Protection of Trade secret and Confidential Information : India Perspective

INTRODUCTION

In today’s globalised economy, the organization are protecting its intellectual property by adopting the available measures in form of patents,copyright,trademark etc. but besides these popular IP rights there are other IP rights not so popular but which are recently drawing attentions all over the world- Confidential Information and Trade Secret.

Confidential information and trade secrets are protected under the common law and there are no statutes that specifically govern the protection of the same. In order to protect trade secrets and confidential information, watertight agreements should be agreed upon, and they should be supported by sound policies and procedures. Protection of Confidential Information in the Hands of Employees In this information age, it’s imperative that a business protects its new formula, product, technology, customer lists, or future business plans. In the global marketplace, Indian corporations are often required to comply with foreign laws and are likely to be exposed to liabilities for violation of confidential information or trade secrets of their business partners or third parties. For example, the U.S. Economic Espionage Act, 1996 imposes criminal liability (including fines and prison sentences) on any person who intentionally or knowingly steals a trade secret, knowingly receives, or purchases a wrongfully obtained trade secret. The standards for protection have to be tailored to address the risks associated with rapid advancement in technology and communications. The standards accepted today may become inadequate tomorrow. However, one constant factor is the presence of a corporate culture imbued with information protection values. The employees of an organization are privy to confidential information and trade secrets on a daily basis. In the absence of any specific Indian statute conferring protection on such information in the hands of employees, recourse has to be taken to common law rights and contractual obligations.

MEANING OF TRADE SECRET AND CONFIDENTIAL INFORMATION

There is no legislation in India defining term trade secret and confidential information. However the concept has been discussed widely around the world and we can sum up under these headings.

What is trade secret?

A trade secret refers to 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. Trade secrets generally give the business a competitive edge over their rivals. Almost any type of data, processes or information can be referred to as trade secrets so long as it is intended to be and kept a secret, and involves an economic interest of the owner. For example, a business may have certain internal business processes that it follows for its day-to-day operations that give it an edge over its competitors. This could be regarded as a trade secret. 

The Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS) under the auspices of the World Trade Organization 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 secret.

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 no 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 Bill defines Confidential Information as “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 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 is secret.

However, the definition in the Innovation Bill also appears to be based (more than the US model law) on Article 39.2 of the TRIPs agreement.

Significance of Trade Secrets

Trade secrets in the industrial economy have increased greatly in the past few years, for a number of reasons. There are mainly two reasons for that, one among them is that other forms of intellectual property like Patent, Trademark and Copyright have an element of uncertainty as compared to Trade Secret. Secondly, trade secrets have gained importance because, in many fields, the technology is changing so rapidly that it has surpassed the existing laws intended to encourage and protect inventions and innovations.

Another significant factor which has enhanced the value of trade secrets is the relative ease of creating and controlling trade secret rights. There are no bureaucratic delays and no multiyear waits for government grants, such as those for patents. Trade secret rights, in contrast, can be established by the explicit conduct or agreement of the interested parties. A trade secret right starts upon the creation of the idea in some concrete form, and continues as long as secrecy is maintained. Protection of information such as ideas or information which does not qualify to be protected as intellectual property within the legal framework Intellectual Property Laws of the land can be protected by Trade Secrets. They also have the advantage of being lasting forever, again, as long as secrecy is maintained.

Of course, trade secrets have negative aspects. They are a volatile form of property, and they terminate when secrecy is lost. Also, they require constant vigilance to protect them. Nevertheless, trade secrets play a major role in protecting innovations and establishing rights to use new technology. It is thus important for the intellectual property practitioner to be alert to the intricacies of this large body of trade secret law.

Confidential Information vs Trade secret

A Trade Secret is some information or “secret” that is important to the business and is not known to the public. It is a term commonly used to cover information that has commercial value. The law on “trade secrets” is really about the protection of Confidential Information. Though there is no clear distinction between the both. At times both the concepts are so intermingled and overlapped that it’s become difficult to draw line. The terms “trade secrets” and “confidential information” have been used somewhat interchangeably by the courts. “Trade secrets” generally refers to information relating to more technical matters such as secret processes or formulas; and “confidential information” relates to non-technical matters such as business plans or pricing information. Although many concepts and ideas may be public knowledge, courts have upheld confidential/trade secret information protection for (i) specific ways to implement ideas and, (ii) combinations of known concepts and ideas. Novelty and invention are not required.

Though case law does not always define clearly whether trade secrets are synonymous with confidential information or proprietary information. Nevertheless, the case law does suggest that trade secrets and confidential information are essentially identical concepts.”

POSITION IN INDIA

The intellectual property laws in India have had an almost docile and stagnant existence ever since they were framed. Being a signatory of the TRIPs Agreement India is under an obligation to bring its intellectual property laws in conformity with international standards. India has achieved this to a large extent by enacting new and amending existing legislations on intellectual property laws. However, unlike the US and other developed countries India has no legislation dealing with trade secrets.

In India protection of trade secrets is Common Law based. However, section 27 of the Indian Contract Act provides some sort of limited remedy, it bars any person from disclosing any information which he acquires as a result of a contract. There are scores of reasons for the absence of any statute dealing with trade secrets. India has since its independence followed a socialist pattern because of which the Indian legal system has always strived for social benefit and public rights as a result of which private rights like intellectual property rights have not been given any importance. Another reason for absence of any trade secret laws is the dependence of Indian economy on agriculture. Also, with the absence of big private corporate houses in India until recently there has hardly been any pressure on the government for granting statutory protection to trade secrets. Protection of trade secrets is a very important and one of the most challenging tasks for the Indian government as this will enhance the foreign investment in India giving a boost to the Indian economy. Foreign investors have to be assured of the protection of their trade secrets, so that they can do business with our country. A proper policy for trade secret protection will further enhance the security in our own industry. Almost all the countries in the world have a policy for the protection of trade secrets and India also being a signatory to the TRIPS is under an obligation to amend its laws or create a new law in order to safeguard the trade secrets of various businesses. So a proper policy for the protection of trade secrets in India is the need of the hour in order to provide a sense of security among the foreign investors and the local businessmen regarding their trade secrets which will further boost the Indian economy.

As mentioned above, in India, no substantive authoritative text or case laws are available to determine the nature or ambit of trade secrets. But the Indian courts have tried putting the trade secrets of various businesses under the purview of various other legislations in order to protect them and also they have tried to define what a trade secret is in various cases, Trade Secret law has gained importance in India only recently with the intensification of competition. Coca cola’s formula has been protected for over a century under Trade Secret law.

PROTECTION OF CONFIDENTIAL INFORMATION/TRADE SECRET IN THE HAND OF EMPLOYEES

As businesses are growing out of their parochial moulds and going global, effective trade secret protection is becoming a necessity. Though there is no enactment in India that affords protection to trade secret, businesses can use the tools mentioned below to safeguard these trade secrets:

Non-disclosure Agreements:

Sound and concise company policies and non-disclosure agreements with the employees protecting confidential information and trade secrets are recommended so as to provide contractual remedy in addition to the one under the common law. Such agreements should define “confidential information” and the exceptions to confidentiality. Agreements should have clauses negating a grant of an implied license, restrictions on disclosure, use and copy; restriction on use of confidential information upon termination of the employment, return of information upon termination and right to withhold salary and emoluments till such return.

Non-compete clauses, depending upon their applicability in the Indian context, read with the confidentiality clauses would afford an organization added protection with respect to its confidential information. Such provisions must have a clear purpose, which is to restrict the use of confidential information and trade secrets obtained during employment and ensure that employees do not compete unfairly. However, non-compete provisions would need to be reasonable, and the Indian courts may treat a tough non-compete provision as unenforceable. In order to ensure that the rights of third parties are not violated, the non-disclosure/employment agreement should clearly impose an obligation on the employee not to integrate into the organization’s data or intellectual property, any confidential information of a third party. Employees should be required to indemnify the organization in case of violation of this clause. If the organization has not executed such agreements at the time of employment, subsequently executed agreements should expressly cover the confidential information obtained by the employee from the date of his employment.

Internal Processes:

Strong internal controls and processes to protect confidential information should be in place. Employees should be educated to identify information that is confidential or in the nature of a trade secret, to enable them to make an informed decision. They should have a clear understanding of their responsibilities to protect confidential matter and treat this as an on-going process that is integral to their work. Data that is confidential should be clearly indicated as such in all communications. Appropriate security procedures must be established and followed by the company and access to specific sensitive areas of workplace restricted or limited to certain senior employees only. Third-party interaction and disclosures should be channeled only through specified personnel. Wherever feasible, confidential information should only be shared with those employees who have a legitimate need to know such information, thus enabling the employees to perform the assigned tasks.

An Exit-Interview:

During such an interview, an employee should be reminded of his obligations with respect to the company’s confidential information and trade secrets and should be asked to sign a document reaffirming his obligations. If an employment agreement was signed, the document to be signed upon termination should be attached. A copy of the signed exit-interview form, including the employment agreement, must be given to the employee. Such an interview not only serves as a meaningful reminder but can also be valuable evidence of employee’s knowledge of such obligations. Success of suits for protection of confidential information and trade secrets depends upon production of satisfactory evidence to prove confidentiality of the information, act of disclosure and the damages caused thereby, as well as the reasonability of such restriction.

TRADE SECRET vis-à-vis OTHER INTELLECTUAL PROPERTY RIGHT

Trade secret protection presents no conflict with the patent law, as it is consistent with the patent policy of encouraging inventions. However, for trade secret protection, uniqueness in the patent law sense is not required. Further, the owner of a trade secret, unlike the holder of a patent, does not have an absolute monopoly on the information or data that comprises the trade secret. Other companies and individuals have the right to discover the elements of a trade secret through their own research and hard work.15 Consequently, inventors of items that may meet the standards of patentability would prefer to seek patent protection because such protection is far superior to the protection afforded by trade secret laws.

As far as copyright protection is concerned, there is no copyright in ideas and hence copyright law cannot protect confidential information. Section 16 of the Copyright Act, 1957 (“the Copyright Act”) states that nothing in the Copyright Act should be considered as restraining an action for breach of confidence or breach of trust. There is thus no copyright pre-emption of trade secret misappropriation claims.

Confidential information

Initially, an objective test dependent on the expectations of reasonable men was adopted. A subjective element was introduced by the decision in Thomas Marshall (Exports) Ltd. v. Guinle where the plaintiff sought an injunction against the Managing Director who had set up a competing business. The Court observed that information became confidential only when the owner of the information has a reasonable belief that its release would be harmful to him and that it was outside the public domain. This implies that the belief of the owner of the information must be taken into account while determining whether information is confidential.

These decisions were reviewed by the House of Lords in the famous Spycatcher case. A British spy published a book containing confidential information he had learnt during his career. Although the British Government sought an injunction, the action failed on the ground that the information had lost its confidential character, as this book was available in other countries. Hence, information must remain outside the public domain if it is to be protected.

However, the Court did not decide whether the above reasoning tantamount to allowing the holder of confidential information to rid himself of the obligation of confidence by disclosure. Lord Goff explained the “springboard principle” and held that disclosure by a third party does not release the confidant from his obligations. This reluctance shown by the courts to allow a confidant to benefit by breaching his confidence prevents an unequivocal declaration that information, which is confidential, cannot be public. Nonetheless, where the holder of the information himself discloses the information, no action for breach of confidence will lie. A lapse of time may also result in breach of confidentiality.32

The obligation of confidence

The obligation of confidence does not arise where the information is divulged in public or in other circumstances that negate the duty of holding it confidential. This test, which is an objective one, focuses on the relationship between the parties. The types of relationships in which such an obligation is said to arise can be divided into three broad categories:

1. Fiduciary relationships

The essence of a fiduciary relationship is that equity imposes an obligation on the trustee to act in the best interest of the beneficiary. For instance, directors may owe an obligation to their company, professionals such as auditors and solicitors may owe a duty to their clients and so on.

2. Contractual relationships

Parties to the contract are free to make such provision as they deem fit for the use of confidential information. It is common to stipulate that information would not be passed beyond the contract.

1. Employee-employer relationship

The basic duty of fidelity arises throughout the course of employment and continues to a limited extent even after the employment terminates. Thus, any employee who discloses confidential information is in breach of confidence.

The major drawbacks associated with an action for breach of confidence are that an adequate remedy is unavailable against the person to whom the information is disclosed, as the holder of the secret may be unable to prevent the continuing use of the confidential information by such person(s). Although damages may be sought against the confidants, they generally do not have the economic capacity to pay adequate damages. The question of liability of third parties assumes importance in this connection.

Misappropriation of trade secrets: liability of third parties

American courts have developed the tort of misappropriation, which imposes liability on third parties for the use of trade secrets. This tort is not committed by a person who uses or publishes a trade secret unless that person has used some unlawful means or breached some duty created by contract or implied by law resulting from some employment or similar relationship.37 It is the use of improper means to procure the trade secret, rather than the mere copying or use, which is the basis of liability.

UTSA contains definitions of “misappropriation” and “improper means”. The American Restatement of Laws has modernized the definition of “improper means” to include “the unauthorized interception of communications”. This implies that even computer hacking is included in the definition of improper means. The Restatement is clear that “improper means” that are “either wrongful in themselves or wrongful under the circumstances of the case” come within the tort of misappropriation.

Though English courts have not framed the issue in terms of “improper means”, the rationale for imposing liability on third parties seems to be the same in both English and American law. Courts have held that even if there is no contractual nexus between the parties, liability arises if the confidentiality of the information is obvious. It must be emphasised that third parties are liable only when the information is not only known, but also known to be confidential in character.

The Law Commission has recommended that the duty should be broader and prevent, for example, a company that has received information in confidence during the course of licensing negotiations from turning that information to its own use, though without disclosing it further.45 Thus, there is a need for reforming the law in this regard.

In India, the tort of misappropriation has not gained judicial recognition. However, Indian courts can adopt the common law approach and grant relief.

CONCLUSION:

The Innovation Bill of 2008 is considered to be a dynamic approach towards protection of Trade secret but it has been argued invariably and needs to be emphasized.

To conclude, Enactment of a strong statute for protection of confidential information and trade secrets would certainly help the Indian industry. In any event, strategies for protection of the organization’s confidential information and trade secrets have, in today’s economic scenario, become a prerequisite to the organization’s survival. Although realizing the need of legislation for the protection of trade secrets, the Indian legislature came up with a bill named

as “The Personal Data Protection Bill” which was introduced in Rajya Sabha on 8th December, 2006, but unfortunately the bill has not been passed till now and is pending the approval of the Indian Parliament before it can become an act.