Theft of trade secrets

13 July 2023

Intangible assets have become essential to corporations. One employee, partner, distributor could change the future of a company if the right measures are not taken into consideration. The courts recognize the importance of trade secrets as alternative protection of intangible assets. For this reason, judges encourage companies to take all measures available in order to prevent the theft of trade secrets.

13 July 2023

When I started writing this note, I immediately remembered. It is the scene in the Fellowship of the Ring where Frodo has to keep the ring at Bilbo’s house until Gandalf returns with information confirming whether this ring is the real Ring of Power. I love the movie but more the books I must say.

Trade secrets have quite a few similarities to this scene and the meaning behind. Something valuable, with powers that only the one who created it knows them and that give him an advantage over his rivals (i.e., Sauron over the rest of the Middle Earth). It turns out that just like the movie with the ring, trade secrets can be easily lost indeed.

Trade secrets require a strategy within the company

Trade secrets have become the most common tool of IP protection. There is no registration, laws are quite harmonized in this type of protection all over the world, and the controversies upon the trade secrets are usually not made public.

Comparing it to patents, when trade secrets are beneficial? The answer would be when the subject matter is not patentable, and it can be kept in secret.

Companies have evolved over the last ten years. It is no longer about moving the company’s capital. Intangibles have more and more presence in the minds of the CEO of each company. For this reason, trade secrets are in the discourse of business media.

One ring to rule them all

A few weeks ago, I came across a news item about the misappropriation of trade secrets in the USA. Within the aviation sector and specifically turbines. Some companies have an extraordinary knowledge of industrial sectors that are key in the great world powers. Aviation is one of them.

An employee of a technology company repeatedly sends photographs of landscapes, photographs of a sunset. All seemingly harmless. However, they contain highly confidential information about the company’s industrial secrets in binary code. This happened recently at General Electric.

Last year, in a BBC news item, FBI Director Christopher Wray told a meeting of businessmen and academics in London that China intended to “plunder” the intellectual property of Western companies in order to accelerate its own industrial development and end up dominating key sectors.

Industrial espionage as a tool for world domination? Evil tongues say that, if you try to hack into industrial secrets in China, the only thing you find is US intellectual property. On the other hand, if this is so, is it China that is trying to take control in all industries?

How do you identify the One?

We are looking into all sorts of financial, business, scientific, technical, economic, or engineering information. Always assuming that:

  • the owner thereof has taken reasonable measures to keep such information secret; and
  • the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.

Information that is shared and “moved” internally in a company is valuable in itself. If, in addition, this is a strategic sector in a particular industry or for a country, it becomes highly sensitive information.

The Civil Code of People’s Republic of China, effective from 1 January 2021, attaches great importance to the protection of trade secrets, with Article 123 of the Civil Code stipulating that trade secrets are a type of intellectual property right and shall therefore be protected by intellectual property laws.

In Spain, with Law 1/2019, a trade secret is any information or knowledge that: Is secret in the sense that it is not information or knowledge generally known by persons belonging to the circles in which such information is used.

TRIPS defines it as: it must be secret, be valuable because of its secrecy, and be reasonably protected. Of these three criteria, what differentiates it from other intellectual property is that it must remain secret over time. And this is the most difficult to achieve. Have you kept it secret?

A confidentiality agreement, for employees or third parties with whom the trade secret is to be shared, is a start. However, by itself it will not guarantee the safeguarding or defense of such confidential information as a trade secret.

The case of Loreal v Olplex is an example of how an NDA was not sufficient. The terms of this agreement were too vague and generic. In the end the judge realized that there was widespread knowledge within L’oreal about these “trade secrets”. The company had not been cautious in protecting such information internally where only a few could have access to it.

Steps to be taken to keep it secret

Putting measures and protocols in place is necessary. However, to what extent is the company mature enough to be able to implement these measures? In an interview with Dyson’s IP counsel, he highlighted above all that, the level of maturity at the internal level that the organization has to be able to implement such measures.

What aspects will the courts take into account?

An intense policy of non-disclosure. Judges want to see that the company has had employees and partners of the company aware of not disclosing confidential information. If it is suddenly apparent that the company has not asked for the return of the documentation once the employment relationship ends it will be difficult for the company to claim it in court.

Physical barriers are very important. Judges are looking for cases where physical means have been put in place to keep it secret.

The measures must be documented internally. An internal register of which aspects are the most at risk. The courts will look for a reasonable standard of effort.

All this must be implemented in those business relationships necessary for the company: suppliers or external collaborators who may have access to secret information in order to help the company concerned. These third parties must be kept informed on an ongoing basis.

In order to be able to carry it out, it will be necessary to train the employees. If the company does not properly inform that part of the information is confidential, the claims in a lawsuit would not be successful.

Overall, there is no crying to the judge unless all measure have been implemented.

Even the smallest person can change the course of the future

Galadriel said that to Frodo when he is was in despair for not knowing how to accomplish the mission. Intangible assets have become essential to corporations. One employee, partner, distributor could change the future of a company if the right measures are not taken into account.

The courts recognize the importance of trade secrets as alternative protection of intangible assets. For this reason, encourage companies to take all measures available in order to prevent the theft of trade secrets. Is it secret, Frodo? Is it safe?

5/5 - (1 vote)

Borja Barrutieta

Lawyer.International Relations Department.Legal Advice Department.


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