Identifying and Enforcing Trade Secrets

By Noel Courage

Trade secrets provide a business with an opportunity to obtain a commercial advantage over competitors who do not know or use the secret. However, the secret must be managed carefully to avoid loss of rights. Trade secrets do not have to be significant innovations, just new and unknown, with at least a minimal degree of skill applied by the secret owner to obtain it. If a new process or formulation developed for a product is unknown, that is often sufficient for a trade secret to exist. As an example, the specific proportion of clam juice, seasonings and tomato juice used in Clamato beverage was a protectable trade secret.¹ This was the case even though the label listed all the basic ingredients (though “spices” listed on the label were not specified). As well, the Clamato brand owners weren’t the first to mix tomato juice and clam broth with spices. This had been disclosed in a cookbook at least 10 years before Mott’s first sold Clamato beverage in 1966. Since it was a trade secret, the owner was able to prevent its misuse by a former business partner.

It is good practice for a company to document the existence and origin of trade secrets. The trade secret needs to be definable and clear. Trade secret rights must be provable, to enforce those rights. Factors that can show existence of a trade secret include:

• is the information that is the subject of the secret generally known in the relevant industry;
• cost and difficulty to initially develop the trade secret;
• ease of acquisition of the secret by others;
• uniqueness²;
• protections used to maintain confidentiality of information inside the business and when shared outside the business; and
• the commercial value of the secret to the business.

In a case involving a company that shared mining and land data with a potential partner, there was no written confidentiality agreement. Nonetheless, the relationship between the companies in that case created an obligation of confidence and a fiduciary duty. The evidence also showed that such information was typically shared on a confidential basis. The company that received the information could not use it for its own purposes to make a business decision acquire land that was the subject of the data.  

Trade Secret Duration and Loss of Rights

As mentioned above, trade secret protection lasts for as long as the information remains a secret. The trade secret is lost when the secret becomes public knowledge. It is not easy to keep a secret, particularly if competitors can reverse engineer the product (and there is no obligation on them not to do so if there is no relationship between the companies). Former employees and business partners also pose a significant risk.

Business and R&D Practices to Protect Trade Secrets

Secure records should be kept of the trade secret and any development history. Also keep records of the location of the trade secret, and who has access (employees and commercial partners with whom the secret was shared). Trade secrets should be clearly identified and categorized, including the level of commercial importance. Weigh competing advantages of using patent, trade secret ‎or both.

Confidentiality agreements and company policies can help protect secrets. Control and train employees, consultants and business partners. Ensure that ownership of any improvement generated by employees and consultants using the trade secret is documented. Consider using non-competition and non-solicitation clauses as another layer of protection beyond confidentiality clauses. Mark documents as confidential (and copyright, if appropriate).

Use physical and electronic security to limit access (file cabinets, passwords etc). Do not over-disclose confidential information. Have exit interviews when confidential relationships end, in order to reinforce confidentiality and ensure return of information to the company. Require return of confidential information‎ at relationship end. Avoid unnecessarily receiving confidential information of other companies, so that your research program is not tainted.

Enforcing Trade Secret Rights

Upon discovering a potential breach of confidence, the trade secret owner should take enforcement action promptly. An injunction can be requested from a court in order to prevent initial disclosure or further misuse of the trade secret.³ In Canada, it is difficult to get an injunction because courts require proof, among other things, that in the absence of the injunction, irreparable harm will occur for which money is not sufficient compensation.⁴ However, it is often easier to show irreparable harm to get an injunction in a trade secret case than in other intellectual property cases involving patents or trademarks.

If a trade secret loss occurs due to misappropriation, then the misappropriator may be liable to pay damages to the trade secret owner for its losses. Courts take a flexible approach to compensating for losses due to trade secret misappropriation. The typical remedies available for a breach of confidence are damages (monetary compensation for losses) or an accounting of profits (a monetary award based on the extra profits earned by a competitor from misuse of the information). The plaintiff can generally elect between damages and an accounting of profits.

¹ Cadbury Schweppes Inc. v FBI Foods Ltd. (1999), 83 CPR (3d) 289 (SCC).
² Julie A. Thorburn & Keith G. Fairbairn, Law of Confidential Business Information (Toronto: Thomson Reuters Canada Limited, 1998).
³ Cadbury Schweppes Inc v FBI Foods Ltd, [1999] 1 SCR 142, 167 DLR (4th) 577.
⁴ RJR  MacDonald Inc v Canada (AG), [1994] 1 SCR 311, 111 DLR (4th) 385.