SECRETS OF TRADE SECRETS

LL.B Dissertation
Submitted to
Indian Institute of Technology, Kharagpur
In partial fulfilment for the award of the degree

of

LL.B (Hons.) in Intellectual Property Law

by

Niharika Swaroop
(Roll No. 11IP60033)

Under the guidance of

Dr. KD Raju

RAJIV GANDHI SCHOOL OF INTELLECTUAL PROPERTY LAW

INDIAN INSTITUTE OF TECHNOLOGY KHARAGPUR
APRIL 2014
 DECLARATION BY STUDENT

I certify that

a. the work contained in this report has been done by me under the guidance of
my supervisor.

b. the work has not been submitted to any other Institute for any degree or
diploma.

c. I have conformed to the norms and guidelines given in the Ethical Code of
Conduct of the Institute.

d. whenever I have used materials (data, theoretical analysis, figures, and text)
from other sources, I have given due credit to them by citing them in the text
of the thesis and giving their details in the references. Further, I have taken
permission from the copyright owners of the sources, whenever necessary.

Date: Niharika Swaroop

ii
 CERTIFICATE BY SUPERVISOR

This is to certify that the project report entitled Secrets of Trade Secrets, submitted
by Ms. Niharika Swaroop to Indian Institute of Technology, Kharagpur, is a bonafide
work carried out by her under my supervision, in fulfilment of the requirements for
the degree of Bachelor of Laws (Hons.) in Intellectual Property Right.

Date:

Dr. KD Raju

iii
 ACKNOWLEDGEMENTS

There are a number of people to whom I owe a debt of gratitude so far as the
completion of this seminar is concerned. First of all, I would like to thank my guide
Prof. Dr. K.D. Raju, who has always encouraged me to march ahead with this topic.
He was kind enough in sorting out every difficulty while doing this project and has
lent me his valuable time to give all important suggestions and ideas regarding this
topic.
I would also like to take this opportunity to thank my class in-charge Dr. S.R.
Subramanian for his unyielding support and kind words.
I would also like to thank Respected Dean Dr. K.I. Vibhute for giving me this
opportunity to pursue with this seminar topic.
I would also like to thank my parents for their unending support. I fully acknowledge
their dedication, love and support towards my academic life at Rajiv Gandhi School
of Intellectual Property Law. And finally I would like to thank my classmates.

iv
LIST OF CASES

Alex Foods, Inc. v. Metcalfe, 290 P.2d 646, 654 ...................................................... 31

Ambiance Indi a Pvt. Ltd. v. Shri Naveen Jain, 122 (2005) D.L.T. 421, para. 6 ....... 51
Amoco Prod. Co. v. Vill. of Gambell, 480 U.S. 531, 541–42 (1987). ........................ 15
Attwood v Lamont, (1920) 3 KB 571: (1920) All ER Rep 55. .................................. 49
Cadence Design Sys., Inc. v. Avant! Corp., 57 P.3d 647, 650–51 (Cal. 2002)........... 30
Emergent Genetics India Pvt. Ltd. v. Shailendra Shivam and Ors ., (2011) 125 D.R.J.
173, para. 33 ........................................................................................................ 51
Feist Publ’ns, Inc. v. Rural Tel. Serv., 499 U.S. 340, 349 (1991) ............................. 30
Graham v. John Deere Co.,383 U.S. 1, 9 n.2 (1966) ................................................ 19
John Richard Brady and Others v. Chemical Process Equipments P. Ltd. and
Another, A.I.R.(1987) Delhi 372. ........................................................................ 13
Jostens, Inc. v. Nat’l Computer Sys., Inc., 318 N.W.2d 691, 699 .............................. 30
K & G Oil Tool & Service Co. v. G & G Fishing Tool Service, 158 Tex. 594, 314
S.W.2d 782 (1958)............................................................................................... 43
Kaiser Aetna v. United States, 444 U.S. 164, 176 (1979) ......................................... 18
Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 493 n.23 (1974 ............................. 32
Rockwell Graphic Sys., Inc v. DEV Indus., Inc., 925 F.2d 174, 178 (7th Cir. 1991) .. 30
Rubber Co. v. Seaquist, 286 Cal. Rptr. 518, 526 (Ct. App. 1991 .............................. 30
Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984 .................................................. 18
Saltman Engineering Co. Ltd. v. Campbell Engineering Co. Ltd., 1948 (65) R.P.C
Warner-Lambert Co. v. Execuquest Corp., 691 N.E.2d 545, 547 ............................. 32
Zee Telefilms v. Sundial Communications, 2003 (5) BomCR 404............................. 46

v
LIST OF ABBREVIATIONS

TRIPS : Trade Related Aspects of Intellectual Property Rights

IPR : Intellectual Property Rights

FTC : Federal Trade Commission

ALJ : Administrative Law Judge

ECJ : European Court of Justice

FSC : Federal Supreme Court

EU : European Union

SC : Supreme Court

HC : High Court

DG : Director General

CG : Controller General

EEA : Economic Espionage Act

USTA : Uniform Trade Secret Act

USPTO : United States Patent and Trademark Office

L.J : Law Journal

v. : Versus

Vol. : Volume

Edn : Edition

vi
ABSTRACT

In the era of globalization, Trade secrets have acquired increased significance,

especially in the view of opening up of World market and enhanced competition.

Moreover the fact that, trade secret protection is being preferred over patent

protection as a method for protection of confidential information has leveraged its

significance.

If trade secrets are property, then laws protecting them are normatively justified. The

study provides economic and philosophical justifications for protection of Trade

Secrets that indeed has cleared the dust in the air with respect to the ambiguity

involved in considering trade secrets as Property. This study further gives an outline

of the trade secret regime that exists in India and underlines its inadequacy in view of

the statutes existing in other jurisdictions throughout the World.

The study also focuses on the vagueness of the common law remedy that is available

for infringement of trade secrets, which is apparent from the line of inconsistent

decisions by the Indian Courts. It deals with the TRIPS mandate and India’s

obligation to legislate on the question of ‘undisclosed information’. The study

attempts to underline the need of a codified regime which is the only way to ensure

strong and effective IPR protection and would open up different avenues for

economic prosperity as well.

Keywords: Intellectual Property, Trade Secrets, Confidential information, TRIPS,

Contractual remedies.

vii
CONTENTS
DECLARATION BY STUDENT........................................................................................ ii

CERTIFICATE BY SUPERVISOR .................................................................................... iii

ACKNOWLEDGEMENT ................................................................................................ iv

LIST OF CASES............................................................................................................ v

LIST OF ABBREVIATIONS ........................................................................................... vi

CONTENTS .............................................................................................................. viii

Chapter 1 ................................................................................................................... 1

INTRODUCTION ..................................................................................................... 1

1.1 Trade Secrets ............................................................................................... 3

1.2 Need for Protecting Trade Secrets................................................................ 4

1.3 Motivation of the Study ............................................................................... 6

1.4 Organization of the Study ............................................................................ 7

Chapter 2 ................................................................................................................... 9

JUSTIFICATION FOR TRADE SECRETS .............................................................. 9

2.1 Property as a Potential Justification ............................................................. 9

2.1.1 Exclusivity Theory ............................................................................... 9

2.1.2 Integrated Theory ............................................................................... 11

2.1.3 Bundle Theory.................................................................................... 12

2.2 Economic Justification of Trade Secrets .................................................... 13

2.3 Philosophical Justification of Trade Secrets ............................................... 15

2.3.1 Labor Value theory ............................................................................. 15

2.3.2 Original Position Theory .................................................................... 19

2.4 Differentiation from other Intellectual property ......................................... 22

Chapter 3 ................................................................................................................. 25
viii
BASICS OF TRADE SECRETS ............................................................................. 25

3.1 Brief History of Trade Secret Law ............................................................. 25

3.2 Concept of Trade Secret ............................................................................ 27

3.2.1 The TRIPS Mandate ........................................................................... 30

3.2.2 Interpretation ...................................................................................... 31

3.2.3 India’s obligation under TRIPS .......................................................... 32

3.2.4 Modalities of Trade Secrets ................................................................ 34

3.3 Trade Secret Misappropriation................................................................... 38

Chapter 4 ................................................................................................................. 44

ANALYSIS OF TRADE SECRETS REGIMES IN DIFFERENT JURISDICTIONS

................................................................................................................................ 44

4.1 India .......................................................................................................... 44

4.1.1 Protection of Trade Secrets ................................................................. 44

4.1.2 Available Remedies ............................................................................ 46

4.1.3 Proposed Legislation .......................................................................... 47

4.1.4 Critical Analysis of the Proposed Legislation ..................................... 49

4.2 United States ............................................................................................. 53

4.2.1 Protection of Trade Secrets ................................................................. 53

4.2.1 Available Remedies ............................................................................ 54

4.3 European Union......................................................................................... 55

4.4 Other Countries ......................................................................................... 56

4.4.1 Brazil ................................................................................................. 56

4.4.2 China .................................................................................................. 56

4.4.3 Russian Federation ............................................................................. 57

4.4.4 South Africa ....................................................................................... 57

ix
Chapter 5 ................................................................................................................. 59

CONCLUSION ....................................................................................................... 59

REFERENCES ........................................................................................................ 62

PRIMARY RESOURCES ........................................................................................... 62

SECONDARY RESOURCES ...................................................................................... 62

LIST OF OTHER AUTHORITIES CITED ..................................................................... 66

x
Chapter 1
INTRODUCTION

In July, 2012, an internal investigation performed by Microsoft found that a senior

architect broke into Microsoft’s Redmond campus and uploaded pre-release software

updates of Windows 8 RT and other proprietary software that can help a

hacker reverse engineer the code. He later gave the files to a notorious blogger who

then posted screen shots of the pre-release on the Internet.1 Technology firms SanDisk

and Toshiba recently filed trade secrets law-suits on opposite sides of the Pacific, each

alleging misappropriation by a third party stemming from the two companies' joint

venture, despite having signed a non-disclosure agreement. In Japan, the alleged

perpetrator was arrested.2 In this context, it is important to discuss the Indian law

regarding the protection of trade secrets and the misappropriation of confidential

information

Businesses have sensitive information that is essential for gaining and maintaining a

competitive edge in the marketplace. If sensitive information of economic value is

disclosed to other entities, businesses may suffer intractable losses. This type of

information is called a trade secret. For example, if the chemical formula for Coke,

which the Coca Cola Company keeps “under lock and key in a bank vault"3 is

disclosed to a competitor, it may lose its market share. The economic value of a trade

1
Brianna Ford , Former Microsoft Employee Steals Trade Secrets (March 22, 2014)
http://www.ipbrief.net/2014/03/22/former-microsoft-employee-steals-trade-secrets/
2
Gabriel M. Ramsey and David Keenan, Civil Suits Filed In The Wake Of Alleged Flash Memory
Trade Secrets Misappropriation (April 4 2014)
www.mondaq.com/unitedstates/x/304598/Trade+Secrets/ExSanDisk+Employee+Arrested+in+Japan+
Civil+Suits+Filed+in+the+Wake+of+Alleged+Flash+Memory+Trade+Secrets+Misappropriation
3
Thomas Ronde. Trade Secrets and Information Sharing. Journal of Economics and Management
Strategy, 10(3), Fall 2001.
1
secret lies in it not being readily ascertainable by other businesses.4 The trade secret

definition is closely dependent on the business nature. For example, the formula that

the Coca Cola Company uses for its flagship beverage is its trade secret. Similarly, in

an online retail business like Amazon,5 the list of customers, sales projections,

marketing plans or other forms of sensitive data may form its trade secret. Businesses

have faced the issue of maintaining ownership and preserving the control over their

sensitive information including their trade secrets, since the inception of trade.

Traditional solutions for preserving sensitive information include patents, copyrights,

trademarks, trade regulations and contracts between business houses.

Patents are issued for a specific time limit and the information becomes available for

public use only after the patent expires within the limited time of law (20 years under

the TRIPs Agreement). Copyrights regulate documents but not the information

contained in them. Likewise, trademarks only specify what naming conventions

businesses can use to name their products/brands. Contracts are used in situations

where the trading parties are known to each other. Any misuse of secret information

results in legal actions taken against the defaulting business. Similarly, trade

regulations are defined to provide legal safety for businesses. Contracts and

regulations may not be effective in cases where law enforcement is difficult and the

legal boundaries are not clearly defined. This thesis underlines the need of legal

solutions for preserving trade secrets in inherently un-trusted environments.

4
Department Of Trade. Uniform Trade Secrets Act 1 (4).
5
Amazon. What sales rank mean. www.amazon.com, (August 2004).
2
1.1 Trade Secrets

Any confidential business information which provides an enterprise a competitive

edge may be considered a trade secret. Trade secrets encompass manufacturing or

industrial secrets and commercial secrets. The unauthorized use of such information

by persons other than the holder is regarded as an unfair practice and a violation of the

trade secret. 6

Trade secrets in India is the newest and least developed of the "big four" types of

intellectual property ("IP"): patents, copyrights, trademarks, and trade secrets. While

confidential business information is as old as business itself, trade secret is a more

recent phenomenon. Trade Secret in India is not protected under any specific law but

Indian Courts from time to time have recognized that confidential business

information qualifies as trade secrets. The jurisprudence that has developed in relation

to trade secrets and confidential information is by way of case laws. The earliest

Indian case discussing Trade Secret happened in 1987 in Delhi High Court wherein

the plaintiff filed a suit alleging misappropriation of know-how information,

drawings, designs and specifications disclosed to defendants. 7

Patents and trade secrets are often referred to as “two sides of the same coin”. For any

specific IP, one has to choose one or the other. However, the decision on which form

to use for a particular piece of IP is critical, and making the wrong choice can be

devastating. In today’s global economy, intense competition, employee mobility, and

6
http://www.wipo.int/sme/en/ip_business/trade_secrets/trade_secrets.htm
7
John Richard Brady and Others v. Chemical Process Equipments P. Ltd. and Another, A.I.R.(1987)
Delhi 372.

3
the proliferation of spin-off and start-up businesses make the protection of trade

secrets critical.

Leading corporations and innovative organizations readily recognize the need for

strong patent protection, but often overlook the formulas, devices, techniques,

patterns, processes, data compilations, and methods that surround patents and bring

breakthrough products to market. Often, this intellectual property cannot be protected

by patent law and other forms of protection are more appropriate. The importance of

being first in the marketplace has significantly increased the incentive for the

unscrupulous to engage in the misappropriation of information. If an employee leaves

with your valuable secrets memorized or tucked in a briefcase, or if you are

vulnerable to industrial espionage, theft, or violations of nondisclosure agreements,

your business stands at risk. Therefore, the most effective way to protect trade secrets

is first to identify what qualifies for protection and then to develop and implement

sophisticated trade secret policies and procedures tailored to a particular

business/industry.

1.2 Need for Protecting Trade Secrets

Why do we need trade secrets? This is a million dollar 8 question. After all, what good

are trade secrets if the owner cannot easily stop someone from using them? If

someone steals source code, then an injunction issues as a matter of course, does it

8
PRICEWATERHOUSECOOPERS, TRENDS IN PROPRIETARY INFORMATION LOSS, U.S. CHAMBER OF
COMMERCE & ASIS FOUND, SURVEY REPORT 1 (2002),
http://www.asisonline.org/newsroom/surveys/spi2.pdf (suggesting that proprietary information and
intellectual property losses exceeded $53 billion in a single year) ; see also Josh Lerner, The
Importance of Trade Secrecy: Evidence from Civil Litigation (Harvard Bus. Sch., Working Paper No.
95-043, 1994)
4
not?9 Why should trade secrets not be treated like any other property? The answers to

these questions are unclear, and, in general, any case law simply does not provide a

compelling answer to the question of why we should have trade secrets and whether

or not trade secrets should be entitled to the same treatment as other forms of real,

personal, and intellectual property.

At present, there is no specific legislation in India which provides the answers for all

the above questions. In the USA there are three layers of protection. Firstly, the

federal Economic Espionage Act, 1996 criminalizes misappropriation of trade secrets

with imprisonment up until 10 years, and organizations are subject to fines up to USD

5,000,000.10 Furthermore, the US International Trade Commission is empowered

under federal legislation to block imports of goods manufactured following a trade

secret misappropriation. State legislation on civil enforcement is highly harmonized.

All the States in US, except New York, North Carolina, and Massachusetts have

adopted a "uniform act" on the protection of trade secrets. European Commission, at

the end of 2013, proposed a new Directive to harmonize the protection of trade

secrets.11 This Directive contains a number of familiar concepts and broadly follows

the provisions in the Agreement on Trade related aspects of Intellectual property

Rights ( Hereinafter ‘TRIPS’) relating to the protection of undisclosed information. 12

9
This question does not address preliminary injunctions for which the standard equitable principles
undoubtedly apply. Amoco Prod. Co. v. Vill. of Gambell, 480 U.S. 531, 541–42 (1987 Instead, this is
a question solely relating to permanent injunctions issued after trial.
10
A defendant convicted for violating § 1831 can be imprisoned for up to 15 years and fined $500,000
or both. 18 U.S.C. § 1831(a)(5). Corporations and other organizations can be fined up to $10,000,000.
18 U.S.C. § 1831(b). A defendant convicted for violating § 1832 can be imprisoned for up to 10 years
and fined $500,000. 18 U.S.C. § 1832(a)(5). Corporations and other entities can be fined not more than
$5,000,000 for violating that provision.
11
http://europa.eu/rapid/press-release_IP-13-1176_en.htm
12
TRIPS, Article 39.
5
There are clear economic justifications which would be highlighted in subsequent

chapters of the thesis, for granting legal protection to trade secrets and confidential

business information. A sound legal environment to protect trade secrets would

contribute to fostering innovation by Indian firms. Trade secrets and their protection

appear to be important to all business sectors, reflecting their pervasiveness and

importance to virtually all Indian States, regardless of their size, as relevance of trade

secrets is acknowledged with the same level of importance by large as well as

medium and small firms. Trade secrets protection both complements and supplements

the protections offered by patents, copyrights and other protection mechanisms.

1.3 Motivation of the Study

My friends who study Physics tell me that one of the great research challenges is

trying to conceptualize and explain dark energy and dark matter. We know that dark

energy and dark matter are both out there, and together they comprise most of the

universe. But because we cannot directly perceive them, our current ability to explain

them empirically is limited. There is something parallel to the dark energy/dark matter

problem in Intellectual Property as well, namely the treatment of trade secrets. We

cannot refute the centrality of Trade secrets. Trade secrets may be the most used of all

IP rights, as reported by people in business. 13 Similar conclusions have been reported

over a period of years across different locations. Given the need for a codified Trade

Secret law in India, this study examines potential justifications for a Trade Secret

Law, as well provides a comparative analysis of the trade secret regime in different

jurisdictions across the globe.

13
February 2012 report by John E Jankowski published by the National Science Foundation, Business
Use of Intellectual Property Protection Documented in NSF Survey (NSF 12–307)
6
1.4 Organization of the Study

The thesis is structured to underline the importance of Trade Secrets protection in

India and propose feasible solutions to the existing loopholes in the proposed draft for

a law on protection of confidential information and know-how in India.

Chapter 1 provides a brief overview about the intention behind this thesis and why is

there a need for a trade secret regime in India. It contains the motivation behind this

thesis and explains the future consequences of acute insufficiency of the existing

framework for protection of trade secrets in India.

Chapter 2 furnishes the justification for considering Trade Secrets as a form of

property. Along with the economic justification, this chapter also covers the

philosophical reasoning for the same.

Chapter 3 consists of the basic concepts to be known with regard to the trade secret

scenario in India and what are the International obligations that India needs to comply

with. It provides a holistic view of the concepts related to misappropriation of

confidential information and it is different from other forms of Intellectual Property.

Chapter 4 comprises of analysis of the Trade Secret regime in different jurisdictions

including India, United States, European Commission and various other countries.

The chapter briefly analyses the approach adopted by courts in various instances

7
related to misappropriation of confidential information and know-how and what are

the remedies available in case of absence of any codified law on Trade Secrets.

Chapter 5 concludes with summary of the research performed with relation to the

existing framework for Trade Secrets in India and critically analyses the National

Innovation Draft, highlighting the pros and cons of the same. It also proposes an

exclusive trade secret law for India.

8
Chapter 2
JUSTIFICATION FOR TRADE SECRETS

2.1 Property as a Potential Justification

Any justification for protection of trade secrets must begin with consideration of

whether trade secrets are property. For some, if trade secrets are property, then laws

protecting them are normatively justified. Thus, the question of whether or not trade

secrets are property has raged on for many years. While some wonder why it

matters,14 others believe that the shift toward calling intangible assets “property” will

continue to create a shift toward the overprotection of intellectual property. 15 Three

primary theories consider trade secrets as property: exclusivity theory, integrated

theory, and bundle theory.

2.1.1 Exclusivity Theory

Scholars who believe exclusive rights are the sole requirement for property disagree

about whether trade secrets should be property. For example, Judge Frank

Easterbrook argues that intellectual property includes the right to exclude, just like

real or personal property. This analysis was followed in Ruckelshaus v. Monsanto

Co.16 “The right to exclude others is generally ‘one of the most essential sticks in the

bundle of rights that are commonly characterized as property.’17

14
Stephen L. Carter, Does It Matter Whether Intellectual Property Is Property?, 68 CHI.-KENT. L.
REV. 715, 716 (1993)
15
Ibid
16
Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984)
17
Id. (quoting Kaiser Aetna v. United States, 444 U.S. 164, 176 (1979).
9
The problem with this argument is that trade secrets are not actually exclusive, as

“The owner of the trade secret is protected only against the appropriation of the secret

by improper means and the subsequent use or disclosure of the improperly acquired

secret. There are various legitimate means, such as reverse engineering, by which a

trade secret can be acquired and used.18” Some scholars however look forward to

Thomas Jefferson’s analysis of the issue: Inventions then cannot, in nature, be a

subject of property. Society may give an exclusive right to the profits arising from

them, as an encouragement to men to pursue ideas which may produce utility, but this

may or may not be done, according to the will and convenience of the society, without

claim or complaint from anybody. 19

The limit of this argument is that regardless of the normative basis for such a right,

the legally enforceable right to exclude is always defined by the “will and

convenience of society,” even for real property.20 There is no reason why a real

property owner must have a right to exclude others even if he or she has the ability to

do so by building a fence; instead, the law allows the owner to exclude even without a

fence. Similarly, those with patents are given the same rights - patent law does not

have an independent development or fair use exception.21 Ideas, real property,

personal property, and other tangible or intangible assets all have the legal rights that

18
Cadence Design Sys., Inc. v. Avant! Corp., 57 P.3d 647, 650 (Cal. 2002)
19
Letter from Thomas Jefferson to Isaac McPherson (Aug. 13, 1813), in THE WRITINGS OF
THOMAS JEFFERSON 334 (Library ed. 1903); see Graham v. John Deere Co.,383 U.S. 1, 9 n.2
(1966) (outlining Jefferson’s philosophy on the nature of patent monopolies).
20
Of course, many might agree that there is a moral right to exclude even without the benefit of the
law.
21
Even this statement is too much; patent law limits exclusive use in the area of certain business
method patents and medical use. 35 U.S.C. §§ 273, 287(c) (2000)
10
the state grants.22 The primary difference is the difficulty of enforcement; real and

personal property may be unique, allowing for exclusivity through possession,23 while

current technology does not allow a purging of ideas in the brain. 24 Thus, it is not

clear why the right to exclude should make trade secrets property, or the lack thereof

should exclude trade secrets from being property.

2.1.2 Integrated Theory

Rather than looking at exclusion, integration theorists look at how the asset is

acquired, used, and disposed.25 They argue that exclusivity is not enough, nor even

necessary, to define property. 26 Even then, scholars cannot agree. For example, Adam

Mossoff argues that trade secrets are property because they are acquired by the

actions of the trade secret owner because discoverers can make their “own use” of the

information because it is secret and because the owners can decide how the

information is disposed of by publication or transfer.27 Even then, scholars cannot

agree. For example, Adam Mossoff argues that trade secrets are property because

they are acquired by the actions of the trade secret owner because discoverers can

make their “own use” of the information because it is secret and because the owners

can decide how the information is disposed of by publication or transfer.28 This

theory, however, also fails to resonate. How is it that two people can acquire and use

22
For example, real property rights do not include the right to exclude in adverse possession, nor do
they include the right to limit flyovers, which were excluded in Christopher. See E.I. duPont
deNemours & Co. v. Christopher, 431 F.2d 1012 (5th Cir. 1970)
23
There is a reason for the maxim that “possession is nine-tenths of the law
24
Such technology is not outside the purview of science fiction, however. If ideas could be purged
from the minds of others, then Jefferson’s argument would be weaker still.
25
Adam Mossoff, What Is Property? Putting the Pieces Back Together, 45 ARIZ. L. REV. 371, 405–
06 (2003); see also Samuelson, supra note 60, at 370 (the most important rights associated with
property are use, enjoyment, possession, transfer, and exclusion).
26
Ibid.
27
Id.
28
Mossoff, Supra note 25.

11
the same secret? Why should acquisition and use of an idea that is free for all to

discover merit any protection? Even though information may be acquired, used, and

transferred, she relies on the Masland point of view that trade secret misappropriation

is about breach of confidences or other use of improper means. Trade secrets are not

property, but instead the enforcement of social values. 29

2.1.3 Bundle Theory

The middle ground is to treat trade secrets as a “Hohfeldian” bundle of rights,30

wherein trade secret rights are simply a collection of social rights and duties. This is

an approach this Article takes below as part of substantive property analysis. A

problem with the bundle of rights theory is that the word “property” ceases to have

any real meaning.31 With the bundle, it is impossible to determine what particular

bundle makes a set of rights property and what bundle renders a set of rights “not

property.”

For all other intents and purposes, trade secrets are a bundle of rights; the only

differences between trade secrets, patents, and real property are the collection and

mixture of rights, what is called as “substantive property.” Thus, whether trade secrets

are normatively justified as “substantive property” will depend on whether the bundle

of rights itself is normatively justified. This is not to say that property rights are

unimportant or that trade secrets are not property. Indeed, if you asked most business

29
Pamela Samuelson, Information as Property: Do Ruckelshaus and Carpenter Signal a Changing
Direction in Intellectual Property Law?, 38 C ATH. U. L. REV. 365, 396 (1989).
30
See generally Wesley N. Hohfeld, Fundamental Legal Conceptions as Applied in Judicial Reasoning,
26 YALE L.J. 710 (1917).
31
Thomas C. Grey, The Malthusian Constitution, 41 U. MIAMI L. REV. 21, 30 (1986)
(“[Modern scholars] see property in resources as consisting of the infinitely divisible claims to
possession, use, disposition, and profit that people might have with respect to those things. There is, on
this conception, no essential core of those rights that naturally constitutes ownership.”)
12
owners, they would say that their trade secrets are their property. This tends to support

the philosophical justification for trade secrets discussed below. However, because

trade secrets are so different from real and personal property and even from other

forms of intellectual property, normative analysis of specific property rights granted is

helpful to justify why trade secret owners call their information property.

2.2 Economic Justification of Trade Secrets

Perhaps the best justification for the existence of trade secrets is a purely economic

one,32 for two primary reasons.

- trade secrets communicate to the economic value of information; it stands to

reason that economic analysis is the appropriate way to justify the law. 33

- economic analysis shows that the particular bundle of rights associated with

trade secrets adds to societal wealth in a defensible, potentially measurable

way.

In short, the bundle of rights associated with trade secret law is justified because it

enhances marginal benefits for the society more than the marginal costs. It is not

disputed that the best justification also requires the most explanation.

32
This is the case, at least, in our market economy. Economists subscribing to a view of shared
resources might disagree. See, e.g., EUGEN LOEBL, HUMANOMICS: HOW WE CAN MAKE THE ECONOMY
SERVE US—NOT DESTROY US 29–34 (1976).
33
Vincent Chiappetta, Myth, Chameleon or Intellectual Property Olympian? A Normative Framework
Supporting Trade Secret Law, 8 G EO. MASON L. REV. 69, 69 (1999). Professor Chiappetta separates
misappropriation into three parts: misuse of voluntary disclosures, torts that threaten public order, and
other improper means. While his analysis of each of these types of misappropriation is helpful for
understanding the particular type of misappropriation, I believe that these categories overlap too much
to allow for distinctions in many cases, and such distinctions were not made when the law was created.
Thus, I attempt to set out a more unified approach in this Article when seeking a justification for trade
secrets. See also James W. Hill, Trade Secrets, Unjust Enrichment, and the Classification of
Obligations, 4 VA. J.L. & TECH. 2 (1999) (arguing that unjust enrichment justifies trade secret law).
The unjust enrichment theory he presents is quite similar to utilitarian strains of the Lockean theory
described in this Article. While Professor Hill provides a general justification for protecting trade
secrets, he does not address in detail the social costs and benefits associated with the specific trade
secret laws in place.
13
The primary benefit of trade secret law is decrease in both the amount spent on

protecting secrets and the amount spent by those who seek to learn them. However,

creating incentives to innovate is a very minor justification of trade secret law.34

Patents and copyrights foster an incentive to create by allowing for a period of

exclusive use. Forced disclosure is not the status quo, however, the marginal incentive

to innovate provided by trade secret law is small because companies would still

protect secret information by obviously keeping such information secret.35 Such

information need not be an innovation. Even the earliest trade secret law protected

customer information.36

The exclusivity is required because of the “public good” nature of innovations and

original works. If others could freely use innovations and original works, then the

creator might not be able to recover the cost of creation. By allowing the creator

exclusive use, the creator can more readily recoup costs of creation. In industries

where there is no self-help, patent and copyright may be the only source of protection

to encourage innovation. Trade secrets do not fall into this category because the

inability to protect information by self-help does not change with trade secret law. If a

company cannot keep its secrets confidential, trade secret protection will not add new

abilities to keep the information secret. Thus, information that owners would

otherwise keep secret shares little of this “public use” property; if information can be

kept secret through self-help, then owners will spend more money to keep the

34
Ibid
35
To the extent that trade secrets eliminate wasteful spending or otherwise reduce the cost (or increase
the value) of research, then companies may spend more on innovation—this is not what I mean by
incentives to innovate in this context.
36
Empire Steam Laundry v. Lozier, 130 P. 1180 (Cal. 1913). Further, a primary economic question is
whether a company should divulge its information in a patent application.
14
information secret even in the absence of the law. As a result, trade secret law (or

even secrecy without the law) does not necessarily confer an opportunity for the

owner to charge more than would be available on the open market.37 In fact, to the

extent that trade secrets reduce production costs, they would lead to lower pricing in

the market. A trade secret must have competitive value, but every company has

information that has competitive value. Take customer lists, for example. Knowing

who to contact will reduce costs of sales vis-a-vis a company’s competitors. This fact

does not mean that a company can extract monopoly pricing; while the company may

have a leg up, product quality and pricing will still affect competition. The same is

true for a secret process for making goods. Assume there is a secret process for

making food taste better or making a widget more cheaply. Producers compete with

other food and widget makers, and they still have price competition. Their

competitors will have their own methods for taste enhancement and cost reduction.

2.3 Philosophical Justification of Trade Secrets

There are two primary philosophical branches that justify trade secrets: labor value

and veil of ignorance.

2.3.1 Labor Value theory

The most cited philosophical theory is one where those who create value through their labor

ought to own the end product of their labour.38 This theory is often called a “Lockean”

theory after John Locke and his theory of property. Locke posited that one who

37
It is not clear that copyrights or patents confer this right either. While an invention might be
incorporated into a device such as a DVD player, one cannot say that monopoly profits are available to
the maker of the DVD player. Indeed, the invention might be necessary simply to compete.
38
Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1002–03 (1984) (citing Locke as a justification of trade
secrets as property).
15
improves the land with his or her labor should be entitled to ownership of that land.39

Under this theory, even information that is not secret could still be property. 40 This

theory is the implicit basis for any business owner’s consideration of trade secrets as

valuable property. An initial criticism of this theory is that Locke was dealing with

real property and not intellectual property, which can be “possessed” by two people at

the same time. The value of the trade secret is not its novelty (like a patent) or its

originality (like a copyright) but rather its secrecy. It follows that the labor used to

discover or assemble such information may “belong” to the originator if that

information is not generally known. Two people might even know the same

information, and each might own it as against others who do not.

Thus, under this Lockean view, we would not necessarily expect trade secret rights to

be lost upon inadvertent or wrongful disclosure. This leads to another potential

criticism of the Lockean theory: it may tend to overprotect information in

contravention to the end goal of innovation and freedom of information. The

argument is that labor should not be enough to create exclusive ownership of

information where valuable social goals can be achieved through the sharing of

information. Locke, however, would not go so far as to protect property to the

exclusion of all others in society. Locke makes clear that his theory is based on the

non-scarcity of land, such that one person’s improvement of land will not deprive
39
JOHN LOCKE, THE SECOND TREATISE OF GOVERNMENT § 27 (J.W. Gough ed., Basil
Blackwell 1956) (1690).
40
Int’l News Serv. v. Associated Press, 248 U.S. 215, 236 (1918) (protecting published news and
stating that “the right to acquire property by honest labor or the conduct of a lawful business is as much
entitled to protection as the right to guard property already acquired”). In International News, the value
was based on timeliness and not secrecy, and was thus protected. Professor Bone criticizes Lockean
theory because it does not explain the secrecy requirement. Bone, supra note 71, at 284. If one
assumes, however, that the information has value because it is secret, then the underlying normative
basis for requiring and protecting secrecy makes sense, even if the owner might use self-help to keep
the secret as well. If the information does not have value because it is generally known, then there
would be little “labor value” to protect it because the information is already available.
16
others of their ability to improve neighboring land.41 Analogized to trade secrets, this

principle means that trade secret owners should not be able to exclude others who

independently develop the same information. This means, as well, that once

information is generally known, even if wrongfully, then the rest of society should not

be restrained from using the information to improve their own businesses. Perhaps the

most persuasive criticism of Lockean theory is that the underlying support for it is

lacking. For example, why should the state of nature result in a world where people

own what they create? After all, Hobbes comes to a contrary result, namely that

nature is a “state of war” in which each person is free to take from others and/or self-

defend until society as a whole agrees to an offshoot of the Golden Rule.

Additionally, according to the strong form of the Coarse theorem, if transaction costs

are low, then it should not matter who is initially granted possessory rights, so there is

no reason why the developer of information necessarily must have rights.

Norms are accepted standards, and so long as the Lockean theory is widely accepted

as a morally justified foundation for rights, then the theory is sufficient justification

for the rights, whether or not the result is efficient and whether or not one can

determine exactly where the lines can be drawn from the theory. Moral rights in

works of art are a good example of a broadly accepted (in Europe, at least) set of

rights that are not necessarily economically efficient. Nonetheless, one can advance

an argument that there is normative justification for the notion that artists should be

able to control how their art is displayed, regardless of how we might want to balance

those rights against owners of the tangible expression of that art or even against

41
LOCKE, supra note 39, §§ 36–38; see also Wendy J. Gordon, A Property Right in Self-Expression:
Equality and Individualism in the Natural Law of Intellectual Property, 102 Y ALE L.J. 1533, 1540
(1993) (discussing Locke-based limits on ownership)
17
society. Whether one agrees that widely accepted norms are a sufficient justification

will depend on whether one agrees with the moral force of the underlying reasoning.

For those who disagree with the moral force of this argument unless there is a

utilitarian justification, Locke relied in part on utilitarian analysis—namely that labor

put into the land will improve it for all of society. This is similar to the notion that

intellectual property laws (and the limitations placed on exclusive use of such

intangible assets) are designed to foster innovation and creativity.

Even trade secrets, which by definition are not publicly disclosed, can have a wealth

enhancing effect, such as lower prices for consumers and enhanced quality of goods.

Furthermore, there are other utilitarian explanations for the Lockean theory. For

example, owners may tend to value the information they “discover” through their

labor more than others, even if idiosyncratically. Even the simple fact that a company

is using a particular but otherwise publicly available process to the exclusion of other

processes can have value; the fact that competitors may overestimate the barriers to

entry into a market has a real, if difficult to measure, value to the owner. An

attribution of higher value warrants protection of trade secrets that includes the right

to exclude where the information would be kept secret by default.42 Similarly, it is

reasonable to assume that people gain utility (more aptly a reduction in disutility)

from the security associated with the ability to keep others from taking or using what

they value to their detriment.43 This utility extends beyond reducing expenditures to

42
Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109
HARV. L. REV. 713, 760–62 (1996).
43
Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules and Inalienability Rules:
One View of the Cathedral, 85 HARV. L. REV. 1089, 1105–06 (1972))(discussing the benefits of
“control” in a property rule); see also WendyJ. Gordon, On Owning Information: Intellectual Property
and the Restitutionary Impulse, 78VA. L. REV. 149, 225–27 (1992) (discussing negative effects on the
18
protect information; reducing the worry associated with potentially losing (or losing

value of) a valuable asset creates utility.

Finally, the strong form of Coase theorem assumes that transaction costs are zero, but

in the real world, transaction costs are common and often high, especially with respect

to licenses of secret information. As a result, the right should initially be vested in the

person whereby value and transaction costs are optimized. Someone who expends

labor to develop a trade secret rather than to license the information from someone

else, has already considered the cost/benefit choice, or the labor would not have been

expended in the first place. Thus, in the absence of any clear justification to the

contrary, if there are to be any rights at all, then initial rights should be placed with

the developer of the secret.

2.3.2 Original Position Theory

Contractarian theories relate to hypothetical bargaining of a set of rules by

hypothetical individuals who have an interest in the outcome. The result of such

bargaining is theoretically normatively justified by ex ante agreements to be bound by

a set of rules. John Rawls popularized one such contractarian theory called the “veil

of ignorance.” The veil of ignorance is a hypothetical “state of nature” that predates

the distribution of rights in which the people making the decision about the

distribution do not know what position they will occupy after the distribution is

complete. Rawls suggests that those forming a society under the veil of ignorance

would implement the “maximin” principle— namely selecting a distribution of wealth

holder’s control andautonomy). This discussion simplifies matters by collapsing unjust enrichment
moral theory into a Lockean form of utility maximization
19
that maximizes the wealth of the person with the least. This seems reasonable if one

accepts the right assumptions—that people operating in ignorance would want to

make sure that if they turn out to be the least well off, then they would not be

destitute. Landes and Posner thus argue that companies would agree to allow reverse

engineering because of the benefits such a rule might bring to everyone in the

industry. Professor Bone criticizes contractarian theories in general on the grounds

that “real world” companies would protest following the agreements made during

hypothetical negotiations by those who do not share their “real world” preferences.

His argument highlights many of the problems with contractarian theory in general,

such as that their moral force is too dependent on the constraints on hypothetical

bargaining—especially as those constraints relate to those in the real world who

would prefer a free market to determine such rules. Despite this criticism, one

particular set of bargaining constraints can shed light on the issue—namely the “veil

of ignorance.” Under the veil, the “founders” would not know what position they

would occupy, and thus the rules they might agree to are determined to be fair and

just.

From a moral standpoint, it is irrelevant what real world people would agree to in

order for these rules to have normative support. Because debate about rules will

always be biased by real world positions, any statements about the justification of

rules will be biased as well. The goal, however difficult it might be to achieve through

thought experiments, is to determine what someone might agree to if he or she did not

know his or her lot in life while making the decision. This leads to a more specific

criticism of the veil of ignorance in particular, there is no reason to believe that any

particular distribution of rights associated with trade secrets would be the outcome.
20
Why, for example, is reverse engineering allowed? Why is unjust enrichment a

measure of damages? Why is improper means broader than common law wrongs?

There is no reason to believe that any of the above choices should be the outcome, or

perhaps all of them could be a just outcome. Even if the current set of rules cannot be

predicted, veil of ignorance analysis is still useful from a normative point of view.

One might be able to consider the balancing those in the original position might have

considered given the current set of rules. This may be sufficient for justifying the

existence of trade secret law. After all, even with efficiency analysis we have no way

of knowing whether a particular rule really is the most efficient in all circumstances.

For example, if one assumes that people value that which they create more than others

do, but at the same time that people want to build on the work of others, it is well

within the bounds of reason that some form of limited protection of trade secrets

would be the outcome of a negotiation under the veil of ignorance.

21
2.4 Differentiation from other Intellectual property

Trade secrets differ from other forms of intellectual property in many ways. The most

significant difference is based on the role of public disclosure. Copyright law and

patent law are founded on the notion that creativity and innovation, respectively, are

rewarded by limited governmental protection to facilitate recoupment of the costs of

creation. Furthermore, the policies of patent and copyright law favor building on prior

work, as well as freedom for all to use subject matter that is outside the scope of

protection.44

Trade secrets are treated exactly opposite. The trade secret owner is rewarded for

keeping information that is neither new nor original away from the public for an

unlimited duration. Thus, information that could not be patented or copyrighted is still

protected for as long as the owner can keep the information secret. These differences

lead to two criticisms of trade secret law. First, there is a lack of public benefit due to

the lack of information sharing. Second, there is little or insignificant incentive to

innovate because the owner obtains protection of the information by keeping it secret

even in the absence of the law.Trade secrets are both similar to and dissimilar from

other areas of intellectual property in a variety of specific ways which are being

summarised below.

44
LANDES & POSNER, supra note 25, (noting that the “incentive” versus “access” paradigm is
important in intellectual property, but that it should not be the only analysis to consider); see also id. at
115–23 (discussing public benefits of the fair use doctrine in copyright law). Note, however, that
copyrighted works need not be published to be protected, but there is little doubt that the public
benefits more when such works are published and when others can fairly use portions of them in new
works.
22
 a) Unlike a patent, information need not be unique, novel, or non-obvious to be

protected as a trade secret.45 In fact, trade secret information need not even be

original, allowing for the protection of information like names and phone

numbers that would not be protected under copyright. 46

b) Unlike patents and trademarks, but like copyrights, trade secret laws allow for

the protection of identical information if two parties independently discover

the information.47 Two companies can own the same trade secret, though they

arguably would never know it.

c) Unlike all other forms of intellectual property, the right to exclude applies

only when information is obtained by improper means. This is most like

copyright’s distinction between illicit copying and fair use, reverse

engineering and independent development.48 This is a weak analogy,

however, because copyright does not require any wrongdoing other than the

copying itself, whereas trade secret misappropriation requires copying in

addition to other improper means.

d) Trade secrets resemble the patent requirement for usefulness and the

trademark requirement for actual use 49 because they must have some

independent economic value by being unknown to others. This threshold is

45
35 U.S.C. §§ 101–103 (2000). But see Jostens, Inc. v. Nat’l Computer Sys., Inc., 318 N.W.2d 691,
699 (Minn. 1982) (“Clearly, the CAD/CAM system as such, as the combination of three generally
known subsystems, does not achieve the degree of novelty or ‘unknown-ness’ needed for a trade
secret.”). Jostens is not generally accepted
46
Feist Publ’ns, Inc. v. Rural Tel. Serv., 499 U.S. 340, 349 (1991; ABBA Rubber Co. v. Seaquist, 286
Cal. Rptr. 518, 526 (Ct. App. 1991)
47
CAL. CIV. CODE § 3426.1(a) (West 1997) (“Reverse engineering or independent derivation alone
shall not be considered improper means.”). The UTSA does not include this sentence, though reverse
engineering is commonly accepted as an exception to improper means. UNIF. TRADE SECRETS
ACT § 1 cmt. (amended 1985), 14 U.L.A. 538 (Supp. 2006); see also Rockwell Graphic Sys., Inc v.
DEV Indus., Inc., 925 F.2d 174, 178 (7th Cir. 1991; Cadence Design Sys., Inc. v. Avant! Corp., 57 P.3d
647, 650–51 (Cal. 2002).
48
17 U.S.C. § 107 (2000).
49
Lanham Act § 1(a), 15 U.S.C. § 1051(a) (2000).
23
 relatively low, however, and minimal “sweat of the brow” is usually sufficient

for protection.50 However, trade secrets only require potential value, while

trademarks require actual use in commerce, which implies actual value. 51

e) With respect to registration, trade secrets are most like unregistered common

law trademarks and unregistered copyrights. Unlike copyrights, there is no

registration requirement prior to filing suit, and unlike patents and trademarks,

there is no examination.

f) Finally, unlike a patent, which must be new, or a copyright, which must be

original, a trade secret need not be absolutely secret to be a trade secret.

The differences discussed above allow trade secrets to exist without conflicting with

other areas of intellectual property protection. Further, some of these differences

become important to the justification of trade secret law discussed in the antecedent

chapters of the study.

Even if a country’s injunctive judicial procedures are surmountable, a country must

also have an effective judicial system to even allow injunctive enforcement to be

brought forward. This requires determining whether a country has an effective judicial

system to enforce trade secret protections.

50
Alex Foods, Inc. v. Metcalfe, 290 P.2d 646, 654 (Cal. Dist. Ct. App. 1955) (finding that peculiar
“likes and fancies” of customers are protectable).
51
Lanham Act § 1(b) (registration for intent to use).

24
Chapter 3
BASICS OF TRADE SECRETS

3.1 Brief History of Trade Secret Law

Trade secret law is the oldest form of IP protection, and already in Roman times the

law afforded relief against a person who induced another’s employee (slave) to

divulge secrets relating to the master’s commercial affairs. Trade secrecy was

practiced extensively in the European guilds in the Middle Ages and beyond. Modern

trade secret law evolved in England in the early 19th century, in response to the

growing accumulation of technology and know-how and the increased mobility of

employees.52

The Delhi High Court appear to be the first court in India to have talked about know-

how and confidential information.53 The Supreme Court of Massachusetts was the

first court in United States to provide a complete view of Trade Secrets. 54

Copyright law entered India in 1847 through an enactment during the East India

Company's regime. In 1914, the then Indian legislature enacted a new Copyright Act

which merely extended most portions of the United Kingdom Copyright Act of 1911

to India. India has enacted Copyright Act, 1957, which provides complete and

comprehensive copyright protection in India. Further, it enacted Trademarks Act,

1999, which repealed the Trade and Merchandise Marks Act, 1958. The Patents Act,

52
RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 39 cmt. a (1995).
53
John Richard Brady And Ors v. Chemical Process Equipments P. Ltd. and Anr [AIR 1987 Delhi
372]
54
See Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 493 n.23 (1974); Warner-Lambert Co. v.
Execuquest Corp., 691 N.E.2d 545, 547 (Mass. 1998).
25
1970 extends protection to Patents in India. But, it is very apparent that there is no

specific law for protection of Trade Secrets in India.

Trade secrets as an intellectual property have the potential to translate intangible value

into economic growth.55 Unfortunately, the unfavorable treatment accorded to trade

secrets has displaced it from the domicile of intellectual property rights (IPR) law. An

important reason for the same is that IPR laws are tuned to bring transparency and

probity in knowledge management whereas the trade secrets are wearing a veil in

secrecy and confidentiality. Trade secrets are accorded confidentiality under legal

protection allowing claims for injunctive relief for unauthorized use and

dissemination by way of recovery of damages.

Further, the breach of confidentiality attracts criminal charges. The extent of

recognition of trade secrets around the world can be gauged by the fact that a majority

of working technologies worldwide are protected as trade secrets rather than by

patents.56 At the International level, North American Free Trade Agreement (NAFTA)

and the Agreement on Trade-Related Aspects of Intellectual property (TRIPS) ratified

provision related to trade secrets during the Uruguay Round of the General

Agreement on Tariffs and Trade (GATT). Since then, there has been an emerging

trend in adoption of Domestic statutes directed at the enhanced protected of trade

secrets.

55
Jorda Karl F, Federalizing trade secret law: A cause whose time has come,
http://law.unh.edu/assets/pdf/germesgausen-newsletter-08-sf-editor.pdf (11 February 2011)
56
Magri Karen A, International aspects of trade secrets law
http://www.myersbigel.com/library/aritcles/InternationalAspectsOfTradeSecretLaw.pdf (10th February
2011)
26
3.2 Concept of Trade Secret

“Trade Secret” is not defined by any enactment in Indian jurisdiction. The remotest

reference to this field of law is found in Section 16 of The Copyright Act, 1957 which

is reproduced as under:

“Section 16. No copyright except as provided in this Act

No person shall be entitled to copyright or any similar right in any work, whether

published or unpublished, otherwise than under and in accordance with the provisions

of this Act or of any other law for the time being in force, but nothing in this section

shall be construed as abrogating any right or jurisdiction to restrain a breach of trust

or confidence.” 57

There are provisions under The Indian Penal Code which refer to acts of “criminal

breach of trust” as an offence. The same is provided as under:

“Section 405. Criminal breach of trust

Whoever, being in any manner entrusted with property, or with any dominion over

property, dishonestly misappropriates or converts to his own use that property, or

dishonestly uses or disposes of that property in violation of any direction of law

prescribing the mode in which such trust is to be discharged, or of any legal contract,

express or implied, which he has made touching the discharge of such trust, or

willfully suffers any other person so to do, commits "criminal breach of trust".”

57
Section 16, Indian Copyright Act, 1957

27
However, it relates to “trust with property”. Though property is not defined under the

Indian Penal Code, there are references to movable or immovable properties and not

intangible properties such as Intellectual Property. The Indian Penal Code, earlier

contained provisions dealing with “property marks” having reference to trade marks

which have been repealed. The definition of trade secret as envisaged in Article 39.2

of the TRIPS Agreement is in line with the factors that need to be proved by a

plaintiff pleading “breach of confidential information.

Trade secrets, just like any other intellectual property rights, can be extremely

valuable to a company's growth and sometimes even critical for its survival.

Businesses must ensure that they adequately protect their business processes,

technical know-how and confidential information from competitors.

Substantiating from the above definitions, trade secret may refer to a practice,

process, design, instrument or a compilation of data or information relating to the

business which is not generally known to the public and which the owner rationally

attempts to keep secret and confidential. Such data or information may also involve an

economic interest of the owner in obtaining an economic advantage over competitors.

28
Table 1.1 shows the different forms of trade secrets that belong to different divisions

of information. A concise overview of some of the different items that can constitute a

trade secret is given below:

Table 1.1

Classifications of Trade Secrets

Technical Production Sales Information Financial

Information Information Information

Formula Cost/price Data Proprietary Budgets

information

Prototype Production Sales forecast Product

Machinery Margins

Experimental Data Manufacturing Customer Lists Operating

Technology costs

Design Drawings Production know- Buying habits Profit/Loss

how statements

Research and Production Customer Internal

Development reports Process confidence financial
specifications management documents

Source : Muhammad Zaki Malik Enforcing Trade Secrets among Competitors on the Semantic Web,
Virginia Polytechnic Institute and State University

29
3.2.1 The TRIPS Mandate
Article 39 of the TRIPS requires member states to protect undisclosed information

(Trade Secrets) in pursuance of Article 10 bis of the Paris Convention, 1967. It must

be noted though that nowhere in the text of Article 39, is the term ‘trade secrets’ or

‘know-how’ used. ‘Undisclosed Information’ is one of the categories of intellectual

property as defined in Article 1(2) of TRIPS. The obligation established under Article

39(1) is limited to the protection of undisclosed information against unfair

competition as provided in Article 10 bis of the Paris Convention. The act of unfair

competition may be defined as:

“any act that a competitor or another market participant undertakes with the

intention of directly exploiting another person’s industrial or commercial

achievements for his own business purposes without substantially departing from the

original achievement”.58

Article 39(2) does not clearly define what ‘undisclosed information’ comprises of. It

merely specifies the conditions/requirements that the information needs to meet, in

order to be deemed ‘undisclosed’ and protectable, namely

a) It should be a secret

b) It should possess a commercial value

c) It should be subject to reasonable steps, under the circumstances to be kept

secret.59

58
WIPO, protection against unfair competition, Geneva, 1994, p 55.
59
UNCTAD, Resource Book on TRIPS and Development (Cambridge University Press, New York)
2005, p. 521.
30
Rather than treating such undisclosed information as a form of property, the

agreement requires that a person lawfully in control of such information must have

the possibility of preventing it from being disclosed to, acquired by, or used by others

without his consent in a manner contrary to honest commercial practice. 60

3.2.2 Interpretation
The TRIPS Agreement is the first multi-lateral instrument dealing with undisclosed

information. Prior to it, there existed only the general obligations in respect of unfair

competition found in Article 10 bis of the Paris Convention. That link to the Paris

Convention in Article 39(1) was used to justify the inclusion of this section in the

TRIPS Agreement.61 Article 39 (1) reads - ‘In the course of ensuring effective

protection against unfair competition as provided in Article 10 bis of the Paris

Convention (1967)’. A plain reading of this provision might make the reader to

believe that only those WTO members who were party to the Paris Convention have

obligations under this. But this is not the case, as even WTO members not party to the

Paris Convention must comply with Article 10 bis, as provided under Article 2(1) of

TRIPS.

Article 39(2) is the operative part of the provision, specifying the conditions

governing any disclosure of the information concerned:

a) The information 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
60
Guide to Uruguay Round Agreement (Kluwer Law International, The Hague) 1999, p.216.
61
Gervaris Daniel, The TRIPS Agreement: Drafting History and Analysis (Sweet & Maxwell, London)
1998, p. 185.
31
 of information in question. 62 This provision incorporates a plan of secrecy by

providing that the relevant information must be ‘not generally known’ or

‘readily accessible’. The extent of secrecy may be determined by comparing it

with the knowledge of a person skilled in the art who has access to normal

sources of specialized information. 63

b) The information must have commercial value because it is secret 64 i.e the

information must give a competitive advantage. The information need not

necessarily be able to put into practice in a valuable way. The fact that

competitors and/or consumers may perceive such information as having value

because it is kept secret would be sufficient to give its holder a competitive

advantage.

c) The information must have been subject to reasonable steps under the

circumstances, by the person lawfully in control of the information, to keep it

secret.65 The provision is vague in as much as it does not identify the type of

steps that could be taken, such as encryption, safes, division of work,

contractual restrictions, etc.

3.2.3 India’s obligation under TRIPS

Being a signatory to the TRIPS Agreement, India is under an obligation to bring its

intellectual property law regime in conformity with the existing International

Standards. This obligation is further emphasized by Article 51 of the Constitution of

India, which makes it a Directive of State Policy, to foster respect for International

62
TRIPS, Article 39(2)(a)
63
Gervaris Daniel, The TRIPS Agreement: Drafting History and Analysis (Sweet & Maxwell, London)
1998, p. 185.
64
TRIPS, Article 39(2)(b)
65
TRIPS, Article 39(2) clause (a), (b) and (c).
32
law and treaty obligations and in dealings of organized peoples with one another.66

India has complied with this obligation to a large extent by enacting new and

amending the existing legislations on intellectual property laws.

The statutory protection to trade secrets is not available in India as yet,

notwithstanding that the courts have repeatedly recognized it as a protectable

intellectual property and prevented its breach. So far, such breaches have been

prevented applying the law of unfair competition, breach of equity and law of

contract. The judicial pronouncements have recognized trade secrets as a category of

intellectual property right but the same are protected under common law of unfair

competition or contractual law. There is no codified enactment on this subject. In the

judgment reported as Cattle Remedies v. Licensing Authority67, the Division Bench of

Allahabad High Court of India observed that trade secret is a form of intellectual

property right. However, the provisions of TRIPS have not been explicitly applied so

far by in courts of India.

In India, protection of trade secrets is largely based on common law. The law relies on

common law principles such as breach of trust and breach of confidence. The only

statutory provision that governs trade secrets is Section 27, Indian Contact Act, 1872,

which states that every agreement by which a person is restrained from carrying on

any trade, business or profession, is invalid. This provision brings within its ambit

non-disclosure, non-compete agreements, which are crucial for the protection of trade

secrets.

66
Seervai H.M, Constitutional Law of India, Vol 1 (Universal Book Traders, Delhi) 4th edn, 1997, p.
305
67
2007(2)AWC 1093
33
Other avenues where law on trade secrets may be located include the Securities

Exchange Board of India (Prohibition of Insider trading) Regulations, 1992, which

renders the use and disclosure of confidential (undisclosed) information by an insider

subject to prosecution under the Securities Exchange Board of India Act.

This clearly indicates the need for a comprehensive legislation on trade secrets, in

compliance with Article 39 of TRIPS. A brief discussion on the law regarding trade

secrets in other member countries in the subsequent chapters of the study will

elucidate the point.

3.2.4 Modalities of Trade Secrets

The TRIPS Agreement recognizes trade secrets under ‘undisclosed information’, but

remains silent on the mechanism and modalities. The methodology differs in state

practices and may range from privacy laws to unfair competition and breach of

contracts.68 The significant modalities to protect trade secrets are being briefly

described as follows:

a) Employment Agreement

Depending upon their needs, businesses include suitable confidentiality, non-

disclosure agreement (NDA) and non-compete clause (NCC) in agreements with

employees. These may comprise the type of information that is likely to be disclosed,

the manner in which it should be used and restrictions on disclosure post-termination.

68
Nair M D, Protection of Trade Secrets, undisclosed information,
www.hindu.com/thehingu/biz/2001/11.../20001112200060100.htm (Last Accessed : 2 November
2001)
34
Succinct company policies and non-disclosure agreements with the employees

protecting confidential information and trade secrets are recommended in order to

provide contractual remedy in addition to the one under the common law. Such

agreements should define “confidential information” and the exceptions to such

confidential information. Agreements should have clauses negating a grant of an

implied license, restrictions on disclosure, use and copy; restriction on use of

confidential information upon termination of the employment, return of information

upon termination and right to withhold salary and emoluments till such return.

Non-compete clauses, depending upon their applicability in the current Indian

context, read with the confidentiality clauses would afford an organization added

protection with respect to its confidential information. Such provisions must have a

lucid purpose, which is to restrict the use of confidential information and trade secrets

obtained during employment tenure and ensure that employees do not compete

unfairly. However, non-compete provisions would need to be reasonable, and the

Indian courts may treat a tough non-compete provision as unenforceable. Some of

such instances would be discussed subsequently in this chapter.

In order to ensure that the rights of third parties are not violated, the non-

disclosure/employment agreement should impose an obligation on the employee not

to integrate into the organization’s data or intellectual property, any confidential

information of a third party. Employees should be required to indemnify the

organization in case of violation of this clause. If the organization has not executed

such agreements at the time of employment, subsequently executed agreements

35
should explicitly cover the confidential information obtained by the employee from

the date of his employment.

The major drawback associated with an action for breach of confidence is that an

adequate remedy is unavailable against the person to whom the information is

disclosed, as the holder of the secret may be unable to prevent the continuing use of

the confidential information by such person(s). Although damages may be sought

against the confidants, they generally do not have the economic capacity to pay

adequate damages. The question of liability of third parties assumes importance in

this connection. Third-party interaction and disclosures should be channeled only

through specified personnel. Wherever feasible, confidential information should only

be shared with those employees who have a legitimate need to know such

information, thus enabling the employees to perform the assigned tasks.

b) Trade Secret Policy

The policies rely on business secrets based on their value and sensitivity and

accordingly employees are fore-warned of any breach. Strong internal controls and

processes to protect confidential information should be in place. Employees should be

educated and trained enough to identify information that is confidential or in the

nature of a trade secret, to enable them to make an informed decision. They should

have a clear and succinct understanding of their responsibilities to protect confidential

matter and treat this as an on-going process that is integral to their work. Data that is

confidential should be clearly indicated as such in all communications. Appropriate

security procedures must be established and followed by the company and access to

36
specific sensitive areas of workplace restricted or limited to certain senior employees

only.

The essence of a fiduciary relationship is that equity imposes an obligation on the

trustee to act in the best interest of the beneficiary. For instance, directors may owe an

obligation to their company, professionals such as auditors and solicitors may owe a

duty to their clients and so on. The question that arises is that whether a trade secret is

an interest protectable from employee appropriation because it is a property right or

because of the fiduciary relationship between employer and employee. The reason

that trade secrets are protectable employer interests is the interest which the public has

in the development of new, better and less expensive products. This public interest is

promoted by giving employers an incentive to develop new processes by protecting

trade secrets from wrongful disclosure by employees.69

c) An Exit Interview

During such an interview, an employee should be reminiscent of his obligations with

respect to the company’s confidential information and trade secrets. Subsequently, he

must be made to sign a document reaffirming his obligations. If an employment

agreement was signed, the document to be signed upon termination should be

attached. A copy of this signed exit-interview form, along with the employment

agreement, must be given to the employee. Such an interview not only serves as a

meaningful reminder but can also be of valuable evidence to showcase employee’s

knowledge of such obligations. Success of suits for protection of confidential

information and trade secrets depends upon production of satisfactory evidence to

69
K & G Oil Tool & Service Co. v. G & G Fishing Tool Service, 158 Tex. 594, 314 S.W.2d 782 (1958.

37
prove confidentiality of the information, act of disclosure and the damages caused

thereby, as well as the reasonability of such restriction.

d) Adequate Documentation

Sufficient records of evidentiary value are maintained of the trade secret information,

which are subject to audit and update at regular intervals.

e) Security Systems

Access to trade secrets and confidential information are restricted to selected

personnels under security checks. In case of an electronic environment, the businesses

use adequate software programs, virus scans, firewalls and other security and

authentication technologies to safeguard their trade secrets. It is important to bear in

mind that a trade secret need neither to be novel nor real; only a secret. 70

3.3 Trade Secret Misappropriation

Misappropriation of a trade secret involves improper means used to acquire or use a

trade secret.71 In large part, “improper means” includes acts that are actionable in and

70
Shah Aashit, Protecting your trade secrets, www.indlegal.com/ProtectingYourTrade.htm. ( 15
february 2009)
71
Under the UTSA, misappropriation is defined as: (i) acquisition of a trade secret of another by a
person who knows or has reason to know that the trade secret was acquired by improper means; or (ii)
disclosure or use of a trade secret of another without express or implied consent by a person who (A)
used improper means to acquire knowledge of the trade secret; or (B) at the time of disclosure or use,
knew or had reason to know that his knowledge of the trade secret was (I) derived from or through a
person who had utilized improper means to acquire it; (II) acquired under circumstances giving rise to
a duty to maintain its secrecy or limit its use; or (III) derived from or through a person who owed a
duty to the person seeking relief to maintain its secrecy or limit its use; or (C) before a material change
of his [or her] position, knew or had reason to know that it was a trade secret and that knowledge of it
had been acquired by accident or mistake. UNIF. TRADE SECRETS ACT § 1(2). The Restatement
(First) of Torts is very similar to the UTSA: One who discloses or uses another’s trade secret, without a
privilege to do so, is liable to the other if (a) he discovered the secret by improper means, or (b) his
disclosure or use constitutes a breach of confidence reposed in him by the other in disclosing the secret
to him, or (c) he learned the secret from a third person with notice of the facts that it was a secret and
that the third person discovered it by improper means or that the third person’s disclosure of it was
otherwise a breach of his duty to the other, or (d) he learned the secret with notice of the facts that it
38
of themselves - trespass, breach of contract, conversion of physical property, and,

under modern laws, the misuse of computer networks. It is this reliance on common

law wrongs that causes Prof. Bone to call trade secret law parasitic72 and Landes and

Posner to declare that there is no law of trade secrets.73

The definition of Trade secrets under the American Economic Espionage Act

(“EEA”) is even broader. These trade secrets may be misappropriated through

industrial espionage, which is the theft of trade secrets by removing, copying, or

recording them so that a competitor may use them. In the United States, these acts are

offences under the UTSA or the EEA. India however, does not have a formal

legislation governing the protection of trade secrets, the misappropriation of

confidential information, or industrial espionage.

Confidential information and technical know-how are protected through contracts.

Traditionally, employers restrict employees from leaking trade secrets or confidential

information by having non-disclosure and confidentiality clauses in employment

agreements. However, Indian courts have been reluctant to enforce such restrictive

covenants and non-disclosure agreements, terming them as unenforceable under

Section 27 (Agreements in restraint of trade) of the Indian Contract Act, 1872. Even

if such clauses are valid, there is no prohibition on the disclosure of confidential

information and trade secrets, merely a contractual obligation. So, a person who is not

was a secret and that its disclosure was made to him by mistake. R ESTATEMENT (FIRST) OF
TORTS § 757.
72
Robert G. Bone, A New Look at Trade Secret Law: Doctrine in Search of Justification, 86 CAL. L.
REV. 241, 245 (1998)
73
WILLIAM M. LANDES & RICHARD A. POSNER, THE ECONOMIC STRUCTURE OF
INTELLECTUAL PROPERTY LAW 355 (2003); see also David D. Friedman et al., Some Economics
of Trade Secret Law, 5 J. ECON. PERSP. 61, 62 (1991).
39
privy to any agreement, such as an employer-employee agreement, has no obligation

to protect any information he has received. The UTSA and the EEA prohibit the

misappropriation of trade secrets by any third party even in the absence of any

confidentiality agreement.

Indian courts however, have stated that if any person receives some information in

confidence, such a person cannot take unfair advantage or make profit out of the

disclosure or use of that information. 74 This is known as the “Springboard doctrine”

and Indian courts have had to rely on common law principles and the decisions of

foreign courts to adopt it. Nevertheless, Indian courts have upheld trade secret

protection on basis of principles of equity, and common law action of breach of

confidence and contractual obligation. This is evident from Section 27 of the Indian

Contract Act, 1872 which is a provision relating to restraint of trade.75

The section was enacted at a time when trade was undeveloped and the object

underlying the section was to protect the trade from restraints. But at a time when

trade in India has developed, there is no reason why a moderate attitude should not be

adopted by acknowledging that some restraints as are reasonable. Taking into

consideration the above, the Law Commission of India in 1958 recommended the

addition of the following in the main section

“…except in so far as the restraint is reasonable having regard to the interest of

the parties to the agreements and of the public”.76

74
Zee Telefilms v. Sundial Communications, 2003 (5) BomCR 404
75
Pollock and Mulla, Indian Contract and Specific Relief Acts, Vol 1, 12 th edn, edited Nilima
Bhadbade (Butterworths, New Delhi), 2004, pp. 818-822.
76
The Law Commission of India, 13th Report, Ministry of Law and Justice (1958), para 55.
40
By inference, this recommendation allows a space for reasonable restraint on the right

to carry on trade and promotion of trade secret law in India. It is pertinent to note that

the Law Commission was beyond time in its recommendation in regard to trade secret

protection.

The Indian courts on several occasion delineated the concept of trade secret. In this

context, the Delhi High Court decision in American Express Bank Ltd v Priya Puri77

is significant. The Court defined trade secrets as

‘… formulae, technical know-how or a peculiar mode or method of business adopted

by an employer which is unknown to others.’

Such information has a reasonable impact on the organizational expansion and

economic interests. Similarly, in the case of Anil Gupta v Kunal Dasgupta78, the Delhi

High Court further ruled that the concept developed and evolved in this particular

case by the plaintiff is result of the work done by the plaintiff upon material which

may be available for the use of anybody, but what makes it confidential is the fact that

the plaintiff has used his brain and thus produced a result in the shape of a concept.

Moreover, in Burlington Home Shopping Pvt Ltd v Rajnish Chibber79, the Delhi High

Court held that the database compiled by the organization could be subject matter of

copyright and its unpermitted use by other party amounts to infringement. Thus, the

judicial policy for the trade secrets protection can be deduced from the Court’s

interpretation of NDAs, NCC and restraint of trade under Contract law.

77
(2006) III LLJ 540 (Del)
78
97 (2002) DLT 257.
79
61 (1995) DLT 6
41
An agreement to restraint a servant from competing with his employer after

termination of employment may not be allowed by the courts. Thus, in Brahmaputra

80
Tea Co v E Scarth , where an attempt was made to restrain a servant from

competing for five years after the period of service, the Calcutta High Court observed:

“Contracts by which persons are restrained from competing, after the term of

their agreement is over, with their former employers within reasonable limits, are well

known in English law, and the omission to make any such contract an exception to the

general prohibition contained in Section 27 indicates that it was not intended to give

them legal effect in this country”.

These principles have been approved by the Supreme Court again in Niranjan

Shanker Golikari v Century Spinning & Manufacturing Co Ltd. Here, a company

manufacturing cord yarn was offered collaboration by a foreign producer on the

clause that the company shall maintain secrecy of all the technical information and

that should obtain corresponding secrecy arrangements from its employees. The

defendant was appointed for a period of five years on condition that during this period

he shall not serve anywhere else even if he left the service earlier.. The defendant was

accordingly restrained from serving anywhere else during the duration of the

agreement. The Supreme Court observed: …

‘..The injunction issued against him is restricted as to time, the nature of employment

and as to area and cannot therefore be said to be too wide or unreasonable or

unnecessary for the protection of the interest of the respondent company’

80
(1885) 11 Cal 545.

42
From the above two landmark decisions of Supreme Court, it clear that although an

employer is not entitled to restrain his servant after the termination of employment

from offering competition, he is entitled to reasonable protection against exploitation

of trade secrets.81

Thus, the only remedy available is of a civil nature. In India, a person aggrieved in

such cases can receive nominal damages from the person charged with disclosure of

confidential information. There is no Indian law that prohibits or punishes industrial

espionage. In the subsequent Chapter, the Trade Secret regime within different

jurisdictions would be enumerated along with the analysis of the Draft legislation for

protection of confidential information in India

81
Attwood v Lamont, (1920) 3 KB 571: (1920) All ER Rep 55/
43
 Chapter 4
ANALYSIS OF TRADE SECRETS REGIMES IN
DIFFERENT JURISDICTIONS

4.1 India

In India, there is no specific legislation to protect trade secrets and confidential

information. Nevertheless, Indian courts have upheld this protection on basis of

principles of equity, and at times, upon common law action of breach of confidence

which in turn amounts to breach of contractual obligations. The remedies available to

the owner of trade secrets is to obtain an injunction preventing the licensee from

disclosing the trade secret, return of all confidential information and compensation for

losses, if any incurred due to disclosure of such confidential information.

4.1.1 Protection of Trade Secrets

Courts in India have relied on equitable and common law remedies as a means of

protection of trade secrets. Specifically, Indian courts have relied on the principles

laid down in the Saltman Engineering Case82 which states that

“maintenance of a secrecy, according to the circumstances in any given case, either

rests 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”.83

82
Saltman Engineering Co. Ltd. v. Campbell Engineering Co. Ltd., 1948 (65) R.P.C. 203.
83
PATRICK HEARN, THE BUSINESS OF INDUSTRIAL LICENSING: A PRACTICAL GUIDE TO
PATENTS, KNOW-HOW, TRADE MARKS, AND INDUSTRIAL DESIGN 112 (1986), quoted in
John Richard Brady and Others v. Chemical Process Equipments P. Ltd. and Another, A.I.R.(1987)
Delhi 372.
44
According to a Delhi High Court, a trade secret ‘can be formulae, technical know-

how or a peculiar mode or method of business adopted by an employer which is

unknown to others.84 However, the Court adds that, “routine day-to-day affairs of

employer which are in knowledge of many and are commonly known to others cannot

be called trade secrets.85 The basic requirement for a cause of action for a breach of

confidence that are used by the Indian Courts are borrowed from the English common

law and enunciated as follows:

a) the information itself must have the necessary quality of confidence about it;

b) that information must have been imparted in circumstances imparting an

obligation of confidence;

c) there must be an unauthorized use of that information to the detrimental of the

party communicating it.86

Indian courts have applied the above mentioned principles in three sets of

circumstances out of which proceedings may arise:

1) Where an employee comes into possession of secret and confidential

information in the normal course of his work, and either carelessly or

deliberately passes that information to an unauthorized person;

2) Where an unauthorized person incites such an employee to provide him with

such confidential information; and

84
Ambiance India Pvt. Ltd. v. Shri Naveen Jain, 122 (2005) D.L.T. 421, para. 6.; see also American
Express Bank, Ltd. v. Priya Puri , (2006) 3 L.L.N. 217.
85
Id.
86
Emergent Genetics India Pvt. Ltd. v. Shailendra Shivam and Ors ., (2011) 125 D.R.J. 173, para. 33.
45
 3) Where, under a license for the use of know-how, a licensee is in breach of a

condition, either expressed in any agreement or implied from conduct, to

maintain secrecy in respect of such know-how and fails to do so.87

4.1.2 Available Remedies

The civil or equitable remedies available in India include

a) Award of an injunction preventing a third party from disclosing the trade

secrets.

b) Return of all confidential and proprietary information.

c) Compensation or damages for any losses suffered due to disclosure of trade

secrets.

d) The court may also order the party at fault to “deliver-up” such materials. 88

Injunctions may be interlocutory (interim relief) or permanent. According to

Advocate P. Narayanan, “the information may remain confidential only for a limited

period and will not extend beyond that period”89 Also, since the information which is

supposed to be confidential may be of value to the plaintiff for a specified period,

interim injunction will be granted only for a specified period, depending on the nature

of the confidential information in question. 90 As per the grant of interlocutory

injunction during the pendency of legal proceedings is a matter requiring the

87
Homag India Private Ltd. v. Mr. Ulfath Ali Khan (Oct. 2012)
http://judgmenthck.kar.nic.in/judgments/bitstream/123456789/759406/1/MFA1682-10-10-10-2012.pdf
(quoting the Delhi High Court in John Richard Brady and Others v. Chemical Process Equipments P.
Ltd. and Another, A.I.R. 1987 Delhi 372.
88
PARAMESWARAN NARAYANAN, INTELLECTUAL PROPERTY LAW 331 (1990).
89
Ibid
90
Id

46
discretion of the Court and the court applies discretion while applying the following

tests:

i. Whether the plaintiff has a prima facie case or not

ii. Whether the balance of convenience is in favor of the plaintiff

iii. Whether the plaintiff would suffer an irreparable injury if his prayer for

interlocutory injunction is disallowed.

Relief by way of interlocutory injunction is granted to mitigate the risk of injustice to

the plaintiff during the period of litigation, before that uncertainty could be resolved.

The legislative intent behind the concept of interlocutory injunction is to protect the

plaintiff against injury by violation of his right for which he could not be adequately

compensated. Corresponding to the same, the defendant has to be protected against

injury which would result if he is prevented from exercising his own legal rights for

which he could not be adequately compensated. The Court weighs one need against

another and determines where the balance of convenience lies. 91 The determination of

damages is based on the market value of the confidential information which is based

on a notional sale between a willing seller and a willing purchaser.

4.1.3 Proposed Legislation

The decade of 2010-2020 has been declared as the Decade of Innovation by the

Department of Industrial Policy and Promotion of India. At present trade secret is

protected through the available contract law provisions in India and is a part of the

concept of protection against unfair competition. Trade Secret is an important form of

intellectual property and most innovative companies rely upon it, to gain business

advantage. In the same context, the Government of India took a step ahead by
91
Gujarat Bottl ng Co. Ltd. v. Coca Cola Co., (1995) 5 S.C.C. 545, para. 43.
47
releasing a draft National Innovation (NI) Act, 2008 to boost research and

innovation.92

The draft Act is proposed by the Department of Science and Technology, Government

of India and has a three branched approach.

a) Firstly, it takes on to encourage innovation through an innovation support

system facilitated by public, private or public-private partnership.

b) The second objective is to evolve a National Integrated Science and

Technology Plan.

c) The third objective is to codify and consolidate a law of confidentiality in aid

of protecting confidential information, trade secret and innovation.93

The Draft Act tries to put forward several structural plans, measures, schemes for

encouragement and development of technological and low cost technological

innovations, for example, national annual integrated science and technology plan,

special measures for low cost technologies, facilitating measures by the appropriate

Government helps private, public or private-public sectors to come up innovative

technologies which are beneficial to public at large, by investing their huge funds and

time in R&D activities. Also, the Act prescribes great incentives and tax benefits

which would definitely acts as incentives to these entities to engage themselves in

R&D activities and develop new products.

92
http://dipp.nic.in/English/Discuss_paper/draftNational_IPR_Strategy_26Sep2012.pdf
93
The draft Act can be found in http://www.dst.gov.in/draftinnovationlaw.pdf (Accessed on March 12,
2014).
48
Further, the Act recognizes equity law principles through which confidential

information has been protected in India since a long time now. Such provisions will

protect interests of the proprietors of trade secrets if they fail to have any agreements

with the third parties, with whom they have shared the information on good faith.

Thus, provisions of this kind which recognizes equity principle would go long way in

securing interests of owners of confidential information. Further, the Act obliges

courts to maintain confidentiality of information during proceedings through assured

ways. As of yet, there is no legislation through-out the world that has statutory laws

that includes the adoption of such protective measures to maintain confidentiality of

information during Court proceedings.

4.1.4 Critical Analysis of the Proposed Legislation

The present draft has a bunch of flaws which are discussed below.

1) As mentioned above the Act defines many characteristics that are employed

under the Act among them it defines the term confidential information under section

2(3). According to it the term confidential information means information, including a

formula, pattern, compilation, program device, method, technique, or process, that:

- is secret in 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

- has commercial value because it is secret

- has been subject to reasonable steps under the circumstances by the person

lawfully in control of the information, to keep it secret.

49
Bare reading of the Act reflects the basic defect of the Act which lies in the definition

part itself, since the Act has failed define the terms in right manner. Further, the

definition do not have an originality because it just defines the term in same verbatim

what has already been defined by the Agreement on Trade Related Aspects of

Intellectual Property(TRIPs), hence the definition is nothing but a reproduce of

meaning given in TRIPs agreement for undisclosed information. Therefore, it is

worth full to mention that, the Act has failed to consider the important term in the

whole Act since the Act has an object to consolidate laws relating to confidential

information and trade secrets in India but has not defined the very basic term in right

manner and spirit.

2) There is no co-relation between title of the Act and object and purpose it

wishes to achieve. As the title of the Act read ‘the National Innovation Act 2008’ and

has one of its objects to amend and consolidate laws relating to confidential

information and to protect trade secrets in India, here the Act tries to addresses two

dissimilar issues with an improper title because title of the Act implies to readers that

the Act deals only with innovation and other allied issues of it but whereas the Act

combines different subject matter called confidential information or trade secrets.

Therefore, while the title implies one issue but the provision under the Act discusses

on another issue shows mismatch of title, object and provisions under the Act.

3) The draft law is silent on area of operation of certain matters like Special

Innovation Zones, Innovation Park and marketing for innovation trading. Hence, the

Act instead of framing out bare substantive law should have laid down provision on

operatibility of these areas, without which the present draft is only like skeleton.
50
4) Fourthly, the structure of the Act is more like Intellectual property (IP) policy

on innovation rather than proposed legislation relating to innovation and confidential

information because the draft Act is drafted with features of IP policy rather than a

proposed law. For instance the whole chapter discusses on National Annual Integrated

Science and Technology Plan which inter alia presents collated information, policy

initiatives and measures concerning basic research, identifying and nurturing students

who can take up basic and applied research in different fields such as sciences,

technology, mathematics as a career, and restructuring & revamping universities,

institutions etc, indicates features of an IP policy not proposed draft which is going to

be a law. Hence, the draft Act seems to be like a policy frame work on innovation

rather than a substantive legal regime.

5) The draft Act does not stands as piece of legislation to codify and consolidate

the law of confidential information because it does not address the issue of

confidential information in proper manner to be a successful law relating to

confidential information. Since, the Act does not deal with subject matters ideally but

also includes other allied areas such encouragement and development of innovation,

marketing of results of innovation, therefore, it can be stated that it is the first time in

the history of India that Government has proposed to enact legislation which

combines allied subject matters each other.

6) Chapter VI containing sections from 8 to 14 exclusively discusses on allied

issues concerning to confidential information. Section 9 deals with obligation of

confidentiality on the person who received the confidential information on contractual

51
terms to maintain secrecy or not to disclose to the public or third party without the

consent and knowledge of the person who conveyed the information. In addition to

this, it further states that, the respective rights and obligations of parties in relation to

the confidential information shall be governed by such terms and conditions as may

be prescribed by the appropriate Government. Generally it would be reasonable that

if the parties have contractual agreements to govern their rights and obligations in

relation to confidential information but it is irrational and unjust that such power has

been conferred on Government to direct and govern rights and obligations of parties

because if such absolute power has been bestowed on Government to oversee right

and duties of parties it would lead to irrationality, unfairness and unjustness.

7) The draft Act recommends common law remedies such as injunctions and

damages etc. in case of misappropriation of confidential information which are

already existing in India in case of misuse or infringement of confidential

information, so the Act again fell short in providing any new remedies in case of

misappropriation of confidential information, hence the remedies provided under the

Act are just like new wine in the old bottle.

8) In addition, to this the Act has failed to lay down any penalty provisions in

case of misappropriation of confidential information which is regarded as grave

offence in relation to confidential information.

52
4.2 United States

4.2.1 Protection of Trade Secrets

In the United States, Trade secrets are primarily protected under state law, including

common law interpretations, which vary from state to state. In general, states only

protect a trade secret from unauthorized disclosure, use of the trade secret by others,

and from another person obtaining the trade secret by some improper means. If the

information is properly acquired, duplicated by others or has been acquired through

reverse engineering, it may not be protected by law.

The language used to define ‘Trade Secret’ varies by jurisdiction, and similarly the

specific types of information that each state recognizes as protectable confidential

information also differs. But there are three factors that all definitions share: A trade

secret is some sort of information that (1) is not generally known to the relevant

portion of the public; (2) confers some sort of economic benefit on its holder; and (3)

is the subject of reasonable efforts to maintain its secrecy.

The USTA define trade secret as "information, including a formula, pattern,

compilation, program device, method, technique, or process, that:

(i) derives independent economic value, actual or potential, from not being

generally known to, and not being readily ascertainable by proper means by,

other persons who can obtain economic value from its disclosure or use, and

53
 (ii) is the subject of efforts that are reasonable under the circumstances to maintain

its secrecy. 94

4.2.1 Available Remedies

The USTA specifies remedies for violation of trade secrets including injunctions,

damages, and attorney's fees. It also gives courts the authority to grant protective

orders to ensure the secrecy of a trade secret during the discovery phase of litigation,

and prevents disclosure of confidential information by witnesses.

The Economic Espionage Act of 1996 95 federally criminalizes the theft or

misappropriation of trade secrets under two key provisions. The first makes it illegal

to steal trade secrets for the benefit of foreign powers96 and the second makes it illegal

to steal trade secrets for commercial or economic purposes regardless of who

benefits. 97 The law provides different penalties for the two offenses, which exceed up

to $5,000,000.98

Further, The Economic Espionage Act of 1996 applies outside of the United States

where the offender is a U.S. citizen or any act in that led to the misuse of the trade

secret occurred in the United States. The first jury trial charging violation of § 1832,

was 1999, resulting in the conviction of a Taiwanese businessman and his daughter on

charges of stealing company secrets from one of the largest adhesive manufacturing

companies in the United States. Since then, many other individuals and corporations

have been found guilty of violating the Act for stealing or misusing confidential

94
1981 c 286 § 1.
95
(18 U.S.C. §§ 1831-1839)
96
18 U.S.C. § 1831,
97
18 U.S.C. § 1832,
98
18 U.S.C. § 1832
54
information, including source code, engineering drawings, confidential medical

research and other trade secrets worth millions of dollars to the trade secret holders.

4.3 European Union

One of the few unexplored areas of Intellectual Property law that has not been

harmonized yet at the European Union ( Hereinafter ‘EU’ ) level includes Trade

Secrets, which was the subject of a proposal issued by the European Commission on

November 28, 2013. This proposal was for a ‘Directive on the protection of

undisclosed know-how and business information (trade secrets) against their unlawful

acquisition, use and disclosure.99

Presently, most of the EU member states comply with their obligation under Article

39(2) of TRIPS through their unfair competition laws, and a variety of legal

theories. 100 On the other hand, the common law jurisdictions in the EU, in the United

Kingdom and Ireland have based their approach to such protection to a ‘judge made

law’ as to breach of confidence that dates back to the 19 th century, in the case of

Prince Albert v. Strange101. A proposal by the UK Law Commission in 1981 to

provide a statutory basis for the law on breach of confidence was rejected/never

adopted. The proposed directive undertakes a lot of issues including third party

liabilities and limitation periods. On the contrary, the Directive does not harmonize all

99
Proposal for a Directive of the European Parliament and of the Council on the protection of
undisclosed knowhow and business information against their unlawful acquisition, use and disclosure –
COM(2013) 813 final 2013/0402 (COD), 28.11.2013.
100
De Werra Jacques, How to protect trade secrets in high-tech sports? An intellectual property
analysis based on the experiences at the America’s Cup and in the formula one championship,
European Intellectual Property Review, 32(4) (2010) 155-164.
101
18 LJ Ch 120, 41 ER 1171, [1849] EWHC Ch J20, (1849) 1 Mac & G 25, Here the court granted
Prince Albert an injunction to restrain the defendant from publishing a catalogue describing cetain
etching made by the Prince.
55
forms of trade secrets protection and avoids addressing many issues encountered with

trade secrets enforcement. The proposed Directive clearly does not address the legal

status of trade secrets, which has a bearing on the question of applicable law.

Subsequently, it presents an interesting question as to the applicability of Article 6

(unfair competition and acts restricting free competition) or Article 8 (intellectual

property rights) applies. 102

4.4 Other Countries

4.4.1 Brazil
In Brazil, the violation of trade secrets is considered crime of unfair competition and

is regulated by Law.103104 A constitutional principle protects the confidentiality of the

source when necessary for the performance of a professional activity. 105 For civil

remedies, the Civil Code determines that a person who practices an illicit act and

causes damage to another person is obligated to repair the damage caused. The Code

of Civil Procedure allows for the search and seizure of a person or thing provided that

the requester justifies the reasons for the measure, and Brazilian Labor Law grants

employers the right to terminate an employee for violation of a trade secret.106

4.4.2 China
In China, the enforcement of trade secret protection may include criminal prosecution

under the Criminal Law and administrative penalties under the Anti-Unfair

Competition Law. The Anti-Unfair Competition Law also provides for compensatory

102
Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the
law applicable to non-contractual obligations (Rome II).
103
Law No. 9,279 of May 14, 1996
104
http://www.planalto.gov.br/ccivil_03/Leis/L9279.htm.
105
CONSTITUIÇÃO FEDERAL art. 5(XIV),
http://www.planalto.gov.br/ccivil_03/Constituicao/Constituicao.htm.
106
CÓDIGO CIVIL, Lei No. 10.406, de Janeiro de 2002, art. 229(I),
http://www.planalto.gov.br/ccivil_03/Leis/2002/ L10406.htm.
56
damages as civil remedies to the trade secret owner, as do other civil and commercial

laws such as the Contract Law and Labor Contract Law. A preliminary injunction for

trade secret misappropriation used to be unusual, but this may be changing. 107

4.4.3 Russian Federation

General civil law principles apply equally to the protection of trade (commercial) and

production (know-how) secrets. Legal protection extends to information that was

formally classified as secret and to cases when the owner of the secrets took the

measures required to protect them. In cases where protected secrets are divulged,

violators are subject to civil, criminal, administrative, and disciplinary measures. Civil

remedies are usually limited to direct real damages incurred as the result of the trade

secret infringement. Injunction relief can be requested by the owner of the

information in order to prevent further damage. 108

4.4.4 South Africa

South Africa does not have specific legislation devoted to protecting trade secrets.

However, South Africa’s common law protects trade secrets from unauthorized

conduct including their acquisition, use, and publication by competitors and current or

former employees. South African courts protect information as a trade secret if it

meets three requirements: it is capable of application in trade and industry, it is not

within public knowledge, and it has an economic value. 109 In cases of infringement of

107
NEW COMPLETE FREQUENTLY-USED LAWS AND REGULATIONS OF THE PEOPLE’S REPUBLIC OF
CHINA 4-352 (2012).
108
GRAZHDANSKII KODEKS ROSSIISKOI FEDERATSII [CIVIL CODE OF THE RUSSIAN FEDERATION],
SOBRANIE ZAKONODATEL’STVA ROSSIISKOI FEDERATSII [SZ RF] [Collection of Russian Federation
Legislation] (official gazette) 1996, No. 5, Item 410, available
http://base.garant.ru/10164072/ (in Russian).
109
J. Neethling & B.R. Rutherford, COMPETITION IN THE LAWS OF SOUTH AFRICA 195, 267
(L.T.C. Harms J.A. Faris eds., 2d ed., pt. 2, 2003).
57
trade secrets, courts can prescribe a number of remedies under contract law and the

law of tort.

58
Chapter 5
CONCLUSION

Historically, the issue of protection of Confidential Information in India has been

dealt with the help of available provisions of Indian Contract Law. Trade secret

protection in India is still at a nascent stage and there is no special legislation which

codifies the principles of trade secret law. This indeed is contrary to the global trend

towards codification of common law principles for trade secret protection. The Indian

Court’s application and interpretation of common law approaches for protection of

trade secrets have been very inconsistent in practice. Therefore, a statutory law on

trade secrets and confidentiality in the framework of Intellectual Property Rights is

not only a good idea but a subject of paramount necessity.

The actuators of industrial development in this age of information protect trade secret

under TRIPS Agreement. The TRIPS Agreement has mandated its Member States to

amend their laws or implement sui generis legislations in order to fulfill obligations

under the Agreement. It is need of the hour, that the Indian Parliament introduces

supplementary provisions in Competition Act incorporating concepts on use,

misappropriation and regulation of confidential information. The Indian Penal Code,

1860 may be concurrently amended to include provisions on the misappropriation of

trade secret. The basic corporate enactment of Companies Act, 1956 should also

contain provisions on confidential information and trade secrets. Keeping in mind the

above considerations, it would be realistic to opine that India needs a statutory law on

confidential information, not just to protect it but also to regulate its use and transfer.

59
Implementation of the above amendments would definitely help solve the

predicament of misappropriation of Confidential Information effectively.

The existing legal regime in India for protection of Trade Secrets does not place any

relevance upon the growth of new and developing laws of Intellectual Property in the

World. With time, the scenario of trade secret protection has acquired great

importance due to the emergence of circumstances where it is preferred over patent

protection. Moreover, in light of the existing Business environment, trade secret

definitely needs specific legislation for its protection. Further, a specific legislation

would help clear the dust of ambiguity that exists in foreign judgments and decisions

on the issue of trade secrets. As said earlier during the course of study, no consistent

line of principles have been laid down for setting up any persuasive precedent by the

Indian Courts.

The response of Indian Government in promulgating draft National Innovation Act,

2008 to boost research and innovation is praiseworthy and has its own pros and cons.

At the same time, the need for a central legislation on trade secret in the current

globalized economy, with influx of multinational corporations and foreign direct

investment cannot be ignored. The proposed legislation should incorporate :

1. Definition of Trade Secrets, misappropriation and improper means.

2. Protection to be extended in the absence of non-compete and non-disclosure

agreements.

3. Clauses on third party liability.

4. Standard format for non-compete and non-disclosure agreements.

60
 5. Exceptions to be made in Public Interest.

6. Over-riding effect of the act on the existing legislations.

7. Civil and Criminal remedies in the nature of damages and injunctive relief.

New trade secret legislation is, therefore the only way to ensure strong and effective

IPR protection which would open up different avenues for economic prosperity.

61
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