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Trade Secrets- As an intellectual property and its protection

Written by: Kunal Arora - IIIrd year BBA-LLB, Symbiosis Law School, Pune
Constitutional Lawyers in India
Legal Service
  • In today's world almost every person knows what intellectual property is and protection of intellectual property has become a matter of paramount importance for every person involved with intellectual property. Patents, trademarks and copyrights have been the most popular forms of intellectual property till now but there are more forms of intellectual property which are gaining importance in the past few decades, designs and geographical indications being the most popular of them. A still new form of intellectual property which has gained recognition in the past two decades is Trade secrets and it is this form of IP with which we are concerned here.

    What is a trade secret?

    North American Free Trade Agreement (NAFTA) defines a trade secret as “information having commercial value, which is not in the public domain, and for which reasonable steps have been taken to maintain its secrecy.”

    The Trade Related Aspects of Intellectual Property Rights (TRIPS) lays down three essential conditions which are to be fulfilled by any information before it can be considered undisclosed information (trade secret), they are:-

    Such information must be secret, i.e., not generally known or readily accessible to "persons within the circles that normally deal with the kinds of information in question."

    the information must have commercial value because it is secret and,
    the information must be the subject of reasonable steps by its owners to keep it secret.

    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 no 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, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy”.

    After reviewing all the above definitions, we can say that a trade secret refers to data or information relating to the business which is not generally known to the public and which the owner reasonably attempts to keep secret and confidential. Trade secrets generally give the business a competitive edge over their rivals. Almost any type of data, processes or information can be referred to as trade secrets so long as it is intended to be and kept a secret, and involves an economic interest of the owner. For example, a business may have certain internal business processes that it follows for its day-to-day operations that give it an edge over its competitors. This could be regarded as a trade secret.

    Significance of Trade Secrets

    Trade secrets in the industrial economy have increased greatly in the past few years, for a number of reasons. There are mainly two reasons for that, one among them is that other forms of intellectual property like Patent, Trademark and Copyright have an element of uncertainty as compared to Trade Secret. Secondly, trade secrets have gained importance because, in many fields, the technology is changing so rapidly that it has surpassed the existing laws intended to encourage and protect inventions and innovations.

    Another significant factor which has enhanced the value of trade secrets is the relative ease of creating and controlling trade secret rights. There are no bureaucratic delays and no multiyear waits for government grants, such as those for patents. Trade secret rights, in contrast, can be established by the explicit conduct or agreement of the interested parties. A trade secret right starts upon the creation of the idea in some concrete form, and continues as long as secrecy is maintained. Protection of information such as ideas or information which does not qualify to be protected as intellectual property within the legal framework Intellectual Property Laws of the land can be protected by Trade Secrets. They also have the advantage of being lasting forever, again, as long as secrecy is maintained.

    Of course, trade secrets have negative aspects. They are a volatile form of property, and they terminate when secrecy is lost. Also, they require constant vigilance to protect them. Nevertheless, trade secrets play a major role in protecting innovations and establishing rights to use new technology. It is thus important for the intellectual property practitioner to be alert to the intricacies of this large body of trade secret law.

    In any developing country, protection of intellectual property is one of the most significant tasks, as it encourages foreign investment in many fields. India does not have any proper laws for protection of Trade Secrets, we still depend on the old traditional Common Law Principles for Protection of Trade Secrets; these Common Law Principles have lost their significance in the scenario of the developing Economy. There is a dire need for a Proper Policy Frame work to regulate Protection of Trade Secrets. There are a lot of Companies, especially chemical companies who prefer Trade Secrets as a form of protection for their Intellectual property; these companies are reluctant to invest in India just because India cannot offer proper protection for their Trade Secrets. India is losing on a lot of Foreign Direct Investment because of this.

    International Protection of Trade Secrets

    Trade Secrets have been provided protection by a large number of agreements and countries throughout the world. For e.g.: -
    Member countries must protect trade secrets from unauthorized acquisition, disclosure or use. Remedies must include injunctive relief and damages. In response to NAFTA, Mexico has amended its 1991 trade secrets law to permit private litigants to obtain injunctive relief.

    On April 15, 1994, the major industrialized nations of the world, including the United States, concluded the Final Act resulting from the Uruguay Round of GATT (General Agreement on Tariffs and Trade). GATT established the World Trade Organization (WTO) and promulgated various trade-related agreements including TRIPS or the Trade-Related Aspects of Intellectual Property Rights.

    Under GATT, "undisclosed information" must be protected against use by others without the consent of the owner if the use is contrary to honest commercial practices. Also, there is third-party liability for misappropriation if third parties knew or were grossly negligent in not knowing that such information had been obtained dishonestly.

    The TRIPS makes it obligatory on member states to ensure Protection of Undisclosed Information under Article 39 of the Agreement.

    The TRIPS Agreement also requires member countries to provide effective remedies for trade secret misappropriation including (a) injunctive relief (b) damages and (c) provisional relief to prevent infringement and to preserve evidence.

    In 1996, Brazil revamped its intellectual property laws. Trade secrets are protected under the rubric of "unfair competition." Borrowing from U.S. law, a variant of the Section 757 (6-factor) test is used to determine whether a particular piece of information qualifies as a trade secret, Common knowledge, knowledge in the public domain, or knowledge that is apparent to an expert in the field cannot qualify for protection as trade secrets. The trade secret owner must take positive steps to safeguard the secrecy of the information.

    The full panoply of relief is available--compensatory damages, punitive damages and injunctions. There are also criminal sanctions available against anyone who releases, exploits, or uses without authorization a trade secret to which he or she had access by virtue of a contractual or employment relationship.

    Effective June 15, 1991, Japan enacted a national trade secrets law. Trade secrets include any "technical or business" information that has commercial value, is not in the public domain, and which has been "administered" as a trade secret. Infringement occurs when a person procures a trade secret, by theft, fraud, or extortion or when there is an unauthorized use or disclosure of a lawfully acquired trade secret for unfair competition. An injured party may obtain injunctive relief and damages. The trade secret holder may also request destruction of any articles that have been manufactured as a result of the illegally obtained trade secret. The statute has similarities to the Uniform Trade Secrets Act. For sample, there is a 3-year statute of limitations after discovery of the trade secret violation. There are no criminal penalties in the statute.

    The Law of the People's Republic of China (PRC) against Unfair Competition (Unfair Competition Law) was promulgated by the State Council in September 1993 and became effective on December 1, 1993. This is China's first trade secret law. The term "trade secrets" is defined as technical and management information that is unknown to the public, can bring economic benefits, is of practical value, and for which the rightful party has adopted measures to maintain its confidentiality. Article 10 of The Unfair Competition Law prohibits business operations from engaging in certain acts and the law also provides for the remedies in case of infringement of trade secrets.

    In 1991, Korea also amended its laws to provide statutory protection for trade secrets. This law, effective December 15, 1992, was enacted during US litigation between GE and a Korean firm that had acquired GE trade secrets from a former GE employee. See General Electric Co. v. Sung, 843 F. Supp. 776 (D. Mass. 1994). The revised Unfair Competition Prevention Act (UCPA) defines trade secrets and Misappropriation ("infringing" acts).

    Israel has a criminal statute (Penal Law 1977 Section 496) prohibiting the disclosure of trade secrets by an employee. Employee contracts enjoin employees from using trade secrets and industrial know-how. There is an implied obligation of confidentiality between employers and employees.
    Besides the abovementioned countries many more countries like United Kingdom, Canada, Mexico, France, Germany, Czech Republic, Hong Kong etc. provide protection for trade secrets, or confidential or undisclosed information through their various old and new laws.

    Trade Secrets: Their position and protection in India

    Position of Trade Secrets in India

    Trade Secrets seems to be a neglected field in India, as there is no enactment or policy framework for the protection of trade secrets. This form of intellectual property is a new entrant in India, but is nevertheless a very important field of IP. Protection of trade secrets is a very important and one of the most challenging tasks for the Indian government as this will enhance the foreign investment in India giving a boost to the Indian economy. Foreign investors have to be assured of the protection of their trade secrets, so that they can do business with our country. A proper policy for trade secret protection will further enhance the security in our own industry. Almost all the countries in the world have a policy for the protection of trade secrets and India also being a signatory to the TRIPS is under an obligation to amend its laws or create a new law in order to safeguard the trade secrets of various businesses. So a proper policy for the protection of trade secrets in India is the need of the hour in order to provide a sense of security among the foreign investors and the local businessmen regarding their trade secrets which will further boost the Indian economy

    Protection of Trade Secrets in India

    As mentioned above, in India, no substantive authoritative text or case laws are available to determine the nature or ambit of trade secrets. But the Indian courts have tried putting the trade secrets of various businesses under the purview of various other legislations in order to protect them and also they have tried to define what a trade secret is in various cases, some of them are as follows:-
    1. American Express Bank Ltd. v. Ms. Priya Puri [1] Delhi High Court, in this case defined trade secrets as “… formulae, technical know-how or a peculiar mode or method of business adopted by an employer which is unknown to others.”
    2. Michael Heath Nathan Johnson v. Subhash Chandra And Ors[2] and John Richard Brady And Ors v. Chemical Process Equipments P. Ltd. And Anr[3] took note of the contentions of the counsels who referred to English decisions to define trade secrets
    3. Mr. Anil Gupta and Anr. v. Mr. Kunal Dasgupta and Ors[4] the Delhi High Court held that the concept developed and evolved by the plaintiff is the result of the work done by the plaintiff upon material which may be available for the use of any body, but what makes it confidential is the fact that the plaintiff has used his brain and thus produced a result in the shape of a concept.

    The legislations which are having a connection with the trade secrets can be summed up as
    1. Copyright Act, 1957[Section 51,55 and 63]
    2. The Designs Act,2000
    3. The Information Technology Act, 2000[Section 65, 72]
    4. Indian Penal Code [Section 408, 415]
    5. The Indian Contract Act [Section 27]
    6. The Competition Act, 2002 [Section 3]
    7. Civil Procedure Code
    8. Criminal Procedure Code

    Below mentioned are the various cases in which an attempt has been made to protect the trade secrets under the heads of their respective legislations:-

    Copyright Act, 1957

    A. Burlington Home Shopping Pvt. Ltd. Vs Rajnish Chibber[5]
    The main issue in this case was whether a database consisting of compilation of mailing addresses of customers could be subject matter of a copyright and whether the defendant can be said to have committed infringement of the plaintiff's copyright? The court held “a database consisting of compilation of mailing addresses of customers can be subject matter of a copyright and if used by the defendant will amount to an infringement”

    B. Mr. Diljeet Titus Vs Mr. Alfred A. Adebare and Ors[6].
    In this case the issue was whether compilation of list of clients and their addresses amounts to a 'literary work' wherein the author has a copyright? The Court came to the conclusion that list of clients and their addresses amounts to a literary work, which falls under the purview of the copyright act.

    C. Mr. Anil Gupta and Anr. Vs. Mr. Kunal Dasgupta and Ors[7]
    There were two main issues before the court in this case. First was, Can there be a copyright in an idea, subject matter, themes, and plots based on historical characters and the second was, Where the theme is the same but is presented and treated differently so that the subsequent work becomes a completely new work, does a question of violation of copyright arises. The court held “concept developed and evolved by the plaintiff is the result of the work done by the plaintiff upon material which may be available for the use of anybody but what makes it confidential is the fact that the plaintiff has used his brain and thus produced a result in the shape of a concept”. And therefore the plaintiff can claim copyright over it.

    D. Puneet Industrial Controls Pvt. Ltd. Vs. Classic Electronics[8]
    One of the issues in this case was whether the defendants are guilty of infringement of the plaintiffs Copyright under Section 51 of the Copyright Act, 1957. In this case the plaintiff who was engaged in the manufacturing and selling broad range of electric goods, alleged that his relative, misusing the trade secret and confidential information, had started his own manufacturing unit and started imitating the products of the plaintiff. The court held that plaintiff had copyright over the information and restrained the defendants from imitating the products of the plaintiff.

    In the above cases attempt has been made to protect their trade secrets under Copyright Act. The primary attempt of the Court in the above cases is to determine whether the trade secret falls within the definition of designs and copyrights in the respective Acts. But the courts have not shown consistency in their stand. In Burlington Home case[9], the Delhi High court held that customer list could be protected as copyright. The same court took the opposite view in American Express case[10], because, the court held, in the case of a customers list there is only compilation and no adaptation. The courts have also held that copyright can be claimed over industrial drawings[11].

    Designs Act, 2000

    A. Tractors and Farm Equipment Ltd. Vs. Green Field Farm Equipments Pvt. Ltd. and Ors.[12]
    The picture that emerges from the above case law is that the court shall entertain injunction only if the same is protected either through Copyright or Designs along with a non-disclosure agreement.

    Attracting Criminal Liability

    A. Pramod s\o Laxmikant Sisamkar and Uday Narayanrao Kirpekar Vs Garware Plastics and Polyester Ltd. and Anr[13]
    The Respondent contending that the action of the petitioner's amounts to Criminal Breach of Trust and cheating as the technical know-how acquired by the respondents amounts to ‘property', filed a criminal complaints. Court did not answer the question of whether a trade secret amounts to being a property,

    because the case hadn't satisfied the other requirements for attracting criminal liability. The plaintiffs failed to prove the dishonest intention on the part of the appellants. The court evades in deciding as to whether it would amount to ‘property'. But, the court had made an observation that if the petitioners use the technical knows how in contravention of the agreement of service, then section 408 and 420 can be attracted.

    But as the burden of proof in criminal cases is much higher in criminal cases, its scope is minimized.
    Contractual Liability (Section 27 of the Contract Act)

    A. Control Print (India) Limited Vs. Sanjay Sribastab and Ors[14]
    The Court held that in order to prove that the confidential information will be or is being used by the ex-employee, it has to be proved to the satisfaction of the court that the ex-employees or the defendant by virtue of the their employment had access to the secret information which was not available to any outsider unless this is proved there is no scope of granting injunction.

    B. Niranjan Shankar Golikari Vs.The Century Spinning and Mfg. Co. Ltd[15]
    This case is an appeal against grant of temporary injunction and the court dismissed the appeal on the ground that Negative covenants operative during period of contract do not fall under Section 27. Therefore the Contract does not amount to restraint in trade.

    C. Shree Gopal Paper Mills Ltd.Vs.Surendra K. Ganeshdas Malhotra[16]
    In this case the plaintiff's sought to restrain the defendant during the continuance of the agreement of employment. The court did not grant injunction and dismissed the appeal on the following grounds:-

    a. The master is entitled to be protected only in regard to his interests in trade secrets and secret process of manufacture. And also in regard to invasion of his customers
    b. The restraints imposed by the contract are alleged to be not reasonable in the interest of the defendant and to be against public policy.
    c. The master is not entitled to be protected against competition.
    d. In the present case the restraint sought to be enforced is not against protection of trade secrets or of trade connection.
    D. American Express Bank Ltd. Vs. Ms. Priya Puri[17]
    The Relief sought in this case was an order for temporary, interim injunction. The court did not grant it. Grounds on which the petition was dismissed were:-
    The court held that the said clause restrained the defendants only from doing any activity competing with the business carried out by the plaintiff's company.
    The restraint clause didn't prevent doing business to the business carried out by the plaintiffs Companies. Merely because the defendants have started similar business it cannot be said that the same amounts to competition with the business of the plaintiffs companies

    E. Ambiance India Pvt. Ltd. Vs. Shri Naveen Jain[18].
    The relief sought here was an order of ad interim injunction till disposal of the suit and the same was not granted. The Court was of prima facie view that the Agreement between the parties prohibiting the defendant for two years from taking employment with any present, past or prospective customer of the plaintiff is void and hit by Section 27 of the Indian Contract Act. This stipulation was prima facie against public policy of India and an arm-twisting tactic adopted by an employer hence relief sought for an order of ad interim injunction till disposal of the suit and the same was not granted on these grounds.

    F. Pepsi Foods Ltd. and Others Vs. Bharat Coca-Cola Holdings Pvt. Ltd. & others[19]
    Relief sought here was an injunction restraining the defendant during the continuance of the agreement of employment and the same was not granted.The court held that the agreement was in restrain of trade. The Court also held that the freedom to seek employment cannot be curtailed and no injunction to such an effect can be granted

    G. Sociedade De Fomento Industrial Ltd. & Ors V. Ravindranath Subraya Kamat & Ors[20]
    The relief sought was an order of permanent injunction and it was not granted. The court held that the said clause restrained the defendants only from doing any activity competing with the business carried out by the plaintiff's company. The restraint clause didn't prevent doing business to the business carried out by the plaintiffs Companies. Merely because the defendants have started similar business it cannot be said that the same amounts to competition with the business of the plaintiffs companies

    H. Sandhya Organic Chemicals P. Ltd V. United Phosphorous Ltd[21]
    Relief sought here was an order of permanent injunction and the court dismissed the petition on the ground that it was not open to the plaintiffs to seek injunction against the defendant, esp. when the plant manager was not in the service of the plaintiff the plant manager cannot be restrained for all times to come from using his knowledge and experience which he gained during the course of his employment with the plaintiff.

    From the cases discussed we can clearly see that in India trade secrets have been protected using common law principles like equity and fraud. In most cases of these they have been refereed under Section 27 of the Indian Contract Act. Relief claimed in these cases, are enforcement of Non-Disclosure Agreements between the employee and the employer. The courts have been very reluctant to enforce covenants, which put post employment restrains on the employee. The courts have seen these cases as a clash of two interests, the right to livelihood of the employee and right to make profit of the employer.

    So it is quite clear from these cases that the courts have try to protect the interest of the employees rather than the employer and in all these cases the court has taken a different stand in the circumstance of the respective case there is no uniform rule. This is where the problem starts when there is no uniform rule you cannot be sure of in which direction the court may lean on, this apprehension discourages development of ideas and Investment by companies in areas where they can protect their Intellectual Property through investment but if we have policy like a legislation this will give a uniformity for protection of Trade Secrets then the courts will have to be bound by the legislation.

    Although realizing the need of legislation for the protection of trade secrets, the Indian legislature came up with a bill named as “The Personal Data Protection Bill” which was introduced in Rajya Sabha on 8th December, 2006, but unfortunately the bill has not been passed till now and is pending the approval of the Indian Parliament before it can become an act.

    Tools to protect the trade secrets of a business in India
    Protect Trade Secret Through Agreements[22]
    I.I Employee Confidentiality and Non Competing Agreement
    I.I.I Define Confidential Information broadly [use of words like “include”, “but not limiting to”, “such as”, “third party information” etc.]
    I.I.II Applicability of agreement [post employment]
    I.I.III Non-authorized disclosure/use illegal
    I.I.III.I Extent of Inevitable disclosure
    I.I.IV Disclosure to be authorized by BOD of company
    I.I.IV.I In case trade secret generated by employee only
    I.I.V Best interest of company
    I.I.VI Limiting access to confidential information
    I.I.VII Covenant not to compete
    I.I.VII.I Define competing activities
    I.I.VII.II Not to engage in conflicting and competing employment
    I.I.VIII Termination of Agreement
    I.I.IX Termination statement
    I.I.X Mode of Adjudication [Arbitration, Litigation subjected to territorial jurisdiction]
    I.I.XI Injunctive Relief
    I.II Invention Assignment Agreement
    I.II.I Applicability of agreement
    I.II.II Definition of subject ideas or inventions
    I.II.III Company ownership/Assignment of invention
    I.II.IV Injunctive Relief and Arbitration

    Please note that with regard to turnkey contracts, it will be necessary to execute following agreements: -
    1. Consulting Agreement For Independent Consultant With Non-Competition Clause
    2. Consultant Non-Disclosure Agreement
    3. Non-Disclosure Agreement
    Strategy in case of dispute
    Invoke Private contract
    Criminal liability
    Civil liability

    [1] (2006)III LLJ 540(Del)
    [2] 60(1995) DLT 757
    [3] AIR 1987 Delhi 372
    [4] 97 (2002) DLT 257; what makes it confidential is the fact that the plaintiff has used his brain and thus produced a result in the shape of a concept.
    [5] 61(1995) DLT6
    [6] 2006(32)PTC609
    [7] 97 (2002) DLT 257
    [8] (1997) Sup ARBLR 195 Delhi(1997)
    [9] 61(1995) DLT 6
    [10] (2006)IIILLJ540Del
    [11] John Richard Brady And Ors V. Chemical Process Equipments P. Ltd. And Anr, AIR1987Delhi372
    [12] 2006(32)PTC343(MAD)
    [13] 1986 (3) Bom.C R411
    [14] (2006) 2CAL LT145(HC)
    [16] AIR1962Cal61
    [17] (2006) III LLJ 540 Del
    [18] 122(2005) DLT421
    [19] 81(1999)DLT122
    [20] 1999(4)BomCR809
    [21] AIR 1997 Guj 177
    [22] Generally, an analysis of wave of Indian judicial decisions shows that Indian Courts resist in enforcing Non Competing Agreements. Therefore, the agreement should not be drafted in a way to broaden its scope unduly. Any hardship caused by the agreement to employee may lead to non-enforcement of agreement or use of “blue pencil” by Indian courts, as they don't follow ‘all or nothing' approach.

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