A “trade secret” is, broadly speaking, any confidential business information which provides a business with a competitive advantage. The precise definition of a trade secret varies depending on the specific laws of a jurisdiction, however, the following three factors are generally common to all such definitions:
- The information is not generally known to the public;
- It confers some sort of economic benefit on its holder; and
- It is the subject of reasonable efforts to maintain its secrecy.
The following types of information are often considered trade secrets:
- Unpatented inventions
- A special recipe or chemical formula
- Methods of doing business, techniques and training manuals
- Marketing and customer information
Unlike patents or trademarks, a trade secret is a type of intellectual property for which the holder does not seek registration or a grant from the Canadian Government. Currently, no province in Canada has enacted any special trade secret legislation. Trade secrets are therefore protected primarily by common law in Canada, with the exception of the province of Quebec. In Quebec, there are a few articles in its civil code which address some aspects of trade secrets.
Trade secret protection differs from patent protection. Patent protection is available for specific types of unique inventions and designs. To acquire a patent, full information about the method or product must be supplied to the government patent office. Then, upon publication or issuance, the information is made available to all. After the expiration of the patent protection period, which in Canada and the U.S. is 20 years, competitors can copy the method or product legally. Trade secret protection, on the other hand, is available for all kinds of methods and products and its protection may last indefinitely so long as the information is kept secret and provides a competitive advantage.
Understandably, businesses go to great lengths to protect their trade secrets from disclosure, accidental or otherwise. The Coca-Cola Company is a famous example. The formula for Coca-Cola is not protected by a patent. It is, and always has been, a trade secret. After Dr. John S. Pemberton invented Coca-Cola in 1886, the formula was kept a close secret. It was shared with a small group of individuals and was not written down. The rights to the business were eventually acquired in 1919 by Ernest Woodruff and a group of investors. To finance the purchase, Woodruff arranged a loan and, as collateral, he provided documentation of the formula by asking the previous owner to commit the formula to paper. This documented formula was placed in a vault in the Guaranty Bank in New York until the loan was repaid six years later. At that time, Woodruff reclaimed the secret formula and brought it to Atlanta and placed it in a vault at the Trust Company Bank, now Sun Trust. The secret formula remained there for more than 85 years until it was moved to a new vault at the World of Coca-Cola in Atlanta in 2011. To this day, the company maintains that the formula is known only by a few employees, mostly executives.1
Ways to Protect Trade Secrets
The primary rule for trade secret protection is that the trade secret must really be a secret. It must be information that is not generally known to the public and would not be ordinarily available to competitors. The greater the degree to which the information is disseminated to others, the less likely it will be a protectable trade secret. Therefore, business owners should be very careful about the type of information that they provide to outsiders. Unless a trade secret owner takes diligent steps to try to preserve the secrecy of its information, courts may be reluctant to provide assistance to that owner if others learn about it.
The following are some measures that a business can, and should, take to protect its trade secrets:
- Notify the recipient of any trade secrets, in writing, that the information is proprietary and confidential and that it is not to be disclosed or used by the recipient for the recipient’s benefit or the benefit of others without the prior written consent of the trade secret owner.
- Enter into properly drafted confidentiality and non-disclosure agreements with employees and third parties.
- Create and maintain written confidentiality policies for employees, contractors and consultants. Distribute these policies to such employees, contractors and consultants and take steps to ensure that they review, understand, and acknowledge them in writing. Continuously monitor their compliance.
- Restrict access to the confidential information to employees who have a legitimate “need to know”.
- Obtain company documents or other devices containing confidential information from ex-employees and remind them of their legal obligation not to disclose or use such information for their own benefit or for the benefit of others. They should also sign a document attesting to the return of such information to the company.
- Install security and access control systems at your company’s premises.
- Require passwords for computers or other electronic devices containing confidential information.
- Mark documents containing your company’s trade secrets with a notice indicating that the information is proprietary and confidential.
- Keep your most prized trade secrets stored in a safe and secure environment under lock and key.
Despite taking precautions such as those outlined above, there are occasions when trade secret owners will nonetheless fall victim to the negative consequences of the inappropriate use or disclosure of their secrets. This could be due to the actions of an unscrupulous employee, consultant, supplier, industrial spy, or former officer or director of the business. In such cases, if the trade secret owner took proper steps to try to keep the information confidential, then courts will generally treat the disclosure and/or use of such information as wrongful. Courts may then order damages against the offending party, or issue an order preventing the party’s use of the information, or both.
1Coca-Cola Moves its Secret Formula to the World of Coca-Cola (http://www.thecoca-colacompany.com/dynamic/press_center/2011/12/coca-cola-secret-formula-moves-to-the-world-of-coca-cola.html)