How can Business protect Trade Secret?

This article will discuss the conventions dealing with a trade secret. This article will also discuss the mechanisms to protect trade secret in India and the role of trade secret in business enhancement.
Estimated Reading Time: 7 minutes

Introduction

Trade secrets are the know-how of any business. We know Maggie is the most delicious noodle among the entire noodle brand. The recipe used by Maggie is their trade secret. The trade secret is the essence of the business. So, they are protected to ensure that there is fair competition in the market. In India, there is no dedicated legislation to protect the trade secret. But the judiciary has protected trade secrets to ensure there is no unfair competition in the market. This article will discuss the conventions dealing with a trade secret. This article will also discuss the mechanisms to protect trade secret in India.

Meaning of trade secret

A trade secret is a kind of intellectual property rights that is the confidential information of any business which may be used fairly either to harm the business or gain or undue profit by selling it. In general terms the trade secret is the know-how of any business. It can be a formula or process or practice or instrument or compilation of information. It is a commercial information which allows a business to compete with others in the market. It has economic value because it is kept secret. Trade secret tends to create monopoly, a business organisation developing a unique kind of product can maintain its monopoly due to its trade secret as it is not shared with other competitors. It provides a competitive advantage to the business organisations, for example KFC has a secret recipe which involves blend of eleven herbs and spices. The Black’s Law Dictionary provides the definition of trade secret as ‘trade secret’ is a formula, process, device, or other business information that is kept confidential to maintain an advantage over competitors. It is information including a formula, pattern, compilation, program, device, method, technique or process:[1]

  1. That derives independent economic value, actual or potential, from not being generally known or readily ascertainable by others who can obtain economic value from its disclosure or use.
  2. That is the subject of reasonable efforts, under the circumstances, to maintain its secrecy.

Need to protect trade secret

The need for protection of trade secrets is felt in international trade due to various reasons. Investors before setting-up business look for the protection of trade secret in the foreign country. They need to be sure that their business will be protected in a foreign country. A strong regulation for the protection of the trade secret wins the trust and confidence of foreign investors. It also encourages international trade.

Legal instruments that protect trade secret

Agreement on Trade-Related Aspects of Intellectual Property Rights provides protection totrade secrets. As per Article 39, the member state of this agreement shall protect undisclosed information and data submitted to governments or governmental agencies. Paragraph 2 of this article states natural and legal persons shall have the possibility of preventing information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices. This paragraph of the article also states the condition for an information to be a trade secret:[2]

  1. a)      The information is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question.
  2. The Information has commercial value because it is secret.
  3. The information has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

The Article 39 in paragraph 3 contains:

In case of provision marketing of pharmaceutical or agricultural chemical products which use new chemical entities, the government requires someundisclosed test data and other data. The submission of these information is required by governments as a condition of approving their operation in market. In such a situation the Member government concerned must protect the data against unfair commercial use. Members must protect such data against disclosure. Member government must take steps to ensure that the data are protected against unfair commercial use. But where it is necessary to protect the public then such data can be disclosed.[3]

North Atlantic Free Trade Agreement (NAFTA) also encourages the protection of the trade secrets and prohibits the misappropriations of trade secrets without the genuine consent of the owners of sensitive information, to achieve an honest and fair commercial practice. 

Protection to trade secret available in India

In India there is no dedicated legislation for the protection of trade secrets but the judiciary while dealing with cases before it has observed that the trade secret must be protected to ensure the fair competitionin the market. The trade secret is protected on the basis of the principle of equity, contractual obligation and breach of confidence. The Indian courts have applied these principles while dealing the cases of trade secrets.

There are few circumstances where the trade secrets are protected are:

  1. If the employer or owner of the business has revealed the trade secret to any employee or member of the business for the purpose to run the business on behalf of him, such employee or member is not permitted to take advantage of it and involve in unfair trade practices. Therefore, the employees who have access to trade secrets should be educated for the protection of trade secrets on the basis of equity principle.[4]
  2. Where the other person is a business partner or in a key position, aware of the trade secret. They have to maintain it as a secret because the owner has put full confidence in them and revealed the trade secrets. He is obliged to maintain it as a secret. Therefore, the protection of the trade secret is not restricted to the owner alone but also the other person who knows it. Thus, if such person breaches the confidence by spilling out the trade secret then an injunction will be sent by the court.[5]
  3. Generally, at the time of employment of any person, the company demand them to enter into a Non-Disclosure Agreement. Other example of Non-Disclosure Agreement is when there is merger or acquisition of companies then a Non-Disclosure Agreement is signed by the persons who know the trade secrets.

In the case of Saltman Eng’g Co. Ltd. vs. Campbell Eng’g Co. Ltd.[6], Lord Green stated the definition of Trade Secret.

It was stated that ‘The information to be confidential must, I apprehend, apart from contract, have the necessary quality of confidence about it, namely, it must not be something which is public property and 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 upon 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.’[7]

In the case of Indian Farmers Fertilizer v. Commissioner of Central Excise, the Customs, Excise and Gold Tribunal, Delhi defined Trade Secrets in the following way:

‘A trade secret is such sort of information, which is not generally known to the relevant portion of the public, that confers some sort of economic benefit on its holder and which is the subject of reasonable efforts to maintain its secrecy.’[8]

In the case of Bombay Dyeing and Manufacturing Co. Ltd. v. Mehar Karan Singh[9], the Hon’ble High Court of Bombay laid down the following factors for information to be classified as a Trade Secret:[10]

  1. The degree to which the information is known outside the business.
  2. The degree to which it is known to those inside the business, i.e.,employees.
  3. The safeguards taken by the holder of the trade secret to guard the secrecy.
  4. The savings involved and the value to the holder in having the information as against competitors.
  5. The amount of effort or money expended in procuring and developing the information.
  6. The amount of time and expense it would take others to acquire and duplicate the information.

The Indian Contract Act of 1857 in Section 27 prohibits any person from disclosing any information which he has obtained as a result of contract. Thus, by virtue of this section any supplier or any employee of the business organisation cannot disclose any information they had gained due to the contract between them and the organisation.

The SEBI (Prohibition of Insider Trading) Regulations, 1992 protects the trade secret in its own way. This regulation prohibits an insider from generating any undue personal gain from any sensitive information of a company which has some economic value. Regulation 3 prohibits an insider from communicating or counsel or procuring directly or indirectly any unpublished price sensitive Information to any person while in possession of such unpublished information or deal in securities.In its regulation 3A, it bars the company from dealing in securities of another company or associate of company while in possession of any unpublished price sensitive information.[11]

If the data containing the details of the clients used in the literary work, if the person lets others use his work but has not revealed the facts then the other person uses the same concept and idea, it leads to copyright infringement. On the other hand, where the person to whom the trade secrets are shared starts a business and gives competition to the real owner, it amounts to copyright infringement. In this entire scenario, the trade secrets are revealed, the court will punish them under the Copyrights Act, 1957 with the imprisonment for a minimum of six months to three months.[12]

Section 72 of the Information Technology Act provides for criminal remedies, whereby a person may be punished with imprisonment for a term along with a fine in case he is found to have secured access to any electronic record, book, register, information document, or other material without the consent of the person concerned and such first person discloses such information further.[13]

Conclusion

Trade secret of a business is a tool to achievecompetitive advantage over its competitor in the market. It is information regarding the operation of the business. Therefore, it is necessary to protect trade secret to ensure fair competition in the market. The international agreements and conventions were passed in which provisions for protection of trade secrets are mentioned. The countries have signed these conventions and agreements to protect the trade secrets.The Indian parliament has not passed any specific law for protection of the trade secrets but the judiciary after referring to the conventions and agreements it has pronounced in its judgment that it is vitalto protect the trade secrets. The Indian judiciary in its decisions has defined the term Trade Secrets and prescribed conditions that make any information a trade secret. Due to the absence of specific legislations for protection of trade secrets, the judiciary has relied upon the principles of natural justice while dealing with the cases of mis-handling of trade secrets. There arelegislations in India that has impliedly protected the trade secrets of the business. SEBI has in one of its regulation has protected the trade secrets and prohibited the unfair trade practices. Insider trading has been prohibited by regulation of the SEBI in India. We have Indian Contract Act which binds the contracting parties from revealing any confidential information including trade secret and it also provides penalty in case a party breaches such contract. Therefore, it can be said that trade secrets are protected to promote fair practices in international trade.

Also read The Role of the Judiciary in interpreting “Deceptive Similarity” in Indian Trademark Law.


[1] Protection of Trade Secret under Indian Law.

[2] https://www.wto.org/english/docs_e/legal_e/27-trips_04d_e.htm

[3] Paragraph 3 of the Article 39 of the TRIPS, https://www.wto.org/english/tratop_e/trips_e/intel2_e.htm

[4] Can trade secret be protected in India,

[5] Ibid. 

[6] [1948] 65 RPC 203,

[7] Protection of Trade Secret under Indian Laws.

[8] Ibid.

[9] 2010 (112) BomLR375

[10] Ibid.

[11] Regulation 3A of the SEBI (Prohibition of Insider Trading) Regulations, 1992.

[12] Can trade secrets be protected in India,

[13] Protection of Trade Secret under Indian Law.