SAFEGUARDING THE UNSEEN: THE LEGAL FRAMEWORK FOR TRADE SECRETS IN INDIA

Abstract

This article examines the current status of trade secret protection in India analyzing existing legal frameworks, their limitations, and recent developments. Despite its obligations under the TRIPS Agreement, India does not have a separate statute for trade secret protection. Instead, the protection is provided under various legal domains, including general contract law, common law principles of breach of confidence, and equity, as well as certain provisions of criminal law. The article discusses recent developments, including the Law Commission of India’s recommendations for a comprehensive trade secret protection law which seeks to create a balance between legitimate commercial interests and the public interest. As India emerges as an economic power and innovation hub, the need for vigorous trade secret protection is important.

Keywords

Trade Secrets, Intellectual Property, TRIPS Agreement, Contract law, Confidentiality, Judicial Decisions, Law Commission of India, Economic Espionage, Innovation, Indian Legal System

INTRODUCTION

In the ever-evolving realm of global commerce and innovation, trade secrets have emerged as a key form of intellectual property. From the closely guarded formula of Coca-Cola to Google’s search algorithms, these proprietary pieces of information have significantly influenced industries and corporate fortunes. While patents, trademarks, and copyrights are well-known forms of IP protection, trade secrets have emerged as an equally critical asset for companies seeking to maintain their competitive edge. Unlike patents or trademarks, which require public disclosure, trade secrets derive their value from remaining confidential. The confidentiality of a trade secret is lost as soon as it becomes public knowledge or is disclosed to a third party through legitimate means or in good faith.

From the ancient silk-making techniques jealously guarded by Chinese emperors to the modern-day legal battles over self-driving car technology between Uber and Google’s Waymo, trade secrets have a long and colourful history. But as globalization and digital technologies make information more fluid than ever, the legal framework protecting these valuable secrets is being put to the test.

India, as a major emerging economy and a hub for innovation and technology, faces unique challenges and opportunities in protecting trade secrets within its legal framework. This article examines the current state of trade secret protection in India, analyzing the existing legal mechanisms, their limitations, the potential need for a comprehensive legislative framework, and recent developments.

DEFINITION AND CRITERIA FOR TRADE SECRETS IN INDIA

The definition of “trade secret” as defined in Black’s Law Dictionary[1]:-

“a formula, process, device or other business information that is kept confidential to maintain an advantage over the competitors. It is the information which includes formula, pattern, compilation, programme, device, method, technique or process. That derives independent economic value from not being generally known or readily ascertainable by others who can obtain economic value from its disclosure or use.”

Trade secrets cover a wide range of valuable business information. They include technical knowledge, like manufacturing processes and software designs, as well as commercial insights, such as client lists and marketing strategies. A trade secret may be also made up of a combination of elements, each of which by itself is in the public domain, but where the combination, which is kept secret, provides a competitive advantage.[2]

The World Trade Organization (WTO) plays an important role in establishing international standards for trade secret protection through its treaties, particularly the General Agreement on Trade and Tariffs (GATT) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). With 150 nations as signatories, these agreements form a global framework for safeguarding intellectual property, including trade secrets. The following is an excerpt, addressing the concept of trade secrets, from the TRIPS Agreement:

“Natural and legal persons shall have the possibility of preventing information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices so long as such information:

(a) is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;

(b) has commercial value because it is secret; and

(c) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.”[3]

In the absence of statutory definition, Indian courts have developed criteria for identifying protectable trade secrets. In India the courts have taken a fairly inclusive or liberal approach and a variety of information including formulae, manufacturing processes, technical details/drawings, Memorandum of Understandings (MoU), joint-venture agreement, due diligence reports, concept, manuals etc. has been protected within the ambit of trade secret.[4]

LEGAL BASIS FOR TRADE SECRET PROTECTION IN INDIA

India’s obligations to protect trade secrets stem primarily from its commitments under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)[5]. However, Article 39 of the TRIPS Agreement does not mandate any particular framework to be adopted to ensure adequate protection. Unlike other forms of intellectual property, trade secrets in India lack protection under a dedicated statute. Instead, protection is conferred under various legal domains, including general contract law, common law principles of breach of confidence, and equity, as well as certain provisions of criminal law.

Common Law and Equitable Principles: Indian courts have relied heavily on common law principles, particularly the doctrine of breach of confidence. This approach allows courts to provide remedies based on the specific circumstances of each case, considering factors such as the nature of the information, the relationship between the parties, and the measures taken to maintain confidentiality.
Contract Law: Many businesses in India rely heavily on contractual mechanisms to protect their trade secrets. This includes non-disclosure agreements (NDAs), confidentiality clauses in employment contracts, and licensing agreements.

The Indian Contract Act, 1872[6], plays an important role in trade secret protection. Section 27[7] of the Indian Contract Act, which deals with agreements in restraint of trade, is particularly relevant. While this section generally renders agreements in restraint of trade void, courts have interpreted it to allow reasonable restrictions to protect legitimate business interests, including trade secrets. This section has attracted most of the trade secret litigation in India.

Criminal Law: In cases involving theft, fraud, or criminal breach of trust, provisions of the Indian Penal Code, 1860, may be applicable such as Section 379[8] for theft; Sections 405 to 409 for criminal breach of trust[9]; Section 417[10] for cheating; Section 418[11] for cheating with knowledge that wrongful loss may occur to a person whose interests the offender is obligated to protect.

However, with the enactment of the Bharatiya Nyaya Sanhita (BNS), 2023[12], the corresponding provisions that could potentially be invoked are: Section 303[13] for theft; Section 316[14] for criminal breach of trust; Section 318[15] for cheating.

Information Technology Law: With the increasing digitization of business information, the Information Technology Act, 2000[16], has become relevant in cases involving electronic theft or unauthorized access to digital trade secrets. Sections 66[17], 72[18] and 72A[19] are some of the relevant sections of the said Act that would apply to misappropriation of confidential information.
National Innovation Act, 2008: An attempt was made for the protection of trade secrets in 2008 by passing the National Innovation Act of 2008. The Act aimed to boost research and innovation while protecting confidential information and trade secrets. The draft legislation, modeled after the U.S. COMPETES Act, sought to create a comprehensive framework for innovation support. It included provisions for protecting confidential information, defining it similarly to the U.S. Uniform Trade Secrets Act (UTSA) and aligning with TRIPS Agreement standards. The Act outlined obligations for maintaining confidentiality, both in contractual and non-contractual relationships, and provided remedies such as injunctions and damages for misappropriation.

However, the draft faced criticism for vague terms like “public interest” and potential misuse of immunity provisions. And it could not come into existence.

KEY JUDICIAL DECISIONS

Several landmark cases have shaped India’s trade secret jurisprudence:

John Richard Brady v. Chemical Process Equipments P. Ltd.[20]: This case dealt with the unauthorized use of trade secrets, specifically concerning a fodder production unit. The court ruled that it was in the interests of justice to prevent the defendants from misusing the plaintiffs’ confidential information. This included know-how, specifications, drawings, and other technical details that had been shared under strict confidentiality agreements. The court noted that the defendants had apparently used this proprietary information as a ‘springboard’ to enter the business field, causing detriment to the plaintiffs.
Diljeet Titus v. Alfred A. Adebare and Ors[21]: The Delhi High Court addressed a critical issue in professional services regarding the protection of confidential client information. Diljeet Titus, the plaintiff, claimed that the defendants, who were previously associated with his firm, had taken away confidential client information when they left to start their own practice. The court ruled in favour of protecting the confidential information. It recognized that while some client information might be publicly available, detailed knowledge about client preferences, specific contacts, and the nature of work handled for clients constitutes protected information.

The court acknowledged that clients might choose to follow a lawyer they’ve worked with closely, but it distinguished between using information retained in memory and copying detailed client lists. The ruling stated that associates working on client matters have an implicit obligation to maintain the trust.

Niranjan Shankar Golikari v. Century Spinning & Manufacturing Company Ltd.[22]: The Supreme Court of India addressed the validity of restrictive covenants in employment contracts. The case revolved around Mr. Niranjan Golankari, a shift supervisor at a tyre cord yarn manufacturing company, who had signed an employment agreement containing specific confidentiality and non-compete clauses. These terms prohibited Mr. Niranjan from working for competitors during his employment and required him to maintain strict confidentiality regarding technical information acquired on the job. The legal dispute arose when he left his position to work for a competitor, prompting his former employer to file a suit alleging breach of contract. The trial court initially granted interim relief, restraining Mr. Niranjan from working for the new company.

On appeal, the Supreme Court upheld the validity of the negative covenants in the contract, ruling that they did not violate Section 27 of the Indian Contract Act. The court reasoned that the restrictive clauses were limited to the duration of Mr. Niranjan’s employment with the original company and thus did not constitute an unreasonable restraint of trade. The Court held that there is an implied term in a contract of employment that a former employee may not make use of his former employer’s trade secrets. This decision set a significant precedent by carving out exceptions to Section 27 of the Contract Act, particularly in cases involving the protection of trade secrets and confidential information.

In Hi-Tech Systems & Services Ltd. v. Suprabhat Ray & Others[23], the court dealt with the protection of trade secrets and confidential information in the context of employee departure and competition. The plaintiff, a manufacturer of advanced engineered products, sued its former high-ranking employees who had resigned to form a competing company. The plaintiff alleged that these ex-employees had access to and were using confidential information and trade secrets to solicit clients and suppliers. The defendants argued that the information was publicly available and that any restrictive covenant in their employment contracts was void under Indian law.

The court recognized the concept of “quia timet” action (preventive action based on reasonable fear of future injury). It was held that the respondents were using confidential information and trade secrets which they had no right to reveal to anyone else or utilize to the detriment of the plaintiff. Balancing trade secret protection with professional rights, the court granted a limited injunction restricting the defendants from certain activities for three years, while allowing them to conduct similar business without using/utilizing the trade secrets of plaintiff in course of their business. This ruling highlighted the complex challenge of safeguarding a company’s trade secrets while preserving employee rights in Indian commercial law.

In Kuoni Travel (India) Pvt. Ltd. vs. Ashish Kishore[24], the Bombay High Court in 2007, addressed the protection of trade secrets and confidential information in the context of employment contracts. The court upheld the validity of “Non-compete” and “Garden Leave” clauses, even after the employee’s resignation, affirming that the “doctrine of restraint” on trade secrets could be invoked post-employment.
In Pramod, Son of Laxmikant Sisamkar and Uday Narayanrao Kirpekar v. Garware Plastics and Polyester Ltd.[25],the court held that merely possessing technical knowledge or general company information after leaving employment is not sufficient grounds for criminal charges such as breach of trust or cheating unless their malafide intention can be proved.
V.N. Deshpande v. Arvind Mills[26]: In this matter the Court held valid a clause relating to confidentiality of information and stated that, Clause 9 of the agreement prevents the Appellant from divulging any secret information of the nature mentioned in that clause after the termination of his service. The Defendant is not prevented from acquiring knowledge, it only prevents him from divulging information which he has received as respondents’ employee to another party.
In Beyond Dreams Entertainment Pvt. Ltd. & Ors. vs. Zee Entertainment Enterprises Ltd. & Anr.[27], the Hon’ble Bombay High Court established a criterion for determining breach of confidence in trade secret disputes. The court ruled that to prove such a breach, the owner or rights holder must demonstrate three key elements:-

i. first, the inherently confidential nature of the information;

ii. second, that reasonable steps were taken to maintain its secrecy and it was shared under circumstances implying an obligation of confidence; and

iii. third, that the information was actually used or threatened to be used without authorization.

These landmark cases collectively illustrate the evolution of trade secret protection in India. These decisions reflect the judiciary’s efforts to adapt traditional contract law principles to the modern business environment, where intellectual property and confidential information are essential assets.

ENFORCEMENT MECHANISMS AND REMEDIES

While misappropriation of trade secrets can technically be prosecuted as a criminal offense in India, this route is seldom pursued due to several significant drawbacks. The enforcement of trade secret rights in India primarily occurs through civil litigation. The remedies available for the protection of trade secrets in India consists a range of legal measures designed to safeguard confidential business information. The primary remedies include injunctions and damages to address the specific circumstances of trade secret misappropriation.

Injunctive Relief: Courts can grant temporary, interlocutory, or permanent injunctions to prevent the disclosure or use of trade secrets. It serves to prevent further unauthorized use or disclosure of the confidential information. The duration of these injunctions is often aligned with the period during which the information remains confidential, reflecting the temporal nature of trade secret value. In cases of imminent harm, ex parte injunctions may be available.
Damages: Compensatory damages can be awarded to cover actual losses suffered due to trade secret misappropriation. In some cases, punitive damages may be considered.
Criminal remedies: While theoretically possible under the Indian Penal Code (now, Bharatiya Nyaya Sanhita), are less common in trade secret cases due to the higher burden of proof and the preference for civil remedies in commercial disputes.

RECENT DEVELOPMENTS

The Law Commission of India has recognized the need for a comprehensive trade secret protection law. In March 2024, India’s 22nd Law Commission released a report titled “Trade Secrets and Economic Espionage”[28] that recommended a new legal framework to adjudicate claims related to trade secret disclosure. Key recommendations include:

Enacting a specific legislation for the protection of trade secrets, separate from existing intellectual property laws.
Adopting a sui generis approach in line with the TRIPS standards
Balancing protection with public interest considerations
Addressing economic espionage separately, potentially through a distinct legislation, due to its broader implications for national security
Providing clear remedies and enforcement mechanisms
Applying the Commercial Courts Act, 2015[29] to trade secret disputes to ensure expedited resolution.
Including specific exceptions for whistleblowers, compulsory licensing for public interest (e.g., public health emergencies), and freedom of speech and expression.
Implementing confidentiality measures in court proceedings to protect sensitive information during litigation.

CONCLUSION

The protection of trade secrets in India presents a complex and evolving legal setting. While the current framework of common law, equity, and contract law has provided some level of protection, it increasingly appears inadequate in the face of rapid technological advancements and global economic integration. The proposed legislation, as recommended by the Law Commission, aims to strike a balance between protecting legitimate business interests and safeguarding public interest. By addressing key issues such as clear definitions, specific remedies, and exceptions for public interest, the proposed framework could significantly enhance our country’s intellectual property regime.

As we continue to grow as a global economic power and hub for innovation, particularly in sectors like information technology and pharmaceuticals, it is important to have strong ways to protect trade secrets. The proposed legislative changes, if implemented, could provide greater certainty for businesses while addressing some of the limitations of the current system.

The path ahead offers an opportunity for India to balance between protecting business interests and promoting healthy competition. This approach could result in developing a trade secret protection system that is not only effective but also aligns with India’s broader economic and social goals.

REFERENCES

WIPO, Trade Secrets, https://www.wipo.int/tradesecrets/en/ (last visited July 21, 2024).
Swati Sharma, Rohin Koolwal & Rohit Raj, The 22nd Law Commission Report on Trade Secrets: Call for a balancing Act?, Intellectual property Blog, Cyril Amarchand Mangaldas (May 09, 2024), https://corporate.cyrilamarchandblogs.com/2024/05/the-22nd-law-commission-report-on-trade-secrets-call-for-a-balancing-act/
Sonal Garg & Aaditya Ranbir Sehgal, Protection of Trade Secret in India, LEXOLOGY (August 10, 2022), https://www.lexology.com/library/detail.aspx?g=4f23531b-10a4-4b69-a9fe-b7d3a10de67d
Pralok Gupta, Trade Secret Protection in India: The Policy Debate, CENTRE FOR WTO STUD. WORKING PAPER, https://wtocentre.iift.ac.in/workingpaper/Trade%20Secret%20Protection%20in%20India-%20The%20policy%20debate.pdf
Niharika Pilania & Dr. Rashmi Khorana Nagpal, Protection of Trade Secrets Under Common Law and World Wide, 13(2) INT’L J. INTELL. PROP. RTS. 1 (2023).
Law Commission of India, Trade Secrets and Economic Espionage, Report No. 289 (2024).

[1] BLACK’S LAW DICTIONARY (9th ed. 2009).

[2] WORLD INTELL. PROP. ORG., Trade Secrets, https://www.wipo.int/tradesecrets/en/ (last visited July 14, 2024).

[3] General Agreement on Tariffs and Trade, Multilateral Trade Negotiations (Uruguay Round). Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), 15 April, 1994. Part II, Section 7: Protection of Undisclosed Information, Article 39 (2).

[4] LAW COMMISSION OF INDIA, Report No. 289: Trade Secrets and Economic Espionage, ¶ 7.4(d) (2024).

[5] Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994.

[6] Indian Contract Act, 1872, No. 9, Acts of Parliament, 1872.

[7] Indian Contract Act, 1872, § 27, No. 9, Acts of Parliament, 1872.

[8] Indian Penal Code, § 379, No. 45, Acts of Parliament, 1860.

[9] Indian Penal Code, § 405-409, No. 45, Acts of Parliament, 1860.

[10] Indian Penal Code, § 417, No. 45, Acts of Parliament, 1860.

[11] Indian Penal Code, § 418, No. 45, Acts of Parliament, 1860.

[12] Bharatiya Nyaya Sanhita, No. 45, Acts of Parliament, 2023.

[13] Bharatiya Nyaya Sanhita, § 303, No. 45, Acts of Parliament, 2023.

[14] Bharatiya Nyaya Sanhita, § 316, No. 45, Acts of Parliament, 2023.

[15] Bharatiya Nyaya Sanhita, § 318, No. 45, Acts of Parliament, 2023.

[16] Information Technology Act, 2000, No. 21, Acts of Parliament, 2000.

[17] Information Technology Act, 2000, § 66, No. 21, Acts of Parliament, 2000.

[18] Information Technology Act, 2000, § 72, No. 21, Acts of Parliament, 2000.

[19] Information Technology Act, 2000, § 72A, No. 21, Acts of Parliament, 2000.

[20] John Richard Brady v. Chemical Process Equipments P. Ltd., [1987] SCC OnLine Del 236.

[21] Diljeet Titus v. Alfred A. Adebare and Ors., [2006] SCC OnLine Del 551.

[22] Niranjan Shankar Golikari v. Century Spinning & Manufacturing Company Ltd., AIR 1967 SC 1098.

[23] Hi-Tech Systems & Services Ltd. v. Suprabhat Ray & Others, [2015] SCC OnLine Cal 1192.

[24] Kuoni Travel (India) Pvt. Ltd. vs. Ashish Kishore, 2007 SCC OnLine Bom 1604 : (2008) 1 AIR Bom R 461.

[25] Pramod, Son of Laxmikant Sisamkar and Uday Narayanrao Kirpekar v. Garware Plastics and Polyester Ltd., 1986 (3) Bom. CR 411.

[26] V.N. Deshpande v. Arvind Mills, AIR 1946 Bom 423.

[27] Beyond Dreams Entertainment Pvt. Ltd. & Ors. vs. Zee Entertainment Enterprises Ltd. & Anr.,

[28] LAW COMMISSION OF INDIA, Report No. 289: Trade Secrets and Economic Espionage (2024).

[29] Commercial Courts Act, 2015, No. 4, Acts of Parliament, 2016.

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