Malaysia: The ‘Law' On Trade Secrets

Last Updated: 15 March 2016
Article by Lim Zhi Jian

When Colonel Harland Sanders opened the first Kentucky Fried Chicken outlet in 1952, neither he nor anyone else could have foreseen that it would grow into 18,875 locations generating US$23 billion in revenue a year, and all due to one trade secret, the "Original Recipe".

Coca-Cola, the world's most valuable brand for 13 consecutive years1 at US$80 billion and based on a sugared beverage served 1.8 billion times a day, was built on a 140-year-old trade secret that the label of ingredients gives no hint of.

A multi-billion dollar business empire can be built on trade secrets.

Every business has its secrets

While the average business may not have a billion-dollar-generating secret, it may not realise the value in their existing information. A business may have more trade secrets than meets the eye (and these are not limited to industrial or manufacturing processes).2

While the name of the individual client is not confidential, the list or database of clients on which a business has expended time and effort to compile may be.3

Business information relating to cost prices, quoted prices (which may vary depending on the particular supplier and client), past transaction records, specific needs and requirements of certain customers — which the business has learned over time — may also be regarded as confidential to the business.4

In the same vein, ongoing negotiations between contracting parties have also been regarded as highly confidential.5 Contracts, too, can be confidential in nature.6 If such information were to fall into a competitor's hands, clients may be poached and prices undercut.7

Information publicly available is not confidential as such. However, it is perfectly possible to have confidential information based on publicly available material, if it can only be reproduced by a laborious compilation process.8 The fact that it consists partly of public information does not mean it cannot be information confidential to a business.9

The list of what may be considered confidential is not exhaustive.10

Protection

As important and valuable as trade secrets are, the protection afforded by the law is not always adequate. Protection of trade secrets may take the following forms:

(a) copyright;

(b) patent; and

(c) duty of confidence.

Copyright

Copyright is the exclusive right granted for the exploitation of an artistic works, literary works, musical works, films, sound recordings and broadcasts. A customer database, information on prices, contracts and individual preferences of customers may qualify for copyright protection as literary works.

However, copyright protection of trade secrets is inadequate and often not feasible because:

(a) Not every trade secret can satisfy the requirement of originality for copyright to subsist;

(b) copyright only subsists during the life of the author plus 50 years;11 and

(c) copyright protects works in tangible form and does not protect ideas as such.

Patent

A patent is an exclusive right granted to exploit an invention. While a patent grants absolute monopoly, protection of trade secrets by means of a patent may be inadequate (and, to an extent, counter-productive) because filing for a patent requires publication of the invention.

a) By filing for a grant of patent:

i) even after publication, there is no guarantee that the patent would even be granted;

ii) Protection is limited to only 20 years from the date of filing, assuming patent granted;

b) the condition for grant has high thresholds, which most trade secrets may not satisfy the requirement that a patent must:

i) be novel;

ii) involve an inventive step; and

iii) be industrially applicable;

c) the application process is costly and lengthy;

d) even if granted, a patent is still open to invalidation actions.

Duty of confidence

A duty of confidence protects information (neither publicly available nor trivial) that is conveyed in confidence.

The law imposes a duty of confidence over information where the information:

a) is not publicly available or is trivial; and

b) is conveyed in confidence

The protection is available without:

a) the need to file any application or make any disclosure; and

b) any time limit to the protection

In the case of employees, there is an implied duty of good faith and fidelity which encompasses an obligation on employees not to divulge confidential information, or use it in a way that is detrimental to their employer. It is a breach of the implied duty even to memorise confidential information with the intention of using it later, even if such use or disclosure is post-employment.12

Legal protection of confidential information has the following drawbacks:

a) if the recipient has no notice of its confidential nature, he is not bound to keep it a secret;

b) therefore continuous effort is required to preserve confidential nature of the information;

c) once disclosed outside of the duty of confidence, it may enter into public domain and be available to the whole world;

d) it does not prohibit an exploitation of a secret manufacturing process discovered upon reverse engineering of the same;13

e) the protection is somewhat amorphous, relying as it does on common law and equitable principles rather than legislation.

Keeping the cat in the bag

The manner in which secrets are guarded has been held to be a material consideration in determining whether a certain material is confidential in nature,14 because a duty of confidence may only arise under circumstances imparting an obligation of confidence; when the recipient has notice.15

In an environment where confidential information needs to be shared, the steps that a business should take to retain confidentiality in information include:

a) plainly making it known that the information is regarded as confidential;

b) giving notice that the sharing is by reason of seniority or responsibility;16

c) demonstrably restricting/limiting access to the information and guarding of the same;

d) employing technological measures to prevent unauthorised copying and sharing of information on devices of employees;

e) entering into non-disclosure or confidentiality agreements (which may be specific for one-off project partners or joint ventures, or wide and general for employees); and

f) alternatively, incorporating confidentiality clauses in employment agreements.

Feathers in the wind

In the event of a leak, seeking immediate advice from your intellectual property legal adviser tops the list of things to do. Once disclosed, a secret can no longer be restored as one.17 Every legal remedy at your disposal will be redundant once the information enters the public domain.

The legal burden in an action for breach of confidence is discharged by establishing unauthorised use of the information to the detriment of the communicating party, the information of which has the necessary quality of confidence and which was imparted to the recipient in circumstances importing an obligation of confidence.18 The manner in which business is conducted and information is treated may be the determining factor.

It is important to pair the action with an application for an injunction restraining further disclosure of the confidential information, thus reducing the risk of further disclosure. An undertaking to pay any damages caused by the injunction must be provided.

When operating with the risk that the confidential information taken or copied may be moved about, disposed of quickly or further replicated, drastic orders — such as the intrusive Anton Piller order, which gives the right to search premises and seize evidence without warning — may need to be resorted to.

In going to court for such orders, the business must act with haste. Equity aids the vigilant, not those who slumber on their rights.19

Other remedies include damages or an account of profits arising from the unauthorised use of the confidential information, and legal costs.

Conclusion

Although the law recognises confidentiality, the greatest value in a trade secret is that it stays that way: secret. The "Original Recipe" is stored in a vault while Coca-Cola once withdrew from India — the second-most populated country in the world — so as to avoid complying with a local law that required it to divulge its formula.

The "law" on trade secrets is thus to take all the steps so that you do not have to rely on the law on breach of confidence, which basically is closing the stable door after the horse has bolted.

Footnotes

1 Until it was dethroned by Apple http://www.bloomberg.com/news/articles/2013-09-30/apple-overtakes-coca-cola-as-most-valuable-brand-study-finds

2 Certact Pte Ltd v Tang Siew Choy [1991] 4 CLJ (Rep) 716 at 722; Faccenda Chicken Ltd v Fowler [1986] 1 All ER 617 at 628

3 Schmidt Scientific Sdn Bhd v Ong Han Suan [1997] 5 MLJ 632

4 Svenson Hair Centre Sdn Bhd v Irene Chin Zee Ling [2008] 8 CLJ 386 at 397-399; Schmidt Scientific Sdn Bhd, supra n 3 at 695; Worldwide Rota Dies Sdn Bhd v Ronald Ong Cheow Joon [2010] 8 MLJ 297; [2010] 1 LNS 444; Certact Pte Ltd, supra n 2

5 Schmidt Scientific Sdn Bhd, supra n 3; Certact Pte Ltd, supra n 2

6 Certact Pte Ltd, supra n 2

7 Schmidt Scientific Sdn Bhd, supra n 3

8 Saltman Engineering Co Ltd v Campbell [1963] 3 All ER 413 at 415; Worldwide Rota Dies Sdn Bhd, supra n 3. The High Court grounds of judgment may also be viewed here: http://www.kehakiman.gov.my/directory/judgment/file/S5%2022%20404%201997%20%20-%20WORLDWIDE%20ROTA%20DIES%20%20%20Ronald%20Ong.pdf   at 34-35

9 Seager v Copydex Ltd [1967] 2 All ER 416

10 Alfa Laval (M) Sdn Bhd v Ng Ah Hai & Ors [2008] 5 MLJ 344

11 Regardless to whom he may assign ownership of the copyright to

12 Schmidt Scientific Sdn Bhd, supra n 3

13 Mars UK Limited v Teknowledge Ltd [2000] FSR 138

14 Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37 at 50; E Worsley & Co Ltd v Cooper [1939] 1 All ER 290 at 307

15 Coco v AN Clark (Engineers) Ltd [1969] RPC 41 at 47

16 Printers and Finishers Ltd v Holloway [1965] RPC 239 at 256; Faccenda Chicken Ltd, supra n 2

17 Dynacast (Melaka) Sdn Bhd & Ors v Vision Cast & Anor [2008] 10 CLJ 190 at 196

18 Coco, supra n 15; Electro Cad Australia Pty Ltd & Ors v Mejati RCS Sdn Bhd & Ors [1998] 3 AMR 2555

19 Haji Wan Habib Syed Mahmud v Datuk Patinggi Haji Abdul Taib Mahmud & Anor [1986] 2 MLJ 198 (SC); Malayan Banking Bhd v Foo See Moi [1981] 2 MLJ 17; Tan Swee Lan v Engku Nik Binti Engku Muda & Ors [1973] 2 MLJ 187 (FC)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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