Due to recent technological progress and the convenience in sharing, copying, and storing of data in the digital realm, safeguarding confidential business information poses a significant challenge for enterprises. This sensitive information encompasses business strategies, proposals, databases and compilations of key clients, suppliers or personnel. It may also include crucial designs, programs, drawings, devices, formulas, and compositions. In this post, Compliance Calendar brings to you a comprehensive note on protecting trade secrets of your business.
To be deemed eligible as a trade secret, an information must satisfy the following criteria:
Be commercially valuable because it is a secret
Be known only to a limited group of people
Be subject to reasonable steps taken by the rightful holder of the information, including the use of confidentiality agreements for business partners and employees.
The unauthorized acquisition, use or disclosure of such secret information in a manner contrary to honest commercial practices by others is regarded as an unfair practice and a violation of the trade secret protection.
Trade secrets confer distinct advantages of access to resourceful information, business contacts, formulae, compositions or confidential information of any kind. However, unlike other forms of intellectual property - trademarks, patents, designs, there is no registration, no fee or even a specific act providing for protecting trade secrets. This makes protection of trade secrets even more crucial for small and medium businesses.
Trade secrets often give companies a competitive edge by providing unique insights, processes, or technologies that set them apart from competitors. These can include proprietary technologies or processes that contribute to innovation. Protecting these secrets ensures that the company can continue to innovate without the risk of competitors copying their methods.
Trade secrets also add long term sustainability to an emerging company, as they ensure competitors cannot easily replicate or imitate the company’s products or services.
In India, the protection of trade secrets is primarily governed by the common law principles of confidentiality and the contractual obligations between parties. Unlike some jurisdictions that have a specific legislation dedicated to trade secrets, India does not have a standalone law for the protection of trade secrets. However Indian courts also look at the following in deciding a case pertaining to trade secrets:
Indian Contract Act, 1872: Section 27 of the Indian Contract Act voids agreements that restrain trade, but as an exception, it allows agreements that protect trade secrets. Therefore, contractual arrangements that involve the protection of trade secrets are enforceable.
Injunction and legal remedies in civil laws - In case of a breach of confidentiality, the affected party can seek civil remedies such as injunctive relief, damages, or an account of profits through legal proceedings.
India is a signatory to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). While TRIPS doesn't specifically address trade secrets, it provides a framework for the protection of intellectual property rights for its member countries.
According to Article 39.2 of the TRIPS Agreement, this protection is available to any information that is secret, that has commercial value because it is secret and that has been subject to reasonable steps to keep it secret.
Preventing information disclosure in a manner contrary to honest commercial practices - While the TRIPS Agreement does not require undisclosed information to be treated as a form of property, it requires that a person lawfully in control of such information must have the possibility of preventing it from being disclosed to, acquired by, or used by others without his or her consent in a manner contrary to honest commercial practices. “Manner contrary to honest commercial practices” includes -
Breach of contract
Breach of confidence and inducement to breach
Acquisition of undisclosed information by third parties who knew, or were grossly negligent in failing to know, that such practices were involved in the acquisition.
It also requires that Member countries protect undisclosed test data, or conditions that involve approvals relating to marketing of pharmaceutical or agricultural chemical products which use new chemical entities.
While there may not be a dedicated trade secrets law, existing legal frameworks and contractual agreements provide avenues for effective protection. A non-disclosure agreement (NDA) is one such instrument that goes a long way in protecting trade secrets. It is a written promise not to reveal or use a business’s confidential information, both before and after employment.
Companies can use NDAs to establish a contractual obligation of confidentiality between parties involved in a business relationship. This agreement outlines the terms and conditions under which confidential information is shared and the consequences of any unauthorized disclosure.
NDAs should typically be signed with:
A leading case law illustrating the protection of trade secrets in the absence of a non-disclosure agreement, is John Richard Brady v. Chemical Process Equipment Private Limited(AIR 1987 Delhi 372 ).
The Delhi High Court while holding that even in the absence of a contract, the broad principle of equity demands that information received in confidence must not be used to take unfair advantage. The court restrained 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.
Penalty clause in NDA - While drafting NDA clauses, it is advisable to include hefty penalties upon its breach to dissuade third parties like employees from spilling secrets. While the legal jurisprudence in India tilts in favor of weaker parties (often the employees) and the penalty clauses may not be upheld by adjudicating courts in their entirety, it still serves as a valuable purpose of discouraging disclosure while also aiding in convincing courts of the seriousness with which the aggrieved company may view such information.
Alternate Dispute Resolution clause in NDA - Even though there are no specialized alternative dispute resolution methods for disputes arising out of trade secrets in India, it is advisable that the NDA contain a clause for arbitration or mediation, so that the resolution is done outside the Courts by traditional ADR methods including mediation, conciliation and arbitration. These methods are not just faster and often less expensive than judicial actions but also minimize the risk of information relating to trade secrets becoming public records in court proceedings.
However, any legal process is lengthy and may involve unnecessary costs. It is advisable to treat NDAs not merely as a formality, but rather a source establishing duties of all personnel associated with the company. It is also advisable to explain duties to parties signing the NDA, while also labeling important information as trade secrets and reinforcing the idea of confidentiality in business practices.
It's important for businesses in India to work with legal experts to tailor their approach to trade secret protection based on their specific needs and circumstances. Connect with our in-house lawyers and company secretaries at Compliance Calendar for the best advice on drafting agreements with employees and partners, enforcing non disclosure agreements and protecting your trade secrets.