Contractarian Approach in Protecting Trade Secrets

A trade secret or undisclosed information is technical or commercial information which is kept confidential to maintain an advantage over competitors. Even though it is rare to find empirical investigations into the value and use of trade secrets in Sri Lanka given its confidential nature, evidence of the utility of trade secrets in innovation-active businesses is found in other parts of the world, for example the United States, Europe and Australia. A major reason for the popularity and significance of trade secrets may be their flexibility in attracting and protecting a wide array of information which is not generally known or readily ascertainable. However, the theoretical irregularity of trade secrets leads to their identification as neither a fully-fledged intellectual property (IP) right nor as a right sitting completely outside of intellectual property law. As such, there is no unanimity on how trade secrets should be protected even after the TRIPS Agreement entered into the force in 1995. In fact, trade secrets law is a combination of many laws such as intellectual property law, unfair competition law, breach of confidence and contract law. For instance, Sri Lankan Intellectual Property Act, No.36 of 2003 enables parties to rely on common law rights while accepting the disclosure of trade secrets as an act of unfair competition. These common law rights may include the rights arising from contracts and the equitable action of breach of confidence. This article particularly examines how trade secrets can be protected under contract law, i.e., through restrictive covenants and what is the legal validity of such covenants. It argues that Roman-Dutch law and English law hold diverse approaches on deciding the validity of restraint of trade clauses. Nonetheless, it is noted that Sri Lankan courts apply English law principles in this regard based on an assertion that both laws adopt an equivalent approach. This paper further examines how courts interpret restraint of trade clauses relying on English law principles. In so doing, it focuses inter alia on how courts apply reasonableness test in establishing a balance between the trade secrets holder and the counterparts such as employees.