What are trade secrets ?

Trade secrets are a valuable asset for businesses of all sizes, providing a competitive edge and valuable information that is kept secret from the public as well as competitors. But what trade secrets and what kind of protection, exactly, is given to their owners?

In the case of Air Philippines Corp vs. Pennswell, Inc., a collection case filed by Pennswell Inc. (PENN) against Air Philippines Corp (AIR), AIR refused to pay on the grounds that PENN misrepresented that the items they sold belonged to a new product line, but which AIR claimed were not new but the same products it had previously purchased from PENN under a different brand name. AIR claimed that had it known about this, it would not have purchased the items.

AIR asked the court to compel PENN to disclose the ingredients and chemical components of the products, to show that the old and new products were the same. For its part, PENN claimed it should not be compelled to disclose the chemical components, because these were trade secrets and by revealing them, its business competitors might easily imitate and sell the same type of products.

The Supreme Court declared that the information sought by AIR  constituted trade secrets of PENN and, as such, privileged information that should not be disclosed.

Notably, the court emphasized that this privilege is not absolute and courts may at times compel disclosure when it finds disclosure to be indispensable to doing justice. (G.R. No. 172835, December 13, 2007)

Notwithstanding the ruling, businesses cannot simply use or rely on the claim that an information is a trade secret without basis.

In a case where a company dismissed an employee for alleged unauthorized disclosure of trade secrets it was ruled to be illegal. The Supreme Court explained that a determination by the company as to the confidential nature of technology, process, formula, or other so called trade secrets must have a substantial and factual basis that can pass judicial scrutiny. (Cocoland Development Corp vs. NLRC, G.R. No. 98458, July 17, 1996)

Definition of trade secrets

Since trade and industrial secrets are privileged and confidential, it would be important to know what constitutes or qualifies as a trade secret.

Some examples are:

1. Recipe or formula to make food, drinks or other products, such as the formula to make Coca-Cola
2. Manufacturing process which gives a company a competitive advantage such as a technique to manufacture a company’s product in a faster or more cost-effective way
3. Customer lists which are kept secret to prevent competitors from poaching clients
4. Software algorithms such as that of Google
5. Marketing strategies used by companies to promote their products or services such as the case of Apple when it closely guards its advertising campaigns to promote its products
6. Design and engineering plans that produce innovative products
7. Financial information, business plans and engineering plans

Philippine law does not specifically define the exact meaning of the term “trade secrets” but the Supreme Court has given some parameters and standards to determine what may constitute the same.

A “trade secret” is something that may consist of any formula, pattern, device, or compilation of information that:

1. is used in one’s business
2. gives the employer an opportunity to obtain an advantage over competitors who do not possess the information.

(Air Philippines Corp vs. Pennswell, Inc.)
The Supreme Court also noted that American case law has utilized the following factors to determine if an information is a trade secret:

1. the extent to which the information is known outside of the employer’s business
2. the extent to which the information is known by employees and others involved in the business
3. the extent of measures taken by the employer to guard the secrecy of the information
4. the value of the information to the employer and to competitors
5. the amount of effort or money expended by the company in developing the information
6. the extent to which the information could be easily or readily obtained through an independent source.

On the other hand, the World Intellectual Property Organization, an agency of the United Nations which was created to promote and protect intellectual property across the world, provides that, in general, to qualify as a trade secret, the information:

1. Must be a secret (i.e. it is not generally known among, or readily accessible, to circles that normally deal with the kind of information in question)

2. It has actual or potential commercial value

3. Reasonable steps must have been taken by the owner to keep the information secret such as marking documents as confidential, using confidentiality agreements to protect the secret, placing physical and electronic restrictions to access trade secret information, putting in place a monitoring system, raising awareness in the organization as to the trade secret and measures taken to maintain the secret.

https://www.wipo.int/tradesecrets/en/tradesecrets_faqs.html

Registration of trade secrets

Unlike patents, trade secrets are protected without registration, it requires no procedural formalities for its protection and are not registered with any government agency. A trade secret can be protected for an unlimited period of time, unless it is discovered or legally acquired by others and disclosed to the public.

Protection of trade secrets

There are several measures available to trade secret owners to protect their secrets, some of which are as follow:

The obvious first step is that trade secrets must be kept secret and the owner must take steps to secure their property such as limiting the persons having access to the information, putting in place physical or electronic security measures to guard against unauthorized access and distribution like keeping the information in a locked vault or, nowadays, in an encrypted file stored in a cold wallet (a device not connected to the internet), enacting a monitoring system, and by contract such as requiring a non-disclosure and non-competition agreements in their dealings.

Notwithstanding diligent efforts and security measures, leakages may still happen and in such cases, owners are given the right to seek relief from the courts for an Injunction to stop and prevent the disclosure of a trade secret (Air Philippines Corporation vs. Pennswell Inc.)

Monetary damages may also be granted to aggrieved owners of trade secrets for unlawful disclosure whether by reason of breach of confidentiality agreements, non-competition agreements or other violations of law such as those provided for under the Civil Code of the Philippines.

The Intellectual Property Code of the Philippines provides that Intellectual Property Rights shall include the Protection of Undisclosed Information and, in some instances, unlawful access, disclosure or dissemination of trade secrets may constitute unfair competition. (Sec. 4(g), Republic Act No. 8293)

The Revised Penal Code also criminally punishes revealing secrets with abuse of office by employees (Arts. 291 and 292)
Depending on the type of secret and industry that the owner is operating in, there are various laws that provide for confidentiality.
Finally, it is important to know that trade secrets are valuable and constitute proprietary rights and owners can derive independent economic value from them apart from other aspects of the company’s business. In some cases, they can represent a company’s most valuable intellectual property asset. (Uniform Trade Secrets Act of the United States)

As the Supreme Court declared, it is indubitable that trade secrets constitute proprietary rights. The inventor, discoverer, or possessor of a trade secret or similar innovation has rights therein which may be treated as property.

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, teaches law at the MLQU School of Law, and an Arbitrator of the Construction Industry Arbitration Commission of the Philippines. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)