriation cuts across state lines.
In Europe, a Trade Secrets Directive5 required European states to set minimum EP standards for protection of trade secrets. For example, it provided a basic definition of “trade secret” and certain remedies must be made available.
Canada’s Next Steps
Canada should create a federal trade secret statute. Canada should implement at least certain basic legislation if the US-Canada-Mexico free trade agreement is implemented. However, there is no guarantee that the free trade agreement will be implemented. The US House of Representatives appears to be sitting on the legislation, and has not called a vote. The Trans-Pacific Partnership also requires certain basic trade secret protections.
In the meantime, there is no reason why every province could not pass trade secret legislation (ideally uniform legislation). The Alberta Law Reform Institute called for legislation in Alberta over three decades ago, and provided recommendations for draft legislation6. The Uniform Law Conference of Canada followed up a few years later with its own version of a Uniform Trade Secrets Act. Many provinces are trying to encourage start-up companies and technology transfer from universities. New companies are quite vulnerable, so trade secret legislation would be a good element to support a start-up ecosystem.
3 18 U.S.C. § 1836.
4 Prior federal laws continue, eg Electronic Espionage Act.
5 Directive (EU) 2016/943 of the European Parliament and of the Council of 8 June 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure.
6 Trade Secrets, 1986 CanLIIDocs 20.
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