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How to Protect your Business' Secrets?

Last revision:
Last revision: January 14, 2020
Last revision:
Category: Business Management

Many businesses owe their success to business secrets. Therefore, whether yours business is a well established one or a startup, you may want to consider how to protect such secrets. Your business secrets may either be confidential information or corporate trade secrets, both of which are recognized as valuable forms of intellectual property with an indefinite term of protection with no formal registration requirements.

In Canada, trade secrets are considered to be a subset of confidential information and are typically reserved for more technical information such as formulae, recipes, patterns, processes and devices. Confidential information, on the other hand, tends to be used to refer to compilations of information such as customer and supplier lists, unknown concepts or business opportunities.

A further distinction is recognized in employment cases where trade secrets are distinguishable from "know-how". Know-how is the "subjective" skill and knowledge which an employee learns as part of his or her trade and which, unless provided otherwise in the employment contract, the employee may continue to use after his or her employment ends. Whatever term is used, it should be emphasized that, in Canada, there is no exhaustive list of what does or does not constitute a trade secret or confidential information.

There are no major differences in the law on this topic across Canada. There is also no statute which either defines or provides any remedy for the misappropriation of confidential information. Sources of protection in Canada include contractual provisions, the common law obligation of employees to not disclose confidential information and the related action for breach of confidence. This guide will also outline what to do in case of a breach and how to ensure such confidential information and trade secrets are protected.

 

Contractual Protections

In order to protect confidential information and trade secrets, you may want to include a confidentiality clause in certain types of contracts, such as an employment contract or a services agreement. If there are particularly important trade secrets or confidential information, you may want to consider a separate non-disclosure agreement.

It is also important to consider post-termination obligations - the obligations that will survive the end of the contract. For example, in an employment contract, the confidentiality obligation of the employee may survive the end of his or her employment for a few years. However, it is important to ensure that all terms are reasonable and do not amount to an unreasonable restriction on trade or future employment as an unreasonable obligation fo confidentiality may be unenforceable by the courts. Non-competition agreements may also be employed; non-competition agreements are used to limit the employee's ability to directly or indirectly compete with the employer or to join a competing company during the period of employment or after cessation of employment for a set period of time and may include a confidentiality clause.

 

Common Law Protections

All employees owe a duty of good faith, loyalty and fidelity to their employers. This means that all employees must maintain confidentiality of trade secrets and other confidential information. However, employees are free to use "know how" or general skills obtained in employment. Senior or other key employees have additional fiduciary duties to maintain confidentiality. These are duties that go beyond normal contractual obligations between employer and employee, and require that these individuals act with the utmost of good faith towards their employer. These obligations may continue after employment ends.

 

Breach of Confidence

While no cause of action for the misappropriation of trade secrets or confidential information may be found in legislation in Canada, the misuse of corporate confidential information can give rise to an action for breach of confidence. The test for whether there has been a breach of confidence was laid out by the Supreme Court of Canada and requires the owner of the confidential information to show that:

1. The information has a quality of confidence about it

In determining whether information should be recognized as confidential information or a trade secret, a court will consider a number of factors including whether the information is:

  • generally known to others;
  • known to others in the industry;
  • unique and novel; and
  • subject to measures to ensure its secrecy.

In Canada, the ability to prevent the unauthorized use of a trade secret is dependent upon the owner's ability to demonstrate that it has been maintained as confidential through the use of physical or contractual means.

2. The information was communicated in circumstances in which an obligation of confidence arises

Obligations of confidence can arise through contract or relationships of confidence, whether they are fiduciary in nature or a more typical employer-employee situation.

In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance, and trust in another whose aid, advice, or protection is sought in some matter.

However, even in the absence of an express agreement regarding confidentiality, Canadian courts will still consider the conduct of the parties to determine whether an obligation of confidence arises. For example, parties working towards a joint venture or some other business arrangement will generally be found to have communicated in circumstances giving rise to an obligation of confidence.

3. The information was misused or used without authorization to the detriment of its owner

Where a party has autonomously developed certain information, similarities with the trade secrets that are alleged to have been stolen are usually not sufficient for an action for misappropriation. However, striking similarities in content, or the timing of a party's use of the information in relation to the disclosure, may lead to an inference of misappropriation. Under the "spring board" doctrine, the use of another's confidential information to develop a competing system can also give rise to damages.

 

Remedies

One of the most common forms of relief is an injunction prohibiting the use of confidential information by the offending party, usually a former employee. Often the business will want to obtain an injunction immediately, before the case is heard. Canadian courts will typically not grant such interlocutory injunctions unless the harm the applicant faces is "irreparable" in that it cannot be adequately compensated by monetary damages. However, in some cases injunctions have been granted in connection with the misappropriation of confidential information and the breach of a non-disclosure agreement.

Nevertheless, the Supreme Court of Canada has held that the remedial goal in a breach of confidence case is to restore the plaintiff to the position it would have been in if the breach did not occur, which often results in an award of monetary damages. Where the owner of the confidential information is in the business of selling the information, the market value of the confidential information is often considered the most appropriate measure of compensation.

Anton Piller Orders are also available in Canada. These orders, typically obtained without notice, permit the applicant to enter a specific premises of the defendant and search for and retain specified classes of documents or information in order to preserve evidence for trial. An Anton Piller Order is generally more difficult to obtain in Canada than an injunction, since there must be evidence that there is a threat of the destruction of evidence.

It is also important to note that criminal remedies are generally not available in Canada. The misappropriation of confidential information is not normally considered theft under the Criminal Code of Canada.

 

How to protect confidential information, including trade secrets

There are a number of things a prudent business can do to better protect itself from the misuse of confidential information and trade secrets.

1. Identify what needs protection

Identify each piece of information that you wish to protect and create a system of identifying newly created material that requires secrecy. When selecting, try not to be too inclusive because this might trivialize protection of trade secrets.

2. Label documents that contain confidential materials

Documents that contain or reflect trade secret information should be labeled "confidential." This will remove all doubt that an employee was not aware that the information was confidential.

Limit copies and circulation of these documents and, when necessary, number copies and require the documents be checked in and out.

3. Obtain contractual protection for all employees

Include a confidentiality clause in employment contracts of all employees, not simply senior or key employees.

4. Obtain contractual protections for outside entities

During the negotiation phase, whether it is with a potential partner or a potential service provider, consider entering into a Non-Disclosure Agreement.

In contracts with outside entities, include a strict confidentiality provision regarding the trade secrets in contracts such as a Services Agreement. When outsourcing production of any of your products, try to choose different vendors for different parts. Do not disclose the final product or the relationship between the pieces.

5. Monitor where information is stored

Conduct an information audit to determine where vital information is stored and who has access to it. Include all hard copies, desktop and laptop computers, and diskettes. Look for potential weak spots.

6. Secure computers

Require passwords for access to computers containing sensitive information. For example, Visa International had a desktop computer stolen that contained confidential information on thousands of credit card accounts. Passwords ensure that nobody can access confidential information and trade secrets on a stolen computer.

Follow security procedures that are routinely updated and monitored.

7. Provide adequate security

For a smaller business, perhaps a locked filing cabinet is enough security. Bigger companies might need security officers, secure zones and badges.

 

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