Need for legislative protection of Trade Secrets

INTRODUCTION

The world today, as prophesized by Herbert McLuhan in the early 1960s, has become a global village. Borders and boundaries are mere representations of sovereign powers, and they pose little to no obstacles to trade and business. With the advent of jet engines and the internet and the deliberate efforts of nations to integrate their economies into the world economy, businesses are no longer exposed to just domestic competition, they are now also exposed to international competition.

The increased competitive business environment is perhaps the most relevant for India, the 3rd largest start-up ecosystem in the world, with over 50,000 start-ups.[1] Apart from start-ups, India is also home to over 1.26 million companies. In such a competitive environment, there are very thin margins that separate one business from the other. In most cases, companies have a single factor that sets their business apart from the rest and that is how they command a market for their products/services. In such light, the concept of trade secrets and the adequate legal protection of the same becomes imperative for businesses. This article analyses the legal regime in India around trade secrets and how it compares with jurisdictions like the USA and EU and highlights the need for legislative protection of trade secrets in India.

Trade Secrets - Meaning

Trade Secret can be understood as any information that is commercially valuable for a business and is a secret known only to a very limited number of people.

The Black's Law Dictionary defines trade secrets as "a formula, process, device, or other business information that is kept confidential to maintain an advantage over competitors; information — including a formula, pattern, compilation, program, device, method, technique, or process that (1) derives independent economic value, actual or potential, from not being generally known or readily ascertainable by others who can obtain economic value from its disclosure or use, and (2) is the subject of reasonable efforts, under the circumstances, to maintain its secrecy”.

The World Intellectual Property Organization (WIPO) defines trade secrets as “any information that is: (1) not generally known to the relevant business circles or the public; (2) confers some sort of economic benefit on its owner. This benefit must derive specifically from the fact that it is not generally known, and not just from the value of the information itself; and (3) the subject of reasonable efforts to maintain its secrecy.” [2]

The World Trade Organization (WTO) defines undisclosed information as “information (that): (a) is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question; (b) has commercial value because it is secret; (c) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.”[3] Even though the definition is adduced to the term “undisclosed information”, it has been clarified in various papers and discussions that undisclosed information and trade secrets can be used interchangeably.

Even India, in the National Innovation Bill, 2008, used the same definition given by WTO under TRIPS to define confidential information. [4]

From the above-mentioned definitions of trade secrets, the following may be ascertained as the essential requirements for an information to qualify as a trade secret are:

1. Secrecy of the information;

2. The competitive advantage of the owner of such information;

3. Efforts of the owner or person in control of such information to maintain its secrecy.

IMPORTANCE OF TRADE SECRET PROTECTION FOR BUSINESS

Trade secrets are important for businesses for various reasons:

Return on Investment in Innovation - Modern-day businesses invest and value innovation. Companies are constantly on the lookout for innovative products, innovative ideas, innovative logistics, innovative processes, innovative services, innovative practices, etc. Businesses need to have a Unique Selling Proposition (USP), or else, sooner or later, they would perish. More often than not, such USPs are a result of considerable investments made in innovation. Therefore, a fundamental pre-requisite for encouraging innovation is the fact that the business’s should be allowed to keep information about inventions secret and prevent the disclosure of the same to other businesses to stay unique in the market and increase competition.[5]

1. Market Share Implications - Some businesses capture considerable, if not huge market shares solely because of their trade secrets. Coca-Cola, Domino’s Pizza, McDonalds, KFC, Google are some examples. Apart from such international giants, even Indian companies such as Zoho and Freshworks have been able to capture a huge market share in the SaaS market due to their trade secrets. Therefore, where a business’ whole value proposition is based on a trade secret, it becomes extremely imperative for such a business to protect its trade secret and failure to do so will be catastrophic.

2. Stagnation in Innovation and Future Revenue - Companies would refrain from investing in innovation if they do not have a reasonable expectation to receive an appropriate return. A consequence of this would be a stagnation in innovation across industries. No business will be motivated to come up with the “next big thing” if they do not see any financial reward for coming up with the same. This would in turn lead to stagnation in the returns of a company. With innovations drying up across industries, the incomes of the businesses involved in such industries will also dry up with the customers not updating to newer and more innovative products/services.

3. Increased Risk of Trade Secret Theft due to Data Breach - Data breach is one of the biggest problems for organizations worldwide. A single data breach can lead to huge losses for businesses. With more organizations choosing to offer remote-work opportunities to their employees, the risk of data breaches is ever so rampant today. In such times, the protection of data about trade secrets becomes indispensable for businesses.

TRADE SECRET PROTECTION IN INDIA

NEED FOR A LEGISLATION

Currently, there is no dedicated legislation that deals with the protection of trade secrets in India.

Businesses deserve comprehensive legislation that deals exclusively deals with trade secrets, such as regimes in the USA and EU, especially when the Indian business environment is booming and Indian businesses are doing significant levels of business worldwide. An enactment of trade secrets would help India to protect its business environment along with becoming an attractive investment destination for trade in the world. In the absence of legislation, trade secrets will still be under the mercy of Court judgments and minimal contractual protection.

Dedicated legislation around trade secrets must clearly define “trade secrets” and provide for events/acts that lead to misappropriation of trade secrets. The owners of trade secrets must be entitled to adequate civil and if need be, even criminal remedies in case of such misappropriation of trade secrets. Such dedicated legislation will impart trust into the Indian business environment, and thereby provide the required impetus for businesses to innovate and safely scale themselves without the fear of losing their competitive advantage.

CURRENT PROTECTION REGIME

The legal regime around trade secrets in India is limited to judicial pronouncements based on common law principles and the Indian Contract Act.

Section 27 of the Indian Contract Act lays down that any agreement that restrains a person from exercising a lawful profession, trade or business of any kind is void. However, the Courts, in various instances have held that the protection of trade secrets through an agreement where an employee is barred from sharing any trade secret with competitors or other entities does not attract the bar of Section 27.

Remedies for Misappropriation of Trade Secrets

1. Injunctive Relief

The owner of trade secrets can seek injunctive relief from Courts in a civil suit to restraint a person from using or disclosing such trade secrets. The plaintiff (owner of trade secrets) will have to establish the following to seek injunctive relief from the Court:

1. That a prima facie case has been made out in favour of the plaintiff;

2. That the balance of convenience is in favour of the plaintiff; and

3. That the plaintiff will suffer irreparable damage if the injunctive relief is not granted.

2. Damages

The owner of trade secrets can claim liquidated damages, or actual damages, or substantial damages, or in some cases, even punitive damages based on the losses suffered by such owner due to the misappropriation of trade secrets. In order to establish a claim for damages, the plaintiff (owner of trade secrets) must establish the following:

1. The existence of damages/losses suffered by the plaintiff;

2. The damages/losses suffered by the plaintiff is a result of the breach of the contract between the plaintiff and the defendant(s);

3. The causal connection between the act of the defendant and the losses suffered by the plaintiff;

4. In case of actual damages, the plaintiff will have to exactly quantify the losses suffered due to the breach of the defendant; and

5. In case of substantial damages, and where consequential and incidental damages are involved, the plaintiff will have to establish the consequential and incidental losses apart from the direct losses suffered due to the breach by the defendant.

3. Criminal Remedies

Since there is no specific legislation for trade secrets in India, there are no specific criminal remedies for the misappropriation of trade secrets. However, criminal remedies may be sought under the Indian Penal Code, 1860 (IPC) for criminal breach of trust, theft, and/or cheating, in accordance with the Code of Criminal Procedure, 1973 (CrPC), and the Indian Evidence Act, 1872.

Where the misappropriation/breach of trade secrets has been carried out through electronic means, criminal remedies may be sought under the Information Technology Act, 2000 under Sections 72, 72A, or 84C.

JUDICIAL INTERPRETATIONS RELATED TO TRADE SECRET PROTECTION

Below are some instances wherein various Courts have dealt with issues related to the protection of trade secrets:

· Bombay Dyeing and Manufacturing Co. Ltd. v Mehar Karan Singh (2010 [112] BomLR 375) - The Hon’ble Bombay High Court, in determining whether Bombay Dyeing’s business plans, strategies and proprietary software shared by the defendant with Bombay Dyeing’s competitors were to be protected as trade secrets or not, laid down the definition of trade secrets as follows:

“Although the exact definition may not be possible, was laid down as the following factors:

1. The extent to which the information is known outside the business.

2. The extent to which it is known to those inside the business i.e. by the employees.

3. The precautions are taken by the holder of the trade secret to guard the secrecy of the information.

4. The savings effected and the value to the holder in having the information as against competitors.

5. The amount of effort or money expended in obtaining and developing the information; and

6. The amount of time and expense it would take for others to acquire and duplicate the information.”

· Beyond Dreams Entertainment Pvt. Ltd. v Zee Entertainment Enterprises Ltd. & Anr. [(2016) 5 Bom CR 266] - The Hon’ble Bombay High Court, in this case, had to determine whether a new show created by Zee Entertainment based on the concept notes shared by Beyond Dreams Entertainment was a breach of confidence. The Hon’ble Court inter alia ruled that to prove breach of confidence, the owner or rights holder must establish that:

1. The information itself is of a confidential nature;

2. The individual or owner of such information took reasonable steps to ensure and maintain its secrecy, and the information was imparted in circumstances importing an obligation of confidence; and

3. The information shared is actually used or threatened to be used unauthorizedly.

Although this judgment did not explicitly deal with trade secrets, in claims arising due to misappropriation of trade secrets, breach of confidence is required to be established.

· Ambience India Pvt. Ltd. v Naveen Jain [2005 (81) DRJ 538] - In this case, the plaintiff sought a restraint on the defendant from continuing in the employment of another entity and to divulge information, know-how and trade secrets which the defendant has acquired during his employment with the plaintiff-Company. The Hon’ble Delhi High Court inter alia laid down that “An employee, particularly, after the cessation of his relationship with his employer is free to pursue his own business or seek employment with someone else. However, during the subsistence of his employment, the employee may be compelled not to get engaged in any other work or not to divulge the business/trade secrets of his employer to others and, especially, the competitors. In such a case, a restraint order may be passed against an employee because Section 27 of the Indian Contract Act does not get attracted to such situation.” The Hon’ble Court further laid down that “…a trade secret is some protected and confidential information which the employee has acquired in the course of his employment and which should not reach others in the interest of the employer. However, routine day-to-day affairs of an employer which are in the knowledge of many and are commonly known to others cannot be called trade secrets. A trade secret can be a formula, technical know-how or a peculiar mode or method of business adopted by an employer which is unknown to others.”

International Regulation of Trade Secrets

United States of America

Trade secrets are regulated through federal and state laws in the USA. Following are the laws that regulate trade secrets in the USA:

• Uniform Trade Secrets Act (UTSA) - The UTSA regulates trade secrets at the state level. The UTSA has been adopted by all states in the USA except New York and North Carolina. It codifies the basic principles of common law trade secret protection. It provides definitions for the key terms “trade secret,” “misappropriation,” and “improper means”, and specifies various forms of injunctive and monetary relief (including compensatory damages, punitive damages, and attorney’s fees) in a civil action for misappropriation of a trade secret.[6] It is important to note that the UTSA was initially the only legislation suggested by a non-profit organization called Uniform Law Commission (ULC).[7] It was later adopted by various states after making some changes to the original model suggested by ULC. Since various states made changes to the original model, some states even provide criminal remedies for the theft of trade secrets.[8]

• Defend Trade Secrets Act (DTSA) - The DTSA is the legislation that regulated trade secrets at the federal level. The Act provides a private civil cause of action for victims of trade secret espionage or theft where a trade secret has been misappropriated.[9] This cause of action provides trade secret owners with a uniform, reliable, and predictable way to protect their valuable trade secrets anywhere in the country. The DTSA does not override the state trade secret laws, it merely gives trade secret owners the option of choosing either state or federal venues to enforce their rights.[10] It is important to note that the DTSA only applies to misappropriation of a trade secret that is related to a product or service used in or intended for use in, interstate commerce.[11]

Under the DTSA, Courts can protect trade secrets by (a) ordering for the misappropriation to stop, (b) ordering for the protection of trade secrets from public exposure, and even (c) ordering for the seizure of the misappropriated trade secret. The Courts may also provide injunctive relief, damages and impose a cost on the parties for proceedings under the DTSA.[12]

• Economic Espionage Act (EEA) - The EEA provides for criminal remedies for the theft of trade secrets. It regulates two forms of trade secret theft, viz:

  1. Theft of trade secret intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent; and

  2. Theft of trade secret that is related to a product or service used in or intended for use in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will, injure any owner of that trade secret.[13]

The EEA imposes fines and provides for imprisonment in case a person is found to be involved in the theft of trade secrets for any of the above-mentioned purposes. The cases under the EEA are prosecuted by the Department of Justice (DoJ).[14]

European Union

• European Union (Protection of Trade Secrets) Regulations, 2018 (EU-PTSR)- The EU-PTSR provides for the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use, and disclosure. It also provides for civil redress measures and remedies in the event a trade secret is unlawfully acquired, used or disclosed. Further, it also ensures the confidentiality of the trade secret during court proceedings by limiting access to the hearing and court documents containing the trade secret.[15]

Pursuant to the passing of the EU-PTSR, all member states of the EU have passed national legislations and/or amendments to pre-existing national legislations that regulate trade secrets. Following are the national legislations and amendments made by the EU member states to incorporate the EU-PTSR:

CONCLUSION

Trade secrets, as mentioned above, are very important for businesses for various reasons. The legal regime around trade secrets in India, as seen above, is limited to judicial pronouncements based on common law principles and the Indian Contract Act. Trade secrets are largely protected by contracts between businesses and their employees. However, businesses deserve comprehensive legislation that deals exclusively deals with trade secrets, such as regimes in the USA and EU, especially when the Indian business environment is booming and Indian businesses are doing significant levels of business worldwide.

In the absence of legislation, trade secrets will still be under the mercy of Court judgments and minimal contractual protection. Courts, on various occasions, have defined trade secrets differently, and there is no uniformity in what is included within the purview of “trade secrets”. Even contractual protections such as post-termination restraints are not adequately upheld when challenged in the Courts as they favour the employee’s right to seek employment over the interests of the employer from the competition.

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[1] Indian Startup Ecosystem – 2019, Ministry of Commerce and Industry, accessible at: https://www.startupindia.gov.in/content/sih/en/international/go-to-market-guide/indian-startup-ecosystem.html#:~:text=India%20has%20about%2050%2C000%20startups,tech%20startups%20born%20every%20day. [2] IP Panorama – Learning Points; Module – 4: Trade Secrets, World Intellectual Property Organization. [3] Article 39, Section 7 – Protection of Undisclosed Information, Trade Related Aspects of Intellectual Property Rights (1995).

[4] S. 3(a), The National Innovation Bill, 2008. [5] Arrow, K.J., “Economic Welfare and the Allocation of Resources for Invention”, The Rate and Direction of Inventive Activity: Economic and Social Factors, 609, 615, National Bureau of Economic Research (1962).[6] Brian T Yeh, Protection of Trade Secrets: Overview of Current Law and Legislation, CRS Report, 22.04.2016, Congressional Research Committee.[7] Trade Secret, Wex, Cornell Law School, Accessible at: https://www.law.cornell.edu/wex/trade_secret. [8] Supra Note 6.

[9] Ben Natter, Xincheng Ma, The Defend Trade Secrets Act: An Overview and Key Developments, JDSupra, 16.07.2020, Accessible at: https://www.jdsupra.com/legalnews/the-defend-trade-secrets-act-an-39692/.[10] Trade Secret Policy, United States Patent and Trademark Office (USPTO), accessible at: https://www.uspto.gov/ip-policy/trade-secret-policy. [11] Supra Note 9. [12] Supra Note 10. [13] S. 1831, Economic Espionage Act, 1996.[14] Supra Note 13. [15] S.I. No. 188/2018 - European Union (Protection of Trade Secrets) Regulations 2018.