RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY

2019-2020
Final draft of:
Trade Secret and Technology Transfer:
Trade Secret-An overview

Submitted to:- Submitted by:-

Dr. Shashank Shekhar Ayushi Verma
Asst.professor Section -A
Rmlnlu Enrollment no.-35

Semester VIII

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TABLE OF CONTENTS:

1- Introduction

2- What are Trade Secrets?

3- Need for the protection of trade secrets

4- Historical Background of trade secrets

5- Trade Secrets v Patent

6- Trade Secrets v Copyright

7- Employees and Trade Secret

8- Position in India

9- Conclusion

10-Bibliography

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RESEARCH METHODOLOGY:

The quality and value of research depends upon the proper and particular methodology adopted
for the completion of research work. Looking at the vastness of the research topic - historical,
doctrinal legal research methodology has been adopted. To make an authenticated study of the
research topic “Trade Secret: An overview” enormous amount of study material is required.
The relevant information and data necessary for its completion has been gathered from both
primary as well as secondary sources available in the books, journals, periodicals, newspapers,
research articles and proceedings of the seminars, conferences, conventions and annual reports
on environment, websites.

RESEARCH QUESTIONS:

1- What are trade secrets?

2- What is the historical background?
3- Why is their a need for the protection of trade secrets?

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INTRODUCTION

In the commercial world, confidential information can be very valuable. Much business
information may be of value to others in the same line of business, which has generated the
information would obviously like to prevent its competitors from discovering and using this
information. Before the advent of modern statutory intellectual property right protection, an
obvious way of protecting information and ideas was by maintaining their secrecy. The
courts gradually begin to attach legal consequences to confidential relationships and, in the
nineteenth century, the equitable action for breach of confidence begins to develop rapidly.
Secrecy is the touchstone upon which an action for breach of confidence is based; effort is
needed to ensure the continued maintenance of such secrecy. Where the confidential
information is employed in a product or process which itself is made available to the public,
if it can be extracted from the product or process through reverse engineering, there can be
no action against the reverse engineer for breach of confidence.

Confidential information or trade secret may be protected not only in equity and by
contract, whether express or implied, but also in tort by means of actions for inducing
breach of contract and conspiracy to induce breach of contract. Although, this is the subject
of both academic and judicial dispute, it is argued by some that confidential information is
a form of property right and may be protected as such1.

In the multiplicity of different types of actions, and the fact that the Courts have at
times tended not to specify clearly which jurisdictions they are relying upon in reaching their
decision, which has created a degree of uncertainty in this area of law. In case of The
Attorney General v. Guardian Newspapers & Others2, Sir Nicolas Browne Wilkinson
stated “The principles upon which the law of confidential information is based have never
been clarified and remain, to my mind, obscure”.

1
Gurry, Breach of Confidence (OUP 1984 ), Chap. IID.
2
[1987] 1 W.L.R. 1248 at 1263.

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WHAT ARE TRADE SECRETS?

The Courts have not limited themselves by any attempt to try to define what type of
information is confidential. When considering this in the case of Faccenda Chicken Ltd. v.
Fowler3, Lord Justice Neill said it “ is clearly impossible to provide a list of matters which
will qualify as trade secrets or their equivalent. Secret processes of manufacture provide
obvious examples, but innumerable other pieces of information are capable of being trade
secrets, though the secrecy of some information may be short lived.”

Trade secret usually means 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 person who obtain economic value from its disclosure or use.

A trade secret is information whose value to its possessor depends on its not becoming
generally known- examples includes customer lists, business plans, and manufacturing
processes. Trade secret law defines the rights that the possessor of trade secrets has against
those who have obtained the secret wrongly – as a result of breach of contract, an employee’s
violation of his duty of loyalty, or a trespass. Unlike patents or copyrights, trade secret law
does not normally provide protection against someone who has obtained the secret without the
consent of the owner but without violating his legal rights by, reverse engineering a product
that embodies the secret.

Trade secret law gives the victim of wrongful appropriation the right to collect damages based
on the value of the secret - the victim’s loss, the appropriator’s gain, or a ‘reasonable royalty’.
It also gives the victim of a wrongful appropriation the right to enjoin innocent third party from
using the secret, providing that to do so does not impose serious costs on them. A third party
who has acquired a secret under circumstances in which he neither knew nor should have
known that it has been misappropriated and has taken actions in reliance on being able to use
the secret may continue to use it.

3
[1987] Ch. 117 at 138, CA.

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NEED FOR THE PROTECTION OF TRADE SECRETS:

Robert A Spanner in his book, Who Owns Innovation- The Rights and Obligations of
Employers and Employees, published in 1984 in the U.S said: The old adage ‘knowledge is
power’ is coming to have its commercial counterpart in the more sordid but equally valid
aphorism ‘information is money’. In a nation that is entering the so-called post-industrial
information society, information has quite literally become Capital.

The dependence of economics on possession of land or machinery and the importance of

that dependence is now out weighed by the importance of that dependence upon what might be
called ‘intellectual capital’. Economics, which have the knowledge to produce things more
efficiently, to develop new technology to do this and to improve efficiency overall, gain the
competitive edge. Intellectual Capital or ideas are paramount to this, As soon as an idea is
shared with the third party, it is open to attack. It is essential that trade secrets can be protected
against disclosure and that the courts impose this obligation to hold such information
confidential.

If this prohibition on releasing information had no exceptions, then economics would stagnate,
and so the courts have balanced these two opposite ends of the spectrum. In general, the Courts
will not allow information, which has been disclosed in confidence to be used in a way that is
inconsistent with the purpose for which the information was imparted. On the other hand, no
one will be prevented from using information, which is already in the public domain. If
someone can prove that they have independently carried out their own research in developing a
product, the courts will not grant an injunction stopping them from using that product even if
another company has already developed it. No one can be stopped from ‘reverse engineering’ a
product, i.e no one can be stopped from purchasing at market value any product in the market
place and working backwards to find out how it is manufactured. Furthermore, the courts have
allowed an employee to use his skill and experience, which he has gained while, employed;
this is as opposed to using the secret of his former employer.

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HISTORICAL BACKGROUND OF TRADE SECRET:

The world’s oldest Written Code of Laws, the Hammurabic Code of 2100 B.C, which
apparently ordered the loss of an eye for those who were caught with forbidden secrets. In
Roman Law, an action existed in relation to the corruption of a slave, which arose most often
where a Roman citizen had persuaded the slave of a competitor to give him his master’s
commercial secrets. Prior o the 18th Century, the Government in England took a very
paternalistic attitude and the economy was strictly regulated. The Guilds, set up to govern
various trades, had strict rules setting out who could receive certain information or trade
secrets. During the 18th and 19th Centuries however, economic policy became permissive and
leissez-faire was the order of the day. The City and the Guild groups became less powerful and
manufactures had to seek new remedies and the Courts gradually introduced the action for the
breach of confidence.

In the case of Webb v. Rose4 an injunction was granted to stop the defendant from printing the
plaintiff’s father’s drafts. In Pope v. Curl5 , Mr. Pope obtained an injunction restraining Mr
Curl, a bookseller, from selling a book called Letters from Swift, Pope and Others as long as
the book contained letters in Mr. Pope’s name.

Although initially the action for breach of confidence related to information in written form,
over the years the law advanced and protected not just the matters of copyright, but also
specifically, the underlying confidence of the information, which was imparted. Take for
instance the case of, Prince Albert v. Strange6 , where the defendants were stopped from
publishing etchings owned by the Royal Family, which had been left with the a printer to have
copies made.

TRADE SECRET v. PATENTS:

4
(1732) 98 ER 924.
5
(1741) 26 ER 608.
6
(1849) 1 Mac & G 25.

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The protection of trade secret differs from that conferred by a granted patent in that it does
not give its creator any monopoly right which can be enforced generally against third party.
The fact that certain information used in a publicly available product is confidential will not
afford any protection if that information is discovered by a third party through reverse
engineering or by the independent development of the same technology.

In this light, where a product is developed which embodies secret, though unpatentable, know-
how, the commercial advantage which the originator of the product obtains does not come
from his being able to prevent imitation by reliance on a monopoly right but rather from the
lead-time, which the originator secures by being the first in the market.

Confidential information, unlike patents does not have a limited life span during which it is
protected. Confidential information can continue to be protected for so long as it remains
outside of the public domain. This period of protection, while indefinite in duration, is not
necessarily perpetual. In the case of Attorney General v. Jonathan Cape Ltd7., Lord
Widgery C.J. stated that there must be a limit in time after which the confidential nature of
information will expire. What this limit will be depends on the particular nature of the
information in question.

As a patent has to be published and the patentable invention must be must be sufficiently
described in the specification, protection by the means of preserving confidence is an
alternative, and not an additional, protection. It is not uncommon, however, for a core
invention to be subject to patent protection, while additional pieces of information, which
may be necessary to put the invention into marketable form, are protected by means of
maintaining confidentiality. Before a patent application can be considered, there will usually
be a research and experimentation stage during which the maintenance of the secrecy of the
information generated will be critical to the protection of it.

7
[1976] Q.B 752 at 771

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Finally, trade secret law provides protection for an inventor whose invention, while patentable,
is not worth the cost of patenting. An invention of only modest value may still qualify for a
patent - but it may not be the worth the substantial cost of getting one. Trade secret protection,
on the other hand, is cheaper, ceteris paribus, the lesser valuable the secret, the less the efforts
that will be made to steal it.
TRADE SECRET v. COPYRIGHT

Unlike in the case of patents, a work may be a copyright work and confidential at the same
time. If, for example, an employee were to misappropriate a hard copy of the source code of
one of his employer’s programs which had been kept secret by his employer and were to use
that source code to reproduce the programs elsewhere, he could be liable both for infringement
of copyright and for the breach of confidence. It is, however, a pre-condition of liability for
copyright infringement that the infringer should perform without authorisation a defined
“restricted act”, the most usual of which is reproduction. There are no defined limits with
respect to trade secrets.

Further, for their to be no copyright infringement there must be copying of the form of the
source code and not merely the idea behind the source code. In contrast, an action for breach of
confidence is concerned with the substance of the information and not simply with its
particular form of expression.

It is clear that an idea or concept, in addition to the expression of that idea or concept, may be
protected as trade secret. In the Australian case of Talbot v. General Television Corporation
Pvt. Ltd. Harris J., specifically rejected the proposition that an obligation of confidence could
not cover concepts or ideas. This principle was applied in Fraser v. Thames Television8, 14
where the idea of a series about a female pop group with three members was held to be capable
of protection as confidential information as “the content of the idea was clearly identifiable,
original, of potential commercial attractiveness and capable of being realised in actuality”.

EMPLOYEES AND TRADE SECRETS:

8
[1983] 2 All E.R. 101.

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The problem for employees and confidential information can be summarized in two points
(i) Employees who become ex-employees can know too much.
(ii) Ex-employees still need to be able to earn a living.

Employees learn much about the organization and management of a business. They need
information about the business in order to their jobs. Some information can be mundane,
some information is sensitive like pricing and some can be highly confidential like future
product plans or unique manufacturing process or product specifications. An employer may
want to be able to exercise some sort of control over this sort of information after an
employee has left.

Imposing obligation on employees:

An employee can be obliged to keep information confidential:

(i) impliedly by law during the period of employment.
(ii) expressly by the contract for the duration of employment.
(iii) expressly by contract for the period following termination of employment.

Implied obligation of the employee

Even though nothing may be expressly agreed, orally or in writing, every employee owes the
employer an obligation to act in good faith during the period of employment this includes
keeping confidential information confidential.

The case of Normalec Ltd v Britton held that the consequences of breach of an employee’s
duty of good faith can be dire. In that case the employee used the employer’s customer
information to build up his own business, and build the business up whilst still an employee.
The end result was that the court decided the employee should lose the whole business to the
employer.

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The employee only owes the duty of fidelity whilst employed. The duty comes to an end on
termination of employment. Additionally the courts recognize a right of any person to use and
to exploit for the purpose of earning a living all the skill, experience and knowledge at the
employees disposal, including that acquired in the course of previous employments. This does
not mean the employee can make use of any information for personal benefit. It will be seen
that trade secrets will still be protected but other information may not. However the problem
can be in deciding what is confidential and what is not.

Express obligation in a contract of employment

Instead of relying on an implied obligation it is better to have an express written agreement,

such as in the employment contract. If the express agreement does not deal with the question of
confidentiality after employment has ceased then the employee will be free to make use of all
general skill, experience and knowledge acquired whilst in the employer’s employ (other than
trade secrets). Thus, in any contract with an employee the employer should ensure the question
of whether any obligation of confidentiality is to continue after cessation of
employment is dealt with.

However, this in itself is not enough

(i) Firstly it does not prevent the employee working for a competitor.
(ii) Secondly it does not deal with what information is to be treated as confidential.

POSITION IN INDIA

In India no specific statutory protection is available for trade secrets or confidential

information. Protection may be obtained in common law civil actions enforcing private
contractual rights or asserting a breach of confidentiality, which is considered a claim in
equity. Trade secrets can be protected through contractual agreements with inclusion of
confidentiality, non-disclosure and non-competitive covenants. Indian Contract Law,
however has its limitations Sec 27 of ICA 1872, states that subject to the sole exception that

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the seller of a businesses goodwill may agree to a reasonable restriction of the seller’s trade,
“[e]very agreement by which any one is restrained from exercising a lawful profession, trade
or business of any kind is to that extent void.” Under Indian law, a restraint to operate a
competitive business during employment is valid, but if the restraint operates after the expiry
of employment, it is illegal and void.

Take for instance the case of Superintendence Company Of India (P) Ltd., v. Sh. Krishan
Murgai9, where two substantial questions were raised : (a) whether a postservice restrictive
covenant in restraint of trade as contained in clause (10) of the service agreement between the
parties is void under Section 27 of the Indian Contract Act ? and (b) whether the said restrictive
covenant, assuming it to be valid, is on its terms enforceable at the instance of the appellant-
company against the respondent. The appellant-company carried on business as valuers and
surveyors, undertaking inspection of quality, weighment, analysis, sampling of merchandise
and commodities, cargoes, industrial products, machinery, textiles, etc. It had established a
reputation and good will in its business by developing its own techniques for quality testing
and control and possesses trade secrets in the form of these techniques and clientele. On March
27, 1971 the respondent was employed by the appellant-company as the Branch Manager of its
New Delhi office on terms and conditions contained in the letter of appointment issued to him
on the same date. Clause (10) of the terms ad conditions of employment placed the respondent
under a post-service restraint that he shall not serve any other competitive firm nor carry on
business on his own in similar line as that of the appellant-company for two years at the place
of his last posting. The said clause ran thus :

“(10) That you will not be permitted to join any firm of our competitors or run a business of
your own [in similar lines] directly and/or indirectly, for a period of two years at the place of
your last posting after you leave the company.”

On November 24, 1978 the appellant-company terminated the respondent's services with effect
from December 27, 1978. Thereafter the respondent started his own business under the name
and style of "Superintendence and Surveillance Inspectorate of India" at New Delhi on lines

9
1981-(002)-SCC -0246 -SC

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identical with or substantially similar to that of the appellant-company. On April 19, 1979 the
appellant-company brought a suit in the High Court claiming damages on account of the
breach of the negative covenant contained in clause (10) and for permanent injunction
restraining the respondent by himself, his servants, agents or otherwise, for carrying on the said
business or any other business on lines similar to that of the appellant company. The learned
Single Judge took the view that the negative covenant, being in partial restraint of trade, was
reasonable inasmuch as it was limited both in point of time (two years) as well as the area of
operation (New Delhi which was his last posting) and, therefore, was not hit by Section 27 of
the Contract Act. It was held by the Hon. Supreme Court that on a true construction of cl. (10)
of the agreement, the negative covenant not to serve elsewhere or enter into a competitive
business does not, arise when the employee does not leave the services but is dismissed from
service and the wrongful dismissal is a repudiation of contract of service which relieves the
employee of the restrictive covenant.

CONCLUSION:

The Courts held that the trade secrets are protected against misuse irrespective of the
existence of a contract, express or implied, based on the broad equitable principle that a

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person who has received information in confidence shall not take unfair advantage of it
because of the duty to maintain confidentiality or the duty to fidality. The Courts will not
restrain such disclosure if the information is divulged in the public interest to one who has
an interest in receiving it. The Common law remedies of injunction and damages (including
infringement profits) are available in the breach of confidentiality action.

BIBLIOGRAPHY

1. Pearson H, Miller Clifford, Commercial Exploitation of International Property, 1990,

Blackstone Press Ltd., London.

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2. Cotter A, Intellectual Property Law: Professional Practice Guides,2003, Cavendish
Publishing, London.

3. Baker & Kenzie M, Guide to Intellectual Property in the I.T Industry, 1998, Sweet and
Maxwell, London.

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