Japan has seen a rise in trade secret cases, with authorities increasingly pursuing criminal charges under the Unfair Competition Prevention Act for misappropriation of corporate data. Recent legal changes have lowered the burden of proof for victims and increased potential damages, heightening compliance risks for companies as the labor market becomes more fluid and digitalization facilitates data leaks.
In July, a Japanese man was sentenced to three years in prison for criminally “acquiring and disclosing” trade secrets — personal information of customers he illegally accessed as an IT worker (see here). The individual was found guilty of violating Japan’s Unfair Competition Prevention Act, which oversees the protection of corporate intellectual property which falls outside of laws regulating patents, design patents, trademarks, and copyright.
The case was initially treated as a massive corporate data breach, with the privacy commission’s administrative enforcement being issued against the man’s former employer a week before the police arrested the individual.
At the time of his arrest in January, police told MLex that they looked at both the unfair competition prevention and personal information protection laws (see here) but ultimately pursued him for violating trade secrets because of its heftier penalties (see here).
According to the National Police Agency, there has been a steady increase in the number of trade secret arrests in the last 10 years — with 2022 recording the highest with 29 cases, and 2023 the second highest with 26. Many are reported to be ex-employees switching to rival firms or going independent.
As Japan’s once-rigid labor market of lifetime employment increasingly gives way to more fluidity, and digitalization facilitates data leaks, companies face the risk of being implicated in data infringements committed by rogue employees. Recent changes to Japan’s unfair competition law have tightened protection for companies holding trade secrets and has heightened the compliance risk, with some companies going on the offensive by filing criminal complaints.
— Lowering the burden of proof —
Since the inclusion of trade secrets in its unfair competition prevention law in 1990, Japan has continuously updated the law, widening its scope and raising penalties. The latest change, implemented in April, broadens the types of Big Data protected under the category of “limited provision data” and expands the legal recourse for victims.
In particular, the new revision lowers the burden of proof for victims alleging trade secret misappropriation, making it less demanding to establish their claims in court, while also increasing the potential damages awarded in successful cases.
Previously, it was up to the plaintiff to prove that trade secrets were being used — with an exception for industrial espionage cases where establishing presumption sufficed.
Because it was difficult for plaintiffs to prove that the defendant was actually "using" trade secrets, the law allowed for the presumption of use when the defendant illicitly acquired trade secrets — mostly pertaining to production methods — and is producing goods made possible by using the trade secrets. This lowered bar, however, only applied to malicious cases, such as industrial spies.
But given the nature of recent trade secret cases — most were carried out by those who had legitimate access to the information — the updated law extends the industrial spy exception to presumption of use for contractors and former employees. It also covers those who became aware of the illicit acquisition after the fact, but continued to possess the data.
Individuals can be sentenced for up to 10 years in prison and/or 20 million yen ($130,000); and under Japan’s dual liability principle (see here), companies can be fined up to 500 million yen.
— Corporate liability —
To be sure, the three-pronged test for determining trade secrets — secrecy, usefulness, and not publicly known — raises the bar on the kinds of customer data information that can be protected. This limits the cases in which authorities can charge data breaches under the IP law.
In fact, criminal investigations under Japan’s personal information protection law have been on the rise (see here), raising alarm bells for companies and individuals to exercise greater vigilance in securing personal data.
The legal consequences for companies remain stark.
In February, a company operating a sushi restaurant, was fined 30 million yen for illegally obtaining and using trade secrets, including procurement prices from its rival. The company's former employee was also convicted. The Tokyo District Court dismissed the defendants’ claims that the information was not managed as confidential information, making it not a trade secret, and the decision was upheld by the appeals court.
In this changed environment, some companies aren't idly sitting by waiting for police to take action. In a move still rare in Japan, an e-commerce logistics company in November announced its plans to file a criminal complaint against its former employees and their new employer for breaching a trade secret (see here).
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