Trade secret law: guidelines revised

Not long ago, trade secret law did not attract much attention in Japan. In 1990 the Unfair Competition Prevention Act introduced the concept of trade secrets; however, few trade secret misappropriation cases were seriously pursued in the years that followed. This is no longer the case. Recently, an alarming number of trade secret misappropriation cases have been reported and Japanese entities at all levels – companies, government, Congress and courts – have been focusing on the protection of trade secrets. Notably, the Ministry of Economy, Trade and Industry (METI), which enforces the Unfair Competition Prevention Act, revised the Guidelines for the Management of Trade Secrets in January 2015. Following the release of these new guidelines, Japanese trade secret law now provides real, effective protection.

Symbolic cases

Two symbolic cases have transformed the attitude towards trade secrets in Japan. In Nippon Steel v Posco Co, technical information concerning methods of making an oriented magnetic steel sheet was leaked to Korean company Posco. According to the press report, ex-employees of Nippon Steel accessed the trade secret and leaked it to Posco in exchange for financial rewards. What shocked Nippon Steel was the revelation that its trade secrets had been subject to theft for approximately 30 years. Also shocking was that its trade secrets had been further leaked to Chinese company Baoshan Iron & Steel Co Ltd. In 2012 Nippon Steel filed suit against Posco seeking approximately Y100 billion – a huge sum in Japanese litigation.

In Toshiba Co v SK Hynix Inc, technical information on the specification of NAND flash memory was leaked to Korean company Hynix. According to the press report, Toshiba entered into a collaboration agreement with SanDisk Ltd, a Japanese subsidiary of California-based SanDisk Co. Toshiba disclosed trade secrets to SanDisk in accordance with the collaboration agreement; an ex-employee then reproduced and leaked these secrets to Hynix in an attempt to gain favourable hiring conditions. In 2014 Toshiba filed suit against Hynix seeking approximately Y110 billion – another shockingly high sum. They reached a settlement in December that year on condition that Hynix pay approximately Y33 billion damages.

Influence

Both cases awakened the Japanese community to the threat of trade secret misappropriation and METI accordingly revised the Guidelines for the Management of Trade Secrets in order to establish a more solid system for trade secret protection. The guidelines include METI’s interpretation of the conditions under which information can be considered a trade secret. METI is an administrative authority; accordingly, its interpretation is not legally binding. However, criminal prosecutors have never failed to refer to the guidelines when deciding whether the allegedly misappropriated information at issue qualifies as a trade secret. Similarly, counsel in civil cases always refer to the guidelines when making a brief. In practice, therefore, the guidelines have a strong influence on the handling of trade secret issues.

Former guidelines: problems

The most important condition for information to be considered a trade secret is that it is kept secret. Under the former guidelines, two elements had to be fulfilled in order to meet this requirement:

• Access to the information had to be restricted (eg, the information should be kept in a locked cabinet or a password should be required to access it electronically); and
• Anyone who accessed the information had to be able to recognise that it was the company’s confidential information (eg, the document containing the information should be explicitly marked as ‘confidential’).

Under the former guidelines, for example, if the information was not kept in a locked cabinet, it was unlikely to be considered a trade secret – even if it was marked ‘confidential’ or the total number of employees with access to it was limited.

However, such interpretation of trade secret law was not necessarily in line with international standards. In the United States, for example, information is considered secret if the company has made reasonable efforts or taken reasonable measures to protect it. In the European Union, the European Commission proposed a draft directive on trade secrets in 2013, under which information will be considered secret if the company has taken reasonable steps to protect it under the circumstances. Clearly, what counts in the interpretation of whether information constitutes a trade secret is whether the steps taken to protect it are reasonable under the circumstances – not whether certain rigid conditions are met. The previous strict interpretation of what qualified as a trade secret was unique to Japanese practice.

Further, the strict interpretation of the requirements did not correspond to the legislative intent behind the trade secret law. The original motive for introducing the requirements was that, as information is intangible by nature, employees may not automatically recognise what information is meant to be confidential. Therefore, if a company wants to protect any information as a trade secret, it must take certain measures to show that such information is confidential so as to protect employees from the risk of accidental exposure.

If the original purpose of the requirements was to clarify the status of trade secrets to employees, then the second condition in the guidelines (ie, that an employee recognise the company’s confidential information) should supersede the first (restricting access). The strict requirements, therefore, were a fundamental flaw in the former guidelines.

New guidelines

In accordance with international standards and the intended purpose of the trade secret law, METI revised the guidelines in January 2015. It relaxed the requirements for qualification as a trade secret and clarified that the ultimate goal of such requirements is to ensure that employees recognise trade secrets at the point of access. Accordingly, the new guidelines state that if employees can recognise information as a trade secret, then the information is a trade secret; further, provided that employees can possibly recognise this, restricted access is not necessarily required.

For example, the following measures would meet the requirement to keep information secret under the new guidelines:

• Printed confidential information is kept separate from general information and marked ‘confidential’.
• Confidential information in electronic form is kept separate from general information and the relevant file names and folder names are marked ‘confidential’.
• Employees are assigned passwords and forms of identification based on their level of access to information.
• Any object containing confidential information in and of itself (eg, a micro-organism or mould tool) is labelled or signposted with ‘for related staff only’ or ‘photography prohibited’.

These examples clearly demonstrate that the new guidelines have relaxed the conditions for information to qualify as secret, aligning the Japanese standard more closely with the global standard.

Future strategies against misappropriation

The aforementioned relaxation of requirements is expected to increase criminal prosecution of trade secret misappropriation. Criminal prosecutors generally refer to the guidelines in deciding whether to accept a criminal complaint or start an investigation. The new requirements make it likely that prosecutors will lower the threshold for initiating a criminal investigation. In fact, following the release of the new guidelines in January 2015, numerous criminal investigations into trade secret misappropriation have been reported. For example, in April 2015 prosecutors opened a criminal investigation into an electronic appliances company. In June 2015 prosecutors in another jurisdiction opened a criminal investigation into a video equipment company. In both cases the companies (rather than the individuals) were investigated – a tactic that was previously extremely rare in Japan. It seems clear that criminal prosecutors have already entered a new era.

The July 2015 revision of the Unfair Competition Prevention Act supports this new trend and demonstrates Japan’s tough new approach to the issue. For example, the revised act raises the maximum individual fine for trade secret misappropriation from Y10 million to Y20 million; if an individual disseminates a trade secret outside Japan, the maximum fine is Y30 million. The maximum fine for companies has been raised from Y300 million to Y500 million; if the trade secret is disseminated outside Japan, the maximum fine is Y1 billion. Further, any property arising out of the misappropriation of trade secrets will be confiscated.

Recent court decisions have also indicated a toughening in trade secret law. For example, in August 2014 a court returned a guilty verdict against a defendant charged with misappropriation of trade secrets. In this case the defendant had taken possession of his employer’s trade secrets, but had not actually relayed them to anyone. It was the first case of prosecution of an employee defendant who had not disseminated the stolen information. Further, in Toshiba, the ex-employee of SanDisk was sentenced to five years in jail and a criminal fine; this, in turn, was the first case in which the court imposed a prison sentence for trade secret misappropriation.

The fact that criminal prosecution is being widely used is good news for companies. Companies seeking damages and injunctions for misappropriation of trade secrets in Japan inevitably encounter the difficulty of proving the defendant’s use of the trade secrets. Because information is intangible by nature, the claimant often does not know how the defendant stole or used the trade secrets. Such evidence is usually in the hands of the defendant. Unlike the United States and certain other countries, Japan still does not have a broad discovery system and winning a civil case for misappropriation is considerably difficult. On the other hand, criminal prosecutors can secure evidence by using legal force. If a criminal procedure for trade secret misappropriation commences first, affected companies can possibly submit the evidence gathered by the authorities to the civil court. Criminal prosecution would provide companies with better opportunities to win civil cases.

The question, therefore, is how companies can prevent trade secret misappropriation. In practice, having firm measures in place to keep sensitive information secret is increasingly important. True, the guidelines’ required conditions for keeping information secret have been relaxed. However, if the measures taken are incomplete, criminal prosecutors will be unwilling to launch an investigation into alleged misappropriation. In-house counsel should therefore read the guidelines carefully in preparation for future criminal prosecution. The guidelines state that the possibility of employee recognition of confidentiality is essential, so the use of ‘confidential’ labels, forms of identification and passwords is important. Further, although not specified in the guidelines, the education of employees about the dangers of misappropriating trade secrets and the use of non-disclosure agreements will also be increasingly important.

Summary

METI’s new guidelines have made it much easier for prosecutors to launch criminal investigations into trade secret misappropriation. Such investigations open a lot of doors for companies, as they allow for much more evidence to be gathered than would be possible in civil cases. Companies are expected to be able to litigate cases of trade secret misappropriation more efficiently and effectively than ever. METI has announced that it will publish a manual for the protection of trade secrets in the near future. This will be of great help in considering how to raise employee awareness about the importance of keeping sensitive information secret. In-house counsel should keep up to date with all guidance issued by METI and the ongoing trends of the authorities and courts in order to keep trade secrets properly protected.

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Yasuhiro Sato
Associate
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Yasuhiro Sato focuses on IP disputes. His practice involves patent infringement litigation, trade secret misappropriation, copyright infringement litigation, unfair competition issues and trademark infringement. He also counsels clients regarding licensing negotiations for a wide range of areas, with a special emphasis on cloud computing. He was a temporary associate at Kenyon & Kenyon LLP in New York in 2014, where his practice focused on patent infringement litigation in federal court. Mr Sato received his LLB and JD from the University of Tokyo, as well as his LLM (with distinction) from Indiana University Maurer School of Law. He is admitted to practise in Japan and New York.

Hajime Watanabe
Partner
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Hajime Watanabe is one of the founding partners of STW & Partners. He has handled a wide range of international issues, with particular emphasis on IP litigation and extensive experience of cases in Japan and elsewhere. He obtained an LLB from the University of Tokyo (1985) and an LLM from the University of Illinois College of Law (1993). He joined Mori Sogo (now Mori Hamada & Matsumoto) in 1987. He worked at Jenner & Block in Chicago from 1993 to 1995 and at the US Federal Trade Commission in Washington DC in 1995. He is admitted to practise in Japan, Illinois and New York. He is a member of the American Bar Association and the American Intellectual Property Law Association.