TRADE SECRET MISAPPROPRIATION AND LEGAL PROTECTIONS AND REMEDIES FOR BUSINESSES

ABSTRACT

Trade secrets are a valuable asset for businesses, as they provide a competitive edge by their confidentiality. However, organizations worldwide are now realizing the importance of protecting these trade secrets, as they are vulnerable to theft and misuse. Consequently, many global companies are becoming cautious about investing and expanding into jurisdictions that do not offer adequate protection for trade secrets.

The purpose of this paper is to shed light on the concept of trade secrets and emphasize the growing need to safeguard them. Additionally, this paper will conduct a comparative analysis of the legal frameworks for trade secret protection in the United States, the European Union, the United Arab Emirates, and India.

By decoding the concept of trade secrets and examining the different approaches taken by various jurisdictions, this paper aims to provide a comprehensive understanding of trade secret protection.

Keywords

Trade secret, Business, protection, misappropriation, legal, TRIPS.

INTRODUCTION

Trade secret law is a crucial component of the legal landscape, intertwining with contract, competition, innovation, and intellectual property rights. It safeguards valuable information that must remain confidential for the benefit of a business. Trade secrets, in contrast to other forms of intellectual property, necessitate fewer formalities and provide a safeguard against competitors through the preservation of confidentiality. Examples like the KFC recipe and Coca-Cola ingredients highlight the significance of trade secrets. It is imperative to have robust legal mechanisms in place to ensure the safeguarding of trade secrets, going beyond mere recognition as intellectual property, to protect the hard work and investments of entrepreneurs seeking a competitive edge in the market.

Trade secrets, also known as confidential and proprietary information, are essential assets for any business, regardless of its size. To be classified as a trade secret, the information must meet three specific criteria :

1. It must hold commercial value, necessitating confidentiality.

2. Only a limited number of individuals should be privy to the information.

3. The rightful owner of the information must have taken reasonable steps to maintain its secrecy, including the use of confidentiality agreements with employees and business partners.

These trade secrets provide a competitive advantage for a business and should not be underestimated. To protect these valuable assets, companies are legally and practically required to seek the expertise of professionals who have completed a business management course and possess the necessary skills to take appropriate measures.

WHAT IS TRADE SECRET?

Trade secrets are a precious asset for businesses, furnishing them with a competitive edge in the request. These secrets encompass nonpublic information that isn’t shared with the public and is kept under tight wraps by the proprietor. Unlike patents and trademarks, trade secrets don’t bear public exposure or enrollment. They can include a wide range of information such as business strategies, fiscal data, client lists, pricing details, marketing plans, software law, manufacturing processes, and formulas. Trade secrets play a pivotal part in colorful diligence, with exemplifications varying depending on the sector. In food assiduity, a secret form for a popular product can be a trade secret. In the technology assiduity, software law or algorithms may be largely guarded trade secrets. Also, in fashion assiduity, designs, and manufacturing processes can be considered precious trade secrets. By securing trade secrets, businesses can maintain their request position, save the confidentiality of their inventions, and shield their precious information from challengers. These secrets give possessors an upper hand over others, allowing them to stay ahead in the game[1].

Various jurisdictions have their definitions of ‘trade secrets’, however, Article 39 of the TRIPS Agreement, which draws heavily from the Uniform Trade Secrets Act of the United States, outlines three key factors for interpreting ‘trade secrets’. These factors include[2]:
The information is confidential and not widely known among those who typically deal with such information;
The information holds commercial value due to its secrecy; and
The person legally in possession of the information has taken reasonable steps to maintain its confidentiality.

THE CORE ELEMENTS THAT DEFINE A TRADE SECRET

The United Trade Secrets Act outlines three fundamental requirements for establishing the classification of information as a trade secret:

Firstly, the information must fall into one of the specified categories, such as a formula, pattern, compilation, program, device, method, technique, or process.
Secondly, the information must possess an economic value that is exclusively obtainable from a single source. This means that the information provides a competitive advantage or financial benefit to the owner.
Lastly, the claimant must have taken reasonable measures to maintain the confidentiality of the information. This includes implementing safeguards and restrictions to prevent unauthorized access or disclosure.

It is important to note that information that is already known or publicly available cannot be considered a trade secret. However, even if certain components of the information are publicly accessible, a combination of these elements can still be deemed a trade secret, However, even if certain components of the information are publicly accessible, a combination of these elements can still be deemed a trade secret if it is unique and holds significant value.

INDIAN LAW AND THE PROTECTION OF TRADE SECRETS

India, as a signatory of the TRIPs Agreement, is required to safeguard undisclosed information. However, Indian courts have chosen to apply common law principles to protect this information, as they are allowed to have their mechanism under the Paris Convention and Articles 39(2) and 39(3). Unlike other countries, India does not have a specific law to protect trade secrets.

Instead, trade secrets in India can be considered under contract, competition, and intellectual property laws simultaneously. They can be safeguarded through restrictive covenants, non-disclosure agreements, and other contractual means. Misappropriation of trade secrets can be addressed through common law, where a breach of confidence or theft can occur.

Indian courts view trade secrets as equitable rights rather than absolute property rights, following the common law tradition. While trade secrets are recognized as a category of protected information, they are often treated alongside other types of confidential information and know-how. Due to the absence of a codified law, trade secret disputes are handled differently by courts based on the specific circumstances of each case, the development of Trade Secrets jurisprudence in India has been rapid since the 1990s due to the liberalization of the Indian economy and an increase in the creation of intellectual property with financial implications for businesses. As a result, disputes related to the classification and protection of information, particularly in its intangible form, have emerged before Indian courts. Information is broadly categorized as either confidential or public. Confidential information can be further classified as a trade secret, government, personal, or know-how[3].

According to the definition provided in the Black’s Law Dictionary, a trade secret refers to business information such as a formula, process, device, or other valuable information that is kept confidential to gain a competitive advantage. This information has independent economic value and is not generally known or easily accessible to others who could benefit from its disclosure or use. Efforts are made to maintain its secrecy. under the given circumstances.

The Calcutta High Court in [4]Tata Motors Limited v State of West Bengal relied on this definition.

The Indian case of [5]Konrad Wiedemann GmbH v. Standard Castings Pvt. Ltd., heavily relied on Lord Green’s observations in the Saltman case.

According to Lord Green, for information to be considered confidential, it must not be public knowledge. However, a document can still be confidential if it is the result of the maker’s unique thinking process, even if the materials used are available to anyone.

In the [6]Indian Farmers Fertilizer v. Commissioner of Central Excise case, the Customs, Excise and Gold Tribunal, Delhi defined Trade Secrets as information not widely known to the public, providing economic benefit to the holder, and kept secret through reasonable efforts.

The criteria for information to be considered a Trade Secret were further elaborated by the Hon’ble High Court of Bombay in the [7]Bombay Dyeing and Manufacturing Co. Ltd. v. Mehar Karan Singh case in 2010:

How much the information is known outside the business;
How much it is known by employees inside the business;
The measures taken to protect the secrecy of the information;
The advantage gained by the holder over competitors by having the information;
The resources invested in obtaining and developing the information;
The time and cost required for others to acquire and replicate the information.

It is a well-established principle that confidentiality is a crucial factor in determining the legal protection of information as a Trade Secret. If the owners of such confidential information do not make reasonable efforts to maintain its secrecy or fail to prove their efforts, they risk losing the confidentiality aspect, even if the information is obtained by third parties without permission.

In India, even without a specific law recognizing or defining “Trade Secrets,” there are extensive provisions that protect confidential information. These provisions include:

Section 27 of the Indian Contract Act, prohibits the disclosure of information acquired through a contract[8].
Section 72 of the Information Technology Act, provides criminal remedies for unauthorized access to electronic records or information and subsequent disclosure[9].
The Information Technology Act of 2009, specifically Section 43A, allows for compensation in cases of failure to protect sensitive personal data. The Act defines sensitive personal data and includes passwords, financial data, and biometric data[10].
The Securities Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, which makes the use and disclosure of confidential information by insiders subject to prosecution under the Securities Exchange Board of India[11].
In 2012, the Copyright (Amendment) Act introduced criminal penalties for bypassing technological measures protecting copyrighted works. It also included penalties for unauthorized access and alteration of rights management information under Section 65B[12].

DIFFERENT WAYS TO PROTECT TRADE SECRETS FROM BEING DISCLOSED

Common Law Principle –

In the realm of common law, it is firmly established that a former employee has the freedom to apply the general skills and knowledge gained during their time of employment.

Independent Discovery –

The owner of a trade secret does not hold exclusive rights to that information. Anyone who puts in the effort could potentially uncover the same, which is a widely recognized defense.

Backward Engineering –

It is legal for an individual to reverse engineer a final product to uncover the process of creating a specific tool that may be a trade secret of another company. To counter this defense, the plaintiff must prove that the trade secret was unlawfully misappropriated.

Public Interest Clause –

It is firmly established that no liability is incurred when using information that is in the public interest to disclose or utilize. Therefore, a defendant in a breach of confidence case will not be held accountable to the plaintiff for any disclosure or use of information if the defendant can demonstrate that the public interest outweighs the confidentiality obligation.

Legal Mandate –

If a court or statute mandates the disclosure of information, the individual will be exempt from liability for misappropriation of the trade secret. Which could undermine the reverse engineering defense[13].

MISAPPROPRIATION OF TRADE SECRETS

Misappropriation, also known as secret infringement, refers to the improper acquisition, disclosure, or use of a trade secret without consent. It can occur when someone accidentally or mistakenly gains knowledge of a trade secret. It’s important to note that misappropriation doesn’t have to be intentional; it can happen unintentionally or due to negligence[14].

According to Section 1(2) of the Uniform Trade Secrets Act,1979, misappropriation can be defined as follows[15]:

When a person acquires a trade secret from another person, knowing or having reason to know that it was obtained through improper means.
When a person discloses or uses another person’s trade secrets without their explicit or implicit consent, and:

The person used improper means to acquire knowledge of the trade secret or b. At the time of disclosure or use, upon disclosure or utilization, the individual was aware or had grounds to believe that their understanding of the confidential information was acquired from a source who engaged in inappropriate practices and means to acquire it. The theft of a trade secret can happen in colorful ways, similar to carrying it intimately, taking it from someone who was supposed to keep it secret, or using it without knowing it was a trade secret. numerous legal systems define misappropriation as the unauthorized access, exposure, or use of a trade secret, or snooping with the rights of the trade secret holder. Indian courts have honored the significance of guarding trade secrets and have enforced laws like Sec 37 of the Specific Relief Act, 1963,[16] for injunctions, Sec 73 of the Indian Contract Act, 1872, for damages, Sec 27 of the Indian Contract Act, 1872, for agreements in restraint of trade[17], and Sec 405 of the Indian Penal Code, 1860, for felonious breach of trust[18]

In the case of [19]John Richard Brady & Ors v. Chemical Process Outfit P Ltd & Anr, the court stressed the principles of confidentiality, stating that those who admit information in confidence shouldn’t misuse it unfairly. Currently, the most prevalent forms of trade secrets encompass know-how (including inventions), technical data, customer lists, and business strategies. In the absence of a contractual agreement between the company and the individual, the court may have the authority to compel the individual to return the trade secret to the company. Misappropriation of trade secrets can be defined as the acquisition of a trade secret through improper means, which is not protected by any specific law. As a result, the typical legal actions against misappropriation or unauthorized disclosure of trade secrets involve civil suits for breach of contract and tortious conduct due to misappropriation; and criminal charges for theft and breach of trust.

According to contract law, an individual can be legally obligated not to disclose certain information. Parties can establish confidentiality agreements, also referred to as non-disclosure agreements (NDAs), to safeguard trade secrets and confidential information. These agreements usually impose obligations on the recipient of the information to maintain its confidentiality and limit its use for unauthorized purposes. Violation of a confidentiality agreement may result in legal remedies and compensation.

An NDA must clearly outline what information is confidential and should not be shared with others. Including strict penalties for breaking the NDA can deter third parties from revealing the information. While India may not have specialized ADR methods for trade secret disputes, it is advisable to include an ADR clause in every NDA. This allows for disputes to be resolved outside of court through methods like mediation, conciliation, and arbitration, saving time and money. ADR methods are generally quicker and more cost-effective than going through the judicial system. If a party breaches a confidentiality agreement or fails to protect trade secrets as agreed, the injured party can seek legal remedies under contract law, such as specific performance, injunctions, and monetary damages.

REMEDIES FOR TRADE SECRETS

A trade secret owner whose information has been unlawfully taken can pursue both injunctive relief and financial compensation to recover from the economic losses caused by the theft. While injunctions are crucial in cases of trade secret misappropriation, the amount of monetary damages available often shapes the litigation strategy and the business response of the owner affected by the misappropriation. The owner can seek these remedies under the Uniform Trade Secrets Act (USTA), the federal Defend Trade Secrets Act (DTSA), or the Economic Espionage Act (EEA)[20]. Deciding which claims to pursue and the appropriate venue are critical decisions for the plaintiff. Recovery of damages and protection of business interests depend on a thorough understanding of the relevant laws, case precedents, and available legal options. Time is of the essence in such cases, making it essential to be well-versed in all possible courses of action.

How can Indian business owners safeguard their trade secrets?

With the rapid-fire advancement of technology, numerous businesses face the daunting task of securing their vital information. The ease of copying and transferring data has resulted in conflicts between employers, workers, third-party contractors, merchandisers, and indeed challengers. In India, there’s no specific law devoted to trade secrets. still, the Indian courts have honored the significance of guarding trade secrets and have handed legal remedies under colorful bills. These include contract law, brand law, principles of equity, and, in certain cases, the common law action of breach of confidence, which constitutes a breach of contractual obligation[21]. also, Section 72 of the Information Technology Act, of 2000 offers some position of protection, albeit limited to electronic records. The possessors of trade secrets have several remedies at their disposal. They can seek instruction to help a designee, hand, seller, or any other party from telling the trade secret. likewise, they can demand the return of all nonpublic and personal information. Incipiently, they’re entitled to seek compensation for any losses incurred as a result of the trade secret’s exposure. Contract law in India provides individuals with the ability to establish legally binding agreements that include provisions for the non-disclosure of confidential information. Even in the absence of a formal contract, Indian courts have recognized the significance of maintaining confidentiality and have granted injunctive relief in cases of breach of confidential information[22].

This recognition is evident in the case of Richard Brady v Chemical Process Equipments (AIR 1987 Delhi 372), where the court acknowledged the importance of information intended to be kept confidential.

Contracts play a crucial role in protecting confidential information that is shared between various parties such as employers, employees, contract manufacturers, vendors, and others involved in business transactions. By establishing contractual obligations, parties can ensure the security and privacy of sensitive information exchanged during the course of their professional relationships.

The legal protection of copyright extends to databases, as they are considered compilations and fall under the category of “literary works” according to Section 2(O) of the Copyright Act, 1957[23]. This recognition by the courts acknowledges that client information stored in databases can be deemed as copyrightable material. Businesses rely on databases to organize and access data systematically, enabling them to analyze profitability, and customer behavior, and manage inventory effectively. By granting copyright protection to databases, businesses are provided with the necessary legal framework to ensure the smooth operation and future growth of their enterprises.

The current legal stance necessitates that any form of endeavor, diligence, or investment of skill leads to a copyrightable creation, but only those works are eligible for protection that:

Exhibit some level of distinctiveness;
Require a certain amount of intellectual exertion; and
Possess a minimal degree of creativity

In the case of [24]Govindan v Gopalakrishna (AIR 1955 Madras 391), which dealt with a compilation, the court ruled that despite the limited originality of a compilation, it is still safeguarded by law. Therefore, no individual is permitted to appropriate or plagiarize the fruits of another person’s intelligence, expertise, or hard work, even in such types of work.

Laws at the international level aimed at safeguarding confidential business information

There are no international treaties specifically dedicated to governing trade secrets. However, the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, which was established during the Uruguay Round of Multilateral Trade Negotiations, sets out minimum standards for the protection of patents, copyrights, trademarks, and trade secrets. This agreement requires all members of the World Trade Organization (WTO) to adhere to its provisions. Article 39 of the TRIPS agreement mandates that WTO members must safeguard individuals and businesses that own or control “undisclosed information” from unauthorized disclosure, acquisition, or use that goes against honest commercial practices. The agreement further elaborates that practices contrary to honest commercial practices include breach of contract, breach of confidence, and inducement to breach, as well as the acquisition of undisclosed information by third parties who were aware or should have been aware of the wrongful nature of the acquisition.

Moreover, Article 39 of the TRIPS agreement defines “undisclosed information” as information that meets the following criteria[25]:

It is secret in the sense that it is not generally known or readily accessible to individuals within the relevant industry circles.
It holds commercial value due to its secretive nature.
It has been subject to reasonable measures, taken by the lawful controller of the information, to maintain its secrecy. Article 39 imposes an obligation on the signatories to create laws that protect trade secrets, but the guidelines and definition of undisclosed information are not as specific as those in the federal Economic Espionage Act, which provides a detailed list of information that can be considered a trade secret. The United States introduced The Uniform Trade Secrets Act in 1970, which still acts as a model for many other countries that are in the process of enacting laws to protect trade secrets. The United States has been influential in encouraging other countries with which it has trade relations to create laws protecting trade secrets through bilateral trade agreements.

Ensuring the utmost confidentiality of information is of paramount importance :

In the case of [26]Ritika v Biba Apparels (DELHC DE 0784 2016), the court emphasized the importance of clearly specifying the trade secrets being infringed upon when seeking an injunction order. It was noted that the plaintiff must demonstrate ownership of the trade secrets in question. Without this specific information, a general injunction order cannot be granted against the defendant.

Similarly, in [27]Emergent Genetics India v Shailendra Shivam and Ors (2011 (47) PTC 494), the court highlighted the significance of including detailed pleadings regarding the confidential nature of the information in question. It was stated that without such crucial information, the claim of confidentiality cannot be upheld.

Therefore, in a trade secret lawsuit, it is essential to establish the confidential nature of the subject information. In addition to asserting confidentiality, the plaintiff must also provide evidence of reasonable efforts taken to maintain the confidentiality of the information. Failure to do so may result in the loss of the information’s confidential status.

CONCLUSION

Trade secret protection has evolved from being a national legal issue to becoming an international concern due to the increasing demand for safeguarding trade secrets. The global landscape of trade and investment has led to the emergence of new legal frameworks aimed at protecting industrial and business confidential information. It is worth noting that national systems for trade secret protection remain unharmonized, with different countries having varying laws in place. International agreements such as TRIPS and NAFTA provide minimal legal standards for trade secret protection, allowing member countries to enact their legislation. The European Union has not directly addressed trade secret protection, further complicating the legal landscape. The diverse theoretical foundations underlying trade secret protection contribute to discrepancies in national laws, highlighting the need for harmonization in this area. While India’s national innovation framework offers valuable trade secret protection, there is a crucial gap in innovation promotion due to the increasing disconnect between innovators and investors. Investors often prioritize the business track record of promoters over the technological innovation itself, necessitating a shift towards identifying and supporting innovations regardless of their origin. To bridge this gap, innovation promoters should focus on providing access to business managers who can help translate innovative ideas into commercial success, as successful businesses often rely on skilled managers for their operations. By encouraging enterprising business managers to collaborate with innovation teams, promising ideas can be effectively developed into successful ventures.

REFERENCES

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[1] Legal Service India E-Journal, https://www.legalserviceindia.com/legal/article-12198-trade-secrets-and-the-importance-of-protecting-confidential-information-in-india.html, (Last Visited Mar. 05, 2024)

[2] Geeta Daswani, Trade secrets, its significance and a comparative analysis of trade secret protection in different jurisdictions, page cited – 3 (2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2869715

[3] Legal service India E-journal, https://www.legalserviceindia.com/legal/article-310-protection-of-trade-secrets-under-indian-law.html (last visited March 05, 2024)

[4] Tata Motors Limited v State of West Bengal, (2008)

[5] Konrad Wiedemann GmbH v. Standard Castings Pvt. Ltd, (1985), (10), IPLR, 243

[6] Indian Farmers Fertilizer v. Commissioner of Central Excise, (2007)7VST6(CESTAT-NEW DELHI)

[7] Bombay Dyeing and Manufacturing Co. Ltd. v. Mehar Karan Singh, (2010)

[8] Indian Contract Act, 1872, 27, No.9, Acts of State Legislature.

[9] Information Technology Act, 2000, 72, No.21, Acts of Indian Parliament.

[10] Information Technology Act, 2009, 43A, No.10, Acts of State Legislature.

[11] Securities Exchange Board of India, 1992, No.15, Acts of Indian Parliament.

[13] Indian Law Portal, https://indianlawportal.co.in/trade-secrets/ (last visited March 6, 2024)

[14] Veena T.N, Misappropriation of Trade Secrets Under Indian Legal Frameworks, 12, Christ University Law Journal, Abstract.83, 85, (2023) https://journals.christuniversity.in/index.php/culj/article/view/4495/2436

[15] Uniform Trade Secrets Act, 1979, 1(2), Acts of State Legislature.

[16] Specific Relief Act, 1963, 37, No. 47, Acts of State Legislature.

[17] Indian Contract Act, 1872, 73 and 27, No.9, Acts of State Legislature.

[18] Indian Penal Code, Act, 1860, Section 405, Acts of State Legislature.

[19] John Richard Brady & Ors v. Chemical Process Outfit P Ltd & Anr, AIR 1987 DELHI 372

[20] Lexology, https://www.lexology.com/library/detail.aspx?g=3084a4e4-19cc-4cd6-aec1-c4fdc668a4f4 (last visited March 6 2024)

[21] Rachna Bakhru, How to protect trade secrets in India, Managing IP, (March 6, 2024, 4:18 PM.) https://www.managingip.com/article/2aldjxz20qoipuhj55se8/sponsored-content/how-to-protect-trade-secrets-in-india

[22] Information Technology Act, 2000, 72, No.21, Acts of Indian Parliament.

[23] The Copyright Act, 1957, 2(o), No.14, Acts of Indian Parliament.

[24] Govindan v Gopalakrishna, AIR 1955MAD391.

[25] Pranav Ravinder, Trade secrets, Indian Law Portal, (March 6, 2024, 4:50 PM) https://indianlawportal.co.in/trade-secrets/

[26] Ritika v Biba Apparels, AIR DELHC DE 0784 2016.

[27] Emergent Genetics India v Shailendra Shivam and Ors, AIR2011 (47) PTC 494.

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