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Trade secrets and the ECSN

12th June 2017
Joe Bush
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Adam Fletcher, Chairman of the Electronic Components Supply Network (ecsn), reviews new legislation and considers it’s likely impact on the electronic components industry where there is currently significant merger and acquisition activity and therefore increased risk of information ‘leakage’. 

The blend of ingredients required to produce Coca-Cola is a classic example of a trade secret (IP). Despite competitors’ attempts to produce the same, details of the recipe have endured without breach since 1891. Some 126 years on and legislators in Europe and the US have finally moved to protect SMEs from theft or abuse of their trade secrets. The EU ‘Trade Secrets Directive’. will come into force in 2018 and despite BREXIT it is very likely to be adopted into UK law along with other harmonisation activities.

The World Trade Organisation's Agreement on Trade Related Aspects of Intelligence Property Rights (TRIPS) was agreed in 1994. The document identifies the three key factors that define a trade secret: 1. It is not generally known to the public; 2. The holder gains an economic benefit from it not being publicly known and 3. The holder has taken reasonable steps to maintain its secrecy.

Trade Secret or Patent?
Patents protect Intellectual Property (IP) that is useful, non-obvious and novel. Part of the premise of all IP - be it a new product, process, software, or data - is that it starts out as a secret and needs its value to be acknowledged and controlled with the granting of a Patent, Trademark or in some cases, Copyright. Organisations in the electronic components sector often hold a patent(s) on the fundamental physics or properties of their product, process, software or data. The granting of a Patent also protects against derivative or extension workarounds by competitors using a slightly different solution. The strong reliance on patents to protect IP in the technology sector remains but the cost of gaining meaningful global patent protection and the protracted timescales needed to achieve it has made the process less attractive for many companies. Counter intuitively, the process also requires the applicant to place large amounts of detailed information in the public domain.

Trade Secret law on the other hand protects any information that is not 'commonly known' and about which the owner has taken reasonable steps to maintain confidentiality. Trade secrets don’t have to be technical, they can simply be anything of commercial value that is not in the public domain. Trade Secret law however, only protects against 'misappropriation', which means wrongful taking, and is therefore more limited than with a Patent. On the plus side, trade secrets, unlike patents, have no expiry date!

Harmonisation and UK Law
The EU's 'Trade Secrets Directive' legislation aims to achieve harmonisation across EU members, and in the process will effectively codify existing English law, the principles of which are based on the laws of equity and were set down in the 19th century. Basically a derivative of common law, all IP protection legislation has two primary themes: 1. the ‘tort* of misuse’ of personal information and 2. an ‘equitable breach’ of confidence in commercial or technical secrets.
*Tort: wrongful act or an infringement of a right leading to legal liability

Like much of English law existing trade secret legislation is entirely judge made (rather than defined by Parliamentary or EU legislators) and is based on evidence presented in court. Their honours held that trade secrets cannot be classed as ‘property’ and therefore cannot be stolen and consequently, there is no criminal sanction against their disclosure or use. That said, a successful action in the civil courts for deliberately taking or using a trade secret carries severe penalties, provided the claimant is able to demonstrate the significance, secrecy and value of what has been misappropriated. The claimant must also prove that a breach of confidence has taken place and demonstrate the damage done to its finances and/or its reputation.

Duty of confidentiality
It is very difficult to prove the existence of a duty of confidentiality if there is no written contract. Critical confidentiality issues in most business-to-business transactions are today covered by mutually binding confidentiality agreements or by Non-Disclosure clauses written into a company's general terms and conditions of trade but the loss of 'soft IP', for example the misappropriation of a previous employer's customer list detailing the components they purchase and the prices they paid, can also be extremely commercially threatening. That said both employers and employees generally accept that some 'leakage' of IP and trade secrets will inevitably occur when people change jobs, possibly in both directions.

The inclusion of duty of confidentiality clauses in employment contracts is also increasing and employers now routinely seek to formally bind employees for a specific period of time, but once employment has terminated it can be very difficult to determine the extent of an employee’s obligations to their former employer. For their part employees have to know how to reasonably recognise a potential or actual trade secret within the information they have access to and what information they may reasonably pass on to others without breaching trade secrets legislation. Employers may also need to consider how - as the (possibly unwitting) recipient of a trade secret that was unlawfully obtained from another - they can protect themselves from the wrongful activities of the people they employ.

With the increasing use of trade secrets rather than patents and the strengthening of trade secret legislation there is now greater incentive for all parties to act appropriately. I suspect organisations will increasingly seek to positively identify their trade secrets and ensure that they are able to define, use and/or communicate them whilst still benefiting from legal protection. Obvious first steps for organisations in the electronic components supply network include reviewing their Employment Contracts, Non-Disclosure Agreements, Terms and Conditions of Trade etc, but importantly, they must also ensure all employees, particularly new employees from competitor organisations, recognise, understand and respect the policy and procedures for honest commercial practice that they are signing up to.

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