The Creation, Control and Loss of Trade Secrets in an Online World

“For two years after the first transport arrived in Botany Bay no word or supplies came from England.  Even Commander Phillip wondered if England had forsaken or forgotton them ….”

Colleen McCullough

Morgan’s Run, Century, 2000

INTRODUCTION

This article is a modified version of a paper given by the author at the September 2000 International Bar Association meeting in Amsterdam.

The issue of trade secrets in an electronic environment is not a new one.  Indeed, large mainframe computers have been around since the 1950’s and since the 1980’s the ubiquitous P.C. has revolutionised the way we create and store information.  However, the true revolution has occurred in the past five years with the ability to connect separate desktop computers into groups or clusters which in turn, connect to others.  The result – a massive, robust network, now called the Internet.

It is apparent that trade secret law remains important in the current networked digital environment and has adapted well to the rigors of this environment.   Generally, it remains effective as a commercial tool.  However, because of the unique character of the Internet, special care needs to be taken to secure and preserve trade secrets dealt with in a digital environment.  At the local and international level, technology and the tensions between the information rich and the information needy will shape the future of the law as lawmakers grapple with the contradiction of trying to keep information closeted and confined but while working in an essentially open environment.

An action for breach of confidence protects information ranging from personal information (with the potential for an attendant right of privacy) to commercial and technical information.  It is this latter type of confidential information that is normally termed a trade secret.

In this article I have referred to “trade secrets” loosely.  There is of course a distinction between confidential information and trade secrets, the latter being a subset of the former.  For convenience I tend to use the term “trade secrets”, unless a distinction needs to be made.

BACKGROUND

The notion of the transmission of trade secrets through electronic means is, in itself, and not worthy of special mention.  That is, as long as the trade secret retains its character of confidence and the means of transmission is secure.  However, when the Internet is used as the means of transmission, the situation begins to change, some say, in a fundamental fashion.

The reason for this is that the notions of confidentiality and secrecy, which lie at the heart of the law of trade secrets and confidence are met by the opposing notion of an entity that is essentially ephemeral, open and largely unstructured.

Indeed, it could be argued that the Internet and trade secrets are inherently antagonistic and inimical to each other’s existence.  There are a number of factors, which create this situation.  Two are speed and scale.  As Lucinda Jones notes, developments in digital technology are now taking place with a pace that outstrips traditional law making processes and challenges law and policy makers.  She also points out the second dramatic feature of the Internet is its proportion, with 150-200 million people around the world connected and having access to more than an estimated 600 million separate documents.

[Lucinda Jones: An Artist’s Entry into Cyberspace: [2000] E.I.P.R.79

The eGlobal Report (at http://www.emarketer.com) reported that there were 130.6 million active users in 1999, Time Magazine (June 22, 1999)

Estimates for January 1999 by Forrester Research Inc. (at http://www.forrester.com)

The World has certainly changed since Commander Phillip landed at the inhospitable Botany Bay.

The pressures to normalise and regulate the Internet are significant and growing.  This is illustrated by the comment that:

“We are at a crossroads; the Internet can be a world-wide electronic kiosk of ideas, information, entertainment, or it can be a government restricted and monitored data highway complete with roadblocks, checkpoints and land-mines that are designed for surveillance, censorship, restricted access, and the use of government-mandated languages.”

[The Clash of Technology and Human Rights, Wayne Masden at Symposium on Privacy-Enhancing Technologies, September 17, 1996, The Citadel Hotel, Ottawa]

When it comes to confidential information and trade secrets the dilemma is no better illustrated than in the seminal words of John Perry Barlow in 1993, where he noted with remarkable precision of thought:

“I refer to the problem of digitised property.  The enigma is this: If our property can be infinitely reproduced and instantaneously distributed all over the planet without cost, without our knowledge, without its even leaving our possession, how can we protect it?  How are we going to be paid for the work we do with our minds?”

[John P. Barlow “The Economy of Ideas: A Framework for rethinking patents and copyright in the Digital Age (Everything you know about intellectual property is wrong)” (1993) Wired Online (at http://virtualschool.edu/mon/Economics/BarlowEconomyOfIdeas.html) ]

THE INTERNATIONAL ENVIRONMENT

At an international level a number of policy concerns have arisen.  As noted by Justice Baragwanath when discussing the challenges ahead:

“The first is a vision of a better future.  There is general consensus that a borderless world of electronic commerce is both technically attainable and essential to the optimal social and economic development of the world.  If properly managed, enhanced commerce and education, aviation safety and culture are among the benefits that can emerge, to the considerable advantage of the world community.

“The second message has a discordant note:  of risk that the opportunity will be lost by our generation.  That is because the legal systems of most of the 187 states are incompatible with one another and there are no adequate plans in place to deal with that problem.”

[Global Electronic Commerce: The Response of the Law Commission by W D Baragwanath, New Zealand Law Conference 1999]

When trade secrets are involved, it is unwise to assume that any particular viewpoint, whether it be socio-economic, political or legal, is necessarily correct.  Indeed, it may be inappropriate to even start from the assumption that trade secrets should necessarily be protected.  The modern digital environment and the Internet in particular present new challenges to law and policy makers.  Some argue that inventions should be protected through intellectual property only for the purposes of creating limited rewards to those whose ideas benefit the public and access to information should be preferred to strict enforcement of rights to control inventions. As Howard Anawalt points out, two major social policies favour the pro-access principle.  The first is a commitment to freedom of speech and the free exchange of ideas in the community.  The second is the general social policy that favours freedom to exercise a trade or to compete. These two principles find their way into judicial thinking in a number of jurisdictions and underpin a range of decisions where access/freedom was preferred over a right to restrict.

[Control of Inventions in a Networked World: Anawalt, Howard C: Information & Communications Technology Law, v8n2 pp: 141-150 June 1999.

Ibid, page 2]

This viewpoint is widely supported in developing countries.  The digital divide between developed and developing countries has been widely observed and commented on.  In the area of trade secrets it is an issue of real debate and concern.

At a recent meeting of experts, organised by UNESCO, in discussing the increasing gap between information have’s and have not’s and the role of recent international treaties and agreements, Wilfredo Trinidad from the Philippines noted that these treaties frustrate the public interest which includes the need for “equitable access to information” and suggested that a legal presumption that “every use is fair use” be adopted.

[Expert Meeting on Legal Framework of Cyberspace: 8-10 September 1998/Seoul, Republic of Korea: Summary of the Asia-Pacific Regional Expert Meeting on Legal Framework of Cyberspace]

This approach is reflected in the WIPO copyright treaty, which in its Preamble acknowledges the need to find “a balance between the interests of authors and the larger public interest, particularly education, research and access to information”.

The suggestion that developing countries accept a new intellectual property paradigm which presumes unrestricted access to digital information by all, and recognises this as a public right to information challenges many of the Western World’s underlying principles.  This call for “universal access” could become louder if the divide between information-rich countries and organisations and the rest is not addressed.

INTERNATIONAL TREATIES

In terms of international treaties, confidential information has, until recently, received little recognition.  The only possible exception was article 10bis of the Paris Convention that provides nationals of the Paris Union with “Effective Protection Against Unfair Competition”.  The TRIPs Agreement was the first attempt to deal with confidential information expressly and in explicit terms.  This step was controversial, with developing countries taking the position that confidential information should not be included within the Agreement because it was not strictly speaking a recognised category of intellectual property.  It is suggested that the real basis for the objection was the widely held view in the developing world that information should be freely available, rather than withheld by developed countries who wish to exploit it and maintain their technological edge.

[Michael Blakeney, Trade Related Aspects of Intellectual Property Rights:  A Concise Guide to the TRIPs Agreement, Sweet & Maxwell, 1996 para 10.01]

In section 6 of the TRIPs Agreement under the title “Protection of Undisclosed Information” article 39(2) states:

“Natural and legal persons shall have the possibility of preventing information, lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices so long as such information:

is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;

has commercial value because it is secret; and

has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.”

A footnote to the paragraph indicates that the phrase “a manner contrary to honest commercial practices” means “at least practices such as breach of contract, breach of confidence and inducement to breach, and includes the acquisition of undisclosed information by third parties who knew or were grossly negligent in failing to know, that such practices were involved in the acquisition”.

Article 39 clearly gives Member States of the WTO a broad margin within which to protect trade secrets.  They may range from relatively loose civil remedies to tough criminal sanctions, typified by the U.S. Economic Espionage Act 1996.  Importantly, however, at least there is now a common international base line from which to work.

THE TECHNICAL CONTEXT

In transmitting trade secrets through a communications network having multiple unsecure access points the holder of that information runs a risk.  In most situations, when a trade secret is lost, it is lost for good.  Practically, the risk increases with the number of recipients of the trade secret.  As Nicolas Browne-Wilkinson V.C. stated: “The truth of the matter is that in the contemporary world of electronics and jumbo jets news anywhere is news everywhere”.

[A.G. v Guardian Newspapers Ltd: [1987] 1 W.L.R. 1248 at 1269]

Likewise, a risk of unauthorised divulgement of the trade secret increases with the frequency, and number of nodes on en route, and the number of access points to the network, particularly if the route and any encryption is not entirely secure.  These are however practical considerations that have affected the maintenance of trade secrets since their very inception.

Where the digital world differs is that these practical problems have grown significantly in proportion.  As indicated above, this is in part because of the dual factors of speed and scale.  Hypothetically, a piece of information could be either transmitted to or otherwise made available to many of the 150-200 million people around the world who are connected to the Internet.  Hypothetically again, but not entirely in the realm of the fanciful, this information could be communicated to all Internet users within minutes, hours or days.  This would have been simply impossible in the older “hard copy” world.

The very essence of the Internet is that while it is very much a reality it is a reality without location, hence the term “cyberspace”.

[A term attributed to the science-fiction author, William Gibson in Neuromancer. Referred to by Lucinda Jones: An Artist’s Entry into Cyberspace: [2000] E.I.P.R. page 81 (cited in F. Gurry “Dispute Resolution on the Internet,” International Federation of Commercial Arbitration Institutions, 5th Biennial International Dispute Resolution Conference (May 1999) ]

What is significant is that when information is communicated over the Internet because of its packet switching system, packets may cross the globe on a large number of paths to geographically distributed points and only re-form in an understandable form when they reach their destination.  Legally, this means that the information, once transmitted, may disperse and pass through various jurisdictions and legal systems before finally reaching its destination.

This raises serious challenges to notions of national jurisdiction, whereby nation states apply their own brand of law, based primarily on the assumption that some actionable activity has occurred within its borders.

The current digital environment is to a large extent multi-faceted and platform neutral.  This makes both control and monitoring of activities extremely difficult (but it has to be said that many governments are trying hard to re-assert control).  The process is also highly democratic in the sense that large corporations and individuals are equally able to utilise the information disseminating advantages of the medium.  For example, information can be disseminated and collected through the World Wide Web, e-mail, news groups, bulletin boards and chat rooms, as well as through localised networks such as extranets, intranets and other controlled groupings.

Recent government attempts to monitor email communications are likely to prove to be difficult.  The Internet has proved to be flexible and innovative in avoiding control.  It may be found that more users by-pass traditional ISP’s and resort to high level encryption and other means of evasion.

To make the situation even more complicated, information is transmitted in an invisible and ephemeral world where transience is the principal feature.  This makes effective detection and enforcement a real problem.  It also allows information to be moved off-shore or reflected in “mirror sites” in jurisdictions where regulation is less rigorous.  Finally, it allows information to be manipulated and altered so as to render its source uncertain.

The problem here is that in countries where unlimited access to information is regarded as a basic human right the owners of trade secrets may have extreme difficulty in tracking down and apprehending those who choose to intercept or otherwise appropriate their trade secrets.  In a world where industrial espionage is a serious growth industry, repackaged trade secrets may become a commodity of a new breed of digital Mafia.

One of the consequences of burgeoning digital communication and electronic commerce is that the often more settled and secure hard copy world has given way to a far more transient and uncertain business environment where sensitive business data is electronically communicated with far greater frequency.  The greater the frequency and number of nodes involved in the communication the greater the risk that the digital data can be intercepted and copied without detection.  This leads to a greater likelihood of theft or misuse and in a trade secret context the potential for loss of a trade secret through dissemination in the public domain.  There are two reasons why the potential for harm is so much higher in the digital world:

an entire database or a company’s entire business records can be copied with relative ease; and

security measures and tracking devices are not always adequate.

In the old days an intruder would need a pick-up truck and avoid security guards to steal a company’s entire records.  Now it can be done effectively but invisibly through an off the shelf modem.

In trade secret terms the problem is severe.  As security expert Bruce Schneier said:

“… we can’t prevent network attacks.  We can install prophylactic technologies – encryption, firewalls, authentication mechanisms – but they can never be perfect.  Attackers will find and exploit flaws in the software, figure out way to bypass the technologies, or social engineer their way through them.  The only way to maintain security is through detection and response.”

April 4, 2000; ZDNet: Special Report: Lines of Defense: Issues: Opinion:  The Importance of Vigilance; http://www.zdnet.com/special/stories/defense/0,10459,2510681,00.html

With trade secrets it is often too late to close the door when the horse has bolted.  On the Internet a single posting can do a lot of damage.

As a visit to a hacking site shows – these guys are smart and organised and they are not well disposed to attempts to curtail their activities, as shown by some of the topics at their recent H2K conference on 13 July 2000 and in particular topics like:

Hacktivism – Terrorism or A New Hope?

Bypassing Modern IDS Products

Telephone Systems of the World

Lockpicking

Counterfeiting IDS and Identity Theft

How I Got My Own Area Code

[http://www.2600.com/

http://www.h2k.net/panels.html]

Allied to this is an increasing concern about the maintenance of privacy and the verification of the identities of participants in electronic transactions.  A key technical tool has been encryption.  The trend towards secure and widespread use of encryption is identified by Lorna Brazell as follows:

“Any business needs to be able to maintain a degree of security over its information, be it trade secrets, client information, details of a research programme or simply the business’ own accounts.  And any business which uses electronic means of data storage and has connections to the outside world via the Internet, is at risk from the possibility of external attack.  A further level of vulnerability arises when data is transmitted electronically by any means, including but not limited to e-mail.”

Brazell: Electronic Security: Encryption in the Real World: [1999] E.I.P.R. Page 17

Even with the best will in the world, the use of virtual private networks, firewalls, encryption and passwords will not stop a determined hacker or cracker from simply deleting filestores and crashing machines or deciding to distribute free copies of confidential material to all and sundry.  Also of concern is the potential for a trapdoor entry into confidential data and materials whereby the normal security measures are bypassed and system protection mechanisms are circumvented in some non-apparent manner.  A firewall would not necessarily be effective against such an attack, as the unauthenticated login from an unauthorised source would not go through the firewall but around it.

The conduct of electronic commerce in the B2B (business to business) environment is now established and has built on the foundation created by the electronic data interchange (“EDI”) structures to the late 80’s. Unlike general business to consumer (B2C) transactions they tend to be closed and handled in a controlled environment governed by contract, rules and standards.  B2B environments are essentially private, unlike the B2C environment which is open.

Many businesses involved in multi jurisdictional marketing wish to use the Internet as both informational and communication vehicle for conducting its business and marketing its services to a wider public.  They may thus seek to move from a private network to a public one, or at least a quasi-open environment.  The primary focus of this paper will be on such an environment.

As security, encryption and privacy are major topics in their own right they will not be discussed any further here.

TRADE SECRETS – THE COMMERCIAL CONTEXT

Trade secrets may arise and be commercialised in a range of commercial settings.  By way of example only, a typical commercial situation might be the licensing of an on-line trade directory.  The original directory might be developed in one country and licensed into others, thereby creating an international trade directory owned by a company in one country and accessible by users through a series of licensed nodes in other countries.  Revenue would be generated by the licensees in each country, with the owner deriving both licence revenue from licensees and also from other users who access the directory on a formal or casual basis and view banner advertisements.  To lapse briefly into jargon, the business would operate in a B2C (business to consumer) manner.

In this relatively straightforward example the organisation, either separately or collectively, would in all likelihood create a range of intellectual property rights.  These might include brand names, logos, slogans and bylines and other indicia designed to attract custom.  There might also be rights arising under copyright and database protection and patentable inventions in the functionality of the database products, search tools, etc.

If the international trade directory was widely published, in the absence of an ability to maintain confidentiality through contractual means, the bulk of the organisation’s intellectual property rights would probably vest in the traditional forms of protection.  However, trade secret protection may be available separately in parts of the system that are not disclosed to end-users and remain inaccessible to them.  These could comprise business schemes, licensee manuals and internal documentation and even the directory content where access is controlled by encryption, firewalls and passwords.

The possible extent of trade secret protection would vary depending on the extent to which proprietary information is kept secret.  Therefore, the greater the extent of restriction of access and use of effective technical protection measures the greater the likely level of trade secret protection.  By the same token, insofar as these measures are either difficult to implement or commercially counterproductive, the organisation would need to rely more heavily on other forms of protection, some of which are identified above.

THE COMMON LAW APPROACH TO TRADE SECRETS

A review of the cases indicates a reasonably high level of conformity between the laws of the United Kingdom, Australia/New Zealand and the USA, at least in terms of broad principles.

The courts in the US have relied on the definition in the Restatement of the Law of Torts:

“A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.”

[Restatement of Torts, s 757 comment b at 5 (1939) ]

In Australia, in Ansell Rubber Co. Pty Ltd v Allied Rubber Industries Pty Ltd the Court relied upon the Restatement to identify a number of factors which assist the Court in determining whether information is a trade secret.  These factors are as follows:

the extent to which the information is known outside the company’s business;

the extent to which it is known by the company’s employees and others involved in the business;

the extent of measures taken by the company to guard the secrecy of the information;

the value of the information to the company and its competitors;

the amount of effort or money expended by the company in developing the information and;

the ease or difficulty with which the information could be properly acquired or duplicated by others.

[1967] VR37

Restatement of Torts, s 757 at 6 (1939).

As a general proposition of the law, a leading common law case is Faccenda Chicken Limited v Fowler where Goulding J., at first instance, identified three classes of information, as follows:

“information which, because of its trivial character or its easy accessibility from public sources of information, cannot be regarded by reasonable persons or by the law as confidential at all;

information which the servant must treat as confidential but which once learned necessarily remains in the servant’s head and becomes part of his skill and knowledge;

specific trade secrets so confidential that, even though they may necessarily have been learned by heart and even though the servant may have left the service, they cannot lawfully be used for anyone’s benefit but the master’s.”

[1985] 1 All ER 724

[1985] 1 All ER 724

Even in the age of modern detergents slates are notoriously difficult to wipe clean.  Accordingly, it is not surprising that the area which has raised difficulties is (2) above, which deals with information in a servant’s head and which becomes part of his/her skill and knowledge and cannot be excised.

In Lansing Linde Ltd v Kerr Staughton LJ identified the essential characteristics of a trade secret, as follows:

“It appears to me that the problem is one of definition: what are trade secrets, and how do they differ (if at all) from confidential information?  Mr Poulton suggested that a trade secret is information which, if disclosed to a competitor, would be liable to cause real (or significant) harm to the owner of the secret.  I would add first, that it must be information used in a trade or business, and secondly that the owner must limit the dissemination of it or at least not encourage or permit widespread publication.

“That is my preferred view of the meaning of trade secret in this context.  It can thus include not only secret formulae for the manufacture of products but also, in an appropriate case, the names of customers and the goods which they buy.”

[21 IPR 529 at 536]

In terms of the test for establishing breach of confidence Megarry J. set out a relatively straight-forward three stage test:

“the information disclosed must have had ‘the necessary quality of confidence about it;

the information must have been imparted in circumstances importing an obligation of confidence;

there must be an unauthorised use of that information to the detriment of the party communicating it”.

[Coco v A N Clark (Engineers) Ltd [1969] RPC 41 at 47]

This test has been seen by many common law judges as a practical and workable one and it has been widely adopted.

An interesting feature of international trade secret law is the way it has evolved from a variety of sources and along different jurisprudential paths but often ended up at the same or a similar end-point.  This becomes apparent from looking at a couple of central principles.

A key foundation-stone of the law is the requirement to retain “inaccessibility”.  As Paul Lavery points out, this concept has been adopted in a number of countries.  The author cites cases in Ireland, India, South Africa and Canada where the same approach has been followed.

[Lavery: Secrecy, Springboards and the Public Domain: [1998] E.I.P.R.]

[In Ireland, for example, Costello J. in House of Springs Gardens v Point Blank Ltd [1984] I.R. 611; in the Indian High Court case of Brady v Chemical Process Equipment Pte Ltd, Saharya J. [1988] F.S.R. 457 AT 465; in the South African case of Northern Office Computers (Pty) Ltd v Rosenstein, Marias A.J. (1981) 4.S.A. 123 AT 136; and in Computer Workshops Ltd v Banner (1988) 50 D.L.R. (4Th) 118 Craig J. in the Ontario Court of Appeal.]

Another important concept is that of a springboard or head start.  The so-called “springboard” doctrine was first enunciated in Terrapin Ltd v Builders Supply Co. (Hayes) Ltd where it was held that if a person misuses confidential information and thereby avoids a laborious or time consuming process, he or she will get an unfair advantage or head start over those who have had to undertake the process.

[1967] R.P.C. 375

Novelty is not a requirement for protection of a trade secret.  Nor is simplicity a bar to protection.  How this latter concept is applied in fact can however be uncertain.  In Coco v A. N. Clark (Engineers) Ltd where Megarry J. noted that “the simpler an idea the more likely it is to need protection”.

[1969] F.S.R. 415 AT 420

In Secton Pty Ltd (t/a BWN Industries) and Another v Delawood Pty Ltd and Others  King J. in the Victorian Supreme Court considered what constituted a trade secret in the field of the use of hydrocyclones used in oil exploration in an action brought against a development engineer and other former employees.  In a mammoth 244 day hearing involving 15 separately identified trade secrets, the Court adopted an interesting approach.  Each contested item was split into three columns of particulars.  The first was headed “Information as Particularised in Further and Better Particulars …”, the second column was headed “Where Found in the Plaintiffs’ Material” and the third “Where Found in the Delawood [the Defendants’] Material”.

21 IPR 136

The second column had three headings; written, oral and implied statements of how the trade secrets came to the knowledge of the individual defendants in the course of their employment.  The third column contained statements of how the defendants were alleged to have disclosed or used the trade secrets.

While satisfied that a particular “commercial twist” or particular slant of a concept or idea could give a trade secret a quality to take out of the realm of public knowledge, King J. found that untested and unproven concepts could not be trade secrets and that mere possibilities or vague mental conceptions were not protectable as trade secrets.

It is worth noting King J.’s cautionary concluding comment on a countervailing need to allow ex-employees to conduct their chosen trade or profession.

“The effect of giving any of them protection would be to place an unacceptable restraint on the freedom of Prendergast and Webb to use their personal skill, knowledge and experience in the area of hydrocyclone engineering in competition with the plaintiffs.  It is difficult to avoid the conclusion that the main motivation behind this litigation has been to restrain this competition and to this end, the defendants Prendergrast and Webb have been personally exposed to long and strenuous litigation with no real basis”.

THE EUROPEAN APPROACH

France

French law recognises three types of trade secrets; manufacturing trade secrets (secrets de fabrique), know-how (savoir-faire) and confidential business information.

In contradistinction to the common law approach, French law offers a range of penal remedies.  While penal in nature they also give rise to civil liability in certain situations.  A useful summary of the legal provisions is found in an article by Mark Powell.

Overview of European Trade Secrets Law, Mark D. Powell, Forrester Norall & Sutton; Error! Reference source not found. found on the International Licensing and Competition Law Site of the Centre for International Legal Studies

Divulgation of Secrets of Factories

Article 418 of the Penal Code prohibits the divulging by an employee of secrets of factories (secrets de fabriques), provided the secret is of an “industrial nature”.  Violation of this article gives rise to civil liability under the Civil Code.

Corruption

In terms of articles 177 and 179 corruption of an employee is prohibited.  This is defined as committing or abstaining from an act in exchange for a reward.

Theft

The theft of trade secrets can be prevented if an item such as software is incorporated in physical objects such as documents or recording media.  Civil liability can arise.

Unfair competition and general civil liability

General liability may arise under the Civil Code where a competitor wrongfully obtains and uses confidential information, with “wrongful” being considered in a commercial context.  Articles 1382 and 1383 may provide a basis for civil liability even when the party involved is not a competitor.

Germany

In Germany trade secrets are covered by way of specific statutory prohibitions in the German Unfair Competition Act.  This provides penal sanctions and in conjunction with the civil liability provisions of the German Civil Codes creates civil liability.

Paragraph 17(1) of the Unfair Competition Act prohibits conduct whereby an employee:

“… discloses without authorization to a third party, a trade secret with which he had been entrusted, or which he has obtained, in the context of his employment, during the term of his employment, with the aim of competing, or of promoting either his own or another person’s financial benefit, or with the aim of damaging the interests of the owner of the undertaking”.

Paragraph 17(2) prohibits a person:

“… for purposes of competition, or of promoting his own or other persons’ financial benefit, or in order to damage the interests of the owner of an undertaking:

“1. Obtain or secures a trade secret in an unauthorized way by:

“(a) use of technical means, or

“(b) creation of a material realization of the secret, or

“(c) stealing a physical item in which the secret is incorporated”.

In order to acquire protection as a trade secret, it needs to be shown that the information is commercially valuable, not in the public domain and the owner is able to show an “objective intent” to keep it secret.

In terms of the broad basis of protection, substantial conformity can be seen between this approach and that of the common law.  For a useful comparison of various trade secret regimes around the world, reference should be made to “The Trade Secrets Home Page”.

The Trade Secrets Home Page ™; R. Mark Halligan, Esq; http://www.execpc.com/~mhallign/

COMMERCIAL THEFT OF TRADE SECRETS

Having looked at the European mixed criminal/civil approach to trade secrets, it is appropriate to look briefly at the US response.  It is also a convenient point to lead into the issue of theft and espionage.

As Allison Coleman states:

Criminal laws regulating the misappropriation of confidential information in general, and trade secrets in particular, are of very respectable antiquity; the Hammurabic Code of 2100 BC, which is the oldest written code of laws, provided for the loss of an eye to one caught prying into forbidden secrets”.

[The Legal Protection of Trade Secrets, Sweet & Maxwell 1992, paragraph 7.1 ]

It is interesting to note from a review of the historical development of the law of trade secrets that it has long been used as a political tool, particularly in the hands of technologically advanced countries.  It is also interesting to note that espionage has always been a major means of technology transfer.  The misappropriation of trade secrets through both developing and technically advanced but economically depressed countries is likely to become an ever increasing problem, particularly as information is conveyed around the globe through digital networks.

[See paragraph 7 of the Legal Protection of Trade Secrets, Allison Coleman, Ibid]

It is widely acknowledged that there has been a significant increase in economic espionage and trade secret theft in recent years.  An example of this is given in a recent edition of Risk Management.  The authors quote the following example:

“… several years ago the New York Daily News reported that “American business executives were stunned in 1991 when the former chief of the French intelligence service revealed that his agency had routinely spied on U.S. executives travelling abroad [and] … regularly bugged first-class seats on Air France so as to pick up conversations by travelling execs, [and] then [entered] their hotel rooms to rummage through attache cases”.

[Complying with the Economic Espionage Act; Carr, Chris; Furniss, Jerry; Morton, Jack; Risk Management v47n3 pp:21-24; http://www.dialogweb.com/cgi/dwclient]

They also refer to the fact that the American Society for Industrial Security estimates that potential losses to American industry total over $60 billion each year and 1,100 entities had experienced economic espionage that year.

According to FBI Director Louis Freeh the number of cyber crimes being investigated by the FBI has doubled in the past year and the recent denial of service attacks on Yahoo!  eBay and Amazon.com are the tips of the iceberg.

[ZDNet: Special Report: Lines of Defense: News: FBI says cybercrime has doubled; http://www.zdnet.com/special/stories/defense/0,10459,2486464,00.html]

In 1996 the Economic Espionage Act was passed into law.  It creates two federal offences.  The first relates to stealing trade secrets in general.  The second is aimed at economic espionage for the benefit of foreign governments.  The Act also covers the theft of trade secrets by American citizens, who thereby attract federal criminal liability.

The proscribed conduct is the knowing or intentional misappropriation of trade secrets; prohibiting anyone from converting, receiving or copying a trade secret intending to benefit someone other than the owner.

Section 1831 provides that any person who knowingly does any of the following acts, intending or knowing that doing so will benefit any foreign government, foreign instrumentality, or foreign agent, will be guilty of an offence:

“steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains a trade secret; or

“without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys a trade secret; or

“receives, buys, or possesses a trade secret, knowing the same to have been stolen or appropriated, obtained, or converted without authorization.”

A trade secret is broadly defined and encompasses “all forms and types of financial, business, scientific, technical, economic or engineering information” provided the owner has taken reasonable steps to secure its secrecy and the information is not in the public domain.  Once again, we see common themes coming through.

THE FORD CASE

The recent Ford case has attracted widespread comment.  It shows just how difficult the issue of trade secrets is when placed in an Internet context.  In August 1999 Ford sued Lane, claiming he violated laws against disclosing trade secrets when he posted Ford company documents on his web site.  Ford sought to prevent him from using, copying or disclosing company information.

[Ford Motor Company v Robert Lane d/b/a/ Warner Publications 67F. Supp. 2d 745 (1999) 52 U.S.P.Q.2D (BNA) 1345]

Lane, a student, allegedly came into possession of certain highly sensitive Ford documents and its products, including photographs of vehicles in development stage, blueprints and sensitive internal Ford documents relating to its products and manufacturing operations.

In response to Ford’s complaint, Lane said he received the documents from sources within the company.  Lane relied, in defence of his actions, on the following statement, posted on his BlueOvalNews site:

“BlueOvalNews DOES NOT solicit information from any Ford employee, supplemental, contract, agency, purchased service or supplier employees.  Further, BlueOvalNews DOES NOT post ANY material marked propriety (sic) information!”

Lane, also went on the offensive stating:

“The real problem is not with BlueOvalNews, but the people at Ford who are leaking the documents.  Ford is going after the symptom, not the disease, said one post to the group”.

[http://www.lemurzone.com/edit/converse7.htm]

In her judgment, denying Ford the relief sought, the Honourable Nancy G. Edmunds stated:

The birth of the Internet, inauspicious at the time, presaged a revolution in worldwide communications.  In the realm of law, we are only beginning to grapple with the impact of the communications revolution, and this case represents just one part of one skirmish – a clash between our commitment to the freedom of speech and the press, and our decision to the protection of commercial innovation and intellectual property.  In this case, the battle is won by the First Amendment.

[http://www.mied.uscourts.gov/edmunds.htm]

The nub of the issue can probably be summarised on page 13 of the judgment where the Learned Judge stated:

And while the reach and power of the Internet raises serious legal implications, nothing in our jurisprudence suggests that the First Amendment is circumscribed by the size of the publisher or his audience.

Thus, because Lane did not owe Ford a particular duty of confidence or fidelity, through an employment contract or otherwise, a key issue became one of freedom of expression.  It is perhaps worthy to note that this, in a perverse sort of way, brings the U.S. into line with the developing world’s view that all information should be freely accessible.  The reason for advocating this freedom is however quite different.

Finally, in terms of First Amendment issues, these are significantly less important outside the U.S. and a different result would probably have occurred in many other jurisdictions.  This shows that uniformity of outcome is still far from certain.

THE PRACTICAL IMPLICATIONS

Given the relatively open-ended nature of trade secrets they could range from specific secret formulae to general know-how associated with a franchise or license or a specific step in a process.  Likewise, they may be found in highly technical specifications and designs, right down to a broad concept or idea that gives a particular competitive edge.  In a database context the raw data may be ascertainable but its particular compilation and arrangement may still constitute a protectable trade secret.

In the digital world, with the frequent and varied exchange of information and the rapid exchange of ideas and realignment of business partners, there is a significant risk of trade secrets being lost.  There is also a greater risk of allegations of misappropriation of trade secrets, whether these allegations are rightly made or not.  They might arise in a number of situations, including where a technology based company enters into a joint venture or license arrangement, whereby trade secrets are disclosed or exchanged.  It could equally occur where a consultant is hired or new employees are taken on board.  These seemingly innocuous commercial dealings may result in significant commercial and legal risk.

It is almost inevitable when companies enter into some form of joint venture or cooperation, that sensitive trade secrets will be disclosed.  In order to avoid allegations of misappropriation, parties can minimise the risk by structuring things in such a way that it is abundantly clear what trade secrets are involved, where they reside, where and when they were disclosed and where they will end up when the relationship ends.  Martin Weinstein sets out a number of practical suggestions as to how defensive evidence can be created.

[Trade Secrets and the Economic Espionage Act by Martin Weinstein of Foley Lardner; http://www.foleylardner.com/PG/IP_ELEC/Trade_Secrets.html]

Document Independent Development

A party trying to avoid an allegation of theft of trade secrets should document its independent effort in the development of its own technology.  The documentation should include written materials, such as laboratory notebooks, progress reports, diary entries, and the like, that support the idea that the technology was independently developed and was not derived from another’s trade secrets.  The documentation should also include business plans showing corporate decisions to create a new generation of technology and should document the amount of money and manpower invested in that effort.

Segregate Records

The company files should be organized to segregate all records relating to contact with the trade secret owner from records relating to the company’s independent development.  If possible, the documents and records should be kept in separate files, separately labelled and separately maintained.  This will reinforce the position that the company’s efforts are independent of the “trade secret” technology.

Avoid Using Competitor’s Terminology

Wherever possible, shorthand expressions, abbreviations or acronyms created by competitors should be avoided.  Only common or recognized terms or those created by the company should be used to describe the processes or products that are independently developed.

File Patent Applications Wherever Possible

A company should aggressively file patent applications covering every aspect of its new technology to the extent possible.

The Lopez Effect, whereby a senior executive leaves with a host of documents and other executives is now part of trade secret lore.  It is reputed to be one of the reasons why the US government introduced the Economic Espionage Act 1996.  It has been widely reported.  An excellent review of the cases can be found in an article by Philip Berkowitz and Mary Elizabeth Cisneros.

[The Volkswagon-General Motors Trade Secrets Lawsuit, its Settlement:  Avoid the Lopez Effect; http://www.ebglaw.com/newsstand/volkswagon-gm.html]

The learned authors suggest a number of preventative measures, to lower the risk of experiencing the so-called Lopez Effect.  These are as follows:

“Confidentiality clauses.  These clauses protect the disclosure of confidential, trade secret information both during and after the cessation of employment and should ensure that the former employee will not discuss or share any confidential information with future employers.

Covenants Not to Compete.  These covenants are valid as long as they are supported by consideration, are reasonable in time and geographic scope, and so long as they seek to protect against the dissemination of trade secrets.

Non-Solicitation Clauses.  These clauses prohibit employees from soliciting customers and co-workers while the employee is still employed and prohibit the departing employee from soliciting customers and/or key employees for an extended period of time after leaving employment.

Liquidated damages clauses.  These clauses will guide the court to grant pre-set agreed-upon liquidated damages if employees breach their fiduciary duty or contractual obligations.

Notice of Job Offer.  Employees should be required to advise the employer of the identity of their new employer should they leave the company.

Return of Documents.  The company should demand the return of all company documents upon the employee’s resignation.  The employee should leave the premises on their last day of employment so that they will not have time to gather information and download computer files.”

These safeguards are applicable to all transactions involving trade secrets.  However, in an on-line environment additional measures may be necessary to establish that “reasonable steps” have been taken to keep the relevant information secret.  These steps may include:

•employing effective encryption measures;

•maintaining effective firewalls;

•using proven authentication systems;

•having a managed security monitoring service to detect unauthorised access or attempts at it; and

•regularly upgrading the system and its security measures to keep it current and reasonably reliable.

PROBLEMS WITH FRANCHISE/LICENCE RELATIONSHIPS

One of the weaknesses with relying on trade secrets as a form of intellectual property is that they are essentially defensive in nature.  That is, the primary remedy is to prevent disclosure or seek damages for unauthorised disclosure or use.  What an owner of a trade secret cannot do is affirmatively prevent a competitor from developing business solutions, albeit along the same lines.  Likewise, the owner of the trade secret cannot prevent a competitor (or indeed anyone) from disclosing the trade secret or indeed obtaining patent protection for it.

Disclosures of trade secrets either through a licensing arrangement or during pre-contract negotiations can be fraught with difficulties.

These difficulties often revolve around the need of the vendor to sufficiently inform the prospective purchaser of the benefits of the deal and the need of the prospective purchaser to be sufficiently informed as to the nature of the vendor’s business (or the licensing opportunity) without being precluded from one day competing with the vendor.

The risk of course is that the prospective purchaser who declines the opportunity but subsequently competes may be seen by a court as having misappropriated commercial secrets obtained during the negotiations.  This occurred in a U.S. case where negotiations occurred in the context of more than one target business.  Trade secrets were involved and the Court held that the acquisition of the alternative company could not proceed because there would be an “inevitable” disclosure of the trade secrets to a competitor.  This effectively foreclosed on a commercial opportunity but also landed the defendant company in strife it little suspected.

[Den-Tal-Ez, Inc v Siemens Capital Corporation, 389 Pa.Super. 219, 566 A.2d 1214 (1989)]

These problems can be avoided by identifying the specific trade secret involved and including those in a Confidentiality Agreement.  Another sensible precaution is for the parties to acknowledge that if the negotiations break down either they themselves or other entities may be competing with each other in the future.  This would then allow the parties to proceed with a clear understanding of what their future intentions are and what information is confidential and how it should be adequately demarcated.

There is nothing to prevent a party licensing a trade secret and requiring royalties to be paid, even after the trade secret has entered the public domain.  By the same token, the legal advisors acting for the licensee should ensure that this does not happen by stipulating that if and when the trade secret enters the public domain, through no fault of the licensee, that the royalty payments should cease.

In the e-commerce area, with business plans and schemes now being patentable, in many jurisdictions the preferred option must surely be to first seek patent protection.  This is a far more precise solution allowing the subject matter to be clearly defined and more importantly, enforceable against third parties who seek to exploit the invention.  The e-commerce or web-related solution can thus become an effective weapon against competitors as British Telecom’s recently unveiled “hypertext” patent shows.

Difficulties do, however, arise if a licence purports to tie together both patented and non-patented technology and know-how.  That is, as amounting to an unlawful extension or tying of the patent rights.  For this reason, separate and clearly demarcated licenses should be entered into.

In terms of preserving confidentiality during negotiations with a potential joint venture partner, licensee, partner or indeed any party involved in joint development and transfer of technology, certain basic protective measures can be taken.  Wendell Ray Guffey as follows:

•All non-tangible information identified when disclosed.

•Written record of all disclosures created within 30 days.

•Access to confidential information restricted and kept on separate file.

•Access limited to those who “need to know”.

•All document clearly labelled to avoid confusion as to status.

•All copies of documents numbered and those having access to them signed for possession of particularly sensitive documents.

•All records marked as “confidential” with the name of the disclosure.

[les Nouvelles, September 1996 at page 105]

Finally, it needs to be remembered that notwithstanding the developments referred to above, the treatment of trade secrets is still not consistent and varies from country to country.  Likewise the laws governing the licensing of technology can vary considerably.  In Asia, the need for government approval of certain types of trade secret licences is common.  In particular, some Asian countries prevent royalty payments for trade secrets beyond a certain period and outlaw automatic renewal provisions.  Clearly good local advice is essential.  For a comprehensive review of the position see Melvin F Jager’s article in les Nouvelles.

[A Comparison of Trade Secret Laws in Asia, June 1997, Pg 54]

In conclusion, based on this review, I suggest the following comments can be offered:

Trade secrets law is going through a process of change and development.  Arguably, it is more important today than ever before.

Notwithstanding diverse approaches, there is a reasonable level of uniformity around the world.

While it has weaknesses as a legal remedy, in a digital environment it is generally effective as a commercial tool.

Having said that, in a digital environment special care needs to be taken to protect and preserve trade secrets – vigilance and attention to detail are critical.

Finally, at a political level the demand for free access to valuable information will increase as the have not’s insist on a greater say, while the information rich seek to maintain and increase their technological and trade advantage.  This struggle will shape the future as new legal norms are created.

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