Trade Secrets and its Protection

Estimated Reading Time: 10 minutes

Introduction

Trade secrets are the data or information about a company that is not widely known to the public and that the owner makes a reasonable effort to keep hidden and confidential. The data must have a separate economic value, either real or potential. Such trade secret must provide a competitive advantage to the bearer. These trade secrets must be protected by any business since they include business secrets that provide a competitive edge.

In the absence of a distinct or specific statutory framework to govern and protect trade secrets, the common law system, which consists mostly of judicial pronouncements, has played a key role in trade secret protection and the evolution of trade secret law. Indeed, trade secrets are mainly found on a few doctrines and theories that serve as the foundation for trade secret law. Let us look at some of the doctrines and theories that are important in the process of protecting and enforcing trade secrets.

Theory of contractual obligation for enforcing trade secrets

Parties to the trade secrets can mutually agree upon certain terms and conditions on the basis of which the information and the trade secrets can be dealt with. In case of any misuse or misappropriation of trade secrets, it does violate the terms of the contract and the contractual relationship binds the parties. The contractual obligation idea essentially asserts that the responsibility not to reveal, misuse or utilize trade secrets is usually derived from a contractual relationship between the right holder and the person who has access to the confidential information.

In practice, trade secrets are protected under the law of contracts, which creates contractual responsibilities on the side of the contracting parties. The person in possession of the trade secrets may enter into an agreement with the person or persons to whom he would transmit the trade secrets to that they will not disclose the same to others and like this the other party to the agreement will be bound to keep the information confidential and not break the owner’s and the contract’s confidence. So the basic principle is that the person to whom the secret is revealed or whoever comes into contact with a trade secret should not reveal it to others or misuse it to deprive the owner of the benefits of its confidentiality.

Nowadays having recognized the necessity of protecting trade secrets it is a regular practice to incorporate “non-disclosure” clause in contracts or to execute a separate non-disclosure agreement to obligate the other party not to disclose the secret information, which he comes across once, the contract is executed. A confidentiality clause is almost always included in employment and trade secret licensing agreements (non-disclosure agreements). The obligation stems from the contractual relationship. Since the rights and obligations of the parties to the contract depend upon what the parties have agreed and what has been laid down in the contract, enough care and caution shall be exercised while drafting the contract. At the most every clause with respect to; what is trade secret that is the subject of the contract, the terms which have been proposed to protect the same as agreed by the parties, proposed and agreed penalty in case of breach of contract etc., shall be dealt with and drafted with required care and caution. In any contract intended to protect trade secret, the parties shall ensure that the standard provisions providing the following substance are incorporated:

(1) The description of what items of information disclosed under the contract are designated and treated as confidential. The law governing the contract where the parties are governed by the laws of different countries and a provision for settlement of disputes;

(2) A covenant that the disclosed information should be kept confidential and used only for the purposes of that contract and that it should not be disclosed to any one, other than recipient’s employees who would have a need to know the information;

(3) A restriction that the recipient shall not, except as may be permitted by law decompile, disassemble, decode, reproduce, redesign, or reverse engineer any samples or computer software containing confidential information or any part thereof provided to him. Undertakings of confidentiality by the recipient of the confidential information and his employees, dealing with the work under that contract;

(4) The period for which this information is to be kept confidential and the period of the contract and a provision for terminating it before that term and the ground on which it may be terminated. Return of all the records containing the confidential information to the disclosing party on the termination of contract at any time, for whatever cause;

(5) Information on what is considered as breach of the terms of the contract, the prescribed penalties and the remedies which parties agree in the event of a breach of contract in case of such eventuality.

According to the case of Niranjan Shankar Golikari v Century Spinning it was decided that negative covenants in employment agreements pertaining to non-disclosure of confidential information operative during the term of the contract of employment and even afterwards are generally not regarded as restraints of trade, and thus do not fall under Section 27 of the Contract Act 1872 as a former employee is not permitted to take undue advantage of the employer’s essential trade secrets which are essential to its business. According to the decision in Homag India Pvt Ltd v Mr Ulfath Ali Khan, post-service restraint in preserving confidentiality and carrying on any other business for a short length of time is permitted under the exemption to section 27 of the Contract Act.

Hence it can be deduced that contract execution is utilized to protect trade secrets. In such instances, the wording of the agreement or contract becomes essential, because the confidentiality of the information is dependent on the contract’s inclusion of a confidential information protection clause. The Indian Contracts Act governs the contractual relationships between the parties, and courts accept both the Act’s mandated characteristics, terms, and conditions, as well as the implicit terms and conditions used in the trade and commerce circles.

Theory of Fiduciary duty for protecting trade secrets

Fiduciary relationships need not be in black and white or in written form. It is a matter of practice or convention that the law courts impose an obligation on the part of the one who comes across the trade secrets of the other to upkeep the secrecy.

The majority of common law nations safeguard trade secrets based on the fiduciary relationship that exists between the employer and the employee. Since the employee enters into a relationship of trust and secrecy with the employer, who has disclosed to him the secrets of his business under the contract of employment therefore the employee has an obligation not to reveal the employer’s secrets to others.

As a result, a fiduciary relationship generally develops in one of three scenarios:

  1. When one person lays their faith in another’s loyal integrity and as a result of it the latter obtains dominance or influence over the first.
  2. When one person receives authority and responsibility over another while also owing the latter a duty to act for or provide advice on issues pertaining to the said relationship.
  3. When there is a certain relationship that has long been recognized as containing fiduciary obligations. For eg. the relationship between a lawyer and a client or a stockbroker and a customer

The theory of fiduciary relation is founded on common law principles and acknowledges the employer-employee fiduciary relationship. In Ei Du Pont de Nemours v Christopher, the court found that anybody who comes into contact with another person’s trade secret enters into a fiduciary obligation with that person to keep the secret private. In the Chemettal judgement the court decided that an employee is required to keep safe the employer’s trade secrets. The fiduciary relation that exists between the employer and the employee imposes a duty on the employee not to reveal or misuse the employer’s trade secrets. According to the fiduciary relation hypothesis, certain relationships have an implied obligation of confidentiality.

Nowadays it is recommended to incorporate non-competition and loyalty clauses in the employment contracts as a measure to prevent disclosure and misuse of trade secrets. Non-competition clause states that the employee once leaves the employment will not undertake any business, which may become competition to the business of the existing employee. However the effect of this clause is limited only for a temporary period. Since the constitution of India guarantees freedom of trade, commerce, occupation and business to everyone nothing prevents the employee from taking up any business. The loyalty clause states that the employee shall be loyal to the employer in helping the latter to protect his trade secrets. As per this clause the employee is obligated not to disclose secrets of the employer to any competitor or not to help the competitor in acquiring the secrets of the employer.

Common law of fiduciary implies a duty on the part of the employee towards the secrets of the employer. In the absence of express contractual terms between the employer and the employee trade secrets are protected on the basis of fiduciary relationship. There is a difference between secrets acquired and skills acquired during the course of employment. Employee is obligated only not to disclose or misuse the secrets that he acquired during the course of the employment and after the termination of the employment. But he can very well use the skills that he acquires during the course of the employment either independently or in any new employment after terminating the existing employment. Further an independent inventor who acquires the knowledge of the secret information can use it without any objections

The Springboard theory for trade secrets

A person who comes across or obtains the trade secrets of any person should not disclose or misuse the same for the detrimental effect of the owner. The springboard theory states that a person who comes to know about others trade secrets is under moral obligation to upkeep the confidentiality of the trade secret. This theory is applied especially to counter dishonest conduct or to prohibit unreasonable behavior with regard to the trade secret. Few states have clearly recognized this theory to extend protection to trade secrets.

Usually Courts apply this theory as an equity measure to counter dishonest, immoral behavior of the defendant or in cases where access to trade secret is obtained illegally. The English Courts devised the”Spring Board” principle to prevent someone from utilising special information received in confidence to gain an advantage over others who would have had to obtain the information via other ways. In short, the doctrine tries to prevent a person who violates a duty of confidence from profiting from the violation.

The “springboard” theory is a helpful guide when it comes to technology. According to the case of Coco v. AN Clark Ltd and Cranleigh Precision Engineering Ltd v Bryant it was held by the court that a person who receives confidential information should not utilize it to save himself the effort and expense of developing the information, as he would have had to do if he had no prior knowledge of it or the expenditure of receiving it from someone else. As pointed out by the court in Ei Du Pont de Nemours v Christopher, whoever comes across trade secret of others is under moral obligation to upkeep the confidentiality of the trade secret and shall not misuse the same for the detrimental effect of the owner.

In the case of Potteers Baltoni v. Weston Baker it was decided that a person who has gained confidential information is not permitted to use it as a springboard for activities that are harmful to the person who has made the secret communication. Even when all of the features have been published or can be verified by real examination by any member of the public, such material remains a springboard. Even when all of the features have been published or can be verified by real examination by any member of the public, such information still remains a springboard. Again in the case of Zee Telefilms Ltd v Sundial Communications Pvt Ltd another addition to this principle came up it was held that in situation of a breach of confidence the duty of confidence applies not only to the original receiver, but also to those who received the information with knowledge obtained at the time or afterwards that it was provided in confidence to the original person

Although confidential information should not be used as a springboard, such a springboard does not stay indefinitely. The court can impose a time limit on such a person’s actions, although such a limitation does not last forever. Due to the difficulties to decisively identify when the spring board began, courts have ruled that monetary relief rather than injunctive remedy would be more equitable rather than the injunctive remedy. When information is obtained illegally, the springboard principle applies to restrict the recipient and others from using it, but only for a limited time and not forever. Some of the variables to determine whether this principle will apply or not are- the methods and manner by which the information becomes public; by what other permissible ways may the defendant get the information; and the defendant’s state of mind while revealing the information.

Conclusion

Looking up upon all these it could be understood how important protection of our trade secret is and what a major role all of these theories play for the protection of the same in the absence of any distinct or specific statutory framework to govern and protect trade secrets. The whole of the trade secret law is somehow based upon these theories and doctrines.

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