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Evaluating Trade Secrets Under The IPR Paradigm: The Hypothesis Of Trade Secrets As A Right Analysed In The Pure Hohfeldian Sense

Written by: Gaurav Wahie
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Ideas and knowledge form the quintessential of trade in modern times. The value of a new product lies in the amount of invention, innovation, research, design and testing that go behind its successful production. With globalization and rapid industrialization the need to protect these ideas has attained paramount importance as it is these ideas that help business concerns to maintain a competitive superiority in the market and further their economic interests. It is for this very reason that corporations, particularly those having multi-national operations need to prevent others from using their inventions, designs or other creations - and to use that right to negotiate payment in return for others using them.

These are referred to as "intellectual property rights" in the present day parlance. Intellectual property rights are not abstract legal concepts, but a broad ranging means to protect core business assets in a fiercely competitive environment, build and protect good will, avoid significant liabilities to others, and preserve and expand enterprise's equity.

In the middle to late nineteenth century, fostering of creation with monetary reward grew into capitalism. Capitalism embodied
(a) the benefits and rewards of hard work (concepts from Puritanism );
(b) the exchange of business ideas through products and services; and
(c) competition in the marketplace and financial reward for the most popular or beneficial ideas i.e. those items that sell the most make the most for their inventors. The need to protect these ideas or intellectual property was realized as early as 1883 when the Paris Convention for Protection of Industrial Property came into existence. With passage of time, emergence of new concepts in intellectual property and need to harmonize different national legislations the developed countries began pressing for the inclusion of intellectual property as an area of discussion under GATT.

In 1986 the Uruguay Round of negotiations began which concluded on 15th April in Marrakesh with the signing of the 'Final Act'. This Act contained 28 agreements, TRIPs being one of them. The aim of TRIPs was to provide and enhance international standards of intellectual property and to harmonize different national laws on protection of these intellectual properties.

This paper deals with the concept of trade secrets in the framework presented by TRIPs and questions the basic doctrinaire assertion of trade secrets as a right in the 'Hohfeldian' sense.


The extent of protection and enforcement of intellectual property rights varied widely around the world; and as intellectual property attained increasing importance in trade, these differences became a source of tension in international economic relations. New internationally agreed trade rules for intellectual property rights were seen as a way to introduce more order and predictability, and for disputes to be settled more systematically.

The Uruguay Round achieved that. The TRIPs Agreement is an attempt to narrow the gaps in the way these rights are protected around the world, and to bring them under common international rules. It establishes minimum levels of protection that each government has to give to the intellectual property of fellow WTO members. In doing so, it strikes a balance between the long-term benefits and possible short term costs to society. Society benefits in the long term when intellectual property protection encourages creation and invention, especially when the period of protection expires and the creations and inventions enter the public domain.

The preamble of the TRIPs Agreement states the object of the agreement as:

"To reduce distortions and impediments to international trade, and taking into account the need to promote effective and adequate protection of intellectual property rights, and to ensure that measures and procedures to enforce intellectual property rights do not themselves become barriers to legitimate trade"

The agreement covers five broad issues
1. How basic principles of the trading system and other international intellectual property agreements should be applied,
2. How to give adequate protection to intellectual property rights,
3. How countries should enforce those rights adequately in their own territories,
4. How to settle disputes on intellectual property between members of the WTO, and
5. Special transitional arrangements during the period when the new system is being introduced

The TRIPs Agreement divided intellectual property rights into the following seven heads:
1. Patents,
2. Trademarks,
3. Copyrights,
4. Industrial designs,
5. Layout designs of integrated circuits,
6. Undisclosed information (trade secrets), and
7. Geographical indications.

Trade Secrets Under Trips

Under the TRIPs Agreement 'trade secrets' are referred to as 'Undisclosed information' . The Agreement defines trade secrets as -
"An information is a trade secret if:
1. 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;
2. has commercial value because it is secret, and
3. has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

In the present scenario of aggressive competition, industrialization and liberalization every corporate house has certain information with regard to technological know-how, idea, business methods etc. over which it has exclusive possession that it wants to protect. These are known as trade secrets. For instance, the formula for making coke is considered to be the most well guarded trade secret in the world.

A trade secret is both a type of intellectual property and a strategy for protecting your intellectual property. It can provide effective protection for some technologies, proprietary knowledge (know-how), confidential information and other forms of intellectual property. The importance of trade secrets is highlighted by the fact that corporations spend millions of dollars every year to protect their trade secrets. Also the employees are required to sign non-disclosure agreements, which clearly state that the employee will not use or disclose any information which he comes to know during his association with the company at the time of joining the company. In cases where for some reason or the other an employee does not sign such an agreement at the time of joining he is made to sign an exit agreement. Both the agreements non-disclosure agreement and exit agreement contain a covenant not to compete.

This covenant bars the employee who wants to leave his job from starting a similar business as to the one in which his previous employer deals (restriction on subject matter) or lay down a limitation on the area of operation, i.e., restricting the geographical area. However, to maintain a balance the Courts have held in a number of cases that if such a covenant is unreasonable it can be declared void and non-operative. One way of avoiding such a situation where the agreement is declared unreasonable is to lay down a specific time frame. For example, company A can restrict person working for it not to start a similar business for a period of 10 years after the employee leaves the company. By providing a specific time frame company A's restriction would not be unreasonable. These restrictions differ from business to business.

To determine whether particular information is a trade secret or not courts generally look into the following points:
1. The extent to which the information is known to the outside world,
2. The extent to which the information is known to the employees,
3. What measures are taken by the company to protect the secret,
4. The value of the information to the business and to the competitors,
5. The amount of time and money spent in developing the information, and
6. The ease or difficulty with which the information can be acquired and duplicated by others.
The above list however is not exhaustive and it would in the end depend on the facts of the case.

Even though keeping a particular invention or information a secret has its advantages - the most important one being the indefinite time period for which one may use it, and consequently prohibit others from using it - there is the accompanying risk of the trade secret passing on from the inventor into the public domain. Moreover, since trade secrets are not registered, it becomes difficult for the inventor to prove that he came up with the trade secret. In most intellectual property cases, the other party claims that he or she, in fact, created or used the item or information first and that any subsequent use is unauthorized. Also, if the competitor acquires the secret by lawful and proper means or by the process of reverse engineering the holder would have no right, while in case of patents even though the protection offered is for a limited period of 20 years no person can duplicate the patented product (in case of a product patent) or use the same method (in case of a process patent) till the protection period expires.

Rationale For Inclusion In Trips

As stated earlier the TRIPs agreement aimed at providing internationally accepted standards of protection to creation of human intellect (intellectual property). The developed countries wanted to further and protect their economic interests and one such way was to provide adequate protection to the capitalists, which could be achieved to a large extent by protecting their creations. Trademarks, patents etc would have achieved this but that was not enough, corporate houses had been for long pressing upon their respective governments to provide protection to their trade secrets which form the back bone of their operations. Trade secrets also had an added advantage, they would be the sole possession of the holder as long as he is able to keep it a secret and even if the competitor acquired the secret through lawful means the original holder could always file a patent application. United States of America was the first country to enact a statute dealing with trade secrets.

The Act is known as the Uniform Trade Secret Act (UTSA). The UTSA sought to provide some consistency in trade secret law that, until recently, was protected only by state laws. Most European and developed countries have based their statutes on the UTSA. However, with liberation and globalization there emerged a need to provide an internationally accepted framework for the protection of these secrets. By including them under the TRIPs was the best way out. The second wave of argument forwarded for their inclusion in TRIPS is that they are a result of human intellect and thus, necessarily fall under the domain of TRIPs.

Position In India
The intellectual property laws in India have had an almost docile and stagnant existence ever since they were framed. Being a signatory of the TRIPs Agreement India is under an obligation to bring its intellectual property laws in conformity with international standards. India has achieved this to a large extent by enacting new and amending existing legislations on intellectual property laws. However, unlike the US and other developed countries India has no legislation dealing with trade secrets.

In India protection of trade secrets is Common Law based. However, section 27 of the Indian Contract Act provides some sort of limited remedy, it bars any person from disclosing any information which he acquires as a result of a contract. There are scores of reasons for the absence of any statute dealing with trade secrets. India has since its independence followed a socialist pattern because of which the Indian legal system has always strived for social benefit and public rights as a result of which private rights like intellectual property rights have not been given any importance. Another reason for absence of any trade secret laws is the dependence of Indian economy on agriculture. Also, with the absence of big private corporate houses in India until recently there has hardly been any pressure on the government for granting statutory protection to trade secrets.

The Concept of 'Right' In Pure Hohfeldian Sense

Claims, liberties and powers are subsumed under the term 'rights' in ordinary speech. They, however, connote four different ideas concerning the activity, or potential activity, of one person with reference to another. The use of the homonym 'right' to denote these separate ideas obscures the distinction and leads to confusion. Gradually, distinctions between the above four terms were arrived at. The credit for bringing out a clear distinction between the four terms goes to Hohfeld, an American jurist who added a fourth term 'immunity' and worked out a table of jural relations with incisive logic.

Hohfeld set out the following diagram - Right or claim Privilege

Duty No-right
Hohfeld suggested the word 'claim' as a substitute for 'right', but continued to use 'right'. Thus, for Hohfeld, 'every right has a corresponding duty'. Hohfeld then differentiated between a right or claim, from the freedom which a person has to do or not to do something, and called it a privilege. For Hohfeld right and privilege are jural opposite . There can be a privilege without a corresponding duty, but there cannot be a right without a corresponding duty.
Trade Secrets: Whether A Right In The Pure Hohfeldian Sense?
During the GATT negotiations, which took place before the draft of the 'Final Act' was passed a number of developing countries questioned the rationale of including trade secrets in TRIPs. Their basic contention was that even though trade secrets are creation of human intellect they are not a right. It is this very premise that the author would like to evaluate and analyse in the Hohfeldian sense.

Trade secrets unlike other intellectual property rights like trademarks, patents, copyrights etc do not confer any right on the holder. A patent holder, user of a registered trade mark, copyright holder etc have a right stricto sensu as they can prevent others from infringing, duplicating and using their product. The law bestows a right on the above mentioned by making it clear that as long as the period of statutory protection is in force no one can without the permission of their permission derive any benefit from their products. However, there is no such provision with regard to trade secrets. Even if we assume that they grant certain rights on the holder, they impose no duty on the other person.

As explained above, 'every right has a corresponding duty,' i.e., if 'A' has a right, 'B' has a corresponding duty. A trade secret according to the Hohfeldian analysis would fall under the head of 'privilege' and not a right. If 'A' has a trade secret he would like to refrain 'B' from using it. However, 'A' can refrain 'B' from using that secret only if 'B' has acquired it unlawfully, i.e., 'A' would have privilege over the use of that secret and would in turn have a liberty and licence to use it exclusively for his own benefit. There is no correlation between 'A's' right and 'B's' duty. The privilege of 'A' cannot be said to be a right . A would have a privilege over that secret as long as he is able to maintain its secrecy, his privilege would end the moment another person acquires or duplicates it using proper means. It is generally argued that in case a person acquires or obtains the trade secrets of his competitor by unlawful means the original holder can prevent his competitor from using them and, hence, the holder of a trade secret has a right from stopping his competitors' from acquiring his secrets.

However, it would be pertinent to note over here that the holder of a trade secret has no right, the law only provides him a remedy and a remedy can be there even in the absence of a right. The remedy is further limited to the mode of acquisition. The holder of a secret would be entitled to a remedy only if his competitor acquires his secret in an unlawful manner, i.e., without employing any proper skill. Moreover, the remedy provided here is not for the protection of a right but to make good or prevent the loss, which a person would incur if his trade secrets were acquired unlawfully. A right entails a positive duty. Incase of trade secrets the law not only provides a privilege to the holder but also to its competitor in the sense that it even provides a privilege to the competitor that he can duplicate the secret by the process of reverse engineering.

The corporate practice of protecting trade secrets can be backtracked to the early 19th century. Protecting these secrets was an important method by which corporate houses maintained a competitive edge - a monopoly. Coca-cola has zealously protected its famous formula for making coke since late 19th century. This example seeks to illustrate that protecting trade secrets has been an age-old ritual for the companies. The TRIPs has just given global recognition and provided certain standards, which have to be complied with. Even in the absence of TRIPs Agreement companies would have protected their secrets. What it means is that the TRIPs Agreement has under the garb of intellectual property extended its ambit to general trade practices.

Also the various statutes that have been enacted limit themselves to the task of defining what constitutes trade secrets and conditions under which there disclosure and acquisition would be proper. The general practice of filing a patent application as soon as the competitor acquires the trade secret by way of reverse engineering also substantiates the point. If trade secrets are a right in itself then why should any person resort to any other right like patents for protecting his interest?

The author can be reached at: a / Print This Article


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