Measures against Leakage of Trade Secrets – Unfair Competition Prevention Law

Cases concerning leakage of trade secrets (cases of violation of the Unfair Competition Prevention Law)

Corporate Law Unfair Competition Prevention Act Trade Secrets Disclosure

Violation of the Unfair Competition Prevention Law by “Kappa Sushi’

On October 30, 2022, the president of “Kappa Sushi” was arrested for illegally obtaining a competitor’s trade secrets. The president was suspected of violating the Unfair Competition Prevention Law by illegally obtaining internal data on the purchase prices of Hama Sushi, a competitor where he worked before changing jobs, through a former officer of the competitor.

Violation of the Unfair Competition Prevention Law by “Rakuten Mobile”

In the past, a former employee of Rakuten Mobile was arrested for violation of the Unfair Competition Prevention Law for illegally obtaining technical information on the “5G” high-speed communication standard from SoftBank, a competitor where he worked before changing jobs. SoftBank claims that it has a right to claim 100 billion yen in damages from Rakuten Mobile, and is currently filing a lawsuit claiming a portion of that amount.

Current Situation Regarding Leakage of Trade Secrets

There have been many other incidents of leakage of confidential information to competing companies. The majority of leaks of confidential information to competing companies are leaks by internal employees. Companies whose confidential information has been leaked can suffer enormous losses as a result of the information leakage. In addition, it is extremely difficult to recover confidential information once it has been leaked. Therefore, it is important for companies to take sufficient measures against the leakage of trade secrets.

“Trade Secrets” under the Unfair Competition Prevention Law

What is a trade secret?

The Unfair Competition Prevention Law is a law that aims to ensure fair competition among business owners. The Unfair Competition Prevention Law provides protection for “trade secrets. A trade secret is confidential technical or trade secret information used by a company in the course of its business activities.

Requirements for Protection as a Trade Secret

To be protected as a trade secret under the Unfair Competition Prevention Law, information must meet the three requirements of confidentiality, usefulness, and nonpublicity.

Confidentiality means that those who have access to the information can objectively recognize that it is managed as a secret and that those who have access to the information are limited. Specifically, this includes data or documents marked as “confidential outside information” or information that is subject to confidentiality obligations under employment regulations or nondisclosure agreements.

Usefulness means that the information is useful business or technical information. The existence of usefulness is judged in light of socially accepted ideas. Examples of information that is considered useful include customer information, supplier information, blueprints, manufacturing methods, programs, and experimental data.

Non-known information is information that is not publicly known. Therefore, information that is already generally known is not protected as a trade secret.

Measures to Prevent Leakage of Trade Secrets

Reasons the Unfair Competition Prevention Law protect trade secrets

The reason why the Unfair Competition Prevention Law protects trade secrets is that they are the source of a company’s profits, the accumulation of many years of corporate efforts, and that once leaked, they are difficult to recover. If information is leaked by a retiree to a new employer, as was the case in this case, the company may suffer damages that are difficult to recover. Therefore, it is important for companies to take firm measures to prevent confidential information from being leaked to competitors and other parties.

One measure to prevent information leaks is to ensure that confidential information is protected as trade secrets under the Unfair Competition Prevention Law by reviewing the management method of confidential information, the content of employment regulations, and the operation of nondisclosure agreements. It is also important to enhance the understanding of the importance of information management not only on the management side but also on the employee side.

Below are some specific measures to be taken.

Measures Required for Information Management

In order for “confidentiality” (a requirement for protection as a trade secret) to be recognized, the intention to manage the information as confidential information must be clearly demonstrated to employees and officers by means of management measures for the information, and the employees and officers must be able to recognize such intention. In other words, a company’s mere subjective recognition of such information as confidential information is not sufficient to protect it as a trade secret.

The information management system must include measures to distinguish between “subject information (trade secrets)” and “information that is not a trade secret,” measures to clarify that the subject information is a trade secret, and measures to prevent the removal of trade secrets.

Measures to distinguish between “trade secrets” and “information that is not a trade secret”

In establishing measures to distinguish between “trade secrets” and “information that is not a trade secret,” depending on the size and type of business of the company, measures should be taken so that employees can distinguish whether the information contains information that is a trade secret or whether it consists only of information that is not a trade secret.

However, it is not necessary to label each sheet of paper or each electronic file as a trade secret or general information, and it is considered to be a sufficient measure for reasonable classification if the label is placed on each file if it is paper, or on each access right if it is electronic media, such as a folder on an internal LAN.

In addition, management in which confidential documents are stored together in a stack is, in principle, permitted as a reasonable classification, but may not be considered as a reasonable classification if there is a significant amount of information that employees naturally recognize as general information due to the content of the information.

Measures to clarify that the subject information is a trade secret

In the case of paper-based documents, it is considered that the possibility of employee recognition of the intention of confidentiality management can be secured by indicating on the document that it is a secret, such as “Secret” or the like. In addition, instead of labeling individual documents and files as confidential, storing them in a lockable cabinet or safe may also be considered as a means of ensuring employee recognizability.

In the case of electronic media, the following measures may be taken: (1) affixing a confidentiality mark to the storage media, (2) marking the name of the electronic file or folder with the confidentiality mark, (3) displaying the fact that the electronic file is confidential on the terminal screen when opened, (4) setting a password for viewing the electronic file itself or folders containing such electronic file, (5) setting a password for viewing the electronic file itself or folders containing such electronic file. Setting a password for viewing the electronic file itself or the folder containing the electronic file, or affixing a “Confidential” label to the case or storage box where the recording media is stored, etc. are considered as measures to ensure the possibility of recognition by the employees.

Control measures concerning leakage of trade secrets

Establishment of employment regulations and conclusion of nondisclosure agreements

An effective measure would be to stipulate in the employment regulations a provision on confidentiality and a disciplinary action to be taken against any employee who divulges trade secrets.

Another effective measure would be to conclude a nondisclosure agreement or written pledge with the employee during his/her employment, imposing an obligation to maintain confidentiality of trade secrets.

Implementation of training and seminars on information management

It is conceivable to hold regular training sessions on information management for employees and executives. It is considered effective to inform employees and officers of the importance of information management and to clearly indicate to them that the company will take disciplinary measures and civil and criminal actions if an employee or officer leaks information.

Another possible measure would be to change the management level of trade secrets according to their level of importance, for example, to allow access to particularly important confidential information among trade secrets only to certain employees and officers. For employees and officers who have access to particularly important confidential information, it is also effective to provide special training sessions on information management in addition to training sessions for general employees, etc., to raise their awareness of the importance of information management.

Measures to prevent intentional information leakage

It is possible that employees, etc., may take out trade secrets to competitors, etc., knowing that the information is confidential. Therefore, a company must also take measures to prevent employees from intentionally taking out trade secrets.

Specifically, in the case of paper-based media, measures may include prohibiting employees from copying, scanning, or photographing paper-based media, controlling the number of copies (shredding excess copies), collecting distributed copies, locking cabinets, and prohibiting employees from taking trade secrets home.

However, unlike in the case of electronic media, it may be difficult to forcibly restrict access to information in the case of paper media unless physical measures such as locking are taken with respect to trade secrets. Therefore, in order to prevent the intentional removal of trade secrets, it is advisable to consider establishing an information management system using electronic media rather than paper media.

In the case of electronic media, changing passwords for each personnel change or resignation, changing mailer settings to restrict forwarding to private e-mail, and physically disabling USB or smart phones from being connected may be effective measures to prevent the intentional removal of trade secrets.

Measures to identify information leaks

Measures that can be taken before information leakage

When trade secrets are in paper form, there is a possibility that the detection of information leaks will be delayed compared to electronic media, where data removal can be checked using access logs and security software. Therefore, a possible measure for companies would be to switch to electronic media, which is easier to check the data taken out of the company.

When the information leaker has not retired

If the employee who leaked the information has not yet resigned, it is conceivable that a lawyer will conduct an interview with the employee and prepare a written confirmation regarding the fact that the information was leaked. Our firm can provide support for the preparation of such interview and written confirmation from the employee.

When the information leaker has resigned

If the employee who leaked the information has already left the company, it may be difficult to interview the employee and prepare a written confirmation. In such cases, digital forensics can be used to ascertain whether trade secrets have been taken out of the company. Digital forensics is a method to recover data that has already been erased in detail and to determine what operations were actually performed on the data. This method makes it possible to find evidence of information leakage by the employee who leaked the information, even if the employee has already left the company.

Measures that can be taken in the event of a leakage of trade secrets

In the event of a leakage of trade secrets by an employee, etc., a company may first send a content-certified mail. Next, as civil measures based on the Unfair Competition Prevention Law, the company may demand an injunction against the leakage, compensation for damages, or measures to restore confidence in the company. In addition, as a criminal measure, a criminal complaint may be filed.

Sending certified mail

In order to minimize the damage caused by the leakage of trade secrets, it is of utmost importance to prevent the leakage of trade secrets that have been illegally taken out of the company. Therefore, it is effective to send a certified letter by attorney-at-law to the person who leaked the information, warning that civil and criminal measures will be taken if the trade secrets taken out of the company are leaked outside the company.

In doing so, it is important to state in detail what kind of claims and measures are contemplated in the event that the trade secrets taken out of the company are leaked outside the company. By stating the amount of high damages you are planning to claim or the fact that you are planning to file criminal charges, etc., this will serve as a more effective warning and increase the possibility of preventing the trade secret from being leaked outside the company.

Civil Actions

Injunction against leakage

If a business interest is infringed or threatened to be infringed by the divulgence of a trade secret, etc., a claim for injunction, prevention of infringement, or destruction of the trade secret may be filed against the infringer (Article 3 of the Unfair Competition Prevention Law).

In addition, if the infringement of business profits by an act of unfair competition has already materialized and there is a possibility of significant damage if the infringement is left unchecked, or if there is a sense of urgency, a preliminary injunction may be filed to stop the infringing act. This will allow the party to seek a stay of the trade secret leakage until the injunction request is granted.

Claims for Compensation for Damages Related to Information Leakage

A company whose information has been leaked may claim damages against the leaker or the company to which the information was leaked for damages suffered as a result of the trade secret infringement. The Unfair Competition Prevention Law provides for a presumption of the amount of damages to ease the burden of proof, making it easier to prove the amount of damages compared to ordinary claims for damages.

Claim for Restoration of Credit

When a company’s business reputation is damaged due to the leakage of trade secrets, the company that has suffered the information leakage may demand that the leaker take measures to restore the company’s reputation, such as advertising an apology.

Criminal Measures

The unauthorized acquisition, use, or disclosure of a trade secret for the purpose of gaining an unfair advantage or causing damage to the owner of the trade secret is subject to imprisonment for up to 10 years or a fine of up to 10 million yen (or both) (Article 21 of the Unfair Competition Prevention Act).

In addition, property and other assets resulting from the infringement of trade secrets may be confiscated from the leaker and the corporation (when both penalty provisions are applied) at the discretion of the court, without any upper limit (Article 21 of the Unfair Competition Prevention Law).

Services our firm can provide

We can provide consultation regarding measures to prevent the divulgence of trade secrets and support for civil or criminal proceedings in the event of a divulgence of trade secrets.

In consultations regarding measures to prevent the leakage of trade secrets, we will ask about the company’s current measures to prevent the leakage of confidential information and consider possible future measures and modifications to employment regulations and nondisclosure agreements. If the employee who leaked the information has not yet resigned from the company, we will also support the preparation of a statement of interview and confirmation from the employee.

In cases where trade secrets have been leaked, we support our clients in preparing certified letters to the leaker and the company to which the information was leaked, as well as in civil and criminal proceedings. Specifically, as civil measures, we provide support for procedures related to injunctions against infringement, etc., claims for damages, and claims for measures to restore confidence in the company. We also provide support for criminal prosecution of the leaker and the company to which the information was leaked.

If you have any questions or concerns regarding confidential information leaks, please feel free to contact us by phone at 03-5357-1750 (office hours: 9:00-18:00(JST)) or by e-mail at info@kslaw.jp.