The Role of Trade Secrets in the Protection of IP Rights1
Definition and Conceptual Analysis:
In the Federal Republic of Nigeria the concept of intellectual property rights and its various
subsets are relatively very well known by both legal practitioners and the owners of these rights.
However, far less written or talked about is the concept of ‘trade secrets’ and the significant role
they play in enhancing and adding value to the more established rights.2 Indeed, the paucity or
near absence of decided local authorities with a direct bearing on this area is clear confirmation
of its relative obscurity and wraithlike nature.3
Traditionally, the concept of trade secrets would fall under the rubric of confidential information
under the Common Law.4 In the United States, it is the conventional wisdom that there are at
least three separate regimes of the trade secret doctrine.5 According to the Restatement (First)
of Torts: “A trade secret may consist of any formula, pattern, device, or compilation of
information which is used in one’s business, and which gives him an opportunity to obtain an
advantage over competitors who do not know or use it. It may be a formula for a chemical
compound, a process of manufacturing, treating or preserving materials, a pattern for a machine
or other device or a list of customers.” 6
From this definition the need for relative secrecy is almost indispensable to the idea of a
protectable trade secret and while some have argued that the requirement of Reasonable
Secrecy Precautions (RSP) is for the most part redundant,7 some indication or colourable
1
John Onyido- LL.B., BL., LL.M., M.I.L.D., LL.M. [Attorney and Counselor at Law], New York, September 2012.
E.g. Trademarks, Patents, Copyright, Entertainment and Media, Sports, Art Law and Franchising. In an article
featured on Reuters online News on 15th February 2011, the alleged re-discovery of the secret Coca-Cola recipe
developed by John Pemberton in 1886 was re-visited, in an apparent attempt to illuminate the dark corridors of this
mysterious area of Intellectual Property Law. See “Coca Cola says secret of its recipe still intact” by Martinne Geller.
http://www.reuters.com/article/2011/02/15/cocacola-idUSN1523031020110215.
3 Most local authorities that address some of the features encountered in the field of trade secrets are generally
limited to employment related matters and general breach of confidence actions. There appears to be no local
legislation specifically regulating trade secrets in Nigeria.
4 In his introduction to Trade Secrets and Confidential information, W. R. Cornish writes that “…countries have
responded in various ways, some confining protection to general civil remedies affecting Contract, Tort, Property and
perhaps unjust enrichment; some building specific provisions into their law of Unfair Competition; some (notably
common law jurisdictions) generating a form of sui generis protection that is akin to but is not quite a property right.
Countries in this last tradition, such as the United Kingdom, have tended to place the protection of trade secrets in a
broader conceptual frame which also encompasses governmental secrets and personal confidences and indeed
privacy…However the protection of secrets is formulated, the rights given are likely to be unlimited in time and also to
be effective against unjustified uses and disclosures of all kinds. Hence the reluctance to give them the absolute
character of ‘property’.” See W. Cornish and D. Llewellyn, Intellectual Property: Patent, Copyright, Trade Marks &
Allied Rights, 6th Ed., London Sweet & Maxwell, 2007 pg. 10 para. 1-10.
5 Found variously in the Restatement First on Torts, The American Uniform Trade Secrets Act and the Restatement
Third of Unfair Competition.
6 Section 757 cmt. b. RESTATEMENT (FIRST) OF TORTS (1939). Articles 1(2) and 39 of the TRIPS Agreement
impose an obligation on member states of the WTO to take appropriate steps to protect trade secrets. See also the
Computer Fraud and Abuse Act 18 U.S.C. § 1030 (a) (4) 1984 and the 1996 Economic Espionage Act (EEA). 18
U.S.C. Section 1839 (3) (2006) effective from 1st January 1997. Section 97 of the Nigerian Criminal Code Act Cap.
C38 LFN 2004 prohibits the disclosure of official secrets by public servants.
7 See for instance Robert G. Bone, Trade Secrecy, Innovation, and the Requirement of Reasonable Secrecy
Precautions, (Boston University School of Law Working Paper No. 09-40) September 3, 2009. Some of these
objections are that the requirement of secrecy is alien to the whole field of intellectual property; most of the policy
justifications do not withstand careful scrutiny, while the increased limitation of public access to valuable information
may inhibit technological innovation, whether in a sequential or cumulative sense.
2
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attempt to keep the valued information from general knowledge is still an important pre-requisite
of trade secret protection under the law.
The 1977 commentary to the Restatement clarifies that, “…A substantial element of secrecy
must exist, so that, except by use of improper means, there would be difficulties in acquiring the
information…The protection is merely against breach of faith and reprehensible means of
learning another’s secret.”
The American Uniform Trade Secrets Act now adopted in about 45 States in the US provides
that: “A trade secret means information, including a formula, pattern, compilation, program,
device, method, technique, or process, that: (i) derives independent economic value, actual or
potential, from not being generally known to, and not being readily ascertainable by proper
means by, other persons who can obtain economic value from its disclosure or use, and (ii) is
the subject of efforts that are reasonable under the circumstances to maintain its secrecy”.8
The requirement that secrecy be maintained by the owner of a trade secret in order to obtain the
protection of the law is analogous to the often proffered advice to intellectual property rights
holders to effectively police their rights or risk encroachment and possible evisceration by
competitors. The necessity to take active and precautious steps to contain the dissemination of
such information is inextricably linked to the perceived value of the know-how or technical
information sought to be preserved, such that the lack thereof creates an appearance of a
voluntary assumption of risk which the courts are generally reluctant to encourage.9
Additionally, the ephemeral nature of trade secrets as essentially wasting assets (considering
the high probability of independent creation, the relative ease of re-enactment by reverse
engineering and the likelihood of dissipation by disclosure) imposes a compelling need that
actual verifiable steps be taken to keep them from becoming public knowledge. Consequently,
the existence of these verifiable steps would provide circumstantial evidence of value, actual
secrecy and improper appropriation, as the case may be.10
Another writer in highlighting an ancillary notice requirement has correctly opined that, “It is
clear that the efforts must be actual, affirmative measures. Mere intent to maintain secrecy is
not enough. The trade secret claimant must manifest its intent by making some effort to keep
the information secret. The law also requires such efforts to be a continuing course of conduct,
signalling to all concerned that the information is secret.”11
In the United States, the development of the trade secret concept has progressively evolved
from a strict property rationale, to one that emphasized and condemned the defendant’s
8
Section 1 (4), 14 U.L.A. 372 (Supp. 1989). On the other hand, Section 39 of the Restatement (Third) of Unfair
Competition 1995 provides that “A trade secret is any information that can be used in the operation of a business or
other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over
others.”
9 J.T. Healey & Son, Inc. v. James A. Murphy & Son, Inc., 357 Mass. 728 (1970); RTE Corp. v. Coatings, Inc., 267
N.W.2d 226, 233 (Wis. 1978).
10 Enterprise Leasing Co. v. Ehmke, 197 Ariz. 144, 150 (1999).
11 David W. Slaby et al., Efforts Reasonable Under the Circumstances to Maintain Secrecy, in Trade Secret
Protection: An Analysis of the Concept, 5 Santa Clara Computer & High Tech. L.J. 321, 327 (1989).
In Faccenda Chicken v. Fowler [1986] 1 All E.R. 617, for instance the factors to be considered by the courts should
include: a) the nature of the employment, b) the nature of the information in question, c) the degree to which the
employer demanded that secrecy be maintained, d) the degree of isolation from other none confidential information,
e) the availability of the information in the public domain and, f) the likely damage that would be occasioned to the
owner by virtue of such use or disclosure.
2
wrongful conduct as constituting unfairly competitive business practice, congealing into the
reasonable precautions requirement which now holds sway.12
Trade Secrets vis-à-vis Other IP Rights:
The rights encapsulated in a trade secret are not contradictory or antithetical to other sister
rights but are complementary in nature and generally accounts for the fringe aspects of other IP
rights, indispensable to their effective enjoyment. Unless protected these rights would go into
the public domain or into the general pool of knowledge, depriving the owners of the full benefit
and just compensation for their inventions and other creative efforts.
The US Supreme Court in Kewanee Oil Co. v. Bicron Corporation13 held that the trade secrets
law applicable in the various states are not pre-empted by the federal patent law but instead the
policy justifications that underpin both concepts can and do co-exist as alternatives or
complementary incentives for inventiveness and creativity. The court observed in that case that:
“Certainly the patent policy of encouraging invention is not disturbed by the existence of another
form of incentive to invention. In this respect the two systems are not and never would be in
conflict.”
In Aronson v. Quick Point Pencil Co.,14 Mrs Jane Aronson who had filed a patent application in
October of 1955 over a new design for a keyholder negotiated a contract with Quick Point Pencil
in June the following year (and while the patent application was still pending) in which Quick
Point agreed to pay a 5% royalty in return for an exclusive right to make and sell the keyholders.
The parties also agreed that if Mrs Aronson did not obtain a patent within 5 years the royalty
payments would be reduced to 2 ½% of sales as long as Quick Point continues to sell them. No
duration was prescribed for the agreement. In September 1961, the Board of Patent Appeals
issued a final rejection to the patent application on the ground that the keyholder was obvious
and therefore not patentable.
Quick Point continued the royalty payments to Mrs Aronson for the next 14 years despite this
development, but at the agreed reduced rate of 2 ½% of sales. However, by the late 1960s
copies had begun to emerge on the market from competitors who did not have to make similar
royalty payments, severely cutting into Quick Point’s established market share. In a bid to get
out of its obligation, Quick Point brought an action in the United States District Court claiming
that the agreement to pay royalties was unenforceable on the ground that state law which
justified the arrangement was pre-empted by federal patent law. The District Court decided that
as long as Quick Point continued to manufacture the keyholders, it was bound under the
agreement to pay royalties under the contract.
12
As late as 1984 the US Supreme Court still held a property concept of trade secret rights as can be gleaned from
the decision in Ruckelshaus v. Monsanto Co. 467 U.S. 986, 1001 – 04 (1984). For a breach of confidence justification
see E.I. du Pont & Co. v. Masland, 244 U.S. 100, 102 (1917).
In the United States, the earliest reported case in which the concept of trade secret was clearly formulated is the case
of Peabody v. Norfolk, 98 Mass. 452 (1868). Even earlier decisions recognizing a cause of action as involving a
misappropriation of trade secrets can be found in cases like Newberry v. James, 35 Eng. Rep. 1011, 1013 (Ct. Ch.
1817); Vicky v. Welch, 36 Mass. 523, 527 (1837). For the UK, see Lamb v. Evans [1893] 1 Ch. 218; House of Spring
Gardens v. Point Blank [1983] F.S.R. 213 at 253, [1985] F.S.R. 327 at 335 S.C. (Ir.); Stephenson Jordan v. McDonald
and Evans (1951) 68 R.P.C.190. Also see Cadbury Schweppes v. FBI Foods (1999) 83 C.P.R. 289; (Supreme Ct.
Canada). Then see Maggbury v. Hafele Australia [2001] 53 I.P.R. 1 HC. Australia.
13 416 U.S. 470 (1974). See also Aronson v. Quick Point Pencil, 440 U.S. 257 (1979); Bonito Boats, Inc. v. Thunder
Craft Boats, Inc., 489 U.S. 141 (1989).
14 440 U.S. 257 (1979).
3
On appeal, the Court of Appeal reversed, holding that the agreement between the parties was in
contemplation of Mrs Aronson’s ability to secure a valid patent and that a continuing obligation
to pay royalties was contrary to “the strong federal policy favouring the full and free use of ideas
in the public domain”. In any event, if Mrs Aronson had actually obtained a patent as
contemplated, Quick Point would have escaped its obligations upon the patent’s expiration after
the then 17-year protectable period.
On further appeal to the Supreme Court, that court observed that the agreement which had
been freely negotiated at arm’s-length between the parties was binding on them. Quick Point
had clearly bargained for the benefits of a novel design which had been disclosed to it in
confidence and which had enabled it to pre-empt the market to its financial advantage.15 The
court stated in part:
On this record it is clear that the parties contracted with full awareness of both
the pendency of a patent application and the possibility that a patent might not
issue. The clause dis-escalating the royalty by half in the event no patent issued
within five years makes that crystal clear. Quick Point apparently placed a
significant value on exploiting the basic novelty of the device, even if no patent
issued; its success demonstrates that this judgment was well founded.
Assuming, arguendo, that the initial letter and the commitment to pay a 5%
royalty was subject to federal patent law, the provision relating to the 2 ½%
royalty was explicitly independent of federal law. The cases and principles relied
on by the Court of Appeals and Quick Point do not bear on a contract that does
not rely on a patent, particularly where, as here, the contracting parties agreed
expressly as to alternative obligations if no patent should issue.16
Trade secrets in practice are utilised in the early stages of an invention, as manufacturing
processes, technical information or know-how, business information or as protection devices for
sub-patentable innovations. They can also form part of the implementation details and
techniques that go beyond the scope of the issued patent17. Peripheral aspects of a patentable
invention although not eligible for patent protection could still be preserved as a trade secret.
And right from the patent drafting stage, through the pendency of a patent application up until
publication, the protection afforded via the utilisation of trade secrets is invaluable.18 The
process of transforming an invention from a patented item to a marketable product could result
in the creation of valuable enabling know-how that could require trade secret protection.
From the nature of a trade secret, as deducible from the foregoing, it could offer additional
benefits to supplement the rights conferred either in the form of a trademark, patent or
copyright.19 Furthermore, there is neither a registration nor a concretization requirement, and
there are no formalities that need to be met like novelty, enablement, and reduction to practice
or a term limitation of any kind as long as the subject matter of the relevant trade secret is
15
As at September 1975, Quick Point had raked in over $7 million in revenue from sales of the keyholder from which
it had paid Mrs. Aronson royalties in the sum of $203,963.84.
16 Id. at ----17 Celeritas Technologies, Ltd. v. Rockwell International Corp. 150 F.3d 1354, 1358 (Fed. Cir. 1998)
18 Wyeth v. Natural Biologics, Inc. civ. No. 98-2469, 2003 WL 22282371 (D.Minn. Oct. 2 nd 2003); C& F Packaging Co.
v. IBP, Inc. 224 F. 3d 1296 (Fed. Cir. 2000) - [The Pizza Hut Case]. Patent applications are usually published 18
months after the filing date and the application remains confidential prior to publication. 35 USC § 122 (a); 122 (b) 1
and 122 (b) (2) (B). See also Paul E. Rossler & Scott Rowland, Originality is Great, but Plagiarism is Faster: Holding
Back the Rising Tide of Trade Secrets Thefts, WhatsUpinIP.com (Dec. 14, 2010).
19 For jurisdictions where copyright registration is a pre-requisite, it may be necessary to redact the portions of the
protected work that constitutes a trade secret.
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preserved.20 They are not territorially confined and do not entail any periodic renewals or
maintenance expense.
In Warner Lambert Pharmaceutical Co. v. John J. Reynolds, Inc.,21 a certain Dr J.J. Lawrence, a
Physician and editor of a medical journal in St. Louis, Missouri having devised a formula for an
antiseptic liquid compound called ‘Listerine’, entered into an agreement with J. W. Lambert in
1881 for the disclosure of the secret formula in consideration of which Lambert agreed on behalf
of himself, his heirs, executors and assigns to pay the sum of $20.00 to Dr Lawrence, his heirs,
executors or assigns for each gross of Listerine which he subsequently manufactures and sells.
This payment was reduced by Dr Lawrence himself to $12.00 and thereafter to $6.00 per gross
between October 1881 and March 1883. And in January of 1885, Dr Lawrence assigned his
rights to Listerine and other synthetic compounds to Lambert Pharmacal Company, the Plaintiffs
predecessor in title. Lambert Pharmacal Company also executed an instrument assuming Mr
Lambert’s obligations under the two aforesaid agreements.
Several years later, the Plaintiffs subsequently alleged before the New York District Court for
the Southern District that over the years the Listerine formula had become a matter of public
knowledge, having being disclosed through no fault of the Plaintiff as a result of proceedings
brought against its predecessor before the Federal Trade Commission and through publication
in the United States Pharmacopoeia, the National Formulary and in the Journal of the American
Medical Association. They further contended that in view of the fact that both the 1881 and 1885
agreements were indefinite in duration, the terms thereof were ambiguous and the Plaintiff
should be relieved from the responsibility of making further royalty payments.
The trial judge held unequivocally that the defendants were entitled to judgment as a matter of
law in view of the undisputed facts. The court reasoned that a distinction ought to be drawn
between instances in which a promisor’s obligations are expressed to last in perpetuity,
normally found in real property cases and which are regulated based upon public policy
considerations, and instances where though apparently intended, the parties have omitted to
prescribe a termination date. In this second instance, the courts would supply a date by
construing the contract based on the perceived intention of the parties as may be discoverable
from the tenor of the contract.22 If no intention can be reasonably ascertained, then such
contracts are deemed to be terminable at will or revocable within a reasonable time.
Both scenarios above are distinguishable from instances where the relevant contract fails to
prescribe a definite termination date but conditions the termination of the promisor’s obligation
upon the occurrence of a definite event, a category to which the facts of the present case
belonged. Consequently, as long as the plaintiff continues to manufacture and sell the Listerine
products it remained obligated to make the royalty payments under the various contracts.
The court went on to remark that:
One who acquires a trade secret or secret formula takes it subject to the risk that
there be a disclosure. The inventor makes no representation that the secret is
non-discoverable. All the inventor does is to convey the knowledge of the formula
or process which is unknown to the purchaser and which in so far as both parties
20
Warner-Lambert Pharmaceutical Co. v. John J. Reynolds, Inc. 178 F. Supp. 655 (S.D.N.Y 1959).
178 F. Supp. 655 (S.D.N.Y 1959). See also Cammack v. J.B. Slattery & Bros., 241 N.Y. 39, 148 N.E. 781.
22 Town of Readsboro v. Hoosac Tunnel & W.R. Co., [6 F.2d 733 (2d Cir. 1925)]. Zimco Restaurants, Inc., v.
Bartenders & Culinary Workers, 165 Cal. App. 2d 235, 331 P.2d 789.
21
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then know is unknown to any one else. The terms upon which they contract with
reference to this subject matter are purely up to them and are governed by what
the contract they enter into provides. Id.
Parameters and Scope of Trade Secrets Protection:
As a practical matter, the need to maintain secrecy should not be confused with the general
perception of keeping a secret in every and all circumstances. In the course of doing business,
there will invariably be a need to reveal or disclose the valuable information to those who have a
need to know in order to work or practice that invention or patent. This calls for appropriate
measures to be put in place to restrict the scope of dissemination as much as practicable.
The usual steps adopted by most establishments is to ensure that employees, contractors,
agents and licensees enter into a non-disclosure agreement and that employment contracts
impose confidentiality obligations on employees.23 Other methods include: the introduction of a
trade secret protection policy, labelling appropriate documents as proprietary and confidential,
and ensuring the safe keeping of valuable documents among other measures.24
In the Nigerian case of Andreas Koumoulis v. Leventis Motors Limited25, the appellant was sued
for breach of his contract of service as spare parts Sales Manager, a position which he
subsequently relinquished and joined, less than 3 weeks later, a rival company located within
400 yards of the respondent’s business in Apapa.
According to Clause 6 of his Service Agreement, the appellant was not for at least a year
following the determination of his employment, to undertake or carry on a similar business or
employment as that of the respondent within a radius of less than 50 miles from any Trading
Station in West Africa, which was then or thereafter owned or managed by the respondent.
Generally, where a covenant is imposed they should go no further than is necessary to protect the employer’s
interest. Failure to limit the scope of the covenant could render it unenforceable on public policy grounds as an undue
restraint of trade. In Expansion Plus Inc., v. Brown Foreman Corp., 132 F.3d 1083 (5th Cir. 1998). The Court
concluded that where an obligation not to disclose is imposed by agreement of the parties, such obligation is
automatically extinguished on the expiration of the applicable limitation period and no further implied obligation could
validly exist.
24 Paul E. Rossler and Scott Rowland op. cit., fn. 18, have identified specific steps that can be taken to reduce the
risk of exposure by corporations and employers. Some of these include, limiting employee access to trade secret
information, strengthening the security of storage facilities, specifically protecting electronically stored information and
taking deliberate steps to control disclosure to third parties even when disclosure is unavoidable.
Under common law rules applicable to breach of confidential information, a distinction can be drawn between
disclosure of discrete technical secrets which are protectable even in the absence of a covenant and merely
incidental or ancillary information revealed to an employee during his employment, which can only be protected if an
appropriate covenant is imposed. There is a further category that deals with the general skill and knowledge acquired
by the employee in the course of employment, which are not protectable in any event.
See SI Handling Systems v. Heisley, 753 F.2d 1244, 1266-69 (3d Cir. 1985), where the court applied a balancing test
between the employer’s needs and the reasonable expectations of the employee and society in general. It would
seem that even in the absence of an express covenant restricting disclosure of confidential information or trade
secrets, the employer can rely on the employee’s implied duty of fidelity during the currency of the employment.
Baker v. Gibbons [1972] 2 All E.R. 759. On the duty of fidelity generally, see Asaolu v. Olaiya Fagbamigbe [1982] 1
FNR 88.
25 (1973) 11 S.C. 100; (1973) All N.L.R. 789; [1973] N.M.L.R. 452; (1973) LPELR-SC. 250/ 1971. Also see CFAO v.
George Leuba (1918) 2 NLR 67; Anglo-African Supply Company v. Benvie (1937) 13 NLR 158; John Holt & Co
(Liverpool) Ltd. v. Chalmers (1918) 3 NLR 77.
23
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Justice Lambo sitting at the Lagos High Court entered judgment in favour of the respondent
(former employer), whereupon the appellant filed an appeal at the Supreme Court, contending
that clause 6 of the contract of service aforesaid was too wide and consequently unenforceable.
The Supreme Court affirmed the decision of the trial court with Udo Udoma JSC., summarising
the court’s decision in the following words:
It was argued by learned counsel that there was no definite finding by the court
as to the specific trade secrets concerning the respondent’s business which had
been acquired by the appellant and that, in any case, the area of operation of the
respondent’s being West Africa, the covenant was too wide. The short answer to
this is that there was un-contradictory evidence that the appellant as a spare
parts sales manager dealt directly on behalf of the respondents and as their
agent with customers of the respondents both overseas and in this country. He
was in possession of the respondent’s trade secrets and soon after his
resignation and departure from this country the respondents lost Overseas
Agencies for which they were negotiating to their rivals, the Nigerian Technical
Company Limited and thereafter they were advised in letters signed by the
appellant to deal with their competitor based about 400 yards away, by whom the
appellant was then employed…Surely, the inference that the appellant had
something to do with the sudden change as regards the respondent’s dealers or
suppliers is irresistible.26
In certain unique circumstances, facts may exist which can justify a court imposing an order
restraining an ex-employee from assuming employment with a competitor even though no
actual misappropriation has occurred but the mere existence of a real likelihood of its
occurrence.
This is what happened in the case of PepsiCo, Inc., v. William Redmond.27 The facts of that
case arose from a fierce beverage-industry competition involving the Plaintiff PepsiCo and
Quaker Oats Company in the sports and new age drinks market. PepsiCo had introduced its ‘All
Sport’ brand to compete with Quaker’s more famous brand ‘Gatorade’ with little success.
PepsiCo which had entered the market through joint venture arrangements with Thomas Lipton
Company and Ocean Spray Cranberries, Inc., had developed extensive plans and strategies for
increasing its market share for the year 1995. Quaker on the other hand, had acquired Snapple
Beverage Corp., in a bid to consolidate its position in the market by integrating the Gatorade
and the Snapple distribution networks. The defendant was the General Manager of the Northern
California business unit of Pepsi-Cola North America division (PCNA) having worked for the
company from 1984 until 1994. From the beginning of 1994, Quaker through an ex-PepsiCo
employee began making overtures at the defendant Redmond and eventually offered Redmond
the position of Vice-President for Gatorade Field Operations, which he accepted.
Redmond thereafter notified his superiors at PepsiCo that he was accepting the offer from
Quaker whereupon he was informed of PepsiCo’s intention to institute legal action against him
based on a Confidentiality Agreement which he had previously signed as a management staff
with the company.
The action which was eventually filed by PepsiCo sought to enjoin the defendant from assuming
his duties at Quaker and from disclosing the company’s confidential information or trade secrets
26
27
Id. at…
54 F.3d 1262 (7th Cir. 1995).
7
to Quaker. The District Court after conducting a preliminary injunction hearing, sided with
PepsiCo on the strength of the substantial evidence of sensitive marketing and distribution
information adduced and to which Redmond had been privy as a former high level managerial
staff. The court enjoined the defendant from assuming his new position at Quaker until May of
1995 and permanently from divulging any PCNA trade secrets or other confidential
information.28 The court held that there existed a real threat of misappropriation of said sensitive
information, exacerbated by the defendant’s lack of honesty and candor in his conduct prior to
accepting the job and in his testimony before the court.
On appeal to the 7th Circuit Court of Appeal, the decision of the District Court was affirmed
under the Illinois Trade Secrets Act (ITSA) 1988.29 The Court of Appeal commented that:
Admittedly, PepsiCo has not brought a traditional trade secret case, in which a
former employee has knowledge of a special manufacturing process or customer
list and can give a competitor an unfair advantage by transferring the technology
or customers to that competitor. PepsiCo has not contended that Quaker has
stolen the All Sport formula or its list of distributors. Rather PepsiCo has asserted
that Redmond cannot help but rely on PCNA trade secrets as he helps plot
Gatorade and Snapple’s new course, and that these secrets will enable Quaker
to achieve a substantial advantage by knowing exactly how PCNA would price,
distribute, and market its sports drinks and new age drinks and being able to
respond strategically. This type of trade secret problem may arise less often, but
it nevertheless falls within the realm of trade secret protection under the present
circumstances.30
The increasing importance of this field to any serious business enterprise cannot be
understated. It is frequently the subject of international espionage and the unspoken justification
behind the success of major multi-national corporations and perhaps, the reason for various
shades of regional and international conflicts.31 According to Karl Jorda, “…patents are but the
tips of icebergs in an ocean of trade secrets. Most technology is unpatented. Based on my
experience, I have reached two conclusions: (1) trade secrets cover over 90% of all new
technology; and (2) over 80% of all license and technology transfer agreements cover trade
secrets or constitute hybrid agreements relating to patents and trade secrets.” 32
The extensive evidence introduced by PepsiCo included: a) PCNA’s ‘Strategic Plan’ an annual documents
reflecting the company’s competition plans, financial goals, manufacturing strategies, production, marketing and
distribution for the next three years, b) PCNA’s ‘Annual Operating Plan’ for the relevant year, disclosing its financial
goals, marketing plans, promotional events calendar, operational changes and growth expectations, c) PCNA’s
‘Pricing Architecture’, showing its pricing structure in the market, its pricing approach and specific price points for
specific regions, trade channels, package sizes and other unique characteristics, d) PCNA’s ‘Attack Plans’ for
designated markets against other brands and, e) PCNA’s innovations in its selling and delivery systems with retailers
over things like shelf space and merchandising targeted at gaining an advantage over its competitors.
29 George S. May Int’l Co. v. Int’l Profit Associates, 256 Ill. App. 3d 779, 195 Ill. Dec 183, 189, 628 N.E.2d 647, 653
(1st Dist. 1993), appeal denied, 156 Ill. 2d 557, 202 Ill. Dec. 921, 638 N.E.2d 1115 (1994).
30 Id at… See Teradyne, Inc., v. Clear Communications Corp., 707 F. Supp. 353 (N.D. Ill. 1989) and AMP Inc. v.
Fleischhacker, 823 F.2d 1199 (7th Cir. 1987).
31 See generally Peter Wright, Spy Catcher: The Candid Autobiography of a Senior Intelligence Officer (Viking
Penguin Inc., 1987).
32 See Karl F. Joda, Patent and Trade Secret Complementariness: An Unsuspected Synergy, published in Washburn
Law Journal Vol. 48 2008. Also see All Pro Sports Camp, Inc. v. Walt Disney Co. 727 So. 2d. 363, 364, 368 (Fla.
Dist. Ct. App. 1999). Also see Dave Price, Cargill Reaps Bitter Harvest in Pioneer Dispute, FINANCE & COMMERCE
May 17, 2000. Lexar Media Inc. v. Toshiba Corp., No 1-02-CV- 812458, 2005 WL 5872071, at 1 (Cal. App. Dep’t
Super. Ct. 14, 2005). The over 120 year old trade secret associated with the famous Coca-Cola recipe is widely
known and cited by other authors. This famous brand is reputed to be the subject of near paranoid and elaborate
28
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The governments of most developed countries also engage in the monitoring of technology
transfers of sensitive goods, technology and software through export control regulations. These
regulations are driven by national interests and foreign policy objectives that manifest in the
form of trade embargoes or boycotts of designated countries and territories. In the United
States, the Commerce Department through its Bureau of Industry and Security (BIS)
administers the Export Administration Regulations (EAR), while the Directorate of Defense
Trade Controls (DDTC) of the US Department of State implements the International Traffic in
Arms Regulations (ITAR). The goal is to closely monitor and circumscribe the transfer of
sensitive information, data or technology to foreign countries without the appropriate license or
permits.33
Trade Secrets and Technology Transfer to Developing Countries:
The importance trade secrets is further underscored by the fact that most patents and
inventions are of very little value without the accompanying know-how to work them and in most
licensing and transfer of technology contracts, the value of the transfer is vastly enhanced if
there is some related trade secret incorporated into the conveyance. Most developing countries
have found to their dismay that without this all important component, attempts to replicate any
and all none locally generated technological knowledge are futile for the most part or
ineffectual.34
The relevance of technology to increased productivity and economic development and as a
means of ensuring a country’s competitiveness within the international market is apparent.35
How to ensure the effective transfer of useful and relevant technological know-how to the less
developed economies has been a source of deep concern both at the international level and at
local-state levels not only in terms of eliciting the willingness of the corporate entities who own
such technologies to transfer them and what the condition for such transfers should be, but also
in terms of how to create an enabling local environment that engenders proper assimilation and
measures to conceal its secret recipe. As the story goes, only two topmost senior staff have knowledge of this
formula at any given time and who are not allowed to travel together in addition to the formula being stored in a bank
vault. One of the early presidents of the company was so obsessed with the idea of protecting the Coca-Cola formula
that he ensured that it was never written down and would remove labels from containers listing the ingredients
together with invoices reflecting those ingredients from the accounts department. With a ₤3.58bn net income reported
for this company for the 4th quarter of 2010, this strange and unusual behavior can be placed in proper context. Other
examples include the secret method for making Cymbals and the secret recipe for the Angostura Bitters both of which
have remained trade secrets for over 200 years. (See Karl F. Joda, above)
33 See Gomulkiewicz, Nguyen and Conway-Jones, Licensing Intellectual Property: Law and Application (Aspen
Publishers/Wolters Kluwer, 2008) pg. at 228-229.
34 Robert M. Sherwood, Intellectual Property and Economic Development (1990). Melvin F. Jager, The Critical
Role of Trade Secret Law in Protecting Intellectual Property Assets, in Licensing Best Practices: The LESI Guide
to Strategic Issues and Contemporary Realities 127 (Robert Goldscheider ed. 2002). See for instance the
National Office for Technology Acquisition and Promotion Act Cap. N62 LFN 2004, which established the NOTAP
office to monitor and regulate the transfer of foreign technology to Nigeria. Also see S. K. Date-Baah, Transfer of
Technology to Nigeria and the Patents and Designs Act, (Journal of African Law, Vol. 25, No. 2, 1981).
35 See for instance Daniel Tien-Pei Lee, Technology Transfer to Developing Countries with Special Reference to
the Economy of the Republic of China (1977 Doctoral Thesis, eBook edition by Barnes and Noble). He argues that
productivity in the manufacturing sector is linked to increased output, capital intensity and capital formation through
foreign investment. And while economic growth is a function of increased productivity through technological
advancement, technological growth is in itself a function of capital formation. Also see Andres Guadamuz,
Technology Transfer: Open Licensing and Developing Countries (eBook edition- Creative Commons Attribution,
2012), highlighting the importance of technology acquisition and development to the problems of poverty and
underdevelopment in Third World countries.
9
diffusion of the transferred technology and know-how, in order to propel economic growth and
extract the attendant social benefits for the masses.36
Part of the problem encountered by policy makers involves the monopolistic control of
technology through the patent regime and through the instrumentality of trade secrets as
identified in this paper as vehicles for increasing financial returns on investments from capital
intensive research and development efforts. Theoretical analysis regarding how far the exercise
of these monopoly rights can go before the justification for granting them is completely eroded,
vis-à-vis how far the public’s right to benefit from the disclosure of such rights within the shortest
possible time can be accommodated, constitutes further challenges for policy makers and
researchers.37
Most of the technology exported to developing countries are of the embodied type, in the form of
equipment, machinery and other finished products, through foreign direct investments to those
regions with the primary if not sole objective of exploiting a new and viable market by the
investors.38 These investment arrangements are often tailored to maintain foreign managerial
control of the local enterprises and the secrecy of the proprietary technologies which the
recipient countries anticipate would be transferred. Furthermore, the repatriation of virtually all
related profits from the venture to the investor’s home country fundamentally interferes with any
meaningful entrenchment of technological knowledge in the host-state.39
A number of developing countries have attempted to address these challenges and problems
through the enactment of legislations that directly regulate the importation and acquisition of
technological know-how, through the use of compulsory licenses in some instances40 and
through parallel importation in other instances.41
36
See Draft International Code of Conduct on the Transfer of Technology, June 20, 1985, Ch. 1.2. United Nations
Conference on Trade and Development UNCTAD. http://www.unctad.org/en/pub/pubframe.htm. Which defines
technology as “…the systematic knowledge for the manufacture of a product, for the application of a process or for
the rendering of a service and does not extend to the transactions involving the mere sale or lease of goods.” Also
see D. Babatunde Thomas, Importing Technology into Africa: Foreign Investment and the Supply of
Technological Innovations (Praeger Publishers Inc., 1976) at pgs. 1-21.
37 For a thorough consideration of these and other issues see G. Sipa-Adjah Yankey, International Patents and
Technology Transfer to Less Developed Countries: The Case of Ghana and Nigeria (Avebury/ Gower
Publishing Company Limited, 1987) at pgs. 1-57. The author identifies some of the restrictive practices inherent in
Patent Licensing arrangements that could stifle the effective transfer of technology to developing countries as
including export prohibitions, the use of grant-backs and improvement clauses, tying clauses, price fixing, field of use
restrictions and no-contest clauses.
38 Other modes for the transfer of technology are through management contracts, technology licensing, bilateral
technical assistance contracts and the transfers of technologies over expired patented rights relevant to the peculiar
needs of developing countries on a non-exclusive royalty free basis. The development of locally grown technology
even on an intermediate scale has been described as risky, expensive, time consuming and perhaps an ill-advised
and wasteful attempt to reinvent the wheel, so to speak. See Thomas op. cit., at pg. 11.
39 Thomas op. cit., at pgs. 4-15.
40 See Section 11 and the First Schedule to the Nigerian Patents and Designs Act Cap. P2 LFN 2004, which allows
for the grant of compulsory licenses to private local concerns on specially identified grounds including the need to
satisfy local demands for the product following the refusal of the patentee to license the subject matter within a
reasonable time and on reasonable terms. On the other hand, the Second Schedule confers similar rights on state
and federal agencies in times of national emergencies. Articles 30 and 31 of the TRIPS Agreement recognizes the
right of contracting state parties to license patented products and processes on a compulsory basis on a nonexclusive, non- assignable basis and after payment of adequate compensation to the rights holder. Also by virtue of
Article 67 of TRIPS, developed countries have committed to provide incentives for the transfer of technological knowhow to developing countries. WTO Doc. WT/L/540 (September 2nd 2003) on the implementation of Paragraph 6 of the
Doha Declaration on the TRIPS Agreement and Public Health and the General Council Amendment of 2005.
41 TRIPS Articles 31 (f) and (h) and 27.1, respectively.
10
The local legislations on technology acquisition are formulated to ensure the full access to the
use and exploitation of the relevant technology by the local enterprise, an assessment of the
value and applicability of the technology in question, the availability and access to the
necessary know-how, technical information or proprietary process needed to work the invention
locally, the extraction of appropriate performance guarantees for technological processes,
ensuring a correlation between the remuneration payable by the local enterprise and the value
of the transferred technology, the use of adequate clauses in technology agreements which
ensure the creation of indigenous technological capabilities through the training of local skilled
manpower and utilization of local content additions, the maintenance of open channels through
technical and managerial support and assistance and through access to improvements in
technology42, and through the imposition of appropriate controls on the repatriation of
earnings.43
How far these strategies have succeeded in facilitating the transfer of essential and useful
technologies to developing countries is doubtful for various reasons not unconnected with the
disadvantaged position of the recipients of such technologies and their economic dependency
on foreign investments and international aid. With the incidence of sovereign debts spiralling out
of control, most developing countries have had to concede, out of perceived desperation, to
unfair trade terms as expressed in a number of bilateral investment treaties and Free Trade
Agreements, that have had the singular consequence of reversing what minor gains may have
resulted from the proper implementation of local legislations on technology acquisition and other
national science, technology and development policies.44
There is also an obvious dread on the part of the corporate owners of these essential
technologies that the full transfer of relevant know-how to third parties, even for fair and
reasonable compensation, would mean loss of full spectrum dominance in the relevant field and
loss of market access and opportunities to sell their products at a premium.
Salient Issues in the Licensing of Trade Secrets:
There is a tendency to group together all sensitive material over which a company seeks to
exercise some form of property control as proprietary information. When faced with the business
decision entailed in the possible transfer of technology or an alleged trade secret, it is vital to
ascertain the value of the information or data to be received. This is in view of the fact that
certain ‘submitted ideas’, ‘know-how’45 and ‘proprietary information’ could indeed be of doubtful
legitimacy or lack any real technical value.
42
See generally the National Office for Technology Acquisition and Promotion (NOTAP) Act supra and the revised
guidelines on acquisition of foreign technology.
43 Pursuant to Section 7 of the NOTAP Act for instance, “no payment shall be made in Nigeria to the credit of any
person outside Nigeria by or on the authority of the Central Bank of Nigeria or any licensed Bank in Nigeria in respect
of any payments due under a contract or agreement mentioned in this Act unless a certificate of registration issued
under the Act is presented by the party or parties concerned, together with a copy of the contract or agreement
certified by the National Office in that regard.” See Beecham Group Ltd. v. Essdee Food Products [1977- 1989] 2
I.P.L.R. 239.
44 A good example is the current North American Free Trade Agreement NAFTA. See Andreas F. Lowenfeld,
International Economic Law (Oxford University Press, 2nd Edition, 2008) pgs. 555-556. See also The Free Trade
Agreement between Singapore and the United States of May 6 th 2003 (Art. 16.9) and the Free Trade Agreement
between Australia and the United States of May 18th 2004 (Arts. 17.1 to 17.2). See Lowenfeld at 363.
45 In Mycalex Corp. of America v. Pemco Corp., 64 F. Supp. 420, 68 USPQ 317 (D. Md 1946) , aff’d, 159 F.2d 907,
72 USPQ 290 (4th Cir. 1947), the court defined ‘Know-how’ as: “…factual knowledge not capable of precise, separate
description but which, when used in an accumulated form, after being acquired as the result of trial and error, gives to
the one acquiring it an ability to produce something which he otherwise would not have known how to produce with
11
A strategy adopted by some is to limit exposure to liability to the submitter of such information
by the use of an appropriate clause in the license agreement. This shields the receiving party
from being saddled with the weighty responsibility of maintaining the secrecy of clearly useless
information. Be that as it may, it is necessary also to be mindful that “…subject matter called
simply ‘Licensor’s Data’ for example, may be highly protectable if the data referred to are limited
by the contract to safeguarded information that is of esoteric quality and substantial business
value.”46
It is necessary to define the nature and scope of the transferred information or technology, the
obligations to be assumed by the recipient regarding their use and protection and the conditions
of use as well as associated responsibilities following the termination of such rights. When the
transfer is in the nature of valuable information there are practical constraints that follow from
termination of obligations in a license arrangement which render the Licensor’s restoration to
exclusive ownership somewhat challenging once there is disclosure.
Therefore it may be expedient to acknowledge that certain portions of the transferred data or
information are hypothetically discoverable by the licensee by the application of reasonable
efforts and investment. The Licensor can however insist on the return of all related data,
drawings, specifications and sketches, as well as all modifications, copies and adaptations
thereof by means of which the technology or trade secret was transferred and to insist on the
non-application or utilization of the technology for a definite period after the termination of the
agreement.47
Applicable Remedies and Defences to Misappropriation of Trade Secrets:
In case of unlawful disclosure of the protected information/trade secret to a third party, the
Licensor has a clear contractual right to sue for trade secret misappropriation, where the trade
secret forms the subject matter of a license agreement. In order to maintain an action in tort
however, the Licensor has to disclose an on-going confidential relationship with the Licensee.48
On the other hand, while an exclusive Licensee has standing to sue for trade secret
misappropriation, a non-exclusive licensee has no such right.49
The general defences available to a defendant accused of the misappropriation of a trade secret
is to contend that the secret was obtained by proper means either through independent effort or
reverse engineering. By the same token, if the information is generally available or in the public
domain, a third party is not precluded from making valid use of it. Being a limited negative right,
use of a trade secret by a third party is only prohibited if it is obtained through improper means
either through breach of a duty or obligation to maintain secrecy, electronic espionage, theft,
bribery or other forms of inducement.50
the same accuracy or precision found necessary for commercial success.” Id. at 425. Also see United States v.
Timken Roller Bearing Co., 83 F. Supp. 284, 81 USPQ 28 (N.D. Ohio 1949).
46 See Brian G. Brunsvold and Dennis P. O’Reilley, Drafting Patent License Agreements (The Bureau of National
Affairs, Inc., 2007) at pg. 240 para. 21.00.
47 Id. at 257-259 para. 21.07.
48 See generally Gomulkiewicz, Nguyen and Conway-Jones, Licensing Intellectual Property: Law and Application
(Aspen Publishers/Wolters Kluwer, 2008) pg. 226.
49 RMS Software Dev., Inc. v. LCS, Inc., 1998 WL 74245 (Tex. App.-Hous. (1st Dist.) Feb. 19, 1998).
50 Sony Computer Entm’t v. Connectix Corp., 203 F.3d 596 (9 th Cir. 2000). Sega Enters., Ltd. v. Accolade, Inc., 977
F.2d 1510 (9th Cir. 1993).
12
As earlier discussed, in some jurisdictions covenants not to compete are either void outright or
voidable at the instance of the employee as being in restraint of trade and the freedom of an exemployee to seek employment or practice a profession. In other jurisdictions, the restrictions
must be reasonable in time and geographical limits and specifically limited in scope to the
protection of the alleged trade secrets.
Although theoretically the remedies of injunction and damages are available to a Licensor who
has successfully maintained an action for trade secret misappropriation,51 the actual benefits of
these remedies are debatable and are largely dependent on the scope and nature of the
breach. Since valuable secret information or data once released to the public cannot be recalled
nor can it be replaced like merchandise, it has been argued by some authors that consequential
damages may be the only meaningful remedy available to an aggrieved party.52
Concluding Remarks:
It has been suggested that for technologies which are susceptible to protection under multiple
fields of intellectual property law, that the benefits conferred by the complementary IP fields be
explored, in order to ensure the adequate protection of these rights. Along those lines, the
benefits of trade secrets protection, as argued in this paper, are viable tools which inventors and
employers can put to very good use.53
However, it is instructive to emphasize that the unique role which trade secrets play in the
proper and effective utilization of other forms of intellectual property protection and in the
instigation of technological growth and economic development through technology transfer
arrangements, are far reaching and incontestable.
It is therefore of paramount importance to carefully monitor and regulate the pervasive
monopolisation of proprietary rights to patented technology and know-how (in the form of trade
secrets) merely for unbridled profiteering and rent collection, at the expense of the benefits
which they are designed to confer upon society through proper disclosure or through the
transfer of essential technologies to meet the developmental needs of Third World Countries
and to assuage their legitimate health and welfare concerns.54
“…the foundation of economic development is the acquisition of more productive knowledge.
The stronger the international protection for IPRs is, the more difficult it is for the follower
countries to acquire new knowledge. This is why, historically, countries did not protect
foreigners’ intellectual property very well (or at all) when they needed to import knowledge. If
knowledge is like water that flows downhill, then today’s IPR system is like a dam that turns
potentially fertile fields into a technological dustbowl. This situation clearly needs fixing.”55
51
Others include the award of reasonable royalty payments and profits. See 35 USC Sections 283-284 (2000).
See Gomulkiewicz et al supra at 228.
53 The interdependence of intellectual property rights as complementary avenues of protection for individual products
or processes has been endorsed by Robert Merges et al in their book: Intellectual Property in the New
Technological Age, Aspen Publishers, 2007.
54 Under Article 7 of TRIPS: “The protection and enforcement of intellectual property rights should contribute to the
promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of
producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a
balance of rights and obligations.”
55 See Ha-Joon Chang, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism
(Bloomsbury Press, New York, 2008) at 142. The author also recounts the sordid history of the technological arms
race of the 17th and 18th centuries during which all manner of illegal means were employed (i.e. clandestine high level
personnel recruitment schemes, the smuggling of complex machinery and industrial espionage) to acquire desirable
52
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scientific knowledge and technologies from competitor countries. See Bad Samaritans at pp. 127-131. Ironically, the
United States has for many years been accusing the Chinese government of sponsoring cyber-attacks and industrial
espionage to gain access to valuable trade secrets belonging to US companies and corporations. In a recent
development, the House Intelligence Committee held a hearing on September 13 th 2012, targeted at two Chinese
companies (Huawei and ZTE Communications) striving to gain substantial market share in the US Telecoms market.
According to a former assistant director of the FBI on cyber security, Shawn Henry: “Telecommunications equipment
is put in place, and its purpose is to route data through a network. An adversary who had control over programming
that hardware or that software could potentially re-route data [by creating a back-door to the system], so that it was
able to be siphoned off or viewed by others.” See U.S. Scrutinizes Chinese Telecom Companies over Spy Fears
(CBS News) http://www.cbsnews.com/2102-505263_162-57511974.html (Accessed September 14th 2012).
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