Contentious trade secret matters and disputes

Understanding how trade secrets are enforced will enable companies to proactively prepare their business operations in the event that they need to engage the legal system to protect important assets or defend against trade secret infringement claims.

Here are some common scenarios in which trade secret disputes arise:

• Key employees gain confidential technical insights about their employer’s business, then they leave to start a competing business or join a competitor.
• A company is exploring a collaboration with another and shares confidential information in the course of discussions. The collaborators later launch a competing product that appears to incorporate such information.

There is a right of action in the above scenarios, based on breach of confidence, fiduciary duties, non-disclosure agreements or all of these.

Generally, the entity that develops and maintains the secret holds ownership. In the agrifood sector, these include proprietary recipes, formulations, manufacturing processes, marketing strategies and R&D data. Determining ownership can often be challenging due to involvement of multiple persons, entities and shared resources. It is crucial to establish clear agreements and documentation outlining ownership rights to avoid disputes.

Trade secrets are often embedded in various locations, such as research labs, production facilities and digital databases. Ensuring these secrets are protected across all locations is vital. Companies must implement robust security measures, including access controls and NDAs, to safeguard their trade secrets effectively. How these secrets are developed, secured, accessed, shared and otherwise controlled should be recorded and regularly updated in a catalog or registry. There are many specialized software products designed to record and maintain trade secret listings.

First, notify your lawyer, in case urgent action is required, such as seeking an injunction (a court order to force the other person to stop). Second, gather and preserve evidence, including performing an internal audit to determine what trade secret may have been misappropriated, documenting any suspicious activities and identifying potential sources of a breach. If your IT systems are set up to regularly clear older content, they should be set to preserve all records relating to the suspect individual or the trade secret at issue.

Your lawyer will need detailed information about the trade secret, how it was protected and the nature of the suspected infringement. They will also require evidence of the infringement, such as emails, access logs and lists of relevant persons.

Your lawyer may also send letters directing the suspected person or the person’s new employer to conduct a litigation hold and to preserve evidence.

You will need to provide evidence that demonstrates the existence of the specific trade secret, including its value and measures taken to protect it. This includes documentation such as NDAs, security protocols and records of access. You must also show how the defendant took or disclosed the trade secret, which can involve digital forensics, witness testimonies and physical evidence.

Establishing the existence and protection of a trade secret requires rigorous and extensive record-keeping demonstrating the value and nature of the trade secret, its development, its documentation, how it is protected and accessed, and any special handling rules. This is where the specialized software mentioned above can be very useful. It is also important to demonstrate that the database is regularly maintained, and that any protection measures are followed and enforced.

To establish trade secret infringement, a company must provide evidence of unauthorized acquisition, disclosure and/or use of the trade secret. Evidence is also required to show that the information conveyed was:

• Confidential;
• Communicated in confidence (e.g., established via agreements, or circumstances where the receiving party should have been aware that the information was communicated confidentially); and
• Misused by the party to whom it was communicated.

If you hold information alleged to belong to another, you will need to prove that you have it lawfully, or that you did not take it, such as by demonstrating independent development. Companies should maintain records related to how and when their key products and processes are developed. These records may provide the evidence required to prove that an accused product or process was developed internally without the use of a competitor’s trade secrets. Such record keeping is not only useful as a defense to trade secret infringement claims, but is a best practice that all companies should employ.

Companies should also be aware of the employment histories of new hires and take active steps to ensure that new hires do not incorporate the confidential information of previous employers in new work products or share such information with new employers. This can be achieved and documented through employment agreements, codes of conduct and employee training.

You can also show that the information was publicly available or show that the plaintiff did not take reasonable steps to protect the secret.

Trade secrets and patents both provide control over the use of proprietary products and methods, but they do so differently. A trade secret is confidential information that provides a competitive advantage, while a patent is a public disclosure of an invention that grants exclusive rights. While it might seem easier and less expensive to rely on trade secrets, trade secret enforcement is often more complex and time consuming due to the challenges of precisely defining trade secrets and clearly delineating your rights.

If someone obtains a patent based on a trade secret they stole from you, you may challenge the patent's validity by proving that the patent applicant is not the true inventor.

Both are no fun. Trade secret litigation can be particularly lengthy and costly. While most cases settle at an earlier stage, if taken all the way to trial, it may take three to five years and $2 million to $3 million in legal fees. The duration of a case depends on its complexity, the amount of evidence and the willingness of parties to settle. Compared to patent infringement cases, it can be more time consuming and expensive to build a trade secret case, as the factual circumstances need to be established to prove existence of the trade secret, its confidentiality and how it was taken—as opposed to relying on a published patent. The damages in a trade secret case can be substantial. For example, in a trade secret case* regarding a bacterial fermentation process used for pharmaceuticals, damages of almost $4 million were awarded to compensate for trade secret theft.

In many cases, obtaining an early injunction against further use of the stolen information will effectively resolve the case.

Whether based on trade secret theft or patent infringement, litigation is very time-consuming and expensive for all involved. This is why excellent record-keeping is so important. If you can assemble a strong evidentiary basis in the beginning, it may convince the other side to cease the objectionable activities and settle early rather than going through protracted litigation.

*Apotex Fermentation Inc. v. Novopharm Ltd. (1995). 63 CPR 3d 77 (Man QB)

Settlements of trade secret disputes involve negotiations between the parties to reach a mutually acceptable agreement. Compared to patent infringement settlements, trade secret settlements may focus more on confidentiality and preventing future misuse. It's essential to understand the implications of the settlement for your company, including any ongoing obligations and the impact on your competitive position and business relationships.

Settlement agreements related to trade secrets can include monetary compensation, commitments to maintain the confidentiality of, return or destroy the misappropriated information, non-compete obligations if legal in your jurisdiction, or licensing agreements.

Trade secret disputes can be used strategically in various business scenarios,—such as pre-IPO, merger or acquisition. For instance, public allegations of trade secret theft can derail business plans and relationships between the candidate company and the potential partner, so a company at one of these critical junctures needs to be particularly careful.

If there are outstanding trade secret issues, they should be resolved before proceeding with major business transactions. Resolving trade secret disputes prior to such transactions also signals that the company is a prudent owner of its intellectual property and can be trusted to enforce its rights.

• Record-Keeping: Have a system for recording details about your company’s trade secrets, and make sure it is regularly updated.
• Upon Suspecting Theft of a Trade Secret:Gather and preserve evidence and consult with legal counsel as soon as possible.
• If You Must Litigate: Consider filing for an injunction early to see if the dispute can be resolved more quickly than going through full litigation process.