No Way Out: Mandatory Trade Secret Protection Laws in International Arbitration

trade secrets text - file cabinet label, bronze holder against grunge and scratched wood

By Charles H. Camp, Anna R. Margolis & Camellia H. Mokri

The World Trade Organization’s member countries are required to include trade secret protections in their respective laws. With that in mind, this article discusses why a State must be critical in every contract it enters with another State.

 

As of today, 164 of the 195 countries in the world are members of the World Trade Organization (the “WTO”). Each of the WTO member countries are required to provide trade secret protections under their respective laws.

According to a policy statement by the United States Patent and Trademark Office1 (“USPTO”),

“Trade secrets consist of information and can include a formula, pattern, compilation, program, device, method, technique or process. To meet the most common definition of a trade secret, it must be used in business, and give an opportunity to obtain an economic advantage over competitors who do not know or use it.”

The United States complies with its international legal obligation to provide trade secret protection as a WTO member, as well as a party to the Agreement on Trade Related Aspects of Intellectual Property Rights (“TRIPS”), by having each of the states within the United States enact the Uniform Trade Secrets Act (“UTSA”) – something which virtually every state has done.2

According to the USPTO official policy statement,3

“As a member of the World Trade Organization (WTO) and a party to the Agreement on Trade Related Aspects of Intellectual-Property Rights (TRIPS), the United States is obligated to provide trade secret protection. Article 39 paragraph 2 requires member nations to provide a means for protecting information that is secret, commercially valuable because it is secret, and subject to reasonable steps to keep it secret. The US fulfils its obligation by offering trade secret protection under state laws. While state laws differ, there is similarity among the laws because almost all states have adopted some form of the Uniform Trade Secrets Act. The language of the Uniform Trade Secrets Act is very similar to the language in TRIPS.”

The obligations of the 164 WTO states to provide trade secret protection – a virtually worldwide public policy requiring trade secret protection – make trade secret protection laws “mandatory rules of law” (or “mandatory rules”) that cannot be contracted out of by parties to international contracts requiring disputes to be resolved through international arbitration.

In other words, parties’ freedom to contract is not unlimited.4 Instead, the parties’ choice of governing law may be overridden by mandatory rules, i.e., rules of law that “cannot be derogated from by way of Contract.”5

A mandatory rule of law has long been defined as:

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“[A]n imperative provision of law which must be applied to an international relationship irrespective of the law that governs that relationship. To put it another way: mandatory rules of law are a matter of public policy (ordre public) and moreover reflect a public policy so commanding that they must be applied even if the general body of law to which they belong is not competent by application of the relevant rule of conflict of laws. It is the imperative nature per se of such rules that make them applicable. One is thus led to conclude that there is an ‘approach to mandatory rules of law’ different from the classical method of conflict of laws. In matters of contract, the effect of a mandatory rule of law of a given country is to create an obligation to apply such a rule, or indeed simply a possibility of so doing, despite the fact that the parties have expressly or implicitly subjected their contract to law of another country.”6

The mandatory rules of a country must be applied where relevant acts are conducted or undertaken with that country or otherwise have a close contact with that country.7 This principle is recognised by Rome I,8 Rome II,9 United States law,10 international bodies such as the International Chamber of Commerce (“ICC”),11 and leading commentators.12

The principle is also consistent with Article 41 of the ICC Rules of Arbitration (the “ICC Rules”), which provides that the tribunal shall make “every effort to make sure that the award is enforceable at law”13 – and, to that end, that the award does not violate the national public policy of jurisdictions with a close connection to the parties and the underlying dispute.14

Consequently, an international arbitral tribunal must apply the mandatory law of a State other than the seat of the arbitration (which often govern disputes when the parties have not otherwise chosen), where (i) the law in question is mandatory in the State where it is enacted; and (ii) the conflicts of law rules applicable in the arbitration would provide for application of the foreign law (save for the parties’ purported choice of law).15

In disputes involving United States’ parties, the UTSA encapsulates the public policy interest of providing robust deterrents to trade secret misuse. In a landmark United States Supreme Court case, Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, “the public interest in vigilant enforcement of the antitrust laws through the instrumentality of the private treble-damage action….”16 was a driving factor in the determination that United States antitrust laws overrode the choice of law provisions of the contract at issue. The United States Supreme Court held that such laws were mandatory:

United States’ courts have repeatedly emphasised the strong public interest in protecting trade secrets and have applied the UTSA even in the face of a contrary choice of law clause.

“[I]n the event the choice-of-forum and choice-of-law clauses operated in tandem as a prospective waiver of a party’s right to pursue statutory remedies for antitrust violations, we would have little hesitation in condemning the agreement as against public policy.17

Similarly, the UTSA provides for treble damages as a powerful deterrent to trade secret misuse, and should be determined to be mandatory by analogy to the Mitsubishi decision involving statutory antitrust laws.

United States’ courts have repeatedly emphasised the strong public interest in protecting trade secrets and have applied the UTSA even in the face of a contrary choice of law clause.18

Indeed, as noted above, parties’ freedom to contract is not without limits, one general limitation being that mandatory rules of a country must be followed where relevant acts are conducted or undertaken within that country.19 This principle is supported by the drafting history of the ICC rules. The 1980 draft of the law applicable to international contracts, submitted by the working group of the Commission on Law and Commercial Practices of the International Chamber of Commerce (ICC Draft Recommendations) considered that arbitrators would often apply mandatory rules. The draft considered two alternative provisions, first that:

“[E]ven when the arbitrator does not apply the law of a certain country as the law governing the contract he may nevertheless give effect to mandatory rules of the law of that country if the contract or the parties have a close contact to that country and if and in so far as under its law those rules must be applied whatever be the law applicable to the contract. On considering whether to give effect to these mandatory rules, regard shall be had to their nature and purpose and to the consequences of their application or non-application.”

Second, that:

“[E]ven when the arbitrator does not apply the law of a certain country as the law governing the contract he may nevertheless give effect to mandatory rules of the law of that country if the contract or the parties have a close contact to that country in question especially when the arbitral award is likely to be enforced there, and if and in so far as under the law of that country those rules must be applied whatever be the law applicable to the contract.”

Both draft provisions reflect a deference to mandatory rules where acts or conduct takes place in a jurisdiction in which mandatory rules exist to govern that conduct.20

Article 21 of the ICC rules provides that: “[t]he parties shall be free to agree upon the rules of law to be applied by the arbitral tribunal to the merits of the dispute. In the absence of any such agreement, the arbitral tribunal shall apply the rules of law which it determines to be appropriate.”21

In Europe (including the United Kingdom), the EU regulation known as “Rome II”22 governs choice of law of non-contractual claims where there is no choice of law agreement between the parties. Prior to the signing of the Rome II, most European states followed the principle of lex loci delicti commissi (the place where the harmful act was committed). Rome II fundamentally changed that position. Under Rome II, choice of law questions are resolved by its Article 4(1), which provides that:

“[T]he law applicable to a non-contractual obligation arising out of a tort/delict shall be the law of the country in which the damage occurs irrespective of the country in which the event giving rise to the damage occurred and irrespective of the country or countries in which the indirect consequences of that event occur.”

Non-contractual breach of confidence claims fall within Article 6(2) of Rome II, because it exclusively affects the interests of the victim of the trade secret misappropriation, not the collective interests of consumers more widely. This is generally the case with commercial breach of confidence claims.23 For that reason, the governing law must be determined pursuant to the terms of Article 6(2), which provides that “Article 4 shall apply.”

As explained above, Article 4 of Rome II determines the applicable law no matter whether (i) the parties were not free to choose the applicable law or (ii) the parties, in fact, made no choice of law.

Article 4 of Rome II provides as follows:

  1. Unless otherwise provided for in this Regulation, the law applicable to a non-contractual obligation arising out of a tort/delict shall be the law of the country in which the damage occurs irrespective of the country in which the event giving rise to the damage occurred and irrespective of the country or countries in which the indirect consequences of that event occur.

  1. Where it is clear from all the circumstances of the case that the tort/delict is manifestly more closely connected with a country other than that indicated in paragraphs 1 or 2, the law of that other country shall apply. A manifestly closer connection with another country might be based in particular on a pre-existing relationship between the parties, such as a contract, that is closely connected with the tort/delict in question.24

It is not possible – and, indeed, from a public policy perspective, should not be possible – to shield oneself from liability for misappropriation of trade secrets through creative drafting of choice of law or limitation of liability provisions in a contract.

In sum, it is critical when entering into a contract with a party from another State to consider the fact that, despite any express agreement of the parties to apply a certain State’s laws to any disputes that may arise out of the contract, whether such disputes are contractual, tortious or statutory in nature, trade secret protection laws – mandatory rules of law – will have application to such disputes. In other words, given the virtual worldwide protection trade secrets enjoy, it is not possible – and, indeed, from a public policy perspective, should not be possible – to shield oneself from liability for misappropriation of trade secrets through creative drafting of choice of law or limitation of liability provisions in a contract.

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About the Author

camp_charles_liCharles H. Camp has taught International Negotiations at George Washington University Law School for over ten years and is an international lawyer based in Washington, D.C. with over thirty years’ experience representing foreign and domestic clients in international litigation, arbitration, negotiation, and international debt recovery. After practicing at large, international law firms for twenty years, Mr. Camp opened the Law Offices of Charles H. Camp, P.C. in 2001 to focus exclusively on complex, international commercial disputes.

 

margolis_anna_liAnna R. Margolis, a graduate of the George Washington University Law School, is an associate at the Law Offices of Charles H. Camp, P.C. Her practice focuses on international arbitration and litigation, including complex international and domestic commercial disputes. Ms. Margolis has worked extensively on litigation matters in the regions of South America and Asia.

 

mokri_camellia_liCamellia H. Mokri, is an associate at the Law Offices of Charles H. Camp, P.C., practicing in the area of international dispute resolution, including international arbitration and litigation. Ms. Mokri focuses on commercial disputes and jurisdictional matters involving foreign sovereigns. Prior to joining the firm, Ms. Mokri, a graduate of New York Law School, was with UBS in New York.

 

References

1. Trade Secret Policy, United States Patent and Trademark Office, https://www.uspto.gov/patents-getting-started/international-protection/trade-secret-policy (last visited Oct. 25, 2016).
2. As of 25 October 2016, only Massachusetts and New York have not yet enacted the UTSA, something they both are expected to do during 2016. See Legislative Fact Sheet – Trade Secrets Act, Uniform Law Commission, http://www.uniformlaws.org/LegislativeFactSheet.aspx?title=Trade%20Secrets%20Act (last visited Oct. 25, 2016).
3. Trade Secret Policy, United States Patent and Trademark Office, https://www.uspto.gov/patents-getting-started/international-protection/trade-secret-policy (last visited Oct. 25, 2016).
4. Y. Derains and E. Schwartz, A Guide to the ICC Rules of Arbitration 239 (2d ed. 2005).
5. N. Blackaby and C. Partasides, Redfern and Hunter on International Arbitration, para. 3.128 (6th ed. 2015).
6. P. Mayer, Mandatory Rules of Law in International Arbitration, 2 Arb. Int’l 274, 274-275 (1986).
7. M. Baniassadi, “Do Mandatory Rules of Public Law Limit Choice of Law in International Commercial Arbitration,” 10 Int’l Tax & Bus. L. 59, 83-84 (1992).
8. Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (“Rome I”), Art. 9.
9. Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (“Rome II”), Art. 14(2).
10. See Restatement (Second) Conflict of Laws §187 (1988 Revision).
11. Draft Recommendations of the ICC Commission on Law and Commercial Practices (1980), cited in O. Lando Conflict-of-Law Rules for Arbitrators, in H. Kötz, et al. (eds.), Festschrift Für Konrad Zweigert 157, 176 (1981) (“Even when an arbitrator does not apply the law of a certain country as the law governing the contract he may nevertheless give effect to mandatory rules of the law of that country if the contract or the parties have a close contact to that country and if and insofar as under its law those rules must be applied whatever be the law applicable to the contract. On considering whether to give effect to those mandatory rules, regard shall be had to their nature and purpose and to the consequences of their application or nonapplication.”).
12. G. Born, International Commercial Arbitration, p. 2715 (Vol. 2, 2014); N. Blackaby and C. Partasides, Redfern and Hunter on International Arbitration, paras. 3.128-3.130 (6th ed. 2015).
13. ICC Rules, Art. 41.
14. M. Baniassadi, “Do Mandatory Rules of Public Law Limit Choice of Law in International Commercial Arbitration,” 10 Int’l Tax & Bus. L. 59, 65-66 (1992).
15. G. Born, International Commercial Arbitration, p. 2715 (Vol. 2, 2014); C. Brower, “Arbitration and Antitrust: Navigating the Contours of Mandatory Law,” 59 Buff. L. Rev. 1127, 1143-1144 (2011).
16. Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 653 (1985) (internal citations omitted).
17. Id. at 637, n. 19 (emphasis added).
18. See Mintel Learning Tech., Inc. v. Beijing Kaiti Ed. & Tech. Dev. Co., No. C-06-7541 PJH, 2007 U.S. Dist. LEXIS 103180, at *28, *29-30 (N.D. Cal. 2007) (“A forum has a significant interest in protecting the intellectual property of its citizens and businesses from infringement by foreign defendants … the questionable choice of law clause which defendants allege supplements the original agreement matters little with regard to California’s compelling interest in defending its citizens”); see also Magnecomp Corp. v. Athene Co., 209 Cal. App. 3d 526, 540 (Cal. Ct. App. 2d Dist. 1989) (“California has manifested a strong interest in providing a forum for its resident for causes of action arising from misappropriation of trade secrets by its enactment of the Uniform Trade Secrets Act”).
19. 2 Henry Batiffo and Paul LaGarde, Droit International Privé 277 (1987).
20. See H. Grigera Naón, Choice of Law Problems in International Commercial Arbitration 159 (1992) (“[T]he limits on the parties’ choice of law stipulations are to be found in the mandatory national norms (lois de police and self-applying lois d’applcation necessaire) which directly claim application, because of their substance and purposes, to international disputes and in the fraude a la loi doctrine. The latter doctrine is understood as preventing the parties from choosing a law leading to avoidance of the prohibitive provision of all the national legal orders objected connected with the transaction”); see also Mitsubishi at n. 19 (“We . . . note that in the event the choice-of-forum and choice-of-law clauses operated in tandem as a prospective waiver of a party’s right to pursue statutory remedies for antitrust violations, we would have little hesitation in condemning the agreement as against public policy.”)
21. ICC Rules, Art. 21(1).
22. Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (“Rome II”).
23. See Innovia Films Ltd v Frito-Lay North America, Inc [2012] EWHC 790 (Pat) at para. 110; Conductive Inkjet Technology Ltd v Uni-Pixel Displays Inc [2013] EWHC 2968 (Ch) at para. 125; and T. Aplin, Gurry on Breach of Confidence, para. 23.70 (2d. ed. 2012).
24. Rome II, Art. 4 (emphasis added).