Author: Nirmala Bhide & Udita Kanwar
According to the World Intellectual Property Organisation, “any confidential business information which provides an enterprise a competitive edge (emphasis added) may be considered a trade secret. This could include sales methods, distribution methods, consumer profiles, advertising strategies, lists of suppliers and clients, and manufacturing processes.”
Trade secrets are a subset of the broader categorisation of “Confidential Information”. All trade secrets are confidential information, but not all confidential information is a trade secret. The distinction, which has evolved over time, is that a trade secret must be business information of such character that it is valuable, arising from its secrecy, and confers a competitive advantage on the possessor of it. So for example, lists of customers, clients, future business strategy, deliberations at a meeting of the board of directors of a company, etc. may be confidential, but they do not confer a competitive advantage over business rivals -however, a secret formula for manufacture a product, or a secret process, or molecule, or ingredient of a product or which enhances the performance of a product, which is valuable because of its secrecy, and which will confer such an advantage, and thus would be classified as a trade secret.
The distinction between the two types of information also results in different forms of legal sanctions to prevent the unauthorised acquisition, or use, of such information.
As a general practice, the definition of what constitutes confidential information, and the limits placed upon its user are created by a non-disclosure contract between the parties and the remedies for its breach, in terms of injunctions, and damages have evolved over time in the courts. Additionally, even in the absence of a specific contract, a claim to restrain a breach of confidentiality can be grounded in equity, in circumstances where it can be established that confidential information has been shared, in circumstances where an obligation of confidentiality can be reasonably inferred (even without a contract in place) , and the recipient or a third party who has access to the confidential information, is going to indulge in competing activity, detrimental to the interests of the disclosing party, using that information as a “springboard”( see Eerrapin Ltd v Builders’ Supply Co (Hayes) Ltd). A distinction between ‘trade secrets’ and ‘confidential information’ was drawn by the Delhi High Court in the case of American Express Bank Ltd. v. Priya Puri where, the Plaintiff had hired the Defendant as a supervisor of its Wealth Management Division. The Defendant, during the course of employment had access to the customer list, investment details of various customers etc. The Defendant resigned from the Plaintiff Company and was joining a competitor firm, the Plaintiff filed a suit for injuncting the Defendant from joining the competitor firm and disclosing any ‘confidential information and trade secret’. The Plaintiff pleaded that the customer list was confidential information even though it was not in a specific document; it was known to the Defendant and retained in her memory. The Defendant argued that details such as customer list and phone numbers could not be confidential since the same are information accessible in public domain. The court held that in the present matter there were no trade secrets known to the Defendant. The Court defined trade secrets as information“…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….” In this case the defendant had acquired all the information and data during her course of employment. It was correctly ruled that trade secrets could not be broadly defined to cover knowledge which is attained through daily operations of the business. The court further stated that in light of these facts the defendant couldn’t be prohibited from joining another company.
Unauthorised use of confidential information is not generally regarded as a criminal offence, and only actual damages, which a plaintiff needs to prove, are recoverable for its unauthorised disclosure or use.
The time period for which information can be kept confidential post the expiry of an NDA also tends to be limited, possibly because of the broad definition of confidential information, and the consequent unfair burden on the recipient, of keeping such a broad swathe of information confidential for an extended period of time. Perpetual post termination restraints on the disclosure or use of confidential information are thus regarded as unreasonable restraints of trade in most jurisdictions.
As a consequence, the legal protection for confidential information varies, depending upon the terms of the definition in the relevant non-disclosure agreement, the equitable claims recognised by the relevant courts in the absence of a specific contract, the law governing such agreement, and the judicial precedents for the grant of injunctions and damages. In India, in the case of Homag India Private Ltd. v Ulfath Ali Khan, the Karnataka High Court has ruled that post-service restraint in maintaining confidentiality and carrying on business for a limited period of time could be permissible as an exception to Section 27 of the Indian Contract Act, 1872 (restraint of trade). In the case of Fairfest Media Ltd. v. ITE Group 1, the Calcutta High Court ordered for return of all confidential and proprietary information and compensation for any losses suffered due to disclosure of trade secrets (using this term interchangeably with confidential information). Similarly, the Delhi High Court held, in the case of John Brady v Chemical Process Equipments P. Ltd 2, irrespective of whether there is a contract in place or not, no one is allowed to benefit and unfairly gain from using the information received in confidence. In Zee Telefilms Ltd. and Film and Shot and Anr. v Sundial Communication Pvt. Ltd. the Bombay High Court held that the duty to maintain confidentiality is binding not only on the recipient of the confidential information but also on the individuals who received the information with the knowledge acquired at that time or at a subsequent time that such information had been given in confidence. Recently, the Delhi High Court in the case of Diljeet Titus v Alfred A Debare held that if it is established that there existed a contract of service between the parties, the Defendant could not claim ownership/copyright over the materials created during the subsistence of such contract. Furthermore, in cases of Advocates, the handling of confidential information has to be done with utmost diligence Section 126 of the Evidence Act, 1872 and Rule 17 of the Bar Council of India rules make it binding on an advocate to keep the information obtained from a client as privileged and confidential. Furthermore, the advocate alone is entitled to the use and retention of such information. Therefore, in matters where a former employee of an Advocate is accused of data theft, the Courts tend to take a stricter view of such act. While post-termination of contract restrictions are usually not binding, in such sensitive cases an individual may be bound to maintain confidentiality at all times and one cannot get head start by making use of such information. Therefore, while the Springboard Doctrine has not been spelt out clearly, the Indian Courts have taken the position that even in the absence of a written contract if any information has been passed on in confidence, it will be protected.
Non-compete obligations, arising out of a potential unauthorised use of confidential information, post-termination of employment may be enforced under certain circumstances, based upon the facts of each individual case. In the case of Desiccant Rotors International Pvt Ltd v. Bappaditya Sarkar & Anr the Delhi High Court opined that in case of conflict between the employer’s interests of non-competition and the employee’s right to seek employment for livelihood, the latter shall prevail. Such clauses which impose a blanket restriction on an employee from seeking employment post-termination are considered as contrary to public policy under Section 27 of the Indian Contract Act, 1872 therefore, it is necessary to word such clauses in reasonable terms to ensure enforceability in India.
The legal protection of trade secrets, on the other hand, tends to be viewed as requiring statutory definition and protection and some countries have separate statutes defining what constitutes a trade secret, with provisions which enable claims for punitive damages, as well as providing criminal sanctions for unauthorised or wrongful acquisition or use of trade secrets. Additionally trade secrets, even under the general common law, can be kept secret in perpetuity, as long as the subject matter remains a secret.
Some examples of the statutory protection for trade secrets are the Uniform Protection of Trade Secrets Act in the US, which has been adopted by most of the individual states. Additionally, at the Federal level, there is the Defend Trade Secrets Act 2016, which has created a separate legal protection for trade secrets at the federal level in the US. In the E.U there is a Directive on Trade Secrets, adopted in June 2016, which specifically mandates member states to enact legislation and administrative processes for the protection of trade secrets, which adequately protects trade secrets uniformly throughout the EU.
Trade secrets, like all confidential information, can claim legal protection only as long as the subject matter is not disclosed. One of the interesting debates on what constitutes such disclosure arises with regard to reverse engineering. It is accepted that if a person independently develops or discovers material which was the subject matter of the trade secret, he is then entitled to use it. Thus, when a product containing a trade secret, is marketed, if it can be easily reverse engineered, and the secret ingredients/process, discovered, it has been held in several cases in the US, that such information cannot be treated as a trade secret at all. On the other hand, if discovering such information through reverse engineering requires much effort, time, and cost, then the US courts have held that such material can continue to be treated as a trade secret, even if the product incorporating that trade secret is available in the market. In the EU, Article 3 of the Trade Secret Directive does permit the discovery of a trade secret by reverse engineering of a product unless the person who is doing the reverse engineering is prohibited from such effort by a contract or is otherwise infringing IP rights in the product such as patents, copyrights or design rights. Disclosure of trade secrets by whistle-blowers, to prevent or publicise wrongdoing, is, under the EU Directive, a protected disclosure, and will not be subjected to sanctions of any sort.
An additional development with regard to trade secrets, is developing in some US courts, in the form of a doctrine of “inevitable disclosure” whereby an employer can sometimes obtain an injunction against an employee from joining a competitor if it can be shown that such employment will inevitably lead to the employee disclosing the former employer’s trade secrets. This doctrine is resorted to by plaintiff companies to avoid the necessity of having to prove that the former employee has in fact disclosed the trade secret, So far, this doctrine has not been applied in India because of the Indian Courts’ being hesitant in interpreting anything contradictory to Section 27 of the Indian Contract Act, 1872. A simple non-compete clause for a reasonable short period of time, post termination, based upon the possibility of improper use of confidential information, is the common resort in India to prevent an erstwhile employee from disclosing sensitive information.
In India, there is no separate statute governing either Confidential Information in general or trade secrets in particular. An attempt in this direction was made in draft Innovations Act, 2008, which was made public for receiving comments. At the heart of this Act were provisions for providing statutory protection to trade secrets and confidential information in India. A bare reading of the provisions of the draft Act makes it amply clear that it simply codifies the judicial precedents on confidential information. The Act further enunciates that in the event that there has been a breach of confidentiality or a trade secret, the owner of such information shall have the remedy of seeking injunction and payment of damages. These provisions are also applicable in case of apprehension of breach of confidentiality. Several practitioners and scholars of Intellectual Property appreciated the government’s efforts in attempting to codify the law on Confidential Information and Trade Secrets. However, many opined that the existing interpretation i.e. flexible judicial precedent was a preferable manner for deciding such matter. Therefore, the Act has till date not come into force. The consequence, so far as trade secrets are concerned in India is that reverse engineering, which does not infringe any of the recognised IP rights, namely patents, trademarks, and copyrights, is not prohibited, which leads to a weaker legal protection regime for trade secrets in India.
Even where copyright protection is attracted, the Indian Copyright Act, 1957, under section 52 (1) (ab) permits, as an exception to copyright protection, any act ‘necessary to obtain information essential for operating inter-operability of an independently created computer programme with other programmes by a lawful possessor of a computer programme provided that such information is not otherwise readily available’ will be an exception to infringement claims. Similarly Section 52(1)(ac) states that any act such as ‘the observation, study or test of functioning of the computer programme in order to determine the ideas and principles which underline any elements of the programme while performing such acts necessary for the functions for which the computer programme was supplied’ will also be an exception. But any commercial gains from such act of reverse engineering, undertaken as an exception to copyright protection, may not be exempted.
The Indian position on the commercial exploitation of reverse engineering, in cases where no established IP right is breached, as well as reverse engineering undertaken in exceptions permitted under the established IPR rights, will be clear upon a judicial interpretation of these provisions.
Given the different approach to the protection given to confidential information and trade secrets in different jurisdictions, in managing confidential information and trade secrets , an organisation needs to identify which information is general confidential information, and which constitutes a trade secret, institute separate and more stringent policies and processes to maintain the confidentiality of trade secrets , execute appropriate NDAs, and be aware of the extent to which the governing law of the agreement permits restrictions on the disclosure and use of such information, and remedies available under that law for breach of these obligations.