Table Of ContentJournal of Intellectual Property Rights
Vol 11, November 2006, pp 397-408
Legal Protection of Trade Secrets: Towards a Codified Regime
Abhinav Kumar†, Pramit Mohanty and Rashmi Nandakumar
The West Bengal National University of Juridical Sciences, NUJS Bhawan, 12 L B Block,
Sector-III, Salt Lake, Kolkata 700 098
Received 31 July 2006, revised 18 October 2006
Trade secrets protection has acquired increased significance in the present scenario especially in view of the opening up
of the world market and enhanced competition worldwide. Moreover, the fact that trade secret protection is increasingly
being preferred over patent protection as a method for protecting undisclosed information has added to its significance. This
paper sketches the broad outline of the trade secret protection law that exists in India and highlights its inadequacy
especially in view of the legal regime existing in other countries such as the US. The paper also focuses on the ambiguity of
the common law remedy that is available for infringement of trade secrets which is manifested in the inconsistent line of
principles laid down by the courts. It also deals with India’s obligation under TRIPS to legislate on the question of
‘undisclosed information’. The article attempts to underline the need to enforce a codified regime by analysing the law as it
exists in various other countries.
Keywords: Trade secrets, undisclosed information, employer-employee conflict
Despite the practical importance of trade secrets to the vulnerable when employees with this knowledge
business community, the law of trade secrets is still a leave his firm. Trade secrets are difficult to maintain
neglected area in intellectual property analysis. This over longer periods or when a larger number of
paper sketches the approach to trade secrets of people are made privy to the secret. Moreover, a
different contracting parties to TRIPS and its contract between parties is a suitable way of
increasing importance in the present scenario with protecting trade secrets but, at times it would be
special emphasis on the protection of trade secrets and difficult to enforce such agreements as one has to be
mechanism related thereto. careful that it does not restrict the employee's right to
earn a living.
What are Trade Secrets? Despite this, manufacturers or producers prefer
A trade secret is any valuable business information trade secret protection as opposed to patent as there is
that is not generally known and is subject to no fixed time period for which protection is granted
reasonable efforts to preserve confidentiality. These and there are no cumbersome official formalities and
are information that companies keep secret to give cost involved. Further, while patents and copyrights
them an advantage over their competitors. Examples require an individual to disclose one’s information in
of trade secrets include customer identities and the application process (information that eventually
preferences, vendors, product pricing, marketing becomes public), trade secrets require the individual
strategies, company finances, manufacturing to actively keep the information secret. In spite of its
processes and other competitively valuable increasing importance, the remedies or protections
information. that are extended to trade secrets are highly
inadequate and insufficient.
Trade Secret Protection Preferred over Patent
Protection No Specific Laws for Trade Secrets in India
Secrecy does not stop anyone else from inventing It is beyond doubt that intellectual property
the same product or process independently and comprises of inter alia copyright, trademark, patent
exploiting it commercially. It does not confer and trade secrets. India has enacted Copyright Act,
exclusive rights upon the owner and makes him 1957, which provides complete and comprehensive
copyright protection in India. Further, it has enacted
___________
Trademarks Act, 1999, which repealed the Trade &
†Email: Corresponding author: [email protected]
398 J INTELLEC PROP RIGHTS, NOVEMBER 2006
Merchandise Marks Act, 1958. The Patents Act, 1970 and (ii) is the subject of efforts that are reasonable
extends protection to patents in India. But, it is very under the circumstances to maintain its secrecy.1
evident that there is no specific law for protection of An information to qualify as a trade secret has to be
trade secrets in India. As opposed to India, other confidential in nature. To be confidential, the
contracting parties to TRIPS have enacted specific information must have the necessary quality of
and comprehensive laws with the sole objective of confidence about it, namely, it must not be something
protection of trade secrets. But in India, some indirect which is public property and in public knowledge and
provisions from contract law, criminal law and maker of the document must have used his intellect
copyright law protect trade secrets. It is submitted that and thus produced a result which can only be
these laws are not sufficient for adequate protection of produced by somebody who goes through the same
trade secrets in India. process.2
Common Law Remedy is Inadequate for Trade Secret Protection Preferred over Patents
Protection At the very outset, it is pertinent to state that it is
A trade secret is described, as property though it is beyond the scope of this paper to delve into the
required to be differentiated from other real or efficacy of patent law in India. Judges and lawyers
personal property, as the possessor, in this case, is not have sometimes thought that because trade secret law
conferred with any special right to use or enjoy. provides less protection to the inventor than patent
Therefore, if through accident or reverse engineering, law does, no rational person with a patentable
the secret or information leaks out, then law provides invention would fail to seek a patent; and therefore,
no remedy. The common law remedy is available in trade secret law must protect a class of lesser
case of trade secrets only when the secret or inventions.3
undisclosed information is lost through breach of David D Friedman in his celebrated work, ‘Some
contract or confidence. Protection of trade secret has economics of trade secret law’ has comprehensively
been made an integral part of principles of equity and laid down most convincing arguments in favour of the
it has been held that protection would be available increasing importance of trade secrets in the present
even in the absence of any contract. However, in this scenario and reasons for its preference over patent
regard, as shall be dealt with subsequently, the protection.4 The authors completely subscribe to his
position of law is not very clear and is definitely views and reasoning and intend to provide a concise
ambiguous. For, at the same time it has also been held interpretation of the same. Trade secret protection is
that breach of contract and unauthorized use of the preferred over patent protection in the following three
information has to be established for any remedy in situations:
the court of law.
In the first situation, the inventor has a patentable
This paper focuses on understanding and applying invention but the cost that has been incurred by him on
the law of trade secrets, non-disclosure agreements the invention is substantially low and he believes that
and covenants not to compete to these very real the cost involved in obtaining patent would be higher
problems facing businesses today. Further, this paper than the cost incurred in invention. So, he would
also focuses on the recent spurt of cases like Google v market the product without obtaining patent till he
Microsoft and problems involved in incorporating recovers the cost. In the instant case, deciding factor
non-compete agreements in trade secret laws. would be returns that are expected from the invention.
In the second situation, the inventor has a
Why are Trade Secrets Important? patentable invention but it is the belief of the inventor
The United States Uniform Trade Secrets Act that competitors would be able to come up with the
defines trade secret as information, including a invention on similar lines in a period less than the
formula, pattern, compilation, programme device, period for which patent protection is provided. In this
method, technique, or process, that: (i) derives case, the deciding factor would be the confidence of
independent economic value, actual or potential, from the inventor in his invention, which may depend upon
not being generally known to, and not being readily the technology involved, or the idea itself.
ascertainable by proper means by, other persons who In the third situation, the inventor has a non-
can obtain economic value from its disclosure or use, patentable invention and therefore, he cannot obtain
KUMAR et al.: LEGAL PROTECTION OF TRADE SECRETS 399
patent. But, by maintaining the trade secret he can property as defined in Article 1(2) of TRIPS. The
introduce the product in the market and can prove the obligation established under Article 39(1) is limited to
government wrong in not including his invention the protection of undisclosed information against
within patentable inventions by showing returns. unfair competition as provided in Article 10 bis of the
It is submitted therefore, that the trade secret law Paris Convention. The act of unfair competition may
supplements the patent system and does not run be defined as:
contrary to it. Inventors would choose trade secret
protection when they believe that patent protection is ‘any act that a competitor or another market
too costly relative to the value of their invention or participant undertakes with the intention of
that it would give them a reward substantially less directly exploiting another person’s industrial
than the benefit of their invention either because the or commercial achievements for his own
invention is not patentable or because the length of business purposes without substantially
patent protection is insufficient. departing from the original achievement.’5
Protection to Trade Secrets becomes even More Article 39(2) does not define what ‘undisclosed
Important in view of Globalization information’ consists of. It merely specifies the
Since 1991, India has adopted a policy of conditions that the information needs to meet in order
globalization and liberalization, which encourages the to be deemed ‘undisclosed’ and protectable, namely,
entry of foreign corporations into India and also it should be secret, possess a commercial value and be
advocates the policy of removal of trade barriers. subject to reasonable steps, under the circumstances,
Under this policy, India is required to enact sufficient to be kept secret.6 Rather than treating such
laws in order to extend adequate protection to the undisclosed information as a form of property, the
interests of the corporations. It is submitted that this agreement requires that a person lawfully in control of
policy cannot take effect unless India enacts laws such information must have the possibility of
protecting trade secrets that are at par with the laws of preventing it from being disclosed to, acquired by, or
other countries. used by others without his consent in a manner
Adequate protection is required in view of business contrary to honest commercial practice.7
planning and for safeguarding the rights of employers
and employees. In order to effectively conduct their Interpretation
The TRIPS Agreement is the first multilateral
business, companies often must share their competitive
instrument dealing with trade secrets or undisclosed
and proprietary information with new hires, current
information. Prior to it there existed only the general
employees, prospective and actual licensors and
obligations in respect of unfair competition found in
licensees, business acquirers, manufacturers, suppliers,
Article 10 bis of the Paris Convention. That link to the
vendors, corporate officers, directors, and so forth. Yet,
Paris Convention in Article 39(1) was used to justify
we live in an era of corporate downsizing where there
the inclusion of this section in the TRIPS Agreement.8
exists a general lack of loyalty between employer and
Article 39(1) reads: ‘In the course of ensuring
employee and where officers, directors, and employees
effective protection against unfair competition as
frequently change jobs. Protecting one's proprietary
provided in Article 10 bis of the Paris Convention
information in this context becomes an essential aspect
(1967)’. A plain reading of this provision might lead
of business planning. Can we say that in a business
the reader to believe that only those WTO Members
environment that exists in India, a specific trade secret
who were party to the Paris Convention of 1967 have
law is not required?
obligations under this. But this is not the case, as even
The TRIPS Mandate WTO Members not party to the Paris Convention
Article 39 of the TRIPS Agreement requires must comply with Article 10 bis, as provided under
member states to protect undisclosed information Article 2(1) of TRIPS.
(trade secrets) in pursuance of Article 10 bis of the Article 39(2) is the operative part of the provision,
Paris Convention, 1967. It must be noted though that specifying the conditions governing any disclosure of
nowhere in the text of Article 39 is the term ‘trade the information concerned:
secrets’ or ‘know-how’ used. ‘Undisclosed (a) The information is secret in the sense that it is
information’ is one of the categories of intellectual not, as a body or in the precise configuration
400 J INTELLEC PROP RIGHTS, NOVEMBER 2006
and assembly of its components, generally obligation to a large extent by enacting new and
known among or readily accessible to persons amending existing legislations on intellectual property
within the circles that normally deal with the laws.
kind of information in question.9 This However, unlike the US and other developed
provision incorporates an objective standard countries, India has no legislation dealing with trade
of secrecy by providing that the relevant secrets. In this regard, it is interesting to note that
information must be ‘not generally known’ or India, in complying with the provisions of TRIPS has
‘readily accessible’. The extent of secrecy legislated or amended the law on six out of the seven
may be determined by comparing it with the categories of intellectual property but has
knowledge of a person ‘skilled in the art’ who conspicuously left out trade secrets.15
has access to normal sources of specialized
Inadequacy of Trade Secret Law in India
information.10
In India, protection of trade secrets is largely
(b) The information must have commercial value
common law based. The law relies on common law
because it is secret11 i.e. the information must
principles such as breach of trust and breach of
give a competitive advantage. The
confidence. The only statutory provision governing
information need not necessarily be able to
trade secrets law is Section 27 of the Indian Contract
put into practice in a valuable way. The fact
Act, which states that every agreement by which a
that competitors and/or consumers may
person is restrained from carrying on any trade,
perceive such information as having value
business or profession, is invalid. This provision
because it is kept secret may be sufficient to
brings within its ambit non-disclosure and non-
give its holder a competitive advantage.
compete agreements, which are indispensable for the
(c) The information must have been subject to
protection of trade secrets. Other avenues where the
reasonable steps under the circumstances, by
law on trade secrets may be located include the
the person lawfully in control of the
Securities Exchange Board of India (Prohibition of
information, to keep it secret.12 The provision
Insider Trading) Regulations, 1992, which renders the
is vague in as much as it does not identify the
use and disclosure of confidential (undisclosed)
type of steps that could be taken, such as
information by an insider subject to prosecution under
encryption, safes, division of wok, contractual
the Securities Exchange Board of India Act.
restrictions, etc.
This clearly underlines the need for a
comprehensive legislation on trade secrets, in
Whenever these conditions are met, persons in
compliance with Article 39 of TRIPS. A brief
control of the information must, under national law,
discussion on the law regarding trade secrets in other
have the possibility of preventing such information
member counties will further elucidate this point.
from being disclosed to, acquired by or used by others
without their consent in a manner contrary to ‘honest United States of America16
The most widely used common law definition of a
commercial practices’. This clearly indicates that the
trade secret was set forth in the Restatement of Torts,
right to prevent such acts only arises when the means
used are condemnable.13 That is, there is not an Section 757 comment b (1939):
absolute protection against non-authorized disclosure,
b. ‘Definition of trade secret’- A trade secret is
acquisition and use of information, but only against
any formula, pattern, device or compilation of
acts made in a condemnable manner.
information which is used in one’s business, and
India’s Obligation under TRIPS which gives him an opportunity to obtain an
Being a signatory to the TRIPS Agreement, India is advantage over competitors who do not know or
under an obligation to bring its intellectual property use it.
laws in conformity with international standards. This
obligation is further emphasized by Article 51 of the In recent years, trade secret law in the US has
Constitution which makes it a directive of State largely become statutory. The Uniform Trade Secret
Policy, to foster respect for international law and Act (UTSA) has been adopted (sometimes with
treaty obligations and in dealings of organized modifications) in most states. Nonetheless, and
peoples with one another.14 India has met with this despite the UTSA’s widespread adoption, the
KUMAR et al.: LEGAL PROTECTION OF TRADE SECRETS 401
Restatement definition retains vitality and is often Trade secrets include any ‘technical or business’
referred to by the courts during the course of their information that has commercial value, is not in the
deliberations in applying the UTSA. public domain, and which has been ‘administered’ as
The Economic Espionage Act (EEA) of 1996 a trade secret. Infringement occurs when a person
provides for trade secret protection at the federal procures a trade secret, by theft, fraud, or extortion or
level. The EEA was enacted as a federal criminal when there is an unauthorized use or disclosure of a
statute. The EEA does not provide for a private civil lawfully acquired trade secret for unfair competition.
right of action. Accordingly, a victim of trade secret An injured party may obtain injunctive relief and
theft seeking redress must persuade the federal damages. The statute has similarities to the Uniform
prosecutor in its judicial district that their particular Trade Secrets Act.
case is worthy of prosecution.
Hence, it is evident that India lacks a substantive
piece of legislation governing trade secrets. The
The European Community
absence of adequate protection for trade secrets in
In general, trade secrets are afforded a high level of
India can be attributed to the socialist ideology of the
protection in the European Community (EC). Under
legislature, which undermines private rights such as
the European Patent Convention, trade secrets are
intellectual property rights for the greater ‘public
generally referred to as ‘know-how’, which is defined
interest.’ This ideology is reflected in the stand taken
as a ‘body of technical information that is secret,
by India during the negotiation of the TRIPS
substantial, and identified in any appropriate form.’
Agreement, wherein the Indian Government
Secret means ‘not generally known or easily
contended that trade secrets were not a form of
accessible.’ The requirement that the trade secret be
intellectual property right. It was further argued that
‘identified in any appropriate form’ essentially means
the protection against unfair competition under
that evidence of the trade secret’s existence must be
Article 10 bis of the Paris Convention would suffice,
fixed in a tangible medium (e.g., paper documents,
and that protection by contract and under civil law
electronic media, etc.) to be legally recognized.
was to be preferred to intellectual property rules.20
In the present era of MNCs, where companies give
Canada17
paramount importance to the protection of their trade
The law of trade secrets in Canada is based on
secrets, it is imperative to have a legal regime that is
English common law and is similar, in many respects,
conducive to globalization. Therefore, it is essential
to the US law. Canadian courts have relied on the
for India to take the necessary legislative step to
same factors set forth in the original Section 757,
assure conformity with the provisions of TRIPS,
Restatement of Torts to define the existence of trade
especially Article 39.
secret rights. Causes of action range from breach of
contract, breach of fiduciary duty, breach of
confidence and unjust enrichment. Ambiguity in Foreign Case Laws Can We Rely
on it?
Korea At the very outset, it is submitted that not enough
In 1991, Korea also amended its laws to provide direct Indian case law has surfaced on the issue of
statutory protection for trade secrets. This law, trade secrets. Only Indian case which has surfaced on
effective from 15 December, 1992, was enacted the issue of confidential information is Diljeet Titus,
during US litigation between GE and a Korean firm Advocate & Ors v Alfred A Adebare.21 As there is no
that had acquired GE trade secrets from a former GE specific law on trade secrets penalizing use of
employee.18 confidential information, the plaintiffs moved the
High Court of Delhi for infringement of copyright.
Japan19 The High Court held that the element of ‘control’ had
Japan implemented its present, and first trade secret to be identified in every case for deciding upon the
law on 1 June 1991. Prior to 1991, there was no nature of information used. If the information was
specific recognition of trade secrets under Japanese obtained in the course of contract of service and not
law. Relief was potentially available under contract contract for service then such information would get
law, as well as unfair competition law, fiduciary law, adequate protection. The Court did not delve into the
and in rare instances, criminal law. issue of importance of pre-existing contract or the
402 J INTELLEC PROP RIGHTS, NOVEMBER 2006
distinction between trade secret and confidential does not apply to him and he is subject to no special
information. So, this case cannot be considered as a restraint.
strong precedent for the pressing issues in trade Finally, in Saltman v Campbell,28 the very basis of
secrets. the development of the law of trade secrets was
Therefore, still Indian courts, when faced with the enunciated and it was said that the law depends on
issue of trade secrets, would have to rely on foreign broad principles of equity and that he who has
case laws. The purpose of this chapter is to enlighten obtained information in confidence shall not take
readers of the position of trade secrets in laws of unfair advantage of it. But, subsequently it was
contracting parties to TRIPS and the ambiguity that realized that there could not be universal applicability
exists in the interpretation. This chapter also focuses of this principle and importance of contract was
upon the importance of non-disclosure agreements emphasized.
and the position taken by courts in case of absence of
any contract to that effect. Existence of Contract made Necessary
The position is not very clear as regards the
Early Case Laws: Importance Attached to the applicability of principles of implied contract and
Principles of Breach of Confidence, Good Faith breach of confidence. In the following cases,
and Implied Contract digressing from the existing position of law, the
One would be surprised to know that the concept of courts took a stand that the presence of a contract is
trade secrets did exist in as early as 18th century. But, necessary for claiming relief. In Harrison v Project &
principles relating to trade secrets were enunciated Design,29 the court noticing the current position
only in later cases. In Wyatt v Wilson,22 Lord Elden observed, ‘the court should ensure that the injured
opined ‘the matter or thing of which party has party is not over-protected at the expense of
obtained knowledge, being the exclusive property of legitimate expectation. Further, the court should not
the owner, he has a right to interposition of the court impute an undertaking that would restrict or inhibit
to prevent any use being made of it.’ The requirement the exercise of discretionary powers conferred on the
of contract for non-disclosure was not required at this party as to the disclosure in the absence of contract’.30
stage and in Tipping v Clarke,23 it was held that In Fraser v Evans,31 it was held that there is no
everyone employed is under an implied contract that breach of confidence when there is no breach of
he will not make public that which he learns in the contract. It was further held that a person to whom the
execution of his duty as an employee. This duty is duty of good faith is owed could only bring an action.
further pronounced in view of the later judgment in It was also observed, ‘In the absence of contract, it
Sanders v Parry24, which held that there was an would be unfortunate to bind the conscience of the
implied duty upon an employee to serve his master defendant in a particular way.’32
(employer) with good faith and fidelity. But, in later cases, the courts reverted to the old
position without even referring to the above
In Saltman Engineering v Campbell Engineering25,
mentioned cases33 and thereby making the position of
the expression ‘consent’ was used for the first time
law on this issue vague and ambiguous.
and it was held that if a defendant is proved to have
used confidential information, directly or indirectly
No Established Law When Information is Improperly
obtained from the plaintiff, without the consent,
Obtained
express or implied of the plaintiff, he would be guilty In Coco v A N Clark Ltd,34 it was held that equity
of an infringement of the plaintiff’s right.
would only intervene if the information has been
Subsequently, this very principle was given the communicated in circumstances importing an
name of ‘springboard doctrine’ and was held that the obligation of confidence. But, the case was silent as to
person cannot be allowed to use the information as a the applicability of the principle in other
springboard for activities detrimental to the person circumstances like when the information is obtained
who made the confidential communication.26 surreptitiously. In The Commonwealth v John Fairfax
However, in Peter Pan Manufacturing Co v Corsets & Sons Ltd,35 the court recognized the difficulty that
Silhouette27 it was held that if the defendant has only would be created when information is obtained
knowledge of and has not wrongly used the improperly. Though the principle of breach of
information before it became public then the doctrine confidence was applied in this case, in subsequent
KUMAR et al.: LEGAL PROTECTION OF TRADE SECRETS 403
cases it was observed that no fiduciary relationship Goulding J held that the information would only be
existed in such cases, hence there was no obligation.36 protected if it can properly be classed as a trade secret
The position is not clear as to the extent of the or as material, which, while not properly described as
obligation in the above mentioned situation. a trade secret, is in all the circumstances of such a
highly confidential nature as to require the same
Exception of Public Interest and Policy also Raises Doubts protection as a trade secret.49 In creating the
In Norwich Pharmacal Co v Commissioners of trichotomy of ‘trade secrets,’ ‘highly confidential
Customs & Excise,37 it was held that public interest information,’ and ‘less confidential information,’ the
must be the criterion by which Equity determines Court created a new difficulty for other courts to
whether it will protect information, which an identify where an employee's general knowledge ends
individual claims is confidential.38 Further, in Ocular and where the employer's confidential information
Sciences v Aspect Vision Care39, it was held that for begins.50
public policy reasons an employee was entitled to use This difficulty was well illustrated in Montour Ltee
and put at the disposal of new employers all acquired v Jolicoeur51 and Monarch Messenger Services Ltd
skill and knowledge whether or not it was secret at the Houlding52 where the courts on a similar fact situation
time the employee acquired it. Where there is a of Faccenda held that all the confidential information
conflict between an employers’ right to protect obtained during the course of employment would be
confidential information and this public policy then in the nature of trade secrets and have to be protected.
the latter prevails. Similarly, in Faccenda Chicken Ltd Finally in Ocular Sciences v Aspect Vision Care53,
v Fowler,40 the Court of Appeal held that the Laddie J rejected the notion that there exists any class
obligation of confidence existing post-employment of information that is so trivial or commonplace that
was more restricted than that which operated during an employee is free to disclose to anyone including a
the currency of the employment contract.41 But in competitor. Such disclosure would breach an
Smithkline & French Laboratories v Secy to the Deptt employee's implied duty of fidelity as postulated in
of Community Service & Health,42 Gummow J Hivac Ltd v Park Royal Scientific Instruments Ltd54
observed, ‘an examination of recent English decisions But, the later cases like AT Poeten (Gloucester
shows that so-called ‘public interest’ defense is not so Plating) Limited v Horton55 and Dranez Anstalt v
much a rule of law and hence can be relied upon all Hayek56 again upheld the classification laid down in
the time. It would have limited application.’43 Faccenda without referring to the abovementioned
Moreover, questions have been raised as to the cases.
content and vagueness of ‘public interest’.44
The Whole Basis of Trade Secret Protection is Challenged on
Can an Undeveloped Idea be Treated as a Trade Secret? Grounds of Monopoly
In Coco v A N Clark Ltd,45 the court held that trade In Stephenson Jordan & Harrion Ltd v
secret protection would be available to an oral idea Macdonalds & Evans,57 the court observed, ‘the claim
and even an undeveloped idea. But, in Fraser v for breach of confidence seems to be an attempt to
Thames Television,46 Hirst J held that any less acquire a monopoly of a branch of human knowledge
elaborately worked idea would not qualify for which the law does not permit.’ Further, in
protection. Further, it was also held that the Humphrson v Syer,58 the court observed that the
information must have potential commercial merit disclosure to any member of the public would destroy
and should be expressed in medium. But, in later the confidentiality of information. But, if it is not
cases, protection was extended to undeveloped ideas. disclosed then it would definitely lead to monopoly.59
These concerns and issues have still not been
Distinction between Trade Secrets and Confidential adequately addressed.
Information is not Clear
In Faccenda Chicken Ltd v Fowler,47 the English
No clear Position as to the Basic Requirements of Trade
Court of Appeal distinguished between trade secrets Secrets
and two degrees of confidential information: ‘highly In Coco v A N Clark Ltd,60 three basic
confidential information’ which will be protected requirements were laid down for an action of trade
after the termination of the employment relationship secret to succeed: (i) the information should have the
and ‘less confidential information’ which will not.48 necessary quality of confidence (ii) information
404 J INTELLEC PROP RIGHTS, NOVEMBER 2006
should have been imparted in circumstances employee to divulge any trade secret of the former
importing an obligation of confidence employer.63 Therefore, it can be stated that non-
(iii) unauthorized use of information. But, in Thomas compete agreements is the most widely used
Marshall v Guinle,61 Megarrey VC laid down new mechanism to prevent the divulgence of a trade secret
requirements without referring to earlier cases. These by an employee or ex-employee of a particular
requirements were: (i) owner should believe that company. This agreement takes the form of a
release of information would be injurious to his restrictive covenant. Other restrictive agreements
interests or advantageous to his rivals (ii) information include non-solicit agreements64, non-disclosure
should be secret according to owner (iii) belief of agreements,65 and confidentiality covenants66.
owner should be reasonable and (iv) must be decided Definition of confidential information, exclusions
in the light of usage and policies of particular industry from confidential information, obligations of
or trade. Therefore, this case made basic requirements receiving party, time periods, and miscellaneous
very subjective and attached a lot of importance to the provisions are few of the important elements which
owner. But, later cases have referred to both these exist in a restrictive covenant such as a non-compete
cases without any consistency.62 agreement for the protection of trade secrets of a
Hence, it is submitted that cases which have been company.
decided on the issue of trade secrets, suffer from The essential question to be answered here is, when
inconsistency and ambiguity and hence cannot be an employee who has had access to your key
relied upon. It is submitted that Indian courts when information and trade secrets walks out your door and
faced with the issue of trade secrets, will have to place into the door of your competitor, is it better to have an
reliance upon such foreign cases, which themselves agreement restraining him from disclosing
are ambiguous. Therefore, this situation makes it even information to your competitor or is trade secret law
more imperative for India to enact specific laws adequate to protect the former employer?
regulating trade secrets so as to evade these Covenants such as non-compete agreements are
inconsistencies. contractual in nature. Valid covenants not to compete
may prevent a former employee from working for a
How are Trade Secrets Protected?
competitor, seeking out clients or copying ones
The topic of ‘trade secrets’ has found an important
products for a specified time and geographic region.
place in a number of discussions and debates being
Trade secrets protection on the other hand, need not
carried on by jurists and legal analysts. This concept
have a time period specified. In some instances, the
has also recently been accepted by courts in India and
former employee does not even have to disclose the
all over the world as an integral component of
trade secret but merely be in a position where
intellectual property which has to be protected.
‘inevitable disclosure’67 of the trade secret could
However, noticing the recent trend of the judiciary
occur. Several jurists and legal analysts support the
and the business firms which possess these trade
system of trade secret law over the concept of
secrets, it can be clearly seen that even today most
restraining agreements.
cases of disclosure of trade secrets are decided on the
However, as shall be discussed subsequently, it has
sole basis of violation of a non-compete agreement
to be noted that most cases regarding disclosure of
which is signed by an employee. Therefore, it can
trade secrets have been solely decided on the basis of
undoubtedly be perceived that non-compete
the violation of the contract between the employer
agreements form an integral part of the method by
and employee. Furthermore, it has to be noted as
which trade secrets are protected.
discussed earlier in this paper that India does not have
Non-Compete Agreements a concrete legislation with respect to trade secrets and
After losing valuable information and several therefore companies in India have to rely on such
employees to competitors, employers all over the agreements to protect its trade secrets.
world require their employees to sign a ‘non-compete It is indeed interesting to note that even countries
agreement’. A non- compete agreement is an that have a statute with respect to the protection of
agreement between the employer and employee trade secrets often rely on the necessity of non-
restraining the latter to work with the competitor of compete agreements. In the recently most celebrated
the former employer. This agreement restricts the case of Microsoft v Google, the software giant,
KUMAR et al.: LEGAL PROTECTION OF TRADE SECRETS 405
Microsoft sued to stop Kai-Fu Lee, a top Microsoft instruments, documents etc., of the Company that
executive, from going to work for their arch rival might come to his knowledge. Clause 17 further
Google. Kai-Fu Lee helped Microsoft establish provided as follows:
operations in Beijing and to develop its core search
technology. Over the past few years, Lee had also ‘In the event of the employee leaving,
been working on Microsoft’s speech recognition abandoning or resigning the service of the
system. On top of this, Microsoft claims that Lee had company in breach of the terms of the agreement
been responsible for the overall development of the before the expiry of the said period of five years
MSN Internet search program. In short, he had he shall not directly or indirectly engage in or
intimate knowledge of company trade secrets carry on of his own accord or in partnership with
including technology developments as well as others the business at present being carried on
business and marketing planning. by the company and he shall not serve in any
Microsoft alleged that Lee’s defection to Google capacity, whatsoever or be associated with any
violated a non-compete agreement68, signed in the person, firm or company carrying on such
year 2000 which stated that if he left Microsoft he business for the remainder of the said period…’
could not work for any competitor for a year in areas
The agreement was held to be valid. The defendant
that would ‘overlap’ with his roles at Microsoft. In the
was accordingly restrained from serving anywhere
instant case it was argued by Microsoft that Lee had
else for the duration of the agreement. The restriction
violated a non-compete agreement signed in the year
imposed in the present case was limited as to time, the
2000. The agreement required Lee to forgo any
nature of employment and as to area, and cannot
employment with any direct competitor of Microsoft.
therefore be said to be too wide or unreasonable or
Notwithstanding this agreement, Lee quit Microsoft
unnecessary for the protection of the interests of the
for its competitor Google. Microsoft therefore
respondent Company. The Court held that there is an
claimed that he violated the agreement and prayed for
implied term in a contract of employment that a
an injunction prohibiting him from working for
former employee may not make use of his former
Google. The Washington Court, after considering the
employer’s trade secrets. But subject to this
arguments presented by both parties passed a
exception, he is entitled to compete. The learned
temporary injunction barring Mr Lee from working
judge distinguished this case from the decision laid
for Google. Therefore, in the instant case the
down in the case of Gopal Paper Mills v Surendra K
injunction was granted on the basis of violation of
Ganeshdas Malhotra71, where an injunction to
contract law and not on the basis of disclosure of
enforce a negative covenant during the period of
trade secrets.
employment as the agreement was for a period of 20
Indian Law years and its terms were also unconscionable.
The validity of agreements such as non-compete More recently, in the case of M/s Ambiance India
agreements, non-disclosure agreements etc. have to be Pvt Ltd v Shri Naveen Jain72, the plaintiff sought an
examined at the altar of Section 2769 of the Indian injunction to restrain the defendant from continuing in
Contract Act, 1872. The Supreme Court in Niranjan the employment of M/s Indigo Orient Limited and to
Shankar Golikari v Century Spg & Mfg Co, Ltd70 divulge information, know-how and trade secrets
enumerated the tests to determine the validity of which the defendant had acquired during his
agreements in terms of Section 27. In the instant case, employment with the plaintiff-company. The
a foreign producer collaborated with a company defendant was employed by the plaintiff-company as
manufacturing tyre cord yarn by an agreement which a fabric technologist. Vide an agreement signed in the
stated that the company would maintain secrecy of all year 2003, he was appointed as a Client Executive.
technical information. In pursuance of the agreement, According to the plaintiff, the agreement between the
the respondent company signed a non-disclosure plaintiff and defendant provided that during the
agreement with the appellant, at the time of his continuance of his employment, the defendant shall
employment. Clause 9 of the agreement provided that not engage directly or indirectly in any other
during the continuance of his employment as well as occupation, business or employment or any similar
thereafter the employee shall keep confidential and business or occupation and would not divulge
prevent divulgence of any and all information, anything which may adversely affect the business of
406 J INTELLEC PROP RIGHTS, NOVEMBER 2006
the plaintiff company. It was also provided that during Therefore, it can be clearly noticed that the law
his tenure and for three years thereafter, the defendant regarding trade secrets in India is guided solely by the
shall not reveal any trade information of the plaintiff existence of a non-compete agreement and its
and for a period of two years after the termination of violation is treated as a violation in contract law.
the service, he would not directly or indirectly take Furthering this problem is the question of employer-
any employment or deal with the plaintiff's present or employee conflict with respect to such agreements.
past customers, vendors, importers, agents,
prospective customers, etc. the defendant left the Employer-Employee Conflict
plaintiff's company in the year 2004 terminating the The inherent interest of the employer to protect his
agreement and subsequently joined one of the trade secrets clashes with the right of an individual for
customer's of the plaintiff, namely, M/s Indigo Orient unhampered and effective occupation and livelihood.
Limited of UK. This act of the defendant is alleged to There are cogent socio-economic arguments in favour
be in violation of the agreement signed in the year of either position. Society as a whole greatly benefits
2003. from technological improvements and the
The Court relied on the judgment of the Delhi High businessman has no alternative but to protect these
Court in the case of Krishan Murgai v technological advancements. It must be recognized
Superintendence Co of India73,which stated that: that modern economic growth and development has
pushed the business venture beyond the size of the
‘An employee, particularly, after the one-man firm, forcing the businessman to a much
cessation of his relationship with his greater degree to entrust confidential business
employer is free to pursue his own information relating to technological development to
business or seek employment with appropriate employees. While recognizing the utility
someone else. However, during the in the dispersion of responsibilities in larger firms, the
subsistence of his employment, optimum amount of ‘entrusting’ will not occur unless
the employee may be compelled not to get the risk of loss to the businessman through a breach of
engaged in any other work or not to trust can be held to a minimum.
divulge the business/trade secrets of his On the other hand, any form of post-employment
employer to others and, especially, the restraint reduces the economic mobility of employees
competitors. In such a case, a restraint and limits their personal freedom to pursue a
order may be passed against an employee preferred course of livelihood. The employee’s
because Section 27 of the Indian Contract bargaining position is weakened because he is
Act does not get attracted to such potentially shackled by the acquisition of alleged
situation…………….’ trade secrets; and thus, paradoxically, he is restrained,
because of his increased expertise, from advancing
The Court held that in the instant case it has not further in the industry in which he is most
been indicated as to what trade secrets and productive.74
confidential information has been divulged to others.
The court further held that in a business house, the Conclusion
employees discharging their duties come across so Protection of trade secret has acquired great
many matters, but all these matters are not trade importance in the present scenario due to the
secrets or confidential matters or formulae, the emergence of different circumstances where it is
divulgence of which may be injurious to the preferred over patent protection. Moreover, in view of
employer. If the defendant on account of his the adoption of the policy of globalization by the
employment with the plaintiff has learnt some Government of India and the existing business
business acumen or ways of dealing with the environment, trade secret definitely needs specific
customers or clients, the same do not constitute trade legislation for its protection.
secrets or confidential information, the divulgence or Further, a specific legislation acquires even more
use of which should be prohibited. The court therefore importance in view of the ambiguity that exists in
held that the restrictions imposed upon the defendant foreign judgments and decisions on the issue of trade
in the agreement, therefore, were void and secrets. No consistent line of principles has been laid
unconscionable. down for setting them as persuasive precedent for
Description:Legal Protection of Trade Secrets: Towards a Codified Regime. Abhinav Kumar†, Pramit Mohanty and Rashmi Nandakumar. The West Bengal National University of Juridical Sciences, NUJS Bhawan, 12 L B Block,. Sector-III, Salt Lake, Kolkata 700 098. Received 31 July 2006, revised 18 October 2006.
