Can Patents and Trade Secrets Co-exist? : Delhi High Court Answers in the Negative

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We’re pleased to bring to you a post by Aditya Gupta on the Delhi High Court’s recent decision on the interplay between trade secrets and patents. Aditya is an attorney at Ira Law. He graduated from National Law University, Jodhpur and then pursued a master’s in law from Harvard Law School. Before co-founding Ira Law, he was part of another law firm for 7 years and then an associate at the chambers of Mr. Amit Sibal.

Can Patents and Trade Secrets Co-exist? :  Delhi High Court Answers in the Negative

Aditya Gupta

In the midst of all the COVID-19 associated disruption, the Delhi High Court has rendered an important decision on the interplay between trade secrets and patents with potential far reaching consequences. A Single Judge has held that the same innovation cannot enjoy both trade secret and patent protection. While on first blush this finding seems logical, the catch here is that the Plaintiffs argued that the aspects of the innovation that they sought to protect as a trade secret were separate from the aspects that formed subject matter of their patent. The Court rejected this contention holding that once a patent has been applied for and expired, the “innovation” is in the public domain and no trade secret protection can be claimed thereon.

For the purpose of this post, the relevant allegations by the Plaintiffs are as under:

1. Plaintiff No. 1 was an inventor of a US patent over a formulation, the De Simone Formulation. This is a high concentration bacterial formulation useful for dietary and pharmaceutical indications. This US patent had expired in the year 2015. Plaintiff No. 1 did not have any corresponding Indian patent.
2. The Plaintiffs claimed that the strain selection and blending ratio of the bacterial formulation were maintained as trade secrets.
3. Plaintiff No.1 entered into a patent license agreement with Defendant No. 3. These two parties had also entered into a know-how agreement, which was to become effective upon the expiration of the Patent Licence Agreement. This was to ensure that Defendant No. 3 could continue to manufacture the formulation even after the patent expired.
4. For India, where no patent subsisted, Plaintiff No.1 and Defendant No. 3 only entered into a know-how agreement.
5. These agreements were terminated when Defendants allegedly sought to use cheaper ingredients which Plaintiff No. 1 disagreed with.
6. Through reverse engineering the De Simone Formulation, Defendant No. 4 made a counterfeit / spurious formulation for the Defendant Group. However, they were unable to find the exact bacteria used in De Simone Formulation and could not make a copy equivalent to De Simone Formulation;
7. When the Defendant group began to publicise the new formulation as being the same as De Simone Formulation. The Plaintiff sought an injunction to restrain the defendants from linking / relating their new product to Plaintiff No. 1 or to the De Simone Formulation or to tests, research, studies conducted with respect to the De Simone Formulation.

In this background, one of the issues that came up before the Court was “whether an invention which does not qualify as patented product and has no property right therein, can acquire property rights by the third person entering into an agreement of exchange of Know-How and thus claiming confidentiality”.

The Court answered this question in the negative and observed the following:

1. “Know-how, without patent being applied for with respect thereto, was in public domain.” The Court categorically noted that the Plaintiffs are not enforcing a contractual right. The Court also found that confidential information and trade secrets are not equated to property in India.
2. Patent law has sufficiency and best mode requirements which require the patentee to disclose the invention fully and sufficiently as also its best mode. Further, the compulsory licensing regime suggests that the licensee should be able to make the product based on the disclosure in the patent.
3. Since the plaintiffs have no subsisting patent protection in India, and since the patent based in US has expired, the innovation, as noted above, is in public domain.
4. The Plaintiff’s claim seeks impermissible judicial creation of an extra-statutory monopoly for perpetuity. This would be in contrast to the scheme of Patent Act, contrary to public interest and judicial discipline.

With great respect, in my opinion, this analysis overlooks fundamental aspects of trade secret law. It has the potential of having significant impact on valuable trade secrets, if applied broadly and outside the context of the facts of this case.

When an inventor develops a technology, she usually has a choice. She can choose to file a patent or protect the technology as a trade secret.

For patent infringement, it is not relevant whether or not she disclosed the patented technology to her competitors. The competitor may have come up with the invention independently and without any reference to her patent. All that would matter is whether the competitor’s technology falls within the scope of the claims of her patent.

In contrast, for a claim of breach of confidentiality, it would be important for her to show that the technology was disclosed by her to the copier in confidence and that this was being used by the copier in breach of such confidence. If a competitor reverse engineers the product or develops it independently, then no claim for breach of confidentiality/trade secrets would lie.

Several factors inform this choice, an important one being whether or not the technology can be reverse engineered i.e. based on the public disclosures pertaining to the invention, would competitors be able to replicate the technology? If so, then she is unlikely to choose trade secret protection for the reason explained above. For instance, most pharmaceutical companies do not protect the core ingredients (such as the API) through trade secret law. Drugs are easy to reverse engineer, and approval processes and regulatory law require disclosure of the product composition. This makes trade secret protection unviable for such APIs.

Another important factor is the pace of development of the technology. If technology develops rapidly, then she would want instant protection. She would not want to risk disclosure of her technology through publication of the patent document and then having to wait for years before the patent is granted.

However, this choice is not an “all or nothing” one. Most sophisticated patentees now view patents and trade secrets as being complementary to each other. Different aspects of their invention are protected in different ways i.e. a layered protection model – those which are immediately available and disclosed to the public (and hence can be easily reverse engineered) are protected as patents. Other aspects which are harder to reverse engineer or with respect to which patent protection is weaker (for instance, backend software) can be protected as trade secrets. For instance, in the pharmaceutical context, companies would often file a patent over the API but may not disclose excipients in the patent, even though these excipients are added to the commercialized product. These excipients are protected as trade secrets. For instance, Wyeth successfully protected its method of manufacturing a drug as a trade secret, even though the patent on the drug itself had expired (Wyeth v. Natural Biologics Inc., see the District Court’s decision at 2003 U.S. Dist. WL 22282371).

To be sure, if a particular invention has already been patented, the patentee cannot protect the same “invention” i.e. the information which is already disclosed by the patent as a “trade secret”/ “confidential information” through a know-how agreement. To the extent that the invention is already disclosed, after the expiry of the patent, third parties are free to make and use the information disclosed in the patent. The analysis would however be different if the Plaintiffs claim protection over information which is not disclosed in the patent.

The Court’s finding that “know-how” is in the public domain without any patent being applied thereon is troubling, and, in my view incorrect. Numerous decisions have found know-how to be protectable even where no patent has been applied for in respect thereof (for instance, see the landmark and widely followed decision in Seager v. Copydex, where the copier had applied for a patent based on the misuse of the confidential information. The Plaintiff successfully brought a suit against the copier, even though the alleged confidential information was potentially patentable, but was not so patented by the Plaintiff).

Even if the Court rejected confidential information as not being “property”, this does not automatically lead to the conclusion that confidential information ought not to be protected under common law in the absence of patent protection over the same. The Court seems to view the Plaintiffs’ claim regarding know-how as a ruse to overcome the rigours of patent protection or to obtain a perpetual monopoly. However, it possibly ignores the risk an inventor takes by not protecting the invention as a patent and rather chooses to protect it as a trade secret. These include the risk of independent creation and reverse engineering, as also the risk that the technology may leak one day, after which it becomes almost impossible to protect.

As regards the Court’s finding of the know-how being in the public domain, this is not a legal question but a factual one. The correct course of action would have been to examine the patent and determine whether or not the aspects of technology claimed as “know-how” were disclosed. If so, no claim for confidentiality could be made on those aspects. Let’s assume for a moment that the Plaintiffs here failed to disclose the “best mode” or failed to fully and sufficiently describe the invention, by keeping these as trade secrets. In my view, this failure would, at best, affect the validity of the patent (the US Patent) and cannot possibly render the trade secret to be in the public domain. There can’t be any presumptive disclosure of such information.

In my opinion, some of the questions which the Plaintiffs ought to have clarified are:

1. Why were the patent license agreement and the know-how agreement not co-terminus? If the subject matter of the patent and the know-how agreement were separate, presumably any person would need both a license for a patent and a know-how license agreement to make the formulation. This dual licensing structure is also common practice in cases where some aspects of a technology are patented and others protected as a trade secret. The fact that the know-how agreement was entered into only to extend the term of the license granted casts serious doubt on the Plaintiffs’ theory that the subject matter of the patent and the know-how agreement were separate and distinct.
2. The Plaintiffs appear to have claimed that Defendant No. 4 made a counterfeit / spurious formulation for the Defendant Group on the basis of reverse engineering on De Simone Formulation. If the Plaintiffs’ case is that Defendant No. 4 has reverse engineered the product rather than misusing the confidential information, then the claim regarding breach of confidentiality must necessarily fail.

At least from the judgment, it does not appear that these facts were placed before the Court. Thus, while there may be some legal flaws in the Court’s analysis, this doesn’t necessarily mean that the Plaintiffs ought to have succeeded in this case.