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[email protected]
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Mon - Fri 09:00-17:00
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1-778-223-6115

Trade secrets are not cheap or easy

You are being misled by the promise of trade secrets being free and easy. 

Indeed, if you buy this promise, consider what other business opportunities exist for you. There is a big bridge in New York that is for sale. So is the Eiffel tower. 

Trade secrets are useful and have their place but they aren’t free – security and compartmentalization cost you something. And they aren’t easy – you have to be constantly vigilant since disclosure could end your IP rights. 

A few people have asked us about only using trade secrets as an IP strategy. It might not work for you. If the core of your technology is unitary then you cannot compartmentalize its development. Without compartmentalization, you need global secrecy. Don’t assume all your employees stay with you forever, your suppliers will keep quiet, and won’t subcontract. Even with an NDA in place, would you be able to trace how or even if your secret got out? The nice thing about registered IP rights is that there is some certainty about your protection.

There are examples of useful trade secrets, such as the Coke recipe, KFC’s secret herbs and spices, and the Caramilk secret. Notice the trade secrets are all consumer goods. They are specifically for consumables since food processing is more suited to trade secrets – it is difficult to do good chemical analysis and supply chains are more flexible. But did you also notice we know the myths surrounding the trade secrets through marketing – secret formulas make for good tales. 

 The leading case on trade secret law in Canada relates to CLAMATO – tomato and clam juice – used to make the caesar cocktail.
The leading case on trade secret law in Canada relates to CLAMATO – tomato and clam juice – used to make the caesar cocktail. (Cadbury Schweppes Inc v FBI Foods Ltd [1999] 1 SCR 142 (Supreme Court of Canada))

You probably have some IP appropriate for trade secret protection. You might have valuable internal processing or a secret sauce that would be too hard to detect in an infringer and they probably couldn’t figure it out from your product either. Those are candidates for trade secret protection. 

We would be happy to discuss protecting your innovations. 

Not easy: NDAs are not enough

There are consultants and software companies pushing Non-Disclosure Agreements (NDAs) as all you need to run a trade secret program. Ask yourself if would you sign a confidentiality agreement with an infinite protection period? That is, you could never disclose the information. Likely not. Indeed, infinite-period NDAs are rare. So given a key advantage of trade secrets is they last forever, NDAs with finite protection periods are not enough.  

The law is complicated but the risk is real. If the confidentiality agreement contains a time limit on a non-disclosure obligation, then the agreement may jeopardize any trade secret shared under that agreement. See B. Riley, Inc. v. AB Engineering Corp., 977 F.Supp 84, 91 (D. Mass 1997) where the court followed the reasoning that “one who claims that he has a trade secret must exercise eternal vigilance”. That is lasting forever, without end.  The Riley court found that a 10-year time limit in one NDA showed Riley’s own expectations that obligation was limited to in time and thus wasn’t “eternal vigilance”. This issue comes up in other cases in the US too. 

Consider who won’t sign confidentiality agreements. 

Bankers and venture capitalists don’t sign confidentiality agreements. They are unlikely to share your secrets. It doesn’t matter. Simply by being free to talk your information isn’t protected. 

Now, confidentiality agreements are absolutely worth using. They are vital IP tools. Just don’t think an NDA system creates a trade secret program sufficient to protect your innovations. 

Are you ready to be shut out? 

You, as the founder of your company, are expected to know your stack. But a proper trade secret program would require compartmentalization. This means few people know everything. The details of the first part of the stack would be hidden from those not directly involved in the first part. Repeat for a second part. So you don’t get to know one or more parts. 

Imagine telling a customer “you only bought a copy but that doesn’t mean you get to know how it works”.

Compartmentalization has costs. You may need extra staff because someone can’t work in two sensitive areas. 

Trade secrets are not cheap

There are two costs in trade secrets: security and assertion. 

Security has costs

Vaults, locks, and alarms are expensive. Looking at Canadian and American law respectively you have to have “acted with the intention to treat the information as secret” or have made “efforts that are reasonable under the circumstances to maintain … secrecy”. The average startup’s security comes from employees working late. Very few companies want to spend money here.

Suing under a trade secret is expensive

Trade secret lawsuits place a lot of burden on the owner of the trade secret. They have to show both that the copier stole the trade secret and is using it. With a patent, there is no need to show theft. 

Trade secret law is changing

Two changes in trade secret law probably will affect your business. 

The US now has a national trade secret law. See Defend Trade Secrets Act (18 U.S.C. § 1836, et seq). This replaced a patchwork of state laws so it is easier for US IP owners to sue for misappropriation of a trade secret. As well, since the law is federal, they can combine a trade secret claim with other IP claims in federal court.

There have been successes like in the protection of a fig jam recipe. See Dalmatia Import Group, Inc. v. FoodMatch Inc. et al., no. 16-cv-02767 (E.D. Pa. 2017). IP owners have failed in some cases such as Broker Genius, Inc. v. Zalta, 280 F. Supp. 3d 495 (SD New York, 2017). The owner of the software was asserting trade secret status but provided demonstrations on a website and to customers not under NDA. 

Canadian case law is changing to favour the IP owner. There is no Canadian federal law on trade secrets. You need to use legal tools under common law like confidentiality agreements and contracts to enforce your rights. Canadian courts have been awarding large damages, disgorgement of profits, and broad injunctions in trade secret cases. For example, see

  • XY, LLC v. Canadian Topsires Selection Inc., 2016 BCSC 1095; and XY, LLC v. IND Diagnostic Inc., 2016 BCCA 469, and ten other sets of reasons. 
  • Google Inc. v. Equustek Solutions Inc., 2017 SCC 34, and about 20 previous sets of reasons
  • GEA Refrigeration Canada Inc. v. Chang, 2015 BCSC 1593, 2018 BCSC 23, 2020 BCCA 361 (leave to appeal dismissed SCC 2021 CanLII 72656), and 2022 BCCA 107.

What are your options?

Define an IP program that works for your company. For your innovations there are two main IP rights: patents and trade secrets. 

Patents play well with others

A patent application once filed doesn’t require any secrecy. All issues with compartmentalizations, security, and confidentiality agreements go away. Consider how liberating that is.

Your patents play well with other IP rights (e.g., copyright and trademark) and other practices like publication and open-source code.

Now patents are limited in time and territory. That is part of the patent system. There are higher upfront costs but you don’t have enduring costs in secrecy and in court, you don’t have to prove theft. 

Trade secrets have their place

You can also use trade secrets. These do last forever if kept secret. And there are no territorial limitations. So for some innovations that can be operated in secret and not reverse-engineered, you should consider this protection. However, you will need specialist advice from someone fully informed of your business.

Conclusion

The trade secret versus patent debate raises complicated issues, which is why you should have an expert review your IP plans and portfolio. The principals at PMP would be happy to help you. We’ve worked in-house guiding these exact issues for years.

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