Geographical Indications,

Trade Secrets and Unfair

Competition
UNIT 8 TRADE SECRETS
Structure
8.1 Introduction
Objectives
8.2 What is a Trade Secret?
8.3 Why to Protect a Trade Secret?
8.4 How to Guard a Trade Secret?
Obligations due to Confidentiality Duty
Confidentiality Agreement
Physical Restrictions
Security in Digital Era
8.5 Provisions for Trade Secret Protection
8.6 Summary
8.7 Terminal Questions
8.8 Answers and Hints
Appendix A: Summary of Uniform Trade Secret Act (UTSA)

8.1 INTRODUCTION
Competitive strength usually depends on innovative techniques and accompanying
know-how in the industrial and/or commercial field. However, such techniques and
know-how are not always protectable by patent law. Firstly, patents are in principle
available only for inventions in the field of technology and not for innovative
achievements concerning the conduct of business, etc. Moreover, some technical
discoveries or information, while providing a valuable commercial advantage for a
particular trader, may lack the novelty or inventive step required to make them
patentable. Furthermore, while a patent application is pending, as long as the
information has not been disclosed to the public, the owner of the information to be
patented ought to be protected against any wrongful disclosure of the information by
others, regardless of whether or not the application eventually leads to the grant of a
patent. All such information can be classified as a trade secret. Although the Paris
Convention does not mention trade secrets as such, Article 10bis on unfair competition
requires protection against any act of competition contrary to honest practices in
industrial or commercial matters; the need for protection against wrongful disclosure
of undisclosed information (another term for trade secrets) is generally recognized.
There are many examples of trade secrets, which are very well guarded. To name just
one, the formula of soft drink coca-cola is one of the most successfully guarded trade
secret till date. Naturally, lot of efforts are taken to keep this secret, which is quite
expensive affair. The trade secrets are also kept at small scale. You may have a
bakery in your locality, which bakes the cakes or cookies in unique way. The recipes
of these items are the trade secrets of that baker. There are many traditional dishes
cooked in a family, whose recipes are passed on from generation to generation, but
kept just within the family. All these types of trade secrets are also protected in some
national laws.
In this Unit, you will learn about the protection of trade secrets. Some basic aspects
like how to guard a trade secret, what is meant by violation of a trade secret, how to
make a choice between patent protection or trade secret, are also discussed.
Objectives
After studying this unit, you should be able to:
• make a choice between patent and trade secret in a given situation;
• explain the ways of protecting a trade secret; and
30 • list the situations pertaining to violation of trade secret.
 Trade Secrets
8.2 WHAT IS A TRADE SECRET?
Before we start discussing the reasons for protecting a trade secret, let us first
understand, what is a trade secret?

There are several lines of inquiry that serve to determine what information constitutes
a trade secret: the extent to which the information is known to the public or within a
particular trade or industry, the amount of effort and money expended by the trader in
developing the secret information, the value of that information to the trader and to his
competitors, the extent of measures taken by the trader to guard the secrecy of the
information and the ease or difficulty with which the information could be properly
acquired by others.

From a subjective point of view, the trader involved must have a considerable interest
in keeping certain information as a trade secret. Although contractual obligations are
not necessary, the trader must have shown the intention to have the information
treated as a secret. Frequently, specific measures to maintain the secrecy of the
particular information are also required. The fact that the information has been
supplied confidentially will not always be sufficient. In some countries (for example,
the United States of America and Japan), the efforts made by the owner of the
information to keep it secret are considered by courts to be of primary importance in
determining whether the information constitutes a trade secret at all.

From an objective point of view, the information must, in order to qualify as a trade
secret, be known to a limited group of persons only, that is, it must not be generally
known to experts or to competitors in the field. Even patent applications may be
regarded as trade secrets as long as they are not published by the patent office.
Therefore, external publications or other information that is readily available will not
be considered secret. For example, the use or disclosure of a trade secret by a person
who has acquired it in a legitimate business transaction and without any negligence is
not deemed unfair. On the other hand, absolute secrecy is not a requirement, for the
information might also be discovered independently by others. Also, business partners
can be informed without loss of secrecy if it is obvious that the information has to
remain secret. Factors that indicate whether the information has the necessary degree
of confidentiality to constitute a protectable trade secret are whether it contains
material that is not confidential if looked at in isolation, whether it has necessarily to
be acquired by employees if they are to work efficiently and whether it is restricted to
senior management or is also known at the junior level. Still, the most solid proof is
the strict confidentiality of the information and the contractual duty to keep it secret.

A trade secret can be any formula, pattern, idea, process, physical device or a
compilation of information which provides its owner a competitive advantage in the
market. The trade secret is expected to be treated in such a way that it is not available
to others (public or competitors) unless obtained by theft or by improper acquisition.

Some potential matters of trade secret can be a recipe, chemical formula, survey
methods, confidential data, computer programmes, manufacturing process, marketing
strategies, financial strategies or a new invention for which patent application is not
yet filed.

Before we discuss the reasons for protecting trade secrets, you may like to attempt an
SAQ.

SAQ 1 Spend "

3 min.
What do you understand by a trade secret?

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Geographical Indications,
Trade Secrets and Unfair 8.3 WHY TO PROTECT A TRADE SECRET?
Competition
The information is usually protected as a trade secret when the other forms of IPR
protection can not be used. For example, an idea can not be protected by patent, it can
not be protected by a copyright, unless it is expressed or fixed. However, to protect
this idea can be very crucial from the commercial point of view. In such case, it has
to be protected as a trade secret. Many other matters like progress of developing a
new product, customer list with critical comments, a negative know-how, which gives
information about ineffectiveness of certain product or process, can not be protected
by any other IPR tools, without disclosing them. All this information can be kept as
trade secrets.
You may be wondering, how to make a choice between a trade secret and a patent
protection for your invention. For this, you must understand the pros and cons of both
systems.
Trade Secret Versus Patent
The patent protection guarantees that nobody can work your invention without your
prior authorization. This protection is valid within the term of the patent protection
(typically 20 years). However, in your patent application, you disclose the patent for
public knowledge and the moment the term of patent protection ends, the information
disclosed in your application becomes a public domain information. Anybody is free
to use it. Further, you have to pay prescribed fee for maintaining the patent protection
valid and that too, in all the countries, where its protection is expected.
Now, keeping a trade secret can be a much simpler and cheaper method, if you can
maintain secrecy in your organization. The less the number of people having access to
the entire secret information the better are the chances of retaining the trade secret.
The trade secret can be held indefinitely.
There are, however, some disadvantages of protecting confidential business
information as a trade secret. If the secret is embodied in an innovative product, others
may be able to inspect it, dissect it and analyze it (i.e. reverse engineer it) and find out
the secret and be thereafter entitled to use it. Trade secret protection of an invention in
fact does not provide the exclusive right to exclude third parties from making
commercial use of it. Only patents and utility models can provide this type of
protection. Once the secret is made public, anyone may have access to it and use it at
will. Also a trade secret may be patented by someone else who developed the relevant
information by legitimate means.
A trade secret is more difficult to enforce than a patent. The level of protection
granted to trade secrets varies significantly from country to country, but is generally
considered weak, particularly when compared with the protection granted by a patent.
Hence, though decision between trade secret and patent protection will have to be
taken on a case-by-case basis, in the following circumstances it would be advisable to
make use of trade secret protection:

• When the secret is not patentable; or

• When the likelihood is high that the information can be kept secret for a
considerable period of time. If the secret information consists of a patentable
invention, trade secret protection would only be convenient if the secret can be
kept confidential for over 20 years (period of protection of a patent) and if others
are not likely to come up with the same invention in a legitimate way; or

• When the trade secret is not considered to be of such great value to be deemed
worth a patent; or

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 Trade Secrets
• When the secret relates to a manufacturing process rather than to a product, as
products would be more likely to be reverse engineered; or

• When you have applied for a patent and are waiting for the patent to be granted.
It is important to bear in mind, however, that trade secret protection is generally weak
in most countries, that the conditions for, and scope of, its protection may vary
significantly from country to country depending on the existing statutory mechanisms
and case law, and that the courts may require very significant and possibly costly
efforts to preserve secrecy.

8.4 HOW TO GUARD A TRADE SECRET?

Contrary to patents, trade secrets are protected without registration, that is, trade
secrets are protected without any procedural formalities. Consequently, a trade secret
can be protected for an unlimited period of time. There are, however, some conditions
for the information to be considered a trade secret. Compliance with such conditions
may turn out to be more difficult and costly than it would appear at first glance. While
these conditions vary from country to country, some general standards exist which are
referred to in Art. 39 of the Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS Agreement):

• The information must be secret (i.e. it is not generally known among, or readily
accessible to, circles that normally deal with the kind of information in question);

• It must have commercial value because it is a secret; and

• It must be subjected to reasonable steps by the rightful holder of the information

to keep it secret.
The trade secrets are widely used by the small and medium scale enterprises (SMEs).
In fact, many such enterprises rely almost exclusively on trade secrets for the
protection of their IP. It is important to make sure that enterprises take all necessary
measures to protect their trade secrets effectively. This may include:

• Making sure that a limited number of people know the secret and that, all those
who do, are well aware that it is a confidential information.

• Signing confidentiality agreements with business partners whenever disclosing

confidential information.

• Including confidentiality agreements within employees' contracts. Under the law

of many countries, however, employees owe confidentiality to their employer
even without such agreements. The duty to maintain confidentiality on the
employer's secrets generally remains even after the employee has left the
employment. This duty may be limited to a certain period of time after the
employment ceases.

8.4.1 Obligations due to Confidentiality Duty

Even in countries where specific provisions on wrongful or unfair disclosure apply,
employment contracts may serve to reinforce and supplement the protection afforded
to trade secrets under the law of unfair competition or tort law. It is generally accepted
that employees have a basic right to use and exploit, for the purpose of earning their
living, all skills, experience and knowledge that they may have acquired in the course
of previous periods of employment, even with the help of trade secrets. Yet, an
employee does have the duty, during the period of employment, to act with good faith
towards his employer and, after the employment has come to an end, not to use or
disclose any confidential information about his employer’s affairs that may have come
to his notice during his employment. In some cases the use or disclosure of
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Geographical Indications, information will constitute a breach of the employment contract by the (former)
Trade Secrets and Unfair
Competition
employee if the information in question must remain secret. However, the distinction
between using the skills, knowledge and experience legitimately acquired during
employment and the prohibition on the use or disclosure of the former employer’s
industrial or commercial secrets is often difficult to make. Clearly, in cases where the
behaviour of the employee is equivalent to theft, embezzlement, industrial espionage
or conspiracy with a competitor, a wilful breach of confidence will be presumed.

Frequently, employment contracts incorporate specific provisions prohibiting the

disclosure of business or trade secrets, but such provisions, like undertakings not to
compete, must not be so restrictive of the professional abilities of the employee in the
future that they constitute an undue restraint of trade. Criminal law, as well as civil
and labour law, could create relevant duties in employment relations: for example, it
can prohibit disclosure of secret information by employees. Such provisions may be
very important in situations where the employee is not bound by contractual clauses,
or where the use of such information by former employees is not related to a
competitive action. If the former employee can be regarded as a competitor of the
former employer, for example if he has set up a company on his own in the same
sector, a breach of confidence by the former employee will normally be an act of
unfair competition. For example, the inducement of customers of the former employer
to become clients of the employee in his new position will probably be deemed unfair,
particularly if the employee misuses lists of customers or internal business details in
order to make better offers. However, there can also be wrongful misuse of
confidential information if special knowledge of the employer’s activities in relation
to clients’ affairs is made use of to persuade those clients to transfer their business to
another.

Hence, the confidentiality duty of employee during the period of employment implies
following obligations:

• An employee must not use the confidential information for any purpose which is
adverse to the employer or disclose that information to third parties;

• An employee must bring to the notice of the employer any valuable information
which he or she comes into the possession of in the course of the employment;
and

• During the course of his or her employment an employee must not compete with
the employer.
There are some continuing obligations that the employee must adhere to even after the
employment ceases. The duties owed by a former employee include:

• The information received from the former employer in confidence should not be
misused;

• The employee should not take advantage of the business opportunities that he or
she came across as a confidential information in the earlier employment.

8.4.2 Confidentiality Agreement

In spite of the obligation implied regarding confidentiality, it is always desirable to

ensure that employees who might be dealing with the trade secrets sign an
employment agreement which addresses confidentiality issues.

Such employment contract should clearly define confidential information and make
specific reference to the issues that the employee may be dealing with like formulae,
processes, customer lists, price lists, business plans or any such categories of
information which the employer is concerned about.
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 Trade Secrets
It may also be desirable to spell out the purposes for which the employee is expected
to use the confidential information.
It should be ensured in the agreement that all material containing confidential
information must be returned at the end of the employment. Special care should be
taken of information in electronic forms like computer files.
Using this Agreement the employee could be prevented from working for competitors
for a specific period after their employment.

8.4.3 Physical Restrictions

The trade secrets or confidential information can be guarded by making use of
security pass mandatory for physically accessing the trade secret document repository
or the laboratory/research facilities, where classified work is carried out. The secret
documents can also be kept in specially designated safe vault which is securely locked
and guarded, if necessary. The information contained in such documents should be
disclosed to the personnel only on the need-to-know basis.
Barring entry to the outsiders and visitors in to the classified area is very essential in
order to retain the confidentiality of the matters.

8.3.4 Security in Digital Era

In modern days the enterprises are using electronic communication and data storage
methods on very large scale. They use intranets, extranets and internet for data
handling and information sharing. There is always a possibility of an intruder hacking
into the communication system and accessing the confidential information being
transmitted on the local intranet. Hence it is essential to integrate digital information
system security measures into the security programme. These measures should include
means of safeguarding digital intellectual assets residing in the network system. As
you are aware, the speed of electronic communication is extremely high and the
information can travel across the networks within no time. Hence to further safeguard
the security system, help of external monitory and surveillance techniques should be
taken. The cyber security of the system can include installation of key and encrypted
computer data accesses as well as antivirus software.
In this way, it is the responsibility of the trade secret owner to take measure to protect
and maintain its confidentiality. Warnings or notices like “Confidential” on the
containers of secret information; agreements of confidentiality with financial partners
and licensees; non-disclosure agreements with employees (during and post
employment) and physical security checks like surveillance cameras, periodic security
checks, restricted access in classified areas, installation of security software for
protecting information stored in computer are some of the measures taken for
guarding the trade secret.
You may now like to answer on SAQ.

SAQ 2 Spend "

5 min.
Which of the following acts are illegal with reference to trade secrets?
a) Jayant hacks into employer’s computer to steal the layout design of a new
integrated circuit;
b) Shirin downloads the list of enterprises listed under “our valued customers” from
her company’s website;
c) Raj approaches a rival company of his employer and promises to share the
formula of the drug being developed by him, in his home Laboratory, in return of
1 Lakh Rupees.
35
Geographical Indications,
Trade Secrets and Unfair 8.5 PROVISIONS FOR TRADE SECRET PROTECTION
Competition
The TRIPS Agreement addresses the issue of trade secrets in its Article 39 under the
Protection of Undisclosed Information.
This Article provides for protection on the terms given below:
1) In the course of ensuring effective protection against unfair competition as
provided in Article 10bis of the Paris Convention (1967), Members shall protect
undisclosed information in accordance with paragraph 2 and data submitted to
governments or governmental agencies in accordance with paragraph 3.
2) Natural and legal persons shall have the possibility of preventing information
lawfully within their control 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.
3) Members, when requiring, as a condition of approving the marketing of
pharmaceutical or of agricultural chemical products which utilize new chemical
entities, the submission of undisclosed test or other data, the origination of which
involves a considerable effort, shall protect such data against unfair commercial
use. In addition, Members shall protect such data against disclosure, except
where necessary to protect the public, or unless steps are taken to ensure that the
data are protected against unfair commercial use.
Trade secrets are protected against unauthorized use and disclosure by various
statutory means. Some countries have special provisions for the protection of trade
secrets either under specific legislation on unfair competition or as part of another
law. Other countries treat trade secrets as an aspect of tort law. Still other countries
have enacted criminal, administrative, commercial or civil law provisions prohibiting
the unauthorized use or disclosure of business secrets. The criminal provisions are less
important in practice, however, since normally knowledge of the secrecy, as well as
malicious or fraudulent intent, have to be proved. Yet if the disclosure of a trade secret
constitutes a criminal offence, it will normally constitute an act of unfair competition
as well. Furthermore, since employees, consultants, independent contractors and joint
venturers are often privy to trade secrets, several aspects of civil law concerning
employment contracts and general contract law are also relevant, depending on the
circumstances of the case. Finally, it is not unusual to have combinations of the above
means available. For example, violation of trade secrets could result in unfair
competition or tort liability, as well as in criminal sanctions. On the other hand, in
situations where non-competitors have intimidated or influenced agents or employees,
or have otherwise induced them or other persons bound to secrecy to disclose the
secret information, only civil tort law might be applicable.
Although a legal definition of a trade secret rarely exists, several countries (following
the example of France) differentiate between manufacturing (or industrial) secrets and
commercial secrets, which could have consequences for the applicability of criminal
law. The first category of trade secrets is related to information of purely technical
character, like production methods, chemical formulae, blueprints or prototypes. Such
information could constitute a patentable invention but, generally, patentability of the
36
 Trade Secrets
information in question, in particular novelty in a patent law sense, is not required for
the secret to be protectable. Commercial secrets include sales methods, distribution
methods, contract forms, business schedules, details of price agreements, consumer
profiles, advertising strategies and lists of suppliers or clients. Usually, the subject
matter of trade secrets is rather broadly defined, and the final determination of what
information can be a trade secret will depend on the specific circumstances of each
individual case. For example, in the Unfair Competition Prevention Act of Japan, a
trade secret is defined as any information relating to a production method, a sales
method or any other information on technology or business that is unknown to the
public. A similar definition is contained in the Uniform Trade Secrets Act of the
United States of America.

Let us now briefly discuss the provisions for trade secret protection in different
countries:

USA: In the USA, all the states have adopted the Uniform Trade Secret Act (UTSA).
According to this Act, the trade secret owner can enforce rights against anybody
stealing the confidential information by requesting the court to issue an injunction
preventing further disclosure. The trade secret owner can also collect damages for
any economic injury suffered as a result of trade secret’s improper acquisition and
use.

The summary of the UTSA is given in the Appendix A.

France: Three types of trade secrets viz.

• Manufacturing trade secrets,

• Know-how and
• Confidential business information
are recognised in the French law. This law provides for action against theft of trade
secrets since as early as 1844. The relief in form of damages, injunction proceedings
and third party liability is available to the private litigant.

UK: A broad and effective protection of trade secrets is provided by the UK law. For
breach of confidence many remedies are present like injunctive relief, third party
liability and damages. There are also provisions of search and seizure to protect a
trade secret and evidence.

Japan: In Japan, injunction, a disposal of objects created by infringement of trade

secret and damages against the person causing infringement are the remedies available
to the person whose business interests are harmed by the infringement.

SAQ 3

Under what conditions, the use of trade secret is not considered as infringement?

Let us now summarize the points you learnt in this unit.

8.6 SUMMARY
• The trade secret is any business information withheld from public knowledge in
order to gain competitive edge over the other enterprises.

• The trade secret can be in any form like formula, pattern, idea, process,
compilation of information etc.

• The trade secret is not registered.

37
Geographical Indications, • Usually the information is protected as a trade secret, when it is not protectable
Trade Secrets and Unfair
Competition under any other intellectual property instruments.

• Many times trade secret scores edge over patent protection because of unlimited
term of protection and avoiding disclosure of the invention.

• Trade secret can be guarded by using means like confidentiality agreement,

physical restrictions and software security.

• TRIPS agreement provides for trade secret protection under the article related to
protection of undisclosed information.

8.7 TERMINAL QUESTIONS Spend 10 min.

1. What type of information can an employee come across while working in the
work place?
2. How would you distinguish between a trade secret and a know-how?

8.8 ANSWERS AND HINTS

Self Assessment Questions
1. Broadly speaking, 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 on the trade secret. While a final
determination of what information constitutes a trade secret will depend on the
circumstances of each individual case, clearly unfair practices in respect of secret
information include industrial or commercial espionage, breach of contract and
breach of confidence.
2. a) It is illegal to steal a secret by hacking;
b) The information on the website is for public viewing and hence not a secret;
c) If Raj is allowed to privately develop a drug by his employer, he has a liberty
to share the outcome of his private research. It is not a trade secret owned by
his employer.
3. Refer UTSA definition of “proper means”.

Terminal Questions
1. Mainly three types of information is available to the employee in the work place:

• Easily accessible information, which is not confidential;

• Confidential information, which the employee is not supposed to use during
employment but in absence of any agreement is free to use after the
employment ceases; and
• Trade secret, which the employee is not supposed to disclose or use even after
the employment ceases.
2. The difference between a trade secret and a know-how is quite subtle. It is mostly
judged on the case basis. But generally speaking, a trade secret is an information,
which a person of ordinary intelligence and honesty would recognize as a property
of the employer and not his own. However, a general knowledge of employer’s
plant or process, of the difficulties encountered in production and the ways, that
the employee himself has discovered by trial and error in order to circumvent the
difficulties are not trade secrets. This information is categorized as know-how.
38