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Trade Secret: ‘Property right’ or ‘Relationship’ dispute’

17

MAY

2019

World’s first trade secret was use a forceps for delivery. It is not surprising but true that the invention of forceps delivery was kept as a family secret for almost 100 years by the Chamberlain’s family. But this never turned into a brand value as it was not marketed. It is true that the real inventor of the Coca - Cola formula was John Pemberton but he was unable to make it as world’s most selling soft drink beverage. The formula of Coca-Cola on the other hand remained a secret of the Candler family which was turned into a class of billion Dollar brand IP asset by Asa Griggs Candler through his innovative ideas and marketing tactics. Recipe of a another controversial French drink Chartreuse is also believed to be a guarded secret since 1737 held by monks of Chartreuse monastery, located in the Chartreuse Mountains in Grenoble [France]. Keeping a trade secret is one thing but making it a marketable asset is altogether different. Though these were guarded secrets for over 100 years yet the need to provide legal protection to the trade secret arose as the number trade secret theft grew.

‘Relationship attribute’ of trade secret

In USA initially “relationship” attribute of trade secrets remain the hall mark of most of the trade secret theft cases till the trade secret law was passed. This view has its origin dating back to 1917 as the opinion of Justice Holmes in E.I. Du Pont De Nemours Powder Co. v. Masland where he observed that

“The word property as applied to trademarks and trade secrets is an unanalyzed expression of certain secondary consequences of the primary fact that the law makes some rudimentary requirements of good faith. Whether the plaintiffs have any valuable secret or not the defendant knows the facts, whatever they are, through a special confidence he accepted. The property may be demanded but the confidence cannot be. Therefore the starting point for the present matter is not the property or due process of the law, but that the defendant stood in confidential relations with the plaintiffs, or one of them.” [Emphasis added]

A natural corollary of this holding is that whether the information is trade secret or not the defendant knows the facts when through a special confidence he accepted such information as disclosed to him. It may be true that right in property subsists even after the disclosure and such property may be demanded but the confidence cannot be. Therefore, the starting point for the trade secret theft dispute is not the property but that the misappropriator stood in confidential relations with the owner of trade secret.

Trade secret as property: Position in USA

Seeds of treating confidential information as property were sown for obvious reasons in well developed country like USA where the threat to theft of confidential information relating a process of manufacture prevailed. Earliest decision which appears to marks the beginning of American trade secret law is famous Peabody v. Norfolk case, where court observed

“[one who develops] a process of manufacture, whether a proper subject for patent or not, ... has a property in it, which a court of chancery will protect against one who in violation of contract and breach of confidence undertakes to apply it to his own use, or to disclose it to third persons.” [Emphasis added]

This case did nothing more than just to elevate the trade secrets as property but courts linked it to apply only against one who in violation of contract and breach of confidence undertakes to apply secret information to his own use, or to disclose it to third persons. Misappropriation of confidential information thus became a subject of dispute of a personal right attached to a specific person, such as contract rights, a tort award against a defendant, or a license.

Attributes of a trade secret : US position

Most of the US courts treated trade secret as property after passing of the trade secret law. The cases of trade secret theft centred on finding the attributes of the trade secret per se. In 1993 the Indiana Supreme Court in the trade secret case of Amoco Production Co. v. Laird clarified what can qualify as a trade secret under the law. Accordingly, the court insisted that the information is not a trade secret if it could have been duplicated without a substantial investment of time, money, or effort. In such a case the confidential relationship has no bearing in deciding the theft of trade secret. In other words the defendant will not be liable even if the defendant obtained access to the information as a result of a confidentiality relationship. Thus the importance of trade secret as substantial property right in USA courts is now the primary criteria to determine misappropriation of trade secrets.

Breach of confidence as remedy

Any surreptitious obtaining and misappropriation of confidential information is dealt by the courts in India and elsewhere very seriously. It was the firm opinion of the courts that misappropriator owes a duty of confidence to the confider which derive its force from the “doctrine of equitable frauds”. According to some equitable fraud is synonymous with the contract law doctrine of an unconscionable transaction. However, equitable fraud, like many concepts issue from equity, appears to be fluid concepts difficult to pin down, but it is fundamental in the legal jurisprudence of common law. Equity is based on a judicial assessment of fairness as opposed to the strict and rigid rule of common law. In the 1870s, England and its colonies merged the courts but the doctrines of equity stayed as judicature norm. Accordingly, contract law remains the most trusted source of protecting confidentiality of the commercial information. Any breach of contract entailed series of court cases to get relief of injunction against the misappropriator of the confidential information. This duty of confidence is known to be instilled in civil law per se.

Position in UK

That being the state of affairs relating to equity English court around 1800 remained subjected to doctrine of equitable fraud. First so called trade secret misappropriation case in English courts date back to 1851 is Morison V Moat [20 Aug 1851] where partnership in development of a commercial medicine was question and Thomas Moat, sought to continue to use a secret formula of a medicine after the end of the partnership with Morison. The plaintiff’s request for grant of an injunction to restrain use of the formula by moats was allowed. However, injunction in this case was allowed based on the trust or obligation not on breach of confidence thus giving equitable tinge to the obligation. Thus court protected the trade secret misappropriation by Moats but left the question to treat trade secret as property unanswered. This case left court to believe that the trade frauds as cases ‘in personam’ rather than cases ‘in rem’.

Position in India

The duty of confidence in English law from which most of the Indian laws derive strength has its origin in law of torts, law of contract, law of partnership and trust. Trade secret protection remained most problematic area for the legal fraternity in India and elsewhere. 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. [John Richard Brady and Others v. Chemical Process Equipments P. Ltd. and Another, A.I.R.(1987) Delhi 372] In this case, Justice Arun B. Saharya followed the traditional UK approach to look into confidentiality of information and equity in order to pin down the undisclosed information as spring board to get unfair start. It is interesting to note that this suit in fact was for grant permanent injunction to restrain the defendants from infringing Copyright of the plaintiffs yet he also looked into the question of misappropriation of trade secret. He categorically observed that

This is just the situation in which the Courts must enforce the general rules of equity and restrain breach of confidence as recommended in the leading Saltman's case, (1948) 65 RPC 203, Cranleigh Precision Engineering Ltd. v. Bryant 1966 RPC81, Scager v. Copydex Limited 1967 RPC 349 and S. Ranganathan J. of this Court in Konrad Wiedemann Gmbh & Co. v. Standard, Castings P. Ltd. and Ors.”

Justice Saharya even quoted what Patrick Hearn has observed on secrecy and analysis of the Saltman's case,

"Secrecy : The maintenance of secrecy which plays such an important part in securing to the owner of an invention the uninterrupted proprietorship of marketable know-how, which thus remains at least a form of property, is enforceable at law.”

Justice Saharya also picked Lord Denning clarification in Seager v. Copydex Limited 1967 RPC 349 page 368 to make a point relating to linking misappropriation with principles of equity when quoted that

"the law on this subject does not depend on any implied contract. It depends on the broad principles of equity that he who has received information in confidence shall not take unfair advantage of it."

Justice Saharya went on to further rely on what Justice S. Ranganathan observed in relation to existence of confidential relationship as step board to concluded the misappropriation issue in Konrad Wiedemann Gmbh & Co. v. Standard Castings Private Limited and Ors.

"If therefore, as concluded by me, the plaintiff has established the existence of a confidential relationship which is sought to be abused, equity requires that such abuse should be restrained; a failure to do so would render the action itself futile."

Courts in India insisted on the plaintiff to prove existence of the specific trade secrets and how the plaintiff had ownership of them before the court would consider granting an injunction order.[ Ritika Pvt Ltd v Biba Apparels Pvt Ltd (Del HC DE 0784 2016), theft of garment design]. Similarly, In Emergent Genetics India Pvt. Ltd.v Shailendra Shiv (2011 (47) PTC 494) Justice Ravindra Bhat observed:

“Pleadings of the nature and quality of information which is confidential are crucial and in the absence thereof there is no question of confidentiality.”

It is not surprising to note that 80% of trade secret cases decided in India revolved around breach of contract by the employee to misappropriate confidential information gained during the course of employment. The relief in such cases was limited to grant of injunction. It may take some more time for Indian courts to grant the compensatory damages or fine for misappropriation of confidential information.

Trade secrets vs copyright

The first case in India where the court tried to define the trade secret as ‘information which if get disclosed to a competitor then would cause a real harm to the real owner of the secret was in Burlington Home Shopping Pvt. Ltd v. Rajnish Chibber, [1995(61) DLT 6], where Justice Lahoti clearly differentiated between trade secret and copyright and observed that

In theory, copyright and trade secret law protect different elements of compiled business data, with copyright protecting the expression in these compilations and trade secret law protecting the underlying data. In fact, copyright and trade secret protection for compilations of business data frequently converge. Copyright protection for business directories often extends to the underlying data, and trade secret protection may extend to particular expressive arrangements of data."

No doubt such a convergence cleared the mist of equating copyright with trade secret but it created a dual actionable issue is data theft suits. In cases where no copyright subsist suit for theft of trade secret can be instituted as breach of contract/confidence. Court’s order for the grant of injunction in this case was purely based on the finding that the defendant’s database was substantially a copy of the plaintiff’s database.

Trade secret as property

The main issue that perplex the courts and the legal commentators stems from the fact as to how to conceptualize a trade secret. Some see it as a property interest, others take it as a subject of an employment contract restricting future disclosure yet others feel it as the subject of a confidential relationship in absence of a contract. In United States for example two competing views on trade secret law in prevailed as judicial precedence one was “relationship” view and the other was “property” view. Justice Holmes once suggested that courts should consider the confidential relationship of the parties as an alternative ground for trade secret protection. Recent decisions however favour ascertaining it as property as cover under the trade secret law.

TRIPS mandate

During the early negotiation relating to USA proposal of 28 October 1987, ‘to include Trade secrets as part of a future agreement on IPRs’ indeed got support from European and Swiss proposals but developing countries were against to provide any form of protection for ‘know-how’ under a future agreement. Indian stand was that trade secrets were not a form of intellectual property right. According to the Indian delegates the protection against unfair competition under Article 10bis of the Paris Convention would be sufficient to protect undisclosed information. India prefers protection of trade secret by contract and under civil law rather than to be under intellectual property law. As the negotiations went along the final draft on undisclosed information under article Section 39 of TRIPS agreement fall short of defining it as intellectual property rather members agreed to link it with the discipline of unfair competition. Though not termed as trade secret, TRIPS covered “Undisclosed information” as one of the categories of intellectual property to ensure effective protection against unfair competition as provided in Article 10bis of the Paris Convention (1967). The main reason for this approach being that protection against unfair competition has been recognized as integral of industrial property protection for almost a century in all the member states. Linking with discipline of unfair competition make this so called right, to prevent such acts only where the means used are condemnable. That means there is not an absolute protection against non-authorized disclosure, acquisition and use of information, but only against acts made in a condemnable manner. The other issue which find this provision difficult to implement is that the concept of “honest” is relative to the values of a particular society at a given point in time and it varies from country to country. This proposal of USA was based on the U.S. Uniform Trade Secrets Act, as adopted by many states in the USA. Though such information has often being treated as trade secret and civil remedies were provided under the common law or rules laid down by courts or under unfair competition statutes in many countries yet need for sui generis trade secret law became apparent.

Advocating for a statutory regime!

The observation of Justice Ravindra Bhat in Emergent Genetics India Vs Shailendra Shiv (2011 (47) PTC 494) about the need for policy for providing monopoly under the so called umbrella of trade secret or confidential information is noteworthy for future course of action by the law makers.

“37. The danger of enclosing as a monopoly, (under the umbrella "trade secret" or confidential information) what is clearly commonly shared information, and resources, in the absence of a statutory regime (as is urged by the Plaintiff) is that the Courts of law would be at one fell stroke, not only make policy choices which would impact livelihoods of millions, but would be ordaining, unwittingly, legislation, which cannot be tested for its reasonableness.

An inventor or innovator undoubtedly should be provided a fair regime which protects his creative efforts, and rewards him. But in the absence of thought out policies, which weigh the advantages as well as the drawbacks, that may manifest in the unhindered enforcement of such impulses, there is a danger of imperilling the right to occupation, guaranteed by Article 19 (1) (g) and the right to livelihood, so emphatically held to be an intrinsic part of Article 21 of the Constitution of India, by our Courts.”

As the trade secrets law in India is yet to see the light of the day we will have a judiciary-made law based on the principle of equity and common law actions against breach of confidence or spring board doctrine. On May 12 2016 Indian Government approved the National IP Rights Policy which in fact agreed to what Justice Bhatt said and gave a policy mandates to the identification of important areas of study and research for future policy development including area of the protection of trade secrets. The recent National IP Rights Policy do raised hopes in direction of the possible enactment of trade secrets law in India to deal with confidential information misappropriation cases effectively. In October 2016 forum discussion on IP rights in US-India Trade Policy Forum Indian representatives reiterated India’s commitment to protects trade secrets through a common law approach and the strong protection of trade secrets. As note of positive move it was agreed that steps would be taken to further conduct study on various legal approaches to the protection of trade secrets in India. So long as trade secret is not elevated to class of Intellectual property grant of damages for its misappropriation would perhaps not find favour with courts in India.

Conclusion

Most of the nations shied away from making trade secret as right in rem as they still feel that trade secret are not qualified as property rights enforceable against the entire world (such as property rights) but do agree to enforce such misappropriation as in personam judgment to binds only the litigants. The idea of limited scope of implied duty of confidence directed towards the employee/partners involved in using the confidential information is going to stay for some more time till the trade secret is elevated as property right. One can safely conclude that legal basis of trade secret protection is instilled in breach of a confidential relationship consistent with the property characterization. This is believed to be true as the courts would not grant relief to the holder of a trade secret in these cases unless the plaintiff proves he possessed property which the courts could protect. However, the rationale of both the proprietary and the confidential relationship rest on the fundamental precept of fairness. Unfair use for commercial gains is primary element so far as use of the trade secret is concerned. Trade secret cases created a hue of unique “quasi-property right” which indeed required a vigilant attention of the business world at least to retain the edge or bargain value as the basis of a cause of action against misappropriator.

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