Trade secrets
Trade secrets
Intellectual Property rights protection is one of the most important issue both in the national as well as the international level. Trade Secrets form a important aspect of the assets of large chunk of industry. In today’s world there are many well guarded secrets which are worth billions of dollars, like the formulation of the preparation of Coca Cola. The main advantage of trade secrets is that contrary to that of patents, trade secrets can be protected for an unlimited period of time. Trade secrets are also a key form of protection for many firms that either choose not to or cannot patent their discoveries. Also trade secrets are protected without registration, that is, trade secrets are protected without any procedural formalities. But the trade secrets had to be shared with some employees (may be a handful). Problem arises when such employees leave the company and either set up their own business or join rival companies. Companies try to minimize the chances of divulging of trade secrets by entering into contracts of confidentiality with their employees including covenants not to compete.
INGREDIENTS OF TRADE SECRETS
Trade Secret law in its modern form in Anglo- American jurisprudence is a common law creation of the 19th century. English and American courts first recognized a cause of action for damages for misappropriation of trade secrets in early nineteenth century. In general terms, trade secret is some sort of information that has value because it is not generally known.
The Uniform Trade Secrets Act is a model law drafted by the National Commissioners on Uniform State Laws in 1979 and amended in 1985. Legislation based on it had been enacted in 46 states, the District of Columbia and the U.S. Virgin Islands. The UTSA defines a trade secret as follows:
“Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:
(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable18 by proper means by, other persons who can obtain economic value from its disclosure or use, and
(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
Section 757 of the Restatement (First) of Torts:
Definition of trade secret. A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. Secrecy. The subject matter of a trade secret must be secret. Matters of public knowledge or of general knowledge in an industry cannot be appropriated by one as his secret.
Other terms used for the trade secret are “confidential information”, “proprietary information”, and “know how”. The terms ‘Trade Secret’ and ‘Confidential Information’ have been, and are used interchangeably by the courts as ‘trade secret’ forms a part and parcel of the latter. ‘Trade Secret’ is a narrow term while ‘Confidential Information’ much wider, and includes many other concepts too, such as personal confidences, government information, artistic and literary confidences etc.
Unlike the case for patent, copyright and trade mark law, there is a lack of comprehensive international treaties pertaining to trade secrets. Article 39 of TRIPs and earlier Art 10bis of the Paris Convention (covering unfair competition) provided a potential source of support for international standards of trade secret protection.
As a general rule, trade secret can be any information not commonly known in the relevant industry that is used in connection with a business to obtain a competitive advantage and the information is secret, is identifiable, and is not readily ascertainable. But the subject matter that can be protected as a trade secret will differ among nations, with countries like India providing no statutory legal protection for trade secrets.
According to Art. 39 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) for an information to qualify as trade secrets, it should qualify the following conditions:
- The information must be secret (i.e. it is not generally known among, or readily accessible to, circles that normally deal with the kind of information in question).
- It must have commercial value because it is a secret.
- It must have been subject to reasonable steps by the rightful holder of the information to keep it secret (e.g., through confidentiality agreements).
The definition of trade secrets under TRIPS is quite similar to the one formulated under UTSA
TRADE SECRET MISAPPROPIATION
Trade secret misappropriation involves improper means used to acquire or use a trade secret.
Under the UTSA, misappropriation is defined as:
(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 had 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 [or her] 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.
Another significant development in U.S. law is the Economic Espionage Act of 1996 (18 U.S.C. §§ 1831–1839), which makes the theft or misappropriation of a trade secret a federal crime. This law contains two provisions criminalizing two sorts of activity. The first, 18 U.S.C. § 1831(a), criminalizes the theft of trade secrets to benefit foreign powers. The second, 18 U.S.C. § 1832, criminalizes their theft for commercial or economic purposes.
The Use of Improper Means :In order to hold a defendant liable for misappropriation, that defendant must have used “improper means” to obtain the information, where such improper means includes torts, breaches of contract and other confidentiality duties, and non-tort espionage. Conversely, if someone obtains information in good faith or independent research, then there can be no misappropriation. As discussed throughout this Article, improper means goes beyond wrongdoing that is only actionable at common law.
LEADING CASE LAW
- I. Dupont Denemours & Company, Inc. v. Rolfe Christopher et al.[1]
The defendants-appellants, Rolfe and Gary Christopher, photographers were hired by an unknown third party to take aerial photographs of new construction at the Beaumont plant of E. I. duPont deNemours & Company, Inc. Sixteen photographs of the DuPont facility were taken from the air and were later developed and delivered to the third party. DuPont contacted the Christophers and asked them to reveal the name of the person or corporation requesting the photographs but the Christophers refused to disclose this information, giving as their reason the client’s desire to remain anonymous.
DuPont filed suit against the Christophers, alleging that they had wrongfully obtained photographs revealing DuPont’s trade secrets which they then sold to the undisclosed third party.
The contention of Dupont was that it had developed a highly secret but unpatented process for producing methanol, a process which gave DuPont a competitive advantage over other producers. This process, DuPont alleged, was a trade secret developed after much expensive and time-consuming research, and a secret which the company had taken special precautions to safeguard. The area photographed by the Christophers was the plant designed to produce methanol by this secret process, and because the plant was still under construction parts of the process were exposed to view from directly above the construction area. Photographs of that area would enable a skilled person to deduce the secret process for making methanol. DuPont thus contended that the Christophers had wrongfully appropriated DuPont trade secrets by taking the photographs and delivering them to the undisclosed third party.
DuPont apart from damages sought temporary and permanent injunctions prohibiting any further circulation of the photographs already taken and prohibiting any additional photographing of the methanol plant.
The Christophers answered with motions to dismiss for lack of jurisdiction and failure to state a claim upon which relief could be granted. Depositions were taken during which the Christophers again refused to disclose the name of the person to whom they had delivered the photographs. DuPont then filed a motion to compel an answer to this question and all related questions.
The trial court denied the Christophers’ motions to dismiss for want of jurisdiction and failure to state a claim and also denied their motion for summary judgment. The court granted DuPont’s motion to compel the Christophers to divulge the name of their client. The court granted the Christophers’ motion for an interlocutory appeal under 28 U.S.C.A. § 1292(b) to allow the Christophers to obtain immediate appellate review of the court’s finding that DuPont had stated a claim upon which relief could be granted. Agreeing with the trial court’s determination that DuPont had stated a valid claim, United States Court of Appeals, Fifth Circuit affirmed the decision of that court.
The question involved in the interlocutory appeal was whether DuPont had asserted a claim upon which relief can be granted. The Christophers argued that they committed no “actionable wrong” in photographing the DuPont facility and passing the photographs on to their client because they conducted all of their activities in public airspace, violated no government aviation standard, did not breach any confidential relation, and did not engage in any fraudulent or illegal conduct. In short, the Christophers argued that for an appropriation of trade secrets to be wrongful there must be a trespass, other illegal conduct, or breach of a confidential relationship.
Referring to the Supreme Court of Texas judgment in Hyde Corporation v. Huffines[2], which held that the undoubted tendency of the law has been to recognize and enforce higher standards of commercial morality in the business world, the Court concluded that “one may use his competitor’s secret process if he discovers the process by reverse engineering applied to the finished product; one may use a competitor’s process if he discovers it by his own independent research; but one may not avoid these labors by taking the process from the discoverer without his permission at a time when he is taking reasonable precautions to maintain its secrecy. To obtain knowledge of a process without spending the time and money to discover it independently is improper unless the holder voluntarily discloses it or fails to take reasonable precautions to ensure its secrecy.”
The Fifth Circuit observed that Christophers deliberately flew over the DuPont plant to get pictures of a process which DuPont had attempted to keep secret and delivered their pictures to a third party who was certainly aware of the means by which they had been acquired and who might be planning to use the information contained therein to manufacture methanol by the DuPont process. The Court noted that the third party had a right to use this process only if he obtained this knowledge through his own research efforts, but thus far all information indicates that the third party has gained this knowledge solely by taking it from DuPont at a time when DuPont was making reasonable efforts to preserve its secrecy. In such a situation DuPont had a valid cause of action to prohibit the Christophers from improperly discovering its trade secret and to prohibit the undisclosed third party from using the improperly obtained information.
In the instant case DuPont was in the midst of constructing a plant. Although after construction the finished plant would have protected much of the process from view, during the period of construction the trade secret was exposed to view from the air. To require DuPont to put a roof over the unfinished plant to guard its secret would impose an enormous expense to prevent nothing more than a school boy’s trick. Reasonable precautions against predatory eyes was required.
Kewanee Oil Co. V. Bicron Corp. Et Al.[3]
Supreme Court of The United States
Harshaw Chemical Co., an unincorporated division of petitioner, over a period of years developed certain processes in the growth and encapsulation of synthetic crystals and purification of raw materials, some of which processes were considered to be trade secrets; it eventually succeeded for the first time in growing a 17-inch crystal of a type useful in the detection of ionizing radiation. The individual respondents, former employees of Harshaw who while working there had signed agreements not to disclose trade secrets obtained as employees, formed or later joined respondent Bicron Corp., which competed with Harshaw in producing crystals; Bicron, soon after its formation, also grew a 17-inch crystal. Petitioner brought this diversity action seeking injunctive relief and damages for misappropriation of trade secrets. The District Court, applying Ohio trade secret law, granted a permanent injunction. The Court of Appeals reversed on the ground that Ohio’s trade secret law conflicted with the federal patent laws.
The first issue was whether the States were forbidden to act at all in the area of protection of the kinds of intellectual property which may make up the subject matter of trade secrets.
Article I, § 8, cl. 8, of the Constitution grants to the Congress the power
“to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries ….”
In Goldstein v. California[4], Supreme Court held that the cl. 8 grant of power to Congress was not exclusive and that, at least in the case of writings, the States were not prohibited from encouraging and protecting the efforts of those within their borders by appropriate legislation. The States could, therefore, protect against the unauthorized rerecording for sale of performances fixed on records or tapes, even though those performances qualified as “writings” in the constitutional sense and Congress was empowered to legislate regarding such performances and could pre-empt the area if it chose to do so. This determination was premised on the great diversity of interests — the essentially non uniform character of the appreciation of intellectual achievements in the various States. Evidence for this came from patents granted by the States in the 18th century. 412 U.S., at 557. Just as the States may exercise regulatory power over writings so may the States regulate with respect to discoveries. States may hold diverse viewpoints in protecting intellectual property relating to invention as they do in protecting the intellectual property relating to the subject matter of copyright. The only limitation on the States was that in regulating the area of patents and copyrights they do not conflict with the operation of the laws in this area passed by Congress, and it is to that more difficult question we now turn.
The question in the Supreme Court was whether the trade secret law of Ohio was void under the Supremacy Clause involved a consideration of whether that law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Hines v. Davidowitz,[5] the Court had already held in Sears, Roebuck & Co. v. Stiffel Co.,[6] that when state law touches upon the area of federal statutes enacted pursuant to constitutional authority, “it is ‘familiar doctrine’ that the federal policy ‘may not be set at naught, or its benefits denied’ by the state law.
The laws which the Court of Appeals in the present case held to be in conflict with the Ohio law of trade secrets were the patent laws passed by the Congress in the unchallenged exercise of its clear power under Art. I, § 8, cl. 8, of the Constitution. The Court observed that patent law does not explicitly endorse or forbid the operation of trade secret law. However if the scheme of protection developed by Ohio respecting trade secrets “clashes with the objectives of the federal patent laws,” Sears, Roebuck & Co. v. Stiffel Co. then the state law must fall. To determine whether the Ohio law “clashes” with the federal law it was held helpful to examine the objectives of both the patent and trade secret laws. The stated objective of the Constitution in granting the power to Congress to legislate in the area of intellectual property is to “promote the Progress of Science and useful Arts.” The patent laws promote this progress by offering a right of exclusion for a limited period as an incentive to inventors to risk the often enormous costs in terms of time, research, and development. The productive effort thereby fostered will have a positive effect on society through the introduction of new products and processes of manufacture into the economy, and the emanations by way of increased employment and better lives for our citizens. In return for the right of exclusion — this “reward for inventions,” Universal Oil Co. v. Globe Co., 322 U.S. 471, 484 (1944) — the patent laws impose upon the inventor a requirement of disclosure. When a patent is granted and the information contained in it is circulated to the general public and those especially skilled in the trade, such additions to the general store of knowledge are of such importance to the public weal that the Federal Government is willing to pay the high price of 17 years of exclusive use for its disclosure, which disclosure, it is assumed, will stimulate ideas and the eventual development of further significant advances in the art.
The Court then went on the examination of the interaction of these systems of protection of intellectual property — one established by the Congress and the other by a State — to determine whether and under what circumstances the latter might constitute “too great an encroachment on the federal patent system to be tolerated.”Sears, Roebuck & Co. v. Stiffel Co.[7] Trade secret law protects items which would not be proper subjects for consideration for patent protection under 35 U. S. C. § 101. As in the case of the recordings in Goldstein v. California, Congress, with respect to non patentable subject matter, “has drawn no balance; rather, it has left the area unattended, and no reason exists why the State should not be free to act.” Goldstein v. California. Since no patent is available for a discovery, however useful, novel, and non obvious, unless it falls within one of the express categories of patentable subject matter of 35 U. S. C. § 101, the holder of such a discovery would have no reason to apply for a patent whether trade secret protection existed or not. Abolition of trade secret protection would, therefore, not result in increased disclosure to the public of discoveries in the area of non patentable subject matter. Also, the Court wondered how the public would be benefited by disclosure of customer lists or advertising campaigns; in fact, keeping such items secret encourage businesses to initiate new and individualized plans of operation, and constructive competition results. This, in turn, leads to a greater variety of business methods than would otherwise be the case if privately developed marketing and other data were passed illicitly among firms involved in the same enterprise. Congress had spoken in the area of those discoveries which fall within one of the categories of patentable subject matter of 35 U. S. C. § 101 and which are, therefore, of a nature that would be subject to consideration for a patent. Processes, machines, manufactures, compositions of matter, and improvements thereof, which meet the tests of utility, novelty, and non obviousness are entitled to be patented, but those which do not, are not. The question remains whether those items which are proper subjects for consideration for a patent may also have available the alternative protection accorded by trade secret law.
The Supreme Court held that the patent policy of encouraging invention was not disturbed by the existence of another form of incentive to invention. In this respect the two systems were not and never would be in conflict. Similarly, the policy that matter once in the public domain must remain in the public domain was not incompatible with the existence of trade secret protection. By definition a trade secret has not been placed in the public domain.
After discussing in great detail it held that the extension of trade secret protection to clearly patentable inventions did not conflict with the patent policy of disclosure. The Court observed that perhaps because trade secret law did not produce any positive effects in the area of clearly patentable inventions, as opposed to the beneficial effects resulting from trade secret protection in the areas of the doubtfully patentable and the clearly un patentable inventions, it had been suggested that partial pre-emption may be appropriate, and that courts should refuse to apply trade secret protection to inventions which the holder should have patented, and which would have been, thereby, disclosed. Dismissing it, the court held that there was no real possibility that trade secret law will conflict with the federal policy favoring disclosure of clearly patentable inventions partial pre-emption was inappropriate. Partial pre-emption, furthermore, could well create serious problems for state courts in the administration of trade secret law. As a preliminary matter in trade secret actions, state courts would be obliged to distinguish between what a reasonable inventor would and would not correctly consider to be clearly patentable, with the holder of the trade secret arguing that the invention was not patentable and the misappropriator of the trade secret arguing its undoubted novelty, utility, and non obviousness. Federal courts had a difficult enough time trying to determine whether an invention, narrowed by the patent application procedure and fixed in the specifications which describe the invention for which the patent had been granted, is patentable. Although state courts in some circumstances must join federal courts in judging whether an issued patent is valid, Lear, Inc. v. Adkins, it would be undesirable to impose the almost impossible burden on state courts to determine the patentability — in fact and in the mind of a reasonable inventor — of a discovery which had not been patented and remains entirely un circumscribed by expert analysis in the administrative process. Neither complete nor partial pre-emption of state trade secret law is justified.
The Supreme Court concluded that Trade secret law and patent law have co-existed in the United States for over one hundred years. Each had its particular role to play, and the operation of one did not take away from the need for the other. Trade secret law encourage the development and exploitation of those items of lesser or different invention than might be accorded protection under the patent laws, but which items still have an important part to play in the technological and scientific advancement of the Nation. Trade secret law promote the sharing of knowledge, and the efficient operation of industry; it permit the individual inventor to reap the rewards of his labor by contracting with a company large enough to develop and exploit it. Congress, by its silence over these many years, had seen the wisdom of allowing the States to enforce trade secret protection. It added that until Congress take affirmative action to the contrary, States should be free to grant protection to trade secrets.
The Supreme Court thus held that Ohio trade secret law was not preempted by the federal patent law, the judgment of the Court of Appeals for the Sixth Circuit was reversed, and the case was remanded to the Court of Appeals with directions to reinstate the judgment of the District Court.
PROTECTING TRADE SECRETS IN INDIA
Currently in India there is no statutory protection to trade secrets. Whatever protection is available under the common law system. India being a member of WTO, it is under an obligation to protect undisclosed information. India can enact a sui generis legislation in place as provided under Article 10bis of the Paris Convention and Article 39(2) and 39(3) of TRIPs.
The leading case in India is Diljeet Titus vs Alfred A. Adebare and Ors [8] (Delhi High Court )
The defendant associates of M/s Titus & Co decided to part with Mr. Titus. Mr. Titus claimed that the defendants, who were associates in his law firm, M/s. Titus and Company, left and at that stage took away privileged information of the law firm the use of which other than by Mr. Titus, can make him liable to his clients. The plaintiff claimed that under his guidance, direction, supervision and control defendants and other associates using the plaintiff’s knowledge, skill, experience, resources and investment, developed and created various extremely confidential, crucial and vital electronic records, documents, data and information utilizing the computer system at the office of the plaintiff. Such record was stated to comprise of various proprietary drafts of precedents, agreements, forms, presentation, petitions, confidential documents, legal opinions, legal action plans, computerized database containing client information, proprietary client list, proprietary potential client list and other related information. Just a couple of days before leaving the plaintiff, the defendant No. 1 was stated to have visited the office of the plaintiff after office hours and requested the security guard to allow him to enter the office on the pretext of downloading some information from the computer for a project handled by him. But he copied all the confidential information using a CD-Writer. Not only that defendant No. 1 stated to have stolen the hard copy precedents comprising over 10 proprietary drafts of the plaintiff.
The High Court observed that what was confidentiality or secret information had been dealt with by McComas, Davison and Gonski in THE PROTECTION OF TRADE SECRETS – A in General Guide (1981 Ed). The authors had stated that it is not possible to provide an exhaustive list of all that a Court may regard as confidential or a trade secret. However, some examples of what has been held to constitute the subject matter of an action to protect confidential information or a trade secret include (amongst others) customers lists and information concerning the proposed contents of a mail order catalogue.
A reference was also made to the judgement of Universal Thermosensors Ltd. v. Hibben and Ors[9]. The duty of a servant in case of confidential information during the course of employment was dealt with and it was held that where an employee leaves to set up a competing business it was not permissible to take confidential information and when the documents are taken away for the purposes of a new business dishonestly the same constitutes theft.
In Coco v. A.N. Clark (Engineers) Ltd. 1969 RPC 41 an order for a breach of contract case all three elements were specified as under:
‘In my judgment, three elements are normally required if, apart from contract, a case of breach of confidence is to succeed. First, the information itself, in the words of Lord Greene, M.R. in the Saltman case on page 215, must ‘have the necessary quality of confidence about it.’ Secondly, that information must have been imparted in circumstances importing an obligation of confidence. Thirdly, there must be an unauthorised use of that information to the detriment of the party communicating it.’
Similarly in Margaret, Duchess of Argyll (Feme Sole) v. Duke of Argyll and Ors.[10] it was observed as under:
These cases, in my view, indicate (i) that a contract or obligation of confidence need not be expressed but can be implied; (ii) that a breach of confidence or trust or faith can arise independently of any right of property or contract other, of course, than any contract which the imparting of the confidence in the relevant circumstances may itself create; (iii) that the court in the exercise of its equitable jurisdiction will restrain a breach of confidence independently of any right at law.
After discussing the case law in detail, the High Court held that the plaintiff had clearly established a prima facie case in respect of the rights in the material taken away by the defendants. The balance of convenience lie in favour of the plaintiff and against the defendants. The Court held that though the defendants were free to carry on their profession, utilize the skills and information they had mentally retained, they were restrained from using the copied material of the plaintiff in which the plaintiff alone had a right. In case the interim relief was not granted to the plaintiff, irreparable prejudice would cause to the plaintiff in more than one manner. The defendants would be entitled to utilize the material of the plaintiff to which the defendants had access in a confidential manner. Not only that the misuse of any such material could expose the plaintiff to liability towards his clients apart from a loss of face in such eventuality.
Star India Private Ltd v. Laxmiraj Seetharam Nayak and Anr.[11]
Decided by the Bombay High Court, dealt with the question of trade Page secrets. The court was of the view that anyone in employment for some period would know certain facts and would come to know certain information without any special efforts and the same cannot be said to amount to trade secrets or confidential information. As regards acquisition of excellence, the court observed that at is a very long process in the careers of every person, no one else can have proprietary rights or interest in such acquisition of excellence’. The court observed that the plaintiff had right to terminate the contract on the ground of misconduct it cannot be said that the defendant had absolutely no right to resign from the employment on account of better prospects or other personal reasons. If he finds a better employment with better remuneration and other service conditions he cannot be tied down under the terms of the service contract.
Trade secrets cases in India mostly involve section 27 of Indian Contract Act, 1872. This section gives statutory recognition to the common law doctrine of restraint of trade. Section 27 of the Act is:
- Agreement in restraint of trade, void
Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.
Exception 1: Saving of agreement not to carry on business of which good will is sold – One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the court reasonable, regard being had to the nature of the business.
But there still remains a pressing demand of a specific protection of trade secret legislation in India.
Trade Secrets are such type of Intellectual property which require comparatively less efforts and resources to protect. Trade secrets serve the same purposes as patent and copyright law – they encourage innovation and the disclosure and dissemination of that innovation. There are strong reasons to suggest that trade secret rights might serve the purposes of IP law better than more traditional IP rights, at least for certain classes of inventions. The public disclosure function of the patent system is not considered appropriate in many kind of industries and services.
There is a urgent need of legislation in India. The federal trade secrets law of USA under the Uniform trade Secrets Act, 1990 can be looked into while drafting our piece of legislation.
[1] United States Court of Appeals, Fifth Circuit. – 431 F.2d 1012
[2] 314 S.W.2d at 773
[3] 416 U.S. 470; 94 S. Ct. 1879
[4] 412 U.S. 546 (1973)
[5] 312 U.S. 52, 67 (1941).
[6] 376 U.S. 225, 229 (1964),
[7] 376 U.S., at 232.
[8] CS (OS) No. 1109 of 2004 decided on 08.05.2006 by High Court of Delhi
[9] 1992 3 All England Law Reports 257
[10] (1965) 1 All England Law Reports 611
[11] 2003 (3) Maha LJ 726
