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Trade Secrets and Patents: Everything You Need To Know

Trade secrets are the Intellectual Property Rights on confidential information that are capable of being stolen or licensed. Trade secrets help a business to get a competitive edge over the other existing business in the similar industry. It is not a hidden truth that the recipe of Coca-Cola was initially known by two persons and made to available to different stake holders in parts. It was kept in a security vault at the Trust Company Bank in Atlanta which could only be opened by the resolution passed by the Boards of directors.[1]

The story of KFC Chicken is truly remarkable, the recipe after being locked in a safe for nearly 7 decades, the Colonel's handwritten recipe of KFC-Chicken of eleven (11) herbs and spices was temporarily reallocated to a more secure location and it was transported in an armored car. It is purported that the recipe of Colonel Harland sanders finger-licking is known to only 2 KFC executives. This is the amount of importance a trade secret carries which can make a business grown in billion dollars and also turn a billion-dollar business into a full zero. The definition and Jurisdiction of trade secret depends upon country to country.

Definition of Trade Secret

A trade secret is defined as any information that is not generally to the relevant business rivals or to the public. It provides some sort of business benefit on its owner. It seeks to maintain and promote standards of commercial ethics and fair dealing.[2] One of the key objectives behind protecting is to provide an add on advantage, rather incentive, for businesses to innovate by safeguarding the substantial time and capital invested thereon.

Development of Trade Protection Law

The roots of trade secret law have its roots in Roman law was introduced in 1929, that trade secret was protected by a claim known as actio servi corrupti (action for making a slave worse).[3]It was granted as a commercial relief against unfair usage by a competitor. It was used to protect slaveholding tradesmen or landholders from the harm caused by rivals corrupting a slave, usually through bribery or intimidation, and causing that slave to turn over confidential information. This claim was however never accepted in the modern law due to lack of evidence.

Commonwealth nations

The Court of Appeal of England and Wales was of the opinion that trade secrets are regarded as an equitable right rather than a property right. Action for breach of confidence is based on a principle of preserving good faith. It was held in the case of Coco v. A.N Clark (Engineers) Ltd. [4]that following conditions must be met in order to file a suit for the breach of trade secret:
  1. The information disclosed itself must have the necessary quality of confidence about it;
  2. That information must have been imparted to the party under circumstances imparting an obligation of non-disclosure;
  3. There must have been unauthorized use of that information to the detriment of the party communicating it.
It must be noted that the quality of confidence highlights the importance of trade secret. Though, the term wasn't used in direct sense, but it surely brough out the legal aspect of trade secret.

European Union
The European Union adopted a Directive on the Protection of the Trade Secrets on 27 May 2016. The Directive was accepted by the European parliament after the proposal of the European Commission. It aims to standardize the national laws in EU countries unlawful disclosure and use of trade secrets. Without establishing criminal sanctions, the proposal harmonizes the civil means through which victims of trade secret misappropriation can seek protection, such as:
  1. Stopping the unlawful use and further disclosure of misappropriated trade secrets
  2. The removal from the market of goods that have been manufactured on the basis of a trade secret that has been illegally acquired
  3. The right to compensation for the damages caused by the unlawful use or disclosure of the misappropriated trade secret.
The goal of the directive is to harmonize the definition of trade secrets in accordance with existing international standards, and the means of obtaining protection of trade secrets within the EU.

United States
Trade secrets law evolved under the state common law in the landmark judgement issued by the United States Supreme Court, Kewanee Oil Co. v. Bicron Corp[5]., which allowed the states to freely develop their own trade secret laws. In the year 1979 several U.S states adopted the Uniform Trade Secrets Act (UTSA)[6], with approximately 47 U.S states adopting variation of it as the basis for trade secret law.[7]

The Uniform Trade Secrets Act (UTSA) codifies the basic principles of common law trade secret protection .Although the differences between State laws and the UTSA are generally relatively minor, they can prove case-dispositive: they may affect which party has the burden of establishing that a trade secret is not readily ascertainable.[8] Another significant development regarding trade law in U.S is the Economic Espionage Act (EEA), which makes the theft of a trade secret a federal crime.

It was specifically enacted for two main purposes theft of a trade secret for the benefit of a foreign entity (economic espionage, 18 U.S.C. Section 1831), and (2) trade secret theft intended to confer an economic benefit to another party (theft of trade secrets, 18 U.S.C. Section 1832) In 2016, Defend Trade Secrets Act was passed to create a federal cause of action for misappropriating trade secrets. The Defend Trade Secrets Act of 2016 created federal civil cause of action, strengthening U.S. trade secret protection, with a choice for the parties between localized disputes under state laws or disputes under federal law, heard in federal courts.[9]

International Law the United States offers a more sophisticated and robust legal regime protecting trade secrets than most other countries. There is no international treaty specifically pertaining to the protection of trade secrets. However, one of the agreements reached during the Uruguay Round of Multilateral Trade Negotiations (that concluded with the signing of the Marrakesh Agreement Establishing the World Trade Organization (WTO))75 was the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

TRIPS establish minimum standards of protection for patents, copyrights, trademarks, and trade secrets that each WTO signatory state must give to the intellectual property of fellow WTO members.76 Compliance with TRIPS is a prerequisite for WTO membership.[10]

Factors Responsible to Protect Trade Secrets

The most crucial factors determined by the statistical Analysis of Trade Secret Litigation in Federal Courts found that confidentiality agreements with employees and business partners can be taken as reasonable measures to protect trade secrets. Following factors can be considered to ensure trade secret protection.
  1. Non-Disclosure Agreements:
    Non-Disclosure agreement with the employees and business partners can form a greater line of defense and hence protect the overall corporate policy of the organization in order to maintain confidentiality. Companies shall make sure that all the policies are followed by the individuals. One of the key aspects about this agreement could be to return the confidential information once the employment is terminated.
     
  2. Control over physical and electronic access to documents:
    Most of the big and wealth organization know that information in physical and electronic form is very important for protecting trade secrets and other intellectual property. Companies must ensure and put limitation on the amount of information that can be accessed by the employees. Company shall also hire an Information Technology (IT) security system to monitor and restrict system access.
     
  3. Identifying Confidential Information:
    It is difficult to protect trade secret unless the information which needs to be protected has been identified. For that matter, the trade secret must be documented in an internal registry in a secure environment. An internal assessment needs to be done to see which department is more vulnerable.
     
  4. Due Diligence Criteria:
    Only non-disclosure agreements with the employees and business partners is not sufficient. There are other third parties including suppliers, distributors and customers. Companies should also include trade secret protection as part of their due diligence criteria. An organization must be pro-active in reviewing the information confidential and regularly communicate about their expectation around trade secrets with thirds parties.
     
  5. Training and Development:
    Training and vendor training can be a fruitful technique to teach and educate the employees, business partners and third parties in handling such sensitive information. Even a single person breaches the terms and conditions, the procedural training can be used as a defensive tool for the company to showcase the active steps taken by the organization to teach the employees on handling such information.
     
  6. SWAT Team:
    One of the best practices a company can adopt is to set-up a cross-functional team that can look at and ensure the protection of trade secrets. The team can also review and revise the policies on trade secrets.
     
  7. Prioritizing trade secrets protection:
    Today, digitalization is at its peak and so are cyber threats. To protect the organization, the company must ensure strong security IT system, put systems in place and ensure trade secrets protection. This would work as a mitigation technique and also trade secret protection won't be compromised.
     

Comparison Between Trade Secret and Patent Protection

One of the bigger confusions for an organization is to choose between trade secrets and patent protection. The two have more differences than similarities. Trade secrets are the secret confidential information which generally includes but not limited to processes, formulas of various things, or any other important business information which is a key driver for in bringing commercial value to the business.

Whereas, patents give the owner a special right to produce, sell, export and restrict the other parties from producing, selling or importing a particular product or service. Patents and Trade secrets are only two of many forms of IP rights. Patent protects patentable information by passing eligible criteria and trade secrets can protect patentable information or any other unique and special information which can add commercial value to the business.
 

Patents

Trade Secrets

Patent protects new and useful invention Trade secret protects valuable and secret information
Patent give the patent holder a right to exclude others from making, selling, using or importing the invention Trade Secrets only protect the organization from fraudulent or misappropriation of information
Patent is granted only when the information is made public In case of trade secret, the information remains private and not available to public
For seeking protection under Patent law, application is filed at the patent office There is no such requirement of filing an application
The term of protection is minimum 20 years There is no such time limit and trade secret are perpetual

Advantages of Patent Protection

  • Patent protection grants an exclusive right to the owner of the patent right holder
  • It acts as an effective tool against imitators
  • The government provides monopoly protection to the owners over production, selling and exporting their goods and services
  • Patents offers superior protection and cannot be easily infringed

Disadvantages of Patent Protection

  • Usually the cost of registration of a patent is an expensive task
  • It involves legal costs as well as soft costs to describe the patented invention
  • Patents provide a relatively shorter economic life of 20 years as compared to other legal rights
  • During patent filing, the investor is expected to disclose every minute details of the patent protection, how the invention works, any specific problem relating to the invention. The downside of this point that the competitors will have exact knowledge of the technology or the technique used in such invention.[11]

Advantages of Trade Secrets

  • The first and the foremost use of trade secrets is that it can protect any sort of information which may not otherwise be protected under any other IP right
  • Unlike patents, trade secrets can contain information such as chemical formula, customers contact list or any information useful for the organization in gaining commercial value.
  • There is no requirement of disclosure of the information, unlike patents
  • Moreover, trade secrets are easy

Disadvantages of Trade Secrets

  • Nothing can stop any other organization from independently using the exact same invention by their own research and development. It means that a competitor can come up with similar or exact design without breaching the trade secret of competitor.
  • Protecting trade secrets require diligent administration and effective IT system to monitor the activities and safely preserve the confidential information.
  • Finally, trade secrets acquire no formal recognition like other IP rights such as patents, copyright, trademark and GI.

Conclusion
Patent Protection is usually preferred when a new invention is brought up by someone and requires format recognition in order to protect his personal interest and earn profit to recover the amount spent on such invention. It is preferred to stop any other person or body corporate to produce the goods with same technology.

Trade secrets are preferred when the information is not about any new invention, rather it contains such confidential information which has the effect of violating the privacy of the company. The organization do not want to use any other IP right because they do not want to disclose their information to public at large which is needed in other IP right and requires no formal recognition.

End-Notes:
  1. Coca-Cola's Formula is at the World of Coca-Cola, The Coca Company, available at https://www.coca-colacompany.com/news/coca-cola-formula-is-at-the-world-of-coca-cola
  2. Trade Secrets, WIPO, available at https://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_4_learning_points.pdf
  3. Van Lindberg Trade Secrets, https://www.oreilly.com/library/view/intellectual-property-and/9780596517960/ch06.html
  4. [1968] FSR 415 (Megarry J),https://watermark.silverchair.com/86-2-41.pdf?token=AQECAHi208BE49Ooan9kkhW_Ercy7Dm3ZL_9Cf3qfKAc485ysgAAAqEwggKdBgkqhkiG9w0BBwagggKOMIICigIBADCCAoMGCSqGSIb3DQEHATAeBglghkgBZQMEAS4wEQQMqKo1zS_GUziYKY5hAgEQgIICVGCKIANWIBKMfNLK8AqTzjkFA86Xoj1MUEVjQIEzL16VSaYnAICPMelnJmCMPIH270J6fZtZfD9e2iU1FWc3xe-Xt7QHHkUAIOOOfctiI1TbYKy5g6IKzPx6_T5HHtIRfHzUo2oOvNaBsAwZG9l7df_6QS-g9x46z4djRczOb1-4iEvPOb6IVbZQv_wWl6BNwDNa2n-xNRbpgyr4h45ClzrU5GkmppyntYMItO4AomQdGJWkY4J7OZAO09FY-4y4TzPLLjepq56ITpGnmr6PLXMJIHWjYxo8qA6KmxNzFSlelb9e52ePQ8qh2Nvuev9ac-d73TquHf7JGF2amhB73G95WI-nY2jeykFS8rGRmhsemveT-4EK989sVPGLYEWGtRbw1bIJfTHnmZ7H6LYCyHMQWs3t6G1Cf3GybHzImhmRo5JagN_0j_0ajjMchCoVv1fUcWdDWFcOX2hxie5abSehW39v5MBaz-K0sNOomQHCSh_9w5G4b-n5LRLOIf40zYrG58KcZcRBklkIWOHKHGtb8gTX365MjcIuKXcu1vr_kXc_Jkza08Gthc9T8gh8mRRN1rKYhq8e_MCWbvQkZosS2iwEMK6re0gRZjyMuZfePlJ1aLlGjwxJrcL9LN5624LPnGR9HOhfg4E8YwU5HZURDpy8npuogKAe3PpaHsAfq0XA2KwmadiWaa20Y_GYGoV3JzZNKLvzTWkwe8cUtqzFE27IHSMwuwJGE5p_EWvhHrAgqiBpjKqXt-uJTwovjQAtgt_baxI4zbvhPPXUOOvUoIMf
  5. 416 U.S470 1974 https://www.casebriefs.com/blog/law/intellectual-property-law/intellectual-property-keyed-to-merges/state-intellectual-property-law-and-federal-preemption/kewanee-oil-co-v-bicron-corp/
  6. Infra 8
  7. Trade Secrets, Legal Information Institute, https://www.law.cornell.edu/wex/trade_secret#:~:text=Overview,Columbia%20have%20adopted%20the%20UTSA.
  8. https://fas.org/sgp/crs/secrecy/R43714.pdf
  9. Trade Secret Policy, United States patents and Trademark office , https://www.uspto.gov/ip-policy/trade-secret-policy
  10. Supra 8
  11. European IP helpdesk, http://www.iprhelpdesk.eu/node/2188
Written By:
  1. Abhishek Sharma (5th Semester B.COM+LLB at Chandigarh University, Punjab) and
  2. Prof. (Dr.) Chitrapu Kama Raju (Principal IFIM Law College, Bangalore)

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