An Opportunity for Leadership on Trade Secrets Protection in the Australia-UK Free Trade Agreement

The proposed Australia-UK Free Trade Agreement aims to promote innovation as a key priority, with provisions in support of bilateral foreign direct investment, balanced protection of intellectual property rights, and co-operation in research and development (R&D). Australia and the UK have published fairly ambitious objectives in this regard. Unfortunately, a notable omission is trade secrets protection, a prime tool for promoting and protecting innovative capacity.

Trade secrets are increasingly important to businesses and national economies. However, they are more vulnerable than ever to cyberattacks and other threats such as poaching of employees with a view to obtaining business confidential information. For example, a 2019 US International Trade Commission case alleged systematic poaching of 70 staff by a Korean battery maker from a competitor with a view to misappropriating trade secrets. (In February 2021, the USITC affirmed that a violation of US Section 337 had taken place.) Despite various reforms, most countries’ laws need improvement. This creates an opportunity for Australia and the UK to demonstrate leadership via their bilateral deal.

The importance of trade secrets

Trade secrets are confidential information, unique to a business, that gives it an edge in competition. They include items like customer lists, manufacturing processes, formulae, ongoing R&D content, and proprietary data.

Trade secret laws promote innovation by protecting investments that other intellectual property laws cannot. For example, to develop a patentable invention, a company must invest in early research that is essential to eventual success but otherwise unprotectable. Furthermore, some innovation is beyond the scope of patent protection, including business plans, customer lists and much financial, administrative and commercial innovation (e.g., the definition of a New York Times best seller). The ability to execute on an essential business goal often relies on unique knowhow built over years through investments protected by trade secret laws.

Trade secrets help firms, particularly small businesses, to maintain a competitive edge. Society as a whole can benefit from this process. For example, pharmaceutical producers drew on their store of knowhow to deliver COVID-19 vaccines in record time.

What is missing?

Although trade secret protection has existed for centuries, it tends to be overshadowed by other intellectual property laws. The WTO TRIPS Agreement (1995) was the first international agreement to require members to protect trade secrets, about a century after the first international agreements protecting patents, copyrights, and trade secrets.

Although TRIPS represented progress, gaps remain. For example, TRIPS does not specify protection against economic espionage by competitors and foreign governments, an increasingly notorious problem. It also lacks criminal penalties for misappropriation. In the case of pharmaceutical and agricultural chemical test data, the term of protection is not specified. WTO members have addressed some issues using domestic law, regional or bilateral trade accords, and other agreements. Still, there remains significant variation in approach and strength of available protection.

In 2014, a detailed OECD survey used a composite indicator to measure the stringency of protection for trade secrets. Between 1990 and 2010, the study found greatly improved availability of protection. Australia and the UK, having started with above-average levels of protection, both modestly enhanced protections. Meanwhile, the rest of the world did not stand still. On average, 15 emerging markets surveyed boosted the stringency of protection by 20% and 17 OECD countries delivered an average 12% rise.

These changes were positively correlated with inflows of FDI, business expenditure on R&D, and goods and services imports. For this sample in this time period, and controlling for other relevant factors, the relationship was statistically significant. Of course, correlation does not demonstrate causality and the relationship may not hold where protection is overly stringent or fails to satisfy minimum commercial requirements.

In recent years, national governments have pursued further reforms. The US adopted its first national trade secret law, the Defend Trade Secrets Act, while the EU engaged in EU-wide reform through the Trade Secrets Directive. The NAFTA partners updated their regional trade agreement to reinforce relevant protections in the new USMCA accord (2020). Korea and China both overhauled evidentiary burdens; Taiwan increased criminal penalties.

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) included some new trade secrets disciplines. For example, it requires availability of criminal procedures and penalties using a menu approach. Members can choose which types of infringement (e.g., “the unlawful and wilful misappropriation of a trade secret”) and which acts (e.g., those “intended to injure the owner of such trade secret”) will be covered.
 

Australia and the UK

Australia and the UK, with historical ties and similarities in business and legal culture, may capitalize on this to reap economic gains through improved alignment and disciplines. Three illustrative areas for potential action include:

1. Providing criminal remedies for certain cases of trade secret theft. Criminal laws enable governments to investigate and address cases where private businesses are overmatched, for example, some instances of state-sponsored economic espionage.
2. Strengthening civil remedies by making punitive damages available under certain conditions to dissuade substantial misappropriation for commercial purposes.
3. Agreeing bilateral disciplines on post-employment duties and non-compete provisions to help ensure reasonable treatment for employee mobility while offering appropriate employer protection.

Also, the UK has applied to join the CPTPP. Australia is already a party. Their proposed bilateral trade deal offers an opportunity to prepare UK for CPTPP including with respect to trade secrets (potentially going beyond CPTPP minimum requirements).
 

The bottom line

Businesses consistently identify trade secrets as important economically, often more so than other types of intellectual property. Australia and the UK perform well in reviews of trade secrets protection. But, improvements are needed, particularly in view of the accelerating pace of innovation and competitive pressures. The Australia-UK Free Trade Agreement provides an opportunity to upgrade, align and balance protection of trade secrets, demonstrating leadership in this important area.

Douglas C. Lippoldt, International Trade Economist & Senior Fellow, CIGI, and

Mark F. Schultz, Professor & Goodyear Chair in IP Law, University of Akron School of Law

The views expressed here are the authors’, and may not represent the views of the Institute for International Trade

Photo by Chris Yang on Unsplash.