NEED FOR A TRADE SECRET LAW IN INDIA
Author: Yashvi Maru, III year of BLS LLB from Government Law College, Mumbai
With globalization taking over the world, intellectual activity has been on the rise. The uniqueness that a business derives from its intellectual property gives it a competitive edge in the market and helps it sustain in the long run. An effective framework of intellectual property laws, hence, plays a vital role in protecting the intellectual property of the owner from unlawful infringement. In India, the existing mechanism regulating intellectual property rights is still underdeveloped so far as trade secrets are concerned.
What is a Trade Secret?
A trade secret can consist of any as design, recipe, device, methodology, algorithm, formulae, product specification etc, that holds commercial value to a business and hence the owner has taken reasonable efforts to protect it from public disclosure. The prominent examples of the world’s most safely protected trade secrets are Google’s search algorithm and Coca Cola’s recipe of its signature soft drink. While it is difficult to explain what constitutes trade secrets in definite terms, unlawful infringement can be clearly set out as breach of trust, breach of contract, and corporate espionage.
A trade secret is usually created with a great deal of intellectual effort, creativity, years of labour and huge investment and often forms the core on which the business operates. Hence, it is only fair that such crucial information is protected through an effective legal regime for the benefit of the same entity which created it. Unfair disclosure and use of such information can prove to be disastrous to that entity and bring it to a grinding halt.
Trade Secret Protection in India
The development of law on trade secrets is still at a nascent stage in India. The country’s first stance on Trade secrets was taken in India’s GATT (General Agreement on Tariffs and Trade) Discussion Paper which was published in 1989, according to which India refused to recognise trade secrets as intellectual property, the reason being that the concept of intellectual property is based upon ultimate disclosure, publication and registration, whereas trade secrets are premised on secrecy and non-disclosure. Till date, the country does not have a codified law governing trade secrets.
However, with the increasing number of cases on trade secrets, a need was felt to bring regulation and hence, the “National Innovation Bill, 2008” was drafted with one of the main objectives to protect confidential information and encourage innovation, but it was never passed by the parliament and, hasn’t seen the light of the day.
Remedies in Courts
Nevertheless, the courts have often, on the principle of common law and equity, granted protection and such other adequate reliefs in cases of misappropriation of the trade secret. The remedies available to the owner are common, the perpetual injunction against the licensee from unlawfully using the trade secret and compensation for any damage suffered by him. There are, also, indirect ways of protecting trade secrets, through provisions of the Indian Contract Act, Information and Technology law, Indian Penal Code etc.
The following case laws will throw some light on the developing jurisprudence on trade secrets in India:
The Supreme Court upheld the validity of the non-compete clause and the non-disclosure clause in the agreement entered between the parties. The court reasoned that when the employee has access to the employer’s trade secrets and technical know-how, he must be refrained from utilising such information for his own benefit and causing irreparable damage to the employer. Negative covenants in employment agreements which infringe the employee’s freedom of trade under Article 19(1)(g) for the purpose of non-disclosure of confidential information are, an exception to section 27 of the Indian Contracts Act, and hence enforceable.
The Delhi High Court rejected the claim of the lawyer and held that the law firm had clear rights over the business information. The court restrained the lawyer from using any confidential information which would cause irreparable harm to the business of the firm. The Court held that the courts are vested with the authority to stop a breach of trust independent of any right under the law. In certain situations, the relations subsisting between the parties are such that breach of confidence arises without there being any formal contract to maintain confidentiality. In such cases, the defendant shall still be liable for disclosing or utilising trade secrets for his own benefit which he has received while in the course of the employment. The court reiterated that irrespective of any agreement of confidentiality, the employee must not be allowed to take unfair advantage of any information given to him in confidence.
The court expounded that breach of confidentiality and trust is wider than copyright infringement. The court reiterated the principles which would amount to a breach of confidence as follows:
- The information relied on by the infringer must be capable of being identified in absolute and clear terms. It shouldn’t be an abstract thing incapable of being defined.
- The information was shared in confidence
- The information was used or apprehended to be used without authorization.
The Court, hence, upheld the claim of the Zee Telefilms even in the absence of an agreement to maintain confidentiality and restrained the defendants from developing the show.
Analysis of the Judicial remedies
A negative covenant in an agreement as to not join the services of the other till a certain time is primarily an agreement in restraint of trade and hence it is prima facie void unless it can be proved that it falls under the exception to section 27 of the Indian Contracts Act. Such a covenant has to pass the test of “reasonability” as it places restrictions on one's right to be employed. In the case of Brahmaputra Tea Co v E Scarth, the non-compete agreement entered between the parties was to be effective for 5 years, which the court held was unreasonable and hence unenforceable. Additionally, a bare covenant as not to compete, cannot be upheld unless it was ancillary to the main contract of employment, to make it enforceable and within the bounds of public interests. The employer has to prove to the court that there is a possibility along with the probability of the confidential information to be disclosed, for him to seek an injunction against his ex-employee, restraining him from joining a rival firm.
Non-disclosure agreements (NDA) are entered between the employer and the employee for the security of the employer that the confidential information received by the employee during the course of his employment will not be disclosed to competitors, and hence are enforceable by law. NDA’s go a long way in establishing a claim for legal damages in case of a breach. The damages would be awarded after assessing the market value of the information which is disclosed. Apart from that, restitutionary remedies such as injunction can also be granted. Such contracts have to be meticulously drafted after giving due attention to the time period for which the restriction is imposed, the nature of the business and the kind of confidential information.
In case of breach of trust, the trade secret owner needs to show that the information relied upon is confidential, identifiable and was given in confidence and was imparted directly from the owner. A major pitfall with regard to instituting a suit for breach of trust it that the trade secret holder may be unable to prevent the use of such confidential information. In practice, the compensation awarded in such cases is inadequate to make up for the economic loss caused by the breach. It is also to be kept in mind that the courts can provide only civil remedies to the owner in case of misappropriation and hence no criminal action can be initiated to that effect.
In the absence of sufficient jurisprudence on trade secrets, the courts are not self-reliant when it comes to deciding disputes relating to confidential information. This insufficiency compels the courts to rely on foreign principles which may not be suitable to be adapted to the conditions of the Indian economy. With proper legislation in place, the trade secret owners would be aware of their legal rights, duties and remedies available to them.
The TRIPS Agreement Obligation
The TRIPS agreement is the most important international agreement on intellectual property rights. Prior to this, there were only general obligations in respect of unfair trade competition elucidated in Article 10 of the Paris Convention. The TRIPS agreement lays down the minimum standard for member states for the formulation and implementation of laws to protect intellectual property rights within their countries. Article 39.2 of the agreement uses the word “undisclosed information”
The definition does not define “undisclosed Information” but merely states the conditions any information needs to meet with in order to gain legal protection, which is Secrecy, Commercial value, Measures taken to keep the information a secret.
Although India is a signatory to the TRIPS agreement which mandates the nation-states to formulate laws to protect confidential information, the parliament is yet to bring a piece of legislation into force in that direction. This obligation is further emphasised by Article 51 of the India Constitution which makes it a Directive of State Policy to encourage respect for international law and treaty obligations. In furtherance of this, India has enacted laws dealing with other branches of intellectual property namely- Copyrights, patents, Geographical Indications.
National Innovation Bill, 2008
One of the key aims of the bill is to protect, codify and consolidate the law on confidentiality and trade secrets. The bill provides for statutory provisions which deal with confidentiality, its misappropriation, damages and injunction. It provides that the obligation to maintain confidentiality rests on the parties, arising out of contractual obligations, and any right arising out of equity.
Section 9 of the bill casts an obligation upon a party to not disclose confidential information received by him in confidence, even in the absence of a contract in that regard. Section 10 of the Bill provides for the remedies to protect confidential information including sealing the confidential information, conducting in-camera proceedings, granting of mandatory protective orders. Section 12 empowers the courts can grant mandatory injunctions even in the case of threatened or apprehended disclosure of confidential information.
One of the disappointing provisions of the bill is that it does not provide for any new remedies in case of misappropriation of confidential information. The remedies mentioned in the bill such as injunction are already being granted by courts on the principle of the common law. The act also does not make misappropriation of confidential information a criminal offence or provide for any penal provisions to that regard. Section 12(4) of the bill provides for payment of royalty in case of breach of confidentiality in “exceptional circumstances” till a period of time for which use could have been prohibited. This provision runs contrary to the very purpose of the bill as the misappropriator may take unfair advantage of the trade secret and get away with it by paying a royalty for a limited period of time.
In the absence of codified law, the courts have to rely on common law to grant protection to the party, which often proves to be inadequate and ambiguous which leads to eventual delay. Lack of penal provisions, further, gives an escape route to the infringer. The existing flaws in the National Innovation Bill should be rectified. A robust framework of laws for trade secret protection will open the floodgates to a host of foreign ventures and investments in the country. It will also boost research and development within the country as businesses will be assured that their innovation will receive due recognition and protection under the law.
Yashvi Maru is a 3 rd year student pursuing BLS LLB from Government Law College, currently interning at a Corporate Litigation firm. She is trying her hand at writing articles on various legal subjects. Her interest lies majorly in the area of Corporate Law in general and Insolvency Law and Intellectual Property Law in particular.