Article: Are Trade Secrets Protected Under the Contract Act?

Author: Shreya Das

Introduction

Trade secrets are a competitive advantage of any business. The commercial value of trade secrets remains as long as confidentiality is maintained. Trade secrets can be in various forms, like secret recipes, marketing methods, business practice, etc. Companies like Coca Cola, KFC reportedly value their secret recipes, and these recipes are considered as trade secret for their businesses. It is important to note that in India, there is no special statutory protection available for trade secrets.

Trade Secret- the lesser known IP

Article 39.2 of the Trade-related Aspects of Intellectual Property Rights (TRIPS) provides that following three criteria should be taken into consideration to determine if the information is a trade secret – 

1. The information is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons that normally deal with the kind of information in question;
2. The information has actual or potential commercial value because it is secret; and
3. The person lawfully in control of the information has taken reasonable steps under the circumstances to keep it a secret.

A Single Judge Bench (Anil Kumar, J.) of the High Court of Delhi in the case of American Express Bank Ltd. v. Ms. Priya Puri [(2006) IIILLJ 540 Del] defined a trade secret as “…a trade secret is some protected and confidential information which the employee has acquired in the course of his employment and which should not reach others in the interest of the employer…A 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”. However, the Court also observed that “…routine day-to-day affairs of employer which are in the knowledge of many and are commonly known to others cannot be called trade secrets.”

A Trade secret is valuable to a business as long as it is confidential information. Thereby, the owner of a trade secret needs to make efforts to protect such confidential information. To protect confidentiality of its information, the owner of the trade secret can take measures such as entering into non-disclosure agreements with its employees or with any concerned party to whom disclosure of the trade secret is necessary for the business purpose. 

Judiciary and Trade Secret Protection

It is often hard to determine what kind of information will qualify as a trade secret, or what measures can be taken in case of disclosure of trade secrets but various judicial decisions have shed some light on this issue. In the case of Bombay Dyeing and Manufacturing Co. Ltd. v. Mehar Karan Singh [2010 (112) Bom LR 375], a Single Judge bench (Smt. Roshan Dalvi, J.) of the High Court of Bombay laid down the following factors to determine if an information will qualify as a trade secret:

“i. The extent to which the information is known outside the business;

ii. The extent to which it is known to those inside the business, i.e., by employees;

iii. The precautions taken by the holder of the trade secret to guard the secrecy;

iv. The savings affected and the value to the holder in having the information as against competitors;

v. The amount of effort or money expended in obtaining and developing the information; and

vi. The amount of time and expense it would take others to acquire and duplicate the information.”

The courts have also pointed out that legal protection of a  trade secret is also dependent upon the proven measures taken by the owner of a trade secret. It means the court will also assess if the owner of a trade secret had taken sufficient steps to protect such trade secret in order to determine a breach of confidentiality. In the case of Emergent Genetics India Pvt. Ltd. v. Shailendra Shivam [I.A. Nos. 388/2004 (U/S 39 R 1 & 2), Order dated August 2, 2011 ], a Single Judge Bench (S. Ravindra Bhat, J.) of the High Court of Delhi said observed “With sufficient effort or through illegal acts rivals may access trade secrets…However, if the trade secret or information owner proves that reasonable efforts were made to keep the information confidential, it (the information) remains a trade secret and is legally protected. If, on the other hand, trade secret owners cannot establish reasonable efforts to protect confidential information, they risk losing the quality of confidentiality of the information even if its information is obtained by rivals without permission”.

Non- disclosure agreements and the Indian Contract Act

Non-disclosure agreement is one of the ways by which the owner of a trade secret can protect its confidential information. However, it is important to note that Section 27 of the Indian Contract Act, 1872 (“Contract Act”) provides that any agreement in restraint of trade will be void. Although, any agreement, which bars any formal former employee to disclose any information which he/she had acquired during his/her employment, is not void under Section 27 of the Contract Act. In respect of this, a Single Judge Bench (R Chopra, J.) of the High Court of Delhi in Ambiance India Pvt. Ltd. v. Shri Naveen Jain [122 (2005) DLT 421], stated that, “An employee, particularly, after the cessation of his relationship with his employer is free to pursue his own business or seek employment with someone else. However, during the subsistence of his employment, the employee may be compelled not to get engaged in any other work or not to divulge the business/trade secrets of his employer to others and, especially, the competitors. In such a case, a restraint order may be passed against an employee because Section 27 of the Indian Contract Act does not get attracted to such situation. It is also to be added that a trade secret is some protected and confidential information which the employee has acquired in the course of his employment and which should not reach others in the interest of the employer.”  

Apart from non-disclosure agreements, there are a few other measures that can be adopted by the business to protect their trade secret, for example creating a sense of responsibility and loyalty in the mind of employees, by investing in more safe databases and ensuring limited numbers of employees get access to the database, etc.

Conclusion:

An information is not trade secret if it is not confidential. The quality of the information, the relevance of the information for the growth of the business and measures taken by the owner to maintain the confidentiality, are some of the factors to be considered while determining whether an information qualifies as a trade secret or not.  Even though the Indian courts have played their part by facilitating the business to keep their trade secret protected through various decisions, it can’t be denied that there is a need for  statutory protection in India. 

Disclaimer: Views, opinions, interpretations are solely those of the author, not of the firm (ALG India Law Offices LLP) nor reflective thereof. Author submissions are not checked for plagiarism or any other aspect before being posted.

Copyright: ALG India Law Offices LLP