A practical insight into trade secret protection in India

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This article is written by Adv. Meenal Garg.

Introduction

Many multinational companies like KFC, Coke, Domino’s, Microsoft etc. prefer to protect their knowledge or product by means of trade secrets instead of other means of IPRs. This is because the concept of an IPR is based on disclosure and IPR law gives protection to such disclosure for a specific period of time. After the expiry of such time period, the information becomes available in the public domain and the owner of such IPRs cannot derive further economic benefits from such innovations. On the other hand, the foundation of trade secrets is based on ‘secrecy’ itself. In other words, as long as an entity is able to keep its innovation a secret, it can enjoy exclusive benefits from its innovation for as long as he wants. Thus, there is a growing demand of protecting innovation through trade secrets globally as well as domestically. 

At the outset, it is necessary to mention that there is some discourse amongst scholars regarding the foundation of trade secret law, however, for the purposes of this article the author has assumed information as property which can be misappropriated.

What is a trade secret

Article 39 of TRIPS requires countries to protect information within the control of natural or legal persons and lays down three essentials to classify information as trade secret, namely:

  1. That information is secret;
  2. That information sought to be protected has some commercial value; 
  3. That the holder of such information has taken reasonable steps to protect such information.

This definition has more or less been incorporated in U.S. law under Sec. 1(4) of Uniform Trade Secrets Act, 1985.

These essentials are discussed below in detail:

  1. Secret: By its very nomenclature, secrecy of information is the foremost essential of a trade secret. Secrecy generally implies that the information sought to be protected is not ordinarily available to people dealing in similar kinds of information. In other words, the information should not be available in the public domain. It is not necessary that the information must be completely novel. For example, the information on how to make fried chicken is common knowledge, however, the information to make an exact replica of KFC fried chicken is not known to all. Thus, KFC’s recipe to make fried chicken qualifies as a secret even though it is not a completely new product per se.
  2. Commercial Value: This information must have some commercial value attached to it. For instance, we often talk about grandmother’s secret recipe but such recipes do not have any commercial value as they are meant for personal use. Such secret recipes do not qualify as trade secrets unless and until they are put to commercial use. Similarly, every confidential information does not qualify as a trade secret. Confidential information may be government, trade or private. The test to determine that a particular confidential information qualifies as a trade secret or not is to see whether such information has some commercial value.
  3. Reasonable efforts by the rightful holder to keep its secrecy: The rightful holder of the trade secret should have taken reasonable efforts to keep it secret. What constitutes reasonable steps varies from case to case and type of information sought to be kept secretive. Softwares and other IT innovations are usually protected by using firewalls, restrictive access to such information, using anti-virus and anti-spyware softwares. The degree of such reasonable steps also depends upon the commercial value of information. For instance, carrying on with the KFC example, KFC protects its original recipe by keeping it in a highly guarded safe in its Louisville headquarters as such a recipe has commercial value of billions of dollars.

With an increasing number of trade secrecy cases, the Hon’ble High Court of Bombay, in the matter of Bombay Dyeing & Manufacturing Co. Ltd. v. Mehar Karan Singh, has laid down the following factors which are to be considered that information is to be classified as a Trade Secret or not:

  1. To what degree the information is in public domain;
  2. To what degree the information is known by employees of the business;
  3. The steps taken by holder to ensure secrecy of information;
  4. The monetary/commercial value and the competitive advantage of the information as perceived by the holder of the information;
  5. Investment in terms of money and time made by the holder to obtain or develop the information;
  6. Estimated cost in terms of money and time that an entity would incur in obtaining/developing the same information independently.

In this case, the defendant was the director of Plaintiff Company and he had disclosed confidential information pertaining to customized software for real estate business to a competitor of plaintiff.  The court while applying the above definition of trade secret opined that since the defendant had obtained confidential information which was not available in public domain by virtue of his employment and that such information had commercial value, it amounted to misappropriation of trade secret.

A comparison of these factors with the essentials laid down by Art. 39 of TRIPS reveals that the first and second factor corresponds to secrecy requirement, fourth, fifth and sixth factor helps to determine the commercial value of information and the third factor corresponds to the reasonable measures requirement under TRIPS. 

Trade secret protection in India

India’s first stance regarding trade secrets is found in India’s GATT (General Agreement on Tariffs and Trade) discussion paper published in 1989. As per this, India refused to include trade secrets within the definition of intellectual property rights. The reason for this was that on one hand, the concept of intellectual property is based upon its eventual disclosure, publication and registration; in contrast, trade secrets are premised upon secrecy and confidentiality. 

Subsequently with an increasing number of “Trade Secrecy” cases coming up before Indian courts, India came up with the National Innovation Bill, 2008 which amongst other things also had certain specific provisions related to Trade Secrecy. Many authors saw this bill as India’s first attempt to bring in a Trade Secret specific legislation. This Bill defined terms like “confidential information”, “misappropriation”, “misappropriate”. It also had specific provisions like Obligations of Confidentiality, Confidentiality arising from non-contractual relationships, Remedies to protect and preserve confidentiality and orders to prevent threatened or apprehended misappropriation thereof and many others. However this bill was never presented before the Parliament and disappeared.

Thus, till date there is no specific law to protect trade secrets in India, however courts have relied upon common law and principles of equity to grant relief in case of misappropriation of trade secret information. Trade secret protection in India is granted under following three categories: 

Breach of contract

In India, a person usually an employee can be bound to not disclose confidential information by means of a contract. This is usually done by including confidentiality clauses, non-disclosure clauses in employment agreements, consultancy agreements, franchise agreements etc. As far as position of Indian courts is concerned, the courts have generally leaned towards upholding such restrictive clauses which impose negative covenants not to disclose or use the information received under the agreement for any purpose other than that agreed in the said agreement. These clauses have been usually challenged under Sec. 27 of the Indian Contract Act, 1872.

In Niranjan Shankar Golikari v. Century Spinning, it has been held that restrictions in employment agreements which prohibit disclosure of confidential information during the period of employment and even subsequent to such employment, are generally not regarded as restraint of trade and therefore such clauses are not covered under Section 27 of the Indian Contract Act, 1872. The rationale for this has been that a former employee should not be allowed to take unfair advantage of the employer’s trade secrets which are vital for his business. 

Post employment non-disclosure covenant and non-compete clauses for a limited period are also permissible under the exception to Section 27 of the Indian Contract Act, 1872 as was held in Homag India Pvt. Ltd. v. Mr. Ulfath Ali Khan.

Breach of confidence

Another way in which Indian courts have granted protection of trade secrets is by extending the original covenant of confidentiality to a third party who has obtained such confidential information under confidence. This can be illustrated by way of an example. Suppose B is an employee of A and he is bound by a non-disclosure agreement. Now, C incites B to give him confidential information received by B in confidence. C misappropriated such information. C would be liable under breach of confidence even though he had no express agreement with A regarding use and disclosure of confidential information.

In Diljeet Titus v. Alfred Adevare & Ors, it was held that it was the duty of the Court to interfere in a case of breach of confidence independent of any right under law. It was further held that breach of confidence need not be always expressed but it can be implied from surrounding circumstances. In this case, the defendants were associates in the law firm of the plaintiff who had taken and used client information after termination of their employment. There was no express confidentiality agreement between plaintiff and defendant. The court held that the nature of relationship between an advocate and his junior is such that there is an implied confidentiality agreement between the two. This means that in absence of express confidentiality agreement, such juniors can still be held liable to maintain confidentiality of such information which is required to be kept confidential by the advocate/employer. Hence, the defendants were held liable.

In Zee Telefilms Ltd. v. Sundial Communications Pvt. Ltd., the court expanded the scope of an action under breach of confidence and held that the obligation of confidence need not be limited to the original recipient but can be extended to those persons who received the information with knowledge acquired at the time or subsequently that it was originally given in confidence. In this case the plaintiff company had made a presentation to the defendant regarding ideas for a film titled ‘Kanhaiya’ and such information was disclosed under confidence. The defendant company had refused to sign a non-disclosure agreement as it was against its company policy. Later on it was found that the defendant had used the idea of the plaintiff to make a similar show. It was held that though there was no express non-disclosure agreement, still the defendant could be held liable as the facts and circumstances proved that the information was disclosed in confidence.

Equity

Indian courts have also relied upon principles of equity to hold the misappropriating party guilty by establishing an implied covenant of confidentiality between the parties.

This concept was first laid down by Delhi High Court in John Richard Brady v. Chemical Process Equipments P. Ltd. where the Court, while exercising its powers under the wider equitable jurisdiction, awarded an injunction even when there was no contract. The Court opined that even in the absence of an express confidentiality clause, confidentiality can be implied from the surrounding facts and circumstances and in such cases, the defendant would be liable for breach of implied confidentiality obligations. In this case, the plaintiff had created a fodder protection unit (FPU) for entering into the fodder market. In relation to the same, plaintiffs had invited quotations for supply of thermal panels for the said machine. In order to provide quotations, all drawings, technical know-how of the FPU machine were provided to the defendant. The said information was supplied under a confidentiality agreement wherein it was agreed that during pendency of agreement, such information would not be supplied to anybody else. However, the supply agreement couldn’t materialize. Later on, it was found that the defendant had frequented various locations having the plaintiff’s FPU machine to understand its working and that the defendant had created a similar machine to the detriment of the plaintiff. In this case, the key point of difference was that while there was no disclosure of information but the defendant had used such information to the detriment of the plaintiff. The court while invoking the principles of equity held that the defendant cannot be allowed to abuse the confidentiality agreement and hence, the defendant was liable.

A reading of these concepts reveal that confidentiality claims may arise in following circumstances–

  1. Where an employee/consultant/any contracting party gets possession of confidential information, in the ordinary course of employment/business transaction and either carelessly or deliberately passes that information to an unauthorized person or misappropriation such information himself. [Breach of Contract]
  2. Where a third party incites/obtains information an employee/holder of such confidential information to provide him with such information; and [Breach of Confidence]
  3. Where, under a license for the use of know-how, a licensee is in breach of a condition, implied from conduct, to maintain secrecy in respect of such know-how and fails to do so. [Equity]

Legal remedy in case of misappropriation of trade secrets in India 

Generally, in cases of trade secret misappropriation, the remedy is to obtain an injunction against the misappropriator to prevent disclosure of the trade secret and return of all confidential information. Moreover, the holder can also claim compensation for any damage suffered due to unauthorized disclosure of trade secrets by the misappropriator. However, depending upon the facts and circumstance of the case, remedies are also available in Copyright Act, 1957, Sec. 72 of Information Technology Act, 2000, Secs. 378, 405, 408 and 420 of Indian Penal Code, 1860 etc. 

While drafting a suit for misappropriation of confidential information it has to be specifically pleaded that:

  1. the information/technique sought to be protected is unique or novel. 
  2. The three essentials i.e. secrecy, commercial value and reasonable steps to protect information need to be specifically pleaded.
  3. Despite taking all reasonable steps, such information has been misappropriated/misused and wrongly obtained by the defendant.

In Emergent Genetics India Pvt Ltd v Shailendra Shiv, the court observed that there has to be specific pleadings with regards to nature and quality of information which is claimed to be confidential. The court further held that there can be no question of confidentiality in absence of such pleadings. 

As regards, measure of damages, as per Section 43 of the Information Technology Act, 2000 the offender is liable to pay damages by way of compensation not exceeding Rs 1 crore to the person affected in cases of theft of information etc. However, such measure of damages is only applicable to misappropriation of information falling within the ambit of the act. In other cases, the calculation of damages is usually done on the basis of the market value of the confidential information. This value is derived by means of a fictitious sale between a willing seller and a willing purchaser. Furthermore, the plaintiff is required to furnish actual proof of damage while claiming any compensation.

Indian courts have generally leaned towards granting injunctions as against granting damages. Injunctions may be interlocutory (interim relief) or permanent.  The principles to determine whether to award an interim or permanent injunction were summarized in the infamous case of Gujarat Bottling Co. Ltd vs. Coca Cola as follows:

  1. whether the plaintiff has a prima facie case, 
  2. whether the balance of convenience is in favour of the plaintiff, and 
  3. whether the plaintiff would suffer an irreparable injury if his prayer for interlocutory injunction is disallowed.  

Thus, it can be seen that principles for granting an injunction in case of misappropriation of trade secrets are the same as the general principles applicable for grant of injunction.

Defences

While defending a suit for misappropriation of trade secret, the following defences are available to the defendant:

  1. General Knowledge: It is a well-established principle of public policy that a former employee is free to utilize the general skill and knowledge acquired during his or her employment. Of course, there exists a thin line between what is general knowledge and confidential information which can be determined on the basis of facts and circumstances of each case. However, carrying on with the example of KFC, the method of cooking an ordinary fried chicken is general knowledge whereas the exact spice blend  used in preparation of KFC chicken would be classified as a trade secret.
  2. Parallel Development: The owner of a trade secret does not possess a monopoly on the data that comprises the trade secret. If any other entity is able to discover or develop the same information independently through its own research and hard work, the same does not amount to misappropriation of trade secrets. 
  3. Reverse Engineering: Discovery by reverse engineering is considered proper means. In lay man’s terms, reverse engineering means dismantling a product to find the method of development and equipment used etc. Therefore, to refute the claim of the defendant that he discovered the trade secret by reverse engineering, plaintiff should establish the means by which the defendant misappropriated the trade secret. 
  4. Innocent Acquisition of Information: Where a person acquired the information innocently, that is, without the knowledge that it was a trade secret whose holder did not consent to such person’s acquisition of it, then such a person is not liable for misappropriation of a trade secret. 
  5. Public Interest: It is well established that no liability is attached to the use of information, which was acquired, utilized or disclosed in public interest. Thus, a person shall not be liable to the holder in respect of any misappropriation or breach of an obligation of confidence if (a) an issue of public interest in relation to disclosure or usage is raised; and (b) if such issue is raised, the holder is unable to prove that the public interest relied upon is outweighed by the public interest involved in upholding the confidentiality of the information. Thus, a public interest argument pertaining to disclosure can only be countered by another argument of public interest of protecting commercial interest of an innovator.
  6. Statutory Obligation: If the information is used or disclosed in accordance with a statutory obligation or power, the defendant is not liable. For instance, if the information is disclosed pursuant to a court order, or otherwise for the purpose of legal proceedings, it comes within the exemption. Similarly, the use or disclosure in the interests of national security or for the prevention, investigation or prosecution of crime is permissible. 

Preventive steps to ensure trade secret protection

The above discussion has revealed that taking reasonable steps to protect trade secrets is very important while availing legal remedy in case of infringement. Therefore, to protect a trade secret, following steps must be taken by the owner:

  1. Labeling information as confidential.
  2. Entering into non-disclosure and non-compete agreements with employees, consultants, licensees etc.
  3. Clearly defining the limits and contours of confidentiality agreement.
  4. Refrain from disclosing complete or substantial part of confidential information.
  5. In case of digital information employing necessary firewall protection, restricting access, using antivirus and antispyware programs.
  6. Enlightening employees about the consequences of wrongful disclosure of confidential information.

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