CASRIP Newsletter - Winter/Spring 2008, Volume 15, Issue 1
Japanese Trade Secret Protection: Litigants Can Feel Secure Bringing Misappropriation Claims in Japanese Courts
By Dario A. Machleidt[†]
Abstract: In response to growing international pressure and a changing national climate toward intellectual property (“IP”) rights, Japan introduced its first step in trade secret protection on June 1, 1991 by amending the Unfair Competition Prevention Law (“UCPL”). This amendment did not provide adequate trade secret protection during litigation. As a result, the Japanese Legislature further amended both the UCPL and the Code of Civil Procedure numerous times over the past two decades to provide better trade secret protection during trial. The most recent amendments to the UCPL came into effect in April 2005, and they addressed many of the prior law’s deficiencies. In light of the 2005 amendments, businesses can feel more secure that bringing misappropriation claims in Japanese courts will not result in disclosure of their trade secrets.
Imagine Coca-Cola suing a Japanese company for misappropriation of its soft drink formula—arguably the most famous trade secret in the world. Until recently, such a suit would have put a tremendous strain on Coca-Cola’s business model. This is due partly to Japan’s requirement for public trials and, until recently, the unavailability of confidentiality orders designed to protect proprietary information from being released to the public. The risk of divulging important intellectual property (“IP”) information during court proceedings creates a disincentive to bring a misappropriation claim in Japanese courts. Recent changes to several of Japan’s laws, however, have laid a statutory foundation that seeks to put an end to every company’s greatest fear: absolute disclosure of its trade secrets during an attempt to protect that very information.
This article will discuss generally the most recent amendments to the Japanese Unfair Competition Prevention Law (“UCPL”) and the Code of Civil Procedure (“the Code”) that sought to strengthen trade secret protection during litigation. Part II of this article discusses the history of trade secret development in Japan, and examines why Japan did not have trade secret protection until the early 1990s. Part III examines the most important statutory amendments to Japanese laws that could affect trade secret misappropriation cases, with a focus on the 2005 amendments to the UCPL, and discusses what problems remain in the realm of trade secret protection. Part IV concludes that Japan has enacted valuable laws for the protection of trade secrets during litigation, and that Japanese and U.S. businesses alike can feel secure that bringing misappropriation cases in Japanese courts will not result in a loss of trade secrets.
II. JAPANESE TRADE SECRET PROTECTION HAS BEEN SLOW TO EVOLVE
Japan has had historically weak protection of IP rights and, prior to 1991, Japan effectively had no trade secret protection. After 1991, the UCPL was the main vehicle for protection of proprietary information, and after 1998 the amended version of the Code of Civil Procedure (“New Code”) provided for some additional protection of trade secrets. Japan had poor trade secret protection until the 1990s for two primary reasons: 1) Japan’s historically unresponsive approach to IP protection, and 2) the inability of Japan’s business and cultural norms to foster IP protection.
A. Japan Traditionally Has Not Valued Trade Secret Protection, but Instead Relied on Life-Long Employee Loyalty
Japan was slow to implement a system for trade secret protection. The reasons for this slow progression are related to Japanese history, culture, and business. The lack of security measures for proprietary information is consistent with the historically weak protection of IP rights in Japan, and the fact that, until recently, Japanese employees rarely changed jobs.
Like many countries, Japan instituted its IP laws during a time when its technological industry was in a developmental state. Japan therefore had little technology of its own that would encourage the development of strong IP laws. Instead, the country focused on importing foreign technologies that it sought to distribute throughout its industries. By disseminating important information without individual protectionist measures, Japan believed it was creating a benefit for the majority of its citizens.
The Japanese notion of society taking precedence over the individual remains true today. In contrast to the United States’ individualistic approach to IP—where the individual inventor reaps the benefits of his or her discovery—Japan’s business model focuses on the success of the group. In an effort to benefit the group over the individual, Japan’s IP system sought to rapidly disseminate information and new technologies. This notion often puzzled and greatly frustrated American companies doing business in Japan. While most countries associated IP generally, and trade secrets specifically, with something to be protected, Japan instead viewed such information as something to be publicly shared with few protectionist measures in place.
Pressure from the United States and other foreign countries has contributed to a reduction in Japan’s efforts to strengthen the group at the expense of the individual. Due to this pressure, Japan signed several international treaties relating to the protection of IP rights—including trade secrets. Despite these treaties, Japan maintained a weak trade secret protection scheme.
Japanese business culture further reflected the country’s historically weak protection of trade secrets. Until recently, Japanese employees could expect to work for one company for life. This fact, combined with the Japanese worker’s sense of loyalty to his or her company, greatly reduced the need for trade secret protection.
Most trade secret misappropriation claims occur in the context of ex-employees sharing their former company’s protected information with a new employer. When a loyal employee remains with the same company, that company’s trade secrets are usually secure. Consequently, so long as the Japanese culture of loyalty and long-term employment existed, trade secret protection was unnecessary. A change in Japanese employment trends added to the country’s need for trade secret protection.
Today Japanese workers can no longer expect to spend their entire careers with the same company. In recent times employers have begun to reward merit over seniority. This has resulted in a greater migration of tenured but less efficient employees to seek work elsewhere. This relocation of employees, nationally and internationally, in addition to increased globalization of the Japanese population, has resulted in the need for greater trade secret protection by Japanese companies.
B. Japanese Trade Secret Protection Has Historically Been Found in the UCPL and the Code
Pressure from foreign countries and the disappearance of the lifetime system of employment provided an impetus for the 1991 amendment to Japan’s UCPL. Since the introduction of the amendment, several other laws have been modified to better protect important business information, where both the UCPL and the Code are most often applied in trade secret matters. This section will discuss the history of these laws, and how the laws have been amended over the years in order to better protect proprietary information.
1. The UCPL Is the Primary Law Relevant to the Protection of Trade Secrets in Japan
Japan’s most comprehensive trade secret protection is in the UCPL. It was not until the 1990s, however, that the UCPL actually contained a provision calling for the protection of trade secrets. The UCPL went through five separate amendments since its enactment—in 1938, 1950, 1953, 1965, and 1975—without establishing any trade secret protection. Finally, during the late 1980s, influence from various foreign countries for greater trade secret protection in Japan resulted in several international agreements that led to Japanese trade secret protection.
The most relevant international agreement signed by Japan is the Agreement on Trade-Related Aspects of IP Rights (“TRIPs”), which was ratified during the Uruguay Round of the General Agreement on Tariffs and Trade (“GATT”). TRIPs requires members of the World Trade Organization (“WTO”) to adopt laws that establish minimum protections for IP rights such as trade secrets. Partly due to its involvement in TRIPs, Japan introduced legislation seeking to amend its UCPL prior to gaining membership to the WTO in 1995.
As a result of the international pressure behind the GATT negotiations, the amended Japanese UCPL came into effect on June 1, 1991. Consequently, the UCPL introduced a statutorily mandated protection of trade secrets in Japan. This amendment signified Japan’s movement away from its historically weak protection of trade secrets, and acknowledged the importance such information holds in industrialized society. For the first time Japanese law gave a trade secret owner the right to seek an injunction against individuals or companies who were not in contractual privity with the owner. Such third parties may have acquired the trade secret information from ex-employees of a competing company, or from individuals who illegally obtained the trade secret and then sold it to the third party. Previously, when a trade secret owner tried to obtain an injunction under a contract theory, the owner could do so only if there was a contractual relationship between themselves and the individual who misappropriated the trade secret. If the individual sold the trade secret to a third party, such as a competitor, there was no possibility of obtaining an injunction against that third party.
This new provision for third party liability in trade secret misappropriation cases was a drastic change from the prior law. Deutsche Werft A.G. v. Waukesha Ch-uets-u Y-ugen Kaisha (“Deutsche Werft”) (1966), the leading Japanese trade secret case prior to 1991, illustrates how the UCPL has changed since its 1991 amendment. In Deutsche Werft, the plaintiff, Deutsche Werft A.G., granted an exclusive license for the manufacture and sale of parts for ship propeller shafts to a U.S. company. In return for the license, the U.S. corporation agreed to restrict the sale of licensed parts to the U.S. and Canada, and assumed an obligation to keep the information regarding the license secret. In order to circumvent the territorial restrictions of the license, the U.S. company violated the license agreement and transferred the information to a joint venture it had set up with a third party Japanese partner. Deutsche Werft A.G. sued the Japanese company, but the Japanese court dismissed the suit. On appeal, the Tokyo High Court held that the proprietary information was not enforceable as a trade secret against the third party Japanese partner. In other words, Japanese law did not provide civil remedies against a third party that had misappropriated a trade secret.
From a policy standpoint, such situations greatly hamper technological innovation. It is reasonable to conclude that, if plaintiffs have no recourse against third parties, they will not license their trade secrets, which will impede further innovation in the relevant field. Fortunately, such a scenario is no longer an issue. Had Deutsche Werft been decided after the 1991 amendment to the UCPL, the Japanese third party would have been enjoined from using the information acquired from the U.S. based corporation.
Apart from granting businesses the right to enjoin third parties from using misappropriated trade secrets, the 1991 amendment impacted U.S. businesses in several additional ways. Although not as comprehensive as U.S. trade secret protection, the amendment to the UCPL required U.S. companies doing business in Japan to keep their trade secrets “objectively” secret. Under the UCPL, objective secrecy requires companies to maintain strict control over trade secrets, which includes establishing rules to regulate the use and protection of proprietary information and requiring parties with knowledge of a company’s secret information to sign confidentiality agreements. In contrast, U.S. law only requires companies to take “reasonable efforts” to keep a trade secret private.
While the UCPL requires more effort to protect trade secrets on the part of U.S. companies than under U.S. law, the trade secret definition is more expansive. Under the 1991 amendment, “Article 1(3) … provide[d] trade secret protection to any ‘manufacturing method, marketing method or other technical or business information useful in commercial activity.’” This standard, although similar to the Uniform Trade Secrets Act in the U.S., was broader than that utilized by U.S. law because it explicitly protected business information under the trade secret definition.
A negative aspect of the 1991 amendment to the UCPL was its failure to sufficiently protect trade secrets during litigation. As one commentator stated, “Japan now ha[d] a machine for the protection of trade secrets, but … [lacked] … sufficient oil to run it.” Although the law was put in place to protect important proprietary information, a system to uphold the UCPL was lacking. The amendment signaled movement in the right direction, but there remained many unresolved issues that had to be addressed and corrected.
2. The Code Is Also an Important Vehicle for the Protection of Trade Secrets in Japan
The Code adds to the protection of trade secrets in Japan, and in 1996 it underwent a revision that furthered trade secret protection during Japanese litigation. The Code was adopted in 1890 by the newly established national Diet, and was amended extensively in 1926. In 1996 the Code was overhauled, and important trade secret protection measures were added. This resulted in the New Code, which came into effect on January 1, 1998. The New Code stipulated that no general duty to produce documents containing trade secrets existed, and it also limited public access to the court record.
Under the New Code, court-ordered production of trial documents was expanded, but with certain exceptions. Notably, documents containing trade secrets were exempted from the general duty of production. However, the presence of a trade secret did not automatically protect a document from disclosure, as a balance between each party’s necessities had to be taken into account. Such a balancing test would occur in closed quarters during an in-camera hearing. This exception to automatic production of trade secret documents did provide for limited protection of proprietary information during litigation. At the very least, a party could feel secure knowing that their secret information would not be disclosed without a hearing on the matter.
In addition to the trade secret exception to document production, another protective measure the New Code enacted was limited access to the court record. Article 92 of the New Code provided for restricted public access to the trial record. This protection, however, provided only meager security for a trade secret plaintiff. The restriction to the record applied only to third parties, and did not apply to the party accused of misappropriating the trade secret. Although in-camera document review and limited access to the court record provided modest protection for trade secrets disclosed at trial, the system was far from complete. The measures taken to further improve Japan’s system of trade secret protection during litigation are discussed below.
III. JAPAN’S TRADE SECRET PROTECTION DURING LITIGATION HAS GREATLY IMPROVED SINCE THE 1991 AMENDMENT TO THE UCPL
Japan, in realizing the importance of trade secrets, amended several of its laws to better protect such information over the past two decades. A recurring problem that early Japanese trade secret law faced was its inability to protect proprietary information during litigation. Despite the 1991 amendment to the UCPL, the lack of any protection for trade secrets during public trial created disincentive for a party to bring a misappropriation claim.
A. The 2005 Amendments to the UCPL Instituted a Statutory Framework for Trade Secret Protection During Litigation
Although the UCPL was amended several times between 1991 and 2004, it was not until April 1, 2005 that the UCPL was amended with the intent to facilitate adequate trade secret litigation. Prior to the 2005 amendments Japanese courts did not issue secrecy orders in trade secret litigation. Due to the fact that the law did not prohibit disclosure of trade secret information that was included in the court record or discussed at trial, the parties were free to use, publish, or otherwise release the information. The possibility of having to divulge trade secret information at trial discouraged businesses from bringing misappropriation claims. In light of this fact, the 2005 amendments authorized Japanese courts to “implement protective orders, closed hearings, and other procedural safeguards to protect trade secret information divulged in litigation.” Article 10 of the amended UCPL relates to protective orders, while Article 13 sets out the requirements for a court to hold closed in-camera proceedings.
The 2005 amendments contain several requirements that must be met before courts will issue a protective order to litigants. Under Article 10, a party moving for the order must show prima facie evidence that a trade secret exists, and that it is necessary to prevent the use or disclosure of the trade secret in order to avoid injury to the party’s business activities. If such a showing is made, a court should grant the protective order. Under the order, Japanese courts have discretion to restrict the use of trade secret information disclosed at trial to matters relating to the litigation, and to limit disclosure of the information to those covered by the protective order. In order to facilitate adequate enforcement, Article 10 provides for criminal penalties for those who violate the order.
Article 13, like Article 10, requires a certain minimum showing before in-camera examination will occur. If a party can show that it will be unable to give full and accurate testimony because statements relating to the trade secret would hinder its business activities, and such statements are required for the court to make an accurate decision, a private in-camera proceeding will be held. During this proceeding the party discloses information only to the court in order to explain that the information in question is a trade secret. When such a determination is made, the court will inform the public in attendance at the trial before requiring them to leave the courtroom.
In-camera proceedings were originally introduced by the New Code, but only as it pertained to document production. The 2005 amendments to the UCPL made these proceedings applicable to party testimony under Article 13. During in-camera hearings, the opposing party may be present to hear the trade secret testimony, and to provide opinions as to the extent of a trade secret’s existence. Protective orders therefore prevent the opposing party from disclosing information regarding the trade secret that was discussed during the in-camera hearing, as well as information that may have inadvertently been disclosed during the public trial.
B. Japanese Courts Have Applied the UCPL’s Protective Orders with Positive Results for Trade Secret Owners
The 2005 amendments to the UCPL made protective orders available to litigants in Japanese courts. By issuing protective orders, courts now have discretion to restrict the use of trade secrets disclosed at trial to matters relating to the litigation, and to limit disclosure of the trade secret information to parties covered by the protective order.
The first court to issue a protective order under Article 10 of the amended UCPL did so in 2006. The plaintiff alleged that the defendant’s importation and sale of a generic drug had infringed one of the plaintiff’s patent rights. The plaintiff further alleged that the defendant had thereby engaged in unfair competition under the UCPL. As a result, the plaintiff requested an injunction against the defendant’s use of the generic drug.
The defendant’s drug had been approved as a generic drug under the Pharmaceutical Affairs Act (“PAA”). When seeking this approval, the defendant had attached documents to the PAA application which the plaintiff now demanded at trial. The defendant declined to produce the documents that were attached to the PAA application by arguing that such information constituted its trade secrets. The defendant thereafter moved for a protective order under Article 10 of the UCPL.
The Tokyo District Court ruled that the requested information did in fact constitute the defendant’s trade secret information under Article 2(6) of the UCPL, and granted the protective order. The UCPL, as amended in 2005, was therefore applied effectively and fairly so as to protect the defendant’s trade secret information. This fact should be of great importance to both future plaintiffs and defendants seeking to bring misappropriation claims in Japanese courts.
C. Inadequate Implementation of the New Code Has Diminished the Efficacy of Trade Secret Protection in Japan
The New Code, in addition to the UCPL, provides a vital step in Japan’s efforts to better protect trade secrets during litigation. It allows for documents containing trade secrets to be viewed in-camera. The New Code also allows the courts to limit public disclosure of the trial record, preventing third parties from viewing its contents. When the New Code is combined with the UCPL’s protective orders as applied to the parties in a dispute, the court has the capacity to dictate adequately who is allowed to view a trade secret, and how they may use that information.
The New Code, as enacted in 1998, expanded the duty to produce documents at trial. The New Code also ensured that proprietary information, such as trade secrets, was protected from this disclosure requirement. However, it is usually the case in trade secret misappropriation litigation that information required to identify an act of misappropriation includes proprietary trade secrets. With this in mind, “[i]f asserting the presence of trade secrets in [a] requested document automatically excused the duty [of production], the courts’ power to request documents would become meaningless.” In light of this possibility, the New Code implemented the use of in-camera hearings to examine whether requested information in fact constituted a trade secret. Despite the availability of in-camera review, Japanese courts have, at times, failed to use this important option when faced with a request for document production.
In 2002 the Japanese Fukuoka District Court rendered an important decision in a large-scale trade secret misappropriation case. The case, Asahi Engineering K.K. v. Dai-ichi Seiko K.K. (“Dai-ichi”), resulted in an award of over 400 million yen, or approximately 3.87 million dollars, to Dai-ichi. Despite the positive result for Dai-ichi, the party alleging misappropriation of its trade secrets, the case highlights a problem that may impede successful litigation in Japan: the failure of the courts to use relevant legal tools to effectively and efficiently dispose of a case.
The Dai-ichi dispute resulted from the misappropriation of Dai-ichi’s trade secrets—which included several drawings pertaining to automobile molds—by Asahi, a company formed by Dai-ichi’s ex-employees. Asahi filed for a declaratory judgment against Dai-ichi in hopes of avoiding disclosure of the molds Asahi was alleged to have misappropriated. Dai-ichi counterclaimed against Asahi, alleging misappropriation of its trade secrets. However, Asahi prevented any adequate discovery by withholding all documents Dai-ichi had requested, claiming that the documents constituted Asahi’s trade secrets.
The first problem for Dai-ichi came when Asahi refused to produce documents that would have verified its theft of Dai-ichi’s proprietary information. Asahi was able to withhold the documents by claiming that they contained its trade secrets. Even though the Fukuoka District Court had at its disposal the use of in-camera hearings to view the documents under the New Code, the court chose not to use the private hearing to review whether the information actually contained trade secrets of Asahi, or to determine whether the information belonged originally to Dai-ichi.
Although the Fukuoka District Court’s failure to use an in-camera hearing did not ultimately destroy Dai-ichi’s chances of prevailing at trial, it did create unnecessary complications in both proving that Dai-ichi’s trade secrets had been misappropriated and the extent to which Dai-ichi deserved to be compensated. Japanese courts risk impeding successful trade secret litigation by failing to use in-camera hearings to determine whether a defendant’s documents contain its trade secrets, or whether the defendant is merely withholding evidence that would prove it had misappropriated the plaintiff’s trade secrets. Failure to use the relevant laws during trade secret litigation will discourage foreign and local businesses alike from engaging in such litigation, and must therefore be avoided by the Japanese courts. It is likely, however, that a Japanese court faced with a trade secret misappropriation claim in 2008 would make sure to use all relevant laws when disposing of the issue. In light of the recently amended UCPL and Japan’s increasing interest in protecting proprietary information, a court would be more mindful of the need to adequately and effectively protect such important information.
Trade secrets are an important item that must be afforded adequate protection—both during the transactional phase of business dealings as well as during litigation. Despite the importance of trade secret protection, it was not until 1991 that Japan instituted a statutory scheme designed to protect proprietary information. Although the 1991 amendment to the UCPL was an important step for Japan, it was far from complete.
Japan has recently strengthened its trade secret security system by providing for protection of information disclosed during litigation. The 2005 amendments to the UCPL allow for in-camera review of testimony relating to proprietary information and, perhaps most importantly, permit the issuance of protective orders in trade secret disputes. The UCPL, as amended in 2005, has been applied to the benefit of trade secret owners, and the current statutory scheme for trade secret protection can therefore give local and foreign businesses alike a sense of security when bringing misappropriation claims in Japanese courts.
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