TRADE SECRETS AND THEIR ROLE IN PROTECTING CORPORATE INNOVATION

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8 months ago

Abstract

Trade secrets are crucial for the success of a business. They give a competitive advantage over competitors. However, protecting trade secrets can be challenging due to the risk of theft by employees or competitors.

This paper emphasizes the importance of safeguarding trade secrets from theft and corporate espionage. It recommends legal and administrative measures for protection. This study is important for educating businesses, especially SMEs, on the significance of safeguarding trade secrets in the digital era. Protecting trade secrets is vital for safeguarding the economy.

Keywords

Trade secrets, businesses, protecting, innovation, safeguard, corporation, India, Information.

Introduction

Business entities worldwide, regardless of their size, are currently encountering challenges related to the theft and misappropriation of confidential information and trade secrets. These threats can arise from both internal sources, such as employees, as well as external factors like competitors, former employees, and third parties. Trade secrets, which are crucial assets, play a vital role in safeguarding the economic value, product innovation, and overall development of a business (Lippoldt & Schultz, 2014). By effectively protecting trade secrets, a business can gain a secure and advantageous position over its competitors, ensuring long-term success. This has been exemplified by renowned companies like Coca-Cola and Kentucky Fried Chicken (KFC).

However, both of these companies have faced the challenge of having their trade secrets stolen by employees or having their secret recipes revealed by individuals who were privy to the information (The Telegraph News, 2016).

In the case of Coca-Cola, the theft of trade secrets was discovered when their competitor, PepsiCo, reported receiving a mysterious letter offering to sell trade secrets to the highest bidder. The matter was promptly investigated by the Federal Bureau of Investigation (FBI), leading to the arrest and prosecution of the individuals involved in stealing and selling the information. Similarly, KFC faced a situation where the secret recipe was revealed by Colonel Sanders’ nephew during an interview with a journalist. Although the alleged trade secret became widely known, the company denied the authenticity of the recipe (The Telegraph News, 2016).

These experiences have taught both Coca-Cola and KFC the importance of implementing comprehensive measures to protect their trade secrets. Such measures include physical and administrative safeguards to ensure the confidentiality and security of valuable information.

By prioritizing the protection of trade secrets, businesses can mitigate the risks posed by theft and misappropriation, thereby safeguarding their competitive advantage and long-term success.

The KFC corporations have taken extensive measures to safeguard the handwritten original recipe of Colonel Sanders. It is securely stored in a digital safe, encased in two feet of concrete, at the KFC Corporate headquarters. This safe is under constant surveillance through a video and motion detection system, ensuring round-the-clock monitoring. The secret recipe is known exclusively by two high-ranking KFC executives, further enhancing its confidentiality. Similarly, the Coca Cola recipe is stored in an underground safe within a Sun Trust Bank, providing an additional layer of protection. These stringent security measures demonstrate the companies’ commitment to safeguarding their trade secrets, as they have invested a significant amount of resources to ensure their protection. However, the role of locks and keys in protecting trade secrets stored in digital format is minimal. This fact has been acknowledged by the Centre for Responsible Enterprise and Trade (Create.org) in their report, which emphasizes the increasing threat of cybersecurity breaches for companies and organizations. These breaches put confidential technical and business information, commonly known as trade secrets, at a higher risk of theft and loss (Create.org, 2016). In this context, the threat primarily manifests as cyber espionage and cyber misappropriation. Against this backdrop, the objective of this paper is to emphasize the importance of safeguarding trade secrets from misuse, abuse, and appropriation by employees, competitors, and third parties with whom the business interacts. Furthermore, the paper will outline the recommended measures for protecting trade secrets, based on best practices that are within a company’s reasonable means.

Trade Secret Laws: Boosting Corporate Business Success

Practically every business possesses confidential information that gives it a competitive advantage. The crucial question for businesses is how they can legally safeguard this non-public information. Does the law provide clear provisions for protecting such information? Are the legal framework and its enforcement strong enough to deter competitors from misusing this information? If a business decides to take legal action, will it be able to swiftly halt the theft of its information? Will the court ensure the protection of its secrets, or does going to court increase the risk of their exposure?

The answers to these inquiries determine whether a business merely possesses secrets or if it has legally protected trade secret rights. These two concepts are not interchangeable. In both cases, a business must take all necessary precautions to safeguard its secrets, but what options does a business have if these precautions fail?[1]

Without legally protected trade secret rights, a business has no recourse if an employee resigns and wrongfully takes secrets with them or if an unscrupulous competitor uncovers the information through espionage.

For all these reasons, businesses heavily rely on robust trade secret laws. Trade secret protection may be the most critical form of intellectual property for businesses. Numerous surveys conducted in different countries with effective trade secret protection have consistently highlighted the significance of trade secret safeguarding. For instance, a survey conducted by Arundel (2001) revealed that European companies preferred trade secrets over patents, with smaller businesses exhibiting the strongest preference.

The Profound Influence of Trade Secret Law on Businesses and Innovation

As your business expands and you prioritize innovation, it is crucial to consider the significance of trade secret law. Trade secret law offers a means to safeguard the confidential information that gives your business a competitive edge, enabling you to maintain the confidentiality of your valuable assets and retain your competitive advantage.

One of the primary advantages of trade secret law is its flexibility and cost-effectiveness compared to traditional forms of intellectual property protection. Unlike patents, which necessitate the public disclosure of your invention for protection, trade secret law allows you to keep your information confidential and protected indefinitely. This enables you to keep driving innovation and maintaining your competitive edge without the necessity of costly legal protections.

Encouraging Creativity and Fostering Teamwork

Trade secret law is essential for driving innovation within your business. By safeguarding your proprietary information and preserving your competitive edge, trade secret law incentivizes you to invest in research and development, secure in the knowledge that your valuable assets are protected. This, in turn, can spur increased innovation and technological progress, enabling you to explore new ideas and take calculated risks without the fear of compromising your competitive position.[2]

Moreover, trade secret law facilitates collaboration and partnership among businesses, including your own. It permits you to exchange confidential information with other companies while safeguarding your trade secrets. This is especially crucial in industries that thrive on cooperation and mutual licensing, such as the technology and pharmaceutical sectors.

The Importance of Trade Secrets in Shaping Innovation Policy

In today’s rapidly evolving business landscape, proprietary information has become a crucial asset for companies seeking a competitive edge. This valuable knowledge, known as trade secrets, encompasses a wide range of high-tech and low-tech information, from cutting-edge chemical formulae and manufacturing techniques to customer lists and marketing strategies. Additionally, the concept of “negative know-how” adds another layer of value, as it includes previously attempted but unsuccessful techniques that can guide companies away from pitfalls. As the United States transitions into a knowledge-based economy, the significance of intangible assets and know-how cannot be overstated. The value of trade secrets owned by publicly traded U.S. companies is estimated to be a staggering five trillion dollars. Intangible assets are becoming increasingly important, as evidenced by the value of the Standard & Poor’s 500. The S&P 500 represents the combined value of 500 major publicly traded companies. Back in 1975, only 16.8% of the S&P 500’s total value was attributed to intangible assets. Fast forward to 2005, and that number had skyrocketed to 79.7%. Attorney R. Mark Halligan emphasizes that the

majority of these intangible assets are trade secret assets. Don’t miss out on the opportunity to capitalize on this growing trend!

The advancement of computer technology, the widespread use of cell phones and the Internet, and our shift to the Information Age have made it more challenging for companies to protect their confidential information. In the past, stealing trade secrets may have involved physically taking documents from a competitor’s office, even with security measures in place. However, in today’s digital world, a trade secret thief can easily download proprietary information from company computers or capture confidential documents using a cell phone camera within seconds. As attorney Victoria A. Cundiff succinctly puts it, “The digital world is not a friend to trade secrets.”

As American companies face increasing global competition, some experts believe that foreign firms and even foreign governments are actively engaged in industrial espionage. According to the Office of the National Counterintelligence Executive, the United States is a prime target for foreign economic collection and industrial espionage due to its global technological leadership and innovation. These efforts not only pose a threat to the economic competitiveness of the United States but also to its national security. Trade secrets are a crucial legal concept that safeguards confidential information from unauthorized use. By upholding trade secret laws, businesses can protect their valuable intellectual property and prevent others from exploiting it for their own gain. This not only encourages innovation but also ensures that companies can reap the rewards of their hard work and investment in developing proprietary information. Additionally, trade secret law catalyzes for firms to invest in their workforce. By providing a level of assurance that employees cannot immediately utilize their knowledge for a competitor’s advantage, firms are more inclined to invest in employee development. This not only enhances the skills and capabilities of their workforce but also fosters a sense of loyalty and commitment. Moreover, trade secret protection can be easily established through self-help measures, eliminating the need for formal government involvement as required for patents. This streamlined approach allows firms to safeguard their commercially valuable information by making reasonable efforts to maintain its confidentiality.

Furthermore, trade secret law plays a vital role in upholding and regulating ethical standards within the commercial realm. The misappropriation doctrine is specifically designed to address individuals who violate their obligation of trust, involve themselves in espionage, or demonstrate dishonest intentions. By doing so, trade secret law acknowledges that certain competitive behaviors exceed societal norms and should be discouraged, even in a marketplace driven by open and free competition. This ensures that fair and ethical practices prevail, promoting a level playing field for all businesses. Trade secret laws can have drawbacks that should not be overlooked. While they may encourage progress, they can also lead to the creation of information that is meant to be kept hidden. This can limit the sharing of knowledge and hinder healthy competition in the market. Moreover, maintaining trade secrets requires significant investment in security measures, which can be costly and time-consuming. This can also result in restricting access to valuable information within the company, potentially hindering employee growth and overall business operations.[3]

Trade secret law plays a crucial role in balancing the benefits and drawbacks associated with trade secrets. By carefully regulating the acquisition and enforcement of trade secrets, these laws aim to optimize their advantages while minimizing any potential disadvantages. In doing so, they ensure that individuals can freely utilize their knowledge and expertise across different job opportunities, empowering them to explore new employment prospects without unnecessary limitations.

The Adverse Effects of Trade Secrets on Innovation

Failure to protect their innovation can result in a significant loss of value for firms. This is why intellectual property protection (IPP) is crucial for both established companies and startups.

Patenting is the most well-known form of IPP, as it allows for ownership claims. While the strength of the patent system varies across regions, it has become more standardized globally. However, research suggests that managers of large companies and entrepreneurs often prioritize other tools over patents when it comes to their IPP strategies. Trade secrecy, in particular, is seen as an increasingly important defense strategy and a source of competitive advantage.

To safeguard trade secrets, employers often require employees to sign non-compete contracts and non-disclosure agreements.[4] These measures aim to prevent employees from joining competitors and sharing valuable information with new employers. However, the impact of trade secrecy on future innovation remains uncertain. In a recent study, we explored this issue and found that strengthening trade secrecy protection for employers can unintentionally reduce inventors’ productivity and hinder long-term innovation.

Effective Strategies for Safeguarding Trade Secrets in Corporate Innovations

In the absence of a specific Trade Secrets Act in India, businesses must adopt robust best practices to protect their trade secrets[5]. Here are some key strategies that organizations should consider implementing:

Develop a Comprehensive Trade Secret Policy: Establish a clear policy that defines what constitutes a trade secret within your organization. Ensure that this policy is effectively communicated and understood by all employees.
Utilize Legal Tools: Establish Non-Disclosure Agreements (NDAs) for staff members, freelancers, and associates to ensure confidentiality. Consider incorporating non-compete clauses where appropriate, while keeping in mind their enforceability may vary.
Employee Training and Awareness: Conduct regular training sessions to educate employees about the significance of trade secret protection. Foster a culture of confidentiality within the organization.
Secure Physical and Digital Assets: Implement physical security measures such as restricted access to sensitive areas. Employ robust cybersecurity practices to safeguard digital trade secrets, including encryption and access controls.
Regular Monitoring and Auditing: Conduct regular audits of internal processes and security measures to ensure the protection of trade secrets. Remain vigilant for any potential internal or external threats.
Managing Departing Employees: Perform exit interviews to reiterate to departing employees their responsibilities regarding confidentiality. Immediately revoke access to confidential information upon employee departure.
Maintain Documentation and Proof of Secrecy: Keep thorough documentation that demonstrates reasonable efforts to maintain the confidentiality of trade secrets. This documentation may play a critical role in legal proceedings.
Adapt and Update Practices: Regularly review and update trade secret protection practices to stay abreast of technological advancements and market changes.

Protecting Sensitive Information with Nondisclosure Agreements (NDAs) to avoid any Damaging Leaks

Businesses rely on legal safeguards to ensure the protection of confidential information. It is essential to recognize that maintaining secrecy is crucial for competitiveness, and upholding confidentiality is a matter of ethics. Non-disclosure agreements (NDAs) play a vital role in safeguarding proprietary data by leveraging contract law. These agreements can be tailored to suit different parties, objectives, and legal jurisdictions. Whether unilateral, focusing on employee data access, or bilateral, involving collaborative projects or business transactions, NDAs are versatile tools for preserving sensitive information. When creating or examining an NDA, it is imperative to consider the specific circumstances and requirements involved.

Identifying the relevant parties involved in the agreement, including the disclosing party and recipient. It is also important to consider potential additional parties, such as accountants and business partners.

Specify the confidentiality of all proprietary information. Many breaches of non-disclosure agreements occur due to misunderstandings rather than intentional dishonesty, and can often be prevented with well-defined parameters. It is not advisable to cover broad categories of information with vague definitions, as such clauses are typically not enforceable. It is crucial to differentiate between trade secrets and general confidential information, as treating them interchangeably may limit statutory protections. Clearly outline any specific exclusions, such as information that was already known or in the public domain. Employees must have a clear understanding of what can be disclosed and under what circumstances to prevent unintentional leaks. Businesses should implement systems to track the disclosure of information, such as databases, record-keeping systems, or document check-out procedures.

It is crucial to clearly outline the protection requirements in any agreement to ensure the safety of confidential information. These obligations can vary in intensity, from simple NDAs to more stringent measures like specific levels of caution. Understanding the necessity of each term is key to avoiding unnecessary restrictions. Be mindful of non-compete and non-solicitation clauses, as recent regulations may impact their future use. Additionally, determining the duration of protection and the protocol for returning or destroying confidential information is essential for maintaining security.

Measures to Address a Breach

It is important to carefully consider the appropriate course of action in the event of a breach of a non-disclosure agreement. A legally binding NDA can outline potential remedies such as financial compensation or a court order to stop the breaching party. On the other hand, an invalid NDA could lead to a breach of confidentiality. Proving a breach of an NDA can be a complex and resource-intensive process.[6] Remedies for breach can vary, including injunctions, compensation for losses, and contractual damages. However, once confidential information is made public, the damage may be irreversible, making it crucial to safeguard valuable corporate secrets with the utmost care.

Various Categories of Trade Secrets in Corporate Fields[7]

Formulations and Culinary Recipes: Vital elements within industries such as food manufacturing and pharmaceuticals.
Strategic Business Approaches and Blueprints: Crucial for upholding a competitive edge in the marketplace.
Lists of Customers and Suppliers: Indispensable for devising effective marketing and sales tactics.
Production Methods and Techniques: Foundational in industrial sectors.
Algorithms and Source Codes for Computer Software: Core to the operations of IT and technology enterprises.

Encouraging Creativity and Fostering Teamwork

Safeguarding Trade Secrets: A Vital Responsibility for Employees

Corporate workers have the potential to jeopardize a company’s intellectual property security. While there are ways to safeguard intellectual property and take precautionary steps, maintaining employee loyalty is crucial. It stands as the primary obstacle that companies need to address to ensure the protection of their IPs. For instance, Coca-Cola goes to great lengths to maintain the secrecy of its formula, with only two individuals within the company knowing the exact ingredient proportions in their beverage. Given the dynamic nature of the business world and the risk of trade secrets being discovered independently, companies are advised to continuously evolve and innovate their trade secrets to stay ahead of the competition and prevent their secrets from being exposed. Companies operating in India face the constant threat of recruitment.

It’s a challenge to come up with fresh ideas for trade secrets that are constantly evolving and innovating. Some companies resort to unethical tactics to steal talent from their competitors, aiming to gain access to their competitors’ artistic abilities and knowledge of success secrets.

Typically, an employee’s ability to utilize the skills and expertise gained during their employment cannot be restricted by a contract after termination. They are free to use their acquired skills and information for personal gain or the benefit of others. However, an employee can be bound by confidentiality obligations regarding any sensitive information obtained during their employment, whether during or after their tenure. For instance, an ex-employee may be prohibited from disclosing a chemical formula or a customer list they memorized. When it comes to loyalty, there is a distinction between an employee and an ex-employee. An employee has a duty of loyalty to their employer, which explicitly forbids them from assisting a competitor, even if no information has been disclosed to them. On the other hand, an ex-employee’s loyalty to their former employer is naturally limited. As long as they are bound by a valid restrictive covenant, they can work for a competitor of their former employer. Additionally, the ex-employee may also have an obligation not to utilize any confidential information provided to them by their employer.[9]

To maintain and increase market share, it is crucial to protect trade secrets. The biggest threat to these secrets often comes from current and former employees. The risk of trade secret theft is higher when there is a level of trust between the individual and the company. This issue is deeply intertwined with the employer-employee relationship, as noted by Justice Holmes in the past. In the realm of trade secrets, the concept of “land” symbolizes a secondary consequence of the fundamental reality that the law enforces basic good faith standards. Regardless of whether the plaintiff possesses a valuable secret, the defendant is privy to certain truths due to a special bond of trust. While the property may be taken, the trust remains intact. Therefore, the key factor in a trade secret case is not the physical property or legal procedures, but rather the establishment of confidential relationships between the parties involved. Employee mobility and departures pose a significant risk to companies. According to Justice Posner, a trade secret can be any valuable piece of information, like a customer list, a manufacturing process, or a secret recipe. The only way to access this confidential information is through illegal means. In essence, trade secrets are knowledge that relies on the employee’s trust in their employer. Unlike patents, copyrights, and trademarks that provide direct ownership rights, trade secrets are based on relationships. If a company proves that a trade secret was stolen by a current or former employee, it must also demonstrate that it took reasonable steps to safeguard its confidential information. With employees using personal email accounts and other external communication methods, businesses face new challenges in protecting their secrets.

Case Laws

The prominent Indian case of [10]Konrad Wiedemann GmbH v. Standard Castings Pvt. Ltd draws heavily from Lord Green’s conclusions in the Saltman case. On the flip side, it is entirely feasible to possess a confidential document, be it a formula, a design, a sketch, or any other similar item, that stems from the manufacturer’s efforts on materials accessible to all; however, what renders it confidential is the manufacturer’s intellectual input, resulting in a unique and provable outcome.
⁠In the case of [11]Suhner v. Transradio Ltd., Judge Plowman affirmed that the confidentiality of a document is not determined by its public accessibility, but rather by the presence of valuable information obtained by the complainant for a specific purpose and submitted to
- the defendant. If these criteria are fulfilled, the document will remain private and the defendant will be prohibited from using it for any other purpose.
The Delhi High Court, in the case of [12]John Richard Brady and Ors v. Chemical Process Outfit P Ltd and Anr decided that it was necessary to stop the defendants from misusing the complainant’s nonpublic fodder product unit’s knowledge, specifications, and specialized information that were given to them under strict confidentiality.
⁠In the case of [13]Burlington Home Shopping Pvt. Ltd. v. Rajnish Chibber, there is sensitive information that, if revealed to a competitor, could result in significant harm to the owner. This information may include not only manufacturing formulas for products but also the names of consumers and the specific products they buy.

Conclusion

This study examined the factors and consequences of firms’ choices to safeguard their innovations through trade secrets and patents. We specifically investigated the effectiveness of utilizing both secrecy and patenting as a combined protection strategy for a single innovation. To address the challenge of determining whether firms employ both methods for the same innovation or different ones, we utilized unique data on the number of completed innovation projects obtained from the German innovation survey. By focusing on firms with a single innovation, we were able to identify the motivations behind using both secrecy and patenting to protect an innovation, as well as the impact of this strategy on innovation output compared to using only one or none of the methods. Firms tend to utilize both secrecy and patenting strategies when their sector has strong patent protection, there is a high level of technological uncertainty, and their innovation is highly novel and requires substantial financial investment.

References

Mark Schultz, Enhancing Trade Secret Protection in India, ISBINSIGHT, https://isbinsight.isb.edu/enhancing-trade-secret-protection-in-india/
Otto. Law, https://www.otto.law/blog/2023/01/how-does-trade-secret-law-impact-business-and-innovation/
EveryCRSReport.com, https://www.everycrsreport.com/reports/R41391.html
Andrea Contigiani and David H. Hsu, How Trade Secrets Hurt Innovation, Harvard Business Review, https://hbr.org/2019/01/how-trade-secrets-hurt-innovation
Oxyzo, https://www.oxyzo.in/blogs/protecting-trade-secrets-in-india-essential-strategies-for-business-innovation/109416
Kathleen Johnson and Jonathan Madara, Proprietary Confidential Info, Trade Secrets, Know-How—–Differences for Business Success, Fox Rothschild, https://www.foxrothschild.com/publications/proprietary-confidential-info-trade-secrets-know-how-differences-for-business-success
Rutu Mistry, Significance of Trade Secret On Business Laws, International Journal of Law Management and Humanities, https://ijlmh.com/paper/significance-of-trade-secret-on-business-laws/
Case Laws, Rutu Mistry, https://ijlmh.com/paper/significance-of-trade-secret-on-business-laws/

[1] Mark Schultz, Enhancing Trade Secret Protection in India, ISBINSIGHT, (March 30, 2024, 6:52 PM), https://isbinsight.isb.edu/enhancing-trade-secret-protection-in-india/

[2] Otto. Law, https://www.otto.law/blog/2023/01/how-does-trade-secret-law-impact-business-and-innovation/ (Last visited March 30, 2024)

[3] EveryCRSReport.com, https://www.everycrsreport.com/reports/R41391.html (Last visited March 30, 2024)

[4] Andrea Contigiani and David H. Hsu, How Trade Secrets Hurt Innovation, Harvard Business Review, (March 30, 2024, 7:6 PM ) https://hbr.org/2019/01/how-trade-secrets-hurt-innovation

[5] Oxyzo, https://www.oxyzo.in/blogs/protecting-trade-secrets-in-india-essential-strategies-for-business-innovation/109416 (Last visited March 30, 2024)

[6] Kathleen Johnson and Jonathan Madara, Proprietary Confidential Info, Trade Secrets, Know-How—–Differences for Business Success, Fox Rothschild, (March 30, 2024, 7:20 PM), https://www.foxrothschild.com/publications/proprietary-confidential-info-trade-secrets-know-how-differences-for-business-success

[7] Oxyzo, https://www.oxyzo.in/blogs/protecting-trade-secrets-in-india-essential-strategies-for-business-innovation/109416 (Last visited March 30, 2024)

[8] Otto. Law, https://www.otto.law/blog/2023/01/how-does-trade-secret-law-impact-business-and-innovation/ (Last visited March 30, 2024)

[9] Rutu Mistry, Significance of Trade Secret On Business Laws, International Journal of Law Management and Humanities, (March 30, 2024, 7:26 PM) https://ijlmh.com/paper/significance-of-trade-secret-on-business-laws/

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

[11] Suhner v. Transradio Ltd, 1967 RPC, 329

[12] John Richard Brady and Orsv. Chemical Process Outfit P Ltd and Anr, AIR1987, DELHI 372

[13] Burlington Home Shopping Pvt. Ltd. v. Rajnish Chibber,1995IVAD, DELHI 732.

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