Trade secrets to gain economic advantage
A trade secret is a formula, practice, process, design, instrument, pattern, commercial method, or compilation of information which is not generally known or reasonably ascertainable by others, and by which a business can obtain an economic advantage over competitors or customers. In some jurisdictions, such secrets are referred to as “confidential information”, but are generally not referred to as “classified information” in the United States, since that refers to government secrets protected by a different set of laws and practices.
Type of intellectual property such as formulary, know how, process, system, or confidential information that gives its owner a competitive advantage and unauthorized disclosure of which will harm the owner. Courts generally grant injunctions to prevent a threatened disclosure of a trade secret by the current or former employees because otherwise the relationship of trust between the employer and employee will be destroyed. The employer must, however, demonstrate that he or she actively safeguarded the trade secret and had informed the employees that it was to remain confidential.
Trade secrets are important, but an invisible component of a company’s Intellectual property (IP). Their contribution to a company’s value, as seen as its Market capitalization, can be major. Being invisible, that contribution is hard to measure Patents are a visible contribution, but delayed, and unsuitable for internal Innovations, Having an internal scoreboard provides insight into the cost of risks of employees leaving to serve or start competitors.
The precise language by which a trade secret is defined varies by jurisdiction (as do the particular types of information that are subject to trade secret protection). However, there are three factors that, although subject to differing interpretations are common to all such definitions: a trade secret is information that:
Is not generally known to the public;
Confers some sort of economic benefit on its holder (where this benefit must derive specifically from its not being publicly known, not just from the value of the information itself);
Is the subject of reasonable efforts to maintain its secrecy.
These three aspects are also incorporated in the TRIPS Agreement in Article 39.
By comparison, under U.S. law, “A trade secret, as defined under 18 U.S.C. § 1839(3) (A), (B) (1996), has three parts:
(2) reasonable measures are taken to protect the information; and
(3) which derives independent economic value from not being publicly known”.
In Commonwealth common law jurisdictions, confidentiality and trade secrets are regarded as an equitable right rather than a property right (with the exception of Hong Kong where a judgment of the High Court indicates that confidential information may be a property right). The Court of Appeal of England and Wales in the case of Saltman Engineering Co Ltd v. Campbell Engineering Ltd. held that the action for breach of confidence is based on a principle of preserving “good faith”. See Breach of confidence in English law.
The test for a cause of action for breach of confidence in the common law world is set out in the case of Coco v. A.N. Clark (Engineers) Ltd:
- The information itself must have the necessary quality of confidence about it;
- That information must have been imparted in circumstances imparting an obligation of confidence;
- There must be an unauthorized use of that information to the detriment of the party communicating it.
The “quality of confidence” highlights that trade secrets are a legal concept. With sufficient effort or through illegal acts (such as break and enter), competitors can usually obtain trade secrets. However, so long as the owner of the trade secret can prove that reasonable efforts have been made to keep the information confidential, the information remains a trade secret and generally remains legally protected. Conversely, trade secret owners who cannot evidence reasonable efforts at protecting confidential information, risk losing the trade secret, even if the information is obtained by competitors illegally. It is for this reason that trade secret owners shred documents and do not simply recycle them.
A successful plaintiff is entitled to various forms of judicial relief, including:
- An injunction
- An account of profits or an award of damages
- A declaration
Trade secrets are by definition not disclosed to the world at large. Instead, owners of trade secrets seek to protect trade secret information from competitors by instituting special procedures for handling it, as well as technological and legal security measures. Legal protections include non-disclosure agreements (NDA) and non-compete clauses. In exchange for an opportunity to be employed by the holder of secrets, an employee may sign an agreement not to reveal his or her prospective employer’s proprietary information. An employee may also surrender or assign to his employer the right to his own intellectual work produced during the course (or as a condition) of employment. Violation of the agreement generally carries the possibility of heavy financial penalties. These penalties operate as a disincentive to reveal trade secrets. However, proving a breach of an NDA against a former employee who is legally working for a competitor can be very difficult. A holder of a trade secret may also require similar agreements from other parties he deals with, such as vendors or licensees.
A company can protect its confidential information through non-compete and non-disclosure contracts with its employees (within the constraints of employment law, including only restraint that is reasonable in geographic- and time-scope). The law of protection of confidential information effectively allows a perpetual monopoly in secret information – it does not expire as would a patent. The lack of formal protection, however, means that a third party is not prevented from independently duplicating and using the secret information once it is discovered.
Secret formulae are often protected by restricting the key information to a few trusted individuals. Famous examples of products protected by trade secrets are Chartreuse liqueur and Coca-Cola.
Confidential information can be the most valuable asset of a business. A competitive edge in the marketplace may rely on a business having certain information which its competitors do not. However, unlike more tangible assets, the law may not automatically prevent others from taking or using valuable information.
Privileged communication shared with only a few people for furthering certain purposes, such as with an attorney for a legal matter, or with a doctor for treatment of a disease. Receiver of confidential information is generally prohibited from using it to take advantage of the giver also called privileged information.
(This article is a segment of author’s research on “INTELLECTUAL PROPERTY LAWS IN BANGLADESH: CURRENT STATUS WITH PROBLEMS AND FUTURE DEVELOPMENT” for the degree of MASTER OF PHILOSOPHY, Under International Culture University. This article is published for educational purpose only, plagiarism is strictly prohibited)