SOME FACTS RELATED TO TRADE SECRET

SOME FACTS RELATED TO TRADE SECRET

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SOME FACTS RELATED TO TRADE SECRET

 

 

 

AuthorCIT V. M. VENKATESWARA RAO (2015) 370 ITR 212 HOB’BLE APPELLATE TRIBUNAL, AP

CS Deepak P. Singh

 

 

 


 
 
As you are aware that we are living in free market economy, where everybody is allowed to participate and compete with exiting players. Every entity, whether big in size or small competing here to contain their market share and survive. A big business house having presence all over world is keen to keep its market share intact and a new enterprise entering into marker with new and innovative products is keep to capture market and new customers. Those companies, whose products are based on some confidential information and Trade Secrets have edge in the market than new one. They have captured market on the basis of quality, variety and uniqueness of their products. Some companies are kept for selling products or they are producing products for small category of customers, such as motor companies. These confidential information or trade secret of these successful companies are always on risk of duplication or infiltration.
If a rival of a company come to know the Trade Secret or Confidential Information of a successful company, then it will by exploiting the same throw out that company from the market. Every trader wants to know Trade Secret or Confidential of its rivals so that it has an edge in the market. Therefore, traders should be very careful in sharing its Trade Secretor Confidential Information to its employees also. A trusted employee of the organization is only allowed to use and trade in this information for the benefit of the organization.
The concept of confidence deals with trust relation between two persons or more. The person who receives information is under an obligation to protect the information not to be used it for the purpose other than those for which such information was imparted.
There is no statute or legislation that governs the protection of trade secrets in India. However, rights in respect of trade secrets are enforced through contract law (Indian Contract Act, 1872) principles of equity or by way of a common law action for breach of confidence.
 
The Delhi High Court, in the case of John Richard Brady & Ors v Chemical Process Equipment P Ltd & Anr (AIR 1987 Delhi 372), held the following:These rules may, according to the circumstances in any given case, either rest on the principles of equity, that is to say the application by the Court of the need for conscientiousness in the course of conduct, or by the common law action for breach of confidence, which is in effect a breach of contract.
 
India is also a signatory of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs).
Under article 39(2), TRIPs allow members the flexibility to frame laws that prevent the unauthorized disclosure and use of certain information, provided this ‘information’ meets the following criteria:
·  it 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;
·  it has commercial value because it is secret; and
·  it has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.
 
The United States Patent and Trademark Office refers to a trade secret as a type of intellectual property. This definition of trade secrets is in reference to the business ownership of a formula, pattern, compilation, program, device, method, technique, or process that provides a competitive edge.
 
A trade secret:
·  is information that has either actual or potential independent economic value by virtue of not being generally known,
·  has value to others who cannot legitimately obtain the information, and
·  is subject to reasonable efforts to maintain its secrecy. 
All three elements are required; if any element ceases to exist, then the trade secret will also cease to exist. Otherwise, there is no limit on the amount of time a trade secret is protected.
The World Intellectual Property Organization (WIPO) defines the term “intellectual property” or “IP” as creations of the mind, such as inventions, literary and artistic works, designs, and symbols, and names and images used in commerce.
However, this definition overlooks “trade secrets,” meaning confidential business information, including any business practice or process, which is generally not known to others and gives the company an economic advantage over its competitors.
Generally, a patent permits its owner to determine who can make, use or sell an invention.
Trademarks permit their owner to market or promote a mark as the source or origin of a product or service to consumers.
Copyrights protect the form of a literary or artistic work and provides the owner with the ability to determine who can reproduce or distribute a work, perform or display a work or prepare derivative works.
Trade secrets protect confidential business information that generally provides a competitive edge to its owner.
In general, to qualify as a trade secret, the information must be:
·  commercially valuable because it is secret,
·  be known only to a limited group of persons, and
·  be subject to reasonable steps taken by the rightful holder of the information to keep it secret, including the use of confidentiality agreements for business partners and employees.
The unauthorized acquisition, use or disclosure of such secret information in a manner contrary to honest commercial practices by others is regarded as an unfair practice and a violation of the trade secret protection.
In general, any confidential business information which provides an enterprise a competitive edge and is unknown to others may be protected as a trade secret.
TYPES OF TRADE SECRETS
Trade secrets encompass both 
  1. Technical information, such as information concerning manufacturing processes, pharmaceutical test data, designs and drawings of computer programs. It generally related to manufacture or improvement of quality of goods or conduct of services and which include secret process for manufacturing specific products, the secret formula or the design of the products or so on and;
  2. Commercial / Business information, such as distribution methods, list of suppliers and clients, and advertising strategies. It generally includes the administration and strategies developed by the organization internally, such as cost pricing data, sales statistics, list of customers, suppliers, market projections, future development plans and strategies of their execution, the future aspects of employees to be hired by the organization, expansion plans etc.
 
A trade secret may be also made up of a combination of elements, each of which by itself is in the public domain, but where the combination, which is kept secret, provides a competitive advantage.
 
Other examples of information that may be protected by trade secrets include financial information, formulas and recipes and source codes.
LET’S DISCUSS PROTECTION OF TRADE SECRET;
From above we understand that “Trade Secret” is confidential information of a business enterprise. A Trade Secret is any information that can be used in the operation of business or other enterprise and tat is sufficiently valuable to afford an actual or potential economic advantage on the others. Trade Secret must not be something which is public property or public knowledge.
In Saltman Engineering Co. Ltd. Vs. Campbell Engineering Co. ltd.[(1948)65 RPC 203 C.A.]-  it was held that “ It is perfectly possible to have confidential document , be it formula, a plan, a sketch or something of that kind, which is the result of work done by the maker upon materials which may be available for the use of anybody——what makes if confidential is the fact that the maker of the document has used his brain and thus produced a result which can only be produced by somebody who goes through the same process.”
WHAT KIND OF PROTECTION DOES A TRADE SECRET OFFER?
Depending on the legal system, the legal protection of business secrets forms part of the general concept of protection against unfair competition or is based on specific provisions or case law on the protection of confidential information.
While a final determination of whether trade secret protection is violated or not depends on the circumstances of each individual case, in general, unfair practices in respect of secret information include industrial or commercial espionage, breach of contract and breach of confidence.
A trade secret owner, however, cannot stop others from using the same technical or commercial information, if they acquired or developed such information independently by themselves through their own R&D, reverse engineering or marketing analysis, etc. Since trade secrets are not made public, unlike patents, they do not provide “defensive” protection, as being prior art.
For example, if a specific process of producing Compound X has been protected by a trade secret, someone else can obtain a patent or a utility model on the same invention, if the inventor arrived at that invention independently.
HOW CAN A TRADE SECRET BE PROTECTED?
Companies should take preventive measures to protect trade secrets against theft or misappropriation, including:
  • Non-disclosure agreement (NDA): employees and business partners should sign a non-disclosure agreement that prevent them from disclosing a company’s confidential information.
  • Non-compete agreement (NCA): employers should ask employees, contractors and consultants to sign a non-compete agreement to prevent them from entering in competition when their employment/service agreement ends.
  • Robust IT security infrastructure
  • Controlling the accessibility of important documents
 
Trade secrets can protect many of the same concepts as patents. A trade secret can be anything of value to your company that is unique and not known to persons outside your company. This potentially includes inventions, processes, and formulas, but unlike patents, also includes customer and supplier lists, business methods and processes, and other business information that gives a competitive advantage.
To have and maintain trade secret protection requires
(1) the secret actually be a secret and
(2) you take steps to maintain the secrecy. Proper protection requires a trade secret protection plan, as explained below.
The secrecy requirement of a trade secret represents one major difference from patent law. If an invention can be reverse engineered, trade secret protection will be impossible to maintain. For instance, a new type of mouse trap would be easy for a competitor to copy. They can disassemble it, study it, and reproduce it without your assistance. Without patent protection on the mouse trap, there is no legal bar to such copying. For an invention like this, patent protection is the only way to go.
PLEASE NOTE THAT:
However, if the invention cannot be reverse engineered, then trade secret protection may be the superior type of protection. Consider one of the most famous trade secrets of all: the formula for Coca-Cola. The Coca-Cola formula has been a secret for nearly 130 years and the formula is a trade secret because no one else has been able to figure it out. Efforts to reverse-engineered it have failed and the Coca-Cola Company goes to great lengths to keep it a secret. Unconfirmed reports and speculation suggest that Coca-Cola actually keeps different parts of the formula in different places and that no one person knows the entire formula. The loss of the formula would likely cost Coca-Cola untold millions of dollars, or more.
WHAT IS NOT PROTECTABLE the information which is in public domain, voluntarily revealed, insufficiently guarded, or reverse engineered may not be protected.
Courts in India do not apply the ‘inevitable disclosure’ doctrine that would prevent an employee from pursuing a legitimate profession or trade. Skills acquired by an employee during the course of his or her employment with an organization and information retained in the mind of an employee may not be protectable as a trade secret. Furthermore, if trade-secret information is learnt through an independent discovery by fair and honest means, which includes reverse engineering, and if it otherwise does not constitute infringement of statutory intellectual property rights, it may not constitute misappropriation of a trade secret. Lastly, if the information itself was available in the public domain and not otherwise ‘secret’, it may not be protectable.
 
PLEASE NOTE THAT:While there is no legislation defining the misappropriation of trade secrets, the discovery of a trade secret by improper means (arising from civil, including breach of contract or tortuous wrongs or criminal acts) would constitute misappropriation of trade secrets.
To prove trade-secret misappropriation, the owner or rights holder of the same, must prove (Beyond Dreams Entertainment Pvt. Ltd. & Ors. vs. Zee Entertainment Enterprises Ltd. & Anr., (2016) 5 Bom CR 266), that:
·  the information was a secret and not known generally, or not readily accessible to persons who deal with such information;
·  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
·  there has been unauthorized use of that information to the detriment of the party communicating it, or there was a threat to use it.
PLEASE NOTE THAT:
  1. In the absence of specific legislation governing trade secrets, the general principles of the burden of proof are set out in the Indian Evidence Act 1872 Under Indian law, the burden of proof lies on the person asserting a fact or claim. The burden of proof lies on the person who would fail if no evidence was given by either side.
  1. In the absence of specific legislation governing trade secrets, the question of extraterritoriality would depend on the specific legislation that is attracted in the facts of the case, as well as The Code of Civil Procedure 1908 (CPC). Under section 20 of the CPC, a civil suit can, inter alia, be brought before a court within the local limits of which the cause of action arises (wholly or in part). Therefore, acts constituting misappropriation must take place in India (either in whole or in part), for an action to be brought in India.
  1. The Information Technology Act 2000 (IT Act) has extraterritorial operation in certain cases. For instance, if a cyberattack is carried out outside India, but involves computer systems physically located in India, and this has resulted in misappropriation of trade secrets, the cyberattack will be actionable in India under the IT Act and the relevant law enforcement authorities will have jurisdiction to take action.
 
ENFORCEMENT PROCEEDINGS
LET’S CONSIDER SOME IMPORTANT QUESTIONS
CAUSES OF ACTION
What causes of action are available and commonly asserted against misappropriation and unauthorised disclosure of trade secrets in your jurisdiction (e.g., statutory and common law claims such as breach of confidence where applicable and breach of contract)?
Causes of action that are commonly asserted against misappropriation and unauthorised disclosure of trade secrets are: breach of confidence; breach of contract; tort of misappropriation; and criminal offences, such as theft and criminal breach of trust. In certain cases, depending on the subject matter involved, copyright infringement may also be relevant.
COURT JURISDICTION
What criteria are used to establish the courts’ jurisdiction over trade-secret disputes? Are there any specialist courts for the resolution of trade-secret disputes?
There are no specialist courts for resolution of trade-secret disputes. A court’s jurisdiction over such disputes is governed by the general statutes governing civil and criminal disputes, namely the Code of Civil Procedure 1908 (CPC) and The Code of Criminal Procedure, 1973
For civil disputes relating to trade secrets, a court’s jurisdiction (for institution of a suit) is determined by section 20 of the CPC. A civil suit shall lie before any court within whose jurisdiction the defendant resides, carries on business or personally works for gain, or where the cause of action arises (whether in whole or in part). Further, the relevant pecuniary jurisdiction of courts will also be relevant in determining where a suit shall lie.
Having said that, disputes relating to trade secrets, similar to suits relating to other intellectual property, may fall within the category of commercial disputes, which are governed by the Commercial Courts Act 2015. It should be noted, however, that under the term ‘intellectual property’ in this Act, the terms ‘trade secrets’ and ‘confidential information’ are not set out specifically, unlike other types of intellectual property such as trademarks, patents, copyrights, etc. Only designated commercial courts shall be provisioned to adjudicate commercial disputes. Section 20 of the CPC is applicable to commercial disputes as well.
In the event a trade-secret dispute arises out of a contract that has an arbitration clause, the arbitral tribunal will have jurisdiction to adjudicate such disputes.
PROCEDURAL CONSIDERATIONS
What is the typical format and timetable of proceedings?
Commercial disputes and civil suits follow the format prescribed under the CPC and the Commercial Courts Act 2015. After a suit is initiated before the relevant court having jurisdiction, a summons is issued by the court to the defendant, who is required to answer the suit within 30 days of the date of service of the summons, extendable up to 120 days. Timelines have been provided under the Commercial Courts Act 2015 for various stages of the suit, including inspection of documents by the parties, filing of affidavits of admission and denial of documents, filing additional documents (if any), holding case management hearings for framing of issues, fixing a trial schedule by the court, etc.
The pleadings (that is, the plaint and the written statement and counterclaim, if any) are followed by framing of the key issues in the dispute by the court (assisted by the parties), and thereafter, by the trial. The trial consists of the examination-in-chief (which may be oral as well as written by way of affidavits) of both parties, followed by cross-examination of the respective witnesses of the parties. After the trial, the court takes up the matter for final hearing and disposal.
In the interim, parties may choose to file applications for discovery, interrogatories, interim relief such as injunctions, appointment of court commissioners for search and seizure, etc.
LIMITATION PERIODS
What limitation periods apply for trade-secret misappropriation claims?
There is no specific limitation period for trade-secret misappropriation claims. However, limitation of suits is governed by the Limitation Act 1963 and depends on the cause of action agitated in the suit. For breach of contract or a claim of tort, the limitation period is three years, from the date of breach or infringement. However, in trade-secret misappropriation cases, as there is a continuing breach, the cause of action will be of a recurring nature.
 
SECONDARY LIABILITY
To what extent can someone be liable for inducing or contributing to trade-secret misappropriation?
Can multiple parties be joined as defendants in the same suit?
Multiple parties can be joined as defendants in the same suit. Common law principles of liability applicable to claims of torts and breach of contract would apply in cases of trade-secret misappropriation as well. Typically, a person contributing to the misappropriation of a trade secret, through any act or omission, may be directly and jointly liable for such misappropriation. Principles of agency and vicarious liability may also apply depending on the facts and circumstances of the case. Contributory infringement is also recognised under the Copyright Act 1957 and, therefore, if the subject matter is protected under copyright laws, such principles will apply.
In cases of criminal breach of trust or theft, any person aiding or abetting such offence would also be liable to be punished under the Indian Penal Code 1860
OBTAINING AND PRESERVING EVIDENCE
What mechanisms are available to obtain and preserve evidence from defendants and third parties in trade-secret litigation?
During the course of a trade-secret litigation, a plaintiff can employ multiple strategies to obtain and preserve evidence, including an application for appointment of a local commissioner for search and seizure of infringing materials, an application for discovery and interrogatories, and an application for temporarily injuncting or restraining the infringing activities of the defendant or maintaining status quo. If there is a high risk of the evidence being destroyed by the defendant or third parties, courts may also be moved to issue such orders without notice to the defendant (that is, on an ex parte basis).
 
 
APPEAL
What avenues of appeal are available following an adverse decision in a civil suit? Is new evidence allowed at the appeal stage?
 
An appeal lies against those orders of a court in civil suits that are specified under Order 43 of the CPC. This is also applicable to commercial disputes, with some modifications. These orders include: orders returning a plaint; orders refusing to set aside dismissal of a suit; orders refusing to set aside an ex parte decree; and orders passed in relation to interim relief (Order 39), including grant or rejection thereof, contempt of interim relief and vacation of interim relief, etc.
 
Depending on the court of first instance, the first appeal may lie before the single judge of a high court or a division bench (two-judge bench). A second appeal shall lie only where a substantial question of law is involved or if the lower court passes an ex parte order or decree.
 
The commercial appellate court is required to endeavour to dispose appeals within six months of the date of filing of the appeal.
 
As a rule, additional evidence is not permitted in appeals, and appellate courts typically evaluate whether the lower court has properly appreciated the evidence already on record. Parties are, however, permitted to file an application before the appellate court to request admission of such additional evidence subject to certain conditions (under Order 41 Rule 27 of the CPC), including necessity in the interest of justice or the inability of the appellant to do so before the lower court, or because the evidence was not within the knowledge of the appellant before the lower court despite reasonable due diligence or other substantial cause. The court has discretionary powers to allow or reject such a plea.
 
 
REMEDIES
1.     INJUNCTIONS
Under what circumstances can a rights holder obtain a preliminary or final injunction in a civil suit for trade-secret misappropriation?
 
The relief of an injunction, both at the preliminary and final stages in a suit, to restrain the defendant from using or disclosing the trade secrets, is available to plaintiffs or rights holders in India.
 
These injunctions are granted at the discretion of the court, primarily by applying the following tests (established in Gujarat Bottling Co Ltd v Coca Cola Co, (1995) 5 SCC 545):
·   whether a prima facie case has been made out by the plaintiff; · whether the balance of convenience is in favour of the plaintiff; and · whether the plaintiff would suffer irreparable injury if the injunction is not granted.
 
Courts have also held that the object of an interim injunction is to protect the plaintiff against injury by violation of its rights, where such injury cannot be adequately compensated by damages. This holds especially true for trade secrets whose value is derived from their secrecy.
 
Therefore, the need for such protection of the plaintiff must be weighed against any injury that may be caused to the defendant from being prevented to exercise its legal rights.
 
To satisfy each of the above requirements, the plaintiff must at the outset clearly set out the trade secrets sought to be enforced (even if details are not provided). The plaintiff must also plead facts that disclose the commercial value of the trade secret and its importance to the plaintiff. Statements relating to competitive advantage offered by the trade secret will also be relevant. The nature and extent of use of the trade secret, both in scale and duration, is important to establish balance of convenience, as well as potential injury.
 
In cases relating to employer–employee relationships, an additional consideration of section 27 of the Indian Contract Act 1857 must be kept in mind. Any contracts or terms in restraint of trade are void and unenforceable under this provision. Therefore, if the plaintiff, being an employer, is seeking to enjoin the alleged defendant from securing a job with a competitor or elsewhere, on the basis of a confidentiality provision in an employment contract, such terms may not be enforceable.
 
2. DAMAGES
What rules and criteria govern the award and calculation of damages for trade-secret misappropriation?
 
Litigants can seek damages and rendition of accounts of profit as a remedy in trade-secret misappropriation cases. Damages must be quantified and proved during trial before being awarded by the court. Damages may be liquidated damages, actual damages or punitive damages.
 
Liquidated damages, if not specifically quantified, will be required to be quantified as per the terms of the contract between the parties.
 
Actual damages will need to be proved through evidence (in relation to which witnesses may also be cross-examined). This will likely be a quantification of losses incurred due to disclosure of trade secrets or a valuation based on the notional market value of the trade secret itself. This can be supported by the report of an expert.
 
Lastly, punitive damages are typically based on the prerogative and discretion of the court, and granted in cases where the infringement or tort is egregious.
 
4.     OTHER CIVIL REMEDIES
 Are any other civil remedies available for wilful trade-secret misappropriation?
 
There are no additional civil remedies available in cases of wilful trade-secret appropriation.
 
However, apart from injunction and damages, other civil remedies available to a plaintiff or rights holder include orders granting return of trade secrets or delivery of materials containing trade secrets, and appointment of court commissioners for taking stock of the materials misappropriated by the defendant (for assistance in quantification of damages). Courts may even direct local police to assist court commissioners in carrying out appropriate search and seizure orders of the court.
 
CRIMINAL REMEDIES
What criminal remedies are available for trade-secret misappropriation? Under what circumstances will they be awarded, and what procedural issues should be considered when seeking them?
 
The Indian Penal Code 1860 (IPC) and specific subject-matter legislation, such as the Copyright Act 1957 (governing copyrights) and the Information Technology Act 2000 (governing electronic records), contain provisions setting out specific offences that may be punishable by imprisonment or a fine. There is no specific offence of trade-secret misappropriation. However, offences such as criminal breach of trust, theft or cheating may be applicable, in the facts of the case.
 
The penalty for criminal breach of trust is imprisonment of up to three years or a fine. A person is said to commit a criminal breach of trust if he or she dishonestly misappropriates or converts for his or her own use any property that has been entrusted to him or her, or dishonestly uses or disposes such property in violation of a contract (express or implied) or applicable law, or permits any other person to do so. Therefore, at the outset, the dishonest intention of the infringer or accused in misappropriating, converting, using or disposing of the property must be established by the complainant.
 
 
The procedural law relating to criminal proceedings is set out in the Code of Criminal Procedure 1973. An offence can be brought to the attention of the police through a complaint. If the offence is a cognisable offence under the IPC (having the penalty of imprisonment of more than three years), a police officer is mandated to register a First Information Report, and can initiate investigations and arrest without warrants. However, if it is not cognisable, the police are not obligated to initiate action and all action must be taken based on the orders of a metropolitan magistrate, who is required to evaluate a criminal complaint in the first instance, and order investigations, arrests, etc, as relevant.
 
The criminal justice machinery in India is marred by delays and is not the preferred enforcement option for rights holders, unless strategically beneficial, where the offence is egregious and merits such action and concomitant penalties, or the identity of the offenders is unknown and needs to be investigated.
 
ADMINISTRATIVE REMEDIES
What administrative remedies are available for trade-secret misappropriation? Under what circumstances will they be awarded, and what procedural issues should be considered when seeking them?
 
In the absence of a specific legislation governing trade secrets, there are no administrative remedies for trade-secret misappropriation in India, as it is governed entirely on the basis of common law principles (evolved through judicial precedent) and Indian contract law.
 
 
CONCLUSION: from above discussion it is clear that Trade Secret is a Confidential Information for a business entity, which keeps the organization on edge from its competitors. It may be in form of Technical Information or Business Information such as, formula, plan, business strategy, know how, secret process, future prospects of company, expansion plan, inclusion of new products or new business, the cost sheet for a product, the list of suppliers, customers etc. this information when leaked in the market affects adversely on the business share of organization and hence the protection of these Trade Secrets are at most important.
Following six factors may be considered to determine whether information owned by an enterprise is a trade secret;
  1. The extent to which the information is known to outside the organization;
  2. The extent to which the information is known by employees and others involved in the organization;
  3. The extent of measures taken by the organization to guard the secrecy of the information;
  4. The value of the information to the enterprise and to competitors;
  5. The expenditures incurred by the organization in terms of time, money and efforts in developing the information and;
  6. The ease or difficulty with which the information could be properly acquired or duplicated by others.
 
DISCLAIMER: the article produced here is only for sharing information to the readers. The article has been prepared on the basis of available information at various forums at the time of preparation. The views expressed here are the personal views of the author and same should not be considered as professional advice. In case of necessity do consult with professionals for more understanding of the subject matter.
 
 
 

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