PublicationsThe Trade of Two Secrets

September 23, 20200
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ABSTRACT

This article aims to explore the various ways in which Trade Secrets are protected. Trade Secrets are similar to patents but larger in purview as it includes formula, pattern, compilation, method among other things that patent law cannot cover. An example of Trade Secret would be the Google Algorithm or the Coca-Cola Recipe. Such, ‘secrets’ need to be protected as part of I.P Rights. However, many countries do not have codified legislation to Protect Trade Secrets.

The United States has codified legislation, The American Uniform Trade Secret Act, that protects trade secrets and provides injunctions for violation of the same. That said, since the TRIPS Agreement, due to the principle of Sui- Generis permits its member states to apply its domestic laws in place of codified law, to Protect Trade Secrets. India relies on common law principles to give desired relief to aggrieved parties.  Through the course of this paper, the author will be analyzing academic research, titled, “Theft of Trade Secrets: The Need for a Statutory Solution” and “The Surprising Virtues of Treating Secrets as IP Rights” By Professor Lemley to draw parallels to the Indian Context along with the famous American Case of Metallurgical Indus v. Fourtek. Inc., that set the tone of Trade Secret Law in the United States.

INTRODUCTION

Does India need a codified Trade Secret Law? A comparative analysis between the USA and India using various case laws while looking at different theories that go behind machining such laws.

Trade secrets are secrets which add value to the business. Although it is protected under Intellectual Property (IP) law, they are known to protect a much wider range of matter and are not only limited to a set term of protection. They are not exclusive rights like patents and therefore cannot be enforced against anybody who independently discovers that secret. and Any misuse of a trade secret or an unlawful acquisition as an under breach of confidence or threat can lead to statutory action, in which, proprietor of the trade secret can get compensation as well and an injunction.[1]According to The American Uniform Trade Secrets Act (UTSA) of 1985, a trade secret is any information, including a formula, pattern, compilation, device, method, technique or process, that :

  • derives independent economic value, actual or potential, from not being commonly known to, and not being readily ascertainable by proper means by, other persons who can attain economic value from its disclosure or use, and
  • is the subject of labors that are reasonable under the circumstances to maintain its secrecy.[2]

Much like other IP rights, trade secrets are also subject to national laws of the country that they are protected in. For example, The Google Algorithm, that is modified to keep businesses and people from gaming the system.[3]  Unlike trademarks or patents, there are no formal requirements to register trade secrets with the official licensing authority. However, most countries have laws which deal with the misappropriation or unauthorized acquisition of trade secrets. In the United States, the policy on trade secrets consists of information that may include formula, pattern, compilation, program, device, method etc. The Defend Trade Secret Act of 2016[4] strengthens trade secret protection in the United States and offers parties with an option to settle disputes under either state or federal laws. As most of the Trade Secrets Laws are adopted from some variation from the Uniform Trade Secrets Act, they tend to have similarities with the state laws.[5]

In contrast, in India, there is no specific legislation to protect trade secrets and confidential information. Nonetheless, Indian courts, much like other common law countries such as the United Kingdom use common law principles of equity, breach of confidence and case precedence to offer protection to aggrieved parties.[i]In my paper, the author will be arguing whether or not this is sufficient or does India also need separate legislation to protect its trade secrets.

TRADE SECRETS AND PATENT LAW

Countries having separate state secret laws like the US argue that the definition of trade secret allows it to reach several corners that patents cannot. For example, protecting business plans, customers list, and so-called “negative know-how” against use by others. Further, in case of patents, an investor needs to apply for patents, publish their applications after eighteen months and then wait for more years for the Patent and Trademark Office to decide whether to grant protection or not. While the trade secret, will be protected by law provided the requirements of the statute is met. Additionally, economic literature suggests that some firms, particularly startups, rely heavily on the incentive to invent provided by the trade secret law. In many cases, patents are seen to be an inadequate substitute. [ii]

Robert Sherwood, studied business practices in Mexico and Brazil to conclude that a lot of times, common law principles fail to reach the desired outcome that the trade secret can meet.[6] [7]He found that companies in these countries took business decisions that inefficiently limit the disclosure of information because they fear that they cannot rely on the courts to prevent the use of the information that they disclose.

Therefore, there are many logical and evidentiary reasons to believe that without the legal protection that the trade secret has to offer, companies in some industries may invest too much, just to keep their secret intact. Restriction on the flow of such valuable information among companies will slow the process of commercialization and improvement of the secret inventions and therefore interfere with both the invention as well as its disclosure under IP law. These limit countries with no trade secret laws to only rely on patent laws in case of inherently self-disclosing inventions.

Additionally, the existence of a legal right to prevent others from using or disclosing any idea in breach of a confidential relationship allows not only to disclose the idea in pre-contractual agreements but also securing the knowledge that the other side is not free to take the idea without compensating for it.[8]  With that being said, this right of disclosure in trade secret law is not an absolute right. The owner cannot sue anybody who comes up with the idea independently, or who reverse engineers a product on the open market to learn the secret.[iii]

TRADE SECRETS AND FEDERAL LAW OF U.S.A

However, in the US the problem is that the preliminary federal preemption question to be asked when it comes to trade secret laws is whether the constitutional grant of the patent has the power to congress is an absolute bar to state action in the field. The question then arises as to what extent a state legislature can protect unpatented or unpatentable ideas without running afoul of the national patent scheme and therefore the supremacy clause. In terms of federal patent policy, no distinction can be created between protecting a contractual disclosure to a second party for increasing production of goods manufactured through such secrets whilst protecting against breach of confidence of espionage. At the same time, if secrecy is maintained, the owner does not enjoy a monopoly.[9]

One argument against protecting industrial secrets is the popularity of public disclosure of all scientific advances. Disclosures under patent law are profitable for scientific inventions as a new invention is placed in the public domain where it functions as a base from which further advances can also evolve. This can help avoid wasteful duplication of research and lower the market price of comparable items while persons other than the inventor can also utilize this scientific knowledge.[iv]Therefore, in my opinion, even under the federal law, patent protection can have its advantage and there is no requirement or need to have a separate trade secret law, governing essentially the same line of protection of ideas and property. That said, patent protection is still significantly broader than any sanctionable state protection of trade secrets.

SCOPE OF TRADE SECRETS; USING COMMON LAW PRINCIPLES IN AN INDIAN CENTRIC PERSPECTIVE

In case a country does not have state secret laws, it can still rely on common law maxims to look at trade secrets. It explores around three basic elements of a cause of action that are:

  1. Proof of the existence of an idea not generally known and treated by the owner as a secret;
  2. Proof of loss, either present or future; and
  3. Improper disclosure or use.[v]

According to Robert Bone in a Stanford Law Review, provisions of trade secret laws can be found in other legal doctrines as well. Common law has been seen to be meeting this demand through tort law as well as contract law.[vi] For example, the common law doctrine of breach of confidence which requires proof that something was offered to the defendant in confidence, and that the defendant disclosed that information. Similarly, in India, misappropriation of trade secrets may occur by law by breach of confidence and obligation of confidence which can arise in case of employment contracts.

For example, in Daljeet Titus v. M. Alfred A. Adebare[10], the court said that one must restrain a breach of confidence independent of any right under the law. Such an obligation need not be expressed or implied, and such a breach must be independent of any other additional right. [vii] Even in the case of John Richard Brady and Ors v. Chemical Process EquipmentsP.Ltd. and Anr[11], the Delhi High Court took the position that, even in the absence of an express confidentiality clause in a contract, confidentiality may be express or implied and that the defendant is liable for the breach of confidentiality obligations and therefore granted the aggrieved party with an injunction for its creation of “Fodder Production Units”.[viii]

Coming to applying principles of tort law while applying common law to trade secret law, courts adopt a “duty-based” theory or what Melvin Jager calls, “The maintenance of Commercial Mortality”. This tort-based view was adopted in the infamous E.I du Pont de Nemours Powder Co. v. Masland[12] in which there appeared to be a breach in the confidential relationship of the employment contract.[ix] This case set the tone for a lot of Indian cases among other common law countries.

According to India, the courts have used various principles such as the ones mentioned above to look at cases of a trade secret. In the case of,Mr. Anil Gupta and Anr. V. Mr Kunal Dasguputa and Ors[13]., the court granted an injunction and held that the concept developed by the plaintiff was the result of work upon the material available in the public domain. However, the concept that was used as confidential as the plaintiff had developed the idea using his brain, resulting in a new unique creation applying his concept. [x]

The contractual obligations and breach of contract laws, the Indian Contract Act, 1872, provides a framework of rules that govern the formation and performance of the employee-employer relationship in India. Under Section 27 of the act, statutory recognition is given to the common law principle of “restraint of trade”. This section is shown to attract most legislation dealing with trade secret in India.[xi]

Restraint of trade is defined as one in which a party agrees with another to restrict their liberty in the present or future to carry on a specific trade or profession with people who are not a party to the contract without the express permission of the contracting party concerned. To be valid, restraint of trade must be reasonable as between the parties and consistent with the interest of the public. In the case of Shree Gopal Paper Mills Ltd. v. Surrendra k. Haneshdas Malhotra[14], the court held that to test the validity of restraint of trade and whether the covenant of restraint was made to protect legitimate propriety interest. The employer may protect his trade secrets from being disclosed or revealed by an employee.

Similarly, a buyer of any business may protect it from competitive activities of the seller, but, in no case, the law will permit an action simply to avoid competition and the restraint which is wider than the protection of propriety interest will also not be permitted.[xii] Additionally, in the case of Homag India Pvt. Ltd. vs. Mr. Ulfath Ali Khan[15], the court held that the maintenance of secrecy either rests on the principle of equity or by the common law action for breach of confidence. This led to three situations out of which such a proceeding may arise, that are:

  1. When an employee comes into contact with information during the course of employment and directly passes it off to an unauthorized person,
  2. When an unauthorized person incites such an employee to provide them with such confidential information, and
  3. Where, under a license for use of know-how, a licensee is in breach of a condition, either expressed in the agreement or implied from conduct, in order to maintain secrecy in respect of such know-how but failed to do so.[xiii]

In contrast, in the US, a similar fact pattern was seen in the case of Metallurgical Indus v. Fourtek, Inc[16]. wherein a former employee, Irvin Bieldefeldt, formed a new company Fourtek to sell zinc recovery furnaces using Metallurgical’s modification process. In that, the court held that evidence at trial could have led a jury to believe that a trade secret existed. Therefore, solely on the evidentiary basis, it was held that Metallurgical failed to provide that its former employee had benefitted from any misappropriation and hence dismissed the appeal.[xiv] This case, therefore, laid the basis of trade secret law to say that first of all, in order to be a trade secret, the subject matter should be a trade secret.

Secondly, efforts should be made to keep it a secret and third, the law of secrecy may not be absolute. This contrast between the US case mentioned above and the Indian courts’ take on trade secret using common law principles goes on to show that despite having a trade secret legislation, a party need not necessarily receive protection under the statute and can be denied compensation.

Furthermore, from the above argument, we can see that having common law principles to guide trade secrecy rather than having specific legislation for the same, can be beneficial to aggrieved party as they give alternative remedies. For example, in India, The Specific Relief Act, 1877[17] is applicable to the action of an injunction. For this, a prima facie case indicating a balance of convenience and irreparable injury must be established.[xv] For this to happen, the suit needs to be that of a breach of contract or misappropriation case; and will prove to be insufficient in case there is a separate trade secret law.

CONCLUDING ARGUMENT ON SUI GENERIS

Lastly, India, being a party to the TRIPS Agreement, is obliged to protect undisclosed information. However, the kind of protection and its modalities are left to the discretion of the member state as per Article 10 of the Paris Convention as well as Article 39(2) and (3) of the TRIPS agreement which provides the state with a sui generis mechanism that gives India the preference to apply common law principles in order to protect trade secrets rather than having codified legislation like in the US.[xvi]

Just like India, many other nations such as the United Kingdom have no formal definition of trade secret laws and are free to draw meaning from case laws. In contrast, much like the US, the European Union in 2016 with the adoption of the EU Trade Secrets Directive codified its trade secret laws to be followed by its member states. This directive covers the unlawful acquisition, use and disclosure of trade secrets and member states of the EU are expected to bring their domestic laws into line with the same.[xvii] Hence, it is legally permitted for a country to have its own trade secret laws,[18] be it in the form of codified legislation or not and India is correct in exercising its right by not following the same.

In furtherance of the same, India also has separate statutory provisions under various other laws which recognize and protect different types of confidential information.[xviii] For Example- Section 72 of the IT[19] Act which provides criminal remedies on access and misuse of electronic information, Section 43A of the IT Act that provides for remedies in case of failure to protects sensitive personal data, The Securities Exchange Board of India (Prohibition on Insider Trading) Regulations, 1992[20] which renders the use and disclosure of confidential information as insider trading and is considered a punishable offence.

Additionally, The Copyright (Amendment) Act, 2012,[21] under 65A and B that provides for criminal remedies for circumvention of copyright and criminal penalties for unauthorized access and mismanagement of information, respectively.[xix] Therefore, the author thinks that there are enough legislations within other areas of law in India as well as different statutory laws under various fields of law that protect trade secrets and thus India does not require a separate codified trade secret laws.

CONCLUSION

In conclusion, in my paper, I discussed that even though trade secrets are seen as confidential information and treated like patents, they do not fall within the purview of IP laws and are treated quite separate. Additionally, some states such as the US have adopted specific codified laws alongside patent and copyright laws to protect trade secrets while various other states such as India have not done the same.

India sees trade secrets to be falling under the large purview of the rest of the IP laws in the country and also uses common law principles to protect confidential information. I feel that using common law maxims along with other aspects of the law such as tortious liability or contractual obligation, broadens the scope of accessing trade secret laws and also provides parties with remedies and injunction in case of breach of duty or misappropriation which may otherwise lead to unauthorized access and misuse of information.

With that being said, the author feels that present statutes and case precedence can be used, as explained above, to protect trade secrets and there is no need of having a separate codified statute like the US or the EU to protect the same. The same can be seen to be applicable to a lot of other domestic laws of India, for example, India is a part of the Refugee Convention but has not adopted a codified refugee law of its own. Instead, India relies on its constitutional principles along with that of Foreigner’s Act, in order to protect asylum seekers in India.[22]

Similarly, as explained in the preceding paras, due to the application of the Principle of Sui-Generis, signatories to International I.P Law Conventions can choose to rely on their domestic laws and legislations in order to protect Trade Secrets. One plus point that I noticed while writing this paper, is that relying on Indian Statutes and on the application of common law principles, an aggrieved party is likely to get more remedies under the law on violation of Trade Secrets as the courts then not only rely on the codified injunctions available under Trade Secret Statutes but also use other common law remedies, as explained above.

 

REFERENCES-

[1]Prajwal Nirwan, ‘Trade Secrets: The Hidden IP Right’ (WIPO Magazine, 2017) <https://www.wipo.int/wipo_magazine/en/2017/06/article_0006.html> accessed 1 October 2019.

[2]D.S Sengar, PROTECTION OF TRADE SECRETS AND UNDISCLOSED INFORMATION: LAW AND LITIGATION (Journal of the Indian Law Institute, 2011) <https://www.jstor.org/stable/43953505> accessed 4 October 2019.

[3] https://info.vethanlaw.com/blog/trade-secrets-10-of-the-most-famous-examples

[4] https://www.congress.gov/114/plaws/publ153/PLAW-114publ153.pdf

[5]Ibid1

[6] [6]Mark A. Lemley, The Surprising Virtues Of Treating Trade Secrets As IP Rights (2nd edn, Stanford Law Review 2008) <https://www.jstor.org/stable/40379687> accessed 1 October 2019.

[7] [7]Mark A. Lemley, The Surprising Virtues Of Treating Trade Secrets As IP Rights (2nd edn, Stanford Law Review 2008) <https://www.jstor.org/stable/40379687> accessed 1 October 2019.

[8] Rokos v. Peck, 182 Cal. App. 3d 604, 227 Cal. Rptr. 480, 1986 Cal. App. LEXIS 1731, 231 U.S.P.Q. (BNA) 707, Copy. L. Rep. (CCH) P25,979 (Cal. App. 2d Dist. June 19, 1986)

[9] 7 Chisum on Patents § 20.04 (2020)

[10] Daljit Titus v. M. Alfred A Adebare, 130(2006) DLT 330

[11] John Richard Brady and Ors v. Chemical Process EquipmentsP.Ltd. and Anr, AIR 1987 Delhi 372

[12] E.I du Pont de Nemours Powder Co. v. Masland, 244 U.S. 100(1917)

[13] ,Mr. Anil Gupta and Anr. V. Mr. Kunal Dasguputa and Ors, AIR 2002 Delhi 379

[14] Shree Gopal Paper Mills Ltd. v. Surrendra k. Haneshdas Malhotra, AIR 1962 Cal 61

[15] Homag India Pvt. Ltd. vs. Mr. Ulfath Ali Khan, M.F.A.No.1682/2010 C/W M.F.A.No.1683/2010 (CPC)

[16] Metallurgical Indus v. Fourtek, Inc., 790 F.2d 1195 (5th Circuit)

[17] https://www.wipo.int/edocs/lexdocs/laws/en/pk/pk011en.pdf

[18] https://www.wipo.int/tradesecrets/en/tradesecrets_faqs.html

[19] https://www.indiacode.nic.in/bitstream/123456789/1999/3/A2000-21.pdf

[20] https://www.sebi.gov.in/acts/insideregu.pdf

[21] https://www.wipo.int/edocs/lexdocs/laws/en/in/in066en.pdf

[22] Ragini Trakaroo, Jayashree Satpute & Md. Saood Tahir, Refugees and the Law 17 (2 ed)

[i]Kamakhya Srivastava, ‘India: Trade Secrets In Indian Courts’ (Mondaq.com, 2012) <http://www.mondaq.com/india/x/204598/Trade+Secrets/Trade+Secrets+In+Indian+Courts> accessed 2 October 2019.

[ii]Mark A. Lemley, The Surprising Virtues Of Treating Trade Secrets As IP Rights (2nd edn, Stanford Law Review 2008) <https://www.jstor.org/stable/40379687> accessed 1 October 2019.

[iii]Ibid5

[iv]Theft Of Trade Secrets: Need For Statutory Solution (University of pensilvania law review 1971) <Available at: https://scholarship.law.upenn.edu/penn_law_review/vol120/iss2/4> accessed 3 October 2019.

[v]Ibid7

[vi]Ibid5

[vii]D.S Sengar, PROTECTION OF TRADE SECRETS AND UNDISCLOSED INFORMATION: LAW AND LITIGATION (Journal of the Indian Law Institute, 2011) <https://www.jstor.org/stable/43953505> accessed 4 October 2019.

[viii]Kamakhya Srivastava, ‘India: Trade Secrets In Indian Courts’ (Mondaq.com, 2012) <http://www.mondaq.com/india/x/204598/Trade+Secrets/Trade+Secrets+In+Indian+Courts> accessed 2 October 2019.

[ix]Mark A. Lemley, The Surprising Virtues Of Treating Trade Secrets As IP Rights (2nd edn, Stanford Law Review 2008) <https://www.jstor.org/stable/40379687> accessed 1 October 2019.

[x]Ibid12

[xi]Ibid12

[xii]D.S Sengar, PROTECTION OF TRADE SECRETS AND UNDISCLOSED INFORMATION: LAW AND LITIGATION (Journal of the Indian Law Institute, 2011) <https://www.jstor.org/stable/43953505> accessed 4 October 2019.

[xiii]Kamakhya Srivastava, ‘India: Trade Secrets In Indian Courts’ (Mondaq.com, 2012) <http://www.mondaq.com/india/x/204598/Trade+Secrets/Trade+Secrets+In+Indian+Courts> accessed 2 October 2019.

[xiv]Metallurgical Industries. V. Fourtek, Inc., 790 F.2d 1195 (5Th Cir. 1986)

[xv]Ibid15

[xvi]Ibid15

[xvii]Prajwal Nirwan, ‘Trade Secrets: The Hidden IP Right’ (WIPO Magazine, 2017) <https://www.wipo.int/wipo_magazine/en/2017/06/article_0006.html> accessed 1 October 2019.

[xviii]Srivatav N., ‘Protection Of Trade Secrets Under Indian Law’ (Legalserviceindia.com, 2019) <http://www.legalserviceindia.com/legal/article-310-protection-of-trade-secrets-under-indian-law.html> accessed 3 October 2019.

[xix]Ibid21

CITE THIS WORK

Legal Maxim (October 26, 2020) The Trade of Two Secrets. Retrieved from https://www.legalmaxim.in/the-trade-of-two-secrets/.
The Trade of Two Secrets.” Legal Maxim – October 26, 2020, https://www.legalmaxim.in/the-trade-of-two-secrets/
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The Trade of Two Secrets.” Legal Maxim [Online]. Available: https://www.legalmaxim.in/the-trade-of-two-secrets/. [Accessed: October 26, 2020]
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Name: Adrija Bhowal

Affiliation: Jindal Global Law School

Year: 5th

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