Trade secrets and confidential information are a cornerstone to most successful intellectual property strategies.  Trade secrets provide important competitive advantages that augment the profitability and value of a business.  The importance and value of trade secrets have been recently confirmed by substantial damage awards, broad enforcement and the introduction of specific legislative protection in the United States.

In the M&A context, particularly during the negotiation and due diligence phases of an M&A transaction, the disclosure of trade secrets and confidential information can expose the disclosing party to various risks. As such, taking measures to protect confidential information must be a priority.

Trade secrets

In Canada trade secrets and confidential information are typically protected by contract, fiduciary obligations and through a breach of confidence action.  The owner of a trade secret must establish that the information was confidential, communicated in confidence and misused by the person to whom it was communicated.  Accordingly, a breach of confidence action will not succeed against someone who used publicly available information to reverse-engineer or independently create the confidential information.  Trade secret protection is perpetual so long as the information remains secret.

Protecting trade secrets 

Trade secret owners should carefully protect the value of their confidential information by documenting, implementing and following procedures to clearly identify the information as confidential and narrowly restricting access to it.  Contracts with employees, suppliers and customers who have access to the confidential information should specifically identify the confidential information and clearly set out the consequences for misuse.  There are numerous examples of former employees trying to misappropriate confidential information to the detriment of their previous employer.

The impact on business value

For those businesses that depend on trade secrets for the their competitive advantage, the unauthorized disclosure of a trade secret can have disasterous effects on a company’s bottom line.  Consequently, it is important to pro-actively identify, document and implement measures to protect trade secrets to anticipate and avoid that risk.  Trade secret owners should also formulate plans to take swift action upon discovery of an actual or potential breach of confidence.  Given its importance, the value of trade secret protection is a critical consideration in any company’s strategic plan.

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