The Business Of Trade Secrets

It is necessary for Indian business to protect its trade secrets from being available in the public domain by entering into such agreements which act as deterrent to employees and other persons who come into contact with these secrets...

I have often wondered as to the secret of my grandma’s recipe with respect to the special mango pickle prepared by her. Whether it had a trade value or not never occurred to me. Over the years, I understood that the secret of my grandma’s recipe is nothing but a trade secret which is passed down generations.

The term trade secret has no specific definition per se. However, the generic definition is as follows:

Trade secret is a formula, process, device or other business information that is kept confidential to maintain an advantage over competitors. It is information which includes the formula, pattern, compilation, program, device, method, technique, or process that derives independent economic value from not being generally known or readily ascertainable².

North American Free Trade Agreement (NAFTA) defines a trade secret as “information having commercial value, which is not in the public domain, and for which, reasonable steps have been taken to maintain its secrecy.”

The Trade-Related Aspects of Intellectual Property Rights (TRIPS) lays down three essential conditions which are to be fulfilled by any information before it can be considered undisclosed information (trade secret). These are:

• such information must be secret, i.e., not generally known or readily accessible to “persons within the circles that normally deal with the kinds of information in question”,
• the information must have commercial value because it is secret, and
• the information must be the subject of reasonable steps by its owners to keep it secret.

The Uniform Trade Secrets Act, 1970 also provides for definition of trade secrets, which is as follows:

“Information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy”.

In India, there exists no specific legislation with regard to protecting a trade secret and/or remedies available in the event of a breach, while the concept of trade secret is well recognized in India through various judge-made laws. Before we proceed to refer to those judge-made laws, it is imperative to note that the absence of legislation is not a deterrent for the affected party to deal with and enforce a case relating to breach of a trade secret. Legislations that have a connection with trade secrets can be summed up as follows:

1. Copyright Act, 1957 [Sections 51, 55 and 63]
2. The Designs Act, 2000
3. The Information Technology Act, 2000 [Sections 65, 72]
4. Indian Penal Code [Sections 408, 415]
5. The Indian Contract Act [Section 27]
6. The Competition Act, 2002 [Section 3]
7. Civil Procedure Code
8. Criminal Procedure Code

The judge-made laws are as follows:

Calcutta High Court in Fair Fest Media Ltd vs Lte Group Plc and Ors³, while summarizing the legal status of trade secret protection in India, stated that “the essence of this branch of law whatever the origin it may be, is that a person who has obtained information in confidence is not allowed to use it as a springboard for activities detrimental to the person who made the confidential communication.”

American Express Bank Ltd. vs. Priya Puri⁴: Delhi High Court defined trade secrets as “…formulae, technical knowhow or a peculiar mode or method of business adopted by an employer which is unknown to others.”

Anil Gupta and Anr. vs. Kunal Dasgupta and Ors⁵: The Delhi High Court held that “the concept developed and evolved by the plaintiff is the result of work done by the plaintiff upon material which may be available for use by anybody but what makes it confidential is the fact that the plaintiff has used his brain and thus produced a result in the shape of a concept.”

In India in the past, we made an attempt for protection of trade secrets by drafting a Bill, namely, National Innovation Act, 2008 as also a National IPR Policy. Unfortunately, neither the Bill nor the Policy saw the light of day.

Therefore, in the Indian context, the protections that are available for breach of a trade secret and tools which one should use to protect interests of the business are mainly through agreements, namely, employee confidentiality and non-compete agreements. However, it is necessary that the said agreement should contain the following clauses:

• We need to define what is covered as confidential information broadly
• The validity of the agreement [it is only during employment and if not, it is perpetual]
• What is considered as non-authorized disclosure [if so, what is the remedy]
• What constitutes an inevitable disclosure
• Limiting access to confidential information [this is to be strictly followed by the company, namely, who all can access the information]
• Non-compete clause and the need to state what are the actions which will be construed as a competition activity
• Bar in joining a competing employment
• Mode of Adjudication if a breach occurs [arbitration, litigation subjected to territorial jurisdiction]
• The right to move for injunctive relief

There is always a misconception that a trade secret can be patented. However, the Courts abroad have clearly held that a trade secret cannot be patented.

In Tewari De-Ox Systems Inc. Vs. Mountain States/ Rosen L.L.C.⁶, the plaintiff and the defendant were parties to a non-disclosure agreement. Under the agreement, the plaintiff showed the defendant a packaging process and oxygen evacuation method to extend the shelf life of meat.

The plaintiff also filed a patent application relating to this process. The patent application was published, but it was never issued as a patent.

The plaintiff sued the defendant for breach of contract and misappropriation of trade secrets. After the lower court granted summary judgment in favor of the defendant, the U.S. Court of Appeals for the 7th Circuit considered whether the defendant waived trade secret protection by including details about the meat-packing method in a published patent application. As trade secrets are governed by state law, the court applied Texas law and noted that:

“There can be no dispute that a published patent application is readily available [and] information that is generally known or readily available... is not secret for the purposes of trade secrecy.”

However, the Court also noted that a trade secret is “one of the most difficult and elusive concepts in law to define,” and that defining a trade secret requires a full presentation of facts.

Although the patent application disclosed many details about the plaintiff’s process, under the non-disclosure agreement, the plaintiff demonstrated to the defendant additional methods that would adapt the plaintiff’s process to the defendant’s “open nozzle” meat-packing system.

Noting that “unique combinations of previously-disclosed elements” can be trade secrets, the 7th Circuit stated that the plaintiff had raised an issue of material fact as to whether the additional methods were trade secrets.

While acknowledging that a “simple and obvious change” to a known process is not a trade secret under Texas law, the Court said that the question of whether the plaintiff’s additional methods were trade secrets was a question of fact for the jury to decide, and not an appropriate subject for summary judgment.

Some of the important judge-made laws with regard to the breach of a confidentiality agreement/non-disclosure Agreement which has the effect of disclosing the trade secret are as follows:

The decision of the Court of Appeal in the Saltman Engineering Co. vs Campbell Engineering Co Ltd.⁷ case is an important judgment extensively relied upon by Indian courts to establish whether information shared between the owner and the recipient is indeed confidential.

The court in this case had held that confidential information “must not be something which is public property or public knowledge. On the other hand, it is perfectly possible to have a confidential document, be it a formula, a plan, a sketch or something of that kind, which is the result of work done by the maker on materials which may be available for the use of anybody; but what makes it confidential is the fact that the maker of the document has used his brain and thus produced a result which can only be produced by somebody who goes through the same process.”

In the same vein, the Delhi High Court in the Ambience India Pvt. Ltd vs Shri Naveen Jain⁸ case in 2005 held that “trade secret is protected and confidential information which the employee has acquired in the course of his employment and which should not reach others in the interest of the employer. However, routine day to day affairs of the employer which are in the knowledge of many and are commonly known to others cannot be called trade secret.”

In conclusion, it is necessary for the Indian business community to protect its trade secrets from being available in the public domain by entering into such agreements which will act as deterrent to employees and other persons who come into contact with the trade secrets, since they have a huge financial implication. This is more so in view of the fact that globalization has done away with geographical boundaries. Equally, it is necessary for Indian Courts to act proactively and restrain leakage of such trade secrets.

Notwithstanding the above, in order to keep pace with other developed countries, it is necessary for the Government of India to put in place a high-powered committee to draft an all-encompassing legislation to protect age-old trade secrets.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.