Trade secret protection

Trade secret

Any data or information that relates to businesses and is not known to the general public along with reasonable attempts being made to keep such information confidential qualifies as a trade secret.

Current framework of trade secret protection in India

In this age of globalization, where companies offshore to various countries for expansion as well as cheaper labour, it becomes difficult to protect business strategies and secrets.

Businesses view technology as secrets rather than patentable information. This is mainly because competition in markets has reached a level where competitors innovate once information is available. Though this gives rise to healthy competition, it becomes difficult for new businesses to keep up or flourish once such information is made available.

Countries today recognize the need for such secrecy and thus are trying to incorporate protection in their legal frameworks.

In the international community, development of trade secret protection can be traced to Trade-related Aspects of Intellectual Property (TRIPS), the General Agreement on Tariffs and Trade (GATT) and North American Free Trade Agreement (NAFTA).

Article 39 of the TRIPS requires countries to protect information within the control of natural or legal persons and lays down three essentials to classified information as trade secret, namely:

• Secret: Information is secret. By its very name, secrecy of information is the foremost essential of a trade secret. Secrecy generally implies that the information requiring protection is not ordinarily available to people dealing with similar kind of information. In other words, the information should not be available in the public domain. It is not necessary that the information must be completely new. For example, the information on how to make fried chicken is common knowledge, however, the information to make an exact replica of KFC fried chicken is not known to all. Thus, KFC's recipe to make fried chicken qualifies as a secret even though it is not a completely new product per se.
• Commercial value: This information requiring protection must have some commercial value attached to it. For instance, we often talk about grandmother's secret recipe but such recipes do not have any commercial value as they are meant for personal use. Such secret recipes do not qualify as trade secrets unless and until they are put to commercial use. Similarly, every confidential information does not qualify as a trade secret. Confidential information may be government, trade or private. The test to determine that a particular confidential information qualifies as a trade secret or not is to see whether such information has some commercial value.
• Reasonable efforts by the rightful holder to keep its secrecy: The rightful holder of the trade secret should have taken reasonable efforts to keep it secret. What constitutes reasonable steps varies from case to case and type of information sought to be kept secretive. Software and other IT innovations are usually protected by using firewalls, restrictive access to such information, using anti-virus and anti-spyware software. The degree of such reasonable steps also depends upon the commercial value of information. For instance, carrying on with the KFC example, KFC protects its original recipe by keeping it in a highly guarded safe in its Louisville headquarters as such that recipe has commercial value of billions of dollars.

Although India has no specific trade secrets law, Indian courts have upheld trade secrets protection under various statutes, including contract law, copyright law, the principles of equity and – at times – the common law action of breach of confidence (which in effect amounts to a breach of contractual obligation). Section 72 of the Information Technology Act 2000 also provides certain protection, although this is limited to electronic records. 

Under contract laws

Indian courts have upheld trade secret protection under principles of equity and contractual obligation.

Section 27 of the Indian Contract Act makes this evident due to the provision relating to restrain of trade. This section bars any person from disclosing any information which he acquires as a result of a contract.

Breach of confidence

Another way in which Indian courts have granted protection of trade secrets is by extending the original covenant of confidentiality to a third party who has obtained such confidential information under confidence. This can be illustrated by way of an example. Suppose B is an employee of A and he is bound by a non-disclosure agreement. Now, C incites B to give him confidential information received by B in confidence. C misappropriated such information. C would be liable under breach of confidence even though he had no express agreement with A regarding use and disclosure of confidential information.

Equity

Indian courts have also relied upon principles of equity to hold the misappropriating party guilty by establishing an implied covenant of confidentiality between the parties.

This concept was first laid down by Delhi High Court in John Richard Brady v. Chemical Process Equipments P. Ltd. where the Court, while exercising its powers under the wider equitable jurisdiction, awarded an injunction even when there was no contract.

The Court opined that even in the absence of an express confidentiality clause, confidentiality can be implied from the surrounding facts and circumstances and in such cases, the defendant would be liable for breach of implied confidentiality obligations.

A reading of these concepts reveal that confidentiality claims may arise in the following circumstances:

• Where an employee/consultant/any contracting party gets possession of confidential information, in the ordinary course of employment/business transaction and either carelessly or deliberately passes that information to an unauthorized person or misappropriation such information himself. [Breach of Contract]
• Where a third party incites/obtains information an employee/holder of such confidential information to provide him with such information; and [Breach of Confidence]
• Where, under a license for the use of know-how, a licensee is in breach of a condition, implied from conduct, to maintain secrecy in respect of such know-how and fails to do so. [Equity]

Remedies for infringement of trade secrets

The remedies available to the owners of trade secrets are: 

• an injunction preventing a licensee, employee, vendor, or other party from disclosing a trade secret,
• the return of all confidential and proprietary information and 
• compensation for any losses suffered due to the disclosure of trade secrets.

Safeguards used by budding entrepreneurs to protect their business secrets

Safeguarding trade secrets is essential for entrepreneurs and small business owners. If the products or services derives a lot of novelty due to such trade secrets and thus lead to the flourishing of the businesses, they will invariably attract attention. This will lead to a lot of competition especially against major businesses that have already made a mark in the market.

The following are certain steps that SMEs can take to protect such information and maintain secrecy:

• Promote employee loyalty
• Monitoring employee activities
• Label the information to be protected as "confidential", so that employees are aware that they are dealing with sensitive business information
• Restrict access to databases, servers and computer programs that store trade secrets
• Educate employees on why protecting trade secrets is important for business
• Ensure that access to servers is password protected and that a suitable notice is displayed on computer screens when accessing sensitive areas
• Drafting a comprehensive trade secret policy for workplace
• Drafting employment/confidentiality agreements that are enforceable in India
• Sign non-disclosure agreements with any third parties with which commercial business information is shared
• Use a combination of technical and legal solutions to protect databases
• Conducting trade secret audits