IP Views

The Protection of Trade Secrets Against Modes of Discovery

February 29, 2008
by: R.P. Soriano

Your company’s trade secrets are important economic rights; they are invaluable tools which give you the advantage over your competitors. They could very well be the backbone of your business and your failure to guard them could result in nothing less than your firm’s demise.

The protection of trade secrets is one of the benchmarks of the TRIPS Agreement, which mandates that member states shall protect undisclosed information and data submitted to governmental agencies. Accordingly, any person may prevent information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices. To be entitled to such protection, the information need be: a secret in the sense that 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; has commercial value because it is secret; and has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

In the Philippines, protection of undisclosed information is considered an intellectually property right by legislation. It is given a concrete legal definition and a clearer scope of protection in the recent case of Air Philippines Corporation v. Pennswell, Inc..

In that case, Air Philippines Corp. (APC), a company engaged in air transportation services, purchased chemical lubricants from Pennswell, a company that manufactures and sells industrial chemicals, including lubricants. APC insisted that Pennswell committed to deliver lubricants of the type belonging to a new line, instead of what it had previously delivered. Apparently the previously delivered lubricants were of second grade quality and simply not fit for specific use by APC. The second batch of lubricants delivered, however, turned out to be of the same type as that of the prior delivery. When APC demanded the return of their money, Pennswell ignored the demand and instead billed APC for the latter’s outstanding debts. APC’s refusal to pay prompted Pennswell to go to court in a collection case amounting to about half a million pesos.

APC claimed that Pennswell committed fraud in its obligation to deliver the lubricants. It wanted to prove fraud by showing the court the chemical composition of Pennswell’s lubricants. During trial, it filed a Motion to Compel Pennswell to give a detailed list of the chemical ingredients of their lubricants. Pennswell objected, claiming that the list constitutes trade secrets which it could not be forced to divulge. It argued that its products are specialized lubricants, and if their components were revealed, its business competitors could easily imitate and market the same types of products. APC disagreed, saying that the use of modes of discovery (i.e., the legal process in which a litigant attempts to uncover some evidence possessed by the other party) operates with desirable flexibility under the control of the court, and that its request was not done in bad faith or to oppress Pennswell.

In deciding on the case, the Supreme Court turned its attention to U.S. cases in determining what constitutes a trade secret. In Palin Mfg. Co., Inc. v. Water Technology, Inc., it was defined as “a secret formula or process not patented, but known only to certain individuals using it in compounding some article of trade having a commercial value.” In the case of Saunders v. Florence Enameling Co., Inc. and Air Products and Chemicals, Inc. v. Johnson, the definition was expounded to “any formula, pattern, device, or compilation of information that is used in one’s business and gives the employer an opportunity to obtain an advantage over competitors who do not possess the information.” Under this definition, trade secrets need not be technical in nature. Market-related information such as information on current and future projects, as well as future opportunities for a firm, may constitute a trade secret. In Alexander & Alexander, Inc. v. Drayton, trade secrets are even expanded to include a firm’s price list, catalogue or specialized customer list.

In Cocoland Development Corporation v. NLRC, it was held that any determination by management as to the confidential nature of trade secrets must have a “substantial factual basis” which can pass judicial scrutiny. In the Air Philippines case, the Court found that there was a substantial factual basis to hold that the chemical composition of the special lubricants were trade secrets within the purview of law. The Court noted that in the creation of its lubricants, Pennswell expended substantial efforts, skills, research, and resources. All told, the ingredients constitute the very fabric of Pennswell’s production and business.

APC argued that the Consumer Act requires all manufacturers of consumer products to indicate the active ingredients of their products in their respective labels of packaging. However, since Pennswell’s products are not consumer products, the legal provision does not apply to it.

However, trade secrets are not completely immune from modes of discovery or from the public. The trial court may compel their disclosure when it is indispensable for doing justice. Unfortunately for APC, there was no reason to exempt Pennswell’s trade secrets from the application of the rule on privilege, as their revelation serves no better purpose to the disposition of the main case pending with the trial court, which was for the collection of a sum of money.

1. Section 7, paragraph 2 of the TRIPS Agreement
2. Section 4 of RA 8293 or the Intellectual Property Code
3. G.R. No. 172835
4. Section 1, Rule 27 of the Rules of Court
5. 103 Ill. App. 3d 926, 59 Ill.Dec. 553, 431
6. 540 So. 2d 651 (Ala. 1988)
7. 296 Pa. Super. 405, 442 A.2d 1114 (1982)
8. 378 F. Supp. 824 (E.D. Pa. 1974), aff’d, 505 F.2d 729 (3d Cir. 1974)
9. 328 Phil. 351 (1996)
10. Section 7 of the Consumer Act

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