Careless Behaviours Can Destroy Trade Secrets

Trade secrets can provide an organisation with a strong competitive advantage, provided they are reasonably protected.  A recent case highlights how the careless use of remote working software can undermine that protection, resulting in the information losing its trade secret status and the owner losing control over it.

 

Trade Secrets – An Important Intellectual Asset

Trade secrets are an important form of intellectual property that protect information that has value to a business and its commercial activities, but is generally not known outside of the organisation.

Typically, trade secrets are characterised as:

  • Not in the public domain
  • Contributing significant value to a business
  • Subject to reasonable steps to keep the information secret

Examples of the types of confidential information that may qualify as trade secrets include: business processes, practices and methods; business strategies; customer information; ideas for commercial opportunities; formulae; recipes.

Trade secrets define a business’s competitive advantage, and if leaked, they have the potential to damage the organisation’s market position.  The law provides protection to prevent third parties using this information, without authorisation, to gain an unfair competitive advantage.  However, steps must have been taken to protect the information, such as contracts, non-disclosure agreements, restraints of trade, access control, and staff education.

 

Poor Use of Video Conferencing Software Can Compromise Trade Secrets

The Covid-19 pandemic has resulted in many companies and their employees working away from the office.  This often involves the use of a variety of remote working and video conferencing software tools.

A recent ruling from the USA (Smash Franchise Partners, LLC v. Kanda Holdings, Inc) highlights the importance of good business practices when adopting and using new technologies.

The defendant in the case (Todd Perri) was interested in obtaining franchise rights from Smash Franchise Partners (“Smash”) and had participated in a number of meetings with Smash and some of its franchisees to learn more about the business.  The videoconferencing technology from Zoom was used in preference to in-person meetings because of the current pandemic.

Perri subsequently decided to launch his own business without working with Smash.  Smash accused him of misappropriating its trade secrets, and sought an injunction to stop the use and disclosure of this information.

The court noted that, assuming the information concerned did qualify as trade secrets, Smash had not taken reasonable steps to protect the information when using the videoconferencing software.  In particular, they had not utilised the various security features that the Zoom software provides:

  • Meeting passwords were not used
  • The waiting room feature was not used to screen participants, in order to verify their identity and control access to the meetings
  • The same meeting code had been used for all meetings
  • Meeting details were made freely available to anyone who expressed an interest in the franchise and had completed an introductory call
  • There was no obligation on invitees to keep the meeting details secret and participants could readily share the meeting link with others

The court also noted that, although Smash had some procedures in place, these were not followed either:

  • A roll call should have been taken at the beginning of a meeting, and anyone who should not have been on the call should have been removed – this was not done
  • Twenty meeting participants could not be identified, and thus it could not be determined whether these people had signed NDAs.

Since the information concerned had not been managed in a way that would be expected for a trade secret, the injunction to stop the use and disclosure of the information was denied.

 

Ensure Your Business Understands and Protects Its Intellectual Assets

If managed appropriately, trade secrets can last forever and provide immense value to a business.  The recipe for Coca-Cola, and the search algorithm behind Google, are prime examples.

However, trade secrets as an intangible asset are often be overlooked by employers and employees alike.  If not managed and protected accordingly, they can be instantly lost with potentially severe consequences for a business.

The way we work is constantly changing, whether through ongoing technological innovation, or because of the impact of major events such as Covid-19.  Anyone engaged by an organisation (e.g. directors, employees or contractors) needs to ensure their business responsibilities, including those to intellectual property, are not forgotten or left behind.

Adhering to relevant business processes, as well as understanding and making appropriate use of the security features of the technologies being used, is extremely important.  Seemingly innocuous acts or oversights can easily and inadvertently undermine or destroy a company’s competitive position.

Alistair Curson

 

References

Bainbridge D. (2012). Intellectual Property, 9th edn, Pearson Education Limited, Harlow, England.

Baldocchi J, Stover E. (2020, September 08). “No Trade Secret Protections for Information Discussed Via Open Zoom Call”. Retrieved October 20, 2020, from: https://www.paulhastings.com/publications-items/details/?id=f470fe6f-2334-6428-811c-ff00004cbded

Batty R. (2016). “’Trade Secrets’ Under New Zealand Law”. Canterbury Law Review 22, 235-268. Retrieved October 19, 2020 from: http://www.nzlii.org/nz/journals/CanterLawRw/2016/12.pdf

Chintalapoodi P, (2020, October 06). “Court Finds That Trade ‘Secrets’ Aren’t Secret on Zoom Call”. Retrieved October 19, 2020, from: https://www.chiplawgroup.com/court-finds-that-trade-secrets-arent-secret-on-zoom-call/

Curson AD. (2019, August 20). “Trade Secrets – Overlooked and Undervalued”. Retrieved October 19, 2020, from: http://adcpatentsearch.co.nz/IP_Analytics_NZ/?p=235

EverEdge Global. (2019, July 30). “Preventing the Leakage of Confidential Information”. Retrieved August 14, 2019, from: https://www.everedgeglobal.com/blog/confidentialinformationleak

EverEdge Global. (2019, July 30). “Understanding Trade Secrets and Confidential Information”. Retrieved August 14, 2019, from: https://www.everedgeglobal.com/blog/tradesecrets

EverEdge Global. (2019, July 30). “US$600 Billion and Rising: Confidential Information and Trade Secret Theft”. Retrieved August 14, 2019, from: https://www.everedgeglobal.com/blog/tradesecrettheft

McDonald A. (2019). “Trade Secrets and Confidential Information”. Retrieved October 19, 2020, from: https://www.amcdonald.co.nz/information/intellectual-property-law-barrister/trade-secrets-confidential-information/

Ministry of Business, Innovation and Employment Hikina Whakatutuki. (2019). “Types of intellectual property”. Retrieved October 19, 2020, from: https://www.business.govt.nz/risks-and-operations/intellectual-property-protection/types-of-intellectual-property/

New Zealand Crimes Act 1961, s230. Retrieved October 19, 2020, from: http://www.legislation.govt.nz/act/public/1961/0043/latest/DLM330238.html

New Zealand Intellectual Property Office. “Trade Secret”. Retrieved October 19, 2020, from: https://www.iponz.govt.nz/assets/pdf/IP-cards/ip-card-trade-secret.pdf

Nirwan P. (2017, December). “Trade secrets: the hidden IP right”. Retrieved October 20, 2020, from: https://www.wipo.int/wipo_magazine/en/2017/06/article_0006.html

Peart S. (2018, May 30). “Protection of Trade Secrets”. Retrieved October 19, 2020, from: http://www.marksandworth.nz/news/articles/protection-of-trade-secrets

Smash Franchise Partners, LLC v. Kanda Holdings, Inc [2020] Court of Chancery of the State of Delaware, C.A. No. 2020-0302-JTL.  Retrieved 20, October 2020, from: https://law.justia.com/cases/delaware/court-of-chancery/2020/c-a-no-2020-0302-jtl.html

Suleymanova R. (2020, October 18). “As new wave of COVID-19 cases hits, remote work becomes the norm”. Retrieved October 20, 2020, from: https://www.aljazeera.com/economy/2020/10/18/with-new-lockdowns-looming-remote-work-feels-like-forever

Tillery MK, Cline JJ, Wheatley EL. (2020, August 28). “Delaware Court of Chancery: Companies Must Maintain Trade Secret Confidentiality in a Remote World”. Retrieved October 20, 2020, from: https://www.troutman.com/insights/delaware-court-of-chancery-companies-must-maintain-trade-secret-confidentiality-in-a-remote-world.html

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