Trade Secrets

Trade Secrets and

Conflict of Interest
 • What is a Trade Secret?
• Broadly speaking, any confidential business information which
provides an enterprise a competitive edge may be considered a trade
secret. Trade secrets encompass manufacturing or industrial secrets and
commercial secrets. The unauthorized use of such information by persons
other than the holder is regarded as an unfair practice and a violation of the
trade secret. Depending on the legal system, the protection of trade secrets
forms part of the general concept of protection against unfair competition or
is based on specific provisions or case law on the protection of confidential
information.
• The subject matter of trade secrets is usually defined in broad terms and
includes sales methods, distribution methods, consumer profiles, advertising
strategies, lists of suppliers and clients, and manufacturing processes.
While a final determination of what information constitutes a trade secret will
depend on the circumstances of each individual case, clearly unfair
practices in respect of secret information include industrial or commercial
espionage, breach of contract and breach of confidence.

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Main Question
• While we recognize that information is a valuable asset
that generally provides companies with significant
advantage over competitors who lack it.

• The main Question as it relates to trade secrets is;

– What rights do companies have in maintaining the
secrecy of valuable information?
• And
– What corresponding obligations do employees have
not to disclose company trade secrets to outsiders or
use them for their own advantage?

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 The Contention

• On one hand
– Employees have an obligation of
confidentiality not to disclose or use
information acquired during their employment.
• On the other hand
– Employees have the right to change jobs or
start up a business of their own using some of
the skill and knowledge they have acquired
while working for a former employeer

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 Trade Secret Protection

• Trade Secret
– Information used in the conduct of a
business that isn’t commonly known by others
• Examples
– The ingredients/chemical composition of a
product
– The details of a manufacturing process

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 Trade Secret Protection

• Confidential Business Information

– Information concerning specific matters which
are kept secret
• Not used to manufacture anything or provide
a service
• Example
– The salary of an employee

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 Six factors used in determining what
information is protectable as a trade secret
1. The extent to which the information is known outside the business
2. The extent to which it is known by employees and others involved
in the business
3. The extent of measures taken to guard secrecy of the information
4. The value of the information to the business and its competitors
5. The amount of effort and money expended in developing the
information
6. The ease or difficulty with which the information could be properly
acquired or duplicated by others

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 Trade Secret Protection

• Economic Espionage Act of 1996 (EEA)

– Made the theft of trade secrets a federal
offence
– Intended to prevent the theft of trade
secrets for the benefit of foreign governments

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 Major arguments for trade secret
protection
1. Trade secrets as property

2. Trade secrets as facilitating the right to

compete and the principles of fair competition

3. Disclosure of trade secrets violate the

obligation of confidentiality that is part of the
employer-employee relationship

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 Trade Secrets as Property

• Ownership of a trade secret does not

confer a right of exclusive use.
• It is a right to not have the secret
– Misused or wrongfully acquired by others
• Once the information is widely known, it
ceases to be a protectable trade secret.

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 The Basis of property rights

• Lockean View
– We own the results of our own labor
• Insofar that intellectual property is created by
individuals who have been hired by a company for
that purpose, it follows in the Lockiean view that
the company is the rightful owner.

• Just as products made on an assembly line belong

to the company and not the workers who make
them, so too do inventions made by people who
are hired to invent.
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 The Basis of property rights
• Utilitarian Arguments
• Adv
– Society benefits from innovation, however, without legal protection
companies may not be willing to invest in research and development
– Copyright laws encourage the free flow of information (people pay to
use copyrighted information). Patents are granted for a 17 year period,
therefore in the long run others can also use this information.
• Dis
– Trade secrets create a monopoly –Company can patent large number of
processes and products that rival its own and prevent competitors from
using them.
– The owner of copyrighted material can prevent wide dissemination of
important information by either denying permission to print it or by
charging exorbitant prices

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 Fair Competition

• Argument that companies are put at an

unfair competitive disadvantage when
information they have expended resources
in developing or gathering can be used
without cost by their competitors.

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 Noncompetition Agreements

• Noncompetition Agreements
– Restrict an employee from working for a
competitor after leaving a company
• For a certain period of time
• Within a given geographical territory
– These agreements tend to be entirely for the
benefit of the employer
• Some U.S. states consider them so unfair that they
have been banned outright.

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 Test to Determine if Non-competitive
agreements are justified
• The Restrictions contained in an agreement

1) Must serve to protect legitimate business interest

2) Must not be greater than that which is required for

the protection of these legitimate interest

3) Must not impose undue hardship on the ability of an

employee to secure gainful employment

4) Must not be injurious to the public

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 Confidentiality Argument

• The argument that employees who

disclose trade secrets to others or use
them themselves are guilty of violating an
obligation of confidentiality
– Argument based on the agent / principal
relationship between employer and employee.

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 Confidentiality Agreements

• An explicit contractual obligation signed by

the employee
– Is more stringent than the obligation of
confidentiality that employees have as agents
• By relying on an enforceable obligation of
confidentiality
– Companies place unnecessary restraints on
employee mobility and career prospects

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 Competitor Intelligence Gathering
• Not all use of a company’s trade secret and other
confidential business information is illegal or unethical
– However, we must be cautious about the means of obtaining this
information

• Unethical methods for gathering competitor intelligence

are:
– Theft and Receipt of Unsolicited Information
– Misrepresentation – Dishonesty
– Improper Influence – Bribery
– Covert Surveillance – Hidden cameras and microphones

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 Conflict of Interest

• Conflict of Interest occurs when

– A personal interest interferes with a person’s
acting
• So as to promote the interests of another

• A person has an interest in something when the

person stands to gain a benefit or an advantage
from that thing.

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 Actual and Potential Conflicts of
Interest
• An actual conflict of interest occurs when
– A personal interest leads you to act
against the interests of
• Someone whose interests that you are obligated
to serve

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 Actual and Potential Conflicts of
Interest
• A potential conflict of interest occurs when
there is the possibility that a person will
– Fail to fulfill an obligation to act
in the interests of another
• Even though the person has not yet done so

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 Personal and Impersonal Conflict of
Interest
• This is where a conflict of interest arises
when a person is obligated to act in the
interest of two different persons or
organizations who’s interest conflict

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 The Kinds of Conflicts of Interest

• There are four kinds of conflicts of interest:

1. Exercising biased judgment – Acting in the interest of another
party(besides the principal) or one's self especially when there
is scope for personal gain. As a purchasing agent, which
supplier do you choose?
2. Engaging in direct competition – Xerox Example.
A Xerox employee, fixes the copy machines for his wife free of
cost, during his free time.
3. Misusing a position – The bank lender who “lines up”
a contractor for the borrower
4. Violating confidentiality – Using information obtained
from a client, to forward personal interest

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 Managing Conflict of Interest

• Major means that can manage conflicts of

interest
– Objectivity, avoidance, or disclosure
• Be objective, avoid acquiring interest that would
bias one’s judgment and disclose information to
those that can be potentially harmed.

– Competition
• Strong Competition serves as a powerful incentive
to avoid conflicts of interest.
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 Managing Conflict of Interest Cont.

– Rules and policies

• Policies should be in place to address this issue.
E.g. Rule s against accepting gifts or investing in
potential suppliers
– Independent judgment
• Sometimes it may be best to use a third party,
when a decision has to be made that can result in
a conflict of interest.
– Structural Changes
• E.g. Accounting firms separating auditing and
advisory services.
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 Conclusion

• Trade secrets and conflict of interest

involve a delicate balance of employer and
employee interest.

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