India: Trade Secrets Protection

Lately, the recipe/formula of making Coca Cola named as "Merchandise 7X" was revealed by American Public Radio Show "This American Life". This formula was a trade secret of Coca Cola for around 125 years. Coca Cola intelligently chose to protect "Merchandise 7x" through confidentiality, a longer lasting route instead of protection through patents which would have provided protection for 20 years only.

The law of trade secrets could be trace back to Roman law, whereas under such ancient legal system a competitor's corruption of a slave to divulge his master's commercial affairs was punished. The modern law evolved in England during the Industrial Revolution. In the United States, the first reported trade secret case dates back to 1837. Companies like Stantec and Wal- Mart rely on the protection of trade secrets for protection of their business model rather than patents which shows the importance of trade secrets.

A trade secret is information which, if disclosed to a competitor, would be liable to cause real or significant harm to the owner of the secret. It must be information used in a trade or business, and secondly that the owner must limit the dissemination of it or at least not encourage or permit widespread publication.

Theory behind Trade Secret Protection:

There are three major approaches to explain trade secret protection:

Contractual Obligation Theory

The duty not to disclose confidential information generally stems from a contractual relationship between the owner of the trade secret and the person(s) to whom the trade secret is communicated. It may be an employment contract, or a licensing agreement, an OEM contract, a commissioning agreement, a contract for works, a joint-venture, a partnership, etc1.

Confidentiality stems from the agreement, under the pacta sunt servanda doctrine, and needs nothing else to protect the information transmitted under its terms. In such theory, the wording of the agreement becomes critical, inasmuch as the protection depends on the confidential information protective clause inclusiveness.

In Niranjan Shankar Golikari v. Century Spinning and Mfg. Co. Ltd2 the appellant joined the service of the company as Shift Supervisor and was given training in the manufacture of tyre cord yarn. The contract was for five years and it was stipulated that during the said period the appellant would not work in similar capacity in any other concern and would maintain secrecy as to the technical aspects of his work. However, shortly after completing his training the appellant joined a rival concern at higher emoluments. The respondent company thereupon filed a suit for an injunction against the appellant restraining him from working elsewhere as a shift Supervisor in the manufacture of tyre cord yarn or in similar capacity and from divulging the trade secrets of the respondent company. The Trial Court grant interim order which was subsequently upheld till Hon'ble Supreme Court on the ground that negative covenants operative during period of contract do not fall under Section 27 of Contract Act, therefore the contract does not amount to restraint in trade.

Fiduciary Relation Theory

The prevailing view holds that fiduciary law is atomistic, arising for varied reasons in established categories of cases (such as trustee-beneficiary and director shareholder) and ad hoc in relationships where one person trusts another and becomes vulnerable to harm as a result.3

This theory also bears on the employer/employee relation because, when a non-disclosure agreement is not in effect, the information is deemed transfer under fiduciary duties, which include the duty of confidence. Where the employee participates in development of confidential business information, he may have some rights to the information under common law principles; indeed, the employee may be the exclusive owner of such information. Even where the employer owns the information, courts may be less generous in protecting the employer against use or disclosure of the information by a former employee where the employee was the source or creator of the information.4

The English law of trade secrets is based on the notion that in given circumstances, the law implies a duty of secrecy. For example, if a recipe for a drug has to be disclosed to the apprentice of a veterinary, there shall be a duty of confidentiality, even if no corresponding agreement is to be proven before the court5

Misappropriation Theory

A perspective that defines the act of stealing confidential information from an employer and then trading securities based on the misappropriated insider knowledge. In the United States, a person guilty according to the misappropriation theory will likely be convicted of insider trading.6

The U.S. Supreme Court adopted the misappropriation theory of insider trading in United States v. O'Hagan;7 O'Hagan was a partner in a law firm representing Grand Met, while it was considering a tender offer for Pillsbury Co. O'Hagan used this inside information by buying call options on Pillsbury stock, resulting in profits of over $4 million. O'Hagan claimed that neither he nor his firm owed a fiduciary duty to Pillsbury, so that he did not commit fraud by purchasing Pillsbury options. The Court rejected O'Hagan's arguments and it specifically recognized that "a corporation's information is its property: "A company's confidential information... qualifies as property to which the company has a right of exclusive use. The undisclosed misappropriation of such information in violation of a fiduciary duty... constitutes fraud akin to embezzlement – the fraudulent appropriation to one's own use of the money or goods entrusted to one's care by another."

In India Security and Exchange Board banned insider trading and has laid down the SEBI (Prohibition of Insider Trading) Regulation 2008.

DEFINITION:

Indian law does not provide for statutory definition of trade secrets thus protection of trade secrets is Common Law based. In Krishan Murgai v. Superintendence Co. of India8 it was held that a "trade secret is some protected and confidential information which the employee has acquired in the course of his employment and which should not reach others in the interest of the employer.

However, routine day-to-day affairs of employer which are in the knowledge of many and are commonly known to others cannot be called trade secrets. A trade secret can be formulae, technical know-how or a peculiar mode or method of business adopted by an employer which is unknown to others."

In Ambiance India P. Ltd. v. Naveen Jain9 trade secret was defined as "a trade secret can be formulae, technical know-how or a peculiar mode or method of business adopted by an employer which is unknown to other"

In Diljeet Titus v. Alfred A. Adebare and Ors10 it was observed that "What is confidentiality or secret information has been dealt with by McComas, Davison and Gonski in THE PROTECTION OF TRADE SECRETS – A in General Guide (1981 Ed). The authors have stated that it is not possible to provide an exhaustive list of all that a Court may regard as confidential or a trade secret. However, some examples of what has been held to constitute the subject matter of an action to protect confidential information or a trade secret include (amongst others) customer's lists and information concerning the proposed contents of a mail order catalogue."

North American Free Trade Agreement (NAFTA) defines a trade secret as "information having commercial value, which is not in the public domain, and for which reasonable steps have been taken to maintain its secrecy."

The Uniform Trades Secrets Act, 1970 also provides for the definition of trade secrets, which is as follows:- "Information, including a formula, pattern, compilation, program device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."

Section 2(3) of Indian Innovation Act, 2008 defines Confidential Information as "information, including a formula, pattern, compilation, program device, method, technique or process, that: (a) is secret, in 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 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 responsible steps under the circumstances by the person lawfully in control of the information, to keep it secret".

The Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS) under the auspices of the World Trade Organization under Section 7 of Article 39.2 lays down the following three criteria for regarding any information as undisclosed information (or trade secrets):

  • 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 steps to keep it

In Control Print (India) Limited Vs. Sanjay Sribastab and Ors11 the Hon'ble Calcutta High Court held that in order to prove that the confidential information will be or is being used by the ex-employee, it has to be proved to the satisfaction of the Court that the ex-employees or the defendant by virtue of the their employment had access to the secret information which was not available to any outsider unless this is proved there is no scope of granting injunction.

In Pramod s\o Laxmikant Sisamkar and Uday Narayanrao Kirpekar Vs Garware Plastics and Polyester Ltd.12 the Respondent contended that the action of the petitioner amounts to Criminal Breach of Trust and cheating as the technical know-how acquired by the respondents amounts to 'property' u/s 405 IPC, filed a criminal complaints. The plaintiffs failed to prove the dishonest intention on the part of the appellants. The Court evades in deciding as to whether it would amount to 'property'. But, the Court had made an observation that if the petitioners use the technical knows how in contravention of the agreement of service, then Section 408 and 420 can be attracted.

CONCLUSION

The Centre for Internet and Society has been researching privacy rights in India since 2010 with the objective of raising public awareness around privacy, completing in depth research, and driving privacy legislation in India.13 In India the Personal Data Protection Bill 2013 has not been passed yet. The rationale behind this Bill is to provide protection of personal data and information of an individual collected for a particular purpose by one organization, and to control the way of its usage by another organization for commercial or other purposes. It also entitles the individual to claim compensation or damages due to disclosure of personal data or information of any individual without his consent and for matters connected with the Act or incidental to the Act. If the Bill is passed it would definitely help in strengthening the protection of trade secrets in India.

Footnotes

1. http://www.unil.ch/files/live//sites/cedidac/files/shared/ Articles/Protection%20Trade%20Secrets.pdf

2. AIR 1967 SC 1098

3. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=339100 The Critical Resource Theory of Fiduciary Duty, by D. Gordon Smith , Brigham Young University - J. Reuben Clark Law School

4. http://www.stoel.com/files/confidentialityagreementguide.pdf

5. http://www.unil.ch/files/live//sites/cedidac/files/shared/ Articles/Protection%20Trade%20Secrets.pdf

6. http://www.investopedia.com/terms/m/misappropriation_ theory.asp

7. 521 U.S. 642, 655 (1997)

8. AIR 1979 Delhi 232

9. 122 (2005) DLT 421

10. 2006(32)PTC609(Del)

11. (2006) 2 CALLT 145 HC

12. 1986 (3) BomCR 411

13. http://cis-india.org/internet-governance/blog/privacyprotection- bill-2013-updated-third-draft

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