Trade Secret Protection in India: An Analysis

Reading time: 8-10 minutes.

Coca Cola is known for its great taste. However, the magic behind this taste is known to very few people. The special formula of Coca Cola is regarded as the world’s best-kept secret. It is kept in a high-security vault at Coca Cola world in Georgia, Atlanta. A similar amount of secrecy is maintained for ingredients of K.F.C, Google Algorithm, Listerine, etc. Such confidential information/formulae/knowledge are known as Trade Secrets.

Trade secrets are the oldest form of intellectual property rights. Under the U.T.S.A (Uniform Trade Secrets Act, 1985), trade secrets could be information, including a formula, pattern, compilation, program, device, method, technique, or process. Article 39.2 of the T.R.I.P.S (Trade-Related Aspects of Intellectual Property Rights) agreement protects trade secrets in the form of undisclosed information. To avail the protection, the information must be secret, have some commercial value and there should be a reasonable effort by a person who is in control of this information, to keep it secret. Trade secret laws usually cover three categories of information: (1) technical information, such as industrial processes and blueprints; (2) confidential business information, such as customer lists; and (3) know-how, such as business methods for efficiency.

Trade Secret Protection in India   

In the absence of a uniform legislation in India, there are mainly two types of protection granted to Trade Secrets: Contractual and Equitable.

Trade secrets are important for running businesses, therefore, it has to be shared with certain employees and sometimes with people outside the organization such as suppliers, franchisees, etc. In both the cases, employers usually rely on “confidentiality clauses” in their contracts with these outsiders. Through this clause, parties are restricted from divulging the information to outsiders. In the case of employees, even after the end of their employment period, they are not allowed to disclose this information or use it for their own benefit. This is done through “non-competition/non-solicitation” clauses. In Desiccant Rotor International Pvt Ltd Vs Bappaditya Sarkar and ors Delhi High Court held that non-solicitation clauses did not amount to restraint of trade, business or profession and therefore would not be hit by Section 27 of the Indian Contract Act, 1872. The Courts have also taken strict views against employees using trade secrets or confidential information which they were entrusted with during the course of their employment, and using it as a “springboard” in the course of their business or career.

Similar restrictions could also be applied to business partners. For example, In M/s Gujarat Bottling Co. Ltd (GBC) and others Vs Coca Cola and Ors., there was a franchise agreement between Coca Cola which allowed the Gujarat Bottling Company (G.B.C) to manufacture, bottle, sell and distribute the beverage, while also restricting its right of dealing with the competitors. The Court held that the restriction, in this case, was for distribution of the goods of the franchiser and that it cannot be considered as restraint of the trade.

In cases where there is no contractual obligation, the courts have relied on common law action of breach of confidence and general rules of equity. In Escorts Construction Equipment Ltd Vs Action Construction Equipment P. Ltd (1998), there was no underlying contract which had been dishonored, but the Delhi High Court granted an interim injunction on the ground of breach of confidence, as the Defendant, who was an ex-employee of the Plaintiff had tried to misappropriate the designs of his ex-employer. The Defendant after serving substantial years in the Plaintiff’s company in a key position, left that company to start up his own entity which manufactured the goods as similar to that of his previous company.   

Further, there are also criminal remedies available to bona-fide owners of trade secrets under Sections 405-409 of the I.P.C (Indian Penal Code) which relate to criminal breach of trust and Sections 417 and 418 of I.P.C concerning cheating. The most widely used civil remedy by trade secret owners is that of the injunction. In the case of unauthorized use of trade secrets, it is quite difficult to ascertain the monetary value of loss incurred to the owner. Hence, the relief of an injunction serves the purpose of preventing the other parties from using the secret in the first place. Despite all these safeguards the US Special 301 Report, 2015 raised concerns about the Indian trade secret protection regime. These concerns were related to the effectiveness in addressing theft of trade secrets in situations where there is no contractual relationship, difficulty in obtaining damages, and lack of sufficient procedural safeguards to protect against disclosure of trade secrets and other confidential information in civil or criminal litigation.

Importance of Trade Secret

The primary distinction between Trade Secret and other intellectual properties is that the former is protected without being disclosed to the world at large. Another important point of difference between them, is that others are allowed to obtain and use trade secrets if it is through legal means, such as reverse engineering, and they will not be held liable for infringing the rights of the owner of trade secrets. So why do people keep their innovation as a trade secret rather than go for patent protection? This depends entirely on the type of invention that needs protection. Sometimes the utility for the invention is likely to last for more than the patent period (20 years in India) and it is difficult to reverse engineer it.

Then there are some inventions whose utility is very less and it is not economically viable to have patent protection for them. There are also some inventions that are not patentable per se. In these scenarios, a business entity would prefer to keep its innovation as a trade secret rather than go for patent protection. Nowadays, companies like to have patented inventions along with know-how (as a trade secret) to enhance the value of the invention by making the working of patents difficult even after the expiry of the patent period. Therefore, trade secret protection has become a major IP issue of the 21st century. As innovation provides a very important competitive advantage to businesses, protecting trade secrets has become increasingly important in their investment decisions and commercial success.

Need for a Uniform Legislation to Protect Trade Secrets

Countries like The United States (US), the European Union (EU), Japan, China, South Korea, Taiwan and others have recognized that effective trade secret protection could be a key competitive advantage and have enacted new statutes to make their trade secret laws more effective. In India, the Central Government introduced the National Innovation Bill, 2008 which had provisions regarding confidentiality of information. However, it was not passed by parliament and subsequently lapsed. The present government has been focusing on greater foreign investments. It is found that there is concern among foreign companies regarding the protection of their trade secrets before doing business in India.

A proper policy and statutory framework can be used to allay these fears. In fact, a coherent policy will also be beneficial for our domestic firms. This will help in giving a boost to the Indian economy which is already in shatters after COVID pandemic and nationwide lockdown. However, the policymakers have to maintain the fine balance between private benefit and social welfare. A strong trade secret law will increase the incentive to keep the new technology confidential, instead of going for patent protection. Without the complete disclosure of the new innovations, the current knowledge in society will remain stagnant and it will also hamper further technological growth. This will go against the fundamental object of Intellectual Property Rights Laws, which allows a temporary monopoly to inventors in lieu of dissemination of knowledge to society at large for the greater public good. Therefore, a national law to protect trade secrets is the need of the hour, but it should not come at the cost of societal progress.

Author: Nishant Mishra, Gujarat National Law University.

Editor: Astha Garg, Junior Editor, Lexlife India.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s