Can Blockchain be a ‘reasonable step’ to keep trade secrets safe?

Guest post by Alessio Balbo*

Blockchain and trade secrets: an interesting combination, surely, but how do they fit? It is worth to mention that know-how and trade secrets are among those intangible assets which have historically been difficult to protect for companies, as they do not fall under the scope of the more classical intellectual property rights, by nature (actually, by law) easier to protect or to enforce. A classic example of a trade secret is the Coca-Cola recipe, kept secret for generations of CEOs, and is apparently often changed, as the rumours whisper. This example shows the importance of trade secrets and the investments that companies make in order to protect such valuable information. 

The problem with trade secrets lies in the passing of time. As much as it may sound like a philosophical sentence, it is actually true. Trade secret holders, in fact, are most affected by the lack of documents, which are sealed and time-proofed (i.e. which have an actual certified date of creation). Of course, the old notary system is a perfectly viable way, as it effectively and legally seals time, although it may result to be extremely expensive and time consuming, thus inefficient.

In order to better understand the problem and how blockchain may be a useful tool when it comes to trade secrets, it is necessary to take a step back.

The EU Trade Secrets Directive adopted on 9 June 2018, lays down the definitions and minimum requirements for trade secrets and know-how protection in the various Member States of the European Union. According to Article 1, the Directive not only provides minimum standards for trade secret protection across Europe but also allows the Member States to provide for “more far-reaching protection against the unlawful acquisition, use or disclosure of trade secrets than [required under the] Directive“.

The first recital of the directive states that businesses significantly invest in “acquiring, developing and applying know-how and information, which is the currency of the knowledge economy and provides a competitive advantage“. Some of that information may be the object of intellectual property protection (i.e. patents, design rights, copyright), although other kinds of information do not meet the minimum requirements for such protection, risking therefore the unlawful acquisition or disclosure to competitors and third parties which may result in substantial damage, due to the fact that the trade secret holder, once the disclosure has become public, cannot revert the situation to prior to the loss of the trade secret (recital 26).

In other words, trade secrets are an alternate way to appropriate the results of innovation thereby protecting “access to, and exploit, knowledge that is valuable to the entity and not widely known” (1st recital). The requirements to qualify as a trade secret are outlined in the TRIPS Agreement, article 39(2), transposed as article 2, paragraph one, of the Directive:

  1. it is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;
  2. it has commercial value because it is secret; 
  3. it has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret;

Hence, the new Trade Secrets Directive introduces a minimum standard level of protection and attempts to harmonize the legislation across the EU Member States.

In light of the above-stated, notwithstanding the fact that the Trade Secrets Directive represents a fine piece of legislation, none of its provisions mentions how a trade secret shall be stored, therefore leaving to the discretionary power of the courts to determine whether the trade secret holder has effectively undertaken all the necessary steps in order to keep the information secret.

Pragmatically, the biggest hurdle to overcome for trade secrets lies in this last requirement, which means, on one hand, to take all the reasonable steps to protect it and, at the same time, need solid proof of its existence. Such compromise is peculiar and difficult to combine. The real question here is what are the “reasonable steps” and how does a trade secret holder keep his/her information safe but, at the same time, accessible and tangible in order to enforce it? It is clear that a Court would need to have at hand various elements in order to determine the ownership and its potential infringement, such as: (i) a description of the trade secret in order to verify whether it meets the minimum requirements, (ii) the moment of its creation, in order to determine the ownership and the chronological creation/existence, and (iii) the guarantee that such a piece of information has been kept secure by the holder.

Bearing in mind that the “safe storage” of trade secrets is not a requirement under the Trade Secrets Directive as such, a practical solution to what has been outlined in the earlier paragraph may lie in the adoption of blockchain, a third party neutral network which gives the possibility to safely store value through cryptography, allowing trade secret holders to upload documents which may describe the desired information to protect (i.e. early notes, further details, recipes, processes, etc.) – therefore avoiding the burden of both keeping it safe at all times and dread to lose such documents – and providing a time seal, a certificate of ownership and the guarantee of incorruptibility and safety.

Many of the readers may now wonder how can the blockchain actually ‘fit’ into the trade secret context, how can it help to comply with the definitions and requirements laid down by the directive. The answer lies in article 2(1)(c): the reasonable steps that have to be taken by the holder in order to keep the trade secret safely stored. In fact, the blockchain permits to secure commercially valuable information on a private network through encryption, which would allow the trade secret holder to comply with the requirement set forth by the aforementioned article 2(1)(c) of the Directive.

Thus, the blockchain may be indeed a measure through which one could secure a trade secret, although it is worth to mention that the type of Blockchain to be used in this context would have to be either a private or a permissioned (in-house company or provided by a guaranteed third party) network and not a public one, with very limited access to the actual content of the information. In fact, in this case, the Blockchain may be considered as a “safe house” for information to be uploaded in compliance with the “reasonable steps” requirement, as in order to access blockchain networks, access keys have to be retrieved and, furthermore, in the unlikely event of the blockchain being “hacked”, it would be immediately detected due to its very nature and changes could not be made unnoticed, as the hacker would need to edit the data in every node (a node is every computer/device connected to the network), therefore leaving relevant pieces of information which could allow the trade secret holder to track back the infringer.

On the other hand, it is very obvious that public (or excessively permissioned) networks would end up disclosing the trade secret, compromising, therefore, the valuable information, as the holder would hence result to not have taken the reasonable steps to keep it secret.

Nowadays, there are already companies which provide such kind of service, one of them is Bernstein, a blockchain-based service which allows holders to upload a digital print (i.e. a copy of the document) of the trade secret confidentially on the Bitcoin blockchain public network, issuing a certificate to the owner that indicates that said document, not accessible neither by Bernstein nor by any other third parties at all times, was uploaded (hence proof of ownership) on a certain date.

Indeed, the Blockchain is not the only solution, but may only be one among the possible solutions to many IP-related issues, one of them being the delicate protection of trade secrets and know-how. These are of vital importance for companies, which invest hugely in its development and subsequent protection. We have to wait and see whether and when blockchain-based evidence will be accepted before the Courts across the EU Member States (or simply wait for the EUIPO Observatory’s report on litigation trends that will have to be released before 9 June 2021, according to Article 18 of the Directive).

To conclude, notwithstanding the fact that trade secrets holder may still live without the use and implementation of the blockchain, it actually provides for a secure, fast, time-stamped proof of when the trade secret was created and what is the object of such protection.

Moreover, blockchain-based evidence would be easily enforceable before Courts (as The Hangzhou Internet Court copyright case of 27 June showed), as they would provide for a time-stamped, secured evidence on a cryptographic incorruptible platform.

In fact, the “traditional” storage of a trade secret or know-how in a safe place (i.e. in banks, home safes, etc.) still represents an act compliant with the new trade secrets Directive. Having said that, the burden of the proof is on the trade secret holder, as it is up to him/her to prove the chronological origin and validity of such documents. As stated before, the notary is still the most secure “tool” for holders, although undoubtedly the most expensive one too.

Can the Blockchain solve the long-lasting issue of time-sealing trade secrets and know-how and, at the same time, be compliant with the law?

 

This article does not reflect the opinion or perspective of Baker McKenzie S.L.P., it is based on my own knowledge and I shall be held responsible for all the views contained herein.

This article does not include any sponsored content. All companies and trademarks are quoted merely for information purposes. 

 

*Alessio Balbo is an IP professional based in Barcelona. He graduated at the University of Turin (Italy) and he holds an LL.M. – Magister Lvcentinvs – in Intellectual Property & Information Technology from the University of Alicanteabvandio@gmail.com

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