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Trade Secrets: The Concealed IP Right

I. INTRODUCTION

The global economy is trending towards an era of protectionism and it can be inferred from policies such as Make America Great Again and Make in India, thereby increasing the significance of exports. As a result, the significance of Intellectual Property (‘IP’) protection also heightens due to the need for extending such exports for its proper commercialization.[1]

Trade secrets can be defined as unpublished business information providing a competitive edge to the business. It can be secrets relating to manufacturing, industrial, or commercial sectors. The application of such information by a person, other than the proprietor, without permission, is considered unfair practice and an infringement of trade secrets.

The concept of a trade secret is very broad in scope which includes sales methods, distribution methods, consumer profiles, and advertising strategies, list of suppliers and clients, and manufacturing process. However, it is not restricted to the above-mentioned methods. There are various factors to be considered to determine if certain information represents a trade secret and will depend on the facts and circumstances of each case. A few aspects to be considered are breaches of; contract and confidence. [2]

Origin of Trade Secrets:

IP provides legal protection to scientific and technological research, against competitors, by way of sustaining confidence and confidentiality. Sophistication and specialism are essential prerequisites to obtain legal exclusivity in using ideas and information for commercial advantage. Trade Secrets, as an IP, have the potential to translate intangible value into economic growth. Trade Secrets have been displaced from IP law due to its nature of secrecy and confidentiality.However, the nature of IP law is to bring transparency and integrity in knowledge management.

Trade Secrets are awarded confidentiality under legal protection, allowing claims for injunctive relief for unaccredited use and circulation by way of recovery of damages. Besides, the breach of confidentiality attracts criminal charges. The degree of recognizing trade secrets, globally, can be estimated by the fact that the majority of working technologies, worldwide, are protected as trade secrets, rather than patents.

At the International level, the North American Free Trade Agreement and the Agreement on Trade-Related Aspects of Intellectual Property (‘TRIPS’) sanctioned the provisions relating to trade secrets during the Uruguay Round of General Agreement on Tariffs and Trade. Subsequently, there has been an optimistic shift towards the adoption of domestic statutes, precisely directed at the increased protection of Trade Secrets.

Concept of Trade Secrets.

IP laws are generally territorial but the immunity of trade secrets fluctuates in line with jurisdiction. Trade secret laws aim at protecting the technological and commercial information, not of common knowledge in the trade, and prevent uncertified commercial use by others. The policy following trade secret protection is to inspire research and development by providing an umbrella to the innovator of business information and maintain an adequate degree of business ethics. The three factors routine,[3] in every definition of trade secrets are as follows:

(i) it is information, not generally known to the public.

(ii) it confers economic advantage by maintaining secrecy and confidentiality.

(iii) is subject to reasonable efforts to maintain its secrecy.

II. PROTECTION UNDER VARIOUS LAWS

Indian Courts have endorsed trade secrets protection under various statues, such as contract law, copyright law, principles of equity and the common law action of breach of confidence through specific trade secret legislation is absent. It is important to note that electronic records are given protection under Section 72 of the Information Technology Act, 2000.

Contract Law:

In India, a person can be contractually required not to pass on information that is disclosed to him/her in confidence. In the case of Richard Brady v Chemical Process Equipments P Ltd,[4] the plaintiff invented a fodder protection unit and had provided information, to the defendant, regarding the technical knowhow, materials, drawings, and other specifications to procure thermal panels from the defendant. Subsequently, it came to light that the defendant failed to supply the thermal panel and the plaintiff learned about the defendant’s own fodder production unit based on the information given by the plaintiff. The Court invoked a wider equitable jurisdiction and awarding an injunction in the absence of a contract.

Copyright Law:

The Courts have recognized that client information stored in the form of a database is subject to copyright. A business regularly collects data and arranges them systematically and can be accessed electronically in the time of their operations. The data may be used to analyze customer behavior, market trends, or simply maintain inventory levels. Hence, the database is an important tool for businesses allowing them to run without disturbances and plan their future development. The same is governed by Section 2(o) of the Copyright Act 1957.

In the case of Govindan V Gopalakrishna,[5] the Court was of the view that the amount of originality in a compilation is immaterial and is protected by law. Hence, no party may misappropriate the result of another’s intelligence, skills, or labor.

The present legal position mandates that every effort, industry, or expense of skill, results in copyrightable work. But the works protectable have the following characteristics:

(i)Reasonably differences.

(ii) involve some intellectual effort.

(iii) involve the slightest degree of creativity.

III. INTERACTION BETWEEN TRADE SECRETS AND COPYRIGHT LAW

The treatment of databases as trade secrets can be a stronger form of protection as it helps to protect the inherent data rather than a mere form of expression protected by the copyright law in theory.[6]

In the case of Burlington Home Shopping Pvt Ltd v RajnishChibber,[7] the Court observed that although trade secret protection applied to a wide range of business data, customer lists, and other compilations of business data maybe copyrightable as a work of fact. The copyright law and trade secrets law protect different elements of compiled business data theoretically. However, there was frequent interaction between both and often trade secrets protection extends to a particular expressive arrangement of data.

In the same case, the court dealt with an application for temporary remedy in a suit by a mail order service company versus its employee for an injunction preventing a breach of copyright and confidentiality. The Court held that “the compilation of addresses developed by devoting time, labor, money and skills amount to literary work in which the author has copyright though the source may be commonly situated. The Court granted interim injunction when it came to light that the defendant’s database was significantly a duplication of the database of the plaintiff.

Proving Confidentiality of Information:

A trade secret suit should make clear that the subject information is confidential. Furthermore, the plaintiff has the burden of proving reasonable efforts taken to protect the confidentiality of the information. In case of failure to prove the same, the information risks losing the quality of confidentiality. Further, if the content is not unique and the database is merely a compilation of existing material, the question of confidentiality ceases to exist.

In the case of Genetics India Pvt Ltd V Shailendra Shiv, the Court observed that “pleadings of nature and the quality of information which is confidential are crucial in the absence thereof there is no question of confidentiality”.[8]

Infringement of Trade Secrets and Remedies.

A trade secret proprietor has the claim to keep others from swindling and make use of his trade secret. Sometimes, misappropriation is a result of industrial espionage, it mostly involves appropriation by previous employees, use in new businesses, or for the latest employers. The protection is destroyed if the owner fails to make reasonable efforts to keep the information confidential. It is pertinent to note that a trade secret is not actionable in all cases. There are several shields available to disclosure and the owners have recourse only against misappropriation.

In common law jurisdictions, it is a customary principle of public policy that a former employee is free to utilize the general skill and knowledge acquired during his or her employment.[9]

India’s Common Law Approach.

In the case of American Express Bank Ltd. V Priya Puri[10], the trade secret as defined by the Court as formulae, technical know-how or a method of business adopted by an employer which is unknown to others and such information has a reasonable impact on the organizational expansion and economic interests. The bases for protection of trade secrets are principles of equity, the action of breach of confidence, and contractual obligations.

The case of Richard Brady v Chemical Process Equipments P Ltd,[11] mentioned above serves as a classic example of equity being taken as a base.

In the case of Diljeet Titus V Alfred Adevare & Ors,[12] it was held that the court must involve restraining a breach of confidence independent of any right under the law and the obligation to maintain confidentiality is implied. Hence, it can be said that the protection of trade secrets does not always originate from the owner of such a secret.

In the case of Niranjan Shankar Golikari V Century Spinning,[13] the Court held that “negative covenants in employment agreements about non-disclosure of confidential information operative during the period of contract of employment and even thereafter are not considered restraint of trade and do not fall within the purview of the Indian Contract Act, 1872.[14]

IV. USERS OF TRADE SECRETS

Trade secrets are largely used by businesses irrespective of their size. The most common users are small and medium-sized enterprises (‘MSE’). There are no limitations associated with trade secrets such as complex legal procedures and is an immediate complement to contracts and securities measures.

Precautionary Measures to be taken by SME:

The following aspects to be considered to ensure the protection of trade secrets:

  1. If the secret is patentable and if the patent offers better protection
  2. A handful of people know the secret and are aware of the confidentiality and the consequences of breaching such confidentiality
  3. Include the duty of confidentiality within the contracts with the stipulated period if necessary.

Sign a confidentiality agreement in separate.[15]It is pertinent to note that calling an information “trade secret” will not make it so. A business must behave in a way that proves its desire to keep the information confidential. The formula of Coca-Cola (‘Coke’) is a classic example. Coke takes extreme steps to protect the formula. The secret is locked in a bank vault and can be opened only by passing a resolution passed in the board meeting. It claims that only two employees of Coke are aware of the formula and are not allowed to travel in the same aircraft. The intention to maintain secrecy and reasonable efforts are to be proved and extreme steps stated above are not necessary.

The most common and most effective method to protect trade secrets is the use of confidentiality agreements commonly known as the Non-Disclosure Agreement (‘NDA’) as stated above. The Courts have emphasized NDA’s and consider it to be the most important.

Practical Steps to Counter Internal Threats:

  1. Protected information technology systems– The Cyber threat to computer systems (malware, ransomware) is archived. Organizations must be equipped with security measures and the steps must be taken to align the level of perceived risk to the value of information concerned. Eg- passwords, encryption, virus protection.
  2. Physical controls– Many organizations have access controls in place. The extent of security may vary for visitors and employees. Eg- inserting a biometric chip under the skin. It has been debated if an extreme measure stated above is proportionate to the business risk.
  3. Documentary security– Confidential information is recorded and transferred within and outside the organization. It is elementary but an important step to mark such documents as confidential
  4. Enforcement policy– The risk of misappropriation is permanent and the secret may be infringed despite the best efforts of the enterprise. Thus, it is important to have an enforcement policy. It is pertinent to use the enforcement policy as litigation has cost and risk implications. However, by taking action against infringers, the enterprise communicates that it will not hesitate to protect and preserve its valuable rights.

Practical Steps to Counter External Threats:

  1. Due diligence- a background screening on the integrity and reliability of a prospective commercial partner and the level of risk it poses to the organization is important. Furthermore, these steps can demonstrate reasonable efforts. Trade secrets unlike other IP rights lose their value if revealed to competitors or made public.

The other external threats can be avoided by taking the precautions outlined above.

The reasonable steps required under TRIPS and the EU Trade Secrets Directive must not be considered merely as legal hurdles. The businesses can satisfy the test and better protect information by implementing the steps mentioned above.[16]

V. FUTURE OF TRADE SECRETS IN INDIA

It is important to note that Article 1(2) of the TRIPS Agreement states that intellectual property shall include protection of undisclosed information and India is a signatory to the Paris Convention. Further, Article 39 of TRIPS ensures effective safeguard distorting competition concerning information which

  1. Is not common knowledge or easily accessible.
  2. Has commercial value under secrecy
  3. Has been subject to reasonable steps for ensuring its secrecy

The 1989 General Agreement on Tariffs and Trade discussion paper on India demonstrates trade secrets cannot be considered IP rights as the fundamental requirement of IP rights is rests in disclosure, publication, and registration, on the other hand, trade secrets are premised on secrecy and confidentiality. The paper also observes that secrecy and confidentiality should be governed by the appropriate civil law, not IP law.

On May 12, 2016, India approved the national IP rights policy which comprises seven objectives. One of the objectives of the policy is to guarantee a successful legal and legislative structure for the protection of IP rights. The initiative towards achieving the objectives includes the recognition of critical fields of study and research for future policy development. A key area located was the protection of trade secrets.

The common law approach adopted by India has been discussed above. The policy also stated that a toolkit will be prepared for the industries highlighting the applicable laws and policies that may enable businesses to protect their trade secrets in India. Furthermore, it stated that a training module for judicial academies maybe be considered and further study to be undertaken concerning other legal approaches for the protection of trade secrets.[17]

VI. CONCLUSION

Indian Trade secrets law is a judiciary made law based on the principles of equity and common law actions against breach of confidence with the jurisprudence as a whole revolving around an employee’s obligation or the duties of the contractor. It is ambiguous in several aspects such as:

  1. Scope of damages in case of a breach of confidential information;
  2. Theft of trade secrets by business competitors and
  3. Procedural safeguards during court litigation.

In the unavailability of specific legislation governing trade secrets, the Courts have ruled in favor the proprietor of information as literary work defined under copyright law and is well suited to business requirements in India.[18]

India’s position should not be misguided to indicate the lack of adequate protection to trade secrets and confidential information in the country. It is also pertinent to note that enacting legislation may be insufficient to define the scope of trade secrets. It is believed that adopting a common-law approach and handling matters, of trade secrets, on an individual basis is a more suitable approach. Furthermore, it would be apt to say the legal proceedings and pleadings with trade secrets being the subject matter should be based on confidentiality thereby protecting the nature of information.[19]

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Author

Bharadwaj Subramaniam
Student - Jindal Global Law School