As part of the Australian Federal Government's Competition Review, Treasury is considering how businesses can protect confidential information or trade secrets without the use of non-disclosure or confidentiality clauses, such as through the use of patents.
In this article we examine the legal definition of trade secrets and how trade secrets are currently protected.
Trade secrets encompass a broad range of confidential information that provides a competitive edge. These secrets may include formulas, practices, designs, instruments, patterns, or any compilation of information which is not generally known or reasonably ascertainable by others. The value of trade secrets lies in their exclusivity, giving businesses leverage to maintain market superiority over competitors.
To qualify as a trade secret, the information must be commercially valuable, closely guarded, and have been subject to reasonable steps by the business to maintain its secrecy. The inherent nature of trade secrets means they can be integral to a business's success and longevity, forming a critical part of its intellectual property portfolio. [What is Intellectual Property?]
In Digital Central (Assets) Pty Ltd v Stefanovski [2017] FCA 738 at paragraph 112 the legal meaning of a "trade secret" was considered:
"A useful measure of what is a "trade secret" is to identify information which, if disclosed to a competitor, would be liable to cause real (or significant) harm to the owner of the asserted "trade secret". An additional consideration is that the owner must limit dissemination and not encourage or permit widespread publication of this information".
Heydon in The Restraint of Trade Doctrine, 4th Edition, considers trade secrets in the context of an employer/employee relationship and indicates that the real question is whether the secret is a particular one of the employer rather than the trade, or part of the employee's own individual skills and experience1.
The legal protection of trade secrets varies from country to country, but a commonality lies in the recognition of their importance to business innovation and competitive advantage.
In Australia, trade secrets are protected under common law through the law of confidence.
The conditions for the existence of an equitable obligation of confidence were identified in Coco v A N Clark (Engineers) Ltd [1969] RPC 41 at 47:
"First, the information itself ... must "have the necessary quality of confidence about it". Secondly, that information must have been imparted in circumstances importing an obligation of confidence. Thirdly, there must be an unauthorised use of that information to the detriment of the party communicating it".
Importantly, a trade secret protected by the law of confidence does not need to be new or novel.
For trade secrets that are new, useful and innovative, the Patents Act 1990 (Cth) provides the framework for the registration of a patent.
Additionally, the Federal Government in its April 2024 Issues Paper 2 indicates that section 183 of the Corporations Act 2001 (Cth), which prohibits an employee from using their position for personal gain and The Privacy Act 1988 (Cth) may also assist an employer with the protection of trade secrets.
At the international level, the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (to which Australia is a member) requires member countries to protect undisclosed information.
Article 39(2) of TRIPS provides:
Natural and legal persons shall have the possibility of preventing information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices so long as such information:
(a) 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 within the circles that normally deal with the kind of information in question;
(b) has commercial value because it is secret; and
(c) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.
Strategies to protect trade secrets can include:
It is estimated that in 2023, 45.3% of Australian businesses were using a non-disclosure agreement for some of their workers3. A study undertaken in the United States in 2014, found that of the 11,500 employees surveyed approximately 18% were subject to non competes (including NDAs).4
Our article Confidentiality Agreements: A Comprehensive Guide goes into more depth about the use of confidentiality agreements or NDAs.
In addition to using confidentiality agreements or NDAs for employees and franchisees, another effective strategy for protecting trade secrets is registering a patent. By registering a patent, businesses can secure legal protection for their innovative ideas, inventions, and processes.
In its 2024 report on Intellectual Property in Australia, the Australian Government reports from a forthcoming paper by Dobson-Keeffe and Falk 5 "in the past two decades, the number of Australian SMEs that hold patents has increased at 5 times the rate of SMEs".
The Australian Government further reports in the same paper "after filing for an IP right, Australian SMEs are 16% more likely to experience high employment growth than their peers without recent filings".
However, a significant limitation on using patents to protect trade secrets is that the trade secret must be new, useful and inventive.
Non-compete clauses can also be used to prohibit franchisees or former business owners from using trade secrets to operate a business in competition with a franchisor or the purchaser of a business that they just sold.
Our article Restraint of Trade Clauses in Franchise Agreements considers the use of restraints and the enforceability of restraints in more depth.
A comprehensive approach also involves employee training to recognise the importance of maintaining secrecy, establishing clear policies on information access, and swift action against any breaches of confidentiality.
In addition to using NDA's, Apple is known for taking extraordinary measures to ensure the secrecy of special projects.6. These measures include keeping teams separate, providing employees with need-to-know information and using lock down rooms for secret information.
Protecting trade secrets requires a strategic blend of legal, technical and organisational measures.
Whether through the use of NDAs, non-compete clauses, patents or comprehensive security protocols, safeguarding trade secrets can preserve a business's competitive edge and foster innovation and growth.
As the Australian Government continues to review and refine its approach to trade secret protection, businesses must remain proactive in their efforts to protect their valuable intellectual property.
Disclaimer
The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.
1. The Restraint of Trade Doctrine, 4th Edition J D Heydon at 108
2. Non-competes and other restraints: understanding the impacts on jobs, business and productivity, Issues Paper, April 2024
3. ABS, ‘Restraint Clauses, Australia, 2023’
4. The 2014 Noncompete Survey Project, 2016 Mich St L Rev 369
5. Dobson-Keeffe B and M Falk (forthcoming), ‘The Structural Change in Patenting Behaviour in Australia’, IP Australia Analytical te.
6 Adam Lashinsky, This Is How Apple Keeps the Secrets (Fortune, Jan 18, 2012)