Fashion Design as a Trade Secret

Protecting the interests of participants in the fashion industry, and above all its creative side (designers, fashion houses, artists, and so on), calls for special tools. Because many of the important ideas, solutions, and processes circulating within the fashion industry cannot be protected by copyright or patent law, the institution of trade secrets and know-how comes to play a particularly important role in protecting them.

As Merlin Hernandez, a management consultant with extensive experience in the fashion industry, notes, industrial spying is fairly widespread in the world of fashion, and a great many such cases are recorded when outsourced manufacturing is used to produce fashion items.¹ In the words of the same Merlin Hernandez, "any [emphasis ours — A.M., L.K.] information about a designer's new collection or marketing strategies that falls into competitors' hands before it has been picked up by the market can shorten the collection's life cycle and, going forward, diminish its value."² As we can see, in order to remain resilient in competition on the fashion market — and not only there — virtually any data, any information about a product, the methods used to make it, and how it's promoted on the market is critically important, not just the portion of that information that happens to be patentable or eligible for copyright protection. Merlin Hernandez himself even uses the phrase "design theft."

The regulation of trade secrets is addressed by Directive (EU) 2016/943 of the European Parliament and of the Council on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use, and disclosure.³ According to the preamble of this Directive, a trade secret covers valuable know-how and business information where that information is not generally known, is not disclosed, and its holder intends to keep it confidential. Trade secrets may be used or disclosed only with the consent of their holder. Article 2 ("Definitions") of the Directive contains the concept of "infringing goods." The obvious first instinct is to translate this as "counterfeit products" ("контрафактная продукция"). However, we render it instead as "goods obtained as a result of the unlawful acquisition, use, or disclosure of a trade secret," especially since, in that same article, an "infringer" is defined as "a natural or legal person who has unlawfully acquired, used, or disclosed information constituting a trade secret." The accuracy of our translation is further confirmed by the Directive's own explanation of what is meant by "infringing goods": goods whose design, characteristics, functioning, production process, or marketing significantly benefits from trade secrets unlawfully acquired, used, or disclosed.⁴

EU member states are required (under Article 10 of the Directive), among other things, to prohibit the production, offering, placing on the market, or use of such "infringing goods," as well as their import, export, or storage for those purposes.⁵

The world of fashion is well aware that, frankly speaking, "protective certificates" in the form of copyright and patent rights over fashion items are a weak barrier against counterfeiters and forgers. One recent example is the infringement of the intellectual property of two Indian fashion designers, Rohit Bal and Raghavendra Rathore. Neither copyright nor patents helped them — within 48 hours of their collections being shown at Lakmé Fashion Week, the original pieces had already been copied and were being sold at low prices. This is not just a matter of economic losses, but also of contempt for the work of entire creative teams who developed those collections and spent a long time preparing for the premiere show.⁶

Fashion houses, like other economic actors, use various means to protect themselves against industrial espionage: special agreements supplementing the employment contract, or terms written directly into the employment contract itself, concerning the non-disclosure of relevant confidential information — including obligations extending for several years after the employee leaves the company. These can also include separate obligations for employees not to compete with the employer (noncompete clauses).⁷

Similar agreements are also concluded with business partners, distributors, retailers, and licensees. In some cases such agreements may even be entered into with a fashion house's clients and with individuals who attend closed preview shows. It is not uncommon for models from new collections to be copied and put into counterfeit circulation by street vendors even before the official show has taken place: for example, an original designer handbag from a fashion collection priced at $700 may be sold as a "pirated" copy for as little as $65.⁸

At the same time, one cannot rely on such agreements alone, since, under the law, the holder of such confidential information (i.e., a trade secret) must protect it through specific measures — a trade secret regime.

For example, under Federal Law No. 98-FZ "On Trade Secrets" of July 29, 2004 (as currently in force), a trade secret is a confidentiality regime for information that allows its holder, under existing or possible circumstances, to increase income, avoid unjustified expenses, maintain a position in the market for goods, works, or services, or obtain some other commercial benefit. In turn, information constituting a trade secret means information of any kind — production, technical, economic, organizational, and other information, including information on the results of intellectual activity in the scientific and technical field, as well as information on methods of carrying out a professional activity — that has actual or potential commercial value precisely because it is unknown to third parties, to which third parties have no lawful free access, and in respect of which the holder of such information has introduced a trade secret regime. The holder of information constituting a trade secret is a person who lawfully possesses such information, has restricted access to it, and has established a trade secret regime with respect to it. As is well known, the required list of such measures necessarily includes: defining the scope of information constituting a trade secret; restricting access to such information by establishing a procedure for handling it and monitoring compliance with that procedure; and marking physical media containing such information, or including in the details of documents containing such information, the label "Trade Secret," indicating the holder of that information.⁹

Ignoring these simple requirements can prove costly for the injured party. For example, a court in New York City (Kings County) once heard a claim brought by an employer (a low-price wholesale clothing distributor) against a former employee and a competing company. The employee's duties included finding overseas retail outlets from which to purchase goods, which he did through a local business broker. Several years later, this employee left the company and went to work for a competitor, who then began placing its orders with the same retail outlets, through the same broker. Under New York law, a former employee generally has the right to do business with the same partners, unless he has signed a "non-compete agreement with the former employer barring him from independently serving his former employer's clients, from using trade or business secrets, and from disclosing customer information obtained unlawfully." The court ultimately ruled in favor of the defendants, finding that the broker's identity and the identifying details of the counterparty businesses did not constitute a trade secret. The defendant failed to prove that the broker and these businesses sold to him exclusively or had promised to do so, and also failed to present evidence that the identifying information about the broker and the businesses was in fact kept secret. Nor did the defendant present evidence that he had made significant efforts to find these businesses, establish business contacts with the broker, or that the identity of the counterparties had been kept confidential.¹⁰

Given the digitalization of nearly every sphere of our lives — and the fashion industry is no exception — cyber espionage attacks targeting fashion houses and other businesses in this industry pose a particular risk. As cybersecurity specialists note, hackers target two kinds of data held by fashion companies: consumer data, including credit card information, and clothing design information. This information can be unlawfully used by former and current employees of fashion companies who go on to start their own fashion businesses, or it can be passed on to competing companies, or simply sold on the black market for confidential information. For example, in 2014, data on more than one million customer credit cards belonging to Neiman Marcus fell into the hands of attackers as a result of a three-month cyberattack. Companies such as Patagonia, Bebe, and Kmart have suffered similar attacks.¹¹

Contemporary researchers particularly highlight "The Internet Threat" facing the fashion industry: thanks to all manner of devices, gadgets, and communication tools, real-time internet broadcasts of premiere collection shows now take place, and the intended recipients of such "transmissions" are so-called "knock-off manufacturers" — inexpensive underground factories abroad focused on producing cheap copies of original pieces on an industrial scale. Such "stamping mills" are capable of producing several thousand copies within six weeks or less. On this point, Xinbo Li notes: "Initially, fashion designers tolerated the production of illegal copies, viewing it as evidence of the popularity of their original fashion pieces. Today, 'fast fashion' items are copied at such a high speed that this has already created an entirely different reality."¹²

Industrial espionage in the textile industry, as such, has existed for several centuries now. For example, in 1259, a special decree of the authorities in Berlin forbade foreigners from working on local weaving looms, "so that they might not learn the secrets."¹³ During the reign of Ivan IV, the English were granted permission to trade duty-free within the Moscow state — this is how the "Muscovy Company" came into being. However, its activities went far beyond mere commerce. The renowned historian Klyuchevsky characterized it as follows: "The instructions with which it (the company) supplied its agents in Russia best show the spirit and the aims with which it operated." Among other things, the Muscovy Company demanded that its agents send samples of the ores and minerals found in abundance in Russia, and insisted on the need to uncover the recipes used for dyeing fabrics, leather, and so on.¹⁴

At one time, Article 1355 of the 1845 Penal Code (Ulozhenie o Nakazaniyakh) provided as follows: "Any person belonging to a factory, plant, or manufacturing establishment who discloses any secretly held method used in the manufacture or finishing of the products of such factories, plants, or manufacturing establishments, without the express consent of those to whom such secret rightfully belongs, and consequently to their detriment, shall be subject to: imprisonment for a term of four to eight months."¹⁵ The prominent Russian legal scholar V. Rosenberg referred to such a secret as an "industrial (trade) secret" and divided it into "a secret concerning the technical processes of manufacturing or producing certain goods (manufacturing-industrial secret), and a commercial or business secret, relating to the operations of selling goods and concerning the individual characteristics of a commercial enterprise and its trading activity."¹⁶ In other words, Rosenberg classified secrets relating to the processes of producing goods under the first category, and secrets relating to the processes of distributing goods under the second.¹⁷

A bit more should be said about "know-how." Translated from English, "know-how" refers to a designation for technical knowledge, production experience, and other information necessary for manufacturing a particular product or reproducing a given technology.

Current legislation contains no detailed definition of know-how, but one of the earlier drafts of the Federal Law "On Trade Secrets" defined "know-how" as "results of intellectual activity protected under a trade secret regime that can be transferred to another person and lawfully used by them, including: unpublished scientific and technical results, technical solutions, methods, ways of using technological processes and devices that are not protected by patent under the law, or that are not protected at the discretion of the person lawfully holding such information; knowledge and experience in the sale of products and services; information on market conditions; results of market research; and commercial, methodological, or organizational-managerial ideas and solutions."¹⁸

A great many inventions, discoveries, production methods, and the like are not patented in today's world but are instead protected under a trade secret regime, and the best-known example of this is the recipe for Coca-Cola, which has been kept secret for over a hundred years. The situation is similar with the production of Chinese porcelain. By some estimates, this technology is more than two thousand years old, and even to this day, the full tradition of its manufacture has never been fully disclosed to producers around the world. As recently as two hundred years ago, disclosing or attempting to obtain this production secret was punishable by death.¹⁹

As we can see, the institution of trade secrets can protect virtually any information related to production, technological data, and the like, whereas under the law, inventions, industrial designs, trademarks, and other intellectual property objects refer to quite specific, defined results of intellectual activity.²⁰