Protection of Trade Secrets in India

27 August 2012

The recognition of the need to protect intellectual property of individuals or corporations has led to statutory creations such as copyrights, trademarks and patents. However, proprietary information such as technical data, formulae, designs, drawings, algorithms, new inventions for which patent applications have not yet been filed, business plans and strategies, customer lists, business information, financial records, data compilations, etc, cannot be protected under any of the above mentioned statutory regimes and hence should be kept confidential as trade secrets.

A trade secret refers to data or information, which is not in public domain and which has commercial value to a business and therefore the owner reasonably attempts to keep the same secret and confidential. The three important criteria for regarding any information as trade secret as laid down by Article 39.2 of the TRIPS Agreement are:

(i) It must have commercial value as a secret.

(ii) It must not be generally known or readily accessible to people who normally deal with such types of information. (However, a trade secret can include a combination of elements that are in the public domain, if the trade secret constitutes a unique, effective, successful and valuable integration of the public domain elements.)

(iii) The lawful owner must take reasonable steps to keep it secret

In India, there is no specific law that protects trade secrets. However, the courts have upheld trade secret protection by creative interpretation of common law. Additionally, the National Innovation Bill, 2008 includes some important provisions for the protection of trade secrets in India.

According to Section 2(3) of the Innovation Bill, which appears to be based on Article 39.2 of the TRIPS agreement, “Confidential Information means information, including a formula, pattern, compilation, program device, method, technique or process, that: (a) is secret, in that it is not, as a body and 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 or information in question; (b) has commercial value because it is secret and (c) has been subject to reasonable steps under the circumstances by the person lawfully in control of the information, to keep it secret.”

Section 8(1) allows parties to “contractually set out the terms and conditions governing rights and obligations in respect of confidential information, including with a view to maintain confidentiality and prevent misappropriation.” Section 8(2) gives the appropriate government the power to set out the terms and conditions governing the rights and obligations of parties in respect of confidential information, subject to the contract between the parties. Section 8(3) provides that notwithstanding anything in subsection (1), parties may nevertheless enforce any rights in Confidential information arising in equity or as a result of circumstances imparting the obligation of confidence.

Section 9 of the Innovation Bill, 2008 provides that when confidential information has been received by a third party without the consent of the complainant, obligations of confidentiality and equitable considerations may also create rights and obligations in respect of the confidential information.

Thus, Sections 8 and 9, when enacted, would simply reaffirm the existing legal position of protection of trade secrets through common law actions of breach of confidence, contractual obligations and principles of equity.

It is, therefore, advisable for the employers to enter into non-disclosure agreements with the employees to provide contractual remedy. Such agreements should define “confidential information” and the exceptions to confidentiality. Adding non-compete clauses to such agreements to restrict the use of confidential information and trade secrets obtained during employment and ensure that the employees do not compete unfairly provides an even stronger remedy. However, such agreements should be drafted keeping in view the limitations posed by Section 27 of the Indian Contract Act, 1872, which states that every agreement by which a person is restrained from carrying on any trade, business or profession, is invalid.

The law of breach of confidence is concerned not with the acquisition of information, but with its subsequent use or disclosure to his own advantage or to the prejudice of the lawful owner. The Securities Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 renders the use and disclosure of confidential information by an insider subject to prosecution under the Securities Exchange Board of India Act (although a third party which makes use of this information is not liable). Additionally, for there to be breach of confidence, there must exist information which is of a confidential character. A trade secret, once in public domain, loses its confidential character.

To maintain the confidential character of trade secrets, it is advisable to have strong internal processes and appropriate security procedures. All confidential information should be clearly marked CONFIDENTIAL in all communications. If possible, only certain senior employees should be privy to such information and have access to specific sensitive areas of workplace where such information might be stored. In any case, all employees should be educated and be contractually bound to protect confidential information. These measures, though not absolute and fullproof, would enable the lawful owner to prove that reasonable steps were taken to maintain secrecy.

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