India: Trade Secrets In Indian Courts

Last Updated: 3 November 2012
Article by Kamakhya Srivastava

Trade secrets, just as other intellectual property rights, can be extremely valuable to a company's growth and sometimes even critical for its survival. Businesses must ensure that they adequately protect their business processes, technical know-how and confidential information from competitors. A trade secret may refer to a practice, process, design, instrument or a compilation of data or information relating to the business which is not generally known to the public and which the owner reasonably attempts to keep secret and confidential. Such data or information may also involve an economic interest of the owner in obtaining an economic advantage over competitors.

The precise language by which a trade secret is defined may differ, however there are three factors, which can be said to be common to all such definitions. They are -

  • It must not be generally known or readily accessible by people who normally deal with such type of information.
  • It must have commercial value as a secret.
  • The lawful owner must take reasonable efforts to maintain its secrecy.

There is no specific legislation in India to protect trade secrets and confidential information. Nevertheless, Indian courts have upheld trade secret protection on basis of principles of equity, and at times, upon a common law action of breach of confidence, which in effect amounts a breach of contractual obligation. The remedies available to the owner of trade secrets is to obtain an injunction preventing the licensee from disclosing the trade secret, return of all confidential and proprietary information and compensation for any losses suffered due to disclosure of trade secrets.

In India, a person can be contractually bound not to disclose any information that is revealed to him/her in confidence. The Indian courts have upheld a restrictive clause in a technology transfer agreement, which imposes negative covenants on licensee not to disclose or use the information received under the agreement for any purpose other than that agreed in the said agreement. Delhi High Court in John Richard Brady And Ors v. Chemical Process Equipments P. Ltd. and Anr [AIR 1987 Delhi 372] invoked a wider equitable jurisdiction and awarded injunction even in the absence of a contract. The plaintiff invented a "Fodder production Unit" (FPU) and for indigenous production of the same sought supply of thermal panels from the defendant. And in that process shared technical material, detailed know-how, drawings and specifications with the defendant concerning the FPU. An agreement was set out between the parties for the supply of specialized thermal panels but later the plaintiffs after discovering the inability of the defendants to supply the required thermal panels did not place any order.

The plaintiffs after learning about the defendant's FPU preferred a suit alleging misappropriation of know-how information, drawings, designs and specifications disclosed to defendants.

Issues Considered

(a) Whether the defendants Fodder Production Unit is based on the plaintiffs' drawings and the related know-how passed to them under the express condition of confidentiality?

(b) Whether the technical drawings of the defendants are artistic works that qualify for protection under the Copyright laws?

The Court took the position that, even in the absence of an express confidentiality clause in the contract, confidentiality is implied and that the defendant is liable for breach of the confidentiality obligations.

In Mr. Anil Gupta and Anr. v. Mr. Kunal Dasgupta and Ors [97(2002) DLT 257], the Court granted an injunction and held that the concept developed and evolved by the plaintiff was the result of the work done by the plaintiff upon the material which may be available in the public domain. However, what made the concept confidential was the fact that the plaintiff had used his brain and thus produced a unique result applying the concept. The plaintiff conceived the idea of 'Swayamvar', a reality television show concerning match making. The plaintiff shared a concept note on this with the defendants. Later on the plaintiff came across a newspaper report informing that the defendants were planning to come out with a big budget reality matchmaking show using the plaintiff's concept. The plaintiff sought injunction.

Issues Considered

1) Can there be a copyright in an idea, subject matter, themes, and plots, which existed in the public domain?

2) Could there be a violation of copyright if the theme is the same as that which existed in the public domain but is presented and treated differently?

The Court held that the concept developed and evolved by the plaintiff was the result of the work done by the plaintiff upon the material, which may be available in the public domain. However, what made the concept confidential was the fact that the plaintiff had used his brain and thus produced a unique result applying the concept. The Court granted an injunction.

The effort to maintain secrecy may be undertaken through adoption of an appropriate policy, adequate documentation and legal instruments such as non-disclosure agreement. To prevent the misuse of trade secrets, it is generally a prudent business practice to enter into non-disclosure agreements. Trade secrets are considered the owner's property and therefore there is no rule of public interest, which invalidates an agreement that prevents their transfer against the owner's will.

The Indian Contract Act, 1872, provides a framework of rules and regulations governing the formation and performance of a contract in India. It deals with the legality of non-compete covenants and stipulates that an agreement, which restrains anyone from carrying on a lawful profession, trade or business, is void to that extent.

Agreement in restraint of trade is defined as the one in which a party agrees with any other party to restrict his liberty in the present or the future to carry on a specified trade or profession with other persons not parties to the contract without the express permission of the latter party in such a manner as he chooses. Negative covenants operative during the period of contract when the licensee is bound to serve the licensor exclusively are not regarded as restraint of trade and do not fall under Section 27 of the Act.

Section 27 of the Act implies that, to be valid, an agreement in restraint of trade must be reasonable as between the parties and consistent with the interest of the public. Recently, in an appeal (Homag India Pvt. Ltd. vs. Mr. Ulfath Ali Khan and IMA AG Asia Pacific PTE. Ltd) preferred against trial judge's order on appellant's application for temporary injunction in a suit filed to restrain the defendants from dealing or transacting in any manner utilizing Homag India's confidential information / trade secret.

Homag India's case was that, Mr. Ulfath Ali Khan had to maintain, as per the signed letter of appointment, confidentiality of the information of plaintiff's business both during the course of employment and also thereafter. He was not expected to take up employment with any competitor of Homag India for a period of one year after termination of his employment or resigning from services. But Mr Ulfath Ali Khan committed breach of the terms of employment by working for IMA AG Asia Pacific, more so when the services of Mr. Khan with the plaintiff was subsisting.

The trial judge dismissed the application for temporary injunction against IMA AG Asia Pacific on the ground that there was no privity of contract between the plaintiff and the second defendant. Karnataka High Court held that the absence of a contract (and its breach) between Homag India and the second defendant IMA AG Asia Pacific does not assume nonexistence of an actionable right. The court relied on the Saltman Case (Saltman Engineering Co Ltd vs. Campbell Engineering Co Ltd 1948 (65) RPC 203), wherein it was held that –

The maintenance of secrecy, according to the circumstances in any given case, either rests on the principles of equity, that is to say the application by the court of the need for conscientiousness in the course of conduct, or by the common law action for breach of confidence, which is in effect a breach of contract.

Thus there are three sets of circumstances out of which proceedings may arise –

  1. Where an employee comes into possession of secret and confidential information, in the normal course of his work and either carelessly or deliberately passes that information to an unauthorized person.
  2. Where an unauthorized person (such as a new employee) incites such an employee to provide him with such confidential information; and
  3. Where, under a license for the use of know-how, a licensee is in breach of a condition, either expressed in any agreement or implied from conduct, to maintain secrecy in respect of such know-how and fails to do so.

The court took into account the materials relied upon by Homag India, in particular the letter of agreement and agreement of contract between the first and the second defendant, to prima facie establish that the second respondent IMA AG Asia Pacific has infringed the legal rights of the appellant Homag India.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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