Protection of trade secrets through IPR and unfair competition law

Question Q215 National Group: Korea Title: Contributors: Representative within Working Committee: Protection of trade secrets through IPR and unfair competition law Sun R. Kim Sun R. Kim Date: April 10, 2010 Questions General Groups are asked to give a description of legal developments and the current situation in their jurisdiction with regard to trade secret protection, answering the following questions: 1. Legal developments on trade secrets. How did trade secret protection evolve in your jurisdiction? For example, what kind of practical influence did the TRIPS agreement have on trade secret protection? As it became certain that provision for the protection of trade secret will be included in the TRIPS agreement, the Korean government introduced the provisions for the definition of trade secrets and its protection scheme in the Unfair Competition Prevention Act of 1991(the UCPA) by revising the Unfair Competition Prevention Act of 1987 the Act was then absent any provision for protection of trade secrets. The 1991 Act was the first statutory legal frame work provided for trade secrets protections in Korea. Prior to the enactment of the UCPA of 1991, traditional laws such as the Civil Law and Criminal Law were resorted to with regard to protection of trade secrets. In 1998, the Korean government amended to rename the UCPA to the Unfair Competition Prevention law and Trade Secrets Protection Act (the Trade Secrets Act) strengthening the statutorily recognized protection scheme for trade secrets. Governing law on trade secrets has continued to expand the scope of protection for trade secrets since the enactment in 1991. In 2004, the government further strengthened the scope of protection for trade secrets by extending the scope of punishable crime to trade secrets and other measures for industrial espionage such as introduction of heavier fine, provisions for increasing penalty period and punishment of the employer of infringers etc. In 2006, Technology Leak Prevention and Industrial Technology Protection Act (the Industrial Technology Protection Act) was enacted to increase the protection of domestic industrial technology seeking to prevent certain key technologies from 1

flowing outside of Korea, thereby promoting technological development and national security. It adjusted penalties for industrial espionage upwards to a maximum jail term of 10 years and a maximum fine of 100million won (equivalent to $1 Million USD) 2. Definition of trade secrets The current Trade Secrets Protection Act ( the Trade Secrets Act ) and the Industrial Technology Protection Act govern the provisions on the protection of trade secrets and know-how. According to Article 2, Section 2 of the Act, the term trade secret means technical or business information which is useful for any production and sale methods or other business activities which; (i) is not known to the public, (ii) has an independent economic value; and (iii) has been maintained in secret by considerable effort, which is an substantially identical definition with TRIPS agreement Article 39.2.. The Industrial Technology Protection Act contains provisions for enhanced criminal penalties for theft of trade secrets and creation of Industrial Protection Committee for increased protection measures for trade secrets created in Korea. Know-how is considered as a form of confidential information in Korea which can be protected under confidentiality or non-disclosure agreement. Conditions of Trade Secret Confidential For certain information to be protected as trade secrets, it must not be generally known to the public unascertainable without having access to trade secret holder s trade secrets protection management system or methods The preceding court rulings indicate that trade secrets do not mean absolute secret. Even if information is available to certain number of people, as long as it is maintained as secret by the owner, it may be considered trade secrets Independent economic value To be protected as trade secrets, the information must have independent economic value. This economic value should be actual and measurable, providing potential advantage to the trade secret holder against competitors without such information. In addition, certain social needs are to be met in order to protect the secrecy. Considerable Efforts In order for certain information is to be qualified as trade secrets, the subjective perception of the owner as secret is insufficient. The information must be being managed with considerable efforts in a way that can be objectively acknowledged as trade secret. For example, the following can be considered as evidentiary factors to determine whether the company expended considerable amount of efforts e.g. creating and placing manuals for maintaining trade secrets, designating trade secret manager, limiting the number of access to the information etc 3. Control of trade secrets In South Korea, the law is silent as to ownership of information created by the employee during the course of employment. However the recent case holding indicates that trade secrets developed by an employee during the course of his/her employment belong to the employer. There is no clear case holding on the ownership 2

issue on trade secrets developed by an employee during his/her personal time using personal resources. Absent an employment contract to the contrary, the employer usually has the control over the invention and information created during the course of employment by an employee by assignment where the terms and the scope of such rights will be defined in detail. Under the Invention Promotion Law employers have a primary control over inventions which an employee is hired to invent. Once the invention is complete, the employee has a duty to disclose such invention to the employer. When such disclosure is made, the employer then will decide whether to agree to such assignment of invention, i.e. taking the control over the invention or decide to reject to such the assignment of such invention made by the employee. When the employer decides not to take the assignment of such invention, the employee then has the ownership of such invention and the employer will have a non-exclusive right to the invention without owing any financial obligation or accounting to the employee. Please note that it is employee s duty to disclose the invention to the employer and the employer must expressly notify its agreement /disagreement to the assignment of such invention in order to preserve employer s right to a non-exclusive license without the consent of the employee. Failure to respond to the disclosure statement submitted by an employee will result in the situation where the employer will not be able to obtain a non-exclusive license without the consent of the employee An employee has a duty to maintain trade secrets of the company and the employer may seek damage for illegal activity against the employee who breached its duty not to disclose when the employer decides to keep the invention as trade secrets. Please note that any person who discloses a part of employee invention to a third party for the purpose of obtaining improper benefits or damaging the company is liable to criminal penalty in addition to compensatory damages when employer brings an accusation 4. Source of law for trade secret protection In South Korea, statutory provisions are available for the protection of trade secrets under the Unfair Competition Prevention and Trade Secrets Protection Act. Further, the Industrial Technology Protection Act which places enhanced protection measures against misappropriation of trade secrets created in Korea relating to specially managed industrial technology. Under the Korea law, the protection of trade secrets derives from the unfair competition law. Therefore notwithstanding some of the protection measures for trade secrets being somewhat similar to that of property rights, the law and case law is silent on the classification of trade secrets as property rights. 5. Available remedies Under Korean law, in general, acquiring trade secrets by theft, deception, coercion or other improper means is considered an act of improper acquisition. Here, the acquisition could be carried out by either a) in the form of document, drawing, photograph, phonograph, film, and information management organization, or b) Employing a person who knows trade secret. The term improper means is interpreted to include all kinds of acts or means that violate social order founded upon sound trade and fair competition as well as such charges that constitute criminal offence such as theft, deception, and coercion 3

According to Article 2 of the Trade Secrets Protection Act, infringement of trade means any of the following: (i) (ii) (iii) (iv) (v) (vi) Acquiring trade secrets by theft, deception, coercion or any other improper means ( acts of improper acquisition), or subsequently using or disclosing the improperly acquired trade secrets(including informing any specific person of the trade secrets while under a duty to maintain secrecy Acquiring trade secrets or using or disclosing them with the knowledge that an act or improper acquisition of the trade secrets has occurred or when the lack of such knowledge was caused by gross negligence; After trade secrets have been acquired, using or disclosing them with knowledge that an act of improper acquisition of the trade secrets has occurred or when the lack of such knowledge was caused by gross negligence; Using or disclosing trade secrets to obtain improper benefits or to damage the owner of the trade secrets while under a contractual or other duty to maintain secrecy of the trade secrets; Acquiring trade secrets, or using or disclosing them with the knowledge that the trade secrets have been disclosed in the manner provided in subparagraph (iv) or when gross negligence was the cause of the disclosure or the lack of such knowledge; After acquiring trade secrets, using or disclosing them with the knowledge that they had been disclosed in a manner provided in (iv), or when gross negligence was the cause of the disclosure or the lack of such knowledge Exception to Bona Fide User When a person who has properly acquired trade secrets through a transaction or uses or discloses the trade secrets within the scope of the rights the person has properly acquired through the transaction. The properly acquired means that the person acquired trade secrets without the knowledge and without gross negligence that the trade secrets were improperly disclosed or that an act of improper acquisition or of improper disclosure of the trade trades occurred. Article 39, 2 of TRIPS As indicated above under infringement of trade secrets under Article2, Korean law protects against misappropriation of trade secrets arising from breach of a contractual relationship. See Article 2. it is infringing activity when acquiring trade secrets, or using or disclosing them with the knowledge that the trade secrets have been disclosed in the manner provided Using or disclosing trade secrets to obtain improper benefits or to damage the owner of the trade secrets while under a contractual or other duty to maintain secrecy of the trade secrets; or when gross negligence was the cause of the disclosure or the lack of such knowledge; Provisional Remedies 4

A person who possesses trade secrets may seek a court prohibition or preventive order against a person who infringes or is likely to infringe trade secrets, if the business interest of the person who possesses the trade secrets is damaged or is likely to be damaged by the infringement. In addition, such holder of the trade secrets may request destruction of goods used in the infringing activities, the removal of facilities used in the infringement or any other measures necessary to prohibit or prevent the infringement Damages: In addition to the provisional remedies, the owner of the trade secrets may seek compensatory damages. Under Article 14 Section 2, damages may be calculated as the transferred amount multiplied by the presumed profit per unit that the person whose business interests have been infringed might have obtained in the absence of infringement during the period in which the infringer transferred the infringing product. In addition, the profits gained by the infringer through the infringement are presumed to be the amount of damages suffered by the person whose business interests were infringed Also in lieu of damages, the damages may be calculated by imposing a reasonable royalty. In awarding damages, the court may consider the element of wilfulness or gross negligence of infringement. There are no punitive damages under the violation of trade secrets. Furthermore, a person who damages the business reputation of a person possessing trade secrets through intentional or negligent infringement of trade secrets, the owner may request the court for necessary measures to restore the business reputation in lieu of or in addition to compensation for damages. Criminal liabilities Under the Trade Secrets Act, criminal liabilities exist against unauthorized activities regarding trade secrets. Under Article 18 of the Act, a person who uses the trade secrets useful to a company in a foreign country or disclose the trade secret to a third party knowing it will be used in the foreign country for the purpose of obtaining improper benefits or damaging the company is liable to imprisonment with labour not exceeding ten years or to a fine exceeding twice of pecuniary profit to not exceeding ten times of it In addition, a person who acquires or uses trade secrets useful to a company or disclosed trade secrets to a third party for the purpose of obtaining improper benefits or damaging the company is liable to imprisonment not exceeding fives years to a fine exceeding twice of pecuniary profit to not exceeding ten times of it. Please note that imprisonment and fines referred to the above may be imposed concurrently and that a person who intends, conspires or attempts to commit such crime as above is also liable to imprisonment. See Article 18bis, 18ter 6. Protection of trade secrets before and during litigation Most litigation involving IP issues involve disclosure of a party s trade secrets or proprietary information. There is, however, no procedural protection currently in place to protect such disclosed information. Such provision has been proposed and such change will hopefully be reflect in our legist ration in the near future 5

7. Licensing trade secrets Licensing trade secrets will place both licensors and licensees additional advantages and disadvantages with the corresponding obligations. In general, trade secrets are usually being licensed as part of patent license as a hybrid contract or a separate contract. Such trade secret licenses allow licensors an access to new markets or added financial gains in return for such license for a considerable period of time where the patent license is for a limited period until the expiration of such patent. On the other hand, such advantages will also come hand in hand with some of the risks where a clear explicit drafting of the contract is required in order to protect illegal disclosure of such trade secrets outside the scope of the trade secrets agreement. Given the nature of trade secrets however, sharing such information puts licensor a great exposure and risks of trade secrets being exposed. In addition, since licensor then lose exclusive control over the secrecy of such information. In general, it is particularly important to clearly and explicitly draft trade secrets contract so that the terms will be specific for the scope, management, term of use of trade secrets. In drafting a license agreement, it is recommended that a special attention is given to non-disclosure provision. Non-disclosure provisions should be stipulated that the licensee is prohibited from unauthorized disclosure and its terms shall survive termination of expiration of such agreement. In practice, there have been many instances where, once the license agreement is terminated, the licensee freely engaged in use of such trade secrets without compensating the licensor. How important are anti-trust considerations in your jurisdiction? Korea law is silent on anti-trust consideration for trade secrets contracts per se, There is a reasonable ground to assume that regulations and laws governing contracts or license agreements will be likely apply to trade secrets licenses. In general, legal restrictions on provisions in licensing agreements relating to duration, exclusivity, and grant-back may be subject to restrictions imposed by anti-trust and anti-competition laws and regulations under Monopoly Regulation and Fair Trade Act (MRFTA), the 2000 Guidelines on Intellectual property Rights and Competition Policy of the Korea Fair Trade Commission( 2000IPR Guidelines) Practices that potentially restrict trade such as exclusive dealing, resale price maintenance, tied selling, territorial, market sector, national or major account or other customer restrictions, predatory pricing, sourcing restrictions, discrimination among licensee are prohibited or other regulated under relevant Korea laws. The general principle of evaluation for anti-competitive activities is the rule of reason, with not only the contents of the arrangements being considered but also the impact on competition in any related markets, the duration of the restrain, the market structure and other relevant factors. Restrictions on sources from which a party may purchase raw materials, parts, manufacturing from the licensor or a party designated by the licensor may not be considered anti-competitive practices when the licensor ensures that the licensed products meets a certain standard of quality or performance. 8. Effectiveness of non-disclosure and non-use agreements. Non-disclosure agreement (NDA) places the person on contractual obligations not to disclose the trade secrets information without authorizations and that violation of such 6

obligations will constitute trade secrets infringement under the Trade Secrets Protection Act as well as the breach of contract. Such a standard non-disclosure provision is included in employment contract creating contractual obligations for employees not to disclose others trade secrets information attained during his term of employment with the company In addition to such contractual NDA, the law places duties on certain officers of companies. Article 382 Paragraph 4 of the Commercial Law imposes the obligation of trade secret maintenance on corporate directors of stockholder companies under fiduciary duty See Article 12 of the Invention Promotion Law/ Court rulings have expended such obligations to parties in privy where the recent court imposed the obligation of trade secret maintenance not only on direct parties of contract but also on parties in privy (High Court 2005.2.18. 2003Hu2218). The law is silent on the exact duration which to maintain such trade secrets information as confidential under the non-disclosure agreement clause in employment contracts. The court cases provide some guidelines where it held that as long as the duration is reasonable, the NDA is effective and valid. In High Court ruling 2002 ma 4380, delivered on 2003,7,16 the court ruled that the NDA to maintain the trade secret information confidential for 3 years after the termination of employment is reasonable thus enforceable. Harmonization 9. Common and practical definition of trade secret the term trade secret means technical or business information which is useful for any production and sale methods or other business activities which; (i) is not known to the public, (ii) has an independent economic value; and (iii) has been maintained in secret by considerable effort, which is an substantially identical definition with TRIPS agreement Article 39.2 10. What is desired in your jurisdiction Provisions for protection scheme for trade secrets before and during litigations must be adopted immediately. The recent increase in trade secrets infringement cases place the owner of trade secrets information at a great risk and the law makers must recognize the urgency and importance of such protective measures for trade secrets owners. 11. What is required for an improved global standard for trade secret protection? NA 12. What would be a desirable and realistic way to proceed NA 13. Other comments 7

Summary Protection for trade secrets were provided under traditional laws such as the Civil Law and Criminal Law until in 1991 when the Korean government introduced the provisions for the definition of trade secrets and its protection scheme in the Unfair Competition Prevention Act of 1991(the UCPA) by revising the Unfair Competition Prevention Act of 1987 the Act was then absent any provision for protection of trade secrets. The 1991 Act was the first statutory legal frame work provided for trade secrets protections in Korea. In 1998, the Korean government amended to rename the UCPA to the Unfair Competition Prevention law and Trade Secrets Protection Act (the Trade Secrets Act) strengthening the statutorily recognized protection scheme for trade secrets, permitting all civil remedies of injunction and damages. In 2006, Technology Leak Prevention and Industrial Technology Protection Act (the Industrial Technology Protection Act) was enacted to increase the protection of domestic industrial technology seeking to prevent certain key technologies from flowing outside of Korea, thereby promoting technological development and national security. It adjusted penalties for industrial espionage upwards to a maximum jail term of 10 years from 7 years and a maximum fine of 100million won 8