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03 Aug 2020
BY Waldo Steyn

Trade secrets: in the news again

Recent news stories have once again shone a spotlight on the issue of trade secrets.

One article speaks about how a Chinese citizen, Zhang Hao, was convicted in the USA for stealing trade secrets from two US tech companies. These trade secrets enabled Hao’s own firm, working together with a Chinese university, to unfairly compete in the market for radio frequency filters on electronic systems. The brazen Hao went on to patent these trade secrets, but he’s in serious trouble now. Although out on bail of USD500 000, he faces a potential prison term of 15 years for economic espionage and 10 years for theft of trade secrets.

An FBI spokesperson gave some context to this case: “Economic espionage is a pervasive threat throughout the US, particularly the San Francisco Bay area and Silicon Valley which is the centre of innovation and technology. This case exemplifies how easily a few motivated employees can conspire to misappropriate intellectual property for the benefit of China”.

There have also been news reports about Anthony Lewandowsky. Lewandowsky, a former Google employee who headed up the company’s autonomous vehicle project, pleaded guilty to charges relating to the theft of trade secrets. He downloaded files from his Google Drive and went on to use the contents of these files to start a company called Otto, that he went on to sell to Uber.

It is important to understand that there is a distinction between know-how and trade secrets. The distinction is critical because a company can’t stop an ex-employee from using their know-how. But it can stop them from using trade secrets.

So, where does the law relating to trade secrets come from? In some parts of the world, the law is codified. For example, there is an EU Trade Secrets Directive 2018 aimed at standardising the national laws in EU countries against the unlawful acquisition, disclosure and use of trade secrets. The directive does various things:

  • It standardises the definition of trade secrets.
  • It defines various forms of misappropriation.
  • It harmonises the civil remedies that are available to victims of trade secrets theft. These remedies include an injunction, an order to remove goods from the market, and a right to damages.

In South Africa, remedies for the theft of trade secrets come from the common law. The protection of trade secrets and confidential information is part of the wider common law action of unlawful competition. The best known South African court case on unlawful competition is probably Schultz v Butt . In this case, the court explained unlawful competition as follows: As a general rule, every person is entitled freely to carry on his trade or business in competition with his rivals. But the competition must remain within lawful bounds. If it is carried on unlawfully, in the sense that it involves a wrongful interference with another’s right as a trader, that constitutes an injuria for which the Aquilian action lies if it has directly resulted in loss”.

Unlawful competition covers a wide range of sins, most notably passing off. But what’s important for our purposes is that it also covers trade secrets and confidential information.

Another famous unlawful competition case, Dun and Bradstreet (Pty) Ltd v SA Merchants Combined Credit Bureau (Cape) Ltd, dealt specifically with trade secrets and confidential information. In this case, which was decided at a time when people still used words like “misappropriation” and “filching”, Judge Corbett said this: “The conduct of a rival trader who obtains and, well knowing the position, uses the information to advance his own business interests and activities amounts to a deliberate misappropriation and filching of the products of another’s skill and labour. Such conduct must, in my view, be regarded as dishonest and as constituting a fraud upon the compiler of the information”.

In a recent case, Pexmart CC v H. Mocke Construction, the Supreme Court of Appeal once again made it clear that there is no definitive list of what constitutes unlawful competition. The court was very clear that it does however cover the misuse of confidential information or trade secrets, describing such conduct as the unfair use of a competitor’s fruits and labour. The court went on to lay down three requirements in order for information to qualify as a trade secret:

  • The information must be capable of application in trade or industry;
  • The information must be secret or confidential;
  • The information must be of economic (business) value to the plaintiff.

Trade secrets and confidential information are valuable assets that deserve careful consideration and protection.

Waldo Steyn

Executive | IP

+27 82 382 6404