Intellectual Property Rights: Trade Secrets

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The article presents the concept of “trade secrets” as intellectual property rights and their protection in India through common law principles and various statutory provisions.

Introduction

Chris Hardwick, an American comedian, has stated that; “We’re not in an information age anymore. We’re in the information management age.” Thanks to technological advancements, businesses are expanding and now generate large volumes of data which need to be collected, stored and managed. Such data may include information about suppliers, distributors and customers, data relating to ongoing projects, market surveys and predictions, computer codes and algorithms and so on. Business information also have sensitive data which are kept confidential, i.e., access to such data is restricted and given under certain terms and conditions. Such data are termed as trade secrets.

Trade Secrets

1. Characteristics

Trade secrets, in the commercial world, are understood to be any information which gives a business a competitive edge and is unknown to others. The World Intellectual Property Organisation (WIPO) has given the following characteristics for trade secrets;

  • Commercially valuable because it is a secret,
  • be known only to a limited group of persons, and
  • be subject to reasonable steps takenby the rightful holder of the information to keep it a secret, including the use of confidentiality agreements for business partners and employees.

Trade secrets may be;

  • technical information, such as information concerning manufacturing processes, experimental research data, software algorithms, technical drawing or sketches and engineering specifications;
  • commercial information, such as distribution methods, list of suppliers and clients, advertising strategies, product specifications, product characteristics, purchase prices of key raw materials, agreements containing details of marketing tie‐ups, promotional or marketing material under development;
  • scientific information such as formulas and recipes, source codes, test data and content of laboratory notebooks;
  • made up of a combination of elements, each of which by itself is in the public domain, but where the combination, which is kept secret, provides a competitive advantage.

Trade secrets are recognized, by WIPO, as intellectual property rights (IPRs) on confidential information which may be sold or licensed.

Examples;

KFC’s secret blend of 11 herbs and spices.

Google’s search algorithm.

Coca-Cola’s recipe.

The process of creating the New York’s Times Bestseller List.

2. Protection

Protection of trade secrets forms part of protection against unfair competition and unfair trade practices. Unfair practices, in relation to trade secrets, include; 

Breach of contract,

Breach of confidence,

Inducing to Breach,

Industrial or commercial espionage,

Use or disclosure a third party if he knew that such confidential information was obtained through unfair trade practices.

Trade secrets are protected under positive protection, that is, the rightful owner has the right to sue any person acquiring, using or disclosing trade secrets through unfair trade practices. The essence of a trade secret lies in maintaining its secrecy. Thus, no right/ownership can be claimed with respect to trade secrets. Hence, the rightful owner cannot stop a person who arrived at the trade secret independently through reverse-engineering from using or disclosing the information arrived at or from creating a similar product. 

[Reverse engineering is the process of dissembling or analysing a product or device to obtain information on how it has been manufactured.]

3. Global Scenario

  • The Defend Trade Secrets Act, 2016, a federal statute;
  • Individual states’ laws modelled after the Uniform Trade Secrets Act of 1979;
  • Common Law in New York,

Recently, as published by Reuters, a jury of an Oakland Federal Court awarded LivePearson Inc. more than $30 million for [24]7.ai Inc’s misuse of trade secrets relating to a client of LivePearson Inc. The two companies had an agreement through which LivePearson Inc had shared its technical know-how and other information to [24]7.ai Inc. The former had accused the latter of creating competing technology with its trade secrets.

  • European Union (EU): The countries which are part of the EU have enacted their own laws for the protection of trade implementing the requirement of the EU Trade Secret Directive (EU 2016/943), which is a directive on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure.
  • United Kingdom (UK): Trade secrets are protected under common law principles;

Common law/equity that protects confidential information;

Contractual measures, such as in non-disclosure agreements

The Trade Secrets (Enforcement, etc) Regulations 2018 implemented the EU directive; however, this may not be applicable after UK’s exit from the EU.

Status of Trade Secrets in India

There is no specific legislation protecting trade secrets in India. The protection of trade secrets is based on common law principles applied by Indian judiciary in case of a dispute. Third-party liability is fixed based on 2 principles;

  1. Principle of Confidentiality– The common law of confidentiality is a broad principle of law that a person who receives information from another party in confidence cannot take advantage of it. That person must not make use of it to the prejudice of the person who gave the information without obtaining his consent.
  2. Principle of Equity– Equity defines a set of legal principles, in all the jurisdictions that follow English common law tradition, that supplements strict rules of law where their application would operate harshly, and this is done to achieve “natural justice”. Grant of injunctions is based on equity.
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1. Characteristics of Trade Secrets: Bombay Dyeing and Manufacturing Company vs Mehar Karan Singh (2010)

In this case, decided by the Bombay High Court (“the Court”) on August 24, 2010, the defendant was the whole-time Director of the Plaintiff-Company appointed under an Agreement of Employment. Under the said agreement, he inter alia agreed not to divulge or disclose confidential information of any nature to any persons under a Confidentiality Clause. The Plaintiff-Company had alleged that the Defendant had divulged confidential information to a competitor company by way of forwarding on email, a manual of a customised software for real estate business of the Plaintiff, which was obtained by the Plaintiff on payment of Rs. 93 lakhs to Oracle, a software producer company. 

The Court relied on a number of judgements and definitions, given by jurists, on ‘trade secrets’ and ‘confidential information’ and laid down the following factors to identify ‘trade secrets’;

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

The Court acknowledged that it is not possible to give an exact definition of trade secrets. 

The Court awarded an injunction in favour of the Plaintiff, restraining the Defendant from divulging or handing over the confidential information, in any manner, contained in the manual of the software attached to the email of the Defendant and also the Memorandum of Understanding, attached in another email of the Defendant, both relating to a property of the Plaintiff in Goa, to any person or Company or any of the Plaintiff’s competitors or utilise the same for the Defendant’s own use in any manner whatsoever.

2. “Know-how” as a Trade Secret: Indian Farmers Fertilizer Co-op Ltd. vs Commissioner of Central Excise [(2007) 7 VST 6 CESTAT New Delhi]

In this case, the appellant had preferred an appeal against the order of the Commissioner (Appeals) which upheld the original order passed by the adjudicating authority, confirming the demand of service tax amounting to Rs. 14,26,231 on the appellant, and directing its recovery under Section 73 of Chapter V of the Finance Act, 1994. The service tax was with respect to availing consultancy services of an engineer of a Company in Denmark by the appellant company.

The appellant, in its defence, stated that the agreements entered by it with the Company was to obtain the license for use and practice of their technology as required for the redesigning, modification and operation of the appellant’s projects. According to the appellant, the real nature of the transactions was the transfer of “know-how” and some technical information and not consultancy. The appellant stated that the agreements were entered into for intellectual property. The engineering package and the development of “know-how” was done outside of India, hence, the amount paid under the agreements was not taxable.

The adjudicating authority noted that from the wordings of the agreements, it can be clearly seen that the appellant had received engineering services, including technical assistance in connection with its projects through transfer of technology and that cannot be termed as “know-how” only. It was, therefore, held to be taxable under the category of consulting engineering services.

The tribunal observed that “know-how” as an intellectual property is also sometimes referred to as ‘trade secret’. When technical information exists beforehand without being intended to be a service to a particular client, such information of confidential nature may properly be described as “know-how” – as a trade secret which can be sold or licensed. However, when the transfer of such “know-how” as a trade secret is required to be supplemented by rendering service in the form of advice, consultation or technical assistance, then any amount paid for such services is taxable. Thus, the tribunal drew a difference between the licence to use given in respect of “know-how” or trade secret as an intellectual property of the licensor and the services which may be rendered as consulting engineer, which may also be provided for under the same agreement.

The tribunal modified the original order by directing that the amount of consideration relating to the license of the “know-how”, as stated in Clause 2 of the agreement, be reduced from the amount of service tax demanded.

3. Trade Secrets and Traditional Knowledge

Traditional knowledge is the knowledge of skills, know-how, traditions and culture passed down from one generation to another. India is a diverse nation and is a rich source of traditional knowledge. For example, the tribal ways of the North-East, the protection of the BlackBuck by the Bishnoi tribe of Rajasthan, ayurvedic medicines and practices and so much more. Traditional knowledge is largely undocumented and uncodified and ancient texts are in Indian languages such as Sanskrit, Pali, Hindi, etc. It becomes difficult to protect traditional knowledge against commercial exploitation without the consent of the concerned community. The protective cover of trade secrets can be used to protect traditional knowledge against unauthorized commercial exploitation.

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Statutory Protection of Trade Secrets in India

Though there is no specific legislation for the protection of trade secrets, there are several provisions scattered across legislations which offer some protection.

1. Information Technology Act, 2000

The IT Act provides protection for computer resources and information, whether confidential or not, stored in computers.

unauthorised access to computer, computer system or computer network or computer resource;

unauthorized downloads, making copies or taking extracts;

damage of computer system, data, computer programme, computer source code;

destruction, deletion or alteration of any information residing in computer resource, or diminishes its utility or value;

theft, concealment, destruction or alteration of computer source code by a person or the person induces a third party to do so.

As per Section 66, the punishment is imprisonment for a term which may extend to 3 years or with fine which may extend to Rs. 5 lakhs or with both.

Section 66-B prescribes the punishment for dishonestly receiving stolen computer resources or communication devices as imprisonment for a term which may extend to 3 years or with fine which may extend to Rs. 1 lakh or with both.

Section 72 prescribes the punishment for disclosure of information in breach of contract as imprisonment for a term which may extend to 3 years or with fine which may extend to Rs. 5 lakhs or with both.

2. The Copyright Act, 1957

Businesses store large amounts of data electronically in databases. This enables business employees to collect, update, store, manage and share data easily and quickly. Thus, databases are important tools for the smooth functioning of a business. Databases are protectable under the Copyright Act (“the Act”). Section 2(o) of the Act defines “literary works” to include computer programmes, tables and compilations including computer databases.

In the case of Burlington Home Shopping Pvt Ltd v Rajnish Chibber (1995 IVAD Delhi 732), decided by the Delhi High Court (“the Court”) on October 20, 1995, the question was whether a database consisting of compilation of mailing addresses of customers can be subject matter of copyright and whether the defendant, alleged to have made a copy of such database and using it to establishing relations with the plaintiff’s clients, can be said to have committed infringement of the plaintiff’s copyright. The Court noted that on comparison of the plaintiff’s and defendant’s databases, it can be clearly seen that the two are exactly the same, with same punctuations and spelling errors. Floppy disks containing the database were seized from the premises of the defendant. There was strong circumstantial evidence to indicate that the defendant had indeed infringed the copyright of the plaintiff. Therefore, an interim injunction, as prayed for by the plaintiff, was awarded, restraining the defendant from carrying on any business by utilising the database of clients exclusively owned by the plaintiff.

The Court also observed that trade secret law and copyright law may cross over each other.  In theory, copyright and trade secret law protect different elements of compiled business data, with copyright protecting the expression in these compilations and trade secret law protecting the underlying data. In fact, copyright and trade secret protection for compilations of business data frequently converge. Copyright protection for business directories often extends to the underlying data, and trade secret protection may extend to particular expressive arrangements of data.

3. The Indian Contract Act, 1872

As per Section 27, a contract restraining anyone from exercising a lawful profession, trade or business of any kind, to that extent is void unless it is reasonable as between parties and it is consistent with the interest of the public. However, restrictive covenants in contracts such as Non-Compete, Non-Solicitation, Non-Poaching and Confidentiality Covenants as well as Non-Disclosure Agreements are not hit by Section 27.

4. The Indian Penal Code, 1860

Sections 405-409, of the IPC, which relates to criminal breach of trust and Section 418 concerning cheating can also be invoked but only to get an appropriate remedy against a grave offence.

Conclusion

The term “trade secrets” has a wide connotation, the boundaries of which are constantly changing due to the evolving nature of conducting business. India follows the UK model of applying common law principles of confidentiality and equity to decide disputes regarding trade secrets. There are a few statutory provisions. However, in view of the global scenario of business, India should consider a comprehensive legislation for the protection of trade secrets for protection of existing businesses and also, to attract new business.

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