Exploring the commercial application of trade secrets

The owner of a trade secret is typically the individual or entity that created or developed it, or that acquired it through legitimate means. Given that trade secrets are not formally registered in Canada, nor publicly disclosed, confirming the ownership of a trade secret can be challenging in some circumstances. To determine who the owner of a trade secret is, records such as employment or consulting agreements, business collaboration agreements, technology or intellectual property transfer agreements, and business records can be consulted.

A trade secret may be jointly owned, particularly in cases where several parties work together to develop it. However, as joint ownership can present challenges regarding permitted use and restrictions surrounding disclosure, and regarding maintenance of secrecy, joint ownership of a trade secret should be reflected and its mechanics described in an agreement between the owners.

An ownership interest in a trade secret is transferable through assignment and transfer. For example, if the owner of a packaged foods company desired to sell that company to a buyer, the owner may assign their rights in, and transfer ownership of, trade secret formulas or recipes used in the manufacturing of the company’s packaged food products to that buyer in order to enable the buyer’s ongoing manufacture of these products.

However, if the owner of a trade secret does not wish to permanently relinquish ownership but intends to share it with another party for a limited period, they may choose to grant a license in the trade secret. For example, if Company A is in the process of scaling and requires assistance from Company B in producing an in-demand beverage, it may license the use of the trade secret beverage production process to Company B for the limited purpose of performing specified production activities. When a trade secret is licensed, as the value and validity of a trade secret require that it remain secret, precautionary steps must be taken by the owner to prevent it from entering the public domain. These measures include the use of appropriate confidentiality provisions or agreements, and ensuring that only those who actually require access to the trade secret are granted such access.

Confidentiality agreements are often used when dealing with trade secrets, such as between an employer and an employee or between a company and a potential business collaborator prior to entering a working relationship that requires the sharing of confidential information, including trade secrets.

One such common type of confidentiality agreement used in these circumstances is a non-disclosure agreement (“NDA”), which specifies how and when information disclosed can be used, and what recourse is available if this information is misused by the party receiving it. However, careful consideration should be given when drafting an NDA, as these agreements are merely a tool to enable limited access to and use of information, and to protect information.

When negotiating an NDA, issues of particular importance include:

1. The precise information that is subject to the non-disclosure agreement
   The scope of information to which the NDA applies should be clearly stated, and no broader than necessary, to enable proper trade secret protection.
2. The level of care that the receiving party must use in protecting the trade secret
   The receiving party should be required to use at least the same standard of care in protecting the information it receives as it uses in protecting its own confidential information.
3. The required steps to be taken upon the potential disclosure of the trade secret
   Common steps may include actions such as notifying the owner, reporting the disclosure to appropriate authorities or personnel, or taking steps to contain and mitigate further damage.
4. Ability of the receiving party to make copies of the trade secrets
   The ability to make copies may be completely prohibited or may be restricted to a certain number of copies for a specific purpose, stored in a specific manner.
5. The handling of the trade secret upon the termination of the relationship
   This may include an obligation to securely destroy any confidential information upon termination of the relationship or allowing the receiving party to keep a single back-up copy of the confidential information.
6. Survival of obligations
   Obligations restricting the disclosure of trade secrets should be clearly set out, and the indefinite survival of such obligations should be clearly stated in the agreement.

To ensure a greater level of protection for trade secrets, companies are encouraged to include confidentiality clauses in employment, consultant and collaborative agreements that may contemplate relationships where this information may be shared. This includes agreements with suppliers, manufacturers and distributors that may need to know information about certain company trade secrets in order to provide services or support.

A business can also protect its trade secrets by entering into non-compete agreements (or including non-compete provisions in agreements) with employees and contractors. Non-compete agreements restrict a former employee or contractor from competing with the company once the employment period or relationship has ended. To ensure that a non-compete is enforceable, however, it must be drafted as narrowly as possible (for example, by specifying a geographical region or limiting the scope of activities to which the agreement applies). The applicability of non-compete agreements will also depend on the jurisdiction of the business, as they may not be enforceable in all provinces, such as Ontario.

If what is being shared is a physical sample of something that embodies a secret (such as a secret formulation or a secret process), other legal considerations may apply. In these instances, additional or alternative agreements, such as material transfer agreements, may be appropriate. These agreements may provide for access to a sample of material but include strict limitations around how it can be used, such as permitted use of the sample, restrictions on reverse engineering or de-construction and method of destruction after a permitted period of use.

In more serious cases of trade secret misappropriation, businesses may apply to the courts in Canada requesting an injunction to prevent further disclosure of their trade secret. This is a difficult route for businesses to take, however, as success requires demonstration that without the injunction being granted, the business will suffer irreparable harm that compensation via monetary damages will not cure.

Whether or not a formal agreement, such as a confidentiality or material transfer agreement, is in place, it is a best practice to only share trade secrets with those who actually require access to them to enable the performance of their duties. Consider sharing information regarding results or benefits that may be obtained via use of the trade secret, rather than the trade secret itself. The more a company limits access to a trade secret, the better it can maintain its secrecy.

Once a trade secret enters the public domain, it is impossible to make it secret again. Therefore, it is crucial that companies take the necessary steps to secure their trade secrets and limit who has access to them. Some types of common precautions that are used to protect trade secrets include:

• Encryption: translates data into another form that is only accessible to users with a secret key. Alternative or supplementary practices may include the use of firewalls and anti-hacker initiatives.
• Black-boxing: break up access to trade secrets so that a single person does not have access to the entire trade secret. For example, various steps required to produce a final product or perform a complete process can be separated into discrete “black boxes”.
• Password protection: strong passwords should be used on any system that houses trade secrets to limit outside or unauthorized access. Multi-factor authentication tools are also recommended.
• Lock and key: a physical lock and key (or lock card protection) system can be used to protect trade secrets that may be set out in documents.This may be supplemented by the use of security cameras, sign-in and sign-out procedures, and security personnel.
• Policies: enact and enforce appropriate company policies regarding confidentiality, electronic access, use of external devices and personal email accounts, visitor access to physical facilities, and marking and labelling of confidential information.

Like many other intangible assets, the direct and indirect costs associated with trade secrets are often difficult to determine, making trade secret valuation a challenging task. Attempting to conduct a valuation of trade secrets is often done pursuant to a discounted cash flow analysis, where assumptions can be made about the characteristics of the trade secret and values can be associated with each such characteristic. Differences in assumptions can often lead to different valuations of the same trade secrets. Some assumptions associated with trade secrets that should be considered are outlined below.

When dealing with a departing employee, it is best practice for a company to conduct an exit interview to remind the employee about the trade secrets they were privy to during their employment term and the confidentiality obligations that will continue to apply to them post-employment.

Upon the resignation or termination of an employee, companies should also ensure that all company property, including devices or documents that may contain trade secrets, are returned to the company prior to departure.

As a general best practice, companies should also monitor and audit intellectual property usage during the employee’s term of employment, to ensure that all company policies regarding access to and usage of trade secrets are being adhered to by the employee before their departure from the company.

The below summarizes the different stages of the employment relationship and high-level considerations that should be taken into account by a company at each stage.