Business Laws & its conflict with Trade Secrets

Businesses usually accumulate and use creative as well as innovative ideas that are unknown to their competitors to gain an edge over and maintain the uniqueness of their product/service. Information that isn’t generally known to competitors and is protected by confidentiality agreements, qualifies as a quasi-intellectual property known as ‘trade secret’ and is eligible for protection under tort or contract law against disclosure or unauthorized use of the trade secret. The size of a business is no criteria for a business to qualify for having a trade secret and protection for the same. Enforcing trade secret protection is very necessary for the survival of organizations and essential for their survival. In this era of globalization, it is of great importance for businesses to ensure that the protection of their trade secrets from their competitors is adequate in cases where there is a fear of disclosure, especially when hiring new employees for strategic developments or launching new products and services.

Trade secret law’s policy is protection, maintenance, and promotion of ethical standards and fair dealing which encourages innovation, unauthorized use of which by anyone who isn’t a holder of the trade secret is considered a violation of trade secrets and unfair practice.

What are Trade Secrets?

A trade secret is a formula, process, device, or other business information that is kept confidential to maintain an advantage over the competitors. It is the information that includes formula, pattern, compilation, program, device, method, technique, or process, that derives independent economic value from not being generally known or readily ascertainable.  For example, Coca-Cola’s formula for its aerated drinks and KFC’s recipe for its delicious fried chicken is considered to be trade secrets that have been preserved for many decades.

Interface with Intellectual Property?

Article 1(2) of the Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS Agreement”), states that intellectual property shall include the protection of undisclosed information. Article 39 of the TRIPS Agreement states that in the course of ensuring effective protection against unfair competition as provided in Article 10 of the Paris Convention, with respect to information which is (a) a secret not generally known or readily accessible, (b) has commercial value by virtue of secrecy, and (c) has been subjected to reasonable steps for ensuring its secrecy, Member nations are to ensure that natural and legal persons have the possibility of preventing such information, within their control, from being disclosed to, acquired by, or used by others without their consent, in a manner contrary to honest commercial practice. It is submitted that the possibility referred to hereinbefore implies that trade secrets should be accorded protection within the legal system and not necessarily in the IP legislative framework of the said Member nation.

India’s Policy Approach

On May 12, 2016, India approved the National IPR Policy with seven objectives and elaborative steps to be undertaken by the identified ministries/departments. One of these objectives was to ensure an effective legal and legislative framework for the protection of IPRs.

Subsequently, the U.S.-India Trade Policy Forum held on October 20, 2016, in New Delhi included a meeting of the High-Level IP Working Group, a side-event on trade secrets, and several notable consensus outcomes related to promoting IP. India announced that it has taken important initiatives and steps, designed to enhance trade secrets protection in India, showing India’s strong commitment towards the importance of trade secrets protection.

Employees as threats

People employed in businesses can be a threat to the intellectual property protection of a business. Though remedies and protective mechanisms can be put into place for the protection of intellectual property, employee loyalty cannot be compromised with and remains the biggest challenge that businesses have to face to protect their IPs. Due to the ever-changing market and the fact that trade secrets are independently discoverable by others, businesses are usually advised to keep transforming their trade secrets and to keep innovating so that competition remains in place and they are able to protect their trade secrets from getting known.

Companies that off-short are in direct view of such threat due to the involvement of employees in major hierarchies and middlemen that do not directly get employed by the company. For example, if a service provider in India has sub-contracted to perform off-shored services for an outsourcing company and such a sub-contractor misappropriated or discloses the outsourcing company’s trade or service secrets or any sort of confidential information, the company won’t be able to bring a breach of contract or a breach of confidence claim against the sub-contractor, except in rare circumstances when the company has directly contracted with the sub-contractor which is not very likely to happen. The contract that stands between the contracted company and the outsourced company might well hold the provider liable for damages caused by the subcontractor’s misappropriation. But such a cause of action will not address the subcontractor’s past or possible future misappropriation. The outsourced company in this sense is left without a remedy against the Indian subcontractor.

For companies that operate and recruit employees in India, the threat that comes with employing is unavoidable. Finding ideas to perpetually keep changing and innovating trade secrets is a challenge. Some enterprises also make efforts to unscrupulously steal employees from their competitors to access their inventive abilities and their knowledge of the secrets of the success of their competitors.

A “psychological contract” always exists between an employer and an employee in any enterprise. Though not a formal legal contract, a psychological contract is basically a set of expectations that both employees and employers have from each other concerning their contributions and incentives. Clauses in such contracts of employment enhance the legal protection for confidential information and provide security in case of litigation. Thus, there are a lot of contractual agreements that an enterprise can enter into to protect confidential information.

India’s Common Law Approach

The Delhi High Court in American Express Bank Ltd. v. Priya Puri defined trade secrets as formulae, technical know-how, or a method of business adopted by an employer that is unknown to others, and such information has a reasonable impact on the organizational expansion and economic interests. Indian courts have approached trade secrets protection on the basis of principles of equity, the action of breach of confidence, and contractual obligations.

  • Breach of Confidence

In Zee Telefilms Ltd. v. Sundial Communications Pvt. Ltd., it was laid down that in an action of breach of confidence, the obligation of confidence is not limited to the original recipient but also extends to those persons who received the information with knowledge acquired at the time or subsequently that it was originally given in confidence. In Diljeet Titus v. Alfred Adevare & Ors, it was held that the Court must step in to restrain a breach of confidence independent of any right under the law and that such an obligation need not be expressed but be implied and the breach of such confidence is independent of any other right. Therefore, it is submitted that the protection of trade secrets does not always necessarily stem from the owner of such secret having a right per se in respect of the same but from the implied obligation to maintain confidence by virtue of the nature of trade secrets in general.

  • Contractual Obligations

In Niranjan Shankar Golikari v. Century Spinning, it was held that negative covenants in employment agreements pertaining to non-disclosure of confidential information operative during the period of the contract of employment and even thereafter, are generally not regarded as restraint of trade and therefore do not fall under Section 27 of the Contract Act, 1872 as a former employee should not be allowed to take unfair advantage of the employer’s trade secrets which are vital for business. Post-service restraint in maintaining confidentiality and also carrying on any other business for a limited period is permissible under the exception to Section 27 of the Contract Act.

Wrapping Up

It is submitted that as explained hereinabove, the common law trinity of equity, breach of confidence, and contractual obligations for the protection of trade secrets is well suited to business requirements in India. India’s position should not be mistaken to connote that there is insufficient protection accorded to trade secrets and confidential information in the country. In fact, it must be clarified that Intellectual Property may not be the correct form of protection accorded to trade secrets. Trade Secrets rely on their nature of secrecy which precludes the quid pro quo disclosure required by the State before granting a statutory right of monopoly. Moreover, secrecy prevents the subject matter from being tested with regards to the scope of “has commercial value” and “has been subjected to reasonable steps of secrecy”. It is also pertinent to note that statutory enactment may not be sufficient to define the scope of what constitutes trade secret and protection thereof which could be more adequately handled on a case to case basis by the common law approach. It would be apposite to mention that legal proceedings and pleadings pertaining to trade secrets should be based on a high modicum of confidentiality to protect the nature of the information as such.

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