Why has protecting trade secrets become imperative for nations and businesses? How are trade secrets the key to fostering greater innovation? Professor Mark Schultz suggests how India can address the gaps in its trade secret protection laws.
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Today, innovation has become a precondition for economic success. Effective Intellectual Property (IP) protection aids in securing risky investments in order to innovate and bring new products to the market. This makes IP protection an essential competitive advantage for both businesses and national economies. With the mounting significance of IP protection, a previously obscure IP right, trade secret law, has gained greater prominence.
Trade secret protection is a major 21st century IP issue. For governments, effective trade secret laws are an important part of a well-functioning, national innovation system. For businesses, protecting trade secrets has become increasingly important to investment decisions and success.
Many countries have come to recognise that more effective trade secret protection is a key competitive advantage, but unfortunately, India’s trade secret laws are yet to evolve to meet new challenges. The United States (US), the European Union (EU), Japan, China, South Korea, Taiwan and others have recently enacted new statutes to make their trade secret laws more effective. India’s competitiveness could benefit from following their lead.
This article considers why trade secret protection is important, how India’s trade secret system ranks against other countries and how India could improve its system to create competitive advantage.
What are Trade Secrets and Why are They Important?
The term ‘trade secrets’ is self-explanatory. A trade secret is information, used in business (“trade”) that is not known to the public or others in the industry (“secret”). The requirements for trade secret protection are fairly universal due to the Agreement on Trade Related Aspects of Intellectual Property (TRIPS). To be a member of the World Trade Organisation (WTO), a country must also agree to TRIPS, which sets forth the following requirements for trade secret protection in Article 39:
Where effective trade secret laws exist, a trade secret owner can use the legal system to protect secrets. It can stop an unscrupulous former employee or competitor from taking the secret and using it as their own.
Trade secret law covers three categories of information: (1) technical information, such as industrial processes and blueprints; (2) confidential business information, such as customer lists; and (3) know-how, such as business methods for efficiency.
With the digitisation of information, trade secrets have become more vulnerable than ever before. Trade secret laws have thus come into prominence as the digital age has made information easier to steal. Vast amounts of information that once filled file cabinets can now be attached to an email or copied onto a thumb drive.
At the same time, trade secrets are more valuable than ever before. Innovation is the key driver of competitive advantage in the 21st century. Innovation requires research and development, which businesses seek to protect from their competitors. Similarly, an innovation is hardly innovative if everybody else is using it, so businesses try to keep their advantages confidential as long as they can.
The Increasing Embrace of Trade Secret Laws
In recent decades, countries have increasingly recognised the importance of trade secret protection. In 2014, this author, along with co-author Douglas Lippoldt released two studies for the Organisation for Economic Cooperation and Development (OECD) that documented the increasing strength of trade secret systems worldwide (Schultz and Lippoldt 2014). An objective index was created to measure the strength of trade secret systems in about 40 major economies- the Trade Secret Protection Index (TSPI).
The TSPI examines about three dozen objective elements of trade secret protection in national legal systems. Those elements are aggregated into five main components: (1) definitions and coverage; (2) specific duties and misappropriation; (3) remedies and restrictions on liability; (4) enforcement, investigation, discovery and data exclusivity; and (5) system functioning and related regulation. The countries are scored on each component based on the absence or presence of these elements, resulting in an aggregate score between 1 – 5.
The data was collected from a diverse global sample of 37 economies from around the world, covering the time period from 1985 to 2010 at five-year intervals. The index captures objective, verifiable information that is comparable across countries. In other words, the index is descriptive, not normative. It is based on facts, rather than a subjective “rating” or opinion.
The TSPI is an innovative effort to create an objective index facilitating international comparisons. Similar indices compare other types of intellectual property and national trade secret laws. For example, Park and Lippoldt (2008) included indices measuring protection of patents, trademarks and copyright in an earlier OECD study, and Professor Ivan Png (2012) developed an indicator measuring trade secret protection across US states. The TSPI differs from these previous efforts in that it is a much more comprehensive, granular examination of the components of an effective law. Expert commentators and practising lawyers often observe that the absence of just a few or even one key component of trade secret protection may render the protection ineffective. The TSPI is thus motivated in part by the need to capture such consequential variations.
It was found that most countries have increased the strength of their trade secret systems since the 1980s. Figure 1 illustrates this evolution. The average OECD economy, which are developed countries, started with a score of around 3.25, which eventually rose to about 4. Brazil, Russia, India, China and South Africa (BRICS) rose even more (from about 1.5 to about 2.75), but still have further to go.
By 2010, many countries had increased the strength of protection of trade secrets, but differences remained (Figure 2).
The trade secret laws of countries that score lower on the TSPI tend to share some common, notable omissions, including:
[This article has been reproduced with permission from the Indian School of Business, India]