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Is your Trade Secret safe?

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Trade Secret

Trade secret includes a certain process or any other confidential information of a company over which the company holds an intellectual property right. Companies either sell or license such trade secrets, which typically provide them with a competitive advantage in the market.

Considering the benefits of trade secrets, it is essential for a company to safeguard them. This paper talks about what qualifies as trade secrets and the importance of protecting them. The paper further discusses the strategies that various countries adopt and the existing legal frameworks while offering suggestions for better protection of trade secrets. It concludes with an in-depth view of trade secrets and the best strategies to adopt for their protection.

What qualifies as a Trade Secret? 

The criteria used to qualify information as a trade secret include several key factors. First, the information must possess actual or potential economic value derived from its secrecy, providing a competitive advantage to the holder because it is not generally known or easily accessible. Second, only a small and limited group of individuals should know the information, as this exclusivity contributes to its value and protection as a trade secret. Finally, the holder of the information must take reasonable steps to maintain its confidentiality, which can involve implementing security measures, restricting access, and establishing non-disclosure agreements with employees and business partners.

These criteria collectively ensure that the information retains its status as a trade secret and remains protected from unauthorized use or disclosure. Any use of such information without the consent of the holder amounts to a violation and has legal implications. 

Apart from the general criteria, any confidential information, whether technical or commercial in nature, qualifies as a trade secret if it gives the holder an edge over their competition. Further, a combination of certain techniques can also qualify as a trade secret even when such techniques are available in the public domain. 

Why to protect Trade Secrets?

Trade Secret

Owners of trade secrets are provided with several rights which are as follows; First, the owners have the right to prevent unlawful use of such information in business practices, second, protection against use, acquisition or disclosure of such information by any individual provided they did not discover it independently and third, protection from the actions of third parties leading to disclosure of such secret, whether it be intentional or negligent.

Apart from providing rights to the owners, protection of trade secrets is necessary for better management and growth of economies as well. Fair and healthy competition in the market with a balance between demand and supply is deemed essential for a growing economy. This facilitates the interest of the businesses in the market along with the consumers. Protection of trade secrets also gives rise to innovation while maintaining a healthy competition in the market.

Patent or Trade Secret: How to Choose? 

Although trade secrets qualify as a company’s intellectual property, they are different from patents based on two criterions. First, trade secrets are not present in the public domain like patents and second, the scope of protection provided by the two varies a lot. Under the current legal framework, the owner of a trade secret cannot restraint others from using such procedure provided they discover it independently through their own research strategies however, a patent restraints other parties from using such information even if they discover it on their own. Once confidential information is disclosed, it loses its status as a trade secret and enters the public domain for free use, until an individual applies for a patent on the process. Therefore, it is essential to protect trade secrets so that the holder of the information can continue to derive benefit from them. 

One must carefully consider all the factors surrounding their situation and decide whether a patent will be more well-suited or protection under a trade secret. Other factors to consider in decision-making include the following: First, assess the nature of the subject matter to determine whether it qualifies for patent protection. Second, evaluate whether maintaining confidentiality is more cost-effective than obtaining a patent. Third, consider that confidentiality can be upheld for a period of twenty years, which aligns with the protection period under patent law.

Additionally, due to the nature of the information, it can be challenging to determine whether it qualifies for protection as a trade secret. Therefore, in comparison with a patent, it is harder to transfer and license confidential information. Resolving disputes that might arise from such transfers are also difficult. 

Here are a few real-world examples where companies have opted to protect their information as trade secrets rather than pursuing patents:

  • Coca-Cola: The recipe for Coca-Cola has remained a closely guarded trade secret for decades. This strategy enables the company to preserve its unique flavor profile and brand identity without having to disclose the recipe to the public, which would be necessary if it pursued patent protection.
  • Google: The company’s search algorithm, stored in code, undergoes frequent updates to improve functionality and sustain its competitive advantage. By treating this algorithm as a trade secret, Google safeguards its proprietary technology from competitors.

Legal Frameworks around Protection of Trade Secrets 

Legal Protection

Use, disclosure or acquirement of confidential information treated as a trade secret in an unlawful manner or without the consent of the owner of such information might lead to certain legal implications such as breach of contract, breach of confidence, unfair practice, etc. Various international conventions have developed guidelines for a better understanding of laws around trade secrets. Countries have tried to integrate such guidelines with their domestic laws for a uniform understanding of trade secrets while developing their own legal provisions for better regulation of trade secrets. 

The WIPO (World Intellectual Property Organization) Symposium on Trade Secrets and Innovation, 2022 provides a forum for experts to address challenges and opportunities that arise form trade secrets and innovation. Other international initiatives include the Paris Convention for the Protection of Industrial Property (Paris Convention) by WIPO and the Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) by the WTO. 

In the United States of America, trade secrets are protected under a specific law and often falls under state jurisdiction, Uniform Trade Secrets Act, 1979 (UTSA). It also falls under federal jurisdiction and is governed by the Defend Trade Secrets Act, 2016 (DTSA). These guidelines provide strict laws regulating trade secrets in an efficient manner that is beneficial to all economic actors. The United States Patent and Trademark Office (USPTO) has also issued essential guidelines that are crucial for understanding the laws surrounding trade secrets and the protection of confidential information.

In the United Kingdoms, trade secrets are protected by Trade Secrets (Enforcement) Regulations, 2018. Multiple remedies are available, including damages and injunctions, provided that confidential information passes the three-stage test outlined in the official guidelines. The landmark judgement, Saltman Engineering Company Ltd. v Campbell Engineering Company Ltd., observed that the absence or presence of a contract does not matter as long as the parties are aware about the true owner and the confidentiality of the product. Using the product without the consent of the party would amount to unfair use. 

In India, the laws governing trade secrets have evolved primarily through case law, leading to various uncertainties and inconsistencies. Since India is a member of the TRIPS Agreement, it has to act in accordance with Article 39 of the Agreement with regards to trade secrets. In John Richard Brady and Ors. v Chemical process Equipment P Ltd. and Anr., the Court discussed principles of confidentiality and observed that law on such subject-matter must be based on broad principles of equity and individuals who receive information in confidence cannot take unfair advantage from it. 

The Calcutta High Court in Dr. Sudipta Banerjee v LS Davar and Company issued an injunction against the former of employees of the company for disclosure of confidential information and trade secrets and held that this amounted to breach of the non-disclosure agreement. In Burlington Home Shopping Pvt. Ltd. v Rajnish Chibber, the defendant was a former employee of the plaintiff’s company who used data collected by the plaintiff in a similar business that he started. The Court held that such data was protected under trade secrets and therefore, held the defendant liable for breach. 

Given the ambiguous laws surrounding trade secrets and confidential information in India, the 22nd Law Commission has recommended the formation of new legislation that provides clear guidelines on the matter. This recommendation is further supported by the 289th Law Commission Report on Trade Secrets and Economic Espionage, which also highlighted the necessity for regulatory frameworks. The proposed draft, titled “Protection of Trade Secrets Bill, 2024,” will include provisions aligned with the TRIPS Agreement, as well as relevant laws from other jurisdictions, such as the UK and the USA.

How to secure your Trade Secrets?

Based on international covenants and domestic laws, various practices have emerged to safeguard confidential information and protect trade secrets. Some of the best preventive measures companies can adopt include the following:

  1. Companies can make their employees, business partners and other parties that interact with the business with knowledge of confidential information sign a non-disclosure agreement (NDA). This can prevent parties from disclosing a company’s confidential information and if they breach such contract, it has legal consequences. 
  2. Companies can make their employees sign a non-compete agreement (NCA) to prevent them from entering the market in a similar field. This can be crucial in certain cases, as employees may possess confidential information about a company that they can leverage to achieve success.
  3. A company’s management should be careful while deciding the accessibility of important documents. These documents should be accessible only to a select group of individuals when necessary, with additional preventive measures in place. Implementing physical and technological restrictions can help limit access and safeguard the information.
  4. A company can foster a work environment that promotes confidentiality of information regarding company and its business among its employees. 

Conclusion 

Companies must protect trade secrets, as this confidential information provides them with a competitive edge and continuous benefits. However, protecting such trade secrets is challenging due to the involvement of multiple actors in a business. Recognising the need for stricter laws and more efficient regulation, international discussions are taking place. Countries have put in efforts to incorporate such guidelines in domestic laws. 

Despite the growing need to protect trade secrets for fair and healthy competition, stricter guidelines are essential. Efforts are ongoing to develop uniform laws across countries, which would also enhance international trade practices.

References

Submitted by Jhanvi Jain, a Law Student pursuing B.Com LL.B. from Jindal Law School.