Protection Of Trade Secrets And Confidential Information
Introduction
With the rise of the information age and growth of the
knowledge economy, managing and protecting information, as well
as enforcing against its misuse, have become increasingly
critical to business enterprises. Aside from protecting the
intellectual capital of a business through the patent,
copyright and trade mark registration systems, the law further
protects against misuse of confidential information, including
trade secrets, to a business that takes the appropriate steps
to protect such information.
A business may choose to keep certain business information
confidential and to maintain trade secrets rather than seeking
statutory protection through patent or copyright laws. Patents
and copyright are statutorily protected for a limited time
only, and only in the jurisdictions in which protection is
applied for and registered. On the other hand, trade secrets
and confidential information, if properly protected and
managed, can be preserved indefinitely and are not restricted
to specific jurisdictions. Furthermore, in many situations, the
subject matter of a trade secret might not be suitable or even
eligible for patent or copyright protection under the relevant
statutes, thus leaving trade secret protection as the only
option.
The law relating to confidential information and trade
secrets has developed partly to promote certain desirable
commercial behaviour. While aiming to enforce good faith
behaviour between commercial parties and provide remedies for
misuse of confidential information, the law has also evolved to
discourage undue restraints on trade, especially in the area of
non-competition by former employees.
This paper examines the fundamental concepts in the law
regarding confidential information and trade secrets in the
context of commercial dealings. Issues relating to
confidentiality of personal information, such as under the
Freedom of Information and Protection of Privacy
Act1 and the Personal Information
Protection and Electronic Documents Act
(Canada),2 are not examined in this paper, but it
should be noted that these and other statutes can create
obligations that should be considered in the formation of an
information-management strategy for a Canadian business.
The Nature of Confidential Information and Trade
Secrets
The terms "trade secrets" and "confidential
information" have been used somewhat interchangeably by
the courts. "Trade secrets" generally refers to
information relating to more technical matters such as secret
processes or formulas; and "confidential information"
relates to non-technical matters such as business plans or
pricing information.3 Although this paper uses the
term "confidential information" to encompass trade
secrets, note that the courts have not always treated these
terms consistently.4
Trade Secrets
The courts have not set out a comprehensive definition for a
trade secret. What is clear is that the element of secrecy must
be present for a trade secret to exist. That is, once a trade
secret enters the public domain, such as through publication in
a trade journal or marketing of a readily reverse-engineered
product embodying the trade secret, it is no longer a trade
secret.5 Other characteristics of a trade secret
were enunciated by the Court in R.I. Crain Ltd. v.
Ashton.6 While noting that he had been unable
to find a definition for a trade secret under Canadian
jurisprudence, Justice Chevrier accepted definitions from U.S.
jurisprudence and concluded that trade secrets include the
following:
a property right that, as soon as discovered, gives the
discoverer the full right to use;
a plan, process, tool, mechanism or compound known only
to its owner and the employees to whom it is necessary to
confide it;
a secret formula or process not patented, but known only
to certain individuals who use it in compounding some article
of trade having commercial value; and not merely denoting the
privacy with which business is carried on;
any secret formula, pattern, process, device or
compilation of information used continuously in the operation
of the business and that gives the owner an opportunity to
obtain an advantage over competitors who do not know or use
it.7
Draft legislation has also attempted to set out the
characteristics of trade secrets. In 1986, the Alberta
Institute of Law Research & Reform recommended enactment of
legislation to protect trade secrets and define the term
"trade secret." Although this draft legislation never
came into force, the proposed definition is nonetheless
generally consistent with court decisions and can thus provide
guidance in analyzing whether certain information is a trade
secret:
Trade secret means information including but not limited to
a formula, pattern, compilation, program, method, technique, or
process, or information contained or embodied in a product
devise or mechanism which:
is, or may be used in a trade or business,
is not generally known in the trade or business,
has economic value from not being generally known,
and
is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.8
It has been suggested that in the context of the information
technology industry, most technology that is created through
the expenditure of time and resources, and that is coupled with
the necessary quality of confidence and inaccessibility to
competitors, can be protected as a trade
secret.9
Confidential Information
As is the case with trade secrets, for any information to
qualify as confidential, the element of secrecy must exist.
Confidential information can therefore not be public property
or in the public knowledge.
A list of factors to consider in determining whether or not
information is confidential is set out in Pharand Ski Corp.
v. Alberta:10
the extent to which the information is known outside the
owner's business;
the extent to which it is known by employees and others
involved in the owner's business;
the extent of measures taken by him to guard the secrecy
of the information;
the value of the information to him and his
competitors;
the amount of money or effort expended by him in
developing the information;
the ease or difficulty with which the information could
be properly acquired or duplicated by others (i.e., by their
independent endeavours).
In listing these factors, the Court cautioned that this
list is not exhaustive and that none of these factors, alone
or in combination, should be taken as
determinative.11
Trade Secrets as Distinguished from Trade
Knowledge
In the employment context, the courts have found that
certain information gained by a person during employment may
fall within the area of trade knowledge, which is different
from trade secrets or confidential information and not
protectable as such.12 An employee is free to take
trade knowledge from job to job and any restrictive covenant
purporting to stop a departing employee from using this trade
knowledge is prima facie an illegal restraint on trade and,
therefore, unenforceable.13
Trade knowledge is typically distinguished from trade
secrets and other confidential information as being the skills,
general knowledge and any personal goodwill that an employee
obtained in the course of employment.14 In making
this determination, the following factors can be
considered:
the nature of the employment;
the nature of the information;
whether the employer impressed on the employee the
confidentiality of the information;
whether the information can be easily isolated from other
information that the employee is free to use or
disclose.15
Property in Confidential Information
Characterizing confidential information as property is
controversial.16 For purposes of the theft provisions in the
Criminal Code,17 confidential information
is not property.18 The Court in Cadbury
Schweppes emphasized that actions for breach of confidence
are rooted in the relationship of confidence rather than in the
characteristics of the information involved.
It can be useful to think of confidential information and
trade secrets as being capable of being controlled rather than
owned. Use or dissemination of such information can be
controlled through contractual means or through other
obligations implied by law without necessarily asserting
property rights. In the employment context, there is also an
implied condition of employment that an employee who learns of
an invention or discovery, including a trade secret, becomes a
trustee of that discovery for his or her employer even beyond
the term of employment.19
Causes of Action Relating to Misuse of Confidential
Information
The Duty of Confidence
A duty of confidence arises when a person acquires knowledge
of confidential information, including trade secrets, under
circumstances in which the person has notice or agreed that the
information is confidential.20 A duty of confidence
can exist beyond the traditional categories of contractual
obligation, fiduciary duty or relationship between the parties
and is based on elements of trust and reasonable
expectations.21 The courts have considered an action
for breach of confidence to be sui generis, with roots
in contract, equity and property law.22
The test to determine whether a duty of confidence arises is
an objective one: whether a reasonable person standing in the
shoes of the recipient of the information would have realized
that the information was given in confidence.23
Industry customs may play a role in the court's
determination of whether a duty of confidence
arises.24 The courts have found that evidence with
regard to industry customs is relevant in determining the
reasonable expectation of confidentiality, even in the absence
of an express confidentiality agreement between the
parties.25 In one case, it was also suggested that a
conversation "in the field" between two engineers can
be regarded as a circumstances of confidence.26
Although a relationship need not exist between the parties
for a duty of confidence to arise, the courts have...
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