Canada: Trade Secret Enforcement In Canada Versus The United States – What's Changed Since Pre-Pandemic?

In January 2019, we compared and contrasted trade secret enforcement in Canada to the United States. After what felt like a decades-long pandemic, and with a fast evolving trade secret landscape, did our pre-pandemic comparison stand the test of time? What has changed?

1. Jurisdiction for trade secret enforcement in Canada

With respect to trade secret enforcement in civil matters, the law in Canada remains as it was in 2019. That is, there is no Trade Secrets Act, federal or provincial, similar to the Defend Trade Secrets Act in the United States. Instead, trade secrets are governed and enforced through common-law principles and torts (e.g., breach of confidence, breach of fiduciary duties and breach of contract).

Legal action for trade secret enforcement therefore takes place in the provincial Superior Courts, and not the Federal Court of Canada. The Federal Court has only statutory jurisdiction; without a Federal Trade Secrets Act granting the Federal Court jurisdiction, it has no direct jurisdiction over trade secret claims.

In our 2019 article, we referred to the Netbored¹ decision to exemplify this lack of jurisdiction, where the Federal Court struck Netbored's claims for breaches of contract, confidence and fiduciary duty. More recently, this principle from Netbored was applied in Planit Software.² Mr. Beaver Inc. was defending a copyright infringement action before the Federal Court. The product accused of infringement was acquired through an asset purchase agreement with a third party. Mr. Beaver Inc. tried to third party claim against this third party, which included a claim for common-law misrepresentation. The Federal Court struck this claim as outside of the Court's jurisdiction, citing Netbored.

While not a trade secret case, Planit Software reinforces the principle that trade secret disputes remain confined to the jurisdiction of provincial Superior Courts, not the Federal Court. This principle applies even in situations like Planit Software where the Federal Court has jurisdiction over part of the action (e.g., copyright infringement).

In addition to civil matters, there is new criminal jurisdiction for trade secret matters. Section 391 of Canada's Criminal Code makes it an offence to knowingly obtain, communicate or make available a trade secret by deceit, falsehood or other fraudulent means. This new provision of the Criminal Code has yet to be considered by Canadian Courts, and it is unclear the extent to which this provision is being prosecuted by law enforcement agencies, especially since most police and Crown investigations are not publicly visible in the pre-trial stages. Since trade secret misappropriation often involves a commercial aspect where the rights holder is alleged to be wronged with a financial loss, it is natural for such disputes to be heard in a civil context, rather than a criminal context. In cases where section 391 may be invoked and/or actual theft of physical property has occurred, rights holders may wish to proactively notify law enforcement in addition to pursuing a civil action in order to put maximum pressure on an infringer. Mechanisms such as a Wagg motion can be useful tools for rights holders in such situations, as a litigant in a civil matter may be able to obtain disclosure of police investigation files from a criminal matter for use in the civil matter.

2. Knowing the case pre-filing

Our recommendation in 2019 was, and still is, to perform considerable upfront case workup before filing a claim against a defendant. It is critical to be able to properly identify and characterize the trade secret that has been taken by the defendant, and to identify how exactly the rights holder has been harmed. As we explained in 2019, such early work-up will assist in limiting procedural issues during litigation and in getting to trial as quickly as possible.

In addition, this early work-up may open the door to obtaining a preliminary injunction, as discussed below.

3. Availability of preliminary injunctions

The Superior Courts remain willing to grant preliminary injunctions, if the appropriate facts are present to meet the test for such a remedy. The legal test has three criteria: (1) there is a serious issue to be tried; (2) irreparable harm will be suffered by the applicant if the injunction is not granted; and (3) the balance of convenience favours granting the injunction.

The "irreparable harm" component is generally the most difficult to satisfy. However, trade secret cases are unique such that irreparable harm can be established in the right case and on the right evidence. We provided one example in our 2019 article.

A more recent example is EnWave,³ which related to vacuum microwave drying products. EnWave was found by the Court to be the only significant marketer of such products in the Western world. In 2018, several executives of EnWave were let go from the company. Before leaving, they took documentation with them, and then later started a company to compete against EnWave. This type of scenario is a classic set of facts for trade secret disputes.

EnWave brought an action against these former executives and their new company for breaches of confidence, fiduciary duty and contract. Almost immediately after commencing the action, EnWave sought a preliminary injunction to prevent the new competitor from entering the market - a good example of the procedural advantage that arises from pre-filing work-up.

There was fairly substantial evidence on the motion, and the Court was satisfied that the three-part test for a preliminary injunction was satisfied. With respect to irreparable harm, there were at least two relevant findings. First, the executives had signed employment agreements acknowledging that EnWave would suffer irreparable harm in the event of any breach of the employment obligations. While not conclusive, it was a factor the Court relied on in finding irreparable harm.

Second, EnWave had established itself as a dominant player based in large part on its trade secrets. This dominant position would have been threatened by the defendants' commercialization of competing products that were allegedly developed based on misappropriated trade secrets. These circumstances militated in favour of a finding of irreparable harm.

Not all cases will present the right facts for a preliminary injunction. But if the right facts present themselves, then good pre-filing work-up and swift movement toward a preliminary injunction may be successful.

4. The US Defend Trade Secrets Act ("DTSA") & Prospects of a Canadian Equivalent

In contrast to the Canadian trade secret regime described above, the US has been operating under the DTSA since 2016. The purpose of the DTSA was, at least in part, to harmonize trade secret laws across the US states and create a more consistent body of law. This change was in recognition of the increased importance of trade secrets as an intellectual property asset in a global economy.

The objective data⁴ show that the number of trade secret cases increased with the introduction of the DTSA, though the number of case filings have decreased gradually since then. With that said, the overall number of cases is still more than pre-DTSA. This data suggest that the harmonization across states provided an incentive for rights holders to assert their trade secrets.

Also, the proportion of trade secret cases that involve the DTSA has increased since 2016, providing another suggestion that the DTSA was a welcomed piece of legislation for trade secret holders.

With less provinces than US states, and less overall trade secret cases, Canada has not seen the same cross-province discrepancies in the development of trade secret laws that gave rise to the DTSA in the US. For the most part, Canadian provinces largely apply the same legal principles in trade secret cases. As we pointed out in 2019, there are some cross-province distinctions. For example, the Statute of Frauds in some provinces may come into play where the facts of the case include an oral agreement. However, the core causes of action (e.g., breaches of confidence, fiduciary duty and contract) are similar, if not the same, across provinces.

Notwithstanding the above, a Federal Trade Secrets Act would be welcome if it provided the Federal Court with jurisdiction over trade secret matters. The discrepancy in litigation speed between the provincial Superior Courts and the Federal Court appears to have grown even wider over the last four years. In the Federal Court, it has almost become a rule to expect an action for IP infringement to proceed to trial in 2.5 years or less. Case management in the Federal Court is efficient and moves proceedings along (provided at least one party is willing to push the pace). Also, once a trial date is set, the Federal Court is generally very reluctant to adjourn the trial unless there are good reasons.

The same cannot be said for provincial Superior Courts. Depending on the specific jurisdiction, it can take several years to get to the start of discovery, then several more years to get to trial. Also, trial dates are adjourned with what appears to be regularity. Overall, and with respect to the Superior Courts, the Federal Court is a more efficient machine.

It is also notable that several well-known IP practitioners have recently been appointed as Judges or Associate Judges of the Federal Court. It is now even more appropriate than ever to call the Federal Court a specialized IP Court. That specialization can be welcome for a trade secret holder in litigation.

5. Practical considerations arising out of the pandemic

It goes without saying that the way people work changed dramatically beginning in March 2020. Although many employees are now back in the office with at least some regularity, work-from-home arrangements have continued and appear to be poised to continue for the foreseeable future.

Although we are not aware of any cases in Canada dealing with trade secret misappropriation or claims specifically arising out of work-from-home circumstances, it could just be a matter of time until such cases wind their way through discovery, trial and to judgment.

As discussed in greater detail in this article, managing trade secrets risk takes on a heightened importance in view of the pandemic and the work-from-home protocol many organizations have adopted and continued to this day. Of critical importance for any trade secret rights holder is the maintenance of the trade secret as confidential. If a trade secret rights holder fails to take adequate steps to maintain confidentiality, a court is less likely to recognize the trade secret as enforceable. Having trade secrets available in hard copy format, on personal devices or in personal e-mail applications outside of the four walls of an organization's regular and secure business premises all increase the risk of leakage and lost protection, not to mention potential misuse.

Organizations should strongly consider what policies and practices they have in place for not only how their trade secrets are handled in a remote working context, but also how those trade secrets are kept secret when an employee that had remote working privileges is terminated or resigns.

Trade secrets have garnered more attention and importance over the last four years, with companies focusing on identifying, protecting and enforcing trade secrets. The enforcement regime in the US underwent an overhaul in 2016 with the implementation of the DTSA. In Canada, the enforcement regime has largely continued as it was in 2019, with the exception of a new provision in the Criminal Code. Otherwise, the Superior Courts remain the sole option for trade secret enforcement, pre-filing case work-up remains a critically important enforcement strategy, and preliminary injunctions are still available.

One question for the future will be whether the Government of Canada implements a Trade Secrets Act that grants the Federal Court jurisdiction over trade secret claims. If that does happen, we would expect a flood of trade secret cases in the Federal Court, with rights holders taking advantage of the Federal Court's efficiency in getting to trial.

Footnotes

1. Netbored Inc v Avery Holdings Inc, 2005 FC 490.

2. Planit Software Ltd v Mr. Beaver Inc, 2022 FC 585.

3. EnWave Corporation v Dehydration Research, LLC, 2022 BCSC 637, leave to appeal dismissed 2022 BCCA 347.

4. https://www.prnewswire.com/news-releases/lex-machina-releases-2023-trade-secret-litigation-report-301872273.html.

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