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Articles and Rulings |
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Protection
of Trade Secrets in Israel
Prepared
by Keith Shaw, Adv.,
Zell & Co.,
Jerusalem and Tel Aviv, an affiliate of the FANDZ International Law Group.
November 2003
Introduction
Prior to
1999, and in contrast to many other areas of law in Israel, the question of
the existence of “trade secret” as a legal concept, and the protection
afforded to it, did not find expression in statute, but only in case law.
However,
in early 1999, the Commercial Wrongs Law ("the Law") found its way on to the
Israeli statute book. For the first time, this law provided, inter alia,
a statutory definition of a trade secret, as well as setting out provisions
concerning the misuse thereof. In doing so, the law greatly simplified the
not entirely certain situation which had existed prior thereto.
This
article first reviews the two leading cases prior to the enactment of the
statute, followed thereafter by a description of the relevant sections of
the new law. It is of course the latter which is now operative.
The
pre-statutory position
Prior to
the enactment of the Law, the courts had discussed trade secrets on a number
of occasions. Aspects which were of particular interest were the extent to
which the courts had recognised trade secrets, how they legally
characterised them, and what forms of protection were available to those who
claim ownership thereof. As will be seen, a level of consensus was reached
with regard to certain aspects, while in other areas the courts did not make
a final pronouncement. This state of affairs of course changed with the
enactment of the Law.
Yavin Plast and others -v- the National Labour Court and others
The facts
of this case were as follows: T worked for a factory, TGL, which produced
rubber, and in the course of his work had free access to TGL’s trade
secrets. T subsequently gave notice to TGL and took a job with the
appellant, Yavin Plast (“YP”), a competitor of TGL. T had not signed any
confidentiality document with regard to his employment by TGL, nor did his
terms of employment with them place any restriction on his working in the
rubber industry.
During
the course of his new employment, T contacted a number of clients of TGL,
and entered into commercial negotiations with them, suggesting that they
purchase instead the products of YP. TGL sought an injunction preventing YP
from employing T, and preventing T from passing to YP information which
constituted trade or professional secrets of TGL. Both injunctions were
duly given by the court of first instance, and YP appealed first to the
appeal court and thence to the High Court of Justice (a particular
composition of the Supreme Court), on the grounds that it was not
appropriate to place restrictions on T in the absence of an express clause
to the contrary in his contract of employment with TGL. In the High Court
of Justice, the leading judgment was given by Judge Barak, now President of
the Supreme Court, who discussed in detail the concept of “trade secret”.
He stated
as follows (in translation):
“The
trade secret is a legal ‘phenomenon’, in respect of which a single and
unequivocal doctrine has not yet crystallised. There are those who view a
trade secret as property, and wish to defend it by way of those methods used
to defend property (see: The Israeli Electric Cable Company
-v-Kristianfoller,
Potshevotsky, ‘Ownership of Information and Freedom of Occupation’).
Others view it as derived from property (see; Friedman, ‘The Laws of
Unjust Enrichment’) or an ‘interest in property’ (see: Selviko Fox
-v- Ayalon and Etzioni Ltd.).
“By
contrast, there are those who are of the opinion that a trade secret
constitutes only a right ‘against a particular person or persons based on a
contract with them or based on laws which according to our legal custom
apply only to particular relations’ (Tadesky, 'Trade Secrets').
“There
are those who view the protection of a trade secret, insofar as it relates
to the employer-employee relationship, as an integral condition of the
contract - ‘The obligation to preserve the information as secret is an
absolute obligation and part of an integral condition deriving from the
basic relationship between the employer and employee’ (The Israeli
Electric Cable Company -v-Kristianfoller). Others see it as an
obligation deriving from the principle of good faith (see; Pilpel, ‘Section
39 of the Law of Contracts and its derivation from German Law’, Goldberg,
‘Good Faith in Labour Law’). As can be seen, the ‘trade secret’ reveals a
thicket of problems, and is difficult to fit into a classical definition.”
On one
point at least, Judge Barak was unequivocal:
“Nevertheless, it seems to me that it is accepted by all that the ‘trade
secret’ exists in law, and that the law provides methods to defend it from
exploitation without the permission of those entitled to it. It was
justifiably noted that: ‘Different grounds have indeed been assigned for the
exercise of that jurisdiction. In some cases it has been referred to
property, in others to contract, and in others, again, it has been treated
as founded on trust or confidence...but upon whatever ground the
jurisdiction is founded, the authorities leave no doubt as to the exercise
of it’ (AB Consolidated Ltd. -v- Europe Strength Food Co. Pty. Ltd.).”
Unfortunately, despite having dealt with the question of the existence of
the “trade secret” as a legal concept in so trenchant a manner, the judge
demurred from deciding between the opinions which he had quoted and thus
from addressing directly the question of its legal character:
“Within
the framework of the petition which is before us, there is no need to decide
between the various legal models, each of which has advantages and
disadvantages, and indeed it is possible that no one model properly defines
the concept in all its aspects. In our matter, it is enough to fix the
following conclusion: there is imposed on an employee a duty of good faith,
which arises from the relations of trust which exist between him and his
employer, protected by a contract the performance of which in good faith
necessitated the preservation of the trade secrets of the employer, their
non-exploitation and non-disclosure other than with the permission of the
employer. This obligation is imposed on the employee throughout the period
of his employment relationship with the employer and indeed thereafter, and
ends only when the trade secret ceases to be a secret, other than due to the
act of the employee. The existence of this obligation is not conditional
upon the presence of an explicit condition in the contract of employment. A
third party which knowingly and without justification enters into relations
with the employee and receives the trade secret from him commits the tort of
inducing breach of contract (section 63 Civil Wrongs Ordinance).”
The
judgment continued by listing the penalties against the employer and the
third party, which would take the form of damages, restitution for any
unjust enrichment, and an injunction to do or to refrain from a particular
action.
Two
propositions were established by this case: that the trade secret was
recognised as a legal concept under Israeli law, and that an employee who
had access to such a secret was subject to an obligation neither to reveal
nor exploit nor make use of such secret, such obligation existing
independently of the need for an express contractual provision to this
effect, and continuing until such time as the secret is no longer a secret -
in other words, until it has entered the public domain. The remedies
established by this case were in contract, as regards the employee, and
tort, as regards the third party.
As
mentioned above, though, the question of the exact legal character of the
trade secret remained unresolved. Moreover, as will be seen, the judges in
the second leading case similarly avoided grasping the conceptual nettle.
Elite Israeli Industries and others -v- Yaakov Serenga and others
This
case, which was heard approximately three years after Yavin Plast,
concerned the appellant, Elite, the largest manufacturer and vendor of
coffee in Israel, and the respondent, who over the course of 15 years had
provided security services and other equipment to the Elite factories,
during which time he had had free access to all aspects of the manufacturing
process, and would also receive documents in connection thereof to enable
him to perform his work. Although not employed by Elite, the respondent had
signed a letter of confidentiality in which he had undertaken not to use or
disclose any of the information he had received during the period of his
providing services to Elite and for five years following his last work for
them.
Some
twenty months after his last work for Elite, the respondent and his
co-respondents began to produce coffee, apparently using the information
which he had undertaken not to use. While the judge at first instance held
that the respondent had breached his obligation of non-confidentiality, he
also held that the letter was void as the period was excessive. Elite
appealed, and during the course of the judgment, the judges of the Supreme
Court once again considered at length the legal position regarding trade
secrets.
Judge
Strassberg-Cohen, giving the leading judgment, began by referring to the
conflicting interests which underlie the legal position, namely the right to
freedom of employment and the principles of free competition and freedom of
information on the one hand, and on the other hand the right of an owner of
a business to protect his trade rights, the information and the time which
he has invested in the business, and the manufacturing processes which
constitute the business and “which can occasionally become his personal
property”. She then, like Judge Barak before her, set out the differing
opinions on the legal character of trade secrets:
“Professor Tadesky, in his article ‘Trade Secrets’ described trade secrets
as follows: ‘Ideas, information and similar matters likely to assure their
owners of an advantage as against their business competitors, commercially
or economically. The interest of their owners therein is a clear possessory
interest, to benefit from this advantage by their own exploitation [of the
information, etc] or by its transfer to others for consideration.’
“...There
are those who view trade secrets as confidential information, and there are
those who view it as a property right. There are those who relate to it
based on the principle of good faith, and refer to the lack of good faith
inherent in the breach of contract concerning it...In a number of Western
countries the trade secret has been defined as property, which is entitled
to be protected like any other types of property. This is also the American
approach, where the National Conference of Commissioners of United Uniform
State Laws in the United States suggested the Uniform Trade Secret Act,
which has been adopted by a large number of states in the USA.
“In
Zenelkol Ltd. -v- Pri Taim Ltd.,
the President of the District Court, Judge Weingrod, surveyed the
classifications of trade secrets, and referred, inter alia, to the ALI
Restatement of Torts, which states: (free translation) ‘A trade secret
includes any formula, programme, method or combination of information which
an individual uses in his business and which gives him the chance to obtain
an advantage over his competitors who do not possess such secret. Such
secret can be a chemical formula, a manufacturing process, a secret
treatment or preservation of goods, a programme for a machine or any other
method or even a list of clients.’”
In order
to indicate the problem of defining and establishing the legal boundaries of
“trade secret”, and the various approaches thereto, Judge Strassberg-Cohen
then referred to with approval and set out in full the relevant section of
the judgment of Judge Barak in Yavin Plast discussed above.
Having
gone on to conclude that a trade secret remains such until it is in the
public domain, and that the manner in which the parties view the information
is also important in deciding whether or not something is to be regarded as
a trade secret (in this case, it was clear that the parties viewed the
information as confidential), the judge then continued by stating that while
the right to protection of trade secrets was nevertheless recognised, there
were nevertheless limits and considerations which acted to restrict the
boundaries of the protection offered. These included:
“The
period in which use of the trade secret is forbidden until the information
is deemed to have reached the public or some other limited time...the amount
of time and effort invested by the competitor himself in producing the
competing product, the need to allow the employee to make use of the
professional information which he has acquired from his employer, the need
to allow employees freedom of movement from one place of employment to
another. The right to secrecy is relative and not absolute, and changes
according to the circumstances, as does the protection available (Dean, ‘The
Law of Trade Secrets”, Zenelkol -v- Pri Taim). The remedy must be
appropriate to the type of secret, the type of breach, the nature of the
damage and its extent. The smaller the damage, the more restricted the
secret and the closer it is to the public domain, the more restricted the
relief will be. If someone has undertaken to keep secret a trade secret and
this undertaking is too wide, there is no prevention on reducing it so as to
make it appropriate (see: Goldberg, ‘Freedom of Employment: From Basic Right
to Basic Law’).”
It should
be noted that this introduction of the concept of the relative nature of the
right represented a departure from the position of Judge Barak in Yavin
Plast, who, it will be recalled, viewed the right as absolute and
unlimited by time for such time as the secret is not pubic knowledge. This
will be discussed further below.
The judge
then stated that the trade secrets which were the subject of this case were
entitled to protection, both as a matter of law and due to the letter of
confidentiality, and that the obligation not to reveal the information arose
both from the contractual undertaking and the common law - in other words,
that the obligation of non-disclosure would have existed even without the
confidentiality letter. The judge further stated that to be of effect, any
period of restriction would have to be appropriate in the light of the
relationship between the parties, and not damage the public interest. A
period which is thought to be reasonable and appropriate as between the
parties themselves will only rarely be thought not to be in the public
interest. In this case, however, the judge ruled that as the process
involved was straightforward and likely to become public knowledge quite
easily, the five year period was unreasonable and should be reduced to two
years.
As to
remedies, the judge noted that:
“The
protection for trade secrets is equally effective as against third parties,
and in the decisions of this court support can be found for the idea that
responsibility for the use of secret information can be imposed on third
parties, even if they are acting in good faith (see: Polystick Ltd. -v-
Cagecol SA),
and section 12 of the suggested new law.”
However,
like Judge Barak before her, Judge Strassberg-Cohen too refrained from
breaking any new ground:
“However,
for the purposes of the matter before us, there is no need to set down firm
rules on this question, since in my view the conditions have been
established for a claim of the tort of inducing breach of contract (section
63 Civil Wrongs Ordinance).”
Once
again, then, the court reached the point of establishing the legal character
of the trade secret more firmly, but decided that it had no need to do so.
Of note, though, is the dissenting decision in this case, by Judge
Goldberg. Although he disagreed with the decision on the factual ground
that he did not view the process in question as being entitled to
protection, his suggested protection for trade secrets was in fact stronger
than that offered by Judge Strassberg-Cohen. He stated as follows:
“I will
begin with the words of Judge Berenzon in The Israeli Electric Cable
Company -v-Kristianfoller: ‘Firstly, one must remember the great
difference between the obligation of the employee to preserve his employer’s
trade secrets, and the restrictions which may be placed on an employee after
he has left the employ of that employer. The trade secrets and secret
information are property rights of their owners and the employee is
forbidden to use them for his own purposes or to reveal them to others at
any time, whether he has explicitly undertaken as such or not. The
obligation to preserve the information as secret is an absolute obligation
and part of an integral condition deriving from the basic relationship
between the employer and employee...The situation is different as regards
the restrictions which may be placed on an employee after he has left the
employ of that employer. Here a specific contractual obligation is required
in order to prevent the employee from working for someone else, and this
restriction must also fulfil the parallel condition that it be necessary to
protect the legitimate business interests of the employer, and be in the
public interest.’”
This
would appear to be the only case where it was stated explicitly that a trade
secret constituted a property right. As has been shown, however, the
Supreme Court later refrained from indicating whether or not it agreed with
this assertion.
Judge
Goldberg continued:
“We are
therefore talking of two systems of rights: the right of employment of the
employee, and the right of the employer to have his professional secrets
protected. As was stated in
Rav Bariach -v- Amgar,
these are two different matters. The obligation of the employee to preserve
professional secrets is unlimited by time, and ‘continues for all such time
as the trade secrets have not entered the public domain.’ However, it is
also clear from case law that the obligation of secrecy does not extend to
general professional knowledge and professional experience which the
employee has obtained through his employment.
“Since
the obligation of preservation of professional secrets is unlimited by time,
and is in effect for all such time as the trade secrets have not entered the
public domain, it can be said that if the employer and employee have reached
an agreement whereby notwithstanding this principle, the secrecy obligation
will continue for a specific limited period of time, they have thereby
indicated their view as to the 'life span’ of the trade secret. In such a
situation, there is no reason for the court to interfere and shorten the
period further.
“...The
obligation of secrecy would have fallen, as stated, on the respondent, even
if he had not signed the confidentiality letter, except that then it would
not have been limited by time, and he would only have been free of it when
the trade secrets entered the public domain.”
The above
statement elicits a remarkable conclusion. Although its precedent value
even then was doubtful, given that it was a single paragraph in a dissenting
judgment which received only implicit support elsewhere (though notably from
Judge Barak in Yavin Plast), the implication was, notwithstanding
that commercial practice is almost without exception to the contrary, that
it might in fact be more effective not to have employees sign
confidentiality letters, since these would invariably contain a limiting
period following which the employee is free to use the information; whereas
in the absence of such an agreement, the secrecy obligation would continue
indefinitely until the trade secrets become public knowledge.
Summary
In the
pre-statutory period, then, one could derive that Israeli law recognised the
existence of a trade secret as a legal concept, but that the legal character
of this concept was undecided - a property right, or contractual, or a cause
of action in tort, or based on good faith, and that the protection and
remedies available would differ accordingly. Furthermore, an employee’s
obligation not to reveal a trade secret, in the absence of an express
agreement, was held to be unlimited by time, and to continue until the
secret is in the public domain, per Judge Barak in Yavin Plast and
Judge Goldberg in Elite (per Judge Strassberg-Cohen in Elite, the
right is relative in the circumstances). However, if there was an express
agreement, then the obligation would only extend until that time, and could
be reducible by a court depending on the circumstances (per Judge Strassberg-Cohen
in Elite).
From case
law to statute
It is
notable that in recent years, and in particular since the passing of the
Basic Law: Freedom of Employment, the courts have dealt at length with the
post-employment rights of employees, and in particular the effectiveness and
enforceability of restrictive covenants signed by employees which seek to
prevent them working for competitors for a specified period following the
end of their employment. In this regard, see in particular the leading case
of
Dan
Frumer and Checkpoint Technologies Ltd. v. Redguard Ltd.
In doing
so, the courts have distinguished between knowledge which has accrued
to an employee as a result of his employment (in other words, the increased
skills and expertise which an employee acquires in the course of his work),
on which the courts are loath to place restrictions, and trade secrets,
which are viewed as belonging to the employer. It is perhaps for this
reason that the new Law, as will be seen, does not deal with trade secrets
in the context of the employer –employee relationship, but on a more general
level. It is therefore not surprising that the Law appears to view a trade
secret as property, rather than a contractual right against particular
individuals. Similarly, since the concept of the trade secret is no longer
viewed exclusively within the framework of the employment relationship, it
is equally to be expected that the Law does not place any time restriction
on the protection afforded the owner of a trade secret. For so long as the
information in question meets the definition (see below), it will be
entitled to protection.
The
Commercial Wrongs Law, 1999
The new
Law creates a new cause of action in tort in the area of unfair
competition. Among other matters, it contains a specific section entitled
“Theft of Trade Secrets”.
“Trade
secret” is defined as trade information of any type, which is not in the
public domain and which is not capable of easy discovery by others, and the
secrecy of which gives its owner a business advantage over his competitors,
provided that the owner takes reasonable steps to preserve its secrecy.
The law
provides that theft of a trade secret shall be a cause of action in tort, to
which the provisions of the Civil Wrongs Ordinance will apply.
“Theft”
is defined as one of the following:
1) the
obtaining of a trade secret without the permission of its owner, by illegal
or unfair means, or the use thereof; for this purpose, it makes no
difference if the secret was obtained from its owner or from someone else
who was in possession of it;
2) use of
a trade secret without the owner's permission, where such use is contrary to
a contractual or good faith obligation owed by the user to the owner;
3) the
receipt of a trade secret or the use thereof without the owner's permission,
where the receiver or the user knows or it is obvious to them, at the time
of receipt or use, that the secret was transmitted to it in a way prohibited
according to (1) and (2) above, or if the secret was transmitted in a
prohibited manner to another prior to its transmission to him.
The law
also provides defences. An individual will not be considered to have stolen
a trade secret if he acquired the knowledge during employment by the owner
of the secret, and the knowledge became part of his general professional
skills; similarly if the use of the secret is justified on public policy
grounds.
In addition, there is no liability for use of a trade secret which was
acquired in good faith and for consideration, unless a court finds that the
interests of justice dictate otherwise.
Discovery
of a trade secret via reverse engineering is also not considered to fall
within the above restrictions.
There is
a presumption of use against a defendant if he obtained knowledge of the
trade secret or had access to it, and if he makes use of information which
is substantively similar to the information which constitutes the trade
secret.
For each
theft of a trade secret pursuant to this law, a court may award damages of
up to 100,000 NIS (though a number of thefts committed within a single act
or series of acts are considered for these purposes as a single breach).
Injunctive relief is also available.
Furthermore, if it is proved to the satisfaction of the court that there is
a realistic suspicion that a wrong has been committed, the court may appoint
a receiver to enter the premises of a defendant or third party with
investigative and confiscatory powers.
The receiver is even entitled to use reasonable force in order to carry out
his responsibilities, provided that he is accompanied by a police officer.
The search must be carried out in the presence of two witnesses.
The order
to appoint such a receiver can even be given ex parte, if the court
is persuaded that delay would cause serious damage to the claiming party or
disappearance of evidence.
A party seeking the appointment of a receiver must lodge with the court
certain forms of security in favour of the party against whom the order is
sought.
With
regard to assets which are found to have been produced using stolen trade
secrets, the court may order their destruction, their transfer to the
plaintiff for consideration, or any other activity.
Such
reported cases which refer to the Law as have so far reached the courts deal
with sections other than those concerning the tort of theft of trade
secrets. It is however submitted that the effect of the Law has been to
codify the legal characterisation of a trade secret and the protection
available to an owner thereof, and in doing so to resolve the legal
uncertainties which existed in this regard prior to its enactment.
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