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The Lacuna of Legal Protection to Trade Secrets in India: The Need of the Hour

Sulagna Dutta [1]



 

Like any other Intellectual property, trade secrets can be the key to an exponential growth of a Company’s goodwill and operations. Trade secrets are often associated with the survival of a company’s reputation in the market. A trade secret may correspond to a business-related procedure, method, design, tool, or collection of data or material not typically accessible by the public and legitimately sought by the proprietor to be kept secret and confidential. Considering the fierce competition in almost all sectors, the current economic strategy to uphold a competitive advantage stands as the foremost concern of the businesses. What makes Kentucky Fried Chicken (KFC) stand out from the rest of the food chains? Why are consumers drawn to the consumption of Coca-Cola or Pepsi instead of other carbonated drinks? The answer to these questions is not only in the brand-value, but the secret recipes that these companies have confined within themselves.


Certain factors are imbibed within the idea of this facet of Intellectual property, despite the variation in the definition of trade secrets. First, it has to be associated with something that is not accessible by the general public or by people who are acquainted to dealing with Information of that kind. In simpler terms, information or a method would qualify to be a trade secret only if it is not within the reach of anyone outside the organization. Second, there must be a commercial value attached to such information, such that it brings about economic gains for the company. Without an attached commercial value, a method would not qualify as a trade secret. The third and paramount consideration while determining the qualification of a trade secret is the portrayal of adequate efforts by the owner of the Company to maintain the secrecy of such a method or design.


It is of prime importance for every business to maintain the secrecy of its technical know-how and methods from its competitors. However, the Indian legal system does not provide statutory backing to the trade secrets up to date. Though the same has received some relevance from the Judiciary on the foundation of principles of equity in common law, trade secrets demand greater attention beyond a breach of contractual obligations. The present system allows the aggrieved party to file for an injunction and claim a compensatory amount, as a last resort to prevent the disclosure. But the same cannot be recognized as an effective, and adequate remedy for the breach of a material that forms the fulcrum of the operations conducted by a Company or Business entity. Besides, the increase in the number of negative covenants and non-disclosure agreements (hereinafter referred to as NDA) for the employees right from the time of their appointment becomes a protracted process that calls for an immediate long-term legal solution. This shortcoming can only be overcome through a definite and specific piece of statutory backing that provides protection and relief measures in this aspect.


Challenges Faced By The Companies Owing To The Legal Lacuna

Trade secrets, as a facet of Intellectual Property Rights, differ from the other forms, owing to the presence of specific legal backing available for the latter. The legal battle over the void in legal protection to trade secrets has been under deliberation for a long time now, but the same has not brought about any positive response from the lawmakers. The instant lacuna has brought about several challenges for the companies whose economic interests revolve around the unique trade secrets, some of them are as follows:


1. Signing of too many negative covenants and non-disclosure agreements- In an attempt to protect the procedures, technical know-how, and confidential information associated with a particular brand-name, the Companies get their employees to sign numerous negative covenants and NDAs, to eliminate any scope of information leak associated to the same. This is aimed to maintain the competitive advantage of the Company and not to dissuade healthy competition. However, more than often, the same ends up becoming a complex mechanism that is strenuous to regulate. This may even go to the extent of disputes arising out of semantic misunderstandings between the employer and employee in the long run. Amid the pile of numerous contracts and covenants, it may render the entire purpose futile through the creation of a cloud of confusion in the mind of the employee over the very aim of such undertakings. It puts a restraint factor on the change of jobs for the employees involved with such Companies.

2. Advanced Technology has Eased the transfer and storage of Data crucial for the survival of the Company- The exponential growth of technology and digital transactions has brought in a variety of opportunities for the Indian Economy in recent times. In these times, one of the most vital challenges for business entities has been the protection of confidential information, crucial to its economic operations and commercial activities. This is not been restricted to business procedures but extends to proposals, cliental databases, programs and designs, methods, recipes, compositions, or formulas. These do not qualify to be brought under patents or copyrights but remain invaluable to the company’s operations. With the advancement of the digital means of operations, transferring such data has become easier. This gives rise to a plethora of concerns among the economic entities dealing in such information by opening them to risks of disclosure and breaches.

3. Lack of Effective Remedy- Under the present circumstances, the entire protection of trade secrets have been brought under the ambit of the Indian Contract Act, 1872. The only remedy available to companies for breach or leak of confidential information is filing an injunction suit in the Court of Law and asking for the compensatory cost to the tune of the losses suffered because of such an information leak. However, this process may take months to several years, following the usual time-frame taken by the Courts in concluding by rightful adjudication. For something as invaluable and crucial as a trade secret, which often stands as the foundation or medium of the companies’ commercial activity, the Indian Contract Law cannot provide the required relief and protection.


Trade Secrets and the Indian Judiciary

The Indian Courts have played a vital role in upholding the trade secrets as far as the Indian Legal Framework is concerned. Based on the principles of Equity drawn from Common Law, the Courts have repeatedly given protection to the confidential information and know-how of a company. In the case of John Richard Brady And Ors v. Chemical Process Equipment P. Ltd. and Anr.[1], the Court observed that fair jurisdiction can be applied even in the absence of a contract and thus awarded an injunction. The case draws its origin back to when the plaintiff had invented a mechanism referred to as a Fodder Production Unit (FPU). The defendant in the case was to supply thermal panels required for running the concerned unit. To achieve the desired results, the plaintiff shared the technical intricacies of the mechanism with the Defendant. After such a disclosure, it came to the knowledge of the Plaintiff that the Defendant was not equipped to supply the same and hence refrained from placing any order. Soon, the defendant started his own FPU, and this gave ample scope to the plaintiff for framing a suit against the Defendant for breach of confidential information associated with the trade.

The Karnataka High Court has also made certain observations in the ambit of upholding trade secrets as a facet of Intellectual Property Rights. In the case of Saltman Engineering Co Ltd vs. Campbell Engineering Co Ltd[2], it was observed by the Court, that, maintenance of secrecy in such cases is of prime importance, and the same is to be achieved either by application of principles of equity by the Courts or by common law action for the breach of confidence by either party to a contractual agreement. This was reiterated in the pronouncement of Homag India Pvt. Ltd. vs. Mr. Ulfath Ali Khan and IMA AG Asia Pacific PTE. Ltd[3], which concerned a restraint on an employee from providing services to any competitor company for one year after termination. Here, instead of solely suing the concerned employee, the plaintiff company filed for a temporary injunction against the second defendant company whose services the employee had joined subsequently. The Court dismissed the application by observing that there was an absence of privity to contract between the plaintiff and the Second defendant by upholding the decision rendered in Saltman Engineering Co Ltd vs. Campbell Engineering Co Ltd.[4]


Therefore, the remedy that is currently available is restricted to the discretion of the Indian Courts. The proceedings in such cases will be initiated from circumstances whereby an employee may have deliberately or carelessly passed on information confined with him, or if he is incited by another person to give out such information or in a situation where confidence has been breached. However, the ultimate shape of adjudication and conclusion of all such proceedings would be determined by the discretion and observance of the Courts, depending on the facts and circumstances of the concerned case. Moreover, owing to the difference in the line of thinking, varying decisions tends to create confusion among the laymen which only makes the issue more complicated.


The Interface between Trade Secrets and Copyright Law

The interface between the two facets of Intellectual Property Rights, namely Copyright law and Trade Secrets, is interesting. Since there stands no specific legislation to cover the protection of trade secrets, the same has often been dragged under the ambit of copyright law. While the former aims to protect the underlying idea, the latter is concerned with the layout or form of data. In the landmark pronouncement of Burlington Home Shopping Pvt Ltd v Rajnish Chibbe[5], the Court believed that certain forms of trade secrets like that of databases and Business compilations can be protected under the Copyright law. The law ends up protecting not only the form and arrangement of the data but also the underlying intellectual ideology inherent in such data since the same would be qualified to be referred to as a literary piece formulated by devotion to time, labour, and intellect under the Copyright law.

The Need for a Specific Indian Legislation

There is an immediate need for formulating législation that is more convenient to the Indian framework and which provides direct statutory protection to trade secrets. The legal battle over the same has received ample deliberation over the years. However, considering the present elements of fierce competition flooding the economy, backed by advanced technological development, the need for legal protection stands more than ever. The remedies available under the current regime include:

1. An Injunction Suit

2. Return of the confidential information

3. Demand compensation for the losses suffered as a result of the disclosure.

India being a signatory to the Paris Convention is obliged by Article 1 (2), which aims to protect undisclosed information. Article 39 of the TRIPs concerns, as also provided for in Article 10*bis* of the Paris Convention, the provision of effective defence against the predatory competition about knowledge which:

o A secret that is not widely known or readily available;

o By confidentiality, has commercial value; and

o To ensure its confidentiality, fair steps have been taken.


Further, Article 39 notes that Member Countries must establish that, without their permission, natural and juridical persons have the 'possibility' of prohibiting, within their jurisdiction, the disclosure, acquisition or use of such information by others in a manner contrary to fair commercial practice. It can be concluded that the "possibility" alluded to here means that protection of trade secrets should be provided within the legal system and not simply within the member nation's Intellectual Property regime.


It is prime time that India comes up with effective legislation that fulfils the demands of the hour and allows the companies to practice commercial activities without the fear of tools that are crucial to their survival. This is a must for the economic forwardness of India and the Multi-National Companies practising trade and investment on the Indian Land. For the same, model inspiration can be taken from Japan’s National Trade Secret law, which has been formulated with the aim of addressing specific concerns arising out of operations that engage trade secrets This will not only help boost economic operations but instil a sense of security among the business operators and employees engaged in conducting business on the ambit of trade secrets.


Conclusion

From the analysis of the challenges and shortcomings owing to the legal lacuna of a trade secret law, it can be ascertained that the present regime governing trade secrets in India is a Judicial Centric one, that revolves around principles of Equity and application of the Common Law. The same is studied from the viewpoint of the obligations and responsibilities that an employee owes towards the organization and his employer. However, the judicial approach fails to fill the lacuna of a legal backing left behind by several concerns in the mind of an average Indian Business organization dealing with the everyday challenges arising out of trade secrets. What is the quantum of damages to be received in case of a confidential breach? What are the procedural safeguards available to the aggrieved party in the course of a proceeding initiated under the same? What is the course of action to be adopted on the commission of theft of trade secrets by a business adversary? These questions have been left open-ended by the Judiciary, and the same can only be answered with the formulation and implementation of a statute.

[1] John Richard Brady And Ors v. Chemical Process Equipment P. Ltd. and Anr, AIR 1987 Delhi 372 [2] Saltman Engineering Co Ltd vs. Campbell Engineering Co Ltd, (1948) [1963] 3 All E.R. 413 [3] Homag India Pvt. Ltd. vs. Mr. Ulfath Ali Khan and IMA AG Asia Pacific PTE. Ltd, MANU/KA/1569/2012 [4] Supra Note 2. [5] Burlington Home Shopping Pvt Ltd v Rajnish Chibbe, 1995 IVAD Delhi 732


 


[1] Sulagna Dutta is an undergraduate from Symbiosis Law School. For any discussion related to the article, she can be contacted via mail: sulagna.dutta@student.slsh.edu.in.




Preferred Citation – Sulagna Dutta, The Lacuna of Legal Protection to Trade Secrets in India: The Need of the Hour", Syin & Sern Law Review, Published on 17th December 2020.


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