September 2006

Protection of Trade Secret in Japan
Tatsubumi SatoJudge, the Intellectual Property High Court
The topic given to me today is protection of trade secret in Japan. This topic has awide range of issues within its scope, but due to the limited time, I won’t be able togo into details of each issue. Instead, what I am going to try is to draw a broad
picture of current situations surrounding trade secret protection in our country. I
think, by the end of this speech, you have impression that we share a lot in common
in this area.
Slide (1)First, I like to briefly touch on the history of protection of trade secret in Japan. As amatter of statutory protection, the most important law in this area is the Unfair
Competition Prevention Law. From now, I refer this Law as “the Unfair Competition
Law.”.
The Unfair Competition Law was enacted in 1934, but no provisions about trade
secret. The Law was amended in 1990 to add civil provisions about infringement oftrade secret. Driving forces of the amendment were such as increasing mobility oflabor forces, growing demand from business sectors, developments of international
trade negotiation.
In 2004, provisions of procedural protection, such as order to keep confidentiality,
explicit authorization for closed trial session, were added to the Law in order toprotect trade secret from being disclosed to competitors through court proceedings.
As to the criminal protection, the Japanese Government had been cautious to add
criminal provisions to the Unfair Competition Law due to the potential tension with
Constitutional rights including freedom to choose an occupation. However, criminal
sanctions are introduced to the Law in 2003, and those provisions are reinforced in2005.

Slides (2)(3)
These slides show overview of legal structure to protect trade secret. Civil
protection can be achieved by both contract and infringement liability. Civil
protection is ensured by procedural provisions. Criminal sanctions may be imposedby the Unfair Competition Law and the Criminal Code.
Slide (4)Next slide is about recent case trend. Although we do not have any official statistics
on trade secret disputes, scholars’ researches indicate number of civil cases
involving trade secret dispute has been increasing. In most of those cases,compensation and injunction are sought, claiming both infringement and breach ofcontract. Trade secret disputes often arise where an employee quits his or hercompany, and the company alleges the employee brings the trade secret out of thecompany.
As to the criminal enforcement, only a small number of cases have been tried inJapan.
Slide (5)So far, I have used the term “trade secret.” But, trade secret is a magical phrase,
sometimes causes a headache to judges. In other words, it is often difficult to decide
the information before us falls within the definition of “trade secret.”
Article 2 Paragraph 4 of the Unfair Competition Law defines the term “trade secret”
as shown in the slide. “Trade secret shall mean technical or business information
useful in commercial activities, such as manufacturing or marketing methods,
which is kept secret and not publicly known.”
This sentence can be broken down into 3 requirements, “to be kept secret,”“information useful business” “not publicly known.”
Slide (6)“To be kept secret” is the most frequently disputed requirement, and many
precedents have been reported. It is a matter of fact-finding on a case-by-case basis
and judges make decisions based on all relevant facts. However, it may be safe to
say that courts generally place emphasis on two factors.

The first factor is whether and to what extent access to the information is restricted.
For instance, does the document is kept in a locked cabinet? Or, do only designatedemployees know its password? Those are typical facts to be considered by courts.
Second factor is indication of confidentiality, in other words, whether a person who
is not authorized to obtain or use the secret can recognize the information as“secret.” Sign of “confidential” or “highly confidential” on a document would be
helpful to be admitted as “trade secret.”
Slide (7)Second requirement is usefulness for business.
Our courts have interpreted the term “useful” generously, and have not required
strict proof on the economic value of the information. So-called “negativeinformation” such as failed test data is also considered as “useful for business.”
Therefore, this requirement has functioned as excluding information against publicorder. Personal scandalous information, concealed data showing violation ofenvironmental regulations are among its examples. In a case, the Tokyo District
Court held that price lists used for bid-rigging did not meet this requirement.
Slide (8)Third requirement is “not publicly known.”
One of contentious issues related to this requirement is information obtained byreverse engineering. In a case before the Osaka District Court, a defendant allegedthat data regarding ceramic condenser at issue could be obtained by reverse
engineering of plaintiff ’s marketed products and therefore those data are publiclyknown. The district court did not agree with this allegation, holding that acquisitionof the data took long-term analysis by highly skilled experts with a lot of expense.
Slide (9)Once the information is found as “trade secret,” next question is whether theconduct is “infringement” or not.
The Unfair Competition Law specified 6 categories of “infringement.” Those arevery important provisions but somewhat complicated even in Japanese. I will try tosimplify and explain one by one.
Let’s suppose that company X kept trade secret, and employee Y who was notauthorized to keep the secret, obtained the secret by improper methods. Such Y’s
conduct fell within Category A-1 infringement on the slide.
In this situation, if a third party Z received the secret from employee Y knowing at
the time of the receipt that the secret was obtained by improper methods, such Z’s
conduct fell within Category A-2 infringement.
If the third party Z did not know that the secret was obtained by improper methods,
but later Z became aware of the improper acquisition, and nevertheless used ordisclosed the information, such Z’s conduct fell within Category A-3 infringement.
Slide (10)Category B assumes a situation where the employee Y was properly disclosed thetrade secret by the Company X, but employee Y misused the secret.
Category B-1 is about the misuse of the secret by employee Y. Category B-2 is about
third party Z’s conduct to receive the secret from employee Y knowing the misuse.
Category B-3 is about the third party Z’s conduct to receive the secret without
knowing the misuse at the time of receipt but later became aware of the misuse andnevertheless used or disclosed the secret.
Slide (11)One of the debated issues related to the definition of “infringement” is trade secretjointly developed by an employer and its employee. The essence of this issue is who
has a right to use the jointly developed trade secret. In Japan, this issue isdiscussed as a question of Category B-1, whether such trade secret should beregarded as “disclosed by an employer to the employee.” A view is that such trade
secret originally belongs to the employer, therefore the secret should be regarded as
disclosed to the employee even if the employee takes a part of the development.
Opposing view is that such trade secret is shared by both the employer andemployee, therefore the secret is not “disclosed” by the employer, and this issue
should be addressed by breach of contract.

In relation to this issue, an interesting case was before our Court. In this case, oneof the issues was whether a retailer could disclose wholesale prices of goods tocustomers in order to show customers that the prices of retailer’s products werevery cheap. The wholesaler argued that the prices were its trade secret. The
intellectual Property High Court did not agree with the defendant’s argument
holding that the prices between the retailer and wholesaler were shared by both,therefore the information was not the one “disclosed by the wholesaler.”
Slide (12)The Unfair Competition Law explicitly allows as remedies, first, injunction, second,
compensation for damages caused by the infringement, third, necessary measures
to restore business credibility.
Term and scope of injunction sometimes became at issue. Economic value of trade
secret can be lost in a short term. In Japan, there are discussions whether judges
may limit the duration of injunction for a certain period without explicit statutory
authority.
Slide (14)As I mentioned earlier, breach of confidentiality agreement is as important as
infringement liability. Scope of “confidential information” agreed by parties may
differ from scope of “trade secret” defined by the Unfair Competition Law. Courts
interpret terms and conditions of agreements and may allow injunction andcompensation if they find breach of contract.
Since proof of breach of confidentiality agreement is difficult, an employment
agreement often contains non-compete provision which requires the employee not toengage in competing business with the employer even after quitting the company.
This provision, however, may cause potential conflict with constitutional rights
including freedom to choose an occupation. Therefore, courts carefully review termsof the agreement and determine whether the non-compete provision should beinvalidated as against public order. Majority view among scholars is, first,
non-compete obligation should be explicitly written in the agreement, second, even
if the obligation is written, term, area and prohibited actions should be limited to areasonable extent, third, fair compensation should be paid by the employer. Courts
have taken more flexible approach based on the facts of each case.

Slide (16)As I mentioned earlier, criminal sanction provisions have been established in theUnfair Competition Law. The scope of criminally punishable conducts is much more
limited than those subject to civil liability. The Unfair Competition Law specifiesconducts to be punished in Article 21. Those provisions are complicated, and I won’t
go into details today.
The punishment for individuals is up to 5 years imprisonment. Companies like thethird party Z in previous example, may be fined up to 150 million yen. Also, even if
punishable conducts take place outside Japan, those conducts can be punished as
far as the trade secret concerned is kept in our country.
Criminal prosecution has not been active so far in Japan. Possible reasons are listed
in the slide. Trade secret disputes are generally regarded as civil dispute by natureand complaints by victims are necessary to pursue prosecution. Disputes are often
settled by parties and the complaint is withdrawn. Also, scope of criminal conducts
is limited, and prosecutors need to prove subjective requirements. For those reasons,prosecutors seem to prefer prosecuting trade secret infringement by way of
traditional crimes like theft, embezzlement, fraud or breach of trust. However, thistrend may change due to the 2005 amendment of the Unfair Competition Law.
Slide (17)That’s the end of my presentation. Thank you for your kind attention.