Confidential know-how and information, even when not covered by patent or copyright, is a critical element of the value proposition of many businesses. The Intellectual Property Rights protection regime in India tends to ignore this valuable asset. Any protection accorded through law of contracts and law of confidence is piece-meal in nature. With the increase of permissible foreign direct investment (FDI) in more and more sectors; as well as India having established itself as a major outsourcing centre and the growing speed with which its economy is looking to progress, an effective specific legal framework for protection of trade secrets and confidential information is imperative. The issues surrounding the protection of trade secrets and confidential information are many fold. This article endeavors to highlight the need for such a framework through specific focus on the outsourcing sector.
A company’s intellectual property assets include its goodwill, brands, patents, trademarks, trade dress, copyrights, and trade secrets, all of which are intangible assets. Among these, trade secrets may be the most elusive because they often are not subject to a uniform statute and vary from jurisdiction to jurisdiction. A trade secret can be information of any kind that is valuable to its owner, not generally known, and is maintained in confidence by its owner. It may also be referred to as confidential information or know-how. At a broad level a trade secret may include manufacturing processes, industrial designs, product formulas, sales and advertising strategies, distribution methods, customer lists, computer algorithms, and the like. In a narrower context it could be data or information relating to the business not generally known to the public which the owner reasonably attempts to keep secret and confidential and gives the business a competitive edge over their rivals. For example, in the BPO business, a business process that the company may be following for its day-to-day operations that give it an edge over its competitors can be a trade secret. At the same time confidential information constitutes really a subset of the broader subject matter of trade secrets.
The economic significance of trade secrets and confidential information in the knowledge economy has increased greatly in the past few years, for a number of reasons. One is that other forms of intellectual property like patent, trademark and copyright have an element ofuncertainty as compared to trade secrets since the former are subject to approval on the basis of specific criteria. Second, significant factor which has enhanced the value of trade secrets is the relative ease of creating and controlling trade secret rights. There are no bureaucratic delays and no multiyear waits for government grants, such as those for patents. Trade secret rights, in contrast, can be established by the explicit conduct or agreement of the interested parties. A trade secret right starts upon the creation of the idea in some concrete form, and continues as long as secrecy is maintained. Protection of information such as ideas or information which does not qualify to be protected as intellectual property within the legal framework of intellectual property laws can be protected through trade secrets. They also have the advantage of being lasting forever, again, as long as secrecy is maintained in contrast to the traditional IPR which are limited by tenure.
Despite recent growth in other emerging markets, India continues to maintain its position of being the number onedestination for outsourcing services involving information technology and business processes. In recent years, moreover India has further emerged as the global KPO “hot spot.” KPO involves the offshore outsourcing of knowledge-driven or “high end” processes that require specialized domain expertise, including such varied areas as R&D, insurance underwriting and risk assessment, financial analysis, data mining, investment research, statistical analysis, tax preparation, engineering and design, animation, graphics simulation, medical services, clinical trials, legal services, and more.
With more and more knowledge intensive and high–end work being outsourced to India, protection of intellectual property (IP), including any trade secrets and confidential information, that may be transferred or created in India becomes an even more critical concern for the outsourcing customer. IP concerns should be addressed early on to achieve and maximize the benefits and strategic incentives the outsourcing business offers. It may be worthwhile to illustrate some of the issues that any outsourcing customer may face due to the risks associated with transfer of trade secrets and confidential information when outsourcing functionalities to India. At the time of outsourcing a “high end” process or functionality, often much of the knowledge transferred offshore (for example, source code, formulae, designs, specifications, or experimental data) is confidential in nature and generally not suitable for local registrations in the form of patents. It,therefore, becomes critical for the outsourcing customer to seriously consider
On the other hand, the Indian service providers have to be aware of these risks and quick to demonstrate the ability and willingness to safeguard the customer’s trade secrets and other commercially valuable confidential information against misappropriation (e.g. of databases), misuse (of client lists), unauthorized disclosure, sabotage or theft (of business processes).
India has no statutory or other legal framework for protection of trade secrets and confidential information. It is usual for parties concerned to primarily rely on contracts to cover any breaches ofobligations related to these issues. Indian law does recognize the common law tort of “breach of confidence” irrespective of the existence of a contract. But this cause is of limited use in an outsourcing context because the duty of confidence can be enforced only against a party that is either a fiduciary to the outsourcing customer or in an employer-employee relationship with the complaining party. Also, the duty arguably only extends to the unauthorized disclosure of confidential information to a third party and does not prevent the recipient’s own “misappropriation” of the information.
In many cases the courts have tried to rely on copyright to protect trade secrets and confidential information rather accord protection to trade secrets directly. For example in Burlington Home Shopping Pvt. Ltd. Vs Rajnish Chibber (1995) 61 DLT 6, the Delhi High court granted protection to a database of compilation of mailing addresses of customers through copyright. In a more recent case involving litigation between partners of a law firm, a compilation of list of clients and their addresses was held to be a ‘literary work’ protectable under copyright law (Diljeet Titus vs. Alfred A. Adebare and Ors (2006) 32 PTC 609). In a yet more recent case of Bombay Dyeing vs. Mehar Karan Singh (decided on 28 August 2010 by the Bombay High Court), Justice R Dalvi restrained an ex-director from divulging any information about software and a manual prepared by Bombay Dyeing as it could prove its proprietary right (copyright). However, the court further held that the information and knowledge amassed with regard to discussion held at Board meetings of the Company fromtime to time, cannot be protected since the ex-director carried them in his head.
On other occasions trade secrets and confidential information have been protected using common law principles like equity and fraud. Most of these cases have been referred under section 27 of the Indian Contract Act, which states that every agreement by which a person is restrained from carrying any trade, business or profession, is invalid. Relief usually claimed in these cases, are enforcement of Non-Disclosure and Non Compete Agreements between the employee and the employer, which are indispensible for protection of trade secrets. However, the courts have been very reluctant to enforce covenants, which put post employment restrains on the employee. The courts tend to view these cases as a clash of two interests, the rightto livelihood of the employee and right of the employer to protect its trade secrets.
The well-established line of court cases lays down the general principle that confidentiality, non-competition and non solicitation agreements will be enforceable during the term of the employment relationship. After termination of employment, however, many provisions of these agreements will be struck down and deemed unenforceable by Indian courts in enforcement proceedings, even if the provisions are reasonable in scope and duration, subject to certain exceptions. In Niranjan Shankar Golikari vs. The Century Spinning & Manufacturing Co. Ltd. (AIR 1967 SC 1098), the Supreme Court upheld a restrictive clause in an employment contract, which imposed constraints on the employee not to reveal or misuse during the period of the employment any trade secrets that the employee learned while employed. While more recently in VFS Global Services Private vs. Suprit Roy (2008 (2) Bom CR 446) the employer has been burdened with the onus of proving that the information is confidential and proprietary to it. The Bombay High Court held that failing the above “a restraint on the use of trade secrets during or after cessation of employment is not tantamount to a “restraint on trade” undersection 27 of the Act and therefore can be enforceable under certain circumstances.
It is important to point out here that in the application of the “reasonableness” test” courts apply a stricter level of scrutiny to non-competition provisions in contracts for the provision of services than to contracts solely for the sale of a business or franchise agreements restraining the franchisee from dealing with competing goods. This exception is however not attracted in the context of an outsourcing contract. Thus, the overall legal position in India remains that unless a trade secret or clearly confidential information is held in a proprietary form (usually in a copyrightable form) it is difficult to protect it especially in the post-termination context.
The terms “Confidential Information” and ‘Trade Secrets” are often used interchangeably. One of the first exercises we conduct when one of our clients plans to execute a material transfer agreement or a license agreement is to ensure that they are aware that confidential information (CI) are different from trade secrets (TS) unless otherwise defined in the definition clause of the agreement or the accompanying non-disclosure agreement. There is an absolute responsibility on both parties to the agreement especially on the disclosing party to ensure that both the CI and TS are accessed on a need-to-know basis, and even then the receiving party must be made aware that even if the facts disclosed in a CI may be publicly known, the circumstances under which it has been marked “CONFIDENTIAL” by the disclosing party makes that information very confidential, and can be made public only after it is declassified by the disclosingparty or under the terms of the agreement or by operation of law. TS on the other hand usually continues to remain confidential at all times even after the agreement has expired. Usually information classified as TS has to fulfil the three point criteria of being generated or known exclusively by the disclosing party or its assignor, where every effort has been made to keep the information secret because the said information gives the disclosing party an advantage over its competitors in business /trade. It is possible that the TS can lose its status by leakage of information or by independent formulation by a third party.
As a patent lawyer though, I find trade secrets and confidential information to be a non-alienable part of the inventive process and the invention requiring patent drafting ingenuity to preserve both the TS and CI while at the same time fulfilling the patentability requirement of sufficient disclosure. Since TS cannot be covered by patent for the obvious reason that patents are always published barring instances where secrecy clause is invoked, it becomes imperative for the originator / knowledge holder to find suitable means/instruments to ensure both the protection of TS as well as enforcement of unauthorized access. We do advise clients to use the self-postage method or the escrow method of declaring right to the TS, but other than this, there appears to be no other instrument to protect the TS per se. The contractual obligation under the contract law and/or the principles of unjust enrichment under the common law of torts are very useful tools for enforcement only if the TS and/or CI is part of a transaction such as in a license-to-use or a MTA with one or more private parties. There is no protection whatsoever if the TS or CI is shared with the Government for e.g. in case of data submitted for regulatory approval. Little has been done on the proposals put forth by the Satwant Reddy Report of May 2007 on the requirement of separate forms of data protection in the three demarcated areas of pharmaceutical, agricultural chemicals and traditional knowledge.
There is an imperative need for; protection of TS per se, enforcement of rights of the TS holder when the TS & CI: is voluntarily shared with private party(ies) and is submitted to the government for regulatory approvals etc.
Last but not the least India requires multiple forms of protection of TS either through a separate statute or through amendments of existing statutes.
Last but not the least One of the main issues in an outscoring contract arises in the context of enforcing security in the context of sub-contractors and employees. Let us consider the following hypothetical scenario where an Indian service provider has engaged a subcontractor in India to perform the outsourced services for an outsourcing customer. If the Indian subcontractordiscloses or misappropriates the outsourcing customer’s trade secrets or confidential information, the outsourcing customer has neither a breach of confidence claim against the subcontractor nor a breach of contract claim, unless the outsourcing customer has contracted directly with the subcontractor, which is usually not the case. The contract between the outsourcing customer and the Indian service provider might hold the service provider liable for damages caused by the subcontractor’s inappropriate disclosure, but that cause of action still does not directly address or foreclose the subcontractor’s past and possibly future misconduct. Essentially, the outsourcing customer is left without a direct remedy against the Indian subcontractor and without an immediate legal means to effectively stop the disclosure which, in most cases is the most sought after remedy. Similar is the concern with respect to the misconduct of employees and ex-employees of the Indian service provider. These concerns further affect the incentive that an outsourcing customer may have in doing business with an Indian service provider.
In order to protect trade secrets and confidential information through the contractual arrangement between the outsourcing customer and the Indian service provider, outsourcing customer should also enter into contractual relationship between that service provider and its subcontractors. A possible way forward for the Indian service provider isto enter into a back to back similar contract with its subcontractors and employees. This can be further achieved by mandating in the master outsourcing contract that the outsourcing customer may exercise the option of directly suing the sub-contractor and or employee directly and include an express right of enforcement by the outsourcing customer against the subcontractors or employee. The contract provisions should, as clearly and as effectively as possible, prohibit the wrongful disclosure and misappropriation of trade secrets and proprietary data by the service provider and the subcontractor(s); the contracts should make equally clear and expressly acknowledge the outsourcing customer’s right to enforce violation of these provisions for damages and the customer’s right to seek to enjoin such wrongful acts locally.
Confidentiality and non-competition covenants can be also used to protect trade secrets and confidential information in India. It is, however, important to draft these in a manner that they do not fall foul of the current line of cases as discussed in the foregoing section. Thus, an outsourcing customer should insist upon explicit provisions in the operative contract that require the Indian service provider to:
A service provider’s failure to comply with the confidentiality obligations should not only permit the customer to immediately terminate the contract but also result in uncapped financial consequences to the service provider. Most critically insufficiency of damages as a remedy should be specifically acknowledged by the recipient of trade secrets and confidential information. The operative contract should also include non-competition covenants that restrict the Indian service provider from using competitive technology or personnel in connection with the outsourcing customer’s competitors. However, as discussed above India has stringent laws against overly restrictive trade practices and therefore the enforceability of a noncompete covenant is subject to a case-bycase determination and any particular terms cannot in every case be assumed to be enforceable. This makes the drafting of these provisions in outsourcing contracts a critical and sensitive task.
To the extent practicable, and depending on the nature and sensitivity of the outsourcing customer’s IP involved in the project, it should consider entering into non-disclosure and IP ownership agreements directly with the Indian service provider’s employees and consultants assigned to the project. In this manner the confidentiality and IP ownership obligations would remain in force even after the employee or consultant is no longer employed orengaged by the Indian service provider. The outsourcing customer will have contractual privity with such employees and consultants and legal standing to sue in India, as well presumably in other venues, in the event of a breach of their obligations.
The volatile nature of trade secrets demands constant vigilance for their protection. In a developing country, protection of intellectual property is one of the most significant tasks, as it encourages foreign investment in many sectors. India continues to falls back on the old traditional common law principles. Moreover in view of the policy of globalisation by the Government of India, there is an urgent need for a policy framework to regulate protection of trade secrets. A specific legislation acquires even more importance in view of the ambiguity that exists in judgments and decisions on the issue of trade secrets. India faces the risk of losing out on substantial FDI unless urgent steps are taken in this direction. A specific legal regime for protection of trade secrets is the only effective means to ensure that India keeps up with its agenda of ensuring strong and effective IPR protection which would attract foreign investors giving our economy the fuel needed for its projected growth.
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