Pedro A. Padilla Torres^*

Intellectual Property Rights (IPRs) protection is one of the most important and current legal issues in the international trade arena. As international trade and investment increases around the world, copyrights, trademarks, patents and trade secrets need to be subjects of a more global perspective. The necessity for legal protection of products of the mind in the international trade and investment context from the stand point of developed countries is apparent: An English or Canadian manufacturing company is more willing to make capital investments in Singapore or Venezuela if they believe that their patented inventions and secret processes of manufacture are adequately protected from unwanted use or misappropriation; similarly, an American software producer will lay its products through Internet if there exists protection against its unauthorized copying.

Not surprisingly one of the hottest topics of the Uruguay Round of Multilateral Negotiations between the Ministers of the General Agreements on Tariffs and Trade (GATT) was the protection of IPRs. Likewise, the North America Free Trade Agreement (NAFTA) Preamble reflects the concerns of the contracting countries (Canada, Mexico and the United States) about the legal protection of those very same rights when, among other issues, they resolved to: "FOSTER creativity and innovation, and promote trade in goods and services that are subject of intellectual property rights". The European Union (EU), notwithstanding its more subtle way to deal with issue, had also addressed the necessity of harmonized rules to protect IPRs.

Some types of intellectual property are protected primarily to encourage technology innovation. In this category belongs patents, industrial designs and trade secrets. Their economic aim is to procure financing for technological research and development, through providing legal protection to products of investment in research and development activities.

In the midst of IPRs designed mostly to stimulate technological advancement, the law of trade secrets is getting, more than ever, international attention because of its potential to become an effective legal tool when other regimes, like patents or copyrights, are not suited to offer the satisfactory or desired protection for investors. This note begins with a brief general definition of trade secrets and an overview of its diverse approaches or theories of protection. Next, I will comment the major elements of trade secrets and some associated economics. Then, I will discuss the international agreements bearing on trade secret protection and the responses of some countries. Finally, I will offer, as a conclusion, some reflections on the current worldwide stage of trade secret protection and its implications to international trade.

The law of trade secrets could be traced to Roman law, whereas under such ancient legal system a competitor’s corruption of a slave to divulge his master’s commercial affairs was punished. The modern law evolved in England during the Industrial Revolution. In the United States, the first reported trade secret case dates back to 1837.

A trade secret is, in the general sense, any confidential information with commercial value, reasonably protected from disclosure by its rightful holder. It could be a formula, process, device or compilation of information used in a business, which bestows the owner an advantage over competitors. No registration requirement or any other formality is necessary in order to be protected by trade secret law.

The policy objectives behind the protection of trade secrets are the maintenance of ethical commercial standards and the encouragement of research and innovation. In the technology industry, trade secrets are particularly useful to protect a patentable invention during the application process, information not covered by the patent and information that is not patentable. Examples of the last mentioned are clients’ lists, advertisement campaigns and business strategies.

But, in spite of this seemingly simple definition, the doctrinal debate on the rationale of trade secrets protection is far from being over. At least, there are three major approaches to explain trade secret protection: the contractual obligation, the fiduciary relation, and the unjust enrichment and misappropriation theories. Which of those is the most accurate approach to trade secrets is beyond the scope of this work. Notwithstanding, a brief comment about their contours, and a concise exposure of the also unfinished debate about trade secret as property, would be helpful to understand the particular provisions of international trade secrets protection agreements and the different legal approaches followed by particular countries.

Simply stated, the duty not to divulge or use trade secrets ordinarily arises from a contractual relation between the right holder and the person with access to the confidential information. Confidentiality stems from the agreement, under the pacta sunt servanda doctrine, and needs nothing else to protect the information transmitted under its terms. In such theory, the wording of the agreement becomes critical, inasmuch as the protection depends on the confidential information protective clause inclusiveness.

Employment and trade secrets licensing contracts are likely to include a secrecy obligation (non-disclosure agreements). The former raises interesting conflicts between the trade secret owner’s rights and the employee’s rights to use technical knowledge acquired through working experience. Where to draw the line is a difficult task. The Second Circuit of the US Court of Appeals has noted that in trade secret cases the courts "[o]ften balance an employer’s right to proprietary information against the employee’s rights to use his or her knowledge, training and experience to gain a livelihood." Some factors taken into account by US courts are the prior general knowledge and skills of the employee and the ability of the employer to isolate the trade secret information from such knowledge and skills.

The fiduciary relation theory proposes that certain relations embrace an implied duty of secrecy. Thus, confidentiality of information does not depend on a prior agreement. The duty not to disclose the correspondent secret information, contrary to the contractual theory, has nothing to do with a concomitant pact, but with the confidence deposited by the trade secret owner on the receiver when the confidential information was entrusted. At the beginning, most common law jurisdictions based its trade secrets protection on the fiduciary relation theory. This theory also bears on the employer/employee relation because, when a non-disclosure agreement is not in effect, the information is deemed transfer under fiduciary duties, which include the duty of confidence.

The misappropriation approach propounds that trade secrets should not be obtained through improper means. Unlike a patent, a trade secret does not give the owner the exclusive right to use the confidential information. Therefore, a person is not legally precluded to use a trade secret, as long as the confidential information was acquired by no improper means. As it stands, the misappropriation theory emphasizes trade secrets as assets, recognizing in that sense the proprietary interests over the protected information.

Industrial espionage is one of the most common methods to misappropriate a trade secret. Reverse engineering and independent discovery, on the other hand, have been considered proper means to "discover" secret information.

The "property" character of trade secrets is an unsettled issue. An American commentator in the area has characterized trade secrets as property. His assertion is founded in the "right of the owner of the trade secret to use and disclosed to others subject to restrictions on their use and disclosure." In contrast, English law negates the property concept of trade secrets. As will be seen, trade secrets protection in England is based upon the law of confidentiality. Most civil law jurisdictions perceive the issue as one of unfair trading practices.

The property approach pursues the encouragement of creativity and inventiveness as a public interest matter, accomplished by giving creators and inventors proprietary interest over their work. Confidentiality, in contrast, does not ascribe proprietary interest to the information, but focuses on the relationship among the parties and the context in which the information was transmitted; as long as the context posits a relationship of confidence, the confidential information deserves protection from unauthorized usage. Lastly, the unfair competition appeals to commercial ethics preservation, denoting preoccupation over the commercial behavior among competitors.

Economic analysis might support trade secrets protection. First of all, why use trade secret protection instead of a patent? An acquisition of a patent is a long and costly process that could undermine profitability. Contrarily, trade secrets protection economic implications are limited to the cost of keeping the information secret. Therefore, in many cases, an entrepreneur will be better off economically using trade secret protection instead of a patent.

The duration of protection is another economic factor bearing on the decision to use a patent or trade secret protection. Every patent regime grants protection for a limited time period, after which anyone can use the patented process at will. Trade secrets protection, differently, last as long as the information met the requirements. It could be perpetual. The formula for Coca-Cola is a well-known example of trade secret protection at its best; it has been protected through such regime for more than a century! Trade secret protection, however, contrary to patents protection, does not preclude competitors from using the information if it is obtained through proper means, as reverse engineering or independent discovery.

Another economic rationale of trade secret protection is that, in a capitalist society, creative efforts are valuable, because they are products of "creative labor". To encourage those efforts, society needs to ascribe fruits of labor to the producing tree. That is why not only trade secrets, but also other intellectual property rights have deserved protection in order to make them valuable assets. To accomplish the goal, in many instances, IPRs grants "monopolies" over products of the mind, allowing the creator to recoup the money and efforts invested in the "switch on the light bulb" process.

The Paris Convention for the Protection of Industrial Property (1883) was enacted, in part, to discourage unfair competition. To that end, it prohibits unfair trade practices among its members, meaning "[a]ny act of competition which is in conflict with the fair customs of industry and trade" is unacceptable. The examples of unfair competition provided by the Paris Convention do not include trade secrets infringement. Thus, it has never been clear if industrial espionage or other unfair means to appropriate a trade secret accounts for unfair competition. Nevertheless, it could be argued that misappropriation of trade secrets is unfair competition under the Paris Convention terms. This is especially true if the unfair competition approach and misappropriation theory are the justification for trade secret protection. Also, the Paris Convention Article 1(2) establishes that industrial property shall be understood in its broadest sense.

The legal consequences of such reading of the convention are deemed to be unclear. The lack of enforcement provisions in the Paris Convention left the international community without the legal apparatus to achieve true consequences.

In 1986, at the beginning of the Uruguay Round of GATT, the negotiating nations’ Ministers stated:

To achieve such goal, and for the first time in the context of international trade regulations, "new rules" regarding the international protection of intellectual property were articulated in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Its basic principle is that members to the World Trade Organization (WTO) shall give effect to the provisions of the agreement, and accord the same treatment to nationals of other members. Thanks to TRIPS, national treatment and most-favored-nation principles are also now part of the international intellectual property rights regime (Arts. 3 and 4). Likewise, almost all the substantive provisions of the Paris Convention for the Protection of Industrial Property and the Berne Convention for the Protection of Literary and Artistic Works are incorporated by reference into the TRIPS (Art. 2). A political scientist and author in public policy and public administration has suggested six key points of the agreement on TRIPS: (1) it is "a statement of general principles and of the interaction of the agreement with the Paris and Berne Conventions"; (2) it provides "substantive norms regarding the protection of the basic kinds of intellectual property"; (3) it creates "obligations concerning domestic enforcement of IP rights"; (4) it originates "obligations regarding the facilitation in domestic legal systems of the acquisition and maintenance of IP rights"; (5) it establishes "disputes settlement"; and (6) it provides "a WTO-based framework".

For purposes of this paper, the most relevant provision of TRIPS is Section 7: Protection of Undisclosed Information. In that regard, Article 39(2) states:

As can be seen, under TRIPS terms, protected "undisclosed information" is secret valuable commercial information reasonably secured from disclosure by its holder. Thus, the critical elements for protection are secrecy, economic value and the rightful holder’s reasonable actions to keep the information secret.

It should also be noted that " ‘a manner contrary to honest commercial practices’ means at least practices such as breach of confidence, and inducement to breach, and includes the acquisition of undisclosed information by third parties who knew, or were grossly negligent in failing to know, that such practices were involved in the acquisition." The definition of a "manner contrary to honest practice", as someone has suggested, expands the scope of protection beyond the actual discloser of secret information. The "important factor remains that action ought to be possible, not only against some one who disclosed information, for example, in the breach of a confidential disclosure agreement, but also against someone who has acquired information through dishonest commercial practices and, even more important in practice, against someone who uses information which he knows, or should have known … to have been acquired through such practice. This reflects, to some extent, the unfair competition approach for trade secrets protection.

Another TRIPS relevant characteristic is its provisions on IPRs enforcement. Up to the TRIPS, "[m]ost international agreements leave the matter of enforcement to national laws … which some times leave the general principles concerning the enforcement of intellectual property rights undefined and do not address the issue of international enforcement." To avoid suchlike weakness, Part III, Articles 41 through 47, imposes on TRIPS’ members the onus of setting up national enforcement systems for the IPRs recognized in the agreement. Members must ensure fair and equitable enforcement procedures to IPRs holders, including sufficient authority to require the production of evidence, and remedies such as injunctions and compensation for damages.

In the outset, Article 39 is a set of minimal rules that GATT and WTO members have to comply with. The wording is not precise enough, leading to variations in the way trade secrets are protected from one country to another. In that sense, it left room for member countries to decide the particular legislation scheme suitable to their legal tradition, as long as the legislation includes the settled "critical elements" and the legal enforcement system. However, Article 39 is certainly an international acknowledgement of the importance of trade secrets to worldwide trade. And it is also a victory for industrialized western nations in their search for a better legal framework to protect industrial property.

Another noteworthy TRIPS’ feature is the Dispute Prevention and Settlement provisions. For the first time in history, an international agreement on IPRs settles specific rules regarding compliance transparency and, most importantly, provides a dispute settlement mechanism. Article 63 demands publication of any law, regulation, judicial decision or administrative ruling bearing on the subject of TRIPS. Also, it requires notification of the laws and regulation to assist the WTO Council in its review of the agreement. A newly created TRIPS Council is in charge of monitoring domestic compliance with the agreement.

Furthermore, Article 64 establishes that the "provisions of Articles XXII and XXIII of GATT 1994 as elaborated and applied by the Dispute Settlement Understanding shall apply to consultations and the settlement of disputes under this Agreement". Now, since 1994, the legal standards for trade secrets protection as well as other IPRs protected by TRIPS are subjects of WTO’s international dispute settlement system.

The NAFTA also carries a provision directed to provide uniform minimum standards for protecting trade secrets. Article 1711(1) reads as follow:

1. the information is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons that normally deal with the kind of information in question;
2. the information has actual or potential value because it is secret; and
3. the person lawfully in control of the information has taken reasonable steps under the circumstances to keep it secret.

It seems quite clear that NAFTA protection of trade secrets is almost the same as that provided by TRIPS to undisclosed information. However, NAFTA’s protection is somewhat broader, to the extent that the confidential information could have present or potential value, while TRIPS does not recognize such a dichotomy.

Other contrasts are that the NAFTA allows its members to require some sort of tangible evidence for trade secrets’ protection [Art. 1711(2)]; also, NAFTA prohibits the parties from limiting the duration of protection, and from discouraging or impeding trade secrets licensing process [Art. 1711(3) and (4)]. TRIPS is silent as to those elements.

The European Union (EU) does not have any specific legal provisions to protect trade secrets or undisclosed information. One of the problems facing this common market and economic union is that "the exercise of industrial or commercial property rights … must inevitably restrict competition; indeed their very purpose is to give their owner some protection against competition by giving him monopoly rights for a certain period of time as a reward for his creative endeavour or acquired goodwill in his product." At the beginning, the Treaty of Rome (1960) established that any prohibition or restriction impeding the free flow of goods arising from an industrial property right could only be exercised if it does not constitute a means of arbitrary discrimination or restriction upon the trade of goods among the member nations. Then, with the Treaty of Maastricht, the "mere existence of industrial property rights cannot infringe on Articles 85 and 86 (now 81 and 82) EC; an improper or abusive exercise of these rights can." As someone admonished, the professed intention to create a single common market of free competition presents the system with fascinating questions about opposite forces: free competition and the protection of industrial and intellectual property rights. From this follows that the possible perpetual trade secret protection is somewhat in doubt within the EU. It could be interpreted as an industrial property right abusive exercise infringing free flow of goods. The concrete answer is not yet available.

Nor does the Mercado Común del Sur (Mercosur) have any provision to protect trade secrets. This economic integration agreement does not even contain any rule concerning industrial property rights. In 1992, the Interparliamentary Committee agreed that industrial property rights should be part of its agenda. Among the items on the agenda was not trade secret protection itself, but unfair competition. Up to 1995, minor success has been accomplished in the area. As an economic integrated region, Mercosur also faces the problems brought up by the conflict between industrial property protection and the policy of free competition.

Trade secrets in the international trade perspective, at least in the parlance of TRIPS and NAFTA, have three main elements: information must be secret in itself, it should have economic value, and the holder must show reasonable efforts to keep the information secret.

Information is secret when it is not "generally known" or "readily accessible". Such an "objective standard" probably means that information already in the "public domain" cannot be treated as a trade secret. Moreover, secrecy is defined in contact with persons who normally deal with the secret information in question. This seems to attach a "relative standard" of secrecy, meaning that information generally known or readily accessible to persons dealing in a particular industry or business is not a trade secret. Thus, in the international trade context, information is not secret if it is within a particular industry or business public domain.

The trade secret economic value factor is very interconnected with the secrecy element. It does not encompass any assessable independent book value or a particular investment figure with respect to the secret information. Instead, the economic value stems from the competitive business advantage presupposed by the information secrecy. "It is mainly the usefulness of information for the ongoing concern that lends some ‘commercial value’".

The reasonable steps to keep the information secret emphasize, once more, the importance of secrecy. A plain assertion of secrecy is not enough to claim the protection. The claimant owner must take affirmative measures that show his or her desires to veil the information from others. Warnings, restriction of access or codes may constitute affirmative measures to protect the information from disclosure.

European industrialized nations have long standing traditions of protecting trade secrets, although their approaches vary from country to country. The United Kingdom has probably the most developed trade secret law, mainly due to the Industrial Revolution and its common law legal system. In fact, the United States trade secret law has its roots in the English appeal to protect commercial or industrial secret information.

In England, trade secret protection is predicated upon the common law concept of "breach of confidence". As Lord Denning expressed in Seager v. Copydex LTD.,

This judicial remark resembles the fiduciary theory of trade secret protection. The guarded principle, then, is the confidence relation between the rightful holder of the secret and the receiver of confidential information.

Nations such as France and Germany have also provided protection to industrial and commercial secrets. For example, Section 1 of the German Act against Unfair Competition held responsible for damages "any person who, in the course of business activity for purposes of competition, commits acts contrary to honest practices". Even though the statute does not define an "act contrary to honest practices", Section 17 makes punishable the unauthorized use, or communication to a third party, of a trade or industrial secret. Therefore, it would be reasonable to conclude that a dishonest practice embodies unauthorized use or communication of trade or industrial secrets.

French law figures of factory or manufacturing secrets (secret de fabrique) and commercial secrets (secret de commerce) taken together are the equivalent of the Anglo-American trade secret concept. In general, factory secrets, which have their roots in the French Penal Code and are not subject of a particular law, are secret information with some sort of industrial application capable of providing commercial or market value. Regarding commercial secrets, there is no specific mention in French legislation. However, Gavalda has pointed out "that commercial trade secret may refer to the organizational structure of an enterprise, the identity of its personnel, the contracts executed with other companies, client lists, supplier list, plans to expand the business, plans to establish branches, the set-up of distribution channels, and the credit of a business." Factory or commercial secrets, not being considered property in France, are most likely to get protection trough the tort of unfair competition and contract law.

Even though England, Germany and France are reluctant to consider trade secrets as property, all protect trade secrets through either breach of confidence (fiduciary theory) or unfair competition approach. But remember the latent conflict between trade secret protection and the EU policy of free competition.

In the US, at first, trade secret law has been an area traditionally regulated by individual states’ common law. The first attempt to "codify" the judge-made law of trade secret was the Restatement (First) of Torts of 1939. A more modern approach was incorporated by the Restatement (Third) of Unfair Competition (1993). Yet, as Milgrim pointed out, it remains to be seen if the latter will gain the widespread acceptance given to the former. On the legislative side, around forty sates and the District of Columbia have adopted some sort of version of the Uniform Trade Secrets Act (UTSA) of 1979.

Notwithstanding the variable sources of trade secret law in the US, and the differences that could be drawn out of them, James Pooley has suggested four trade secret law elements. First, it must be "qualified information", meaning information distinguished from general knowledge and skill. Second is the "secrecy" element, "in the sense that it is not well known or easy to compile". Third, it should have economic value "reflected in some competitive advantage". And fourth, the holder has taken reasonable efforts to keep the information secret. It is fair to say, thereupon, that the American approach is directed at the nature of the information. The information itself acquires major relevance, to some extent leading toward the property conception of trade secrets, instead of the trusting relationship protected in English law. This is not to say, however, that trade secrets in the US are property, as the traditional concept understands it. To be legally unacceptable, the appropriation of the secret information must be done by some sort of wrongdoing.

Canadian trade secret law is, apart from the province of Quebec, also common law in nature. Breach of confidence, as in England, is the core protection of confidential information in Canada. The elements of such cause of action in torts are: 1) "that the information conveyed was confidential; 2) that it was communicated in confidence; and 3) that it was misused by the party to whom it was communicated." Business information is one of the types considered confidential when it met the aforementioned elements. Actually, in DI Giacomo v. D Giacomo Canada Inc. "the court stated that a trade secret might be a formula, a pattern, a device or a compilation of information which is used in one’s business and which gives one an advantage over competitors who do not know or uses it." In Three Savers Int’l LTD v. Savoy, as factual example, plaintiff’s former employees were found liable for using their employer’s clients list to procure business for a competing company formed by the employees after they left their jobs.

Latin America, in general, does not have a history of intellectual property protection. The common law concept of trade secrets has not had an absolute analog legal figure in Latin America. In the region, as is the case of most continental European nations, "[t]rade secrets are protected under competition law only if they are disclosed or obtained by dishonest commercial practices." Hence, legal concepts as secreto comercial and secreto de fábrica are not unknown throughout South America. In addition to competition law, the idea that an employee ought to show loyalty to his employer by not using or disclosing useful confidential information that belongs to the latter, has been part of the labor codes of the region for many years. Such an approach seems to fit the fiduciary relation theory. Yet, there is little demonstrable practical protection under both, competition or labor laws.

During the last decade, fundamental legislative changes have been in progress. As professor Carlos M. Correa pointed out:

Countries such as Mexico, Brazil, and Argentina paved the legal road with legislation aimed to protect industrial or commercial confidential information. Since 1992, even before NAFTA, Mexico has considered secreto industrial (industrial secret) any confidential information with industrial application, which gives a competitive or economic advantage to a physical or moral person over their competitors, as long as the holder of such information adopted the sufficient means or systems to preserve its confidentiality and restricted access. The reference to "industrial application" in the Mexican law, however, provokes uncertainty regarding its compliance with NAFTA and TRIPS. Neither of those international agreements limits the protection of trade secrets to information with industrial application.

Argentina also now has an act for trade secrecy protection. In 1996, the Argentinean legislature approved the Ley de Confidencialidad sobre la Información y Productos que estén Legítimamente Bajo el Control de una Persona y se Divulge Indebidamente de Manera Contraria a los Usos Comerciales Honestos. Essentialy, this law adopted the TRIPS’ approach for "undisclosed information" protection. It gives protection to commercially valuable secret information, provided that the legitimate holder adopted reasonable steps to keep it from disclosure. The act, as is the case in Mexico, requires some sort of tangible evidence to afford the protection. Article 11 provides injunctive relief and compensation for damages. As I see it, Argentinean law adopted the eclectic approach of TRIPS. It uses a trade secret definition to particularize the information deserving protection, but also clarified that legally reproachable conduct means dishonest commercial efforts to use or disclose the protected "undisclosed information".

In Brazil, the Lei de Propriedade Industrial, among other things, defines unfair competition as an act committed by any person who "discloses, exploits or uses, without previous consent, confidential knowledge, information or data which may be used in industry, commerce or service rendering", unless the object of protection is in the public domain, or it is obvious to a skilled person. The scarce literature refers the protection to segredo industrial (industrial secret) or segredo de negócio (business secret). Damages and injunctive relief are available through the Brazilian Civil Code and the Code of Civil Procedure. Clearly, Brazil has elected the unfair competition approach to deal with the protection of trade secrets. However, Brazilian law does not have a precise definition of "confidential knowledge". In that respect, it would be an arduous task for the judicial system to determine what constitutes the object of protection; in other words, which is the information that can not be disclosed, exploited or used without the previous consent of the information holder.

No doubt that Latin American countries movement towards protection of trade secrets has been influenced by the exigencies of theirs international responsibilities under TRIPS, and in the case of Mexico also under NAFTA. From being an unaware trade secret protection region, it is now developing a legal framework designed to change that reputation. The time is too early for any kind of effectiveness assessment. From the international trade and investment standpoint, however, this new stage of trade secret protection is very much welcome. The investor at least now has a legislative starting point from which to develop his legal strategies to protect secret information, frequently so crucial to his business and investment decisions.

Trade secret protection is no longer a national legal issue. The transnational trade and investment scenario has created the underpinnings for new legal developments in the protection of industries and business secret information. Especially, global investment has been the driving force for many of the changes. Industrialized nations were reluctant to invest abroad and expose their "secret knowledge", until some level of trade secret protection was recognized among the members of the international community. Trade and investment agreements turned out to be the spark of the current stage in trade secret protection.

However, it is important to recognize that national systems for trade secret protection are not totally harmonized. TRIPS and NAFTA are just minimal legal standards for trade secret protection, leaving to individual countries enough room to approach the issue. The EU and Mercosur have not addressed the issue directly. The theoretical approaches from which trade secret protection arises, then, creates differences in national law. Therefore, international lawyers should be aware of those potential differences in order to render accurate legal opinions.

Lastly, it is still to be seen if some individual countries are capable of fulfilling their international responsibilities, especially by providing meaningful and effective enforcement mechanisms. Sometimes cultural values or philosophical differences and the particular level of technological development could undermine the efforts towards trade secret protection.

Copyright 2001 National Law Center for Inter-American Free Trade

E-mail