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TRADE SECRET MISAPPROPRIATION IN SUPPLY CHAINS: LEGAL IMPLICATIONS AND RISK MITIGATION

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This article is written by Deepika Kapoor of Dr. Ram Manohar Lohiya National Law University, an intern under Legal Vidhiya

Abstract

Trade secret misappropriation in supply chains is a critical issue that can have serious implications for businesses. This paper aims to explore the concept of trade secrets, their importance in maintaining a competitive edge, and the various forms of misappropriation that can occur. Examples of such forms include breaches of non-disclosure agreements, industrial espionage, theft, fraud, and bribery. The legal implications of trade secret misappropriation in India and internationally are also examined, highlighting the need for strong legal protections to safeguard intellectual property. Furthermore, the paper discusses strategies for mitigating the risk of trade secret misappropriation in supply chains. These strategies include identifying and protecting trade secrets, conducting thorough due diligence on vendors and partners, and implementing technological solutions such as data loss prevention tools and encryption. Employee training and awareness are also crucial to ensure that trade secrets are handled with care and confidentiality.

Keywords

Trade Secret, Trade Secret Misappropriation, Supply Chains, Businesses.

Introduction

Imagine getting the recipe of the famous K.F.C. chicken fry leaked to the public domain, allowing other outlets to copy it and create duplications. Would the hype surrounding K.F.C. remain the same? This particular scenario highlights the critical issue of trade secret misappropriation in supply chains, where valuable intellectual property is at high risk of being used unlawfully by competitors. running a successful trade business often needs certain secrets that one wishes to hide from their competitor to be ahead in the game. A trade secret, as the name suggests, is defined as a piece of information that derives independent economic value; any valuable assets for any business that are confidential for a trade business can be termed as a trade secret; a trade secret is important for a business to prosper, thrive and survive and losing onto that trade secret can diminish business credibility, three important constituents of a trade secret is information that is not known to the generic public or relevant business circle something that confers an economic benefit on its owner, and the subject of reasonable efforts to maintain its secrecy. Anything that can be easily gathered via public by a mere inspection cannot be called as a trade secret. Misappropriation of trade secrets can be defined as gathering information about trade secrets by fraud, coercion, or any unlawful means to use that trade secret for their own growth or for inflicting harm on that particular business whose trade secret is misappropriated. Trade secret misappropriation in supply chains refers to the unauthorized acquisition, use, or disclosure of valuable confidential information within the supply chain context. This can occur at various stages of the supply chain from suppliers to manufacturers to distributors and can involve a range of information.

UNDERSTANDING TRADE SECRETS

What constitutes a trade secret?

Any formula, one example being the Coca-Cola formula that is famously protected as a trade secret, pattern or templates that are not generally known that provide a competitive edge in the market or information that’s a secret ingredient and is used for a considerable period of time in a business, any information that is used in manufacturing and producing a particular good, sensitive marketing information, or any strategy on which a business runs can be said to constitute a trade secret. Any scientific or financial information or business plans or processes, a list of customers, suppliers, certain raw materials or formulas, databases, and electronic data compilations, agreements, marketing tie-ups, promotional ideas are some other examples of trade secret.[1]

Importance of protecting trade secrets In this 21st century, where humans have generated technologies such as A.I., it’s evident how efficient the human brain is when it comes to innovation and invention; trade secrets are the invention or modification of a business rule, a formula that helps to prosper a business if those formulas rules aren’t protected it will affect the trades growth and will lead to unfair competition, competition being the driving force of innovation, Misappropriation of a trade secret would also lead to hindrance in the innovation as one will try focusing onto gathering information of another trade secret rather than being in a fair and equitable competition where one uses its own potential to innovate a trade secret of oneself., trade secrets protection seeks to promote commercial ethics and fair competition.

What are the requirements for trade secret protection?  

Anything that can be readily available by a mere inspection cannot be considered a secret to be protected as a trade secret; the information must be secret; the word secret herein doesn’t imply in absolute terms, the implication here is that the secret is available by a group of several people working together for the same business, it is considered a secret until and unless it’s not known to another person in the same domain, it must also contain economic value that adds to the trade prosperity or survival,  for example – A business creates a manufacturing process that enables it to produce its items more efficiently and economically A procedure like this gives the business an advantage over rivals. As a result, the concerned company can see its expertise as a trade secret and want to keep it that way from rivals. It ensures that the secret is known to very few individuals and that those who do are made fully aware of its confidentiality.[2]

How do trade secrets get misappropriated?

Breaches of non-disclosure agreements, industrial espionage, theft, fraud, and bribery are all improper means of acquiring a trade secret. For example, an employer of a particular company shares details with another company in the same field in return for a bribe.

In industrial espionage, there exists intense competition in the domestic and export markets that leads to an alarming increase in theft by outsiders. Corporate spying with professional criminals targeting a particular specific technology or initiating hackers accessing the source code, product design, marketing plans, or approaching the employees of the company to reveal company information is an external threat to trade secrets while exploiting the workers or former employers either for money or merely for spite is an internal threat to trade markets.

LEGAL IMPLICATIONS OF TRADE SECRET MISAPPROPRIATION

Misappropriation of supply chains can have serious legal implications as it can lead to unfair competition, loss of competitive advantage, and financial harm to the affected businesses. Trade Secrets are an important intellectual property right that needs protection from getting violated for a fair environment. After liberalization in 1991, India became a member of the World Trade Organisation, and later on, India signed the agreement on trade-related aspects of intellectual property rights in 1994[3]. still, India does not have proper legislation protecting this intellectual property. However, protection of trade secrets can be found under the Indian Contract Act under Section 27 of the Contract Act[4] law. That bound the party not to disclose information contrary to the terms of the contract between the party, that is, the non-closure agreement. The aggrieved person can also take relief under Section 405[5]-409[6] of the Indian Penal Code,1860, which deals with cases of criminal breach of trust. Protection for the misappropriation of trade secrets can be sought under the Indian Contract Act based on the principle of equity, which is the common breach of confidence between the parties which results in the breakdown of contractual obligation. This concept was laid down in the case of John Richard Brady and others v. Chemical Process Limited[7]. The person has to enter into the contractual obligation of not disclosing the information to the 3rd party as it amounts to the asset of the company. If the person has disclosed the information, the only remedy that is available to the companies is to seek an injunction and compensation for the losses that have occurred.

The trade secret laws in India can be protected under various statutes such as contract law, copyright act[8], and also in the I.T. act[9]. Under the Information Technology Act, the information shall be limited to electronic records only, and section 72 of the I.T. Act provides for such protection. The act ensures criminal liability for breach of secrecy and trust. The Securities and Exchange Board of India Act 1992[10] also makes insider use in the publication of sensitive information as a Punishable Act. There are certain remedies that are available to the person if the trade secrets are violated. Such remedies are –

  1. providing injunction to the license of such goods produced from the information.
  2.  compensation in cases of loss occurred.
  3.  returning all the confidential information and property used after disclosing the trade secrets.[11]

INTERNATIONAL LEGAL FRAMEWORK OF TRADE SECRET MISAPPROPRIATIONS

In the U.S., trade secrets are protected by the Uniform Trade Secret Act, which is a state law enacted by the Uniform Law Commission in 1979. It is also protected by federal law, the Defendant Trade Secret Act of 2016. The U.S. has the strongest law for the protection of trade secrets; under the U.T.S.A., a former employee provision is incorporated where an employer may show that a former employee used their memory to disclose trade secret information to hold the employee accountable for the misappropriation of this is known as formal employee provision. In any misappropriation of trade secrets, in case where the act of theft or misappropriation of a trade secret has been done with the intent that it will benefit any foreign government for instrumentality or foreign agent, it will be a criminal offense as per the Economic Espionage Act 1996.[12]

In the U.K., trade secrets are protected by Trade Secret (Enforcement) Regulation 2018, and these regulations considerably overlap the common law regime for confidential information as a trade secret is a subset of confidential information.[13]

Globally, countries like the U.S., Japan, and the U.K. have taken a step forward in protecting trade secrets and confidential information by having legislation; India also requires formal legislation along the lines of the U.T.S.A. to deter the illegal transfer of trade secrets by individual or supply chains for a fair and equitable market.

MITIGATING THE RISK OF MISAPPROPRIATION OF TRADE SECRETS

Putting up with a system for identifying trade secrets – to solve any problem, one needs to start from the grassroots level so that there exists a properly resolved conflict at the end; identification and categorization of trade secrets is a prerequisite for mitigating the risk of misappropriation.

  1. There should be an evaluation of what information impacts the business if the competitors get it and the level of that impact.
  2. Having a proper staff specifically assigned to record-keeping data security or for the preservation of trade secrets.[14]
  3.  Develop an information security policy that includes the trade secret protection policy. The information security policy covers the systems and practices intended to safeguard the information assets against disclosure to any individual or organization not permitted to have access to that information, particularly data that falls under the categories of proprietary, confidential, and sensitive. Information security can be implemented at various levels, such as physical controls, administrative controls, and technical controls.[15]
  4. Educating all employees on issues relating to information security, hiring employees on the basis of their competence, knowledge, and skills, avoiding hiring a person bound by a non-compete agreement, reminding the employees not to disclose state secrets to unauthorized individuals or entities, and to follow the security procedures do so by way of notices memos or emails.[16]
  5. Importance of exercising care in hiring an employee of a competitor: hiring away more than one employee from a competitor would raise suspicion of wrongdoing and, therefore, should be avoided.
  6. Technological Protection: Use technology solutions such as data loss prevention (D.L.P.) tools, encryption, and watermarking to protect trade secrets from unauthorized access and use.
  7. Regular review and update regularly review and updated trade secret production methods to address evolving threats and vulnerabilities in your supply chain.[17]

By implementing these strategies, organisations can significantly reduce the risk of trade secret misappropriation in their supply chains.

Conclusion

Trade secret misappropriation is a significant threat to businesses, particularly in supply chains where sensitive information is shared among multiple parties. To reduce this risk, businesses should take proactive measures to protect their trade secrets and ensure that all parties involved in their supply chain follow strict confidentiality agreements. Effective protection strategies should include identifying and categorizing trade secrets, implementing robust information security policies, and educating employees about the significance of confidentiality. Additionally, businesses should conduct regular audits of their supply chain practices to identify and address any potential vulnerabilities. By implementing these strategies, businesses can reduce the risk of trade secret misappropriation and protect their competitive advantage. A strong legal framework is also essential to deter potential infringers and provide recourse for businesses that have been affected by misappropriation.

REFERENCES

  1. WIPO,https://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_4_learning_points.pdf (last visited Mar 6, 2024).
  2. WIPO, https://www.wipo.int/tradesecrets/en/tradesecrets_faqs.html#:~:text=In%20general%2C%20trade%20secret%20protection,contrary%20to%20honest%20commercial%20practice. (last visited Mar 6, 2024).
  3. Vijay Pal Dalmia, Protection of Trade Secret in India, Lexology (Mar. 6, 2024, 10:59 PM),https://www.lexology.com/library/detail.aspx?g=4f23531b-10a4-4b69-a9fe-b7d3a10de67d.
  4. WIPO,https://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_4_learning_points.pdf (last visited Mar 6, 2024).
  5. David H. Schwartz, WHAT QUALIFIES AS MISAPPROPRIATIONS OF A TRADE SECRET?, law Offices of DAVID H. SCHWARTZ (Mar. 6, 2024,11:05 PM) https://www.lodhs.com/blog/what-qualifies-misappropriation-trade-secret/.
  6. Neha Chaudhary, Protection of trade secrets and confidential information in India and global trends, Ipleaders (Mar. 6, 2024,11:05 PM) https://blog.ipleaders.in/protection-of-trade-secrets-and-confidential-information-in-india-and-global-trends/#How_Trade_Secret_law_is_governed.

[1] WIPO,https://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_4_learning_points.pdf (last visited Mar 6, 2024).

[2] WIPO, https://www.wipo.int/tradesecrets/en/tradesecrets_faqs.html#:~:text=In%20general%2C%20trade%20secret%20protection,contrary%20to%20honest%20commercial%20practice. (last visited Mar 6, 2024).

[3] Vijay Pal Dalmia, Protection of Trade Secret in India, Lexology (Mar. 6, 2024, 10:59 PM),https://www.lexology.com/library/detail.aspx?g=4f23531b-10a4-4b69-a9fe-b7d3a10de67d.

[4] India Contract Act, 1872, § 27, No. 09, Acts of Parliament, 1872 (India).

[5] Indian Penal Code, 1860, § 409, No. 45, Acts of Parliament, 1860 (India).

[6] Indian Penal Code, 1860, § 409, No. 45, Acts of Parliament, 1860 (India).

[7] John Richard Brady and ors v. Chemical Process Equipments Pvt. Ltd. and Anr., AIR 1987 DEL 372.

[8] The Copyright Act, 1957, No. 14. Acts of Parliament, 1957(India).

[9] The Information Technology Act, 2019, No. 21, Acts of Parliament(India).

[10] The Securities and Exchange Board of India Act 1992, No. 15, Acts of Parliament, 1992(India).

[11] WIPO,https://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_4_learning_points.pdf (last visited Mar 6, 2024).

[12] David H. Schwartz, WHAT QUALIFIES AS MISAPPROPRIATIONS OF A TRADE SECRET?, law Offices of DAVID H. SCHWARTZ (Mar. 6, 2024,11:05 PM) https://www.lodhs.com/blog/what-qualifies-misappropriation-trade-secret/.

[13] Neha Chaudhary, Protection of trade secrets and confidential information in India and global trends, Ipleaders (Mar. 6, 2024,11:05 PM) https://blog.ipleaders.in/protection-of-trade-secrets-and-confidential-information-in-india-and-global-trends/#How_Trade_Secret_law_is_governed.

[14] WIPO,https://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_4_learning_points.pdf (last visited Mar 6, 2024).

[15] WIPO,https://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_4_learning_points.pdf (last visited Mar 6, 2024).

[16] WIPO,https://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_4_learning_points.pdf (last visited Mar 6, 2024).

[17] WIPO,https://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_4_learning_points.pdf (last visited Mar 6, 2024).

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