This article is written by Himanshu Mishra, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Tanmaya Sharma (Associate, LawSikho), Ruchika Mohapatra (Associate, LawSikho) and Arundhati Das (Intern at LawSikho).
This article has been published by Abanti Bose.
Table of Contents
KFC spices, McDonald’s sauce, Coca Cola’s secret formula, and the Google search algorithm- these are all examples of some of the most heavily guarded trade secrets in the world. This business information is important for a company’s existence and trade secrets are among the most commercially valuable assets in a business. The value of trade secrets is often said to be derived from the extent to which they are protected. In this article, we will analyse under what circumstances the level of confidentiality can be lowered for trade secrets and whether lowering the confidentiality level would be beneficial for a business, or whether it would reduce its economic value.
What is a trade secret?
Colorado‘s Trade Secrets Act defines a trade secret as the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, the listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value. To be a trade secret, the owner thereof must have taken measures to prevent the secret from becoming available to persons other than those selected by the owner to have access thereto for limited purposes.
It is a practice or process that is extensively protected by the company. Its secrecy gives an enterprise a competitive edge over its competitors or provides value to its customers and is generally a product of the company’s own research and development. Unlike a patent, it is not known to the public. Only one or two executive members or a select few people of a company have access to such information.
What is confidentiality?
Confidentiality is a set of rules or promises that limits the access or places restrictions on certain types of information, including private information. Only people with the proper authorization have the right to access the information. This is referred to as a ‘need-to-know’ basis. Information that isn’t generally known to the public and would not ordinarily be accessible to competitors, except through illegal or improper means, falls under the domain of confidential information.
Importance of trade secrets
To keep your critical business and operational information safe from competitors, you need to stay up-to-date with the latest trends and developments in your industry. The reason why it is so crucial for business owners to protect their trade secrets is that it is their key selling point.
Information that is a trade secret is protected by law, but some of them are discussed below:
- Business owners spend years and billions of dollars to develop new products and services. Without adequate trade secret protection, a competitor would easily be able to copy their creation; rendering the expense futile. Developing a new medicine can cost millions or even billions to a pharma company; which is why trade secret protection is so crucial.
- Technologies are evolving rapidly, which means information leaks easily.. With the advancement in technology, secret information has become more vulnerable nowadays. Trade secrets are no longer kept on paper or in a secure safe as they used to be.
- We live in a hyperconnected globalized world where information, ideas, and goods flow seamlessly across national borders within a very short period. Businesses spend a great deal of time and resources developing new products and services, only to discover that their competitors in other countries are copying them and reaping the rewards without punishment.
- Almost every company has a trade secret that provides them with a competitive advantage over their competitors. Due to the lack of legislative definitions, the scope of trade secret definition has widened. For example, the number of federal trade secrets cases has increased dramatically in the USA since the passage of DTSA (Defend Trade Secret Act).
Advantages of having a trade secret
Customer lists, recipes, formulas, software, and unpatented (but not necessarily unpatentable) inventions are examples of trade secrets. Google’s unique search algorithm, the New York Times “Best Seller List” ranking system, the chemical formula for WD-40, and the recipes for Twinkies, Thomas’ English Muffins, and Mrs Field’s chocolate chip cookies are all well-known trade secrets. Business owners of these well-known items can benefit from trade secret protection not only in terms of preserving their intellectual property rights but also in terms of some advantages that a patent may not provide. There are several benefits to protecting a trade secret, which makes it popular among business owners.
● Duration- Generally, patents in India last 20 years whereas trade secrets are not limited in time.
● Cost- Trade secrets do not require any registration but keeping the information confidential involves a high cost.
● Abstract ideas- If a method or process is drawn to an abstract idea, it will not be qualified for a patent but as long as the data or ideas are kept secret, they can be protected as trade secrets.
● Popularity- Obtaining a trade secret can create popularity and advertising marketers can create buzz.
● A trade secret does not require compliance with formalities and public disclosures.
Points of concern
● Independent discovery of the secret without using illegal methods or violating state or contract law is quite possible in today’s day and age. For example, reverse engineering.
● It is possible for a trade secret to be patented by someone else who developed the relevant information using legal means.
● Due to the nature of trade secrets, selling or licensing them is difficult.
● Trade secrets are not a statutory right in most countries, so the level of protection varies among them.
● If the secret is made public, then it is hard to keep it a secret since everyone would have access to it, and would be able to use it at their discretion.
Types of agreement/documents required for protecting trade secrets
● Injunction relief agreement.
● Non-disclosure agreement.
● Termination of agreements and statements.
● Non-compete and Employee Confidentiality Agreement.
● Applicability of post-employment agreement.
● Authorized disclosure by the Board of Directors of the company.
● Invention assignment agreement and its applicability.
Governing laws in India
In India, there is no explicit law that protects trade secrets and confidential information. Indian courts and tribunals, on the other hand, protect trade secrets, confidential information, and business know-how. Under common law, a misappropriation action can provide broad protection for trade secrets. Trade secrets can be misappropriated if there is a breach of confidence or if a third party has unlawful access to confidential information. This misappropriation can occur either by misappropriation of confidential information or by trickery or theft.
In the case of John Richard Brady vs Chemical Equipment P Limited, the Delhi High Court invoked a wider equitable jurisdiction in order to grant an injunction in the absence of a contract.
Under contract law
Under the basis of equity and contractual obligation, Indian courts have maintained trade secret protection. The provision relating to restraint of business in Section 27 of the Indian Contract Act makes this clear. This provision, which is broad in scope, renders all trade restraint agreements void. The section was rigorous in its invalidation of restraints at first, but it was adopted when trade was still developing, and the purpose of the section was to defend trade restraints. Later, the Law Commission of India’s involvement in 1958 and its suggestion to allow reasonable restraint came into play.
When should the level of confidentiality be lowered?
The increase of artificial intelligence would also increase algorithmic processing. Algorithms structure the core of our information system. Currently, many online services are provided by private companies, and even government agencies are dependent on algorithms. In addition to ensuring principles such as fair competition, non-discrimination, and access to information, regulators should be permitted to assess trade secret information/data. The degree of scrutiny has to be proportional to the scale of facts processed and the effect it has on the public. We can examine from the Cambridge Analytica case the manner in which the data of Facebook users have been used to manipulate the US election.
Allowing trade secret records to pass scrutiny will supply extra room to data processed beneath the hood and will additionally erode the rule of law. In general, trade secret law prevents the people who are best suited to understand technology from deploying it, even if the original developers have abandoned it long ago. Information is effectively trapped inside the company.
In the medical field, drugs initially developed for one purpose sometimes prove beneficial in other contexts as well. This is particularly problematic since the best uses for innovation are hard to predict ahead of time. Despite a company’s decision not to pursue an invention, a third party might still find a use for it. However, a secret that is locked away in a company’s vault will never be revealed to that higher-value user.
Allowing for exceptions to trade secrecy in the public interest
Proponents of trade secrecy argue that by limiting the flow of proprietary information, trade secrecy protects innovation. Many types of data, despite being claimed as trade secrets, are clearly not trade secrets.
Trade secrecy exceptions for public interest can help ensure that data can be shared to benefit public health. There are at least four ways to codify these exceptions:
- Mandatory, proactive disclosure requirements for certain health and safety information can benefit the public.
- Excluding certain public health information from the scope of trade secret protections can benefit the public.
- Giving public health weight in balancing tests can help the public good.
- Inappropriate cases, developing mechanisms such as involuntary licences or intellectual property “pools” can override previously established ones.
Since trade secrets and techniques add top-notch prices to the business, they should be handled with proper care and precision. A middle path should be found to assess the impact of trade secret information without publishing the details of the business model to everyone as McDonald’s doesn’t need to disclose the secret sauce recipe on the front web page of a newspaper for the regulators to determine its fitness impacts. If a trade expires or is abandoned it should be in the public domain. It will encourage others to develop the technology further for the public interest.
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