Trade secret theft becomes a criminal offence

An amendment to the Crimes Act creates further criminal offences to protect certain types of intellectual property.

Last year, Parliament amended the Crimes Act 1961 (the Act) to create a number of new offences, discussion of which has principally focused on computer-related crimes.

However, the Act also now includes the potentially important new crime of “taking, obtaining or copying trade secrets”, which applies to some types of intellectual property infringement occurring after 1 October 2003.

This new offence is the first attempt to protect any form of intellectual property through a Crimes Act offence and carries a maximum sentence of five years' imprisonment. Prior to the amendment, trade secrets were protected by the general law, usually through an action for breach of contract or breach of confidence.

The new offence supplements but does not replace the general law. As the new provision is yet to be tested in court, it is too early to say what impact it will have.

However, at the very least the creation of a criminal offence may have a deterrent effect, and should shift some of the financial burden of bringing a claim against an employee or commercial spy away from the private sector.

What is a trade secret?

The definition of “trade secret” contained in the Act is broad and not markedly different from that developed by the courts under the general law. Prior case law will be instructive in illuminating the Crimes Act definition of a trade secret.

Under the Act, it means any information that is (or could be) used industrially or commercially, is not generally available, has potential economic value, and is the subject of “all reasonable efforts” to preserve its secrecy. Examples could include chemical formulae, industrial processes, business plans, quotations and plans prepared for tendering purposes.

The Act treats trade secrets fundamentally differently from other forms of property in that it protects the trade secret owner's economic rather than possessory interest. The owner of the trade secret is additionally required to preserve that economic interest by taking reasonable steps to preserve the confidentiality of the trade secret. The extent of the security measures taken by the owner of the trade secret need not be absolute, but must be reasonable under the circumstances, depending on the facts of the specific case.

Elements of the offence

The offence is committed where the person taking, obtaining or copying the trade secret:

• knows that the document, model or other depiction of any thing or process contains or embodies a trade secret;
  
  
• intends to obtain a pecuniary advantage or to cause loss to any other person; and
  
  
• acts without a belief that he or she was authorised to take, obtain or copy the trade secret and without a belief that his or her actions were lawful.

Significantly, given that issues as to the misappropriation of trade secrets often arise in the context of allegations that an employee who has been given confidential material has improperly retained it for use to his or her own advantage, “obtain” is defined elsewhere in the Act to include “retain”.

For example, where an employee has authorisation from his or her employer to possess a trade secret during the course of employment, he or she commits an offence if he or she “retains” it after the employment relationship ends. To take or to copy is also likely to cover the situation where the employee conveys the trade secret to a competitor without his or her employer's permission.

Other provisions of the Crimes Act cover attempts and conspiracies and some conduct occurring outside New Zealand (where any act forming part of the offence, or any event necessary to the completion of the offence, occurs in New Zealand).

Potential problems?

The application of the criminal burden of proof means that the offence will be more difficult to prove than a breach of the general law. The experience in foreign jurisdictions with similar provisions suggests that the Crown will be reluctant to prosecute all but the clearest cases.

Some commentators have attributed the conservative use of comparative provisions to the tension between criminal law and the generally civil nature and history of intellectual property protection.

Difficulties may also arise out of the exact meaning to be given to the word “take”. For example, will it cover conduct such as an accused reading a document containing the trade secret but making no physical or electronic copy of it and then using the memorised information for his or her own purposes? On these facts there is no obtaining or copying of the document. Nor would the conduct obviously appear to be a “taking”. Under the general law, such conduct is actionable if the reader deliberately memorised the information, but not if it was later fortuitously recalled.

The impact of the Bill of Rights Act in the criminal context could have implications for the confidentiality of the trade secret at trial as the necessity of proving the offence will require at least some details of the trade secret to be put before the court.

Benefits

The principal benefit of the creation of the criminal offence is that it will be significantly less expensive for the owner of a trade secret to pursue his or her rights. Instead of becoming the plaintiff, the owner will take the role of the complainant and the Crown will wear the cost of the prosecution.

A related benefit is that it may be possible to obtain search warrants in advance of the trial to recover the trade secret. This is significant in that it avoids the need to apply for the often prohibitively expensive civil law equivalent – the Anton Pillar order.

Under the Act and the Proceeds of Crime Act 1991, it is possible for the complainant to receive the equivalent of civil remedies, especially if the offender has profited from use of the trade secret. At a more general level, it is likely that the criminal offence will have a deterrent effect on employees and commercial spies.

Practical steps for employers and manufacturers

In order to maintain business information as a trade secret under both the civil and the criminal law, you must take reasonable precautions to prevent the information becoming generally known to competitors.

As under the general law, employee education and other risk management policies are an important part of trade secret management. Reasonable precautions could include:

• Restricting business information to employees on a “need-to-know” basis.
  
  
• Keeping sensitive documents secure, including requiring passwords to access computer files.
  
  
• Restricting access to certain areas of production facilities and requiring visitors to sign in and out.
  
  
• Ensuring manufacturing contracts include express and comprehensive confidentiality clauses.
  
  
• Ensuring employment agreements and contracts for service make the confidentiality of trade secrets an express condition of the contract. Having a contract in place will make it easier for the employee to be found to be criminally liable.
  
  
• Conducting entrance interviews to inform and educate employees about trade secrets generally and specifically those that they may encounter in their new job.
  
  
• Using exit interviews to review what you consider to be a trade secret and to review the contractual terms of the employee's agreement in that respect.

Enquiries and information

For more information on these new criminal offences, please email or call Garry Williams on 64 9 916 8661.