Scintilla – a flash, a spark, an iota. Shorthand for creativity and an indicator of inventiveness under Australian law.

Tuesday, January 21, 2014

An important step in trade secrets harmonisation

By David Stewart, Lawyer

What do Colonel Sanders' original recipe chicken, Coca-Cola and Dr Pepper all have in common? As an IP blog, we are going to ignore the obvious suggestion that enjoying them other than in moderation may be somewhat unkind to one's waistline.

The correct answer in this little IP-centric quiz is that none of the formulas for these products are protected as registered IP. Rather, the recipes have been kept hidden from the public as 'trade secrets' for a combined total of more than 325 years. (Conspiracy theories appear on a relatively regular basis claiming that a recipe has been 'cracked', but Scintilla's own 'secret herbs and spices' experiments leave us seriously doubting those claims). By protecting their recipes as trade secrets, KFC, Coca-Cola and Dr Pepper have been able to extend the monopolies over their recipes for a much greater period of time than would have been possible if they had been protected as registered IP (and they will be able to continue doing so for as long as the recipes remain secret).

So why hasn't everyone ditched registered IP rights in favour of protecting everything as a trade secret?

Well, there can be downsides. First, protection is only available so long as the information remains secret. As we all know, it can be quite difficult keeping a secret under wraps, particularly one as tasty as KFC's chicken. To combat this natural human desire to blab, KFC, Coca-Cola and Dr Pepper have employed a baffling array of security measures that wouldn't seem out of place in a Hollywood spy movie. For example, it is rumoured that only two executives in the entire Coca-Cola Corporation have access to the complete recipe for Coca-Cola.

Secondly, in Australia at least, a trade secret holder can generally only seek recourse against someone who owes them a duty of confidence. This contrasts unfavourably with the broader (although time-limited) monopoly granted to patent holders.

Thirdly, even if the secret does get leaked by someone who owes a duty of confidence, the laws protecting against and providing relief for misappropriation of trade secrets vary significantly across different jurisdictions and may be poorly defined compared with other forms of IP protection. This lack of uniformity and clarity was recently identified by the European Commission in a series of public consultations as a major disincentive to the use of trade secrets as a means of protecting IP, particularly for organisations sharing information across borders where levels of protection may vary significantly.

In response, the European Commission has introduced a proposal which aims to harmonise the laws governing the protection of trade secrets across the European Union and to bring those laws in line with the requirements for trade secrets set out in the TRIPS Agreement. The key elements of the proposal are as follows.

  • A broad definition of 'trade secrets' which requires three elements: (i) the information must be confidential; (ii) the information must have commercial value due to its confidentiality; and (iii) the trade secret holder must have made reasonable efforts to keep the information confidential.
  • A trade secret holder may bring a claim where a trade secret has been acquired, used or disclosed: (i) by a party without the consent of the holder; or (ii) by a third party not directly involved in the original breach if the third party was aware, should have been aware or was given notice of the original unlawful act.
  • A broad range of remedies, including prohibitions against further use of the trade secret or any infringing goods; destruction or delivery up of the information and damages awards (including an account of profits).

It is expected that the proposal will be considered for adoption by the European Parliament before the end of 2014, although it may be some time before any new laws come into effect at a national level.

The European Commission proposal has many similarities with the Australian action for breach of confidence. However, there are some important differences that may have implications for parties trying to bring claims in the respective jurisdictions. These differences are most clearly demonstrated by taking a quick look at the scope of the Australian action.

Broadly speaking, the Australian action for breach of confidence uses a three limb test (information having the necessary quality of confidence, imparted in circumstances imposing a duty of confidence, and unauthorised use of that information to the detriment of the communicating party) to protect 'confidential information'. 'Confidential information' is the overarching term used in Australia to describe the two categories of information that can be protected by a breach of confidence action:

  • 'know-how', being the knowledge of how to do something, usually acquired through experience; and
  • 'trade secrets', being detailed knowledge specific and confidential to a particular business.

The distinction between 'trade secrets' and 'know-how' is most relevant in the context of a failed employer-employee relationship. That is, once an employee has departed their job, the employee will not be entitled to use any 'confidential information' that constitutes a 'trade secret' in their new job but they will, absent a valid restraint of trade clause, be entitled to use 'know-how'.

Unfortunately, the distinction is not always entirely clear in practice. Australian courts have identified a number of factors which may assist in determining whether information is a 'trade secret'. Many of these factors are consistent with the elements of the definition proposed by the European Commission. For example, the commercial value of the information and the measures taken by the holder to protect the information are relevant factors under Australian law. In this way, the Australian meaning of 'trade secrets' is largely consistent with the European Commission definition. However, the Australian action for breach of confidence applies to both 'trade secrets' and 'know-how'. Therefore, the class of information to which the Australian breach of confidence action applies is potentially much broader than in the European Commission proposal.

However, in the European context, the European Commission proposal marks a significant step forward in the development of harmonised trade secrets laws which may, if adopted, promote cross-border information sharing in the European Union and in any event give greater certainty and protection. This proposal will therefore be relevant to any organisations with business dealings in Europe.

Difficulties in cross-border information sharing outside of Europe will persist. More progress on that front may come in the form of the mooted Trans-Pacific Partnership Agreement which is expected to include significant provisions relating to trade secrets.

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