Legal Protection of Trade Secrets
by Vandana Pai*
& Ramya Seetharaman**
Cite as : (2004) 1 SCC (Jour) 22
In todays exceedingly competitive markets, the protection of proprietary information often foretells the difference between a business success and failure. However, in order to conduct their business effectively, companies often must share their competitive and proprietary information with several persons. At the same time, it is vital that such information be kept confidential.
Intellectual property rights such as copyright, trademark and patent are ineffective where the information is sought to be kept secret. They require governmental filings that are expensive to obtain and enforce. Further, the scope of protection available from these statutory systems is in many respects being narrowed. In this context, trade secret protection provides an effective and economically viable remedy to businesses of all sizes.
Trade secrets consist of virtually any information developed by the company through the expenditure of time and effort, unknown to others in competing businesses, and which gives an advantage to the company over such competition. The formula for Coca-Cola and the Hyderabad fish cure for asthma are well-known examples.
The law of trade secrets is derived from the basic principles of the law of torts, restitution, agency, quasi-contract, property and contracts. There are sound economic reasons for trade secret protection. Failure to protect obligations of confidentiality could inhibit both the quantity of information exchanged and its quality. The owner of the secret will in most cases have expended substantial resources to discover the secret and hence has a clear economic interest in its remaining secret.1 In addition, the economic rationale behind such protection is to offer an incentive to invest in the creation of information.2
However, there are also some economic disadvantages in the protection of secret information. The producer will keep secret about the research until it can be protected by patent laws, thereby leading to a great deal of duplicated research which is not efficient.3 These considerations have to be kept in mind while deciding what information should be protected. In certain circumstances, it has been decided that the misuse of secrets should be actionable. If the disadvantages outweighed the advantages, the civil law should not intervene. This article discusses the efficacy of available civil remedies in case of an infringement of a trade secret and makes a case for the codification of the common law of trade secrets.
Defining trade secrets
Trade secret law is directed towards promoting inventions and discoveries. Hence, it is vital that only such information be protected that helps achieve this end. The common law has adopted a functional approach to the definition of trade secrets. Courts have preferred to demarcate between information that is in the public domain and that which is not.4 The Law Commission of England and Wales5 has, however, laid down specific categories of information that can be regarded as trade secrets.
In contrast, in the United States, the Uniform Trade Secrets Act6 (UTSA), which has been adopted by over forty States, identifies three essential elements of a trade secret. A trade secret:
must be information such as a formula, pattern, compilation, program, device, method, technique or process;
that has independent economic value available from only one source; and
is the subject of reasonable efforts to maintain its secrecy.
This definition allows a business to protect, due to its potential value, information, which it does not presently intend to utilise, or which it has not or cannot presently fully develop. Furthermore, a trade secret need not necessarily be comprised of positive information, such as a specific formula, but can include negative, inconclusive or sufficiently suggestive research data that would give a person, skilled in the art, a competitive advantage he might not otherwise enjoy but for the knowledge gleaned from the owners research investment.7
Information that is publicly known or easily accessible to the public, cannot be held to be a trade secret. However, most courts require only relative or qualified, and not absolute secrecy.8 Information may thus go beyond its initial source to other persons while at the same time remaining confidential.9 It ceases to be a secret only when it is known to a substantial number of persons.
Further, every part of the information need not be completely confidential to qualify for protection as a trade secret. A trade secret can include a combination of elements that are in the public domain, if the trade secret constitutes a unique, effective, successful and valuable integration of the public domain elements.10 This principle simply recognises that the choice of individually known components and techniques to create a working manufacturing process is often a difficult undertaking. Where at individual steps of a process there are a variety of alternatives, the choice made through much effort of specific ingredients, materials, conditions and steps in an actual working process constitutes a trade secret.
Independent economic value
The test is not whether the information has independent economic value in general, but whether it has independent economic value by not being known to other persons who can obtain economic value from its disclosure.11 Hence, a customers list is considered a trade secret only where the identity of customers has economic value.12 For example, where many firms are potential customers for a product but only a few actually purchase it, their identities have economic value because compiling a list of actual customers requires an investment of time and money. In contrast, a customers list does not achieve trade secret status where the identity of actual customers is common knowledge in the market at issue.13
Reasonable security measures
If a company wishes to protect information as a trade secret, it must implement reasonable measures to safeguard against its disclosure. Under the common law, it was wise to do so not only in order to maintain competitive advantage, but also to bolster arguments of protectability should trade secret litigation become necessary. Under UTSA, in order to even meet the threshold qualifications as a trade secret, information must be the subject of efforts that are reasonable under the circumstances to maintain its secrecy. The extent of the security measures taken by the owner of the trade secret need not be absolute, but must be reasonable under the circumstances.14
Trade secrets vis-à-vis other intellectual property rights
Trade secret protection presents no conflict with the patent law, as it is consistent with the patent policy of encouraging inventions. However, for trade secret protection, uniqueness in the patent law sense is not required. Further, the owner of a trade secret, unlike the holder of a patent, does not have an absolute monopoly on the information or data that comprises the trade secret. Other companies and individuals have the right to discover the elements of a trade secret through their own research and hard work.15 Consequently, inventors of items that may meet the standards of patentability would prefer to seek patent protection because such protection is far superior to the protection afforded by trade secret laws.
As far as copyright protection is concerned, there is no copyright in ideas and hence copyright law cannot protect confidential information. Section 16 of the Copyright Act, 1957 (the Copyright Act) states that nothing in the Copyright Act should be considered as restraining an action for breach of confidence or breach of trust. There is thus no copyright pre-emption of trade secret misappropriation claims.
Tort of breach of confidence
A right of action for breach of confidence underpins and in many cases predates a more crystallised intellectual property right. The nature of such an action was considered in the leading Spycatcher case16 where Lord Keith held that the obligation may exist independently of any contract, on the basis of an equitable principle of confidence. The rationale for such an action seems to stem from the notion that information can be regarded as a property right. However, this assertion has been the focus of intensive debate.17
A trade secret has both monopoly value and use value, but only the former will normally be affected by misuse of the secret. On this basis, some courts have held that information cannot be considered property.18 Nevertheless, a comparison of the attributes of trade secrets with those of orthodox property reveals that some of the key attributes of orthodox property rights to create, use, alter, destroy, exchange etc. do seem to be shared by information.19 However, the problem arises due to the fact that once the secret is revealed, the usual ideas of legal and equitable title cannot be applied.20
Hence, courts have based the action for breach of confidence on other legal theories such as the notion of implied contract, the relationship of trust and confidence that existed between the parties and so on.21 It is argued by some jurists that basing trade secret law on such concepts narrows its scope and creates greater scope for conflict as the law can afford protection only when such a relationship exists.22 In such a circumstance, courts have examined trade secret protection in a new light viz. as a conflict between the freedom of the individual to support himself and the policy of encouraging business enterprise.23
Elements of the tort
The law of breach of confidence is concerned not with the acquisition of information, but with its subsequent use or disclosure.24 The basic test for imposing an obligation for breach of confidence was laid down in Saltman Engg. Co. v. Campbell Engg. Co. Ltd.25 where Lord Greene stated: (All ER p. 414 I)
If defendant is proved to have used confidential information, directly or indirectly obtained from a plaintiff, without the consent, express or implied of the plaintiff, he will be guilty of an infringement of the plaintiffs rights.
To this basic test, the additional requirements of unfair advantage to the party and detriment caused by the unauthorised use were added.26 Thus, the plaintiff in an action for breach of confidence must prove three things before he succeeds in his claim:
Information must be in itself of a confidential character.
Imparting of information must occur in a circumstance of or an occasion of confidence.
Information must be used in an unauthorised way to cause detriment to the plaintiff.
Initially, an objective test dependent on the expectations of reasonable men was adopted.27 A subjective element was introduced by the decision in Thomas Marshall (Exports) Ltd. v. Guinle28 where the plaintiff sought an injunction against the Managing Director who had set up a competing business. The Court observed that information became confidential only when the owner of the information has a reasonable belief that its release would be harmful to him and that it was outside the public domain. This implies that the belief of the owner of the information must be taken into account while determining whether information is confidential.
These decisions were reviewed by the House of Lords in the famous Spycatcher case29. A British spy published a book containing confidential information he had learnt during his career. Although the British Government sought an injunction, the action failed on the ground that the information had lost its confidential character, as this book was available in other countries. Hence, information must remain outside the public domain if it is to be protected.
However, the Court did not decide whether the above reasoning tantamounts to allowing the holder of confidential information to rid himself of the obligation of confidence by disclosure. Lord Goff explained the springboard principle and held that disclosure by a third party does not release the confidant from his obligations. This reluctance shown by the courts to allow a confidant to benefit by breaching his confidence prevents an unequivocal declaration that information, which is confidential, cannot be public.30 Nonetheless, where the holder of the information himself discloses the information, no action for breach of confidence will lie.31 A lapse of time may also result in breach of confidentiality.32
The obligation of confidence
The obligation of confidence does not arise where the information is divulged in public or in other circumstances that negate the duty of holding it confidential.33 This test, which is an objective one, focuses on the relationship between the parties. The types of relationships in which such an obligation is said to arise can be divided into three broad categories:
1. Fiduciary relationships
The essence of a fiduciary relationship is that equity imposes an obligation on the trustee to act in the best interest of the beneficiary. For instance, directors may owe an obligation to their company, professionals such as auditors and solicitors may owe a duty to their clients and so on.34
2. Contractual relationships
Parties to the contract are free to make such provision as they deem fit for the use of confidential information. It is common to stipulate that information would not be passed beyond the contract.35
The basic duty of fidelity arises throughout the course of employment and continues to a limited extent even after the employment terminates. Thus, any employee who discloses confidential information is in breach of confidence.36
The major drawbacks associated with an action for breach of confidence are that an adequate remedy is unavailable against the person to whom the information is disclosed, as the holder of the secret may be unable to prevent the continuing use of the confidential information by such person(s). Although damages may be sought against the confidants, they generally do not have the economic capacity to pay adequate damages. The question of liability of third parties assumes importance in this connection.
Misappropriation of trade secrets: liability of third parties
American courts have developed the tort of misappropriation, which imposes liability on third parties for the use of trade secrets. This tort is not committed by a person who uses or publishes a trade secret unless that person has used some unlawful means or breached some duty created by contract or implied by law resulting from some employment or similar relationship.37 It is the use of improper means to procure the trade secret, rather than the mere copying or use, which is the basis of liability.38
UTSA contains definitions of misappropriation39 and improper means.40 The American Restatement of Laws has modernised the definition of improper means to include the unauthorized interception of communications.41 This implies that even computer hacking is included in the definition of improper means. The Restatement is clear that improper means that are either wrongful in themselves or wrongful under the circumstances of the case come within the tort of misappropriation.42
Though English courts have not framed the issue in terms of improper means, the rationale for imposing liability on third parties seems to be the same in both English and American law. Courts have held that even if there is no contractual nexus between the parties, liability arises if the confidentiality of the information is obvious.43 It must be emphasised that third parties are liable only when the information is not only known, but also known to be confidential in character.44
The Law Commission has recommended that the duty should be broader and prevent, for example, a company that has received information in confidence during the course of licensing negotiations from turning that information to its own use, though without disclosing it further.45 Thus, there is a need for reforming the law in this regard.
In India, the tort of misappropriation has not gained judicial recognition. However, Indian courts can adopt the common law approach and grant relief.
Non-disclosure agreements: an overview
To prevent the misuse of trade secrets, it is generally prudent business practice to enter into non-disclosure agreements. Trade secrets are considered the masters property, and therefore there is no rule of public interest, which invalidates an agreement that prevents their transfer against the masters will. However, the validity of such agreements has to be examined at the altar of Section 27 of the Indian Contract Act, 1872 (the Contract Act), which states that every agreement by which a person is restrained from carrying on any trade, business or profession, is invalid.
The Supreme Court in Niranjan Shankar Golikari v. Century Spg. & Mfg. Co., Ltd.46 enumerated the tests to determine the validity of agreements in terms of Section 27. A foreign producer collaborated with a company manufacturing tyre cord yarn on the condition that the company would maintain secrecy of all technical information and that it obtain corresponding secrecy arrangements from its employees. The defendant was appointed for a period of five years on the condition that during this period he shall not serve anywhere else even if he left the service earlier.
Shelat, J. held the agreement to be valid. The defendant was accordingly restrained from serving anywhere else for the duration of the agreement. The restriction imposed in the present case was limited as to time, the nature of employment and as to area, and cannot therefore be said to be too wide or unreasonable or unnecessary for the protection of the interests of the respondent Company. The Court held that there is an implied term in a contract of employment that a former employee may not make use of his former employers trade secrets. But subject to this exception, he is entitled to compete. Hence, even if the contract of employment had contained a covenant not to compete in respect of future contracts, such covenants would have been an unreasonable restraint of trade and void.47 However, several United States courts have recognised the inevitable disclosure rule, which permits a former employer to enjoin an employee from working for a direct competitor where the new employment will inevitably lead the employee to rely on the former employers trade secrets.48
Tort of malicious interference in contractual relations
Where the parties have entered into a non-disclosure agreement, and one of them reveals the secret to a third party in breach thereof, the holder of the secret can obtain an injunction restraining the third party from disclosing the information. English courts have developed the tort of malicious interference in contractual relations.49 Under American law, UTSA lists inducement of a breach of the duty to maintain secrecy as an improper means of discovery resulting in an action for misappropriation of trade secrets.
Exceptions to liability
Disclosure of trade secrets is not actionable in all cases and courts have carved out a number of defences.
The general knowledge exception
In common law, by a long-established principle of public policy, a former employee was free to utilise the general skill and knowledge acquired during his or her employment.50 Similarly, in America, the Economic Espionage Act does not apply to individuals who seek to capitalise on their lawfully developed knowledge, skill or abilities. The exclusion applies not only to the exploitation of the information for the employees own benefit, but also to the employees use of it for other employers.51
The clearest test for distinguishing between trade secrets on the one hand and general knowledge and skill on the other, has been laid down by Cross, J. in Printers and Finishers Ltd. v. Holloway52. If the information in question can be regarded as a separate part of the employees stock of knowledge, which a man of honesty and intelligence would recognise to be the property of his former employer, then an injunction could be granted. The apparent simplicity of this formula belies the practical difficulty in demarcating between the two. The problem is accentuated by employers efforts to prevent disclosure of information by means of restrictive covenants.
The owner of a trade secret does not possess a monopoly on the data that comprises the trade secret. Other companies and individuals have the right to discover the elements of trade secret through their own research and hard work.53 Thus, it is a defence if the defendant demonstrates that he independently developed the trade secret.
The Legislative Comment to UTSA states, Discovery by reverse engineering, that is, starting with the known product and working backward to find the method by which it was developed, is considered proper means. Therefore, to avoid a successful claim by the defendant that he discovered the trade secret by reverse engineering, prosecutors should establish the means by which the defendant misappropriated the trade secret. For example, if the prosecution could show that the defendant unlawfully obtained access to the trade secret, it would refute his claim that he learnt the trade secret through reverse engineering. Further, a defendant cannot defeat a prosecution by claiming that the trade secret could have been discovered by reverse engineering.54
Innocent acquisition of information
Information which the defendant acquired innocently, that is, without knowing that it was a trade secret belonging to a person who did not consent to the defendants acquisition of it is not a trade secret under English law.55 However, under American law, a person who learns of a trade secret innocently, without notice, is liable after receipt of notice unless he can prove that he has in good faith paid value for the secret or has so changed his position that to subject him to liability would be inequitable.56
The public interest exception
It is well established that no liability attaches to the use of information, which it was in the public interest to use or disclose. Thus, a defendant in proceedings for breach of confidence shall not be liable to the plaintiff in respect of any disclosure or use of information by the defendant in breach of an obligation of confidence if (a) the defendant raises the issue of public interest in relation to that disclosure or use; and (b) the plaintiff is unable to satisfy the court that the public interest relied on by the defendant under that sub-section is outweighed by the public interest involved in upholding the confidentiality of the information.
Statutory obligation/Exercise of power
If the information is used or disclosed in accordance with a statutory obligation or power, the defendant is not liable. For instance, if the information is disclosed pursuant to a court order, or otherwise for the purpose of legal proceedings, it comes within the exemption. Similarly, the use or disclosure in the interests of national security or for the prevention, investigation or prosecution of crime is permissible. However, the disclosure must be to someone who has a proper interest to receive the information in question.57
Concluding remarks: a case for codification
In India, trade secret protection is still in a nascent stage, with no special legislation codifying the principles of trade secret law. This is contrary to the global trend towards codification of the common law. Though, the equitable principle of fiduciary relationships has been codified in the Securities Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, which renders the use and disclosure of confidential information by an insider subject to prosecution under the Securities Exchange Board of India Act, a third party who makes use of this information is not liable.
In this era of globalisation, multinational corporations want assurances that the national law will protect their secrets. This is clear from the TRIPS Agreement, which refers to Article 10 of the Paris Convention, and incorporates a duty on signatories to protect confidential information. The kind of protection envisaged by the TRIPS Agreement is not afforded by the Indian law relating to trade secrets. The TRIPS Agreement casts an obligation on India to codify the law on trade secrets. Even Asian countries like Korea and Japan have codified the common law on trade secrets as far back as 1990. India should follow their example in this regard.
Trade secret law can protect even an invention that is unpatentable because it does not meet the legal requirements for patentability. Further, before a patent is obtained for a new idea, the inventor may want to disclose it to a prospective user, purchaser or backer. Indian businessmen forced to bear the high expense of patent litigation may be at a disadvantage when compared to their foreign counterparts. Hence, the North-South debate that often arises when it comes to patent law has no relevance in this regard. Indian businessmen relying on trade secrets will have a better protection if the common law principles are given concrete shape. Trade secret law facilitates trade and hence it is high time that the Indian Government wakes up to the need to reform the trade secret law.
(i) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
(ii) disclosure or use of a trade secret of another without express or implied consent by a person who
(A) used improper means to acquire knowledge of the trade secret; or
(B) at the time of disclosure or use knew or had reason to know that his knowledge of the trade secret was
(I) derived from or through a person who has utilized improper means to acquire it;
(II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or
(III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
(C) before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.