22nd Law Commission Report -The Trade Secret and Economic Espionage
Innovation is paramount for businesses that want to maintain competitiveness in the market. This could incorporate valuable components such as information, concealed manufacturing strategies, or confidential business intel. KFC’s distinctive recipe and Coca-Cola’s secret formula are just two instances exemplifying proprietary knowledge value. For this reason, safeguarding trade secrets is imperative because losing them is detrimental to an organization’s competitive competency. Former employees with access to such sensitive information are often a primary source of concern for organizations.
Generally, any information kept using reasonable discretion for confidentiality and not confidential is deemed a trade secret. Unlike other categories of intellectual property like patents or trademarks, trade secrets do not come with registration restrictions. WIPOs and TRIPs deliver framework obligations that safeguard undisclosed knowledge from competition malpractices. These international agreements provide the right to protect such knowledge.
Indian judicial systems, understanding the importance of trade secrets, laid down principles for their protection in its landmark judgment of Bombay Dyeing v Mehar Karan Singh and Niranjan Shankar Golikari v Century Spinning and Mfg, detailing the parameters for claiming and defending a trade secret, such as the information is secret; there exists some degree of proprietary value, and the holder has made reasonable efforts to safeguard and keep the information secret.
The New Legislation Proposal
Published on 5 March 2024, the report by the 22nd Law Commission of India titled "Trade Secrets and Economic Espionage" included a draft bill proposing a sui generis legal regime for trade secret disclosure suits. This would clarify the protection of confidential information in favour of companies, instil confidence in industries regarding technology transfer to India, and give leverage to negotiations for free trade agreements considering the current worries regarding the absence of proper laws related to trade secrets. Whistleblower protections are also explicitly provided for in the proposal.
Legal Framework for Trade Secret in India
Protectable IP exists as different categories that connect to distinct subject matter types. While patents protect only novel inventions, they do not cover scientific principles or abstract theories compared to copyright protection, which is reserved for expressing ideas. Trade secrets do not offer permanent protection because their protection disappears when they become publicly known through any honest disclosure to third parties. Trade secrets do not need public disclosure and can maintain their value indefinitely if protected properly.
India's current trade secret protection framework operates on equity principles and common law breach of confidence actions alongside specific contractual obligations between parties. The Indian Contract Act of 1872 and the Specific Relief Act of 1963 provide crucial legal foundations for resolving employer-employee contractual disputes in India. Theft of trade secrets and criminal breach of trust or cheating can result in criminal liability under the Bharatiya Nyaya Sanhita of 2023. When electronic records are stolen or removed in connection with computer-related offences, the Information Technology Act of 2000 applies.
Most of the time, the action is against breach of contract as per Section 27 of the Contracts Act, which prohibits enforcement of restrictive clauses as restraining the Trade. Usually, client non-disclosure agreements for employees have accompanying non-compete clauses prohibiting employees from joining a competitor (to prevent/quest halt disclosure). Negative covenants are valid when employment is ongoing but invalidated after termination. The logic underlying such restraint is that an employee should not be restrained from applying business experience gained during past employment. This also applies to licensing and other commercial arrangements.
Statutory Basis for the Protection of Trade Secrets
In October, the Commission consulted a number of experts and stakeholders to evaluate the shortcomings of the current framework. Hence, it has also drafted/ suggested contours for the possible law on trade secrets.
Hon’ble Ms. Justice Pratibha M. Singh of the High Court of Delhi remarked and advocated for a trade secrets law, pointing out that such a law would have three purposes:
1. It would provide clarity to firms and allow them to safeguard their confidential information better.
2. Enhance industry confidence and facilitate technology transfer to India and
3. Help to negotiate free trade agreements, in which the lack of a definite law on trade secrets is usually an issue.
However, academically, the former HRD chair on IPR at CUSAT, Prof. (Dr.) N. S. Gopalakrishnan, who has also contributed to policy formulation for the Indian government, expressed that new legislation could serve the interest of the owner of the information and will not have that balanced approach being followed by courts today. To counter that fear, he proposed adopting the principle of unfair competition rather than a property approach. In addition, he suggested safeguarding common knowledge, employee mobility, reverse engineering and independent innovation. To the same effect, Dr Arul George Scaria pointed out that little empirical evidence proves the insufficiency of the prevailing legal regime. Thus, if we embrace legislation, all interests must be weighed carefully.
In the industry, the Associated Chambers of Commerce & Industry of India (ASSOCHAM) believes that there is a need for a codified law on trade secrets. The lack of the same impedes domestic and international business development and complicates the assertion of rights. The availability of a codified law will give confidence to the industry and further ease of doing business. ASSOCHAM also noted that start-ups, in particular, lack the funds to pursue litigation, and IP is their sole trading asset. Therefore, the codification of such a law becomes even more important. Regarding the debate on setting up a trade secret board, a Confederation of Indian Industry (CII) delegation pointed out that a registration system might not be feasible, considering the high risk of leaked trade secrets.
After consultations with the government, it was observed that the absence of proper protection for trade secrets unfolds in the global arena, where India's trading partners are attempting to press for the inclusion of trade secret provisions. Dr. G.R. Raghavendra opined that a clear-cut law would enhance the confidence of foreign investors and enable information exchange, thus batting for a sui generis law on trade secrets.
Recommendations
Firstly, the Commission pointed out that trade secrets aren’t quite like property, unlike other forms of intellectual property, because they don’t come with clear monopoly rights. For instance, unlike patents, trade secrets don’t require any information to be made public. Secondly, since trade secrets can cover a wide range of information, they should be defined based on the criteria in Article 39 of the TRIPS Agreement, which includes aspects like secrecy, commercial value, and the reasonable steps taken to protect them. Thirdly, when defining misappropriation, we should avoid an overly protective framework, ensuring that only acts done in bad faith led to liability. Lastly, negative covenants that restrict post-employment activities shouldn’t be allowed, as they go against the spirit of Section 27 of the Contracts Act, which prohibits agreements that restrain trade. Also, confidentiality or secrecy clauses in non-disclosure agreements can't shield any information that's already public.
The Commission recommended introducing certain exceptions, such as protection of whistle-blowers, compulsory licensing, and public interest, into the trade secret legislation. The Commission cited the inadequacies of the existing framework during the COVID-19 pandemic, emphasizing the dire necessity for remedies against the wrongful appropriation of trade secrets. Such remedies shall consist of injunctive relief, damages, account of profits, and delivery up. However, without applicable criminal law provisions, there cannot be any criminal action.
Trade secrets, being commercial assets, belong to the purview of the Commercial Courts Act, 2015, made applicable to suits to the misappropriation of trade secret laws. Just like any trade, misappropriation is bound by the law of limitation, which as per the Limitation Act, 1963[xx] is a limitation period of three years from the date on which the right to sue arises. The Commission did introduce an element of presumed confidentiality in cases involving the misappropriation of trade secrets, guaranteeing that any material presented to the court will not be disclosed without that fear.
The Commission has also recommended against setting up a trade secret board/registry since that would be counterproductive considering the encumbering chore of protecting sensitive information. The recommendations of the Commission have been based primarily on the existing framework, with the experience of the COVID-19 pandemic underscoring the need for specific remedies and procedural aspects.
Besides, the LCR concerns the proposed legislation's overall horizon with reference to exceptions and limitations, remedies, etc. It has also annexed a draft bill titled ‘The Protection of Trade Secrets Bill, 2024,’ that seeks to codify the acquisition, use and disclosure of trade secrets and related court proceedings. However, with the trade secret and confidentiality regime being treated with utmost gravity in Industry 4.0, the Commission's effort toward drafting an all-encompassing document outlining trade secret holders' rights, lawful acquisition/use, compulsory licensing, remedies, confidentiality, etc., would be a game changer.
References
1. Section 27 of Indian Contract Act - https://indiankanoon.org/
2. Law Commission Report- https://lawcommissionofindia.nic.in/report_twentysecond/
3. Ambiance India (Private) Limited v. Naveen Jain (2005) 81 DRJ 538.
https://indiankanoon.org/
4. Bombay Dyeing v Mehar Karan Singh and Niranjan Shankar Golikari v Century Spinning and Mfg.
https://indiankanoon.org/
5. https://www.swaniti.com/wp-content/uploads/2022/10/National-IPR-Policy-2016-An-Analysis-.pdf