Employment-Agreement

This article is written by Niharika Malhotra and Ambika Bohra, students of Jindal Global Law School, Sonepat.

In a world where the minutest piece of information is stored in various gadgets such as pen drives and hard drives, we often forget that when an employee works for a company, he is made to adjust his working style and push himself for maximum utilization. This process takes the effort of the employer, both in terms of time and money. Thus, when the same employee leaves the company in order to join a competitor in the search of better monetary benefits, he utilizes the same skill and confidential information of the earlier company. Many encourage this set up, however, in practice it results in significant losses, and due to the lack of legal safeguard, companies may not utilize their human resources to the fullest. In order to curb this practice, the American legal system has brought about a doctrine that helps to restrain an employee and maintain balance between the interests of an employer and employee.

This paper will be analyzing the doctrine of Inevitable Disclosure through various case laws and articles. This paper will apply this doctrine to the existing provisions of the Indian Copyright Act, 1957. The application will indicate the existing flaws in the present law and suggest amendments to Sections 14, 17 and 55 of the Copyright Act, 1957 to protect the trade secrets and confidential information from being misused by former employees of an organization. .

 

Analysis of Case of Diljit Titus and Priya Puri:

The case of Diljit Titus v. Seema Ahluwalia and Ors[1] is landmark judgment, which decided whether a client list and other data stored in a computer database constitutes the copyright of the law firm. However, another aspect which is addressed is with regard to the data acquired by an employee in course of employment which is not stored in a tangible form, but as knowledge or information in the brain and whether that could cause a copyright infringement.

In the aforesaid case, the plaintiffs, Mr Diljit Titus and the defendants were partners in a law firm, Titus & Co. After few years of employment the defendants decided to change their job and work independently. The case, in discussion was filed by the plaintiff, Mr Diljit Titus, against the defendants, alleging that they had copied the client list and the other confidential material. The main issue in this case was whether the client list and other confidential data prepared by the employees of a law firm, was a copyright of the firm. While discussing the nature of the copyright under the Copyright Act, the court held that the data was covered as a literary work defined under Section 2(o)[2] of the Copyright Act because the definition includes computer database. Further, it said that Section 17 was necessary to determine who the owner of the copyrighted work was. According to section 17(c)[3] the owner of any work, done in course of an employment, is the employer and not the author himself. However, evidence must be given in order to show that there was contract of service. The court established that the relationship between the defendants and the plaintiff was that of contract of service and not contract for service.[4] The court relied on the three forms of evidence that was provided to them. One that Mr. Titus made the investment and he was the sole proprietor of the firm. Two, all the major decisions needed Mr. Titus’s approval. Three, when the defendants left the firm, there was no division of property. Hence, the defendants were working for him and not as partners.

On the basis of the above reasoning, the court finally held that Mr. Dijit Titus was the copyright owner and the defendants were barred from using any confidential material.[5] However, the court provided a proviso to this statement that the defendants could not be barred from utilizing any skills or information that they may have mentally acquired during the course of their employment, while being employed in another company.[6]

The proviso developed in the case of American Express Bank Ltd. v. Priya Puri.[7] The central issues were with respect to breach of confidentiality and disclosure of trade secrets. The defendant was given the responsibility of supervising the Wealth Management Division of the plaintiff (the employers) and was required to act in accordance with the code of conduct for all employees. The defendant was not allowed to engage in activities, which conflicted with the plaintiff’s interest. Additionally, during the defendant’s course of employment, all confidential information, like customer records and information, was to be protected from the society and the competitors. The defendant gave her resignation letter to the Director of the Wealth Management Department. It was soon discovered that the defendant was in the process of joining the competitor firm. It was also found that the defendant had taken advantage of her position and had acquired a comprehensive list of all customer information and investment related data. The plaintiff, being a reputed bank, filed a suit for injunction against the defendant restricting her not to release any confidential information and trade secrets related to the transactions as they have a duty of confidentiality to their customers. It was contended by the plaintiff’s that even though the confidential information is not in any document, it existed in the mind of the defendant. Hence, this existent, intangible threat was sufficient enough to prevent her from disclosing it.

On the other hand, the defendant asserted that customer details like their phone numbers and addresses cannot come under the ambit of confidential information or trade secrets. The reason being that the same were common knowledge and could be easily accessed as they were in the public domain.

However, the court held that “trade secrets are acquired over a period of time and are the formulae, technical know-how or a peculiar mode or method of business adopted by an employer which is unknown to others….[8] Here the defendant had acquired all the information and data during her course of employment. Trade secrets do not cover the knowledge which is attained through daily operations of the business. The court further stated that the defendant couldn’t be prohibited from changing her job as it helps in overall development.

In the case of Pepsi Food Ltd and ors v. Bharat Coca Cola Holding,[9] it was held that enforcing a post – employment contract, which curbs the freedom of a former employee to change her job, is void. In this case, the contract consisted of a clause that restrained the employee for 12 months to undertake any employment. This was held to void because it was violative of Section 27 of the Indian Contract Act, 1872.

Therefore, it was concluded that the defendant couldn’t be detained from transacting with clients with whom the plaintiffs are dealing. After viewing all the facts of the present case it was held that if the injunction will be granted then the defendant would face a lot of inconvenience.

 

Doctrine of Inevitable Disclosure

In today’s globalized and highly capitalistic economy, the market and the companies comprising it have become highly competitive. However, the very same qualified employees who build these companies are easily lured into by the perks offered by companies, who are more than willing to pay for classified technological know-how of their competitors.[10] Thus, these irreplaceable employees become the biggest threat to the maintenance of a company’s trade secrets and this is one of the major reasons why the companies go to the courts to receive protection.[11]

Doctrine of inevitable disclosure purports that the employee’s duties at his new job which is quite similar to the previous one will inevitably instigate him to depend upon the former employer’s trade secrets.[12] Courts in the US have started pronouncing decisions in favor of former employers and subsequently have also started issuing injunctions, preventing the employee from going and joining the competitor organization like in the cases of DoubleClick Inc. v. Henderson[13] and Lumex, Inc, v. Highsmith[14], the New York Supreme Court had effectively used this doctrine to enjoin the former employee from utilizing the trade secrets. Courts before applying the doctrine of inevitable disclosure contemplate whether –

  • The new employers are competitors and if the products or services provided are similar or not.
  • The employee’s position in the new organisation is identical to the previous one or not, such that the employee is compelled to use the trade secrets in order to finish the job given to him.
  • The trade secrets are of a high value to both the former as well as the new employer.
  • The bad faith of an employee.[15]

The doctrine was first established in the case of PepsiCo, Inc. v. Redmond[16]. In this case, the defendant, Redmond was an employee of PepsiCo and was planning to change his job. However, PepsiCo filed the case to get an injunction against him to prevent him from joining their competitor, Quaker. The main contention of PepsiCo was that the defendant had access to their trade secret and he might use the same working strategies or technical know-how when he joins their competitor firm. The argument raised by the plaintiff was that the presence of a trade secret in the written form is not important; defendant’s mental knowledge about the trade secret has a greater negative impact on the company. This case is analogous to the Dilijit Titus case. The district court granted an injunction in favor of PepsiCo and thus restrained Redmond from joining Quaker. The district court found ‘bad faith’ or mala fide intent in Redmond’s conduct. It held that Redmond had not compartmentalized the information that he gained from PepsiCo and had used the same in his new job.

This decision was upheld by the Seventh Circuit Court, Chicago. The court reasoned that an injunction could be granted when there is an “actual or threatened misappropriation”.[17]

The court elaborated on the doctrine by stating “a plaintiff may prove a claim of trade secret misappropriation by demonstrating that the defendant’s new employment will inevitably lead him to rely on plaintiff’s trade secrets.”[18] However, it would not be sufficient to show that the defendant will have a similar job profile to attract doctrine of inevitable disclosure. The plaintiff will have to establish that the information is not just general skills but are particularized plans and processes which the former employee may use to benefit the competitor company.[19]

Even though this case provided a reasonable standard for application of this doctrine it has not been applied always. The reasons as to why any state could possibly reject this doctrine can be seen in a recent case of Holton v. Physician Oncology Services[20]. The Georgia Supreme Court held that the State of Georgia could not recognize this doctrine and the reason stated was that the trade secret misappropriation could be included in a wider framework. Additionally, the Georgia Supreme Court was of the view that the doctrine of inevitable disclosure cannot be easily applied in the present case.

In this case, Mr. Holton was the vice president at Physician Oncology Services, which was later merged with Vantage Oncology LLC. Vantage had terminated Mr. Holton’s employment. Since the contract of employment consisted of one year compete and a two-year confidentiality clause. Mr. Holton accepted the offer of Radiation Oncology Services of America, in the meanwhile, Inc. Vantage filed a suit for injunction in order to stop Mr. Holton from joining Radiation Oncology Services of America as he had acquired certain trade secrets which he would ‘inevitably disclose in the period of his new employment’.

The trial court accepted Vantage’s argument and granted an injunction. Mr. Holton then appealed to the Supreme Court. The Supreme Court rejected the logic that was provided in the case of PepsiCo and held that “the inevitable disclosure doctrine is not a self-sufficient claim under which a court may instruct an employee from working for an employer or reveal any trade secrets”.[21] The court, in other words, said that a claim for trade secret misappropriation could be interpreted widely along with criminal breach of trust and a separate claim would not be required.

From the above it is clear that this doctrine can be applied only when there is an actual or threatened misappropriation of trade secret by an employee. Thus, then a court may enjoin his new employment by establishing that the employee’s new job will inevitably cause the employee to rely upon the knowledge that he acquired during his former employment.

Trade secrets, used in the definition of doctrine of Inevitable Disclosure, have been defined under the Uniform Trade Secrets Act (UTSA)[22]. When the definition of a trade secret is broadly viewed it also includes strategic decision making such as pricing, budgeting, marketing schemes and product advancement.[23] The protection provided by trade secrets helps in encouraging investment in the area of research and development and it also circumvents misuse of information that is commercially of a very high standard.[24] The owner of the trade secret is also safeguarded from the unhealthy competition in the market. The main remedy in any case of possible infringement on trade secrets is giving an injunction. The importance of a trade secret is understood by the confidentiality it possesses. Any kind of unlawful disclosure of a trade secret will cost heavily to the owner as once a trade secret is leaked to a person or an organization without authorization then the value of the trade secret is lost.

The words- “actual or threatened misappropriation” was defined in the case of PepsiCo. v. Redmond.[25] The court said that the plaintiff company needs to establish that the employee’s new job will inevitably make him rely on the knowledge that he acquired in the plaintiff’s company. In other words, the burden will be on the plaintiff to prove that there is an actual or threatened misappropriation of the trade secret by the employee by pursuing the new employment.[26]

The basic principle behind the doctrine of Inevitable Disclosure is that it is not practically possible for an employee to compartmentalize the knowledge he gained from his former employment.[27] Even though his intentions might be good but he would inevitably use that information when he does any similar work in his new employment.

 

 

APPLICATION OF DOCTRINE OF INEVITABLE DISCLOSURE ON INDIAN CASES:

The doctrine of inevitable disclosure is not recognized in India. A company invests millions on establishing a technique and teaching its employee. The employees on the other hand are able to misuse important information, skills, techniques which a company relies upon to maintain its exclusivity. In a country like India, which still on its way to development, it is very crucial for companies to protect their trade secret as much as they can. The reason being it helps the company to gain a stand and dominate a market. Courts have been proactive in protecting the rights of individuals. This can also be seen through two landmark judgments- Diljit Titus and Priya Puri. The judgment given in these cases would not have been the same had doctrine of Inevitable Disclosure been a part of Indian Law.

In the case of Diljit Titus court had granted an injunction against the defendants. The reasoning behind this judgment of the court was mentally acquired information applicable as a possible mode of infringement under the Copyright Act, 1957.

By applying the doctrine of inevitable disclosure the defendants who were former employees at the firm, could have been restrained from carrying out their independent practice. The real reason being the defendants were employees at the firm and had established relationships through the firm. Each firm has a way of working, drafting opinions, structure of arguments, which an employee learns by associating themselves with the firm. Similarly, the firm too invests a lot in making an employee fluent and articulate with the working structure of the firm. The defendants in this case had acquired a technique to make a trustworthy environment for the clients. Therefore, it can be said that in this case it was inevitable for the defendants to not use what they had acquired from the firm. Hence, using doctrine of inevitable disclosure would grant an injunction against the defendants to change their employment.

In the case of Priya Puri, the court had held that merely having customer information will not benefit the defendant in any way, as the customers will not be convinced enough to switch their business from the plaintiff to any other competitor bank.

However, in this case the defendant was the relationship manager of the Wealth division of the plaintiff and possessed the technical know- how of how to attract the customers towards the plaintiff. Therefore, it would be quite easy for her to use the same techniques to attract customers at the new organization.

If the doctrine of inevitable disclosure was included in the Indian Copyright Act, the High court would have granted an injunction against her. The basis being fulfillment of the conditions of the doctrine; first that if the former employee has the similar job profile to that of her new employment then an injunction can be granted against her; and second, with regard to the possession of the trade secret.

In the Priya Puri case, the defendant was in the post to acquire the trade secrets of the plaintiff company and her new job would require her to utilize the same working procedures and practices. Therefore, it is inevitable for the defendant to carry out the duties delegated at her new job without utilizing trade secrets that she had acquired mentally in her previous job. Fulfillment of the two conditions would have led to the granting of an injunction.

From the above the need for strict application of the can be seen.  An employee should not be allowed to join another firm that has a similar kind of trade or business as that of the former firm as there is greater possibility that one might utilize the trade secrets that was acquired in the previous employment.

 

Proposed Amendments:

After analyzing the doctrine of inevitable disclosure through American and Indian cases, it can be seen that it is imperative to incorporate this doctrine in present set up for copyright.

In our paper we have concentrated on definition of copyright[28], the owner of copyright[29], when can we say that a copyright has been infringed[30] and what are possible civil remedies when there is an infringement[31]. Section 17 defines the owner of the copyright and its clause (c) makes the employer the owner of the copyright. Therefore, if the said doctrine is to be incorporated in to the present Copyright Act then certain amendments will have to be made:

Firstly, the meaning of “Mental aspect of Copyrighted document” should be included in the Interpretation section (Section 2). The meaning should include how certain procedures and practices get embedded in a person’s mind when dealing with them on a daily basis, which is crucial for a particular kind of business or transaction.

Secondly, the legislature should insert of Section 14, subsection 1, clause (f) to incorporate the mental aspect of a copyrighted document within the definition of copyright, as provided under Section 14.

Thirdly, Legislature should widen the scope of Section 17(c). Section 17 talks about the ownership of copyrighted material and this amendment shall be inserted with other provisos. The amended section should include that the information acquired mentally by an employee through copyrighted documents owned by the employer is the copyright of the employer.  There should also be a proviso to Section 17(c) which should be added explaining and defining the doctrine of inevitable disclosure.

Fourthly, Section 55, which talks about civil remedies for infringement of copyright. The legislature should insert a sub-clause – Section 55(4), because this doctrine provides for a civil remedy to an employer or a company against a former employee who may pose a threat to their confidential information and trade secrets.

However, when we think of an employer and employee relationship, we cannot ignore a provision of the Indian Contract Act. The section 27 of the Indian Contract Act[32] provides that any agreement that puts a restraint on any person to carry out his business or trade then that contract is void. Thus, it would mean that if any employee has enough knowledge about a trade secret to harm his employer, that person should be allowed to carry out his trade.

Furthermore, under Article 19(1)(g), our constitution gives a fundamental right to each citizen to carry out his trade and business without any restriction. Therefore, according to this the Doctrine of Inevitable disclosure will lose its essence if it is introduced in India.  Pennsylvania courts have taken a similar view and they believe that even though it is important to have laws to protect employer’s trade secret, it is not constitutional to curb an employee’s mobility.[33] The court argued that if an employee is restrained from joining some other company, on the basis of a non-competition agreement, which never existed in the first place, then an employer would be able to benefit through contractual provisions it did not pay for.[34] The bargaining power will be more towards the former employer and an employee who might not be a threat will suffer.[35] In order to avoid this, the courts have started asking employers to take all possible details of an employee, including their future prospects, and if an employee concedes or refuses to accept the later on then this doctrine could be applied against him.[36] This could also be used against him to prove bad faith.[37]

 

However, the doctrine of Inevitable Disclosure should be analyzed with respect to its aims and objectives. As abovementioned, this doctrine protects the misuse of trade secrets through employees who carry the knowledge because of their posts. Hence, it is important to see that if an employee is allowed to carry on with his business and trade without any form of restriction then the restriction to trade and business of the employer will be greater. One of the ways through which this can be done is by enforcement of non-competent clauses more strictly and broadly by restricting an employee from working in the competitive firm for certain amount of time, depending upon the information he may carry. If the employee breaches that clause, then an injunction could be granted.

Furthermore, it is necessary to realize that apart from acknowledging the disputes between an employer and employee, interests of the competitors and employers must  be attended too. Trade Secret law is governed by an important principle of commercial ethics.  Competition is an integral part of every business and laws are created to make sure that the competition is done in a fair and unbiased manner. Just like a company should not steal its competitor’s secret formulae in the same way a employer should not hire its competitor’s former employee just to know its trade secrets. Similarly, a balance should be maintained between anti-competitive strategies and trade secret protection under the doctrine of inevitable disclosure. (citation legal india)

 

Another issue that requires attention is whether an employee can be convicted for Criminal Breach of Trust as it was suggested in the case of Holton v. Physician Oncology Services[38]?  In India, criminal breach of trust is defined under section 405 of Indian Penal Code[39]. The section focuses on the fact that when an employee is in possession of any ‘property’ of the firm and he puts it to his own use to earn profits out of it then he is committing criminal breach of trust. In the case of RK Dalmia V. Delhi Administration[40], the Supreme Court had held that the ‘property’ used in the Indian Penal Code is not restricted to just ‘movable’ property. The word ‘any property’ must be given a wide interpretation, as there is no reason as to why such interpretation must be restricted.[41] Therefore, intangible property can fall within the ambit of Section 405 and thus, an employee can be convicted under Section 409 of the Indian Penal Code. Even though the interpretation can be rightly used, conviction under the Indian Penal Code can be serious. The problem with this approach is three fold. Firstly, the remedy under Section 405 is imprisonment for three years. This would definitely restrict an employee to physically transmit the information, however, the information will still be in his possession and at some point of time the employee might use it. Therefore, incorporating this doctrine within the Indian Copyright Act would provide a more concrete remedy, that is a civil remedy in form of an injunction. This would in turn legally prohibit an employee to transmit or use any form of trade secret in his new employment. Secondly, under the Indian Criminal Law the burden of proof is always beyond reasonable doubt and this would defeat the entire purpose of this doctrine, as under this doctrine mere proof of bad faith is sufficient as the risk is very high. Thirdly, criminal litigation in India is tedious and time consuming. This would result in wastage of crucial time and resources of an employer and the employer may not end up getting the desired remedy. Therefore, remedy provided under section 405 of Indian Penal Code will not act as a permanent deterrent towards trade secret misappropriation.

The doctrine of inevitable disclosure should therefore, be interpreted liberally so that there is certain amount of restriction on the employees and the employer also does not suffer loss due to disclosure of his trade secrets.

 

In India, Intellectual Property Rights is still at a nascent stage. Application of Doctrine of Inevitable disclosure will help in further development of IPR. In the recent times, employers of big firms have started spending a lot of time and money on developing innovative techniques. Thus, it becomes necessary to protect the trade secrets, which is as an intangible asset for the corporation. The content and the expression, which are the most important factors of a trade secret, should be kept confidential. Furthermore, the applicability of the doctrine will help in safeguarding the principles of commercial ethics and fair dealing.

In India, the situation is such that there is a need for a concrete trade secret protection as there is absence of trade secret jurisprudence in the country. With the application of foreign principle like ‘Doctrine of inevitable disclosure’, there will be fewer ambiguities and moreover little chances of losses being incurred.  The changes suggested in the Copy Right Act, will definitely help in adjudicating legal suits in an expeditious manner.

 

[1] Diljit Titus v. Seema Ahluwalia & Ors, 130 (2006) DLT 330

[2] Section 2(o), Indian Copyright Act, 1957.

[3] Section 17(c), Indian Copyright Act, 1957.

[4] Diljit Titus v. Seema Ahluwalia & Ors 130 (2006) DLT 330 (Para 12).

[5] Diljit Titus v. Seema Ahluwalia & Ors 130 (2006) DLT 330 (Para 86).

[6] Diljit Titus v. Seema Ahluwalia & Ors 130 (2006) DLT 330 (Para 86).

[7] American Express Bank Ltd. v. Priya Puri, (2006) IIILLJ 540 Del.

[8] American Express Bank Ltd. v. Priya Puri, (2006) IIILLJ 540 Del (Para 6).

[9] Pepsi food ltd and ors v. Bharat Coca Cola Holding, 81 (1999) DLT 122.

[10] Edward M. Kaplan et al., The Doctrine of Inevitable Disclosure, Available at http://www.sulloway.com/publications/54-litigation-articles/292-the-doctrine-of-inevitable-disclosure.html  (last visted August 26, 2014, 11:45 PM).

[11] Id.

[12] Id.

[13] DoubleClick Inc. v. Henderson, 1997 NY Misc LEXIS 577

[14] Lumex, Inc, v. Highsmith, 919 F. Supp 624 (EDNY 1996)

[15] Supra note 10

[16] PepsiCo. v. Redmond, 54 F.3d 1262 (7th Cir. 1995)

[17] Supra note 10

[18] Id.

[19] Id.

[20] Holton v. Physician Oncology Services, No. S13A0012, 2013 WL 1859294 (Ga. May 6, 2013)

[21] Holton v. Physician Oncology Services, No. S13A0012, 2013 WL 1859294 (Ga. May 6, 2013)

[22] “Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

  • 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
  • is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

[23] Supra note 10

[24] I.P.L. Png, Law and Innovation: Evidence from the Uniform Trade Secrets Act,  Available at http://isites.harvard.edu/fs/docs/icb.topic955399.files/Paper03_background_Png_02-27.pdf (last visited August 26, 2014, 10:00 PM)

[25] PepsiCo. v. Redmond, 54 F.3d 1262 (7th Cir. 1995)

[26] PepsiCo. v. Redmond, 54 F.3d 1262 (7th Cir. 1995)

[27] Supra note at 10

[28] Section 14, Indian Copyright Act, 1957.

[29] Section 17, Indian Copyright Act, 1957.

[30] Section 151, Indian Copyright Act, 1957.

[31]  Section 55, Indian Copyright Act, 1957.

[32] Section 27, Indian Contract Act, 1872.

[33] 6 U, Pa. J. Lab. & Emp. L. 157 (2003- 2004) , available at:https://www.law.upenn.edu/journals/jbl/articles/volume6/issue1/Berkun6U.Pa.J.Lab.&Emp.L.157(2003).pdf (last visited 28 August, 2014, 8:00 PM)

[34] Id

[35] Id

[36] Id

[37] Id

[38] Holton v. Physician Oncology Services, No. S13A0012, 2013 WL 1859294 (Ga. May 6, 2013)

[39] Section 405, Indian Penal Code, 1860.

[40] RK Dalmia V. Delhi Administration, 1962 AIR 1821

[41] Supra note 39

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