Trade Secret & The Need for Protection

One of the main issues that organizations have these days is protecting their proprietary information due to the rapid advancements in technology and the simplicity with which information can be shared, copied, and stored in the digital age. Business plans, proposals, client databases and information, compilations, designs, programs, drawings, devices, formulas, or compositions are a […]

One of the main issues that organizations have these days is protecting their proprietary information due to the rapid advancements in technology and the simplicity with which information can be shared, copied, and stored in the digital age. Business plans, proposals, client databases and information, compilations, designs, programs, drawings, devices, formulas, or compositions are a few examples of this information. Not all kinds of data are protected by patent and copyright laws; also, some data come from a business’s regular activities and are important even if formal protection is not sought for them.

Because there are so many physical and online technologies available to facilitate data transfer, many firms are finding it difficult to secure their critical information. In addition to external threats, they may also face internal ones from contractors and employees who have access to critical company data..

Employee job switching is becoming more and more regular. Upon leaving their prior workplace, individuals can take sensitive information with them or even launch rival companies using the technological know-how, business plans, and tactics that were pilfered from the employer. Sometimes, contractors will offer same or comparable products under a different name and at a lower cost, infringing on drawings, designs, recipes, and compositions that a client has shared with them (or manufactured under a client’s technical guidance).

Protection under various laws
India does not have a specific trade secrets law, but Indian courts have upheld the protection of trade secrets under a number of statutes, including copyright law, contract law, equity principles, and occasionally the common law action of breach of confidence (which is essentially a breach of contract).
The remedies available to the owners of trade secrets are:
1. an injunction preventing a licensee, employee, vendor or other party from disclosing a trade secret;
2. the return of all confidential and proprietary information; and
3. compensation for any losses suffered due to the disclosure of trade secrets.

Contract law
In the case of Richard Brady v Chemical Process Equipments P Ltd delhi high court have expanded the scope of confidentiality beyond contractual agreements. The plaintiff, who had developed a fodder production unit, shared technical details with the defendant for the supply of thermal panels. Despite an agreement, the defendant failed to fulfill the order. The court, invoking equitable jurisdiction, granted an injunction even in the absence of a contract, highlighting the importance of protecting confidential information in cases involving technical expertise and trade secrets. This decision established a broader basis for enforcing confidentiality beyond explicit contractual obligations.

Copyright law
Businesses routinely collect and organize electronic data for tasks like analyzing profitability, understanding customer behaviour, and managing inventory. Recognizing their importance, databases receive protection under copyright law as “literary works” according to Section 2(o) of the Copyright Act 1957. The case of Govindan v Gopalakrishnan emphasized that even though compilations may have limited originality, they are still legally protected. The ruling highlighted that no one can misappropriate the result of another’s intelligence or labour in such works. Present legal standards require copyrightable works to exhibit some distinct character, involve intellectual effort, and possess a minimum level of creativity. This framework underscores the protection of efforts, industry, and skill, ensuring that original works, including compilations, are safeguarded against unauthorized use. The intersection between trade secrets and copyright law further complicates the legal landscape, necessitating careful consideration of intellectual property rights in the business context.

Proving confidentiality of information
In the case of Ritika Pvt Ltd v Biba Apparels Pvt Ltd, which involved a claim of infringement of the plaintiff’s clothing designs, the court adopted a specific stance regarding injunction orders related to trade secrets. The court emphasized the necessity of explicitly identifying the trade secrets in question and establishing the plaintiff’s ownership of these secrets. It was held that a generalized order concerning unspecified trade secrets would not be permissible. Additionally, the court ruled out relief under the Copyright Act, citing Section 15(2), which stipulates that once a drawing, sketch, or design has been utilized in creating more than 50 garments, it loses copyright protection. This case highlights the importance of precision in legal claims related to trade secrets and the limitations imposed by copyright law in certain circumstances involving mass production.

In Genetics India Pvt Ltd v Shailendra Shiv, the court emphasized that in trade secret suits, it’s crucial to explicitly plead and prove the confidentiality of the information. The plaintiff must not only assert but also demonstrate reasonable efforts to maintain confidentiality. The court highlighted that the mere documentation of information in a database doesn’t automatically render it confidential; exclusivity is essential. Accepting a plaintiff’s assumption without scrutiny could infringe on constitutional rights, specifically the right to occupation (Article 19(1)(g)) and livelihood (Article 21), especially if the information is part of the public domain.

Breach of confidence
The Diljeet Titus, Advocate v Alfred A Adebare case established that courts have a duty to prevent breaches of confidence, regardless of specific legal rights. It acknowledged copyright protection for a list within a law firm, detailing client information, nature of work, and contacts, even if the duty of confidentiality is implied rather than explicitly stated. This ruling underscored the court’s role in protecting against breaches of confidence, especially in the context of law firms, even when there are no clear contractual agreements or statutory provisions.

Future of trade secrets in India
India, as a signatory to the Paris Convention, aligns with the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). TRIPs, in Article 1(2), includes protection for undisclosed information. Article 39 emphasizes effective protection against unfair competition, similar to the Paris Convention. For information to qualify, it must be a secret not widely known, possess commercial value due to secrecy, and have undergone reasonable steps for confidentiality. Article 39 mandates member nations to offer the “possibility” for individuals to prevent unauthorized disclosure, acquisition, or use of such information, implying the need for legal protection. A 1989 General Agreement on Tariffs and Trade paper suggests that trade secrets, unlike traditional IP rights, rely on secrecy, recommending contractual and civil law for enforcement. India, as discussed in the US-India Trade Policy Forum, safeguards trade secrets through common law, emphasizing commitment and proposing a toolkit, training modules, and legal studies for effective protection.

Comparative analysis with other countries
In certain countries, laws pertaining to trade secrets exhibit fragmentation, with some having specific legislation while others rely on various scattered legal frameworks such as tort and contract law. The United States, however, has a more consolidated approach through the “Uniform Trade Secrets Act.” In Europe, the European Commission proposed a dedicated trade secrets law to harmonize regulations across the EU, fostering investment, reducing competition, and encouraging innovation. The EU Directive ensures uniform protection, setting high standards without addressing criminal sanctions but offering civil rights and remedies in case of violations. Acquisition of trade secrets is considered legal if obtained through independent discovery, reverse engineering, or honest commercial practices. The EU provides a range of remedies, including injunctions, corrective measures, damages, and protection during litigation. In Southeast Asian countries, legal systems are often underdeveloped, and while some nations like Singapore have specific trade secrets protection, others like Cambodia are working on draft laws. The protection extends to electronic data under acts like the Computer Misuse Act.

Licensing Trade Secret In India : A systematic Approach
A trade secret license is a confidential arrangement where the licensor permits the licensee to utilize specific proprietary knowledge related to their trade or business. The licensor retains complete ownership and title rights over the trade secret while granting the license, aiming to generate income through royalties. During initial discussions, sensitive information is shared, but to prevent the loss of proprietary know-how, Non-Disclosure Agreements (NDAs) are employed. These NDAs, carefully reviewed by the trade secret owner, specify the authorized use of confidential information and the conditions for its disclosure to third parties. Positioned as a legal tool preceding licensing negotiations, the primary purpose of the NDA is to ensure the confidentiality of disclosed information.

Presently, Indian trade secrets law is largely a product of judicial decisions, grounded in equity and common law principles addressing breaches of confidence. The legal landscape predominantly focuses on an employee’s responsibilities to their employer regarding confidential information acquired during employment. However, clarity is lacking in Indian jurisprudence on various essential aspects of trade secrets. The recent establishment of the National IP Rights Policy has instilled optimism for the introduction of a dedicated trade secrets law, as outlined in the policy’s objectives. While no specific timeline is provided for achieving this goal, it is reasonably anticipated that a trade secrets law will be enacted in the foreseeable future.

Practical tips to protect trade secrets
1. Label the information to be protected as “confidential”, so that employees are aware that they are dealing with sensitive business information.
2. Restrict access to databases, servers and computer programs that store trade secrets.
3. Ensure that access to servers is password protected and that a suitable notice is displayed on computer screens when accessing sensitive areas.
4. Educate employees on why protecting trade secrets is important for business.
5. Sign non-disclosure agreements with any third parties with which commercial business information is shared.
6. Use a combination of technical and legal solutions to protect databases