Module 21: Trade Secrets: Conditions of Protection
Introduction
A trade secret “may consist of any formula, pattern, device or compilation of
information which is used in one's business, and which gives him an opportunity to
obtain an advantage over competitors who do not know or use it. It may be a formula
for a chemical compound, a process of manufacturing, treating or preserving
materials, a pattern for a machine or other device, or a list of customers.”1 Thus, cost
of devising the trade secret and the inherent value of the trade secret are the
underlying reasons that the law operates to protect the holder of the secret. Therefore,
trade secrets law seeks to protect business information that an entity deems important
enough to keep a secret because of the advantage that it confers upon such entity in
the market.
Background: Protection of Trade Secrets in India
Trade secrets law operates once a trade secret has been unlawfully disclosed. This
branch of the law fits uneasily within the intellectual property framework. In general,
a competitive advantage is only conferred upon the holder of intellectual property in
exchange for transparency and disclosure. This is most clearly seen in the context of
patent law. However, unlike other forms of intellectual property rights, the law
protects trade secrets only when it remains, as the name suggests, a secret. Thus, a
trade secret “is any information that can be used in the operation of a business or other
enterprise and that is sufficiently valuable and secret to afford an actual or potential
economic advantage over others.”2
Unlike most other forms of intellectual property rights in India, trade secrets law
is not codified but is protected by the principles of common law. As explained earlier,
1
See, Restatement of Torts § 757, comment b (1939).
2
Restatement Third (Unfair Competition), §39 (1995).
no statute codifies trade secrets law, or even the elements of what constitutes a trade
secret. Indian courts have therefore relied on common law cases and principles in its
own decisions on trade secrets. In the United Kingdom, the seminal case that
discusses the elements of a trade secret is Coco v. A.N. Clark. In that case, the court
held that to be considered a trade secret:
● the information must have the necessary quality of confidence about it,
● it must have been imparted in circumstances imparting an obligation of
confidence, and,
● it must be an unauthorised use of that information to the detriment of the
party communicating it.3
This precedent and other relevant principles taken together form the basis for the
jurisprudence of trade secrets law in India. As trade secrets law is not codified, the
term of protection is indefinite—that is, until the secret is disclosed.
An important exception that must be noted is the protection given to a government
secret. In such cases, the Official Secrets Act, 1923 may apply.
Element 1: Subject Matter Must Be Confidential
Generally, “[m]atters of general knowledge in an industry cannot be appropriated
by one as his secret.”4The most important prerequisite for protection of information
under the law of trade secrets is that information must be, in fact, a secret—that is,
confidential in nature. Since the information is undisclosed and unknown to others, it
has been often characterized as a novelty requirement.5
In India, courts have interpreted that confidential information in a manner similar
to the interpretation in the United Kingdom. One such enunciation of this standard
was laid out by the U.K. court in Saltman Engineering Co. Ltd. v. Campbell
Engineering Co. Ltd.: “[For] information, to be confidential, [it] must have the
necessary quality of confidence about it, namely, it must not be something which is
3
Coco v. A.N. Clark (Engineers) Ltd, (1969) R.P.C. 41 at 47.
4
Wissman v. Boucher, 150 Tex. 326, 240 S.W.2d 278, 280 (1951); Zoecon Industries v. American
Stockman Tag Co., 713 F.2d 1174, 1179 (5th Cir.1983)
5
Anil Gupta v. KunalDasgupta, 2002 (97) DLT 257 (citing Talbot v. General Television Corp., 1981
RPC 1)
2
public property and public knowledge.”6 In another case from the United Kingdom,
the court listed four requirements for information to be considered a trade secret:
“First, … the information must be information the release of which the owner
believes would be injurious to him or of advantage to his rivals or others.
Second, … the owner must believe that the information is confidential or
secret, i.e. that it is not already in the public domain. It may be that some or all
of his rivals already have the information; but as long as the owner believes it
to be confidential … he is entitled to try and protect it. Third, … the owner's
belief under the two previous heads must be reasonable. Fourth, … the
information must be judged in the light of the usage and practices of the
particular industry or trade concerned.”7
The standard for information to qualify as being trade secret by courts in the
United States is lower than its U.K. counterpart. In the United States, the law does not
require absolute secrecy. U.S. courts have held, “[r]easonable precautions against
predatory eyes we may require, but an impenetrable fortress is an unreasonable
requirement, and we are not disposed to burden industrial inventors with such a duty
in order to protect the fruits of their efforts.” 8 Thus, in the United States, the test is
one of reasonableness—has the plaintiff taken all the reasonable steps considering the
nature of the information sought to be protected as well as conduct of the parties?
While Indian courts have not yet adopted the lower U.S. standard for information to
qualify as being confidential, the case law in this area is relatively scant and standards
are still evolving.
Where information has been condensed into a tangible form, it is much easier to
identify the subject matter sought to be protected as a trade secret. However, where
the information sought to be protected is an idea, proving that the disclosure of such
information carried an obligation of confidence becomes more difficult. However,
6
(1948) 65 RPC 203, 213. This standard has been approved by Indian courts. See, e.g., John Richard
Brady v. Chemical Process Equipments, AIR 1987 Del. 372; Zee Telefilms Ltd. v. Sundial
Communications Pvt. Ltd., 2003 (27) PTC 457 (Bom).
7
Thomas Marshal (Exports) Ltd. v. Guinel, (1978) 3 All E.R. 193.
8
E.I. duPontdeNemours& Co. v. Christopher, 431 F.2d 1012, 1017 (5th Cir.1970), cert. denied, 400
U.S. 1024 (1971). See also, Greenberg v. Croydon Plastics Co., 378 F. Supp. 806, 813-814 (E.D. Pa.
1974); Allen Mfg. Co. v. Loika, 145 Conn. 509, 516 (1958); RTE Corp. v. Coatings, Inc., 84 Wis.2d
105, 115 (1978).
3
courts have held that protecting an idea that is original is favoured under principles of
equity. Great emphasis in this respect has been laid by Indian courts on the form and
degree of development of the information or idea. In Anil Gupta v. Kunal Dasgupta,
the Delhi High Court observed that when “an idea/ concept or theme which is
original, laws must ensure that people like such are rewarded for their labour.” 9 Using
this rationale, the court in this case protected a concept for reality television show as a
trade secret.
Thus, the subject matter of a trade secret need not be in its final or even tangible
form to receive protection under trade secrets law.
Element 2: Existence of a Confidential Relationship
In an ideal situation, disclosure of a trade secret could be avoided altogether if it
was not known to anyone but the holder of the secret. However, it is necessary to
disclose information to some extent to employees, business associates, affiliates,
courts and regulatory bodies. Thus, a confidential relationship must exist for the
information to continue to be regarded as a trade secret. In other words, common law
jurisdictions have held that information will remain a trade secret despite disclosure,
if such disclosure was made under limited and necessary circumstances.10 Such
confidential relationship may be formed either expressly or impliedly.
1. Limited Disclosures and “Confidentiality Clubs”
This concept of limited disclosure was laid out by the U.S. court in the case
Metallurgical Industries v. Fourtek. In that case, the court cited the Restatement of
Torts to explain that there are certain circumstances under which information can be
conveyed to others while continue to remain a secret. 11 The court specifically stated
that disclosures may not be construed as destroying the secrecy of information as long
as the holder of such information can present evidence such as the information was
disclosed “to only … businesses with whom it was dealing”, and not via a public
announcement or “to further [the entity’s] economic interests”.12 The court also stated
9
Anil Gupta v. KunalDasgupta, 2002 (97) DLT 257, at para 27.
10
Metallurgical Industries v. Fourtek, Inc., 790 F.2d 1195, 1201 (1986).
11
Restatement of Torts § 757, comment b (1939).
12
Metallurgical Industries v. Fourtek, Inc., 790 F.2d 1195, 1201 (1986).
4
that evidence of “confidential relationships with these two companies” would help
strengthen the limited nature of the disclosure.13
Indian courts have recognized another form of such limited but permitted
disclosure in cases when courts have ordered documents to be placed under seal, or
designate certain specific persons as part of a “confidentiality club”. 14 This enables
not just the lawyers, but also the courts to function efficiently and comprehensively
adjudicate a case in which the underlying disputed subject matter or incidental data
disclosed is confidential.
2. Permissive Reliance
In certain situations, persons can use information deemed to be confidential, even
if there was no specific authorisation granted by the trade secret holder for such use.
This “permissive reliance” on confidential information holds a special place in the
realm of ‘data exclusivity’. “Data exclusivity or exclusivity of registration data is the
period of non-reliance or non-disclosure that is provided to new chemical entities,
pharmaceutical compositions, and agrochemical registration data or test data.” 15 Since
India does not have a statute that protects such data for a specified period of time,
inventors rely on common law principles under trade secret law. In the case In Re
Smith Kline & French Laboratories, the U.K. court held that confidential test data
regarding safety, efficacy and quality of the medicinal product for the grant of the
marketing license of the product can be used by the licensing authority in the
discharge of its duties.16 The court held that the licensing authority can use such
confidential information as long as it is under the authority of the statute and,
foremost, it is in the interest of the public. Thus, public interest would enable Indian
courts and adjudicatory bodies to rely upon the permissive reliance standard in
carrying out their functions comprehensively and efficiently.
3. Obligation of Confidence through Employment
13
Id.
14
See Order disposing of I.A. No.10268/2009 in CS (OS) No.599/2007, Mvf 3 Aps v. M. Sivasamy
(Aug. 31, 2008), available at
[Link]
15
Nomani, Md. Zafar Mahfoozand Rahman, Faizanur.“Intellection of Trade Secret and Innovation
Laws in India.” Journal of Intellectual Property Rights 16 (2011): 341-45.
16
In Re Smith Kline & French Laboratories Ltd., (1989) 1 ALL ER 578.
5
A covenant not to compete or a nondisclosure clause in a contract of employment,
which are provisions routinely executed in the course of business, are forms of
agreements that may carry an obligation of confidence. A nondisclosure clause during
the course of employment has been upheld to be valid. 17 However, after the
employment concludes, the validity of a nondisclosure clause or a covenant not to
compete has been questioned before Indian courts as a restraint of trade.
Under Section 27 of the Indian Contract Act, 1872, “[e]very agreement by which
any one is restrained from exercising a lawful profession, trade or business of any
kind, is to that extent void.” In 1958, recognizing that some restraints of trade may
restrict competition in the market, the Law Commission of India recommended the
addition of an exception recognizing that reasonable restraints of trade in the interest
of the parties and the public ought to be held valid.18 While the Law Commission’s
recommendation was never implemented in the Contract Act, courts have—both
before and after the recommendation—have taken the reasonableness of a restraint
into account in deciding cases before it.19
Interestingly, the Competition Commission of India (CCI) also had occasion to
examine the validity of non-compete clauses in contracts of employment from the
perspective of competition law. In Larry Lee Mccallister v. M/s Pangea3 Legal
Database Systems Pvt. Ltd., the CCI held that:
“Once he enters into contract of employment with the enterprise, he is not a
service provider to one and all, nor can his service be purchased by other
competitors of the enterprise, so long as he is in employment of that
enterprise. All consultants/experts who seek employment negotiate the terms
of employment in the very beginning. If an expert is unique kind of expert and
is much sought after, he is able to dictate his terms at the time of employment
and reverse is also possible where the kind of employee the company is
seeking is easily available and there are lot many people seeking job, than the
company is able to dictate its terms. In such contracts, no issue of competition
17
See, e.g., Gopal Paper Mills v. SurendraGanesha, AIR 1962 Cal 61.
18
See, “The Law Commission of India.” 13th Report at para 55. Ministry of Law and Justice (1958).
19
See, Brahmaputra Tea Co. v. E Scarth, (1885) 11 Cal 545; NiranjanShankerGolikari v. Century
Spinning & Manufacturing, AIR 1967 SC 1098.
6
arises. A clause in service contract restricting an employee from taking
employment with the competitors, after he leaves the employment, for a
particular period, raises no competition issue. The employee who enters into
such contract negotiates his salary/pay package accordingly and takes into
calculations even the period for which he would not be able to provide his
expertise to competitors.”20
Thus, courts as well as quasi-judicial authorities such as the CCI have recognized that
where the restraint is reasonably limited by time, geographic area and the like, the
restraint may be held to be valid. Consequently, any party bound by such valid
restraint is obligated to not disclose any confidential information that may be revealed
to him for the period that such restraint remains binding.
4. Protection of an Idea
Where information or an idea has been condensed into a tangible form, it is much
easier to protect such information as well as monitor its disclosure. Proving that a
confidential relationship exists where the underlying information is an idea is more
difficult. Great emphasis in this respect has been laid by courts on the form and
degree of development of the information or idea.
Courts with a common law system when faced with the question of whether an
idea (when it is not concrete) ought to be protected have examined the relationship
between the parties as either an implied contract or a quasi-contract. Under an implied
contract, usually a person does not stop the person with the idea from disclosing it to
him.21 A quasi contract may exist where the person using the idea is unduly enriched
or the idea is thrust on a person. 22Indian courts have ruled that it is necessary to
examine the concreteness and novelty of the idea to determine the existence of a
confidential relationship.23
20
Order under Section 26(2) of the Competition Act, 2002 by the Competition Commission of
India,Mr. Larry Lee Mccallister v. M/s Pangea3 Legal Database Systems Pvt. Ltd. &Ors., Case No. 66
of 2013, available at [Link]
21
See, Nadel v. Play-By-Play Toys & Novelties, Inc., 208 F.3d 368 (2d Cir. 2000); Lueddecke v.
Chevrolet Motor Co., 70 F.2d 345 (8th Cir. 1934).
22
See, Matarese v. Moore-McCormack Lines, 158 F.2d 631 (2d Cir. 1946).
23
See, e.g., John Richard Brady v. Chemical Process Equipments P. Ltd., AIR 1987 Delhi 372;
UrmiJuvekar Chiang v. Global Broadcast News Limited, 2008 (36) PTC 377 (Bom); Anil Gupta v.
KunalDasgupta, 2002 (97) DLT 257; Zee Telefilms Ltd. v. Sundial Communications Pvt. Ltd., 2003
7
Element 3: Unauthorized Use of Confidential Information
“If a defendant is proved to have used confidential information, directly or
indirectly obtained from a plaintiff, without the consent, express or implied of the
plaintiff, he will be guilty of an infringement of the plaintiff’s rights.” 24 Thus, the
infringement of a trade secret can have two specific forms—(1) a misappropriation of
a trade secret and its variants, and (2) a breach of confidence.
1. Misappropriation of a Trade Secret
The misappropriation of a trade secret is where the trade secret has been
wrongfully acquired by a third party. One example of trade secret misappropriation is
the famous case of EI Dupont De Nemours v. Christopher. In this case, DuPont
alleged that the defendants misappropriated its secret process for making methanol by
flying over its factories and taking photographs that would enable a skilled person to
deduce the process.25While holding that the defendants had misappropriated Dupont’s
trade secrets and indulged in industry espionage, the U.S. court observed that its
ruling was not meant to curtail competition in the market. 26The court also held that a
trade secret holder is not required to take “unreasonable precautions” to protect its
secret from its competitors. Thus, the standard for misappropriation of a trade secret is
a third party’s unlawful taking of a trade secret without expending any effort by
techniques such as reverse engineering or independent research.27
2. Breach of Confidence
In relation to breach of confidence, the trade secret holder is required to have,
either expressly or impliedly, disclosed the trade secret to a third party. Where the use
of the trade secret by the third party is beyond the scope of the authorisation granted,
such act by third party is also considered a breach of confidence.
(27) PTC 457 (Bom).
24
Saltman Engineering Co. Ltd. v. Campbell Engineering Co. Ltd.,(1948) 65 RPC 203, 213.
25
EI DupontDeNemours v. Christopher, (1970) 431 F.2d 1012.
26
Id. at 1016 (“A competitor can and must shop his competition for pricing and examine his products
for quality, components, and methods of manufacture.”).
27
Id. at 1017 (“Reasonable precautions against predatory eyes we may require, but an impenetrable
fortress is an unreasonable requirement, and we are not disposed to burden industrial inventors with
such a duty in order to protect the fruits of their efforts.”).
8
Cases of trade secret misappropriation, however, are far and few between. It is
more common to encounter infringement of trade secret in the form of a breach of
confidence. The rationale behind intervening when confidence is as follows:
“The ground of equitable intervention [when a breach for confidence claim
arises] is that it is unconscionable for a person who has received information
on the basis that it is confidential subsequently to reveal that information.
Acceptance of information on the basis that it will be kept secret affects the
conscience of the recipient of the information. In general it is in the public
interest that confidences should be respected, even where the confider can
point to no specific financial detriment to himself. If a defendant is proved to
have used confidential information, directly or indirectly obtained from a
plaintiff, without his consent, express or implied, he will be guilty of an
infringement of the plaintiff's rights.”28
A breach of confidence claim may arise from either an express or an implied
relationship of confidence between the parties.
Remedies
The sort of remedies available to trade secret holder depends on the nature of the
infringement. Where the infringement is in the nature of misappropriation, the trade
secret holder can seek both civil and criminal remedies. Where the infringement is in
the nature of a breach of confidence, only civil remedies are available to the trade
secret holder.
The crimes under which the trade secret holder may file a case of
misappropriation of a trade secret include theft, trespass and cheating.
A person pursuing civil remedies for the unlawful use of a trade secret for either
misappropriation of a trade secret or breach of confidence can seek:
28
See,Zee Telefilms Ltd. v. Sundial Communications Pvt. Ltd., 2003 (27) PTC 457, at para 9 (Bom)
(citing Copingerand Skone-James on Copyright. p. 720–21).
9
(1) A permanent injunction restraining the infringer and any other unauthorised
beneficiaries from using the trade secret, and a temporary injunction as interim
relief;
(2) A direction from the court for delivery-up of all the confidential information,
where possible; and/or
(3) Compensation or damages for losses suffered due to disclosure of trade
secrets.
Conclusion
This chapter aimed to provide an overview of the basic principles of trade secrets
law and the application of those principles. The situation may change if and when
India decides to enact the National Innovation Bill, which codifies standards for the
disclosure and protection of a trade secret. Until then information is protected as a
trade secret between parties in line with principles of common law and precedents.
Points to Remember
➔ Trade secrets law operates once a trade secret has been unlawfully disclosed.
➔ A competitive advantage is only conferred upon the holder of intellectual
property in exchange for transparency and disclosure.
➔ To be considered a trade secret the information must have the necessary
quality of confidence about it, it must have been imparted in circumstances
imparting an obligation of confidence, and it must be an unauthorized use of
that information to the detriment of the party communicating it.
➔ Common law jurisdictions have held that information will remain a trade
secret despite disclosure, if such disclosure was made under limited and
necessary circumstances.
➔ This concept of limited disclosure was laid out by the U.S. court in the case
Metallurgical Industries v. Fourtek.
➔ In Re Smith Kline & French Laboratories, the U.K. court held that
confidential test data regarding safety, efficacy and quality of the medicinal
product for the grant of the marketing license of the product can be used by
the licensing authority in the discharge of its duties.
➔ A covenant not to compete or a nondisclosure clause in a contract of
10
employment, which are provisions routinely executed in the course of
business, are forms of agreements that may carry an obligation of confidence.
➔ “If a defendant is proved to have used confidential information, directly or
indirectly obtained from a plaintiff, without the consent, express or implied of
the plaintiff, he will be guilty of an infringement of the plaintiff’s rights.”
Thus, the infringement of a trade secret can have two specific forms—(1) a
misappropriation of a trade secret and its variants, and (2) a breach of
confidence.
➔ The sort of remedies available to trade secret holder depends on the nature of
the infringement. Where the infringement is in the nature of misappropriation,
the trade secret holder can seek both civil and criminal remedies. Where the
infringement is in the nature of a breach of confidence, only civil remedies are
available to the trade secret holder.
11