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...