THE PROTECTION OF TRADE SECRETS IN INTERNATIONAL COMMERCIAL TRANSACTIONS BY - JESTY K AJAY, ADV. NEETHU S., KIRTHI MANOJ, ARYA K ASHOK & RESHMA RANJITH
THE PROTECTION OF TRADE SECRETS IN INTERNATIONAL
COMMERCIAL TRANSACTIONS
AUTHORED BY - JESTY K AJAY, ADV. NEETHU S.,
KIRTHI
MANOJ, ARYA K ASHOK & RESHMA RANJITH
ABSTRACT
Protecting intellectual
property rights is the goal of the TRIPs Agreement. "Over the long term,
intellectual property should be treated on the same basis as other traded commodities,
and appropriations or transfers of intellectual property at less than full
value should be subject to the same considerations as any other below-value
appropriation or transfer, whether prohibited, compensated for, or treated as
other forms of economic aid" 1. The entirety of the TRIPs Agreement, in a
sense, relates to confidential information that is shielded by copyrights,
patents, or designs and models. However, only information that is considered
"proprietary information" and not otherwise covered by patents,
copyrights, designs, or models is covered by Article 39 TRIPs. Traditionally,
"trade secrets" have been used to refer to this kind of information;
the phrasing of Article 39 TRIPs should not take away from this understanding
of the subject.
INTRODUCTION
Trade secrets are a
legally nebulous idea. They are widely acknowledged as belonging to a class of
commercially sensitive confidential information. A trade secret needs to be
more than just an objective, purpose, or potential. A trade secret, however,
may be a unique method of accomplishing a task or objective. Information must
be of sufficient commercial importance to the confider for it to be considered
a trade secret, meaning that revealing it to a rival could seriously hurt the
confider. Although a wide range of information is protected under the law of
breach of confidence, including government secrets, trade secrets, and personal
confidences, trade secrets are especially valuable to enterprises due to their
commercial nature. Two of the most well-known instances of trade secrets are
probably the formula for Coca-Cola and the combination of eleven spices and
herbs used in Kentucky Fried Chicken. A company's customer list is the
traditional illustration of a trade secret in legal jurisprudence. Nonetheless,
courts have determined that a variety of items can be protected as trade
secrets, including pricing strategies, industrial manufacturing processes, data
pertaining to the production, analysis, formulation, quality control, distribution,
and sales of pharmaceuticals, supply chain models, software source code, and
food preparation recipes. Trade secrets are, in fact, a very broad idea that
might theoretically include any type of information. Systems for protecting
trade secrets frequently fill in the "gaps" left by other types of
intellectual property protection. For instance, in most jurisdictions, customer
lists that include raw data are unlikely to be covered by copyright. Even
though they can be patentable, industrial manufacturing methods can be
challenging to enforce under the patent system, especially if a competitor's
procedures are hidden from the public or cannot be inferred from their final
goods. Furthermore, preserving the trust in such systems can grant a company a
longer exclusive period than the 20-year monopoly granted under the patent
regime. Trade secret protection may also be used to enhance other types of
intellectual property in certain situations. For instance, if a former employee
copies proprietary software owned by the company, it may be considered a breach
of confidence if the source code is confidential as well as an infringement on
the copyright in the source code. In reality, the majority of companies use a
combination of trade secrets and other types of intellectual property
protection to safeguard their intangible assets.
Protection of Trade Secrets in Australia
Australia does not have a
legislative framework in place to safeguard trade secrets. Rather, the
equitable doctrine of breach of confidence safeguards trade secrets. In order
to succeed in an action for breach of confidence under Australian law, a
plaintiff must show:[1]
- That the information
in question can be identified with specificity;
- That the information
has the necessary quality of confidentiality (and is not, for example,
common or public knowledge, or properly considered the 'know-how' of an
employee);
- The information was
received by the defendant in such circumstances as to import an obligation
of confidence;
- There has been an
actual or threatened misuse of the information; and
- That the misuse
resulted (or will result) in the plaintiff suffering damage.
Regarding the third
component, if the recipient knew or a reasonable person in the recipient's
position would have known that the information was received in confidence, then
there will be a duty of confidence. Information that was gained covertly or
incidentally that is, when the recipient knew or should have known that they
shouldn't have had the information at all is also covered by this requirement.
The specific conditions that impose a duty of confidence are a matter of fact
that must be evaluated case by case. Authorities in Australia have acknowledged
a concept referred to as the "springboard doctrine." That is, a
person who has received information in confidence is not allowed to use it as a
'springboard' to gain a competitive advantage over the person who provided the
information, or to put themselves in a position more favourable than would have
been achieved from the use of publically available information and the
recipient's own independent skill and ingenuity.[2] Remarkably,
even in the event that the recipient does not employ a private solution
directly, a breach of trust will still occur if the recipient's ability to
launch its own solution faster was made possible by learning about the
confidential solution. The springboard theory, which emphasises the value of
putting in place independent design processes and "clean room"
development settings, comes up regularly in the context of product development.
Know-How vs Trade Secrets
A key distinction exists
between trade secrets of a previous employer and "know-how" that an
employee of the business has gained and is entitled to utilise for professional
progress even after leaving the company. The former is not protectable in a
breach of confidence case, whereas the latter is. The contrast highlights the
conflict between the public interest in free and open competition and enabling
employees to use their learnt skills and knowledge, and the preservation of
intellectual property rights (in this example, an employer's secret
information). Courts have recognised that it can be difficult to distinguish
between trade secrets and know-how. A trade secret is information that may be
part of an employee's knowledge base but that "a person of ordinary
honesty and intelligence would recognise was the property of their old
employer." This is the somewhat circular test used to distinguish between
the two.
Knowing the difference between trade secrets and know-how may be made easier by the following factors:
·
Knowledge
acquired and committed to memory by an employee during regular work hours is
more likely to be regarded as know-how;
·
On
the other hand, data included in a written document that the former employee
brings with them to their new job is more likely to be protected as trade
secret;
·
Conversely,
know-how is more likely to be information that a worker has honestly learnt
during their career;
·
A
trade secret is more likely to be formed from information that is difficult,
intricate, or required a lot of time and effort to independently ascertain;
Although businesses have
a legitimate interest in limiting the use of know-how passed on to their former
employees, Australian courts have determined that contractual restraint of
trade provisions which are subject to temporal and geographic limitations are a
better way to protect this interest than the law of breach of confidence. A
plaintiff seeking damages or, in the event that the case for breach of
confidence is successful, an account of profits and injunctive remedy, such as
orders limiting the defendant's use of private information, are entitled to.
Final injunctive relief is often granted by Australian courts to litigants who
have successfully argued their case. In contrast to other jurisdictions, a
plaintiff does not need to meet any extra requirements in order to be granted
this type of remedy, such as proving that the sought injunction would not
negatively impact the public interest or have any unjustified anti-competitive
implications. Contractual safeguards for trade secrets include confidentiality
clauses in non-disclosure, collaboration, and employment agreements, among
other clauses. When this happens, in addition to any underlying action for
breach of confidence in equity, the person who disclosed the trade secrets will
also have a claim for breach of contract. Most Australian jurisdictions do not provide an
express limitation term for breaches of confidence because they are equitable
causes of action. In actuality, though, courts may employ the statute of
limitations for a comparable cause of action, such as the six-year statute of
limitations for tort or contract breach claims.
Protection of Trade Secrets in the United Kingdom
The equitable doctrine of
breach of confidence, which is generally in line with the Australian legal
system previously discussed, and the Trade Secrets Regulations, which brought
the EU Trade Secrets Directive to the UK in 2018, are the two parallel systems
that protect trade secrets in the UK. The common law of breach of confidence in
the UK and the Trade Secrets Regulations overlap significantly. Nonetheless,
the Trade Secrets Regulations clearly provide that a trade secret owner may
depend on additional safeguards when they are provided by UK law. Trade secrets
are infringed upon by unlawful acquisition, use, or disclosure, according to
the Trade Secrets Regulations. It is important to remember that any one of the
three activities by itself has the potential to result in an infringement. As a
result, even if trade secrets were obtained legally, an infringement may still
happen if their use or disclosure in the future will be illegal. In the event that the Trade Secrets
Regulations are violated, the court may award monetary damages in addition to
any other customary remedies available to a UK court. Interim and final
measures are also mentioned directly in the Trade Secrets Regulations.
Orders for interim measures comprise:
·
The
temporary halt to the use or disclosure of the trade secret, or if applicable the
outright restriction of doing so;
·
Prohibiting
the manufacture, distribution, sale, or use of counterfeit goods, as well as
their importation, exportation, or storage for those purposes; and
·
The
removal or seizure of suspected counterfeit goods, particularly those that are
imported, in order to stop them from reaching or being used on the market.
Infringing goods are
defined by the Trade Secrets Regulations as goods whose design, operation,
manufacturing method, marketing, or feature primarily derives from a trade
secret that was obtained, utilised, or revealed illegally. Ex parte hearings
may be used to request interim measures, but in England and Wales, they are
only allowed in very specific circumstances for example, when there is a
genuine fear that the infringer may try to destroy evidence. Orders for final
actions include:
·
The
trade secret will no longer be used or disclosed, or, if applicable, will be
prohibited;
·
The
outlawing of the manufacture, distribution, use, and sale of counterfeit goods,
as well as the importing, exporting, and storing of counterfeit goods for such
uses;
·
Taking
corrective action against goods that violate intellectual property rights, such
as: (i) recalling the infringing goods from the market; (ii) depriving the
infringing goods of their infringing quality; and (iii) destroying the
infringing goods or withdrawing them from the market, as long as doing so does
not jeopardise the protection of the relevant trade secret; and
·
The
total or partial destruction of any document, object, material, substance, or
electronic file that contains or incorporates the trade secret, or, if
applicable, the total or partial surrender of such document, object, material,
substance, or electronic file to the applicant.
Under the Trade Secrets
Regulations, an aggrieved party may also be entitled to monetary compensation
if the infringement knew or should have known that the acquisition, use, or
disclosure of a trade secret was being done illegally. The amount of money
awarded will be commensurate with the real harm caused by the unauthorised
acquisition, use, or disclosure of the trade secret. The court will take into
account elements other than economic factors, such as the moral prejudice
inflicted on the trade secret holder by the unlawful acquisition, use, or
disclosure of the trade secret, as well as the negative economic consequences,
including any lost profits suffered by the trade secret holder and any unfair
profits made by the infringer. Any monetary award, nevertheless, must be
greater than what would have been paid in royalties or other fees if the
violator had been granted permission to utilise the infringing trade secret. In
England, the Trade Secrets Regulations impose a 6-year statute of limitations;
however, an equitable breach of confidence case is not subject to this
limitation.
Protection of Trade Secrets in the U.S.
Up until recently, state
courts applied state law to offer trade secret protection in the United States.
Nevertheless, the Defend Trade Secrets Act of 2016 (DTSA), which was passed by
the federal government of the United States in May 2016, provides businesses
with a federal avenue to pursue damages for the misuse of trade secrets. Under
the DTSA, a “trade secret” means “all forms and types of financial, business,
scientific, technical, economic, or engineering information, including
patterns, plans, compilations, program devices, formulas, designs, prototypes,
methods, techniques, processes, procedures, programs, or codes, whether
tangible or intangible, and whether or how stored, compiled, or memorialized
physically, electronically, graphically, photographically, or in writing.”[3]
It is crucial to remember that just because knowledge fits neatly into one of
the listed categories or kinds of trade secrets, it does not automatically
qualify for trade secret protection. A customer list with easily recognisable
names and addresses, for instance, "will not be protected as a trade
secret." Additionally, businesses must "derive independent economic
value, actual or potential, from the information not generally known to another
person who can obtain economic value from the disclosure or use of the
information." This implies that a client list that is sufficiently
"secret," but does not have sufficient value to warrant protection as
a trade secret. "Reasonable measures to keep such information secret"
are also required of the owner of the trade secret. Because gaining financial
advantage from a trade secret occasionally necessitates selective disclosure of
that trade secret, determining what constitutes a reasonable precaution
involves striking a fine balance between the costs and the advantages.
According to the explanation in Rockwell Graphic, which addressed part drawings
used in the production of replacement parts: On the one hand, the trade secret
owner proves that the secret has actual value deserving of legal protection,
that he was harmed by the misappropriation, and that there was misappropriation
by spending more money to keep the secret from leaking out. However, his costs
increase with his expenditures. Both direct and indirect costs are possible. It
will be increasingly difficult for Rockwell's engineers and vendors to complete
the tasks required of them the more access to its designs is restricted. Let's
say Rockwell prohibits the duplication of its designs. A group of engineers
would therefore have to collaborate on a single drawing, maybe by handing it
back and forth or by gathered together in the same room. Such reconfigurations
of patterns of work and production are far from costless; and therefore,
perfect security is not optimum security.[4] Companies
are accountable for monitoring the use and disclosure of their trade secrets
after weighing the relevant considerations and determining whether information
should be considered confidential. Two definitions of
"misappropriation" of a trade secret are provided by the DTSA. The
"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" is
the first definition of misappropriation. Second, misappropriation can also
refer to the following situations in which someone disclosed or exploited a
trade secret without permission:
·
Used
improper means to acquire knowledge of the trade secret;
·
Knew
or had reason to know at the time of disclosure or use that the trade secret
was acquired by improper means; or
·
Knew
or had reason to know before a material change in position that the trade
secret is a trade secret and was acquired by accident or mistake.43
Under the DTSA, a trade
secret owner may file a civil lawsuit in federal district court against anyone
they believe is misappropriating their trade secret in order to safeguard it.
However, the DTSA establishes a statute of limitations that forbids recovery
for misappropriation later than “3 years after the date on which the
misappropriation with respect to which the action would relate is discovered or
by the exercise of reasonable diligence should have been discovered,” so trade
secret owners must be prompt and diligent in filing a complaint in order to
have a chance at a suitable remedy. The DTSA provides three specific avenues
for recovery if a business establishes that it is the owner of a trade secret
and believes that the trade secret has been misappropriated within the statute
of limitations period. Initially, either the trade secret owner or the Attorney
General may petition the court for injunctive relief. Second, "property
necessary to prevent the propagation or dissemination of the trade secret that
is the subject of the civil action" may be seized civilly under the DTSA.
The foundation of the civil seizure remedy is the idea that "if such
seizure is not ordered, an immediate and irreparable injury will occur and the
harm to the applicant of having the application denied outweighs the harm to
the person against whom seizure would be ordered if the application is granted
and substantially outweighs the harm to any third parties who may be harmed by
such seizure." Finally, financial remedies that have historically been
sought to protect intellectual property rights, such as patent rights in patent
litigation, are made available by the DTSA. In addition to potential unjust
enrichment and actual loss, a damages award may also include fair royalties in
lieu of further monetary damages. In exceptional cases where there is
deliberate and malicious misappropriation of a trade secret, exemplary damages
may be awarded by a court, with the maximum amount being twice the number of
damages granted for actual loss, unjust enrichment, or per fair royalty.
[1] Smith Kline & French
Laboratories (Aust) Ltd v Secretary, Dept of Community Services and Health (1990)
95 ALR 87 at 102; Optus Networks Pty Ltd v Telstra Corporation Ltd (2010)
265 ALR 281
[2] See Dart Industries Inc v
David Bryar & Associates Pty Ltd (1997) 38 IPR 389 at
408-409; Sports Data Pty Ltd v Prozone Sports Australia (2014)
316 ALR 475 at [126]; RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd (2011)
280 ALR 125 at [70] to [75]
[3] 18 U.S.C § 1839(3). The DTSA
sought consistency with the Uniform Trade Secrets Act (“UTSA”) — the model law
on which most states structure their trade secret misappropriation statutes
[4] Rockwell Graphic Sys., Inc. v.
DEV Indus., Inc., 925 F.2d 174, 179–80 (7th Cir. 1991)