Protection of trade secrets in Latvia - problems and possibilities

(c) Maria Boicova, 2005

Protection of trade secrets in Latvia - problems and possibilities.
A speech delivered by Ms Maria Boicova at AIPPI Baltic conference in Riga, April 2005

First of all I would like to give a glimpse of the structure of my speach....

On one hand the topic of the protection of the trade secrets might seem a very narrow one – really – what there is much to say: trade secrets are mostly either non-protectable at all, or as the best outcome – protectable with very few means provided in the laws. Patents, copyright and trademarks are by virtue of their nature afforded certain protections by law, but trade secrets demand more proactive steps on the part of their owners in order to warrant protection.

On the other hand though in order to find out the way, you have have to know where to go, what is the starting point, what are the problems, that lack the possibility of solving at the time being, and various other questions that undoubtedly arise when starting analyzing this complex issue. So... The structure.

First and foremost the definition and prerequisites
Moreover, before I will come directly to the legislation of Latvia I will say some words about when the trade secret is a benefit and regarding the misappropriation of trade secrets – the definition and when the disclosure is not considered a misappropriation.

Therefore as to begin I would like to stress first and foremost, so-to-say the main problem in protection of the trade sescrets, which from others do arise – that is – that there exist neither global law on trade secrets nor there is any globally accepted definition of such. To say the least actually. In fact even in the different laws of one country might and do exist different definition of one and the same legal institute. And not even different definitions, but also different terms to be used in connection with this legal institute. For instance, I will here jump closer to the last part of my speach – in Latvian laws – trade secret is called commercial secret, then again trade secret, even know-how, although some believe it to be the same, it is definitely not .
In latvian laws you may also find the term zinatiba – which if translated grammatically is something like special knowledge. Here I stop for the moment.

Although as I have mentioned above, there exist no precise globally accepted definition, almost everyone agrees, that for the information to be considered as being a trade secret it has to be first of all de facto secret – that`s what everybody agrees with. Actually, there is both practical business reason and a concrete legal rationale for putting in motion a plan for safe-guarding trade secrets. On the first hand, for business purposes you need to protect your secret information from disclosure to your competitors for the reason that knowing that information gives you a supremacy over them. On the other hand, for information to be regarded as being a trade secret it obviously has to be actually kept secret. It is important to stress that the prerogative of secrecy, which in fact is included in the legal term “trade secret” is an absolute must for the information to be regarded as a trade secret.

When this requirement is satisfied? This question of course is in close connection with the question of misappropriation, though briefly the requirement of secrecy is satisfied if it would be difficult or costly for others to acquire and exploit the information without resorting to some form of wrongful conduct.
For the information to be considered a trade secret it has also to be protected by the owner, namely, the owner of the information has to be interested in keeping the information secret, he has to make continued efforts that are reasonable – here I have to stop once again. Concerning the reasonability – it is not defined either. You might, applying certain common principles, say that reasonable in this case has to be defined in comparing with the value of the trade secret itself. Although that would be the question of interpretation, which unfortunately is not clarified in any law.

Coming back in addition to the mentioned, the trade secret has to give its owner some sort of advantage over competitors. We might argue the prerequisite of commercial value, though the information which is trade secret has to be used in business – that`s for sure.

So – what might suit the aforesaid prerequisites?
First it is surely – any formula, pattern, device or compilation of information which is used in one`s business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. And in addition to that trade secret might constitute also the negative information – for instance research options that have been explored and found worthless.

The trade secret is a benefit:
1) when the information, which is considered to be a trade secret is not protectable by any other IPR
2) when the likelihood is high that the information can be kept secret for a considerable period of time
3) when the trade secret is not considered to be of such great value to be deemed worth a patent
4) when the new information does not need to be put on the market at the time of its exploitation, e.g. when the secret relates to a manufacturing process rather than to a product, as produced are more likely to be reverse engineered.

Of course many intangible assets are more suitable for trade secret than for patent protection. For example, customer lists, manufacturing methods, marketing plans and source code are all undoubtedly highly valuable assets to many companies. Trade secret protection for these types of assets may be the wisest choice, requiring a fundamental understanding of the key issues involved in trade secret protection.

Therefore if the information which suits the prerequisites to be considered a trade secret and the situation is one of the aforementioned benefit situations, then the protection offered by the status of the trade secret is much recommended.

As to the examples,– first that comes to mind is Coca-Cola. Patented technology, protected trademarks, and anyway – the recipe of this world-known drink is locked away in a bank vault in Atlanta, Georgia, accessible to only two people who are never permitted to travel together, in case they are both killed in an accident . Therefore – Coca-Cola is protected by all means available.

Concerning the misappropriation. As hyperdictionary defines it – it is wrongful borrowing, any wrongful taking in fact. To define the scope of what is wrongful and what is not, it is much more easier to start from an end – that is to define what is not considered the misappropriation and that is:
1) confidential disclosure to employees or others bound to secrecy does not destroy status of the trade secret
2) if the subject matter of an alleged trade secret is created through an initiative of the employee, the employee may then have an interest in the subject matter at least equal to that of his employer or in any event, such knowledge is part of employee’s skill and experience, consequently it cannot be regarded as a misappropriation.
3) an inevitable misappropriation; if the former employee’s new job is so similar to the former job, that the former employee cannot prevent his knowledge of his former employer’s confidential methods from showing up in his work.
4) Concerning the reverse engineering it is a complex issue – actually, taking into account that no espionage of any kind is in connection with pure reverse engineering – simply the final product, available to the public is studied to the point of defining the technology of producing it. Well… from this point of view, reverse engineering is also to be added to non-misappropriation.

So, it is possible to make the following conclusion regarding the misappropriation – everything which was not mentioned above as a non-misappropriation is to be considered as such, namely any borrowing of the trade secret, which is not included in the list of OK borrowing, is wrongful borrowing and therefore misappropriation.

But here it is noteworthy to stress also that a duty not to disclose can be regarded as being breached only when the information disclosed can be properly classified as a trade secret.

And here finally I have come to the main question – trade secrets in Latvia.
In the absence of special legislation the protection for this unique type of IP, might be granted under:
1) the Labour law
2) the Criminal law
3) the Law on competition
4) the Civil law
5) The Freedom of Information law
6) The Commercial law
+ 7) the provisions of TRIPs and
8) the provisions of Paris Convention for the protection of industrial property

On one hand – eight laws – might be rather good protection. Unfortunately.

Under the Labour law the employees are required not to disclose the information which is considered to be a trade secret of employer. Here! Another stumbling-block – so what? The employee is required… But what if he, by he I mean employee, decides that required, obliged et caetera are simply words, which in fact they are – there are no sanctions under the Labour law, namely if this requirement is not satisfied, then what? The questions remains unsolved.

Going forward. The Criminal law. Article 200 has sanctions for the disclosure or misappropriation of the commercial secret and the inside information and these are as follows:
deprivation of liberty for a term not exceeding five years, or custodial arrest, or community service, or a fine not exceeding one hundred times the minimum monthly wage.

And for the theft of the aforesaid information:
deprivation of liberty for a term not exceeding eight years, or a fine not exceeding one hundred and fifty times the minimum monthly wage.
In comparing with Lithuania, if I don’t mix up the matter – where for the aforesaid is the deprivation of liberty for a term not exceeding two years. one might say that the Criminal law in Latvia is to be considered as being rather tough for infringers. Though there comes another problem – the first I mentioned – the inconsistency of the terms used in the legislation of Latvia – this article of the Criminal law is applicable to the information containing commercial secrets and to the inside information of the financial instrument market. In fact trade secret is almost the same as commercial secret, but anyway not completely the same. Speaking about know-how – which surely must have been included in the scope of protection by the Criminal law is not mentioned either. But ok - for the purpose of this speech let us consider trade secrets and commercial secrets as being almost the same, especially taking into account that no legally accepted definition of any of them actually exist in Latvian laws.

The law on competition defines the fact of misappropriation of the trade secret as an unfair competition. Well, taking into account the possible fine for the unfair competition which might the Competition Board apply, being up to 5% of the net turnover of the last financial year… Comparing to that of Criminal law the sanctions under the law on competition are not the strict ones.

The misappropriation of the trade secrets might cause actual damages, which might be granted under the Civil law – article 1, article 2391… although it important to stress that these articles are only general principles… If you base your statement of claim on these articles only, that most probably won’t be regarded as being sufficient.

The Freedom of information law provides us with another term to be used in connection with trade secrets – a restricted access information… Articles concerning the matter are mainly descriptive in their nature, in other words – no sanctions included for the breach of the trade secret or the misappropriation of such.

The Commercial law speaks about commercial secrets – without defining precisely what are to be considered as such. Referring to the article 19, which defines commercial secret as inter alia information which is, restructuring the text of an article: recorded or not, has actual or potential value or does not have a financial value – so the definition which defines nothing though makes the issue even more complex. Besides in the aforesaid definition there is an interesting phrase included, namely “which may cause losses to the merchant”… Taking into account that the word “may” is of course more strict than “might”, although anyway – may is may not as well. What does the aforesaid signify? As to the commercial law – no precise definition of what is considered a commercial secret, no precise definition of the scope of protection. Ok, article 19, provides that a merchant has exclusive rights, and in particular right to request the protection of commercial secrets, as well as compensation for losses, which have been caused by the illegal disclosure or utilization of the commercial secrets. Fine. At least under this Article an owner of the commercial secret might claim actual damages. Of course once again – a question of the inconsistency of the terms, which by now I think is obvious. But there comes another problem as well – the merchant. According to the Commercial law – the merchant is a natural person (individual merchant) or a commercial company (partnership and Capital Company) registered with the Commercial Register. Does it mean that only a merchant has a right to protect his commercial secret, and trade secret as well? Or does it mean that commercial secret might belong only to merchant? Too many questions arise in connection with this matter.

That’s actually it with the Latvian laws. The owner of the trade secret may also refer to TRIPS, and the provisions of the Paris convention for the protection of industrial property, although the first one speaks about undisclosed information – which embraces both know-how and trade secrets and provides as follows – that 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 the manner contrary to honest commercial practises.

And concerning the Paris Convention. Of course the examples of unfair competition provided by the Paris Convention do not include trade secrets infringement. Nevertheless, to my point of view and actually to the point of view of many lawyers it could be argued that misappropriation of trade secrets is unfair competition under the Paris Convention terms. Especially this sounds like appropriate if taking into account the Paris Convention Article 1, which inter alia establishes that industrial property shall be understood in its broadest sense.

So… The trade secrets following the aforementioned logic might, and actually are to be also be included in the scope of industrial property protection and therefore all the laws governing the industrial property protection in general might be applicable to them as well. Therefore when deciding cases concerning the trade secrets protection, all possible measures have to be analyzed profoundly.

In order to summarize the problems of trade secret’s protection in Latvia it is noteworthy to stress the following:
1) no exact definition;
2) almost absolute inconsistency of terms: know-how, special technical information, commercial secrets, trade secrets, special professional knowledge, even zinatiba etc.
3) no concrete law governing all the various aspects of protection of that type of IPR
4) in the absence of law - no defined principles of protection
5) remedies available for the misappropriation of the trade secrets not defined

As the topic of my speech is trade secret protection in Latvia – problems and possibilities and till this moment I have spoken mainly about the problems, now I would like to refer to the possibilities as well. Concerning the later it is important to emphasize that if speaking about the possibilities of the protection of the trade secrets one has to speak mainly about non-legislative measures of protection and theses are:

First and foremost – agreements with licensees and financial partners
Then – warnings or notices on written materials, stating that they are secret
Of course physical measures, such as periodic security checks, closed-circuit monitor, restricted access etc.
And finally – non-disclosure agreements with employees

The later must consist of several important points, such as:
clear definition of what is considered a trade secret – of what is entitled to protection
definition of steps, which the employee need to perform in order to protect the trade secret of the employer
promise of the employer that he will actually disclose to the employee the trade secret containing information and what is an absolute must in the non-disclosure agreements is
a return promise of the employee that he will not either use the trade secret of his employer for his own sake or disclose it to any third party

The aforesaid of course cannot assure absolute protection, but at least would be something…

And of course I am to add, that notwithstanding the problems in legislation of Latvia, mainly the inconsistency of terms, taking into consideration two following principles, the protection of trade secrets is still possible, even in under Latvian laws. These principles are the following:

First is one of the basic principles of legal theory that interpretation of the law cannot be only grammatical, you have to see the purpose of law – therefore use teleological method, and of course see things in general, therefore using systemical method – applying this principle even in Latvian laws, that lack legally defined definition, remedies et c. , lawyers can find the way to protect trade secrets of their clients.

And second principle is rather precisely defined by Lord Denning in famous case Seager versus Copydex Ltd. Citing: “The law on this subject does not depend on any implied contract. It depends on the broad principle of equity that he who has received the information in confidence shall not take unfair advantage of it. He must not make use of it to the prejudice of him who gave it without obtaining his consent.”
In other words – to trade secret’s protection is applicable the basic legal principle of good faith, provided inter alia in the first article of Civillikums - Civil Law of the Republic of Latvia - “rights should be used and duties should be performed only in good faith”.

Trade secrets therefore, notwithstanding Latvia being a civil law country, are to be treated with due care and due attention to both the doctrine, the case law and the basic legal principles. And taking into account the globalization processes, the accession of Latvia to the European Union and the harmonization of laws inside the Union, the question of defining the common for all the European countries principles of protection of this type of IP is undoubtedly of high importance.

I have mentioned at the beginning – in order to find the way, you need to know where to go, and as one of the wise man told – if we always knew where we are, it would be much easier to know where to go.

By now we do know where we are in the field of trade secret protection in Latvia – so going forward has to be much more easier.