How are trade secrets protected when I buy a business?

Buying a business usually means buying know-how: a recipe, a pricing method, a customer list, a process competitors cannot see. Unlike a patent or a trademark, a trade secret has no certificate behind it. In practice you are buying a record of confidentiality, and due diligence should test whether that record is real.

Why there is no registry to check

Trade secrets are not registered anywhere, so no government office can confirm that one exists or is valid. Registered rights work differently: the Canadian Intellectual Property Office registers transfers of trademark ownership, for example. Protection for a trade secret comes from the common law rather than a registration system, so evidence of the steps the business took matters more than the information itself.

What the seller should be able to show

• Signed confidentiality or non-disclosure agreements with employees, contractors and any outsider who saw the information.
• How files were marked, stored and restricted. Information treated casually is much harder to protect.
• Any past disclosure to a competitor or the public, and any former employee who left to work for one.

If staff never signed anything, that is a real gap. It does not make the information worthless, but it weakens any claim to legal protection, so raise it with your lawyer before closing.

Customer data inside the secret

Customer lists often include personal information, and privacy law applies while you are still only reviewing the business. Under the federal privacy statute, the parties to a prospective business transaction may use and disclose personal information without consent if they agree to use it only for the transaction, protect it, and return or destroy it if the deal does not proceed, and the information is necessary to decide whether to proceed with the deal. That exception does not cover a deal whose main purpose is buying or selling personal information.

What carries over at closing

Structure changes the paperwork. In a share purchase, confidentiality agreements the company already holds are more likely to stay in force, while in an asset purchase they may need to be signed again with you. In Ontario, the Employment Standards Act, 2000 voids most employee non-compete agreements, with an exception where a seller becomes the purchaser’s employee as part of the sale, so confidentiality terms carry more weight. Other provinces set their own rules.