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Protecting Trade Secrets in India: Applicable Laws and Benefits

November 3, 2022
Protecting Trade Secrets in India

By Bhanu Dhingra and Nitika Sinha

Trade secret law safeguards technological and commercial information that is not commonly recognized in the trade and prevents others from commercially exploiting it without authorization. The purpose of trade secrets protection is to promote research and development by protecting the source of business information and to uphold proper business ethics. A trade secret, or confidential information in the trade, must contain secret information that no one else knows about, it must have commercial value, and reasonable measures must be taken to safeguard the secret. A formula, pattern, compilation programme device, method, or technique that derives independent economic value from not being known can be recognised as a trade secret. Hence, trade secrets can be understood as Intellectual Property rights on confidential information which may be sold or licensed1.

Trade Secrets Protection in India

In 1985, the United States of America became the first country to grant legal sanctity to data exclusivity, by way of the Uniform Trade Secrets Act, and has pursued it relentlessly since. The US Act seeks to harmonise trade secret law.

In India, there is no uniform legislation protecting trade secrets and confidential information. It is protected by numerous, disparate provisions of various statutes. Indian courts have recognized trade secret protection based on equity principles and common law remedies for breach of confidence and breach of contractsuch as Section 272 of the Contract Act, 1872, which states that, covenants shall be structured in such a way that they protect the firm’s confidentiality while also allowing the employee to work in his preferred profession. Businesses have trade secrets that must be protected, which is why it is necessary to include a restrictive clause in service contracts to ensure that the firm’s trade secrets are adequately secured.

In the case of Richard Brady v. Chemical Process Equipment Pvt. Ltd3. , the Delhi High Court went farther by invoking a broader equitable jurisdiction and awarding an injunction in the absence of a contract. Non-compete covenants, non-solicitation covenants, non-poaching covenants, and confidentiality covenants are all examples of restrictive covenants. The courts have recognized client information kept in databases as copyrightable material under the Copyright Act, 1957, implying indirectly to protection of trade secrets and confidential information from disclosure/infringement.

In Burlington Home Shopping Pvt. Ltd. v Rajnish Chibber4 , the Delhi High Court examined an application for interim relief in relation to a suit brought by a mail order service company against an employee seeking an injunction prohibiting “breach of copyright and confidentiality.” The Court determined that a compilation of addresses formed through the commitment of time, money, labor, and skill constitutes a literary work in which the author holds copyright. Hence, copyright and trade secret law cover distinct aspects of compiled business data, with copyright protecting the expression contained in these compilations and trade secret law protecting the underlying data.

Though not expressly but impliedly, trade secrets protection clauses have also been incorporated in Statutes including the Information Technology Act, 2000, the Indian Penal Code, the Securities Exchange Board of India Act, 1992 as well as the Code of Civil Procedure. For instance, Section 43A5 of the Information Technology Act 2000, provides for compensation where any entity handling any personal sensitive information causes wrongful loss or wrongful gain to any person. Further, Section 726 of the Information Technology Act ensues criminal liability for breach of secrecy and trust. Similarly, the Indian Penal Code provides for criminal violation of trust and the Code7 of Civil Procedure protects documents that may be deemed necessary for the Courts to adjudicate effectively. In this context, it is also relevant to refer to the Securities and Exchange Board of India Act, 1992 which makes Insider use and publication of sensitive information a punishable act.

Licensing Trade Secrets

A trade secret license is a confidential agreement in which the licensor authorizes the licensee to utilize all or part of the secret knowledge pertinent to the trade/business. The licensor retains full title and all ownership rights associated with the trade secret. The licensor grants the license with the goal of maximizing their earnings through royalties on the trade secret. Preliminary negotiations require the disclosure of sensitive information, however unrestricted disclosure could result in the loss of proprietary know-how. They are safeguarded through the execution of Non-Disclosure Agreements (NDA) that needs to be meticulously vetted by the trade secret owner. The agreement states the purpose for which the confidential information may be used and the conditions under which it may be disclosed to a third party. The NDA is positioned as a legal tool that precedes licensing negotiations and its primary objective is to maintain confidentiality of the information disclosed within it.

Misappropriation of Trade Secrets

Misappropriation is the unjust acquisition of a trade secret through theft, fraud, or other dishonest or unlawful conduct. Industrial espionage and insider trading are two examples of misappropriation. Industrial espionage is an unlawful or unethical theft of a business’s trade secrets by a competitor for the purpose of gaining a competitive edgewhereas insider trading is an illegal practice of profiting from the stock market by gaining access to sensitive, confidential information. Corporations engage in industrial espionage to save time and money, as it takes years of research and development to bring breakthrough products and services to market. Insider trading has developed in India alongwith the security market and the formation of the Bombay Stock Exchange. Prior to the formation of the Securities Exchange Board of India (SEBI), insider trading was governed by the Companies Act, which included a provision aimed at reducing the act of insider trading.

Conclusion

India also requires formal legislation along the lines of the UTSA to deter the illegal transfer of trade secrets by individuals who has access to them as part of their employment responsibilities. These steps, in conjunction with provisions relating to breach of contract or Non-Disclosure Agreements, can help promote a culture of respect in industrial circles for trade secrets and undisclosed information as proprietary assets belonging to their owners. Without specific legislation, this is likely an area in which India falls short in its defence of intellectual property rights.

[1] https://www.wipo.int/tradesecrets/en/
[2] Contract Act, 1972 Section 27 – Agreement in restraint of trade, void.
[3] AIR 1987 Delhi 372
[4] 61(1995) DLT 6
[5] The Information Technology Act, 2000 Section 43A – Compensation for failure to protect data
[6] The Information Technology Act, 2000 Section 72 – Penalty for breach of confidentiality and privacy
[7] Indian Penal Code, 1860 Section 405 – Criminal breach of trust

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Niyati Pathak, Intern at S.S. Rana & Co. has assisted in the research of this article.

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