What Are Trade Secrets and Why Protect Them
A successful technology company invests years developing a unique algorithm. A key employee leaves for a competitor, and suddenly the competitor launches a suspiciously similar product. This scenario haunts most technology companies, yet many don't understand how to protect themselves legally.
Trade secrets are valuable information assets that provide competitive advantages to their owners. Unlike patents or trademarks, trade secrets are not formally registered but maintained as confidential information. Their importance to technology companies is immense - they may include source code, algorithms, customer lists, manufacturing methods, or business strategies.
Under Israeli law, trade secret protection derives from multiple sources: the Contracts (Remedies) Law, 5731-1970, the Civil Wrongs Ordinance, 5728-1968, and the Penal Law, 5737-1977. Additionally, principles of labor law and fiduciary relationships between employers and employees provide additional protection. Unlike other jurisdictions, Israel lacks dedicated trade secret legislation, requiring familiarity with various legal sources.
Types of Trade Secrets in Technology Industry
In the technology industry, trade secrets take diverse and evolving forms. Understanding different categories is essential for building tailored protection strategies.
Technological and Development Information
- Source code and algorithms: The technological heart of many companies. This includes not only the code itself but also architecture, optimization methods, and unique technical solutions
- Development methodologies: Customized Agile processes, unique testing methods, and DevOps processes developed within the company
- Technical specifications: System requirements, interface specifications, and technical documentation not available to the public
Business and Marketing Information
- Customer lists and usage data: Customer databases, usage patterns, preferences, and insights collected during service delivery
- Pricing strategies: Economic models, dynamic pricing strategies, and profitability data
- Product roadmaps and strategy: Future roadmaps, launch plans, and market entry strategies for new markets
It's important to note that in the digital era, boundaries between different types of information are increasingly blurred. Customer data may feed algorithms, and algorithms influence business strategies. Therefore, a holistic approach to information protection is essential.
Legal Protection Mechanisms
Israeli law provides several protection mechanisms for trade secrets, each with distinct characteristics and applications.
Protection Under Contract Law
The Contracts (Remedies) Law, 5731-1970, provides the strongest legal foundation for trade secret protection. When express agreements exist between parties - such as confidentiality agreements or employment contract clauses - breach constitutes classic contract violation. Remedies include damages, liquidated damages, and injunctive relief.
Advantages of the contractual approach are clear: proving breach is relatively straightforward, liquidated damages can be predetermined, and ancillary remedies such as document return are available. The disadvantage is that protection is limited to parties with contractual relationships.
Tort Protection
Even without express agreements, the Civil Wrongs Ordinance, 5728-1968, provides protection in cases of unfair use of information. Unjust enrichment torts and unfair competition principles can serve as bases for claims. This cause of action is particularly relevant in cases of information theft by competitors or third parties without contractual relationships.
Criminal Protection
In serious cases, the Penal Law, 5737-1977, provides criminal protection. Sections dealing with theft, fraud, and computer intrusion can apply to trade secret theft cases. Additionally, the Computers Law, 5755-1995, specifically addresses offenses related to computer systems and digital data.
It's important to emphasize that criminal protection is not a substitute for civil protection but complements it. While criminal proceedings are conducted by the state, victims must still pursue civil proceedings for restitution and compensation.
Employment Contracts and Protection Clauses
Employment agreements are the first and most important line of defense for trade secrets. Proper employment contract design can prevent future problems and provide solid legal foundation for enforcement.
Detailed Confidentiality Clauses
Confidentiality clauses must be specific and detailed. Instead of general language like "employee commits to maintain confidentiality," it's preferable to specify types of information included in the definition: source code, algorithms, customer lists, business plans, and performance data. Additionally, it's important to define the duration of the obligation - typically unlimited for information constituting actual trade secrets.
Quality clauses will also include exception definitions - information not considered confidential, such as information known to the employee previously or information that became public knowledge not through breach. These clear definitions prevent future disputes and strengthen clause enforceability.
Non-Compete and Non-Solicitation Clauses
Non-compete clauses in Israel are subject to strict court oversight, applying the "proper balance" principle under the Standard Contracts Law, 5736-1975. Courts examine whether clauses are necessary for protecting legitimate employer interests, whether they are proportionate in scope and duration, and whether they don't unreasonably harm employees' right to earn a living.
In contrast, non-solicitation clauses receive more favorable treatment from courts, especially when focusing on key employees or customers the employee contacted. Good non-solicitation clauses will precisely define people included in the prohibition and reasonable duration - typically 12-24 months.
Property and Information Return Clauses
In the digital era, property return clauses extend beyond returning company laptops and phones. They must include commitments to delete information from all personal devices, home computers, and cloud storage services. Additionally, it's advisable to include authorization for employers to inspect equipment returned by employees and verify information deletion.
Practical clauses will also include lists of specific actions employees commit to perform: returning keys, canceling information system access permissions, and returning all physical and digital materials. It's important to predetermine timelines for performing these actions.
Non-Disclosure Agreements (NDAs) with External Parties
Confidentiality agreements with external parties - potential investors, business partners, service providers, and contractors - are integral parts of trade secret protection strategies. In the startup and technology world, sensitive information sharing is required almost daily.
Professional NDA Structure
Quality confidentiality agreements begin with precise "confidential information" definitions. Unlike employment agreements, definitions here must be broader to cover wide ranges of information that might be shared during negotiations or collaborations. Definitions must also include information conveyed orally, in presentations, or during facility tours.
Exception clauses are equally important. They must clearly define which information is not considered confidential: publicly known information, information the receiving party knew independently, and information received from third parties without confidentiality breach. These clear exceptions prevent over-expansion of confidentiality obligations and strengthen enforceability.
Confidentiality Period and Remedies
Unlike employee confidentiality obligations, confidentiality agreements with external parties are typically time-limited. Common periods are 3-7 years, depending on information nature and business sector. For information with short shelf lives (like marketing plans), periods can be shorter. For advanced technologies, periods can be longer.
Remedy clauses must emphasize that confidentiality breaches may cause damages that cannot be quantified monetarily, therefore injured parties are entitled to injunctive relief. Additionally, it's advisable to include liquidated damages or at least commitments to cover reasonable legal expenses.
Mutual Confidentiality Agreements
In many situations, especially technological collaborations, mutual confidentiality agreements are required where each party commits to protecting the other party's information. Such agreements are more complex and must address "information contamination" situations - cases where one company's employee is exposed to another company's information and might develop similar technology in the future.
A common solution is defining "clean teams" - employees not exposed to the other party's information who can continue working on similar developments. Another alternative is parties' advance agreement on handling technological overlap situations.
Technological and Legal Protection Measures
Effective trade secret protection requires combining technological and legal measures. Technological measures alone are insufficient, but they provide strong evidence that companies took reasonable measures to maintain confidentiality - an important criterion for legal recognition of trade secrets.
Access Control and Permission Management Systems
The "Need to Know" principle must be implemented at all organizational levels. Employees should receive access only to information required for performing their roles, and no more. Advanced identity management systems enable precise permission settings for each employee and tracking of all information access activities.
It's especially important to document all permission changes and conduct periodic audits. When employees change roles or leave companies, their permissions must be updated or cancelled immediately. Automated systems can perform this based on human resources data.
Encryption and Sensitive Information Marking
All sensitive information must be encrypted both at rest and in transit. Data Loss Prevention (DLP) technologies can identify and prevent sensitive information transfer to unauthorized parties. Automatic document marking as "confidential" or "sensitive" alerts employees to information nature and makes ignorance claims difficult.
It's important to document all technological measures taken. This documentation can serve as evidence in legal proceedings to prove reasonable measures were taken to maintain confidentiality.
Backup and Information Survivability
The information protection paradox is the need to protect it from loss while simultaneously protecting it from leakage. Backup systems must be no less secure than original information, and backup access must be limited to a small number of people.
Additionally, it's important to plan in advance how to thoroughly delete information when it's no longer needed. Simple file deletion is insufficient - cryptographic or physical deletion of storage media is required.
Monitoring and Anomaly Detection
Security Information and Event Management (SIEM) systems can identify unusual access patterns to sensitive information. For example, employees who suddenly access large quantities of documents irrelevant to their roles, or information access during unusual hours.
It's important to predetermine response protocols for suspected information leakage cases. Quick response can minimize damage and improve chances in future legal proceedings.
Enforcement and Legal Remedies
When confidentiality breaches are discovered or suspected, the speed and accuracy of legal response largely determine enforcement success. Israeli law offers various remedies, but their effectiveness depends on preparation quality and response speed.
Temporary Injunctions
Temporary injunctions are the most important tools in trade secret leakage cases. They enable stopping ongoing damage before full trials. Israeli courts typically issue injunctions when strong evidence exists for trade secret existence, reasonable evidence of breach, and proof that delay in treatment would cause irreversible damage.
Filing effective injunction requests requires thorough advance preparation. Evidence must be collected for trade secret existence, its commercial value proven, and specific evidence of breach presented. Affidavits from employees familiar with the technology and its business importance are critical.
It's important to note that courts may require financial guarantees from applicants to cover possible damages to respondents if injunctions are later cancelled. Guarantee amounts can be significant and must be financially prepared for.
Financial Remedies and Compensation
Calculating damage from trade secret leakage is a complex challenge. Israeli courts recognize several approaches: actual damage caused to plaintiffs, profits violators gained from breaches, or reasonable royalties for information use. In appropriate cases, punitive damages can be obtained.
Proving damage requires preparing professional economic materials. Courts must be presented with economic expert opinions explaining information commercial value and damage caused by leakage. Comparative analysis of similar industry transactions can strengthen claims.
Ancillary Relief and Restitution
Beyond financial compensation, courts can order return of stolen information, its deletion from respondent systems, and return of all documents and materials related to trade secrets. In appropriate cases, work prohibition orders can be obtained against violators for specific periods.
In the digital world, implementing such remedies is more complex. Courts may order computer and system audits of respondents by court-appointed experts to ensure thorough information deletion.
Parallel Criminal Proceedings
In serious trade secret theft cases, consider filing police complaints. Parallel criminal proceedings can strengthen civil claims and apply additional pressure on violators. However, proceedings must be coordinated to avoid situations where one harms the other.
Criminal investigations can reveal evidence difficult to obtain in civil proceedings, but criminal proceedings are slower and not under victim control. Specialized legal counsel is essential for coordinating strategies.
The information contained in this article is general in nature and does not constitute legal advice. For advice tailored to the specific circumstances of your company, we invite you to contact our firm.
