Trade Secrets: What are they and why are they needed?
With recent developments in technology and the ease of sharing, copying, and storing information in the digital ecosystem, one of the major challenges that businesses face is the protection of their confidential business information. This information can comprise business strategies, proposals, client databases and information, compilations, designs, programs, drawings, devices, formulae, or compositions.
Several businesses are finding it arduous to protect their vital information due to the many online and offline tools available to ease the transfer of data. The threat they face is not only external – but can also come from internal sources, such as employees and contractors, who have access to vital business information.
A trade secret is a formula, practice, process, design, instrument, pattern, commercial method, or compilation of information that is not generally known or reasonably ascertainable by others; and by which – a business can obtain an economic advantage over its competitors or customers. The scope of trade secrets is virtually unlimited. A trade secret continues for as long as the information is maintained a secret. However, information may no longer be considered a trade secret once it becomes easily accessible, is no longer protected adequately, or has no commercial value.
Legal Basis for Protecting Trade Secrets
The TRIPS Agreement was the first international agreement to safeguard trade secrets explicitly. The approach under the TRIPS Agreement is founded on the notion that protection against unfair competition should include protection for undisclosed information. In presenting this approach, the TRIPS Agreement refers to the prior-existing protection against unfair competition as presented in the Paris Convention for the Protection of Industrial Property – a convention that is administered by the World Intellectual Property Organization (WIPO).
Although trade secrets are confidential, they are also commercial. For a trade secret to have any practical value, the proprietor generally has to share it to work together with a limited number of employees and business partners. Legislation therefore foresees and accounts for some amount of protected disclosure within a constrained circle. However, even if trade secrets are not ‘secret’ in the strictest sense of the term, they must remain non-public and known only to a limited number of people. The definition of trade secrets, therefore, is generally similar among nations recognizing their dual characteristic of being confidential but commercial.
Article 39 of the TRIPS Agreement addresses the protection of undisclosed information. It reads as follows:
- 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.
- 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:
- 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;
- Has commercial value because it is secret; and
- Has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.
- 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.
Article 10bis of the Paris Convention referenced in Article 39 of the TRIPS Agreement highlights the nature of protection against unfair competition. The resemblances among countries in defining trade secrets are owed to the three requirements of Article 39 of TRIPS. In fact, on this matter, TRIPS reflected then-current practice in many countries, and it has shaped consequent law-making.
WTO members comply with this obligation in several ways. The fact that TRIPS Article 39 does not set forth a comprehensive regime for protection is related to substantial variation between nations in the methods adapted to provide the TRIPS mandated protection. Few nations have implemented express legislation. In others, the obligation is observed by legislation that includes misappropriation via means such as breach of contract, inducement of others to breach contracts and acquisition by third parties of information known to be disclosed dishonestly (or where it was negligent not to know). These two approaches can affect the ways businesses and employees conduct their affairs, and hence, there are reasons to believe that the statutory protection of trade secrets may have important economic effects.
Trade secrets are not protected against learning by fair means, such as independent creation, reverse engineering, or reading public documents. In other words, trade secrecy does not provide an exclusive right to use the information, so long as a second party obtains the information fairly or it enters the public domain by fair means. Hence, unlike patented inventions or copyright-protected content, trade secrets are not protected for a statutory time limit, and they can run out in the normal course of the competition.
Essential Requirements of Trade Secrets
In practice, the TRIPS requirements for trade secrets are now generally applied in law as follows:
- Secrecy– The information protected must be secret. Secrecy does not have to be absolute. The trade secret owner may share the information with employees and business partners. Secrecy implies that the information must not be readily available to the public and that it is revealed to others only under conditions that maintain secrecy concerning the broader public.
- Commercial Value– The information must have economic value as a result of it being secret. Trade secret law usually protects commercial information, and that information must derive some utility from being kept secret.
- Reasonable Efforts to Maintain Secrecy – The information must be the subject of reasonable efforts on the part of the proprietor to maintain its secrecy. By its nature, a trade secret claim arises when measures to protect the secret have failed. Thus, the law does not require one who claims a trade secret to be entirely successful at protecting it. However, the law does mandate the owner to make some efforts to maintain secrecy. In domestic legislation of countries, the essential effort is often broadly described as ‘reasonable,’ keeping in line with Article 39 of the TRIPS Agreement. However, some nations impose more specific, additional obligations, which can be characterized as a specific implementation of the wide reasonableness requirement. For instance, some common law nations mandate that the defendant has a contractual or implied obligation to keep the information secret. Other nations require written contracts with recipients and confidentiality notices.
These three conditions define trade secrets in a manner covering a potentially very large scope of economic activity and have become synonymous with the definition of trade secrets.
Protecting Your Trade Secrets Effectively: Final Thoughts
Trade secrets can be one of the most crucial assets in the Intellectual Property (IP) portfolio of a company. Trade secrets are on par with other kinds of IP, such as patents, copyright, and trademarks. Some even agree that trade secrets are the heart of any IP portfolio. Depending on the jurisdiction, the protection of trade secrets forms part of the general concept of protection against unfair competition or is based on specific provisions or case law on the protection of confidential information.
Banking on the legal protection of trade secrets alone is not enough. Companies possessing trade secrets have to make reasonable efforts to protect these assets with the help of some specific administrative and technical measures. Administrative measures may involve having robust trade secret policies and procedures in place. At the very least, a reasonable policy should require that an organization identifies trade secret material and a prominent ‘Trade Secret’ label on the document itself. After that, the number of people who have access to the trade secret has to be limited. The employees should be trained about the trade secret policy of the companies. Employees with access to trade secrets should be mandated to sign a confidentiality or nondisclosure agreement. Technical measures can comprise access control and security measures to make it tough for the trade secrets to be stolen. With the surge in cybersecurity threats, hacking, electronic espionage, malware, etc., trade secrets that are stored in electronic format must be appropriately safeguarded.
Trade secrets are a vital but invisible component of an organization’s IP asset portfolio. They can add incredible business value, so they need to be correctly and professionally managed and looked after. Appropriate and professional trade secret management necessitates a thorough understanding of this specific form of IP, a robust trade secret management system, and a decent governance process along with regular trade secret audits.