Protecting Trade Secrets In India In The Absence Of A Regime

9th June, 2020 - 1:22 pm Categories: Trade Secrets 0 Comments

Introduction

Businesses usually accumulate and use creative as well as innovative ideas that are unknown to their competitors to gain an edge over and maintain the uniqueness of their product/service. Information that isn’t generally known to competitors and is protected by confidentiality agreements, qualifies as quasi-intellectual property known as ‘trade secret’ and is eligible for protection under tort or contracts law against disclosure or unauthorized use of the trade secret. The size of a business is nocriteriafor a business to qualify for having a trade secret and protection for the same. Enforcing trade secret protection is very necessary for the survival of organisations and essential for their survival. In this era of globalization, it is of great importance for businesses to ensure that the protection of their trade secrets from their competitors is adequate in cases where there is fear of disclosure, especially when hiring new employees for strategic developments or launching new products and services.

Trade secret law’s policy is protection, maintenance and promotion of ethical standards[1] and fair dealing which encourages innovation, unauthorized use of which by anyone who isn’t a holder of the trade secret is considered a violation of trade secrets and unfair practice.

Defining Trade Secret

Any data or information that relates to businesses and is not known to the general public along with reasonable attempts being made to keep such informational confidential qualifies as a trade secret. According to North American Free Trade Agreement (NAFTA) “a trade secret is any information having commercial value, which is not in the public domain, and for which reasonable steps have been taken to maintain its secrecy”[2]. In Burlington Home Shopping Pvt. Ltd. v. Rajnish Chibber[3], the court held that a trade secret is information that would cause real or significant harm to the owner if disclosed to a competitor. It can include formulae not only for the manufacture of products but also, in an appropriate case, the names of the customers and the goods which they buy.

According to Article 39.2 of the Trade-related Aspects of Intellectual Property Rights (TRIPS) there are three criteria that have to be taken into consideration;

(a)The information is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons that normally deal with the kind of information in question;
(b)The information has actual or potential commercial value because it is secret;

(c)The person lawfully in control of the information has taken reasonable steps under the circumstances to keep it a secret.

The Uniform Trade Secret Act, 1979 adopted in the United States of America, defines trade secrets as information which includes formulae, patterns, compilations, programs, devices, methods that:

(a)Derive independent economic value from not being generally available or known to or not being easily ascertainable by proper means by others who can obtain economic value from its disclosure.

(b)It is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Financial records, customer lists, customer details along with strategies and policies of the companies may also be considered trade secrets. However, in India, details of customers were held to not be trade secrets not property. It was held that the objective of secrecy is utility so a trade secret has to be utilitarian in nature[4].

Current framework of Trade Secret protection in India

In this era of globalization, where companies off-shore to various countries for expansion as well as cheaper labor, it is becoming increasingly difficulty to protect business strategies and secrets. Businesses view technology as secrets rather than patentable information. This is mainly because competition in markets has reached a level where competitors innovate once information is available. Though this gives rise to healthy competition, it becomes increasingly difficult for new businesses to keep up or flourish once such information is available to business majors. Countries today recognize the need for such secrecy and thus are trying to incorporate protection for the same in their legal frameworks. In the international community, development of trade secret protection can be traced to Trade-related Aspects of Intellectual Property (TRIPS), the General Agreement on Tariffs and Trade (GATT) and North American Free Trade Agreement (NAFTA).

In India, the only protection that trade secrets have received is through traditional judicial rulings and through provisions and aspects of equitable law, contracts law and torts. The absence of a legislation for trade secrets has always made rulings difficult but judicial pronouncements have always tried to develop and protect trade secrets and give remedy to breach of confidentiality.

Judicial rulings for the protection of trade secrets

No specific law protects trade secrets and confidential information in India. However, Indian courts and tribunals uphold trade secret protection, confidential information and business know-how. Action of misappropriation under common law can broadly protect trade secrets. Breach of obligation of confidence as well as third party accessing confidential information in an unauthorized manner can misappropriate trade secrets. This misappropriation can take place either by misappropriating information shared in confidence or taken by cheating or theft.

The Indian Courts have streamlines 3 sets of circumstances out of which proceedings may arise:

(a)When any employee comes into possession of a secret or any confidential information in normal course of his work, and either carelessly ordeliberately transfers that information to any unauthorized person;

(b)When any unauthorized person (may be a new employer) incites such an employee to provide him with such information as has been mentionedabove; and

(c)When, under a license for the use of know-how, a licensee is in breach of a condition, either expressed in any agreement or implied from conduct,to maintain secrecy in respect of such know-how and fails to do so.

Indian courts and tribunals have made it immensely clear that in the absence of legislation, they will be protecting trade secrets through common law for the betterment of businesses in India. In John Richard Brady and Ors v. Chemical Process Equipment P Ltd and Anr[5], the Delhi High Court in a case involving unauthorized use of trade secrets observed that it would in interest of justice to restrain the defendants from abusing the know-how, specifications, technical information regarding the plaintiff’s fodder production unit entrusted to them under express condition of strict confidentiality. In Daljeet Titus, Advocate v. M Alfred A Adebare and Ors[6] it was held that in agreement with Duchess of Argyll and Ors[7], the court must step into restrain of a breach of confidence independent of another side. In the end, while granting injunction by the court, it directed that the defendants would not be entitled to make use of the material of the plaintiff to which they had access to in breach of confidentiality. The defendants that worked with the plaintiffs cannot use the agreements, due diligence reports, customer contact lists, and other such material that came into their knowledge through confidential relationships. With respect to trade secrets of banking businesses, the Delhi High court in relation to secrecy to banks towards their customers observed that banks owe a duty of confidentiality to customers which emerges through their monetary relations thus if someone steals such information that is guided by secrecy between such a bank and the customer, it shall be liable for hampering such secrecy.

Under Contracts Law

Indian Courts have upheld trade secret protection under principles of equity and contractual obligation. Section 27 of the Indian Contract Act makes this evident due to the provision relating to restrain of trade. This section that is general in its terms, declares all agreements that restrain trade as void. Initially the section was rigid in its invalidation of restrains, however it was enacted when trade was still undeveloped and the object of the section was protection of restraint of trade. Later, the implication of the Law Commission of India in 1958 and its recommendation to allow reasonable restrain came into picture.

Remedies for infringement of Trade Secrets

The remedy in the case of infringement may be injunction or damages. The law of Specific Reliefs Act, 1877 may apply in favor of the wronged as under the law of injunction in India. However, a prima facie case, and balance of convenience along with irreparable loss must be established. In many cases, the grant of injunction has been refused due to insufficiency of prima facie case. It has been observed by the courts that in order to obtain injunctions there should be actual concealment of material fact by the plaintiff to get equitable relief. As per Section 41 (e) of the specific relief act, injunction cannot be specifically enforced by the court should not be granted.

Trade Secrets in consonance to IPR

IPR laws in India have territorial nature and protection granted to trade secrets may vary from one region to another. Providing an exhaustive list of what courts in India consider as confidential or a trade secret isn’t possible. However, through judicial pronouncements, there are a lot of pieces of information that the court has considered as Trade Secrets traditionally throughout the years.

The most important part about trade secrets is their secrecy as opposed to its novelty[8]. In Re Providian Credit Card[9] it was held that information would not be constituted under the head of trade secret if it isn’t confidential or a secret. Further, in State ex rel. Lucas County Board of Commissioner v/s. Ohio Environmental Protection Agency[10] it was held that a trade secret loses its essence as a trade secret as soon as it is disclosed or comes into the limelight as public information. Since the advantages of trade secrets have taken center stage, it has increasingly attracted the fancy of people and become the intellectual property of choice. However, there are certain problems with respect to drawing a legislation with respect to trade secrets in consonance with the Intellectual Property Rights as construed and known in India. Intellectual Property includes copyrights, trademarks, patents and now, increasingly gaining popularity, trade secrets, however, there is legislation in place for everything names herein except trade secrets. Patents ride on the fact that the invention is novel, unique and non-obvious while being useful as well. Copyrights protect manner of expression but not content or idea but once the idea is materialized in a form, it is protected. Such information is protectable because it is given the same after being disclosed. Disclosure of trade secrets will harm the owner of the trade secret and kill the idea and essence of the trade secret thus making it difficult to gain protection the way patents and trademark/ copyrights enjoy protection. If trade secrets are exposed to the public, they can never be evoked[11]. This is true even if the product itself leads to disclosure[12]. Thus, there will be no protection of trade secrets if its process of use gets disclosed[13].

Employees as threats

People employed in businesses can be a threat to the intellectual property protection of a business. Though remedies and protective mechanisms can be put into place for protection of intellectual property, employee loyalty cannot be compromised with and remains the biggest challenge that businesses have to face to protect their IPs. Coco-cola goes to the extent of letting just two people in the business know about the ratios of ingredients in their drink to protect the recipe as a trade secret. Due to the ever changing market and the fact that trade secrets are independently discoverable by others, businesses are usually advised to keep transforming their trade secrets and to keep innovating so that competition remains in place and they are able to protect their trade secrets from getting known.

Companies that off-short are in direct view of such threat due to the involvement of employees in major hierarchies and middle men that do not directly get employed by the company. For example, if a service provider in India has sub-contracted to perform off-shored services for an outsourcing company and such a sub-contractor misappropriated or discloses the outsourcing company’s trade or service secrets or any sort of confidential information, the company won’t be able to bring a breach of contract or a breach of confidence claim against the sub-contractor, except in rare circumstances when the company has directly contracted with the sub-contractor which is not very likely to happen. The contract that stands between the contracted company and the outsourced company might well hold the provider liable for damages caused by the subcontractor’s misappropriation. But such a cause of action will not address the subcontractor’s past or possible future misappropriation. The outsourced company in this sense is left without a remedy against the Indian subcontractor.

For companies that operate and recruit employees in India, the threat that comes with employing is unavoidable. Finding ideas to perpetually keep changing and innovating the trade secrets is a challenge. Some enterprises also make efforts to unscrupulously steal employees from their competitors to access their inventive abilities and their knowledge of the secrets of success of their competitors.

A “psychological contract” always exists between an employer and an employee in any enterprise. Though not a formal legal contract, a psychological contract is basically a set of expectations that both employees and employers have from each other concerning their contributions and incentives. Expectations with respect to such contracts flourish while working in the company. In such scenarios, an employeeautomatically creates a bond of confidentiality with the employer. However, there are certain environments where mobility is high and as a result these sort of contracts aren’t reliable increasing the need for formal contracts. Clauses in such contracts of employment enhance the legal protection for confidential information and provide security in case of litigation. Thus, there are a lot of contractual agreements that an enterprise can enter into to protect confidential information.

National Innovation Act

Article 10 (b) of the Paris Convention and Article 39(2) and 39(3) of the TRIPS Agreement, 1995 set the global standard for trade secret laws. However, no such unique Indian legislation exists and hence undisclosed proprietary assets in India remain at risk. The draft National Innovation Act implemented by the Department of Science and Technology was the first real effort in protecting Confidential Information, trade secrets and innovation. It’s approached is based on three pillars. It endeavors to encourage innovation through public-private partnerships. Further, it hopes to evolve a National Report on addressing Trade Secret Provisions in India. Finally, it works toward the codification and consolidation of a law of confidentiality in aid of protecting trade secrets, information and innovation. Its salient features are as follows:

1. “Confidential information” is defined under Section 2 (3) of the Act as information, including a formula, pattern, compilation, program device, method, technique, or process, that:

(a)is secret, is not generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;

(b)has commercial value because it is secret; and

(c)Has been subject to reasonable steps under the circumstances by the person lawfully in control of the information, to keep it secret.

2. The obligations of confidentiality are set out under Section 8 of the Act. Parties can set the terms and conditions in respect of Confidential Information hoping to maintain confidentiality and prohibit misappropriation contractually. The section further provides for enforceability within the contract in the event of a breach.

3. Confidentiality arising from non-confidential relationships are detailed under Section 9. It creates rights to maintain and prevent the disclosure of confidential information. Any third party who receives such information without the consent of the complainant is also placed under an obligation not to release it into the public domain.

4. Section 10 extends the protection of information even to perceived or apprehended concerns of possible misappropriation of such information. It empowers courts to hold in camera proceedings, seal discovery proceedings, seal confidential filings or records of the action, and order any person or class of persons impleaded in an action not to disclose the confidential information.

5. The exceptions to misappropriation of Confidential Information are laid out Section 11. These are:

(a)The Confidential Information was available in the public domain; or

(b)The Confidential Information has been independently derived by the alleged misappropriator, or by any third party from whom the alleged misappropriator received the information; or
(c)Where disclosure of the Confidential Information is held to be in the public interest by a court of law.

6. Section 12 lays out the injunctive authority of the courts. It provides for preventive or mandatory injunctions restraining misappropriation of Confidential Information. As per the section, courts may grant interim, ad interim or final injunction as may be required to restrain any misappropriation. An injunction may further be vacated or altered if it is found to be exempted as under Section 11. The complainant may later be held liable to compensate actual damages to the defendant for injunctions passed against the latter in the event it is later discovered that the claim was without warrant and eventually decided against the complainant. If the circumstances so warrant, an injunction may provide for the use of the information under the condition of payment of a royalty for a period of time no longer than that for which its use may have been prohibited. Government mechanisms of police and local administration may be employed to enforce such restrictions.

7. Mandatory damages when confidentiality has been breached are prescribed under Section 13. If a misappropriator has utilized the confidential information or is responsible, either directly or indirectly, for the information falling into the hands of a third party, or into the public domain, a complainant may be entitled to:

(a)such mandatory damages not exceeding the limit as may have been notified by the Appropriate Government from time to time as underSection 15 (c), which sum shall be recoverable as a contract debt; or

(b)such damages as may have been agreed upon by contract between theparties; or

(c)Actual damages as may be demonstrated, including consequential losses.

Further, if the misappropriation was carried out with malicious or wilful intent, the complainant may be entitled to up to three times the amount provided under Section 13. The defendant may further be required to pre-deposit 10 percent of the damages claimed by the complainant in order to secure his right to defend the suit where the preconditions for securing the right to injunctive relief are met.

8. Section 14 permits immunity for acts carried out in good faith or purporting to have been so done.

The implementation of the National Innovation Act would be a milestone in securing the rights of those who possess trade secrets, and hence greatly benefit businesses in India; thus making it a more competitive global market space. Yet, this Act has not yet seen the light of day.

9. Section 14 provides for Immunity for acts done in good faith or purportingto be so done.However this Act is yet to see the light of the day.

Legislation in other countries and possible influence of such legislation in India

The pressing need for a legislation with respect to trade secrets in India is undeniable. The Indian law could conveniently be based on principles that are lifted off English Law and English courts or the Federal Trade Secrets Law of USA under the Uniform Trade Secrets Act, 1990, the Restatement (Third) Unfair and the judicial pronouncements of the same.

In codified law in India must first define the word ‘trade secrets’ and the subject matter thereto. Protection should be extending to information that is in bulk and combinations of such information. Individual elements of trade secrets may not be of any use even if protected. Thus information in combination to other information should be protected[14]. To make sure that the knowledge is not in public domain, industry level of general knowledge and information’s ability can be taken as factors. It is essential for the codified law to take the tort of misappropriation into consideration which is usually committed through improper means or breach of confidence. With respect to the tort of misappropriation, the Spoliation doctrine when says that destruction or significantly altering evidence or failing to preserve property of another’s use as evidence in pending or reasonably foreseeable litigation the sort that allows the court to infer misappropriation from the defendant’s destruction of evidence must be recognized.

A body specializing in deciding cases related to trade secrets as in other cases related to IPR should be in place to conduct proceedings. Also, disclosure of the trade secret should be taken care of and disclosing such a trade secret in lieu of the proceedings should be taken care of. The Uniform Trade Secrets Acts, 1990 of USA propounds the doctrine or displacement wherein if the cause of action is in conflict with the trade secrets misappropriation then it is displaced or preempted. Third party liability also should be codified due to off-shoring and outsourcing. In imposing such liability principles of agency and vicarious liability should also be brought in. Exceptions protecting trade secrets should be laid down keeping in mind the exceptions by the common law courts.

Safeguards used by budding entrepreneurs to protect their business secrets

Safeguarding trade secrets is very essential for entrepreneurs and small business owners in recent time. If the products or services derive a lot of novelty due to such trade secrets and thus lead to the flourishing of the businesses, they will invariably gain focus. This will lead to a lot of competition especially against major businesses that have already made a mark in the market. Due to better research and development operations and abundance of funds on the part of these huge major businesses, operations and innovation using the trade secret will become easier and these small businesses and entrepreneurs will be thrown off-board with relative ease.

Thus it is very essential for them to come up with ways to protect trade secrets and promote innovation while keeping them as secrets. The following are certain steps that they can take to protect such information and maintain secrecy.

Promote Employee Loyalty

Businesses need to understand that employees commit when human resource policies and overall business strategies are well integrated. Employee loyalty is more important than customer loyalty to certain extents. Incentives and other advantages are a must to be given to employees because satisfaction plays a major role in the way employees function.

Monitoring Employee Activities

It is important to make sure that employers do not lose the importance of protecting trade secrets will giving impetus to employee loyalty. Employers should monitor the activities of employees in the work place, however, privacy of employees should be respected and employees must not be given an impression of distrust.

Drafting a comprehensive trade secret policy for workplace

A comprehensive trade secret policy should be drafted for employees and the staff making them aware of the sensitivity of the issue as well as the nature of such confidential information along with the potential consequences of breaching such trust.

Drafting employment/confidentiality agreements that are enforceable in India

Confidential information like trade secrets can be fairly protected by enforcing contracts and agreements that are enforceable in India. Such contract provisions should be prohibiting wrongful disclosure and misappropriation of confidential information. These agreements should focus on the type of information that is likely to be disclosed, the manner in which it should be used and the restrictions on disclosure post-termination.

Due diligence and maintaining non-disclosure agreements

Due diligence is of extreme importance to check the employee’s track record of keeping secrets and maintaining confidentiality. Due diligence including scrutinizing documents as well as agreements with the special emphasis with respect to non-disclosure obligations as thoroughly as possible without leaving out a possibility of error.

Conducting Trade secret audits

1. Identifying trade secrets that are of significance.
2. Verifying the company’s title to such trade secrets.
3. Verifying to make sure that confidentiality procedures are up to the mark and followed.

Conclusion

Though the law of trade secrets fits into the existing framework of law of torts, law of contracts and competition law, there are certain problems with respect to its inception in the field of intellectual property rights. However, a separate legislation for trade secrets would eliminate that disparity as well. India, being a developing nation must have a robust law for protecting trade secrets. The TRIPS Agreement mandated that its Member States mustchange their laws andbring in new legislations to fulfill the obligations as under the TRIPS Agreement. It is time now for a statutory law to come into force in India that not only protects trade secrets and confidentiality but also makes suitable amendments in the existing framework of Competition Act against misappropriation and regulation of such confidential information.

The criminal law of the country, the Indian Penal Code, 1860, also needs amendingthat provides for criminal liability in cases wherein there is breach of confidence or disclosure of trade secrets similar to what exists in different Countries. The mere presence of a criminal law does not act as deterrence for individuals who indulge in such practices and thus intensive action and practice is also needed to keep such incidents at bay. The Companies Act, 1956 should also be amended with similar provisions that take due diligence with respect to trade secrets into its ambit. Thus, the Companies can be pro-active and vigilant while protecting their trade secrets. Companies, in this manner and for this purpose, must build a strong protection system around such information. Companies must also establish strong psychological loyalty amongst its employees to so that nondisclosure and/or non-compete agreements are more effective and thus safeguarding its trade secrets is easier.

Taking the above considerations into effect, it is reasonable to be of the opinion that Trade Secret protection in India is in its nascent stage and it is essential for it to develop keeping in mind that India as a developing country needs laws and legislations to be conducive to the business environment so as to transform the country into a bed of opportunities for companies off-shoring as well as entrepreneurs that are looking for competition conducive to their businesses without the fear of misappropriation of their trade secrets and confidential business information, the very basis that they thrive on.

Author: Niharika Sanadhya, Litigation Associate, at Khurana & Khurana, Advocates and IP Attorneys. In case of any queries please contact/write back to us at niharika@khuranaandkhurana.com.

References:

[2] Article 1711 of NAFTA

[3] 61 (1995) DLT 6

[4] American Express Bank Ltd. v. Ms. Priya Puri [2006] (110) FLR 1061

[5] AIR 1987 Delhi 372

[6] 130 (2006) DLT 330

[7] (1965) 1 all ER 611

[8] Dionne v. Southest Foam Converting & Packaging, Inc., 240 Va.297, 302 (1990).

[9] 96 Cal.App.4th 292, 304 (2002).

[10] 88 Ohio St.3d 166, 174 (2000)

[11]Religious Technology Center v. Netcom On-Line Communication Services, Inc., 923 F.Supp. 1231, 1254 (N.D.Cal.1995) (applying

California version of UTSA).

[12] Vacco Industries, Inc v. Van Den Berg, 5 Cal.App.4th 34, 49-50(1992).

[13]Supra note.5 at pg.2, Harvey Barnett, Inc v. Shidler, 143 F.Supp.2d 1247, 1252-1253 (D.Colo.2001) (applying Colorado version of UTSA).

[14] Catalyst & Chemical Services Inc v. Global Broung Support, 250 F. Supp. 2d 1, 9 (D.C. 2004)