The Past and Future of Canada’s Criminalization of Trade Secret Theft – Part I

March 2, 2020

By Noel Courage

In the U.S., theft of confidential information can lead to handcuffs. That is unlike the current situation in Canada (soon changing), where the criminal landscape is a patchwork with uncertainties and gaps. A decades old court case decided that copying and taking confidential information per se is not theft under the Canadian Criminal Code1. The copied information may be gigabytes of R&D results, or a million dollar trade secret, but it is still not considered criminal theft of property (it may be some other offence, depending on the circumstances, as discussed below). Alternatively, taking the confidential information on an employer’s $10 flash drive would be theft, since a flash drive was stolen, which is tangible property.

Canada is about to criminalize trade secret theft as a result of amendments to the Criminal Code to implement the Canada-US-Mexico free trade agreement CUSMA2 (not discussed in this article).

This article will provide a brief history of the controversy over confidential information theft. A second part of this article will review the potential for future criminalization.  

 

Confidential Information– Criminal Law vs Civil Law

In the leading criminal case3 from 1988, a consultant named Stewart tried to hire a hotel security guard to copy the names, addresses and phone numbers of hotel employees without authorization. The information would have been used to organize a union. No list or other physical object would have been taken. Stewart was charged with counselling theft, fraud, and mischief to property. He was acquitted of all the charges at trial. Taking this confidential information would not have been illegal under the Criminal Code4.

The Ontario Court of Appeal entered a conviction on appeal, after it decided that confidential information was property for civil law and for criminal law, and capable of theft. However, the Supreme Court of Canada overturned this point on appeal. The rules do not have to be the same for civil law and criminal law. The Supreme Court took the position that confidential information per se was not “property” capable of theft.

 

Why Confidential Information is not “Property” Capable of Theft for Purposes of the Criminal Code

The Supreme Court decided that there must be a proprietary right (tangible or intangible) at stake. That right must be capable of being taken or converted to deprive the owner of that right. Copying confidential information did not deprive the owner of any property, only of the confidentiality of the information. Information per se cannot be the subject of a taking.

The Court did acknowledge that, given recent technological developments at the time, confidential information was in need of some protection through criminal law. However, it wasn’t the Court’s place to extend the law – it was left to Parliament. The Court did consider it a criminal offence to take intangible property that is embodied in an tangible object, hence taking the flash drive would be illegal in the example provided at the start of this article.  

In contrast, civil law routinely deals with confidential information subject matter. For example, trade secret information can be licensed, sold or otherwise dealt with under a contract. There can be liability, such as damages or an injunction, for misappropriating confidential information or for a breach of confidence. Copying information could also be a copyright infringement.

 

Offences in Relation to Confidential Information

There can still be penal repercussions for certain types of misuse of confidential information, even if not categorized as theft.

Economic Espionage

Certain types of economic espionage for the benefit of a foreign entity would be an offence5. For example, it would be an offence if one were to communicate or destroy a trade secret for the benefit of a foreign economic entity, to the detriment of Canada’s economic interests and the like.

Criminal Code - Breach of Trust

A government official can commit a criminal breach of trust in connection with commercialization of technology owned by the government employer6. Breach of trust is a broken obligation associated with the public office that can cause economic prejudice to the employer, breach of privacy or breach of duty.

Criminal Code - Computer/Data-related Offences

As well, unauthorized use of a computer and deleting or modifying (as opposed to copying) confidential information may be criminal. In the government arena, an aide to the former Ontario premier was convicted of Unauthorized Use of a Computer7 and Attempt to Commit Mischief to Data8 for his role in irretrievably deleting politically embarrassing records from Ontario government computers.

Criminal Code - Fraud

In the Stewart case, the Supreme Court said that very little was argued before it in relation to the fraud charge9. The Court did not convict because the appropriation of information would not have resulted in economic loss amounting to deprivation. The hotel would not have been defrauded of money or economic advantage. Only the confidentiality of information would be lost. The Court did agree that criminal fraud may occur where there is a victim deprived of confidential information in the nature of a trade secret or copyrighted material having a commercial value that was intended to be exploited by the victim10. This appears to be a better, though still uncertain, fishing ground for a prosecutor wishing to pursue charges for trade secret theft. The author did not locate any criminal cases that have pursued this avenue in relation to a trade secret11.

While there is a place for these offences, it still appears there would be certainty created by a straightforward provision criminalizing trade secret theft.

 

Downsides from Lack of Criminalization of Theft

Without effective criminalization, companies may be left with the slow turning wheels of the civil justice system. As one example, a software engineer working for IMAX allegedly took valuable company trade secrets and used it to set up a competing business that launched competitive bids against IMAX in China12. IMAX got a court award of damages for theft and misuse of the confidential information and trade secrets. The court also ordered disgorgement of profits, punitive damages and costs. Of course, there is a significant challenge to enforcing a Canadian judgment against a Chinese-based defendant13. If the allegations are true, it appears that the departed employee was very bold and confident in moving the technology offshore, out of reach of the Canadian courts. The departed employee apparently treated the Canadian civil process with enough disdain that an arrest warrant was eventually issued for contempt of court. In general, it appears that further deterrent (criminal sanctions) may be necessary as a deterrent where allegations of brazen commercial trade secret theft justify a criminal arrest warrant.

 

Risks of Criminalization

A lot of technology is complex, developed by people with advanced degrees in fields such as chemistry, engineering and biotechnology. There may be a smoking gun in some cases (eg. digital trail or missing storage drive). In other cases, it may not be simple or quick for law enforcement to sort out the specific nature or seriousness of the crime. To what extent could the initially reported facts of the crime coloured by acrimony of an employee departure or broken commercial partnership. There is a need to act quickly in response to trade secret theft, but it is important not to shoot first and ask questions later.

The American Civil Liberties Union (ACLU) became involved in a civil lawsuit based on trade secret arrests. For example, in a 2015 US case, Federal prosecutors dropped criminal charges against two scientists accused of stealing drug company trade secrets worth $55m. A US news service reported that court documents stated that the case collapsed after Eli Lilly provided “additional information” to the US Dept of Justice. The defence attorney stated that the info alleged to be confidential and proprietary was not, because it was exploratory data which had been published by the company in articles. Evidence may also have been spoiled. It is not clear whether there was any trade secret theft at all in this case, but it is clear that potentially having a case and being able to prove it are two different things.

                                                                                                                                                  

Toward Criminalizing Theft

It is an important modernization that Canada is amending the Criminal Code to create sanctions for certain types of trade secret misappropriation14. A second part of this article provides more details.   


1 s. 283(1) of the Criminal Code, R.S.C., 1985, c. C-46 (now s.322(1)). ”Every one commits theft who fraudulently and without colour of right takes, or fraudulently and without colour of right converts to his use or to the use of another person, anything whether animate or inanimate, with intent.”

2 Bill C-4.

3 R. v Stewart, [1988] 1 SCR 963.

4 However, the Court did say that it may be fraud under the Criminal Code in some circumstances, though Stewart was acquitted.

5 Security of Information Act, RSC 1985, c. O-5, s. 19.

6 S.122 of the Criminal Code. See R v Nielson, 2017 ONCJ 446 where the accused committed a breach of trust for taking bacterial samples from the Canadian Food Inspection Agency and attempting to leave Canada. He was also convicted of regulatory offences in relation to the handling of the material.

7 S.342.1 of the Criminal Code.

8 S.430(5)(a) of the Criminal Code.

9 Formerly s.338, now s.380. (1) Fraud. Everyone who, by deceit, falsehood or other fraudulent means…defrauds the public or any person, whether ascertained or not, of any property… 

10 Not all confidential information is a trade secret.

11 Thank you to Aaraf Dewan for research on this issue. In R v Kirkwood, (1983) 42 OR (2d) 65 (ONCA), the accused was convicted of fraud for selling counterfeit video cassettes, which were unauthorized duplications of legitimate videotapes. The Court noted that copyright per se may not be categorized as property under the Criminal Code. The trial judge had found the accused knew that by dealing in the counterfeit tapes, he was effectively fraudulently depriving their owners of copyright and distribution revenues which they otherwise would have earned. See also R v Bonamy, 2000 BCCA 308.

12 IMAX Corp. v. Trotum Systems Inc., 2014 ONSC 3863.

13 IMAX also launched separate actions in China and the US relating to the trade secret theft.

14 Article 20.72 of CUSMA: Criminal Enforcement. “…each party shall provide for criminal procedures for the unauthorized and willful misappropriation of a trade secret.” “An Act to Implement the Agreement between Canada, the United States of America and the United Mexican States.” Bill C-4.

Information on this website is for information only. It is not, and should not be taken as, legal advice. You should not rely on, or take or not take any action, based upon this information. Professional legal advice should be promptly obtained. Bereskin & Parr LLP professionals will be pleased to advise you.

Author(s):

Noel Courage Noel Courage
B.Sc. (Biochem.), LL.B.
Partner
416.957.1655