How Intellectual Property Laws Protect Trade Secrets

Article written By Anisha Saksena . Edited by Sugandha Nagariya.

Does your company have any information related to your product or service of the company that has to be protected by the outside world?

Information like a secret pattern, formula, design, prototype, method, techniques, processes, program, codes, etc., have such a commercial value that if kept a secret, would provide your company a competitive advantage and will contribute to the economic value of your company.

Such information has to be kept in secrecy and should not be disclosed to the public so that the competitors do not learn and use the information to make their product or service better than yours.

Such secrets can be manufacturing, industrial or commercial secrets and can be your most valuable corporate assets. Many leading companies are now successful because of trade secrets and are dependent on it for its survival, like Coca Cola has a secret formula that has made Coca Cola stand out in the market similarly Google’s search algorithm has its own coding or like Bumble’s dating software etc.

These secrets can be protected and can remain undisclosed from the public as trade secrets by virtue of intellectual property laws.

This article deals with those intellectual property laws of USA, UK and India that protect trade secrets. This article is a must-read, if you are planning to keep any innovation in your business as a trade secret instead of copyrighting/patenting it.

WHAT ARE TRADE SECRETS?

Trade Secret is any confidential business information that, if kept a secret, can provide an advantage to the company over its competitors. It is imperative information that distinguishes your product or service from the competitor’s and increases the market value.

The three essentials of a trade secret are:

It is not public information: It should be information that is not known to the public and is a “secret” which is preserved by the company.
Provides a competitive advantage: Keeping the information secret contributes to the economic value of the company which is holding the secret, thus providing a competitive advantage.
The secret is actively protected: The holder of the secret should always take effective measures required to keep the trade secret a “secret”. The more people know the secret, the more there are chances for it to be revealed. Once a trade secret becomes public, its status as a trade secret cease to exist. That’s why some companies go to great lengths to protect the trade secret. For example, the secret formula of Coca Cola is kept in a bank vault safely and is known only to, two employees whose identities are not disclosed. Moreover, these two employees are not allowed to travel in the same plane.

Sometimes trade secrets can be patentable, that is, they fulfill the criterion that is required to be protected by patents.

In such a situation, you have to choose whether to patent the invention or to keep it as a trade secret. If you choose to patent, then you have to disclose the information to the public. Trade secrets do not require such disclosure. It requires no registration costs and has immediate effect. These can remain a secret as long as they are not revealed to the public.

It is difficult to enforce a trade secret and the level of protection provided to trade secrets differs from country to country. Let’s see how intellectual property laws protect trade secrets in the three major countries in the world-

USA,
UK, and
India

PROTECTION OF TRADE SECRETS IN USA

The United States has the most evolved legal system for the protection of trade secrets. Since United States is a signatory country to the Agreement on Trade Related Aspects of Intellectual-Property Rights (TRIPS), the United States is bound to take important measures and enforce laws for the protection of trade secrets.

Article 39 of the Agreement on Trade Related Aspects of Intellectual-Property Rights (TRIPS), provides provision for trade secrets protection.

The United States has taken several measures and has enacted several acts to comply with the provisions of the Agreement on Trade Related Aspects of Intellectual-Property Rights and strengthen the laws that protect trade secrets.

The three main acts that have developed the laws of United Nations for the protection of trade secrets are as follows:

Uniform Trade Secrets Act (UTSA), 1985

After the judgement of the Supreme Court in Kewanee Oil Co. v. Bicron Corp. 416 U.S. 470 (1974), the states were allowed to have different views on the protection of intellectual property as long as they are not contradictory to the laws passed by the Congress in this area.

Laws to protect trade secrets vary from state to state as they are protected by State Law in the United States. There are some states that have not passed a law for the protection of trade secret and rely on common law principles. Disclosure or illegal use of trade secret was a common law tort.

US courts have adopted the provisions laid down in Sections 757 and Section 758 of the Restatement of Torts (1939) for the protection of trade secrets.

But this was changed after the adoption of Uniform Trade Secrets Act, 1979 which was drafted by the Uniform Law Commission. It provided a uniform body of law for the protection of trade secrets in the United States. It was drafted by the National Conference of Commissioners on Uniform State Laws and was amended on August 8, 1985.

Uniform Trade Secrets Act (UTSA) has been adopted by 48 states. New York and North Carolina are the only states that have not adopted UTSA.

Trade secrets are protected in those jurisdictions under the common law principles like the inevitable disclosure doctrine in which a former employee is prevented by the former employer from disclosing a trade secret that is known to him during his employment in that company and is also prevented from working for a competitor.

In the case PepsiCo, Inc., a Corporation v. William E. Redmond, Jr., and the Quaker Oats Company, Corporation, 46 F.3d 29 (7th Cir. 1995), it was held that the former executive of PepsiCo cannot work as Chief Executive Officer in Quaker Oats Company for a new Quaker’s sports drink “Gatorade” as he may disclose confidential information of PepsiCo to its competition Quaker and provide a unfair competitive advantage to Quaker.

Many States reject the inevitable disclosure of doctrine unless and until bad faith of the employee is proved. The inevitable disclosure of doctrine is not accepted in many states in order to provide right to freedom to the employee to switch employers.

The main features and provisions of this Act are as follows:

Trade secrets are complementary to Patent, Trademark and Copyright protection.

Related Read: How You Can Register Copyright in the US

UTSA has codified the basic common law principles for the protection of trade secret like more than one person can be entitled to the protection of the trade secret in respect of the same information.
Reverse engineering of a product in order to know the trade secret was allowed and was considered lawful but misappropriate, that is, discovering trade secret in an illegal and unauthorized manner, was prohibited and remedies for the misappropriation of trade secret were provided.
The time period prescribed for a company to file a case against misappropriation is 3 years, after the misappropriation is discovered.

The remedies available to you under this act are:

An injunction could be granted for a reasonable period of time in case of actual or threatened misappropriation in order to prevent competitor’s commercial advantage.
The trade secret holder is entitled to recover damages for misappropriation that can be an actual loss or the unfair profit acquired due to misappropriation.
The trade secret holder can also choose to impose a liability on the company or individual who has misappropriated to pay a reasonable royalty for the disclosure and future use of the trade secret.
All the proceedings have to be held in a way that the alleged trade secret is prevented from further disclosure and no person involved in the case is allowed to disclose the trade secret without the court’s approval.

Economic Espionage Act, 1996

Federal trade secret protection was provided by the enactment of The Economic Espionage Act, 1996 which was signed into law by President Clinton and is codified as 18 U.S.C. §§ 1831-1839.

With the enactment of Economic Espionage Act on October 11, 1996, theft or misappropriation of trade secrets has been made a federal crime. This Act has provided U.S. Attorney General the right to prosecute any person or company that steals or misappropriates trade secrets.

Under Economic Espionage Act 1996, any person is punishable if he steals, copies, downloads or uploads, alters, destroys, receives, buys, possesses or carries away trade secret without authorization or by deception or by any other wrongful means. He is also punishable if he is proved guilty in the court, of even attempting to do any of the above mentioned acts.

The remedies available to you under this act are as follows:

Punishment for the individual found guilty under this act is imprisonment of up to 10 years or fine up to $500,000.
A company can be fined up to $5,000,000 if found guilty.
In case of a foreign company or foreign agent, fine can be charged up to $10,000,000 and can also be liable for imprisonment up to 15 years.
The guilty would have to give up all the profits or benefits acquired due to the illegal use of trade secret.
Court could also issue injunctions to prevent further use of trade secrets by the competitors.

In the case U.S. v. Aleynikov 676 F.3d 71 (2012), the emphasis was given on the fact that the Act only applied to a “trade secret that is related to or included in a product that is produced for or placed in interstate or foreign commerce, for the economic benefit of anyone other than the owner thereof.” This was done to protect a trade secret that may be used internally to provide services to third parties.

Defend Trade Secrets Act, 2016

The United States strengthened the laws related to trade secret protection by introducing two bills- HR 3326 and S. 1890 and by passing the proposed legislation named “Defend Trade Secrets Act, 2014” to create a federal private right of action for the misappropriation of trade secrets.

Proposed legislation of 2014 was not successful and was again passed in 2015 with necessary amendments.

It was further amended in 2016.

Defend Trade Secrets Act, 2015 made theft or misappropriation of trade secrets a federal civil offence. It provided an extension to Economic Espionage Act, 1996 and strengthened the trade secret protection laws.

Due to Defend Trade Secrets Act, 2016, your company can now pursue civil claims for the misappropriation of trade secrets and seek remedies as follows:

An injunction can be granted for the prevention of further use of trade secrets acquired through actual or threatened misappropriation.
An injunction can be granted to pay reasonable royalty for the future use of the trade secret for the time period for which use could have been prohibited.
The trade secret holder can recover damages for misappropriation that can be an actual loss or unfair profit acquired due to misappropriation.
A liability can also be imposed on the company or individual who has misappropriated to pay a reasonable royalty for the disclosure and future use of the trade secret.
In case of willful or malicious misappropriation of trade secrets, exemplary damages can be awarded of amount not more than 3 times the amount of the damages.
If the claim of misappropriation is made in bad faith, reasonable attorney’s fee is awarded to the prevailing party.

The time period prescribed for a company to file a case against misappropriation is 5 years after the misappropriation is or by the exercise of reasonable diligence should have been discovered. You cannot file a case after 5 years.

Extraterritorial Application of State Trade Secret Law

US Courts have held that state trade secret laws can have extra-territorial reach.

In the case Horne v. Adolph Coors Co., 684 F.2d 255, 259 (3d Cir. 1982), it was held that fictional situs of the harm caused by trade secret misappropriation is always the residence of the trade secret owner irrespective of the place where misappropriation happened.

The U.S. International Trade Commission has provided for the provisions to apply U.S. federal trade secret law extraterritorially for the theft or misappropriation that has occurred abroad.

The Defend Trade Secrets Act, 2016 has amended the Economic Espionage Act1996 by adding Section 1837 that has prescribed that Economic Espionage Act is entitled to be applicable to conduct outside the United States.

Check out in more depth, how your trade secret can be protected in the US.

PROTECTION OF TRADE SECRETS IN UK

In UK, Trade secrets were initially protected by common law under the law of confidence. For claiming for the breach of confidence, the trade secret holder had to prove that:

The information shared is not known by the public and is a secret;
The information was shared in confidence by a reasonable person;
The person to whom the information was shared had used the information in a manner that is unauthorized or disclosed it to a third party resulting in breach of confidence.

The law regarding trade secrets changed in UK after the adoption of Trade Secrets Directive by the European Parliament and European Council.

On 8th June 2016, UK adopted Trade Secrets Directive of the European Parliament and of the Council for the protection of undisclosed know-how and trade secrets against their unlawful acquisition, use and disclosure.

Effective measures are provided in the regulation to protect further disclosure and misuse of trade secrets, like holding proceedings in private. Some of the rights and remedies provided under this regulation are as follows:

This regulation provided for both interim and final injunctions in order to prevent further misuse of trade secrets and courts have to carefully decide whether to grant interim of final injunction after considering all the facts of the case.
The innocent defendants who were involved in the misappropriation of trade secret can ask for remedies limiting to financial compensation.
In addition to that the regulation has provided for confidentiality clubs. It is an agreement between the parties to a suit made to prevent disclosure of the alleged confidential information. Under this agreement, only specified people are allowed to have access to some confidential documents.

This regulation provided new rights and remedies to strengthen the laws relating to trade secret. This regulation is complementary to the former UK Law of breach of confidence and will run together to protect trade secrets.

PROTECTION OF TRADE SECRET IN INDIA

Laws for the protection of trade secrets in India are underdeveloped. They have not yet evolved in order to meet the new challenges faced in today’s global market.

India has no statutory legislation protecting trade secrets and relies on principles of equity, action of breach of confidence and contractual obligations.
According to the General Agreement on Tariffs and Trade (GATT) of India 1989, the basic principles of intellectual property is the disclosure, publication and registration and these principles are absent in the case of trade secrets as it consists of secrecy and confidentiality.

Thus, in the General Agreement on Tariffs and Trade (GATT), trade secrets were decided to be treated as contractual obligations and not a part of intellectual property.

Contractual obligations are the obligations that arise between parties under a contract. Your company can add a confidentiality clause or a non-disclosure clause or a restrictive covenant or any other clause in the agreement to prevent disclosure of the trade secret by the employee or any other member of the company.

Although there is no specific statutory legislation, there are many statutory provisions in Indian law that protects confidential information like:

Section 27 of Indian Contract Act prevents any person to disclose any information that he acquired during his employment in the company.
Section 72 of the Information Technology Act, 2000 makes a person liable if it is proved that he had unauthorized access to confidential information and has disclosed it and has provided for criminal remedies.
Section 43A of the Information Technology Act, 2000 provides for compensation for failure to protect sensitive personal data like passwords, financial data, biometric data etc.
Securities Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 has prohibited the use and disclosure of confidential information by an insider.

Other than contractual obligations, Indian courts have also considered equitable/implied confidentiality obligations to protect trade secrets. In John Richard Brady v. Chemical Process Equipments P. Ltd., the court held that in the absence of a contract, the person who has received the trade secret in confidence cannot use it to get unfair advantage as there is an implied obligation to maintain confidentiality on the part of the employee.

In Diljeet Titus v. Alfred Adevare & Ors, the court held that the obligation of confidence is not only expressed but also implied in order to maintain confidence by virtue of the nature of trade secrets.

India is taking several initiatives to improve laws protecting trade secrets and strengthen its IPR laws relating to trade secrets.

In the Indian National IPR Policy that was approved on 12 May 2016, elaborative steps were laid down to ensure an effective legal system for the protection of intellectual properties. In this policy, protection of trade secrets was considered one of the areas for study and research for future policy development.
In the U.S.-India Trade Policy Forum held on 20th October 2016, India ensured that:
1. It is committed to protect of trade secrets.
2. It will protect it through common law approach and will conduct research to find various legal approaches to protect trade secrets.
3. It will provide toolkit, especially to small and medium-sized enterprises, to spread awareness about the laws and policies available to protect trade secrets.
In 2008, a draft titled “National Innovation Act, 2008 (‘Innovation Bill’)” was proposed by the Ministry of Science and Technology in order protect confidential information, trade secrets and innovation. But no further initiative has been taken to pass this draft till date.

Trade secrets have proved to be a major aspect of the survival of many successful businesses.

It is a very valuable asset that has to be protected with the help of laws. With the continuous growth of Indian markets and globalization, it is the need of the hour to have a stronger legal system to protect trade secrets.

India has taken many initiatives for the same and is still working towards the protection of trade secrets.

Interesting Read: All You Need to Know about Registering Trademarks in India

Read Next:

Author Bio: Anisha Saksena is a BBA,LLB student at Guru Gobind Singh Indraprastha University and an intern at WinSavvy. Connect with her on LinkedIn.

Editor Bio: Sugandha Nagariya is a law student at GLC, Mumbai and is an intern at WinSavvy.com. Connect with her on LinkedIn.