Ever heard of the secret recipe of the most popular drink in the world – Coca Cola? Or the algorithm Google uses to rank various websites in its search engine results pages? You would have heard rumours disclosing the special ingredients used to make Coke or the data used by Google to rank websites based on relevance to users. But, none of them would have the backing to be true, neither the practical applicability nor the affirmation from the companies themselves. These secrets are known as trade secrets. As the name suggests, any sensitive information such as a formula, pattern, compilation, program, device, method, technique or process that needs to be protected from the general public comes under the purview of trade secrets.
One might wonder why Coca Cola and Google chose not to file for a patent instead. The obvious reason here is that the highly confidential information would have been disclosed to the public, despite giving the companies an exclusive right to the patented process, design or invention for a designated period. Unlike other intellectual property rights, trade secrets protect a much wider range of subject matter such as a business strategy, a new product roadmap, or lists of suppliers and customers and are not limited to set terms of protection. However, they can’t be enforced against anyone who independently discovers the secret. They are actionable only when there is any unlawful acquisition, disclosure or misuse either under breach of confidence or theft. Under such circumstances, the proprietor of the trade secret is eligible to get compensation from the party who committed this unlawful act.
With growing cases of infringement of trade secrets, both the organisations and governments worldwide have responded by amending and introducing increasingly robust rules to protect trade secret owners and their rights. On the flip side, it must be ensured that the companies themselves do not misuse the protection provided to them by law and defraud the public by not disclosing harmful information that might lead the company to lose the competitive advantage it has earned due to the trade secret.
The classic example of a company engaged in this malpractice has been Theranos – the blood-testing startup with the big vision of testing patients for over 200 conditions off just a small sample of blood from the fingertip, thus saying goodbye to the big, bad needles. The innovative technology soon gained momentum, with the company valuing at $9 billion in 2015 and its CEO Elizabeth Holmes, the darling Stanford dropout of the Silicon Valley, continuously featuring in the lists of top global executives.
Even before Theranos reached its peak in 2015, questions were raised regarding the reliability of the technology and the honesty of the company. The first decade of inception of Theranos in 2003 saw several collaborations such as partnering with Walgreens as well as Safeway to run health clinics, however, things started getting tense gradually when experts started showing concerns of discrepancies in blood test results of patients. The events that followed were clearly indicative of the secrets frauds committed by the company, with the chief scientist of Theranos committing suicide in 2013, President Sunny Balwani leaving the company in 2016 and an end to the partnerships with Walgreens and Safeway leading to the shutting down of wellness centres and clinical labs combined with the laying-off of employees and the piling up of lawsuits filed by investors, patients and collaborators. Such cases prove that although trade secrets give a competitive advantage to the owner of such confidential information, it can also result in misuse by way of not disclosing significant facts – the process of conducting tests in case of Theranos.
Many countries, like India, do not have sufficient laws to protect businesses from increasingly sophisticated infringers and at the same time to ensure that the companies make use of the protection provided to them by the state. The scenario is changing with the US and Europe, two of the most prominent markets, taking a step forward and implementing new laws that make a difference.
The protection of trade secrets was addressed by individual states in the EU before the implementation of Directive in 2016, which led to the harmonisation of laws across all EU member nations. The countries were given the autonomy to go beyond the minimum requirements and level of protection set out by the directive. The aim was not of full harmonisation, but rather to ensure that every EU nation at least achieves the bare minimum safeguard against the illegal acquisition, disclosure and use of trade secrets.
The UK government introduced The Trade Secrets (Enforcement, etc.) Regulations in 2018 as a complement to the already existing Trade Secrets Directive applicable in the entire EU. The Directive was adopted by the UK so as to ensure that UK-based businesses having offices in other countries of the EU can rely on equivalent protection to their trade secrets in the local jurisdictions of other nations. Even post Brexit, the Directive will be applicable, regardless of where the secret holder is domiciled, provided the damage took place in a Member State.
As per UK law, the cases are solved in a court of law wherein the plaintiff has to prove that the relevant information had the quality of confidence in the sense of not being generally known and not being of trivial nature. It has to be shown that the information was disclosed to the defendant in circumstances of confidence, and the defendant used or disclosed the information without permission or had threatened to do so. However, the Directive has placed restrictions by mandating the organisation to prove that it has taken reasonable steps to safeguard their secret, failing to do so results in loss of protection to the organisation. That apart, the Directive has scaled back the earlier system of confidential hearings and redacted publication of court documents, which may disincentivise companies to actually engage in litigation due to the fear of their trade secret becoming public.
Unlike other countries, the Defend Trade Secrets Act, 2016 of the US offers the parties the option of settling disputes under either state or federal laws. The parties have the option to choose from three different forums for litigation related to trade secrets – Federal District Courts, US state courts or the US International Trade Commission. These forums deal with any sensitive information acquired by “improper means” namely theft, bribery, misrepresentation, breach or inducement of breach of duty to maintain secrecy, espionage through electronic or other means. Although the laws at the state and central levels differ in some aspects, there is a great deal of similarity among state laws as the majority of them have adopted certain variations of the Uniform Trade Secrets Act.
The prime onus to prevent misappropriation of trade secrets lies on the shoulders of the organisation itself, and not on the government. The business must clearly identify and classify its trade secrets, restrict access and educate employees on the importance of adhering to confidentiality. The employees must be made to sign Non-Disclosure Agreements (NDAs), legally restricting the employees from disclosing private information either to the competitor or the public at large. Exit interviews with outgoing employees can also be used to reinforce the organisation’s trade secret policy. Some special tactics of preventing data leak include read-only files; password and firewall protection; check-in and check-out procedures; document destruction policies; and review of publications, presentations, at trade shows, on websites, etc. Wherein information is exorbitantly sensitive and would result in immense losses, the companies must segregate this precious information, under lock and key, designated as confidential.
With rampant cybercrime, easier and faster decryption of data by hackers, the cases of data leak and misuse are growing day-by-day. In such an era, this serious yet undiscussed issue of trade secrets can be solved only by nudging the countries across the globe for the adoption of laws with stricter consequences of committing such crimes at international platforms.
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