DJN Blogs

1. Abstract :

Business means generally an entity (or) an organization (or) group of people who come together with a common interest & get engaged in commercial, industrial activities. They provide goods & services for profits. With the growth & advancement in technology as well as the improvements in sharing, copying aspects the biggest challenge faced by every business would be now to protect their confidential business information.

This confidential information can include business strategies, compilations, designs, drawings, formulae etc., But we even cannot include all kinds of information under confidential information. In the course of protection of this information, many businesses may face threats. These threats may be internal and sometimes external. Internal sources may include the people from within the business itself like employees, contractors etc., who have access to such information.

So, in this paper I would look into the protection of trade secrets in the arena of business law and analyse if there are any laws applicable to safeguard the interests of businessmen.

2. Introduction :

Trade secrets – It consists of any virtual information which is owned by the company/organization by their time, efforts in the competing business arena. It gives an advantage to the business in this competition. This information must be unknown to others, it must be away from the outsiders.

–        It contains both the technical & commercial information that includes manufacturing process, distribution methods, advertising strategies.

Examples – The formula used by Coca-Cola & KFC in preparation of their products.

Essentials of Trade Secret –

§  Trade secrets require no registration. There are no procedures that are required to be complied.

§  It can be protected for an unlimited period of time, there is no prescribed time limit as such.

§  The information must not be known to the general public. It must not be easily accessible & available. Thus, the information must remain in secrecy.

§  Absolute secrecy has to be maintained while claiming for trade secrets.

§  This information has to carry some actual/potential value as it is a secret.

§  Even the owners of such information must have taken reasonable steps so as to maintain the secrecy & confidentiality.

§  These reasonable steps also varies accordingly & depends on the circumstances of each case.

3. Theories for the protection of trade secrets :

A) Contractual obligation theory – Generally a contractual obligation makes the parties binding that they should not disclose the information. It may be any kind of contract like employment contract, licensing agreements, partnership etc.,

It is also given under the pacta sunt servanda doctrine that confidentiality generally comes from the agreement. Thus, the terms of the agreement has to be abided.

In this theory, the words of the agreement becomes very important where as the protection of confidential information depends upon the inclusion of protective clause.

In Niranjan Shankar Golikari v. Century Spinning and Mfg. Co. Ltd, where here the appellant joined the service of the company as Shift Supervisor and he was given training in the manufacture of tyre cord yarn. The contract was for five years and it was stipulated in the said contract that during the said period the appellant would not work in similar capacity in any other concern and would maintain secrecy as to the technical aspects of his work.

However, shortly after completing his training the appellant joined a rival concern at higher emoluments. The respondent company there upon filed a suit for an injunction order against the appellant restraining him from working elsewhere as a shift Supervisor in the manufacture of tyre cord yarn (or) in similar capacity and from divulging the trade secrets of the respondent company.

The Trial Court granted an interim order which was subsequently upheld by the Hon’ble Supreme Court on the ground that negative covenants operative during the period of contract do not fall under Section 27 of the Indian Contract Act, therefore the contract does not amount to restraint in trade[1].

B) Fiduciary Relation Theory –

Fiduciary relations are generally based on the trust. The major aspect is trust which operates such kind of relations.

Examples – These kinds of relations generally exists between the doctor & patient, trustee & beneficiary, client & lawyers, employers & employees etc.,

This theory also has an impact on the employer-employee relation because, when there is no non-disclosure agreement in effect, then the information is deemed to be transferred under fiduciary relations. These fiduciary relations includes the duty of confidence.

Where an employee participates in development of the confidential business information, then he may also have some rights to such confidential information under the Common law principles; indeed, the employee may be the exclusive owner of such information. Even where the employer owns the information, courts may be less inclined in protecting the employer against use (or) disclosure of the information by a former employee where the employee was the source or creator of the information.

The English law of trade secrets is based on an idea that in given circumstances, the law implies that there is a duty of secrecy.

C) Misappropriation Theory –

This theory is defined as an act of stealing confidential information from an employer and then trading securities based on such misappropriated insider knowledge. In the United States, a person who is guilty according to the misappropriation theory will likely to be convicted of insider trading.

The U.S. Supreme Court adopted the misappropriation theory of insider trading in United States v. O’Hagan

–        O’Hagan was a partner in a law firm representing Grand Met, while it was considering a tender offer for Pillsbury Co.

–        O’Hagan used this inside information by buying call options on Pillsbury stock, resulting in profits of over $4 million.

–        O’Hagan claimed that neither he nor his firm owed a fiduciary duty to Pillsbury, so that he did not commit any fraud by purchasing Pillsbury options.

–        The Court rejected O’Hagan’s arguments and it specifically recognized that “a corporation’s information is its property. A company’s confidential information qualifies as property to which the company has a right of exclusive use.

–        The undisclosed misappropriation of such information in violation of a fiduciary duty  constitutes fraud akin to embezzlement – the fraudulent appropriation to one’s own use of the money or goods entrusted to one’s care by another[2].

In India, Security and Exchange Board i.e. SEBI has banned insider trading and has laid down the SEBI (Prohibition of Insider Trading) Regulation 2008.

There is no specific law for protection of trade secrets in India. But the Indian courts has provided for protection through various statutes, through contract law, copyright law etc., and also through the equity principles.

–        Section 72 of the IT Act 2000 provides for penalty for breach of confidentiality & privacy.

4. Conflicts in the protection of Trade secrets :

There is a constant conflict between the fields of contract law & trade secrets which is unavoidable. It is expressed by the indiscriminate use of non-compete clause in the contracts. Through this clause, the outgoing employees from the companies are restricted from being a competition to their employers. This clause causes a serious impact on the working & efficacy of employees.

In Bombay Dyeing & Manufacturing Company ltd. v. Mehar Karan Singh, it was laid down by the Bombay High Court that there are some precautions that are to be taken by the owner of the trade secret as a factor for the information to be recognized as a trade secret.

Rule of thumb – This rule lays down that the companies have to take some precautionary and confidentiality measures so as to protect their information. These measures have to be in a way obvious that even the outsiders should also give the same treatment.

If the owner of the trade secret shares such information very easily then there is a chance that such information may lose the status of trade secret[3].

5. How can this conflict be eased ?

There are no clear rules, principles & guidelines to protect these trade secrets in Indian law. There is no specific legislation currently that is available. There is an absence of some effective regulations to deal with the exchange of confidential information between businesses.

There is a dire need & requirement for the trade secret laws to control all the types of malpractices occurring all around in the business jurisprudence. Where by it also paves a way for growth and innovation.

a) Contract law –

Under the Indian law, a person can be bound under the contract not to disclose information which is revealed to him/her in confidence.  

In Richard Brady v. Chemical Process Equipments P Ltd, the court invoked a wider equitable jurisdiction. Here the plaintiff had invented a fodder production unit. For the production purposes, he sought the supply of thermal panels from the defendant.

In this regard, the plaintiff shared technical materials, know-how and specifications of that fodder production with the defendant. Then, there was an agreement made between these parties for the supply of thermal panels from the defendants. Later it was discovered by the plaintiffs that the defendants were unable to supply the thermal plants.

After the plaintiffs came to know about the defendant’s own fodder production unit, the plaintiffs filed a suit for misappropriation of their trade secrets.

Here an injunction was awarded in the absence of a contract.[4]

b) Copyright law –

Courts have recognized in some instances that the client’s information stored in the form of databases is also copyrightable. In the operation of business activities, they collect data on a regular basis, which will be arranged systematically/methodically so as to have an electronic access. Databases are protectable under the Copyright law where ‘Section 2(o)’ of the Copyright Act, 1957 defines compilations, including computer databases as “literary works”.

In Govindan v. Gopala Krishna, the issue was with respect to a compilation. Though the amount of originality in this compilation is very small, but still it can be protected by law. Thus a person (or) a party cannot appropriate other’s skills/intelligence[5].

According to the prevailing legal situation, those works which are being provided protection are –

·       Different in character

·       Involvement of some intellectual efforts

·       Involvement of minimum degree of creativity

6. Interface between Copyright law & Trade secrets :

The databases are being given the stronger form of protection.

In Burlington Home Shopping Pvt Ltd. v. Rajnish Chibber, where the judgement was passed by the Delhi High Court. There was an application made by mail order service company for the grant of an interim injunction against its employee as there was a breach with respect to confidentiality. Here the database of defendants was a substantive copy of that of the plaintiffs. It was held that though the sources may be common for both the works but the devotion of time, efforts, labour & skills gives rise to a literary work where the author can claim a copyright. But in this case, the interim injunction was granted[6].

Confidentiality of information –

In Ritika Pvt Ltd v. Biba Apparels Pvt Ltd, there was a suit filed by the plaintiffs. The issue was that there was an infringement of plaintiff’s clothing designs.

It was held by the court that in order to grant an injunction order the trade secrets has to be very specific. It is also required to be established that plaintiff has an ownership and the specific trade secrets has to be mentioned clearly. For an unspecific trade secret, an order against the defendant cannot be passed.

And the court also observed that it was given under Section 15(2) of the Copyright Act if a drawing, sketch (or) design has been used once for more than 50 garments, then copyright cannot subsist in such works[7].

In Genetics India Pvt Ltd v. Shailendra Shivam, it was observed by the court that in a suit for trade secret the subject matter has to be put in confidentiality. It must be proved by the plaintiffs/owners that they have made reasonable efforts to protect the information that is confidential. Otherwise there may be risks with respect to loss of quality of confidentiality[8].

Breach of confidence –

In Diljeet Titus, Advocate v. Alfred A Adebare, it was held that there exists copyrights in works in the context of a law firm which has been designed by an advocate containing the details of the clients of the firm. This kind of obligation need not be express, but can be implied even[9].  

7. Practical methods to protect the trade secrets information :

–        To make the employees aware that they are dealing with the confidential information of the company, labelling of such information as “confidential” is useful.

–        Restricted access has to be given to those kind of servers & databases that contain confidential information.

–        This kind of information has to be protected by the owners & they have to make sure that they are protected by passwords for access of sensitive areas.

–        Employees need to be educated in this regard as to why the trade secrets are to be protected.

–        Employees have to be explained the importance of trade secrets in a business.

–        When the company shares their confidential information with the outsiders/some businesses they have make an agreement regarding the confidential information that it should not misused & shared for any purposes.

–        Agreements makes the parties binding & obliges them to work accordingly.

8. Conclusion :

In India, amid the other IPs, trade secrets protection is not covered under any statutory position, and trade secrets are considered to be one of the most isolated regimes from a legal perspective. The present law system which in some manner seeks to provide interim protection to those possessing technical know-how (or) information is subjected to several flaws and shortcomings. There exists no consent (or) consistency among the present laws, and when the cause of action is a breach of confidence, there are only civil (or) equitable remedies available. The law on this issue is still at an emerging stage and there are several concepts that have not been introduced yet to the present law.

Therefore, the present system is extremely ambiguous and inconsistent, which further leads to impediments in the growth of the economy. There is a critical need to extend protection to reassure innovation and promote standards of commercial ethics and fair dealing in the area. In India, the discovery of trade secrets is not actionable in all cases and trade secrets owners have resort only against misappropriation, this demands a need for adopting laws to impose criminal liability upon infringers.

Indian jurisprudence regarding trade secrets is unclear on a number of important aspects, including:

•  the scope of damages in the case of a breach of confidential information;
•  theft of trade secrets by business competitors; and 
• procedural safeguards during court litigation.

Thus, there is a need of proper legislation to solve all these issues with respect to trade secrets. The recent creation of the National IP Rights Policy has raised hopes for the enactment of a trade secrets law, since this is one of the objectives of the policy. Although no timeframe has been provided for the achievement of this objective, one can be certain that there will be a trade secrets law in the near future.