Trade Secrets

Introduction

The uniqueness of trade secret law is that it fits into the extensive framework of contract, competition, innovation, and intellectual property rights. A trade secret is a widely recognised intellectual property right that protects information that should be confidential for the interest of the business. A trade secret is an intellectual property that needs less compliance and protection against competitors sustaining confidentiality. The written recipe of KFC, ingredients of Coca Cola is some of the famous examples of trade secrets. Proper law is needed to enforce the protection of trade secrets than merely recognising as intellectual property is of utmost importance to protect the businessman who had invested his intellectual and labour work to create a process or anything that could give a competitive advantage coupled with commercial value. 

Definition of Trade Secrets

 North American Trade Agreement (NAFTA) defines a trade secret as “information having a commercial value, which is not in the public domain and for which reasonable steps have been taken to maintain its secrecy.” The Uniform Trades Secrets Act, 1970 also provides for the definition of trade secrets, which is as follows:-

“Information, including a formula, pattern, compilation, program device, method, technique, or process, that

(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use

 (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy”.

Trade secrets are valuable information that needs to be protected from the public to have an advantage and a competitive edge amongst the competitors

 

Essential elements of Trade Secret

The United Trade Secrets  Act provides three essentials to establish that information is a trade secret.

  1. The information should be a formula, pattern, compilation, program, device, method, technique or process 
  2. The information should have an economic value available only from one source
  3. The claimant  should have made reasonable efforts to protect the confidentiality of the  information 

The information which is known or which is under the public domain cannot be called a trade secret. Information need not be completely confidential yet it can also be a combination of publicly available information but it is can be considered as a trade secret only if the resultant combination is unique and valuable information.[i] 

Independent Economic Value of Information

The test of the economic value of information is not the general value of the information but the individual economic value by not being known to others. Any information which could be used to gain a valuable share in the market or which has a competitive edge is known as the economic value of information. Information on the regular customer list or any techniques which save the cost of production or any other information which would solely influence the revenue generation can be regarded as a trade secret. 

Reasonable efforts to protect the confidentiality of information.

When there is a breach of trade secret it is essential to establish that reasonable efforts were made to protect the trade secret. An organisation in which production is the trade secret can use safety production vaults enabled with digital card access to only a few employees. A trade secret that has a physical form a company should try to secure it by proper surveillance and security. In case if the said trade secret is in an intangible form proper confidential policies should be followed by the company. In companies where the information which is confidential in nature is often used by the employees a nondisclosure agreement has to be signed by their employees to protect the trade secret. Due diligence coupled with proper surveillance can protect the trade secret from external threats. 

International laws for the protection of trade secrets

There are no international treaties that govern trade secrets. However the  Trade-Related Aspects of Intellectual Property Rights (TRIPS) was signed during the Uruguay Round of Multilateral Trade Negotiations that laid down minimum standards of protection for patents, copyrights, trademarks, and trade secrets obligated all the members of WTO to comply with the TRIPS agreement. Article 39 of TRIPS obliges WTO members to protect individuals and corporations who own or control “undisclosed information” from unauthorized disclosure, acquisition, or use without their consent in a manner contrary to honest commercial practices. A footnote defines a manner contrary to honest commercial practices to mean “practices such as breach of contract, breach of confidence and inducement to breach and includes the acquisition of undisclosed information by third parties who knew or were grossly negligent in failing to know, that such practices were involved in the acquisition.

 Article 39 also defines “undisclosed information” as information that

 1. Is the secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question

 2. Has commercial value because it is secret

 3. Has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

Though Article 39 created an obligation on the signatories to enact laws protecting the trade secret the guidelines and the definition of undisclosed information are not specific as the definition in the federal Economic Espionage Act which gives a detailed list of information that can be brought under the definition of a trade secret. United States enacted The Uniform Trades Secrets Act, 1970 which still serves as a guideline to many other countries who enact laws to protect trade secrets. The United States has been very instrumental in promoting other countries which it maintains trade relations to enact laws to protect trade secrets through its bilateral trade agreements.

Protection of Trade secrets in India

Currently, in India there are no such laws that protect trade secrets. The judiciary still relies on the traditional common law principles to protect the confidentiality of information. However there are few legislations that recognise the protection of Trade secrets.

Information Technology Act

Section 8(1)(d) of the Right to Information Act, 2005 says that there is no obligation to provide any information to any citizen regarding commercial confidence, trade secrets or intellectual property unless there is a larger public interest involved. This section recognizes the need to protect trade secrets and the section clearly emphasises that there is no need to disclose any information that is vital or confidential information that could have a competitive advantage in the business unless in the interest of the public.

Indian Contracts Act,1872

Section 27 of the Indian contracts act declares any agreement which attempts to restrict trade to be null and void. Entering into non compete agreements with employees or any stakeholder of the company is one of the common ideas to protect trade secrets. However any restriction in the agreement which is unreasonable could be declared void. In the case of Niranjan Shankar Golikari v. Century Spinning and Manufacturing Company[ii], an agreement was entered with an employee restraining him to prematurely terminate his service before 5 years and work with another company with the same capacity. The employee quit the job and joined the competitor’s company for which the plaintiff company sought an injunction. The court upheld the negative clause of restraint on trade only for a particular period of time which is a reasonable restraint and thus granted an injunction to protect the trade secret of the company. 

Similarly in the case of Herbert Morris Ltd v. Saxelby[iii] the defendant was a servant of the plaintiff company. He entered into an agreement not to carry on any business competing with that company for a period of seven years after leaving its service. The court held that there was no trade secret involved in the protection of restraint was involved. The so called secret was only the particular method of organisation that cannot be considered as a trade secret and hence this agreement is an unreasonable restriction of trade and held the agreement to be void. 

In the case of Forester & Sons v. Suggest[iv], a glass manufacturer engaged a servant who was instructed with a confidential method of making glass bottle. A contract of not to carry on glass manufacture for five years after leaving in this circumstance held to be a reasonable one.

Indian Penal Code

Section 405 of the Indian Penal Code talks about the criminal breach of trust wherein, if any person is trusted with any property and the person misappropriates it contrary to the given directions, he will be liable under this section. In the case of RK Dalmia v Delhi Administration[v]it was held that the property under section 405 can also include movable property and the definition of property cannot be restrained. Similarly, Section 408 penalises a clerk or servant who has been trusted with a master’s property and subsequently breaches that trust. The main limitation to this section is whether trade secrets can be considered as property under Section 405 is a question left being unanswered. Though trade secrets are included under the definition the compensation it would just act as a deterrent factor and the loss due to misappropriation will be greater than the compensation under Section 357 of criminal procedure code.  

India does not have any comprehensive laws to protect trade secrets and it is the need of the hour to legislate a law to protect confidential information to attract foreign investments and to develop the current business sector. 

Defences to Disclosure of trade secrets

1) General Knowledge

In common law, it is a well-established principle of public policy that a former employee is free to utilize the general skill and knowledge acquired during his or her employment. 

2) Parallel Development

An owner of a trade secret does not enjoy the monopoly status of information. Any person who works hard could also discover the same which is a widely accepted defense.

3) Reverse Engineering

It is lawful for person to work backward of an end product to find out the method to produce a particular instrument which could be a trade secret of another company. To counter this defence the plaintiff should establish that the trade secret was wrongfully misappropriated which could straightaway defeat the defense of reverse engineering. 

4) Public Interest

 It is well established that no liability is attached to the use of information, which was in the public interest to use or disclose. Thus, a defendant in proceedings for breach of confidence shall not be liable to the plaintiff in respect of any disclosure or use of information by the defendant in breach of an obligation of confidence if 

(a) the defendant raises the issue of public interest in relation to that disclosure or use

(b) the plaintiff is unable to satisfy the court that the public interest relied on by the defendant under that subsection is outweighed by the public interest involved in upholding the confidentiality of the information.

 

5) Statutory Obligation 

If the disclosure of the information is ordered under any court of law or under any statute the person will be absolved from the liability of misappropriation of the trade secret. 

Conclusion

Trade secret protection in India is still at a nascent stage as there is no special legislation codifying the principles of trade secret law. The reliance of the courts on traditional common law principle to protect trade secrets has proved to be obsolete and it is quite important that the country will develop only if the country protects the trade secrets held by the business sector to minimise the loss of revenue due to dissemination of information without lack of comprehensive law. Therefore, a statutory law on trade secrets and confidentiality in the framework of IPR is not only a good idea but a subject of utmost necessity.

References

  1. https://blog.ipleaders.in/the-need-for-an-innovative-law-for-innovation-laws/
  2. https://www.wipo.int/tradesecrets/en/
  3. http://www.legalserviceindia.com/article/l123-Trade-Secrets.html

[i] Stephens v. Avery, (1988) 2 All ER 477

[ii]1967 (2) SCR 37

[iii]1961 (1) AC 688

[iv]1918 (35) TLR 87

[v]AIR [1962] SC 182

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