What are trade secrets and how do we protect them?
12 Apr 2017
A Trade secret is information that is useful in the industry and that is kept confidential. It is information that imparts value to its holder and one that provides a competitive edge over its competitors. Should information that constitutes as a trade secret be leaked, it could have a major negative effect on the business. Information such as customer lists, information received by an employee regarding business opportunities valuable to an employer and information provided to an employee in confidence in the course and scope of his employment could be identified as confidential.
Even negative information such as failed remedies or manufacture of products and failed research could be protected as a trade secret as it could save a competing business high costs if they have a what not to do guide.
Article 39 of the TRIPS Agreement, provides that member states shall protect “undisclosed information” against the unauthorised use “in a manner contrary to honest commercial practices” as long as the information is:
- a secret in a sense that it is not generally known among or readily accessible to persons that generally deal with the type of information;
- has commercial value because it is secret; and
- has been subject to reasonable steps by the person in control of the information to keep it a secret.
This is the general guideline in determining whether information is a secret and if it can be protected as a ‘trade secret’. Member countries may have identified more criteria but Article 39 serves as a basis for the member states of the TRIPS Agreement
The advantages of trade secrets are that trade secrets do not have to be registered and have no limited protection frame, there are no registration costs and there are no formal compliance requirements that have to be met. However, the disadvantages are that trade secrets can be reverse-engineered once the secret is made public and then anyone is at liberty to use the information.
The enforceability of the trade secrets is generally not easy and may prove to be costly – not ideal for small entities and start-ups. Nonetheless, trade secrets can still be a useful tool for small and medium businesses that do not have the resources to protect their intellectual property assets by other forms of protection such as trade marks and patents which require registration.
How to protect your trade secrets
A trade secret owner should employ as many precautions as reasonably possible such as:
- restricting access to confidential information physically and electronically to only those individuals that need to know the information;
- marking documents that they constitute confidential information;
- making use of non-disclosure and confidentiality agreements;
- maintaining information with password protection;
- disposing confidential information by shredding or other means designed to destroy the information;
- conducting exit interviews with departing employees to ensure the return of all confidential information in the employee’s possession and to emphasise confidential obligations;
- ensuring that there are restraint of trade provisions in the employment contracts;
- establishing due diligence and on-going third party management procedures;
- instituting and information protection team;
- make trade secret protection a priority.
It is important to note that confidential information not classified as a trade secret may be used by an employee for his own benefit or for the benefit of others after the termination of his employment to the extent that it was not copied and/ or deliberately memorized for use after of the employment contract. In this case, the applicant sought to interdict an ex-employee from joining a competitor on the basis that the respondent would unlawfully make use of the applicant’s trade secrets. The court held that the applicant had failed to prove that any of the information was confidential. It was decided that the audio and lighting production of the IDOLS TV show required little originality input since all the relevant information was already in the public domain.
In the event that it becomes apparent that trade secrets have been exposed, the trade secret owner can approach the courts to claim against the infringer on the basis of breach of contract which allows the wronged party could claim for damages from the infringer for breaching confidentiality agreements or based on unlawful competition which allows the wronged party to claim for an interdict in order to refrain the infringer from continuing the unlawful act. Furthermore the wronged party can claim for damages they have incurred due to the act of the infringer and claim costs they have incurred in instituting proceedings. Proof of damages and causation is imperative to succeed with an action under unlawful competition.
Proving damages can prove to be quite difficult. Below are different options that can be exercised in quantifying the economic harm in misappropriated trade secrets.
- Lost Profits and unjust enrichment calculations – this involves determining how much more increased sales the company would have made had the trade secrets not been revealed;
- Reasonable royalty – this remedy is suitable where it would be difficult to prove the extent of the patrimonial loss. This is determined by recovering the reasonable royalty that would have been paid by a licensee ; and
- Transaction specific Reasonable Royalty– relates to the royalty that would have been paid for a specific product or service.
Trade secrets are an important form of intellectual property just like trade marks, patents, copyright and designs. It is imperative that any business takes the initial steps in identifying the trade secrets of the business and thereafter, incorporate protection mechanisms within the business such as ensuring that documents are stored securely and in places where there is limited access. Furthermore agreements with employees should be in place as well as education about what constitutes confidential information as well as the consequences of revealing the confidential information.(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)