Companies usually accumulate and use innovative ideas that are not known to their contenders, to gain an edge in the market and maintain the uniqueness of their product/service. Information that isn’t generally known to competitors and is protected by confidentiality agreements qualifies as an intellectual property, i.e., TRADE SECRET. It is eligible for protection against disclosure or unlawful use by a third party. Protection and enforcing trade secret is very essential for the survival of a business.
In this era of globalization, it is of great importance for companies to ensure that the protection of their trade secrets is adequate in cases where there is fear of disclosure, especially when hiring new employees for strategic developments or launching new products/ services.
The most well- known example of a trade secret is the formula for Coca- Cola. The company guards its formula with extensive agreements and only a handful of people actually know the formula. Even the ones who do have knowledge of the preparation are required to sign lengthy non-disclosure agreements so that the unique formulation does not get in the public domain.
What is Trade Secret ?
Any information that relates to businesses and is not known to the general public along with reasonable attempts being made to keep such informational confidential qualifies as a trade secret. In Burlington Home Shopping Pvt. Ltd. v. Rajnish Chibber, the Delhi High Court held that a trade secret is information that would cause real or significant harm to the owner if disclosed to a competitor. It can include formula or method, not only for the manufacture of products but also the names of the customers and the goods/ services which they buy.
As per Article 39.2 of the TRIPS there are three criteria that have to be taken into consideration:-
1. The information is not generally known among or readily accessible to persons that normally deal with the kind of information in question.
2. The information has actual or potential commercial value because it is secret.
3. The person lawfully in control of the information has taken reasonable steps under the circumstances to keep it a secret.
Financial records, customer lists, customer details along with strategies and policies of the companies may also be considered trade secrets. In India, however, details of customers have been held to not be trade secrets. It was held that the objective of secrecy is utility so a trade secret has to be utilitarian in nature.
Current Framework of Trade Secret Protection in India
In this era of globalization it is becoming increasingly difficulty to protect business strategies and secrets. 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 increasingly difficult for new businesses to keep up or flourish once such information is available in the business domain.
Today, countries recognize the need for such secrecy and thus are trying to incorporate protection for the same in their legal frameworks. In the international community, development of trade secret protection can be traced to Trade-related Aspects of Intellectual Property (TRIPS) and the General Agreement on Tariffs and Trade (GATT).
In India, the only protection that trade secrets have received is through judicial rulings and through provisions and aspects of equitable law, contracts law and torts. The absence of legislation for trade secrets has always made rulings difficult but judicial pronouncements have always tried to develop and protect trade secrets and give remedy to breach of confidentiality.
Judicial Rulings for the Protection of Trade Secrets
There is no law in India to protect trade secrets and confidential information. However, the courts have upheld protection of trade secrets, confidential information and business know-how. Action of misappropriation under common law can broadly protect trade secrets. Breach of obligation of confidence as well as third party accessing confidential information in an unauthorized manner can misappropriate trade secrets. This misappropriation can take place either by misappropriating information shared in confidence or taken by cheating or theft.
The Indian Courts have reorganized 3 sets of circumstances in which proceedings against misappropriation of trade secret may arise:
1. When an employee comes into possession of a trade secret or any confidential information in normal course of his work, and either carelessly or deliberately transfers that information to a person not authorised to have access of such information.
2. When any unauthorized person (may be a new employer) incites such an employee to provide him with such information; and
3. When a licensee, in breach of a condition of license for the use of trade information, either expressed in any agreement or implied from conduct to maintain secrecy in respect of such know-how and fails to do so.
The courts have made it immensely clear that in the absence of legislation, they will be protecting trade secrets through common law for the betterment of businesses in India.
Under Contract Law
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 that is general in its terms, declares all agreements that restrain trade as void. Initially the section was rigid in its invalidation of restrains, however it was enacted when trade was still undeveloped and the object of the section was protection of restraint of trade. Later, the implication of the Law Commission of India in 1958 and its recommendation to allow reasonable restrain came into picture.
Remedies for infringement of Trade Secrets
The remedy in the case of infringement may be injunction or damages. The party whose trade secret has been wrongly used may, under the Specific Reliefs Act, 1877, file a suit of injunction against the wrongdoer. It has been observed by the courts that in order to obtain an injunction in such cases, there should be actual concealment of material fact by the Plaintiff to get equitable relief.
Safeguards used by Entrepreneurs to Protect their Trade Secrets
Safeguarding trade secrets is very essential for entrepreneurs and small business owners, especially the ones that are just starting out. If the products/ services is novel due to such trade secrets and thus lead to the flourishing of the businesses, they will invariably gain focus. This will lead to a lot of competition, especially with big businesses that have already made a mark in the market. Due to better R&D facilities and abundance of funds on the part of these business giants, operations and innovation using the trade secret will become easier and these small businesses and entrepreneurs will be thrown out of the market competition with relative ease.
Thus it is very essential for small business entrepreneurs to come up with ways to protect trade secrets and promote innovation while keeping them a secret. Following steps can be taken to protect such information and maintain secrecy:-
1. Promote Employee Loyalty: Employee loyalty is more important than customer loyalty to certain extents. Incentives and other advantages must be given to employees because satisfaction plays a major role in the way employees function.
2. Monitoring Employee Activities: It is important to ensure that you do not lose the importance of protecting trade secrets while incentivising employee loyalty. Employers should monitor the activities of employees in the work place, however, privacy of employees should be respected and employees must not be given an impression of distrust.
3. Drafting a comprehensive trade secret policy for workplace: A comprehensive trade secret policy should be drafted for employees making them aware of the sensitivity of the issue as well as the nature of such confidential information along with the potential consequences of breaching such trust.
4. Drafting confidentiality agreements that are enforceable in India: Confidential information like trade secrets can be fairly protected by enforcing contracts and agreements that are enforceable in India. Such contract provisions should prohibit wrongful disclosure and misappropriation of trade secret/ confidential information. These agreements should focus on the type of information that is likely to be disclosed, the manner in which it should be used and the restrictions on disclosure post-termination.
5. Due diligence and maintaining non-disclosure agreements: Due diligence is extremely important to check the employee’s track record of keeping secrets and maintaining confidentiality. Due diligence, including scrutinizing documents as well as agreements with the special emphasis with respect to non-disclosure obligations as thoroughly as possible without leaving out a possibility of error.
6. Conducting trade secret audits: A trade secret audit can be conducted simply by taking the following steps:-
a) Identifying trade secrets that are of significance.
b) Verifying the company’s title to such trade secrets.
c) Verifying to make sure that confidentiality procedures are up to the mark and are followed strictly.
Business owners need to be proactive and vigilant while protecting their trade secrets. They, in this manner and for this purpose, must build a strong protection system around such information. They must also establish strong psychological loyalty amongst its employees to so that non-disclosure and/or non-compete agreements are more effective and thus safeguarding its trade secrets is easier.
It is imperative that if they find any violations with respect to their trade secrets, they take immediate action to minimise their losses. This can be done by swiftly getting in touch with their legal counsel and seek advice on the best possible course of action to protect their trade secrets.