Trade Secret and it’s Protection

Khusboo Asrani

According to Cambridge Dictionary “a piece of information about a product that is known only to the particular company that makes it”

Informally it also means a piece of information or knowledge that you are not willing to tell anyone, and it is considered highly confidential which upon making public will occur monetary or not-monetary damage to the person who wished to keep it confidential.

Legal Definition of Trade Secret:

  • Any information, knowledge or data that relates to businesses and is not known to the general public and is considered as prise sensitive, along with reasonable attempts being made to keep such informational confidential qualifies as a trade secret.

 

  • According to North American Free Trade Agreement (NAFTA) “any information holding commercial value is considered as trade secret, which is not available in the public domain, and for which reasonable steps have been taken to maintain its confidentiality”.

 

  • In Burlington Home Shopping Pvt. Ltd. v. Rajnish Chibber, the court held that the information that would cause real or significant harm to the company or an organisation or the sole proprietor if disclosed to a competitor can be said as a trade secret. It can include formulae not only for the manufacture of products but also, in an appropriate case, the names of the customers and the goods which they buy.

 

  • Trade secrets usually occur to be very price sensitive as it may have been covering up the entire foundation of the business which upon making it available in the public domain might take down the business and in worst cases will eat up the entire economic value of the business.

According to Article 39.2 of the Trade-related Aspects of Intellectual Property Rights (TRIPS) following criteria must be taken into consideration for an information to be called as a trade secret;

(a)The information is not, as a body or in the precise configuration and assembly of its components, usually the nature is prise sensitive, generally known among or readily accessible to persons that normally deal with the kind of information in question;

(b)The information has phenomenal commercial value because it is secret;

(c)The person lawfully in control of the information (usually a key managerial personnel) has taken reasonable steps and measures under the circumstances to keep it a secret.

The Uniform Trade Secret Act, 1979 adopted in the United States of America, defines trade secrets as includes formulae, compilations, patterns, programs, methods, devices in a form of information that:

(a)Derive independent economic value of the business from not being generally available or known to or not being easily accessible by proper means by others who can obtain economic value for their business from its disclosure.

(b)It is the subject of efforts and insider trustworthiness that are responsible under the matter to maintain its secrecy.

Financial records, customer details, customer lists, manufacturing process, raw material of a product, along with strategies and policies of the companies may also be considered trade secrets. However, details of customers were held to not be trade secrets not property in India. It was held that the utility is the main ingredient of secrecy ,so a trade secret must be utilitarian in nature.

The Hon’ble High Court of Bombay, in the matter of Bombay Dyeing and Manufacturing Co. Ltd. v. Mehar Karan Singh, in the year 2010 laid down the following factors for information to be classified as a Trade Secret:

(1) Extent to which the information is kept confidential;

(2) Extent to which it is known to the insiders of the business;

(3) The precautions taken by the holder of the trade secret to keep it confidential;

(4) Extent of prise sensitivity of the business upon its disclosure;

(5) The amount of effort or expenditure in obtaining and developing and guarding the information; and

(6) The amount of time and expense it would take others to duplicate, acquire or steal the information.

Why Trade Secrets must be protected?

Trade Secret is a price sensitive information and thus it is highly confidential. Price sensitive information is an information which is not public but which upon making public might affect the growth, product value, market value or goodwill of the company.

With the growth in economy and technology the era of digitalisation came. Digitalisation do make an ease in growth of business and make everyone more productive but it is also a very risky aspect to have as sharing, copying and storing information in the digital world, one of the biggest challenges that businesses face is the protection of their confidential business information.

This information can include business strategies, proposals, client databases and information, compilations, designs, programmes, drawings, devices, formulae or compositions. Not all types of information qualify for protection under the patent and copyright laws; further, certain data arises out of a company’s day-to-day operations for which formal protection is not sought, but which remains valuable.

Many businesses have hard time to safeguard their price sensitive information, due to the various physical and digital sources available to ease the forgery or theft of data. They are not just worried about external phenomena but can also come from internal sources such as contractors, employees and other insiders who have access to confidential business information.

It is very common for employees to resign from their jobs. When they do, they might take confidential information with them or even establish competing businesses based on their previous employer’s stolen or duplicated data, including business methods, strategies and technical information. Contractors sometimes infringe on designs, drawings, compositions and receipts that have been shared with them by a customers, by offering the same or similar products at a cheaper price and under a different trade mark.

Laws to protect Trade Secrets in India:

In India we don’t have any specific and separate laws to protect Trade Secrets of businesses even though India is in desperate need of a dedicated law and legislation towards Trade Secrets as in the world of digitalisation and modernisation stealing and duplicating information is very easy and infringers drain out each and every drop of the economic value of the business by stealing their confidential information but however we do have other multiple laws including contract law, copyright law, the principles of equity and – at times – the common law action of breach of confidence(which in effect amounts to a breach of contractual obligation). Information Technology Act 2000 (section 72) also provides certain protection, although this is limited to electronic records, for protection of Trade Secrets.

Contract Law:

Indian Contract Act (section 27) bars any person from disclosing any information which he acquires as a result of a contract.

However, in Richard Brady v Chemical Process Equipments P Ltd AIR 1987 Delhi 372 the court further invoked a wider equitable jurisdiction and awarded an injunction in the absence of a contract. The plaintiff had invented a fodder production unit and, for indigenous production of the same, had sought a supply of thermal panels from the defendant.

The plaintiff shared technical materials, drawings, know-how and specifications concerning the fodder production unit with the defendant. An agreement was set out between the parties for the supply of specialised thermal panels; however, the plaintiffs later discovered that the defendants were unable to supply the required thermal panels and did not place an order.

After learning about the defendant’s own fodder production unit, the plaintiff filed a suit for misappropriation of drawings, know-how, specifications and designs disclosed to the defendant.

Copyright Law:

Section 65A of The Copyright Act, 2012 has given for criminal remedies for circumvention of technological measures implemented for the protection of works in which copyright subsists, especially if such act is done solely with an intention of infringing the copyright in such works.

Furthermore, under Section 65B of the same Act there is a criminal penalty for unauthorized access and alteration of rights management information, usually maintained through online contracts regulating digital rights. In some cases, the courts have also recognised client information stored in the form of databases as copyrightable material.

During their operation, businesses regularly collect data which they arrange methodically or systematically and can be accessed digitally– for instance, in order to analyse profitability of the business or behaviour of the customers, or to record inventory of goods.

Thus, databases are an important resource for businesses, allowing the smooth running and planning of their future development. Databases are given protection under copyright law. The Copyright Act 1957 under section 2(o) defines compilations, including computer databases, as “literary works”.

In Govindan v Gopalakrishna AIR 1955 Mad 391, which concerned a compilation, it was held that even after the amount of originality in a compilation is very little, it is still protected by the law. Thus, no party may duplicate or steal the result of another’s skills, intelligence or labour, even in such works.

The present legal situation makes it mandatory that every effort, industry or expense of skill result in copyrightable work, but only those works are protectable which:

  • Show minimal difference in character;
  • Indulgence of some intellectual effort; and
  • Indulgence of a minimal degree of creativity.

Information Technology Act:

The Information Technology Act (section72) provides for criminal remedies, whereby a person punishable with imprisonment for a term of prescribed period along with a fine of a prescribed amount in case he is found to have secured access to any digital record, book, information document, register or other important material without the consent of the person concerned and such first person discloses such information further.

The Information Technology Act, in the year 2009 under Section 43A provided for “Compensation for failure to protect sensitive personal data.” Sensitive personal data is further defined in the rules promulgated under this Act and include passwords, biometric data, financial data, etc.

Securities Exchange Board of India:

The Securities Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, provides for the disclosure and use of confidential information by an insider i.e key managerial personnel subject to prosecution under the SEBI Act.

Proposed Legislation:

The Department of Science and Technology in the year 2008 as part of the Ministry of Science and Technology, published draft legislation titled the National Innovation Act of 2008 that would in part “consolidate and codify the law of confidentiality in aid of protecting Confidential Information, Innovation and Trad Secrets.” Chapter VI would regulate Trade secrets, which is titled “Confidentiality and Confidential Information and Remedies and Offences.” The current status of this draft legislation is unclear and vague.

Available Remedies:

The remedy in the case of infringement may be recovery of damages or imposing of the injunction. The charges may be filed under the law of Specific Reliefs Act, 1877 the law of injunction in India.

A prima facie case, and balance of convenience along with irreparable loss must be established. In many cases the injunction has not been granted due to insufficiency of prima facie case. It has been noted by the courts that in order to grant injunctions there should be actual concealment of material fact by the plaintiff to get equitable relief. As per specific relief act [u/s 41(e)], injunction cannot be specifically enforced by the court.

In India only equitable or remedies are available for a breach of confidence cause of action. The available remedies include the grant of an injunction “prevention of a third party from disclosing the trade secrets,” the return of all “proprietary and confidential information,” and compensation or damages “for any losses faced due to disclosure of trade secrets. The order to “deliver up” such materials may also be made by the court.

Injunctions may be interlocutory or permanent. The information may remain confidential only for a limited period in which case the injunction will not extend beyond that period. Moreover, since the information alleged is confidential may be of economic value to the plaintiff only for a specified period, interim injunction will ordinarily be granted only for a specified period depending upon the circumstances and the nature of the confidential information. The determination of damages is based on the “market value of the confidential information based on a notional sale between a willing seller and a willing purchaser.”

Legislation in other countries and possible influence of such legislation in India:

The need for a specific dedicated legislation and law towards trade secret in India is undeniable. The Indian law can easily be based on principles that are borrowed from English Law and English courts or the Federal Trade Secrets Law of USA under the Uniform Trade Secrets Act, 1990, the Restatement (Third) Unfair and the judicial pronouncements of the same.

In codified law in India must define the term ‘trade secrets’ and its subject matter. Protection should depend on the information that might be in bulk and combinations of such information. Individual elements of trade secrets may not make any difference even if protected. Hence, information in compilation to other information should be protected. To make sure that the knowledge is not in public domain, industry level of general knowledge and information’s ability can be taken as factors.

It is essential for the codified law to take the tort of misappropriation into consideration which is usually committed through improper means or breach of confidence. With respect to the tort of misappropriation, the Spoliation doctrine when says that destruction or significantly altering evidence or failing to preserve property of another’s use as evidence in pending or reasonably foreseeable litigation the sort that allows the court to infer misappropriation from the defendant’s destruction of evidence must be recognized.

A body specializing in deciding cases related to trade secrets as in other cases related to IPR should be in place to conduct proceedings. Also, disclosure of the trade secret should be taken care of.

The Uniform Trade Secrets Acts, 1990 of USA propounds the doctrine or displacement wherein if the cause of action conflicts with the trade secrets misappropriation then it is displaced or pre-empted. Third party liability also should be codified due to outsourcing and offshoring. In imposing such liability principles of agency and vicarious liability should also be brought in. Exceptions protecting trade secrets should be laid down keeping in mind the exceptions by the common law courts and the level and amount of damage occurred to the business and general public at large.

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