Trade Secret

What is 'Trade Secret'

A trade secret is a type of intellectual property (IP) that consists of confidential business information providing a company with a competitive advantage by remaining undisclosed to the public. This includes formulas, practices, processes, designs, instruments, patterns, or compilations of information that are not generally known or readily accessible. Unlike patents or trademarks, trade secrets do not require formal registration and can be protected indefinitely, provided their secrecy is maintained through reasonable efforts.

Official Definition of 'Trade Secret'

'Trade Secret' as defined in legislation(s)

In Indian Scenario, based on Article 39 of the TRIPS Agreement and common law principles, Indian courts assess the question as to on what amounts to trade secret breach on a case-by-case basis. In general, Indian courts consider protected information that itself has the necessary quality of confidence, the information that was transferred in circumstances imparting an obligation of confidence.

Under article 39(2), TRIPs allows members the flexibility to frame laws that prevent the unauthorised disclosure and use of certain information, provided this ‘information’ meets the following criteria:

· it is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;

· it has commercial value because it is secret; and

· it has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

Legal provision(s) relating to 'Trade Secret'

There is no statute or legislation that governs the protection of trade secrets in India. However, rights in respect of trade secrets are enforced through contract law (Indian Contract Act, 1872) principles of equity or by way of a common law action for breach of confidence.

'Trade Secret' as defined in international instrument(s)

According to the World Intellectual Property Organization (WIPO), A trade secret is defined as any information that is: (1) not generally known to the relevant business circles or to the public; (2) confers some sort of economic benefit on its owner. This benefit must derive specifically from the fact that it is not generally known, and not just from the value of the information itself; and (3) the subject of reasonable efforts to maintain its secrecy. A trade secret continues for as long as the information is maintained as a trade secret.

Section 1(4) UTSA (United Trade Secret Act) defines a 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 (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

According to 18 U.S.C. § 1839(3) the term "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 if (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information

'Trade Secret' as defined in case law(s)

In the landmark case of John Richard Brady & Ors v. Chemical Process Equipment P Ltd & Anr (AIR 1987 Delhi 372), the Delhi High Court addressed the protection of confidential information and trade secrets. The plaintiffs had developed a unique Fodder Production Unit (FPU) and shared technical details with the defendants under a confidentiality agreement for manufacturing purposes. However, the defendants allegedly misused this information to produce a similar machine.

The court emphasized that the protection of confidential information can arise from both equitable principles and common law actions for breach of confidence, underscoring that individuals who receive information in confidence must not exploit it unfairly. In Tata Motors Limited & Anr. v. State of West Bengal & Ors. (GA No. 3876 of 2008 in WP No. 1773 of 2008), the Calcutta High Court addressed the definition and protection of trade secrets within the context of a Right to Information (RTI) request. The case arose when Tata Motors sought to prevent the disclosure of confidential information related to their manufacturing processes and business strategies, arguing that such disclosure would compromise their competitive advantage.

The court referenced Black's Law Dictionary to define a trade secret as a "formula, process, device, or other business information that is kept confidential to maintain an advantage over competitors." Furthermore, the court outlined two essential criteria for information to qualify as a trade secrets.

This judgment underscores the delicate balance between the public's right to information and the protection of confidential business information. It highlights the judiciary's role in delineating the boundaries of trade secret protection, especially in cases where disclosure could impact a company's competitive position. The information includes a formula, pattern, compilation, programme, device, method, technique or process:

· That derives independent economic value, actual or potential, from not being generally known or readily ascertainable by others who can obtain economic value from its disclosure or use; and

· That is the subject of reasonable efforts, under the circumstances, to maintain its secrecy. In Bombay Dyeing and Manufacturing Co. Ltd. v. Mehar Karan Singh (2010 (112) BomLR 375), the Bombay High Court addressed the protection of trade secrets and confidential information within the context of employment relationships. The case involved allegations that the defendant, a former director of Bombay Dyeing, had disclosed proprietary information to a competitor, Dawnay Day India Land Private Limited (DD), in violation of confidentiality clauses in his employment agreement. In addition to the above, has laid down the following criteria for any piece of information to be considered a trade secret:

· The extent to which the information is known outside the business;

· The extent to which it is known to those inside the business, namely employees;

· The precautions taken by the holder of the trade secret to guard the secrecy; · the savings affected and the value to the holder in having the information as against competitors;

· The amount of effort or money expended in obtaining and developing the information; and

· The amount of time and expense it would take others to acquire and duplicate the information.

In Navigators Logistics Limited v Kashif Qureshi and Ors, the importance of protecting trade secrets and confidential information in a competitive business environment while respecting statutory safeguards against the restraint of trade was highlighted.

Relevant elements of 'Trade Secret'

Establishment of ownership of 'Trade Secret'

If a trade secret is the subject matter of an action, the proprietor, in order to establish his or her rights must provide at the very least, the nature of the information believed to be a trade secret and how it came to be in the possession of the proprietor (even if the details of the trade secret are not disclosed in the suit).

In the case of Ambiance India Pvt. Ltd. v. Shri Naveen Jain (122 (2005) DLT 421), the Delhi High Court emphasized that when claiming a trade secret in legal proceedings, the owner must clearly identify the nature of the confidential information and explain how they came to possess it. Failure to provide such specifics can result in the court denying relief. The court also distinguished between general business knowledge or skills that employees acquire during their employment and genuine trade secrets that warrant protection. Therefore, it's crucial for trade secret owners to precisely define the information they seek to protect. In some cases, this trade-secret information may consist of works created and developed by the proprietor that are the subject matter of copyright protection, for example client lists in the case of Diljeet Titus and Ors v Alfred A Adebare and Ors (2006(32)PTC609(Del)) or technical drawings in the case of John Richard Brady and Ors v Chemical Process Equipments Pvt Limited & Anr (AIR 1987 DEL 372). Therefore, the principles of authorship and ownership applicable to copyright would apply.

In other cases, the trade-secret information may have been acquired and the proprietor must demonstrate that he or she has acquired proper title to such information.

This means that such information will not be protected as a trade secret if it is derived or created independently by any person (not having access to the trade secret), using information that is available in the public domain.

Criteria to establish the state of secrecy of 'Trade Secret'

In the case of Bombay Dyeing, the High Court of Bombay laid down certain criteria for information to be considered as a trade secret. The first three criteria concern the state of secrecy. These include:

1. The extent to which the information is known outside the business
2. The extent to which it is known by employees and others involved in the business; and
3. The extent of measures taken by the employer to guard the secrecy of the information.

To qualify as a trade secret, the information must have commercial value due to its secrecy, and the owner must take reasonable steps to keep it confidential. The measures a company implements to restrict access and prevent dissemination are key indicators of the information's secrecy status.

Information that is accessed by any person by virtue of their relationship to the proprietor of such information (such as employees or vendors) may bear with it an implied obligation of confidentiality or secrecy, whether or not expressly provided, either in a contract or by way of any other communication (especially if it is not otherwise available through other sources or in the public domain).

When someone accesses information because of their relationship with the owner (like employees or vendors), there might be an unspoken duty to keep it confidential, even without a formal agreement. In such cases, it must be shown that

1. This information was not available to any person to whom it was not delivered by the proprietor him or herself; and
2. The implied obligation is supported by the facts and circumstances surrounding the correspondence, other conduct of the parties, etc (provided it meets the other criteria for trade secrets).

Assessing Reasonable Protective Measures for Trade Secrets

The worth of a trade secret depends on its secrecy. Courts usually assess the safeguards a company has in place—such as physical, technological, access control, and contractual protections—to prevent its disclosure.

These safeguards may include confidentiality agreements with vendors and employees, internal security measures to limit access, cybersecurity defenses against attacks, and well-documented company policies on protecting confidential information. Even without extensive measures, explicitly marking information as "confidential" may sometimes be enough to justify legal protection.

Confidentiality can also be implied. The way trade secrets are accessed, shared, or delivered may help determine whether the company's protective steps were reasonable.

International Experience

International Definitions and Operationalization of Trade Secrets

European Union's Harmonized Approach

The European Union has established a consistent framework for trade secret protection through Directive (EU) 2016/943 ("TSD") and the European Union (Protection of Trade Secrets) Regulations 2018. These instruments harmonize trade secret protection across member states while providing a clear definition that aligns with international standards. Under the EU framework, trade secrets are defined using three essential criteria:

1. The information must be secret, meaning not generally known or readily accessible to those who normally handle such information
2. It must possess commercial value specifically because it is secret
3. The rightful holder must have taken reasonable steps to maintain its secrecy

The EU approach focuses primarily on civil remedies against unlawful acquisition, use, and disclosure of trade secrets. The regulations ensure confidentiality of trade secrets during court proceedings by limiting access to hearings and court documents containing protected information. This framework provides victims with multiple civil remedies, including injunctions against further disclosure, removal of infringing goods from the market, and compensation for damages caused by unlawful use or disclosure.

United Kingdom's Dual Protection System

The United Kingdom employs a dual system of protection, operating two parallel regimes: common law confidentiality principles (breach of confidence) and the Trade Secrets Enforcement Regulations 2018, which implemented the EU Trade Secrets Directive. This comprehensive approach enables courts to grant injunctions, award damages, and impose criminal sanctions where appropriate. The UK definition of trade secrets mirrors the EU standard, requiring information to be:

1. Secret in that it is not generally known among relevant professionals
2. Commercially valuable due to its secrecy
3. Subject to reasonable protective measures by the lawful controller of the information

This bifurcated approach provides greater flexibility in enforcement while maintaining alignment with international standards.

United States' Multi-Level Protection Framework

The United States has developed a robust multi-tiered system for trade secret protection. At the federal level, the Defend Trade Secrets Act of 2016 (DTSA) established a comprehensive trade secret law defining protected information as having independent economic value due to its secrecy with reasonable efforts to maintain that secrecy. Unlike many other jurisdictions, the DTSA offers powerful ex parte seizure orders to prevent dissemination of misappropriated trade secrets.

Additionally, most states have adopted the Uniform Trade Secrets Act (UTSA), with 48 states implementing this model legislation by 2020. New York stands as an exception, relying instead on common law principles. The Economic Espionage Act of 1996 further strengthens protection by criminalizing trade secret misappropriation, with penalties including significant fines and prison sentences of up to 15 years for foreign espionage and 10 years for commercial theft.

Other National Approaches

Germany's "Trade Secrets Protection Act" of April 25, 2019, implements the EU Directive while maintaining definitional consistency with Article 39 of the TRIPS Agreement. France similarly transposed the EU Directive through Law No. 2018-670 of July 30, 2018. South Korea has established trade secret protections designed to safeguard Korean industries and contribute to national security and economic development.

These various international frameworks demonstrate a global consensus around the core definition of trade secrets while showcasing different implementation approaches.

Deviations from Indian Practice and Conceptualization

Absence of Dedicated Legislation

The most significant deviation between international best practices and the Indian approach is India's lack of dedicated trade secret legislation. While other major jurisdictions have implemented specific statutes, India relies on a fragmented framework encompassing elements of Civil Law, Criminal Law, and the Information Technology Act of 2000. This patchwork approach has resulted in a system that "lacks clarity and effectiveness" for protecting valuable confidential business information.

Definitional Consistency with International Standards

Despite lacking dedicated legislation, India's conceptual understanding of trade secrets appears to align with international norms. The definition found in the Civil Code of Ukraine is noted to be similar to that in the TRIPS Agreement, which establishes the three criteria of secrecy, commercial value, and adequate protective measures. This suggests that India's conceptual understanding follows international norms, even if the implementation diverges significantly.

Regulatory Oversight Gaps

Unlike jurisdictions with dedicated trade secret authorities, India lacks a specialized regulatory body for overseeing trade secret protection. The ASSOCHAM report identifies "a pressing need for a codified law with a dedicated regulator, akin to the Competition Commission of India (CCI), to provide clarity and robust enforcement mechanisms" for trade secret protection. This represents a substantial departure from the comprehensive administrative frameworks established in other major economies.

Enforcement Mechanisms

International regimes typically provide clear pathways for enforcement, including specialized civil remedies and, in some cases, criminal penalties. The absence of dedicated legislation in India creates ambiguity in enforcement mechanisms, making it challenging for trade secret holders to pursue effective remedies. The lack of specialized procedures for maintaining confidentiality during litigation further complicates enforcement efforts.

Best Practices and Key Learnings

Implementing Dedicated Legislation

The international experience clearly demonstrates the value of dedicated trade secret legislation. Countries with specific statutes addressing trade secret protection tend to provide more robust and predictable protection. A dedicated Indian trade secrets law could significantly improve clarity, enforcement, and alignment with international standards.

Adopting Standardized Definitions

Successful trade secret regimes consistently employ the three-part definition established in the TRIPS Agreement. This standardized approach, requiring information to be secret, commercially valuable because of its secrecy, and subject to reasonable protective measures, has been widely adopted and proven effective. India should consider formally codifying this definition in any future legislation.

Establishing Specialized Regulatory Oversight

The recommendation for India to create a dedicated regulatory body "akin to the Competition Commission of India" reflects an important international learning. Specialized oversight can ensure consistent application of trade secret laws and provide necessary expertise for addressing complex misappropriation cases.

Balancing Civil and Criminal Enforcement

The American approach of complementary civil and criminal enforcement mechanisms offers a valuable model. The combination of private civil remedies through the DTSA and public prosecution under the Economic Espionage Act creates a comprehensive deterrent against misappropriation while providing multiple avenues for redress.

Procedural Protections During Litigation

The EU approach of ensuring confidentiality during legal proceedings represents a critical best practice. Specialized procedures to limit access to court documents and hearings containing trade secrets are essential to prevent the litigation process itself from becoming a mechanism for further disclosure.

Harmonization with International Standards

The EU's success in harmonizing trade secret protection across member states demonstrates the value of aligning national approaches with international standards. By adopting legislation consistent with the TRIPS Agreement and other major trading partners, India could facilitate cross-border business operations while strengthening domestic innovation.

Appearance of Trade Secret in Database

The term “trade secret” has not yet been explicitly defined in Indian legislation, but it is governed by the principles of equity and common law. Even after becoming a signatory to the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, under which undisclosed information – inclusive of trade secrets – are to be protected under Article 39.2, India did not enact specific laws to do so. Though attempts have been made to enact legislation, India’s protection framework largely depends on provisions of existing statutes.

Database A

As Indian legislation does not currently have a proper definition for trade secrets, the definitions from international contexts are being relied upon to understand the scope of the term.

• WIPO defines trade secrets as “intellectual property (IP) rights on confidential information which may be sold or licensed.”
• The TRIPS Agreement calls for the protection of information from “being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices so long as such information:

(a) is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;

(b) has commercial value because it is secret; and

(c) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.”

• The Uniform Trade Secrets Act (UTSA), which is a USA legislation, defines it as "information, including a formula, pattern, compilation, program, device, method, technique, or process that:
  • 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
  • Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."

Database B

• Black’s Law Dictionary defines a trade secret as “a formula, process, device, or other business information that is kept confidential to maintain an advantage over competitors.”
• Cambridge Dictionary defines it as "a piece of information about a product that is known only to the particular company that makes it."
• Merriam-Webster's dictionary describes it as "a formula, process, device, or item of information used by a business that has economic value because it is not generally known or easily discovered by observation or examination and for which reasonable efforts to maintain secrecy have been made."
• Bajaj Finance has termed it as "a form of intellectual property that comprises confidential business information, offering a competitive advantage."

Challenges

Unlike other countries such as the United States, where laws have been drafted to comprehensively safeguard trade secrets under intellectual property rights, India currently relies on contract law, criminal law under certain circumstances, and the Information Technology Act of 2000. The absence causes businesses to have to navigate justice through remedies for breach of contract or tort law, thus leading to inconsistent court decisions and uncertainty.

Secondly, the dynamic nature of technology and globalization brings in extra threats. The development of AI and information technologies raises the risk of trade secrets being hacked through cyber espionage and data breaches, requiring effective digital security. In total, the existing Indian legal framework highlights the necessity for a codified legislation with strong enforcement powers to protect trade secrets effectively.

Way Ahead

In March 2024, the 22nd Law Commission of India recommended a Bill for the protection of Trade Secrets, understanding the urgent need for specialised legislation. This recommendation follows previous attempts to define and create provisions to safeguard trade secrets in India. These include the 2008 National Innovation Bill, and the Intellectual Property Rights Policy, 2016. The new legislation should include clear definitions, protections, and remedies for trade secrets and comply with international norms as defined under the TRIPS Agreement. This would make for a solid legal framework that businesses can use with confidence in their protection from misappropriation and unauthorized disclosure. For example, nations such as the U.S. have realized substantial advantage through having strong trade secret legislation, which has aided in developing innovation and guarding business against unjust competition.

Furthermore, continued judicial education and familiarity can assist in developing a more predictable body of case law that would offer better guidance to business in terms of enforcement of trade secret protection and available remedies. This would facilitate the courts being in a position to deal more predictably with trade secret controversies. The TRIPS Agreement also provides for a sui generis system to help protect trade secrets and restrict unfair competition. Sui generis refers to the principle of creating an entirely unique and tailored legislation in order to address an issue that demands it.