Trade Secret in Antitrust, Innovation and Competition Law

BACKGROUND AND CONCEPT OF TRADE SECRET

Another area of Intellectual Property known as ‘undisclosed information’ or ‘trade secret’ is quite important nowadays. As the name suggests, it is a secret.[1] It has been explained by the US Supreme Court in the Kewanee case[2],

‘Trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives opportunity to obtain an advantage over competitors who do not know or use it..

The subject of a trade secret must be secret, and must not be of public knowledge or of a general knowledge in the trade or business.

This necessary element of secrecy is not lost, however, if the holder of the trade secret reveals the trade secret to another in confidence, and under an implied obligation not to use or disclose it…

These others may include those of the holder’s “employees to whom it is necessary to confide it, in order to apply it to uses for which it is intended.”….Often the recipient of the confidential knowledge of the subject of a trade secret is a licensee of its holder…

Novelty, in the patent law sense, is not required for a trade secret…

However, some novelty will be required merely because that which does not possess novelty is usually known; secrecy, in the context of trade secrets, thus implies at least minimal novelty.’

Trade secret as an intellectual property has potential to translate intangible value into economic growth. Unfortunately, the unfavorable treatment accorded to trade secret has displaced if from the home of Intellectual Property Rights (IPR) law. An important reason for the same is that IPR laws are tuned to bring transparency and probity in knowledge management whereas the trade secret are shrouded in secrecy and confidentiality[3].

The extent of recognition of trade secret in the world can be gauged by the fact that a majority of working technologies worldwide are protected as trade secrets rather than patents

Trade secrets are accorded confidentiality under legal protection allowing claims for injunctive relief for unauthorized use and dissemination by way of recovery of damages. Further, the breach of confidentiality attracts criminal charges. At the international level, the North American Free Trade Agreement (NAFTA) and the Agreement on Trade Related Aspects of Intellectual Property (TRIPS) ratified provision related to trade secrets during Uruguay Round of the General Agreement on Tariff and Trade (GATT). Since then, there has been a positive trend toward adoption of domestic statues specifically directed at the increased protection of trade secret.[4]

Intellectual Property Laws are generally territorial in character but trade secret protection varies according to jurisdiction. Trade secret protects technological and commercial information not generally known in the trade and prevents unauthorized commercial use by others.[5]

A trade secret is commonly ‘any formula, pattern, device or compilation of information which is used in one’s business, and which gives human opportunity to obtain an advantages over competitors. Broadly speaking, there are three factors common to all definition of trade secret;

i. It is information  not generally known to the public

ii. It confers economic benefit by maintaining secrecy and confidentiality and,

iii. Is the subject of reasonable efforts to maintain its secrecy.

Trade secret acts as an incentive to incremental innovation in technology not meeting the non obviousness standards of patent law and patent laws. The inventions protected as utility model, trademarks, industrial designs, artistic or literary works are often maintained as trade secrets until used or published during the process of registration or grant of the relevant IPR. A substantial part of economically meaningful technology, particularly new and cutting edge technology prone to reverse engineering, such as biotechnology, computer program microchips, computer aided designs and hence preserved as trade secrets.[6]

The uniqueness of trade secret law is that it fits into the extensive framework of contract, competition, innovation, information technology and intellectual property rights. The trade secrets doctrines are closely linked to the domain of tort and criminal law although subject to different rationalization.[7]    

MECHANISMS AND MODALITIES OF TRADE SECRET

The TRIPS Agreement recognizes trade secrets under ‘undisclosed information’, but remains silent on the mechanism and modalities.[8]

The nature and methodology differ in state practices and range from privacy laws to unfair competition and breach of contracts.[9]

The prominent modalities to protect trade secret are:-

1) Employment Agreement: Depending upon the needs, businesses include suitable confidentiality, non-disclosure agreement (NDA) and non-compete clause (NCC) in agreements with employees.

2) Trade Secret Policy: Trade secret policies rely on business secrets and are based on value and sensitivity.

3) Non-disclosure Agreements: Businesses enter into NDAs with third parties while discussing any business prospects and ventures and thereby they preclude the third parties from divulging trade secrets. Moreover when third party receives any information without the consent of the complainant then the third party also receives certain rights and obligations in favour of the confidential information. In Fraser vs Thames Television[10], the court held that third party will be held liable only if the information is both unknown in public, and is known to be confidential by the defendants

4) Adequate documentation: Records of evidentiary value of the trade secret information are maintained. They are updated and subjected to audit at regular intervals.

5) Security Systems:- Access to trade secrets and confidential information are restricted to selected personnel under security checks.[11]

LAWS OR REGULATIONS GOVERNING TRADE SECRET UNIVERSALLY

American law represents one of the advanced forms of trade secret law in the world. Article 39(2) of the TRIPS lays down the essentials for undisclosed information or trade secret. The US enactment on trade secret i.e. Uniform Trade Secrets Ace, 1970 provides the most comprehensive definition of trade secret.

The UTSA has been enacted, in one form or another, by 40 states and the District of Columbia.  Prior the development of the UTSA, improper use or disclosure of a trade secret was traditionally a common law tort. Sections 757 and 758 of the Restatement of Torts (1939) set forth the basic principles of trade secret law that were widely adopted by U.S. courts.[12]

Another significant development in US law is the Economic Espionage Act, 1996. It clarifies as to what makes theft or misappropriation of trade secrets a federal crime. This law criminalizes two types of activity. The first includes conspiracy to misappropriate trade secret and acquisition of such misappropriated trade secret. The second criminalizes the misappropriation of trade secrets related to or included in a product that is produced for interstate commerce.[13]

TRIPS AGREEMENT AND PARIS CONVENTION

TRIPS Agreement is important for detailed understanding as it provides that ‘in course of ensuring effective protection against unfair competition as provided in Article 10(bis) of the Paris Convention, 1967, Members shall protect undisclosed information. TRIPS is the first international convention specifically imposing obligations on disclosed information, including test data.  The TRIPS agreement negotiators preserve the confidentiality of test data submitted to government approval agencies.

Article 39 of TRIPS Agreement deals with undisclosed information which is often been referred to as  “trade secrets” of “know-how”, Article 39 does not use these terms nor does it provide a definition of “undisclosed information. The scope of Article 39(3) is limited to undisclosed data which are required by a national authority as a condition for obtaining approval for the marketing of pharmaceutical or of agricultural chemical products “which utilize new chemical entities”, provided that the origination of the data involved a “considerable effort”. [14]

This provision is, therefore, applicable, when:

(a) There is an obligation to submit test data for obtaining marketing authorization for pharmaceuticals and agrochemicals;

(b)The pertinent information is not publicly available;

(c) The submission should refer to a “new chemical entity”. Hence, there is no obligation with regard to new dosage forms, new uses or combinations of known products; and

(d) In order to qualify as protectable the origination of the data should have involved a “considerable effort”.

POSITION IN INDIA:-

The Indian Courts on several occasion delineated the concept of trade secret. In the case of Anil Gupta v Kunal Dasgupta[15], the Delhi High Court ruled that the concept developed and evolved by the plaintiff is the result of the work done by the plaintiff upon material which may be available for the use of anybody, but what makes it confidential is the fact that the plaintiff has used his brain and thus produced a result in the shape of a concept.

Any developing country like India should devise a proper law for protection of trade secrets as it encourages foreign investment in many fields. The Indian law still depends on old traditional common law principles which have lost their significance in the present scenario. There are large numbers of companies, especially chemical company who prefer trade secrets as a form of protection of their IP. These companies are reluctant to invest in India because India cannot offer appropriate protection for their trade secrets. Therefore there is a dire need for a proper policy framework to regulate protection of trade secrets in India.[16]

MEANS OF PROTECTION OF TRADE SECRET

A common way of protecting trade secrets is through confidentiality or non-disclosure and non-compete clauses in an employment contract. Companies should have rules and regulations for the protection of confidential information from contractors, consultants, vendors, customers, staffs, interns, visitors, non-employees working on site, etc. There is no government registration process in any country of the world that forces enterprises to reveal their confidential business information to the authorities in order to obtain trade secret rights. So the cost of protecting trade secrets is largely the cost of putting in place an information security and protection policy and program in the company and the cost of monitoring, surveillance, audit and legal measures against insiders or outsiders who breach or try to breach the security system.[17]

It is illegal to acquire another’s trade secret if one knows or has reason to know that the trade secret was acquired by improper means. Improper means include theft, bribery, misrepresentation, breach or induced breach of a duty to maintain secrecy, or espionage by electronic or other means. Reverse engineering or independent derivations alone are not considered improper means. Thus, a trade secret suit will not succeed if an aspect of a product’s design or construction has been obtained by examination of an item purchased in the marketplace.[18]

REVERSE ENGINEERING

Reverse Engineering means ‘starting with the known product and working backward to derive the process which aided in its development or manufacture’.[19] Therefore to avoid a successful claim by the defendant that he discovered the trade secret by reverse engineering, prosecutors should establish the means by which the defendant misappropriated the trade secret. If the prosecution could show that the defendant unlawfully obtained access to the trade secret, it would refute his claim that he learnt the trade secret through reverse engineering. However a defendant cannot defeat a prosecution by claiming that the trade secret could have been discovered by reverse engineering.[20]

In Telerate System Inc v Caro[21], the court held that the proper focus of inquiry is not whether an alleged trade secret can be deduced by reverse engineering but rather, whether improper means are required to access it.

The reasons for revere engineering in software industry could be to,-

· Retrieve the source code of a program because the source code was lost; or

· Study how the program performs certain operations; or

· Improve the performance of a program; or

· Correct an error in the program when the source code is not available; or

· Identify malicious content in a program such as virus; or

· Achieve interoperability.[22]

Under New Jersey's law against misappropriation of trade secrets, information can only be protected if the plaintiff has a business advantage because that information is not known to its competitors and cannot be easily developed by them using proper means. If the information in question is readily ascertainable by a competitor, without resort to misappropriation, then trade secret protection is not available.[23]

Reverse engineering of a proprietary computer program is not necessarily, a misappropriation of trade secrets.[24]

California’s version of the Uniform Trade Secrets Act “specifically states that ‘reverse engineering alone shall not be considered improper means’” of acquiring trade secret information. The fact that the plaintiff’s EULA(End User License Agreement)  prohibited reverse engineering “may support a cognizable breach of contract claim,” but “the mere presence of the EULA does not convert reverse engineering into an ‘improper means’ within the definition of California trade secret law.” 

According to the US Supreme Court it’s perfectly legal for competitors to reverse-engineer the product in order to copy it. The minute an unpatented product is sold in the marketplace, it is no longer considered a trade secret.[25]

TRADE SECRET AND ANTITRUST LAWS

The antitrust treatment of trade secrets has remained largely hidden. There has been little separate focus on the competition problems that trade secrets may present, even though trade secret protection was raised as a defense in early antitrust litigation. Antitrust enforcers have not always taken the position that antitrust analysis should be the same without regard to whether a patent or a trade secret is involved. Justice Department in US issued enforcement guidelines in 1977 made some effort to give lesser scope to the licensing of trade secrets than to the licensing of patents, stressing the lack of Congressional mandate for trade secrets and the lack of patent law’s disclosure quid pro quo for legal protection.[26]But these distinctions have been lost under the current guidelines, with antitrust analysis focusing more on economic effects than on legal categories and ignoring the different legal properties of the trade secrets regime. Regime choice should matter to antitrust analysis, however, because the nature of the legal protection granted the right-holder is related to the economic reasons for that protection. Parties that choose trade secrets over patent are making a decision that may very well reflect what they feel needs protecting the most, as well as accepting the trade-offs that such a decision entails. Parties that choose trade secrecy do not make public disclosure, but they do gain protection from misappropriation, even when “free” appropriation might advance competition in the short run. By not taking the “patents for disclosure” bargain they also lose the ability to keep others from developing the same invention through reverse engineering, a significant risk associated with trade secret protection.[27] In assessing the economic effects of restrictive agreements or exclusionary conduct related to trade secrets, good economic analysis will pay attention to these legal choices that the parties have made. By contrast, the European Commission takes the view that trade secrets do not merit the same level of deference as that accorded to intellectual property rights. In Microsoft, the Commission decided that Microsoft's refusal to disclose secret interoperability information to its competitors constituted an abuse of a dominant position because the refusal created an unfair competitive advantage for Microsoft. Moreover, as the recent controversy over the implementation of the Microsoft decision shows, the Commission position is that Microsoft does not have the right to charge royalties or control the secret interoperability information it was forced to disclose, unless such information qualifies for patent protection. The source of these divergent approaches may be the lack of harmonized EU standards of trade secret protection. Whereas U.S. antitrust authorities naturally relied on the harmonized principles of trade secrets law, the EU antitrust enforcers, lacking such uniform standards, have been using competition law to shape substantive trade secret laws. In doing so, they have undermined national trade secret protection measures and thus created a legal environment which may discourage private R&D investment and impede diffusion of technologies.

LAW, INNOVATION AND TRADE SECRET

With the large amount of information stored as trade secret in India there is definitely an immediate need for an active legislation like the Uniform Trade Secrets Act, 2007. This regulation would help to improve the security status of trade secret by declining the treats. And moreover along with other regulations like NDA, NCC, and breach of contract they would better serve in the interests of undisclosed information or trade secret.

Innovation depends on tangible investments such as plant and equipment and intangible investments such as research and development (R&D) and marketing. Patents provide broad exclusivity but only for a fixed period of time and are limited to technical innovations that require particular standards, disclosure of the innovation as well as application fees and other expenses. By contrast, trade secrets are unlimited in time and do not require disclosure. They are not limited by particular technical standards and the cost is relatively less. However, secrecy does not protect against accidental disclosure, independent discovery, or reverse engineering. Moreover, the scope of trade secrecy is much broader than that of patents. Trade secrecy protects work in progress as well as completed innovations. This protection is important even for innovations that will be patented, as it reduces the time for competitors to invent around the innovation. In addition, trade secrecy extends beyond technical innovations to commercial innovations including business plans, marketing concepts, and customer lists.[28]

Like intellectual property in general, the purpose of trade secrets law is to encourage innovation and ultimately foster economic growth though trade secrets laws may have conflicting effects on investment in innovation. Stronger secrecy laws would strengthen appropriability and thereby would provide better assurance of exclusivity. This would increase the innovator's return from investment. Trade secrecy matters, especially in high-tech industries and for larger companies. By harnessing the property rights arising from this relatively under-explored area of the law, nations and businesses can increase innovation, and achieve faster economic growth and higher long-run welfare.[29]

SOME ECONOMICS OF TRADE SECRET

Judges and lawyers have sometimes thought that because trade secret law provides less protection to the inventor than patent law does, no rational person with a patentable invention would fail to seek a patent; and therefore trade secret law must protect a class of lesser inventions.[30] This reasoning is incorrect. Consider three cases.[31] In the first, the inventor has a patentable invention that he believes will take as long or almost as long as the term of a patent for anyone else to invent, but the invention has only modest economic value. In the second case, the inventor again has a patentable invention, but in this case one that he believes will take much longer than the term of a patent for anyone else to invent. In the third case he has a non patentable invention but believes that reinventing it would take so long that he can obtain a substantial return by keeping the invention secret.

The inventor's decision may seem an obvious one in the first case, since the patent will yield greater protection. But it will probably do so at greater cost, which may not pay if as assumed the invention is not of great value. Obtaining patent protection involves significant fixed costs of preparing the patent application. Protecting a trade secret avoids these fixed costs, but adds expenditures to prevent disclosure of the secret. The latter cost should be roughly proportional to the value of the secret to prospective appropriators, and hence should be low when the secret is of modest value. In that situation, trade secret protection may well be cheaper than patent protection, and the difference may exceed the difference in benefits arising from the fact that patent protection is broader and lasts longer. Notice also that the cost of obtaining a patent must be incurred in every case, whereas the cost of establishing trade secret protection is incurred only if the secret turns out to be valuable enough to incite someone to try to steal it.

In the second case (the patentable invention that the inventor believes will take much longer than the term of a patent for anyone else to invent), the inventor's choice is between patenting the invention for stronger protection and keeping it a trade secret, hopefully for a longer time. He will choose the latter course of action if he thinks that doing so will give him a greater return. By doing so he will in effect be contending that the social value of the invention is greater than the patent law assumes and offering to demonstrate it through the failure of other inventors to duplicate the invention though legally free to do so. The law of trade secrets assists him in this demonstration by increasing the chance that if someone does duplicate the invention, he will do so by inventing rather than by stealing it.

Admittedly we are oversimplifying. On the one hand, the inventor is more than demonstrating his claim; the existence of the invention will typically lower the cost to others of duplicating it, so that their failure to do so will demonstrate a fortiori that they would not have come up with the invention independently. On the other hand, the existence of the invention lowers the return from duplicating it, and thus lowers the incentive to try to duplicate it. These effects cut in opposite ways insofar as the length of time the trade secret will remain a secret is concerned, and therefore need not affect that time.

The third case that of the non patentable invention expected by its inventor to yield a substantial return if only it can be kept secret--is analytically similar to the second. The case assumes that the government thinks the invention obvious--thinks that someone else will come up with it shortly and therefore that granting the inventor a patent would over reward him; for that is (roughly) what it means to say the invention is non patentable. The inventor offers to demonstrate the contrary--that it is not an obvious invention--by keeping it a secret. If he is wrong and someone else invents the same thing the next year, this proves the government right; so it is as if the inventor had been denied a patent and the patent laws were exclusive. But if the inventor is right and there is no duplication, then he gets the approximate reward he would have gotten if the invention were patentable--as he should, for he has shown that the government was mistaken in thinking the invention unworthy of patent protection.[32]

This third case need not reflect a disagreement between the inventor and the patent authorities, though we have posed it that way; it may merely reflect the fact that patent law cannot be tailored finely enough to cover every case. Everyone may agree that the invention will be duplicated in five years, but since patent law contains no provision for patents that expire in five years, awarding the inventor a patent will substantially over reward him. The Patent Office correctly refuses the patent--and the inventor correctly uses trade secret protection instead.

To summarize, trade secret law supplements the patent system. Inventors choose trade secret protection when they believe that patent protection is too costly relative to the value of their invention, or that it will give them a reward substantially less than the benefit of their invention (as reflected, in part, in the length of time before any else will invent it), either because the invention is not patentable or because the length (or other conditions) of patent protection is insufficient. By successfully maintaining their trade secret they provide evidence that their belief was correct. In effect the common law has plugged several economic holes in the patent statute. It has not done so costlessly; patenting results in the disclosure of socially valuable information, and trade-secret protection does not. Our analysis of trade secret law is congruent with the basic economic explanation for patent protection that it provides a means of internalizing the benefits of innovation.

CONCLUSION:

As an economic matter, trade secrets are, of course, intended to provide some protection for innovations, thereby acting as an incentive for their production, but they have never been intended to provide monopoly rents. Rather, the core purpose of trade secret protection has been to protect against misappropriation and thereby promote relationships of trust. These relationships have important economic and social benefits, enabling cooperative enterprises to succeed, but protection against misappropriation does not require giving monopoly profits to the trade secret holder.

Trade secret is still developing in India and there is no specific statute codifying the principles of trade secret. The codification of trade secret law is of utmost necessity because application of common law principles to protect trade secret is quite inconsistent. The courts have not reached a consensus regarding whether a manufacturer can claim a trade secret in the materials or components of its product. Several courts have held that there can be no trade “secret” because a purchaser of the product can learn the secret by reverse engineering the product. However, other courts have held that where the “secret” can be ascertained only by reverse engineering, which would be time-consuming, difficult, and costly, the manufacturer has a protectable trade secret. As far as the antitrust laws are concerned India does not have any proper framework for it. As in US Sherman Act, under which the trade secret case concerning competition issues are dealt with. Sherman Act cases reveal a careful understanding of the legal properties of trade secret protection and a desire to limit the ability of trade secret holders to use trade secret licenses to restrict competition,

BY DISHARI CHAKRABARTI

KIIT SCHOOL OF LAW

3RD YEAR, BSc. LL.B