Confidentiality Clause and Legal Issues in India

July 18, 2018
Confidentiality Clause and Legal Issues in India (CCLII)

“Confidentiality is a virtue of the loyal, as loyalty is the virtue of faithfulness.”

-Edwin Louis Cole

A person is more likely to succeed and be valued in his career if he builds good professional network, gets along with co-workers and most importantly builds a reputation as a trustworthy employee. During the work the employer trusts his employees with crucial information which, if revealed, may have some material adverse effect on the business. This ranges from something as harmless as employee’s personal information to things more serious, like, secret information about a new product, client details, business plans, manufacturing process and methods etc. Confidentiality, thus, means not discussing company’s information and internal activities with competitors, press and in some instances even co-workers. Confidential information can be divided into 3 types-

  1. Employee InformationAt the time of recruitment, an employee has to provide certain personal information, such as home address, license number, DOB, and in most of the cases even the fingerprints. All employee related data (personal information and things like compensation, access codes) is stored by the HR department. Such information, though seems to be very harmless and general but is actually very sensitive information which has to be kept confidential. For instance, Mystique from “X-Men” used harmless employee information like eye-color; fingerprints etc. and turned it into lethal weapons by using it to gain access to any confidential documents and files she wanted. The whole point is that, such data in wrong hands could be misused to commit fraud, discrimination, and other violations.
  2. Management InformationConfidential management information includes discussions about employee relations issues, disciplinary actions, impending layoffs/reductions-in-force, terminations, workplace investigations of employee misconduct, anonymous feedback, etc. While disclosure of this information isn’t necessarily “illegal,” it is almost always counterproductive and can seriously damage the collective “psyche” of a workplace.
  3. Business InformationConfidential business information mostly includes “trade secrets”. Trade secrets refer to data of paramount importance, on which the entire business runs. Common examples of trade secrets include, processes for converting raw materials into other usable materials, recipes for food or food products, methods of manufacturing consumer products, chemical formulas for cleaning products or other similar goods, technological processes like computer program processes, client list, etc., basically not available to general public and by which the company derives economic benefits. Since this data provides a competitive edge to the company, its revelation will put the entire business at risk of being ruined.

Breach of Confidentiality

Breach of confidentiality occurs when someone intentionally or unintentionally, discloses the information given to him in confidence. When you agree to keep something private, you will be responsible for its violation even if there was no mens rea.

The most classic example of breach of confidentiality is the “Coco-Cola” case, wherein 3 employees offered the company’s “Coke” trade secrets to PepsiCo. They were charged with stealing secrets, including a sample of a new drink being developed from Coca-Cola. PepsiCo received a letter saying that it contained “detailed and confidential” information about Coco-Cola. On investigation by the FBI, they were found guilty. Coke executive’s administrative assistant was sentenced for 8 years and other employees for 5 years, along with a fine of $40,000 for restitution.

Today, virtually all administrative, marketing and business work takes place online. As a result, there are higher confidential risks with storing sensitive material online or in a company database, especially if a company’s greatest asset is their Intellectual Property. IP along with other confidential matters, is an asset worth protecting since it includes proprietary software, marketing strategies, exclusive products, and processes for manufacturing products, corporate branding and more. The companies have to install some security software to curb the system hacks and data theft.

The employees and freelancers have access to a lot of confidential information during work. Unfortunately employees pose the biggest threat to company confidentiality by divulging ideas, digital records and other private information. For this reason, there are some ways in which an employer can preserve the company’s integrity and reputation by proactively mitigating privacy risks in the workplace.

  • Confidentiality ClausesThis is the most common practice to protect proprietary information. Confidentiality clauses in employment contracts and Non-Disclosure Agreements (NDAs) legally bind the employees to keep the confidential information to themselves. It includes various clauses which ensure that no sensitive information is revealed, the employees do not compete with the business during or after their employment/training period or solicit other employees. Such non-compete clauses are not enforceable in law, however, they are still agreed upon by the parties. It is important that the agreement specifies what is included in private confidential information, whether such clauses are applicable during or after the employment and what are the consequences of breach of the contract. This ensures that employees know what is expected from them in respect of confidentiality.
  • Confidentiality TrainingWhen employees give out confidential information, it is not always intentional or malicious, the employees sometimes don’t even know that they are supposed to keep it private. This is why confidentiality training is a very important process for a company. Employees should know the rules, this can be through online training, lectures or a small course covering all issues and policies of the company. It need not be a very big operation and can be done in a course of a day. This ensures that the employees know exactly how to handle information, what to share and what to dispose. This practice can be a part of the induction so that employees get acquainted to the policies and practices as and when they join.
  • Mobile Phone PolicyPersonal mobile phone use in the workplace allows employees to instantly communicate with friends, family or competitors, and compromise data in ways that don’t seem obvious, such as taking photos, dispelling private information and uploading sensitive material to their device. A mobile phone policy should cover permitted and prohibited uses of communication devices in the workplace, as well as the consequences for violation of the policy.
  • Social Media PolicyIn this age of internet and technology, social media poses a lot of privacy concerns. While it is very easy to upload stuff it is equally difficult to get it out of people’s mind. For instance, the Domino’s Pizza making video on YouTube and the anti-diversity memo leaked from Google had cost the companies their image and people are not forgetting about these any time soon. This is why companies should have a social media policy containing guidelines for social media usage, mentioning what all company information can be uploaded, if any and what are the consequences on any violation. Companies can appoint a person or set up a department for use of social media for company’s marketing.
  • RemindersThe meetings, training and contracts are good ways but have a temporary effect on the employees. It is important to follow up and give reminders when required just to reinforce the outline of confidentiality agreement. This becomes important while starting a new project, letting the people working on it know to keep it low-key.

Consequences of Breach

When you have access to confidential information, you should not publicize it irrespective of any agreement or contract. Employees have an ethical as well as legal responsibility to keep private information to themselves. These are some of the consequences of breach of proprietary information-

  • TerminationThe first and the most obvious consequence is termination. No employer will be willing to retain employees who maliciously or carelessly lose confidential information, they’re no longer assets for the business. An employer is usually within his legal rights to terminate the employment, even if there is no confidentiality clause signed up. Breach of confidentiality is considered to be breach of employment agreement.
  • Lawsuit
    The employer can even file a lawsuit and if successful, the employee will be required to pay lawsuit damages. For instance, if some secret is revealed to the competitor and the employer is able to prove the loss of business or image, the employee has to pay the same. Even if the employer is not able to prove the quantitative damage, he is entitled to punitive damage.
  • Criminal ChargesIn extreme information, a breach of confidentiality can even lead to criminal charges against the employee. It may happen if the employee is involved in theft of proprietary data or Intellectual Property.
  • ReputationIn a specialized industry where businesses are well-aware about the other businesses such acts of breach can permanently tarnish an employee’s reputation. This is a long term consequence wherein an employee’s future job aspects maybe doomed.

Legal Provisions

The importance of data protection and privacy have been recognized with the recognition of crimes in cyber space and otherwise. Every country has its own laws for maintaining privacy and taking actions against breach of confidentiality.

  • The Information Technology Act, 2000 is the main legislation pertaining to protection of data and privacy in cyber space. It has provisions relating to civil and criminal liability in cases where any person tries to secure access to any confidential data. It also provides consequences for breach of confidentiality.Section 72 of the Act relates to any person who, in pursuance of any of the powers conferred by the Act or its allied rules and regulations has secured access to any:
    i) Electronic record, ii) book, iii) Register, iv) Correspondence, v) Information, vi) Document, or vii) Other material. If such person discloses such electronic record, book, register, correspondence, information, document or other material to any other person, he will be punished with imprisonment for a term, which may extend to two years, or with fine, which may extend to two years, or with fine, which may extend to one lakh rupees, or both.This section applies only to person who has gained access to the abovementioned information in pursuance to a power granted under Information Technology Act, its allied rules e.g. a police officer, the Controller, etc. It would not apply to disclosure of personal information of a person by a website, by his email service provider etc.
  • The Department of Science and Technology had introduced the Draft National Innovation Act, 2008. One of the objects of the Act is to ‘codify and consolidate the law of confidentiality in aid of protecting Confidential Information, trade secrets and Innovation’. Provisions in connection with trade secrets are found in Chapter VI of the Innovation Bill, titled “Confidentiality and Confidential Information and Remedies and Offences”. The definition of confidential information has been lifted verbatim from the definition of ‘undisclosed information’ in Article 39 of the WTO Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement
    • Section 8 of the Draft Act recognizes the contractual right of parties to set out terms and conditions in respect of confidentiality. In India as well as globally, it is already common practice to enter into confidentiality and non-disclosure contracts with employees to prevent them from disclosing trade secrets or confidential informationThe Draft Act however, significantly also provides for confidentiality arising from non-contractual relationships; arising in equity or as a result of circumstances imparting an obligation of confidence [Section 8(3)].
    • Section 10 provides remedies to protect and preserve confidentiality and orders to prevent threatened or apprehended misappropriation.
    • Section 11 lays down three exceptions to misappropriation of Confidential Information: (a) availability of the information in the public domain, (b) the information has been independently derived, and (c) disclosure of the information is held to be in public interest by a court of law.
    • Significantly, Section 12 is an extensive section providing for preventive or mandatory injunctions restraining the misappropriation of confidential information. An injunction, being an equitable remedy, is generally only issued when other remedy at law (such as damages) is inadequate.
    • Mandatory damages on proof of breach of confidentiality are also provided for in Section 13.
    • Finally, the Section 14 provides immunity for acts done in good faith, or purporting to do so.



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