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Breach of confidentiality by ex-employee vis-à-vis IP infringement

December 3, 2021

By Priya Adlakha and Rima Majumdar

It is generally a prudent practice of corporations to have in place confidentiality clauses in their agreements/contracts with employees or agents, so that anything done by the employee/agent during the tenure of their association which adds to the intellectual property of the corporation, remains vested in the corporation even after the termination of such employment/association.

However, a common trend which emerges out of this is organisations trying to hamper the business of their competitors by instituting IP infringement suits, on the pretexts (broadly) that an ex-employee has shared their confidential information with their new employer and this amounts to an infringement of their IP- be it trade secrets, copyright, design, patent, trade marks etc. There have been cases where an ex-employee of an organisation has started up a new business under the name and style of its previous employer, thereby giving the impression that they may still be connected with such former employer.

Through the present article, we aim to discuss what the law has had to say about suits arising out of such situations, and the judgements courts have laid down over the years under IP infringement lawsuits, wherein the principal subject matter was infringement by an ex-employee.

POSITION OF LAW REGARDING IP INFRINGEMENT BY EX-EMPLOYEES

Kerly on Law of Trade Marks and Trade Names, Thirteenth Edition (2001) in Chapter 14 paragraph 90 states that a partner or employee who has left a well-known firm and set up a similar business of his own is entitled to advertise his former connection, but must take care to do it so as not to suggest that the connection is still existing between them and him, or that they have ceased to carry on business and he is their successor. Further in paragraph 201 of that chapter, Kerly has warned that an injunction would be granted if such business was calculated to lead to the belief that it was an agency or department of the claimant company.[1]

This would mean that, otherwise than in a case of intended misdirection, an erstwhile partner or employee can advertise their former connection, provided they take care to show that it is only history and not a current agency or branch of the other business firm. However, this isn’t always the case, and more often than not, courts are faced with a situation where an ex-employee leaves and either starts their own business, using the previous employer’s intellectual property, or joins a competitor and discloses confidential information pertaining to the IP of his previous organisation.

In Glenny v. Smith (1865)2 Drew & Sm 476, Defendant was an employee of the Plaintiffs, Thresher, Glenny & Co. After leaving their service he opened a shop in Oxford Street and placed on the shop windows the words “from Thresher & Glenny”, the word ‘from’ being in very small letters. Injunction was granted to restrain the Defendant from using the name of the Plaintiffs.

In Charan Dass v. Bombay Crockery House 1984 PTC 102 (Del), the Defendants were the retailers for stoves manufactured by the Plaintiffs under the Plaintiffs’ registered trade mark PERFECT and SWASTIK PERFECT. The same continued upto 1981. It was in the year 1981 that the Defendants started manufacturing their own stoves under the trade marks ‘TRISHUL PERFECT’ and ‘VIJAYA PERFECT’. The court held that, because of the Defendant’s previous role as a seller of the Plaintiff’s goods, the act of the Defendant in selling their similar goods under a similar trade mark s not a bona fide act and amounts to passing off their goods as those of the Plaintiffs, and therefore the court granted the Plaintiffs an ad-interim injunction.

In the case of Velcro Industries v. Velcro India Ltd., 1993 (1) Arb. LR 465 a learned Single Judge of the Bombay High Court rejected a contention made on behalf of the Defendants that they are entitled to continue use of Velcro as a part of their corporate name because they have independently developed a reputation in India. It was noted that the defendants in that case were merely acting as licensees and even if the agreement between the parties did not provide that on termination of the license, the defendants would cease to use Velcro as a part of their trade name, that would make no difference, since the trademark Velcro is a registered trademark of the plaintiff and to allow the defendants to use it as a part of their corporate name is to permit them to give an impression to the public that they are still connected with or have a license from the plaintiffs.

In Burlington Home Shopping Pvt. Ltd. vs. Rajnish Chibber, 61 (1995) DLT 6 a Single Judge of the Delhi High Court was concerned with an application for interim relief in a suit by a mail order service company against its ex-employee for injunction restraining breach of copyright and confidentiality, pleading that compilation of addresses developed by devoting time, money, labour and skill, though the sources may be commonly situated, amounted to a `literary work’ wherein an author has a copyright. Finding that the database available with Defendant was substantially a copy of the database available with and compiled by the Plaintiff, interim injunction was granted.

In the case of J.K. Jain and Ors. Vs. Ziff-Davies Inc. 2000 (56) DRJ 806, where the subject matter of the suit were four titles used with respect to magazines, the basis of the Plaintiff’s suit was that the Defendants were only publishing their computer magazine under the trade mark “PC MAGAZINE INDIA” under a license agreement. As per the license agreement, the Defendants had specifically agreed and acknowledged the copyright and trade marks of the Plaintiff, not to exercise its rights under the agreement or otherwise claim any right or interest in trade marks beyond the rights bestowed by the agreement. After the license was terminated, the Defendants started publishing four magazines, contrary to the terms of license. The Court, on the issue of whether the words “PC”, “WEEK”, “MAGAZINE”, “COMPUTER”, “SHOPPER”, “USER”, “INTERNET”, are descriptive or general words, observed that as an ex-licensee, Defendants were estopped from claiming that the mark was descriptive since the Defendants, under the terms of the license agreement were unable to challenge the proprietary rights of the Plaintiff’s trade mark or trade name on any ground. It was held that after termination of the license the very act of the Defendant in publishing the four titles is contrary to the terms of the licence.

In the case of Sanofi India vs. Universal Neutraceuticals, 2014 the Delhi High Court was faced with a case wherein the Defendant company had been formed by the ex-employees of the Plaintiff company, and the Defendants were in exactly the same business as that of their previous employer, operating under the name and style of Universal Neutraceuticals Pvt. Ltd, selling neutraceutical products by adopting the same trade dress as that of the Plaintiff’s. The mark UNIVERSAL was the registered trade mark of the Plaintiffs. The Court in this case held that “The use of the mark UNIVERSAL by the Defendant company, that has been formed by ex- employees of Plaintiff No.2, would cause irreparable loss and injury to the Plaintiffs, in case the interim order is not passed.”

In the case of Koninklijke Philips Electronics N.V. v Rajesh Bansal & Ors, MANU/DE/2436/2018 the court ordered the Defendant to pay up punitive damages in a suit for patent infringement, due to the reason that the Defendant was an ex-employee of the Plaintiff’s, who knew about the specifications of the Plaintiff’s invention, which was a method for decoding contents stored on optical storage media, which is a function employed in a DVD player. The Defendants manufactured DVD players under their own brand, but used the Plaintiff’s patented method in it. After trial, the Court was satisfied that it was a fit case of patent infringement and that the Defendants were using the patent of their ex-employer with impunity.

Last year in 2020, in the case of Bennett Coleman & Co. Ltd. vs Arg Outlier Media Pvt Ltd & Ors, MANU/DE/1918/2020 the Delhi High Court was faced with the issue of whether the Defendants’ use of the mark THE NEWSHOUR and NATION WANTS TO KNOW was an infringement of the Plaintiff’s prior used and registered trademarks THE NEWSHOUR and THE NATION WANTS TO KNOW. It was the case of the Plaintiff that the Defendants were ex-employees of theirs, and after resigning from their employment, they had started their own news program and started using the impugned marks/taglines of the Plaintiff on their news channel. After careful deliberation, the Hon’ble Court held that “merely adding some prefixes or suffixes to the trade mark NEWS HOUR, in my opinion does not help the defendants to claim that the mark which is being used by the defendants is not deceptively similar to that of the plaintiff. The marks which are being used by the defendants, namely, ARNAB GOSWAMI’s NEWSHOUR, ARNAB GOSWAMI’s NEWSHOUR 9, etc. prima facie would be deceptively similar to the mark of the plaintiff THE NEWS HOUR. The plaintiff is entitled to relief on this account.”

Conversely though, in the case of Pompadour Laboratories v. Stanley Frazer (1966) RPC 7, where the Defendants had formerly been manufacturing hair lacquer for the Plaintiffs, used the message “Frazer Chemicals have manufactured hair lacquer for Pompadour Laboratories Ltd. for several years” on their goods and advertisements, it was held that this did not amount to an assertion that the Defendants’ goods were the goods of the Plaintiffs, and the Plaintiffs were unsuccessful in restraining the Defendant from their chosen representations.

In Star India Pvt. Ltd. Vs. Laxmiraj Seetharam Nayak 2003 SCC OnLine Bom 27 it was held that everyone in any employment for a certain period of time would come to know certain facts and information without any special effort; all such persons cannot be said to know trade secrets or confidential information and that every opinion or general knowledge of facts cannot be labelled as trade secrets or confidential information. It was further held that if such knowledge is called “trade secrets”, or secret, then the term would lose its meaning and significance. It was held that the basic nature of the business dealings of the plaintiff in that case with its advertisers would be openly known and cannot be called a trade secret or confidential information; the rates of the advertisements are within the public domain and every businessman generally knows the rates of his rivals; the concerned people know the rates of the advertisements; unless they are told the rates and other conditions of the advertisements, no business transaction can be done; such matters are not even open secrets. Similarly it was held that fixation of rates etc. depends on a number of factors including the popularity, in that case of T.V. serial and the time-slots of the display of such T.V. serials and mere use of the words ‘strategies’, ‘policy decisions’ or ‘crucial policies’ repeatedly in all the items does not acquire the position or character of secrecy. It was held that there was nothing on record from which it could be inferred that the defendant had come to know any trade secrets or confidential information concerning the plaintiff company and its business especially when the trade secrets and the confidential information were not even spelled out.

Similarly, in the case of Navigators Logistics Ltd. vs. Kashif Qureshi & Ors., MANU/DE/3355/2018 a Single Judge of the Delhi High Court was faced with a case wherein the Plaintiff had sued its ex-employees for copyright infringement and breach of confidentiality for stealing data concerning the Plaintiff’s clients. The Court however held that “even if list compiled/prepared by the Plaintiff of its customers/clients with contact persons/numbers were to qualify as a original literary, dramatic, musical and artistic works (it cannot possibly be a cinematographic film or a sound recording), copyright will not vest therein unless the said list has been published or unless the said list, if unpublished, is authored by a citizen of India or domiciled in India.” Therefore, the Plaintiff in this case had not made out a case for being granted permanent injunction.

it is pertinent to note that in suits for infringement of IP, where the Plaintiff has taken the stance of breach of confidentiality or breach of contract by an ex-employee, the courts have had varied opinions while considering whether to grant injunctions or not.

In Ambiance India (Private) Ltd. Vs. Naveen Jain 2005 SCC OnLine Del 367 the Delhi High Court held that written day to day affairs of employment which are in the knowledge of many and are commonly known to others cannot be called trade secrets. It was further held that trade secret can be a formulae, technical know-how or a peculiar mode or method of business adopted by an employer which is unknown to others. It was further held that in a business house, the employees discharging their duties necessarily come across so many matters, but all these matters cannot be considered trade secrets or confidential matters or formulae, the divulging of which may be injurious to the employer, and if an employee, in the course of employment, has acquired some business acumen or ways of dealing with the customers or clients, the same do not constitute trade secret or confidential information, the divulging or use of which should be prohibited.

In the case of Ozone Spa Private Limited vs. Pure Fitness and Ors., MANU/DE/2182/2015 a Single Bench of the Delhi High Court held that “Defendants could not resile back after expressly agreeing to become a licensee/franchisee under Management Agreement which was in continuation of Franchise Agreement and said business agreed to fall within ambit of franchised business. Ingredients of tort of the passing off were satisfied. Plaintiff had goodwill in business of fitness center, spa and salon services which had been generated from business done by Plaintiff prior to that of Defendants. Defendants being franchisee and licensee of all these businesses under mark OZONE could not dispute the said position seriously being beneficiary under contract.”

Case of misrepresentation and resultant damage was glaring in the above case which could be seen in the conduct of Defendants which was completely mala fide and aimed at encashing upon the goodwill of the Plaintiff’s business. They were found to be inducing customers by offering discount coupons, associating Plaintiff OZONE spa with Hairmaster Salons, by having common staff roaming around the fitness center and providing salon services, etc., so as to cause confusion and deception amongst customers and to encash upon the Plaintiff’s established and captive customer base and cause damage to the Plaintiff’s goodwill acquired in respect of Salon services. Defendants have promoted their Hair Master Salon by riding upon the goodwill and reputation of the OZONE brand. Prima facie, it appeared that Defendants had been trying in a clandestine and surreptitious manner to filch Plaintiff’s clientele and tarnish their goodwill by diverting their business to their own competing business viz. Hair Masters/Hairmasters.

In the Ozone case cited above, the Court was also of the view that “it is well settled principle of law that the negative covenants contained in the agreement which are aimed at to operate during the subsistence/validity of the agreement in a commercial contract can be validly enforced and injunction for enforcement of the said covenant cannot be refused on the ground that the same are in restraint of the trade as the underlying purpose of the said negative covenant prohibiting the party to conduct the competing business is to serve the contractual relationship and there exists no such restraint of trade in such a case as the party so restricted is already doing the business as per commercial arrangement under the contract.”

Even when there was no specific contract with a confidentiality clause, the Delhi High Court in the case of John Richard Brady v. Chemical Process Equipments Private Limited, AIR 1987 Delhi 372, relying on Lord Denning, M. R. in Seager v. Copydex Limited 1967 RFC 349, held that “the law on this subject does not depend on any implied contract. It depends on the broad principles of equity that he who has received information in confidence shall not take unfair advantage of it.” It was also reiterated that the possessor of such information must be placed under a special disability in the field of competition in order to ensure that he does not get an unfair start. The High Court while granting an interim stay found it to be in the interest of justice to restrain the Defendants from abusing the know-how, specifications, drawings and other technical information regarding the Plaintiff’s machine “which was entrusted to them under express condition of strict confidentiality, which they have apparently used as a ‘spring-board’ to jump into the business field to the detriment of the Plaintiffs.

CONCLUSION

It has therefore become imperative, in today’s cut-throat competitive culture, for organizations to keep a tight check over its IP rights so as to maintain their edge in the marketplace. Thus, it is concurrently crucial to have specific contracts in place, catering to different legions of persons/stakeholders and circumstances, in order to protect their confidential information, including amongst an organization’s allies, affiliates and employees. However, it is also important to distinguish what will be construed as amounting to confidential information and trade secrets, and will accordingly be granted protection from infringement by the Courts.

[1] Parle Products Private Limited v. Parle Agro Private Limited, Bombay High Court in Notice Of Motion No. 4431 Of 2007 In Suit No. 3203 Of 2007

 

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