The 22nd Law Commission of India issued a report titled “Trade Secrets and Economic Espionage” (“LCR”), on March 5, 2024, to recommend a new legal framework to adjudicate claims related to disclosure of trade secrets, and the key provisions that it should encompass. Through this article, we intend to briefly summarise the legal framework applicable to trade secrets in India, highlight significant perspectives considered by the Law Commission and the recommendations thereof.
Extant legal framework for Trade Secrets in India
Trade secrets are valuable confidential business information. Each form of protectable IP relates to a particular type of subject matter. For instance, patents are only concerned with novel inventions and not discovery of scientific principles/ abstract theories, whereas copyright only protects expressions and not ideas. In comparison, trade secrets lack permanence and stability – the protection fades away the moment a trade secret becomes publicly available, or becomes known to any third party by virtue of honest and/or bonafide disclosure. As a corollary, there is no requirement for the trade secrets to be disclosed, and, if protected carefully, it can retain value perpetually.
In India, the extant system of trade secret protection relies on the principles of equity, common law actions of breach of confidence and inter partes contractual obligations. For contractual matters particularly involving employer-employee disputes, provisions of the Indian Contract Act, 1872 (hereinafter, the Contracts Act), and the Specific Relief Act, 1963, are key. Criminal liability in cases of theft of trade secrets, criminal breach of trust or cheating, may arise under the provisions of the Indian Penal Code, 1960 (and Bharatiya Nyaya Sanhita, 2023, after it comes into force on July 1, 2024). Where theft or removal of electronic records is involved, in relation to computer-related offences, the Information Technology Act, 2000, may also come into play.
Often, cause of action is based on Section 27 of the Contracts Act, which prohibits enforcement of restrictive clauses as it amounts to trade restraint.[i] Typically, when employees sign non-disclosure agreements, it includes non-compete clauses, which prevent them from joining a competitor (to avoid/ stop information from being divulged). Such negative covenants have been held to be permissible during the course of employment but not post termination.[ii] The underlying logic for not entertaining such restraints is that an employee cannot be restrained from utilising the business acumen acquired during the course of previous employment.[iii] This is applicable to licensing and any other business agreements as well.
Where no contracts exist, equitable and common law principles of breach of confidence govern such disputes. In Tarun Wadhwa v. Saregama India Ltd.[iv], the Bombay High Court held that for such actions, a plaintiff should identify the information, demonstrate that it was handed in circumstances of confidence & it was to be treated as confidential, and that it was used or threatened to be used without consent. Such information shall not be vague[v] and be sufficiently developed.[vi] Where information contains elements that are in public domain, one must prove that the information was a result of application of skill or mind to produce something not already known.[vii]
The aforementioned causes of action are applicable to any trade secret related dispute. Considering its wide gamut and the rise in digital fraud and misappropriation, the Department-related Parliamentary Standing Committee on Commerce has recommended enacting a separate statute or framework for protection of trade secrets.[viii]
Perspectives on a statutory framework for protection of Trade Secrets
The Commission has consulted several experts and stakeholders to assess the inadequacy of the present framework. Accordingly, it has framed/ recommended contours for the potential law on trade secrets.
Hon’ble Ms. Justice Pratibha M. Singh of the High Court of Delhi commented on the critical role played by data and trade secrets, with the onset of artificial intelligence, technology and start-up ecosystem. Businesses invest heavily in research and data protection. Such sensitive information, if leaked, can cause serious economic impact on businesses. Given the grave consequences of such misappropriation, Justice Singh recommended the need for a law on trade secrets.[ix] Justice Singh noted that a law on this subject would serve three purposes:
- it would give clarity to companies and enable them to better protect their confidential information;
- increase industry confidence and enable technology transfer to India; and
- facilitate negotiation of free trade agreements, where the absence of a clear law on trade secret is often a point of concern.
However, from an academic perspective, Prof. (Dr.) N. S. Gopalakrishnan, former HRD chair on IPR at CUSAT, who has also assisted the Indian government in policy-making, noted that a separate legislation may favour the holder of information and not have a balanced approach that the courts presently adopt. To counter this fear, he suggested following the principle of unfair competition instead of property approach. Further, he recommended protecting common knowledge, employee mobility, reverse engineering and independent innovation.[x] On a similar note, Dr. Arul George Scaria highlighted that there is scant empirical data that demonstrates the inadequacy of the prevalent legal regime and hence, if adopting a legislation, all interests must be carefully balanced.[xi]
Within the industry, Associated Chambers of Commerce & Industry of India (ASSOCHAM) opined that a separate codified law on trade secrets is required. Absence of the same thwarts domestic and international business growth and makes it difficult to assert rights. Presence of a codified law will instil confidence in the industry and further ease of doing business.[xii] ASSOCHAM also observed that start-ups, especially, do not have the capital to engage in litigation and IP is their only trading element, hence codification of such law becomes all the more critical.[xiii] In reference to the discussion on establishing a trade secret board, a Confederation of Indian Industry (CII) delegation noted that registration mechanism may not be possible, given the high risk of trade secrets getting leaked.[xiv]
Upon consultations with the Government, it was noted that lack of adequate trade secret protection plays out in the international forum where India’s trading partners try to push for inclusion of provisions on trade secrets.[xv] Dr. G.R. Raghavendra suggested that a definitive law would help in boosting the confidence of international investors and facilitate information exchange, thereby batting for a sui generis legislation on trade secrets.[xvi]
Key Recommendations on Trade Secrets legislation[xvii]
The LCR has recommended a sui generis legislation that consolidates the existing principles and judicial precedents and accommodates the needs of the Indian industry, while taking into consideration the perspectives of all stakeholders. The contours of the proposed legislation are discussed within this section.
Firstly, the Commission has noted that trade secrets conceptually cannot be property-like, which is the case with other forms of IP since there are no definite monopoly rights attached to it. Particularly, unlike patents, there is no disclosure of information in the public domain in the case of trade secrets. Secondly, since trade secrets are expansive in nature, they should be defined as per the approach in Article 39 of the TRIPS Agreement[xviii] wherein secrecy, commercial value and reasonable steps are the qualifying criteria for protection of trade secrets. Thirdly, when defining misappropriation, an over-protective framework should be avoided, ensuring only bad faith acts attract liability. Fourthly, negative covenants on post-employment restraints shall not be permitted as it violates the spirit of Section 27 of the Contracts Act, that prohibits agreements in restraint of trade. Additionally, information that is already in the public domain cannot be protected by way of confidentiality or secrecy provisions in non-disclosure agreements.
The Commission has contemplated exceptions that should be carved out in such legislation. To start with, it recommended incorporating provisions to protect whistleblowers, as illegal activities under the garb of it being a trade secret cannot be exempted by law – any non-disclosure agreements to that end would be void under Section 23 of the Contracts Act.[xix] The Commission recommended incorporating exceptions for compulsory licensing and public interest, observing that the proposed act shall include provisions on compulsory licensing and/ or government use where public interest is involved. It has cited the COVID-19 pandemic, where efforts for voluntary licensing of trade secrets around vaccines were refused and, hence, the extant framework proved to be inadequate.
On remedies, it has proposed that reliefs for misappropriation of trade secrets should include injunctive relief in the form of orders granting interim injunctions, ex-parte injunctions and permanent injunctions, as well as other ancillary reliefs ordinarily available under other IP statutes such as damages, rendition of accounts or profits, delivery up, etc., as also remedy in case of groundless threats of legal proceedings. However, as per the Commission, criminal action may only be taken under the applicable criminal law provisions under various existing statutes.
For procedural issues, among other things, the Commission observed that as trade secrets are commercial assets, the procedure under the Commercial Courts Act, 2015, shall be applicable to suits on misappropriation of trade secrets. In relation to the limitation period, Article 113 of the Limitation Act, 1963[xx], shall be applicable wherein limitation starts from three years from when right to sue accrues. The LCR is silent on whether, like with other forms of IP, a violation by virtue of misappropriation of trade secrets would give rise to a continuing cause of action. It has also proposed in-built confidentiality provisions for proceedings pertaining to misappropriation of trade secrets, such that disclosures to the Court can be given without any apprehension. The LCR has specifically recommended not including a trade secret board/ registry as such registry will be counter-intuitive since the task of protecting sensitive information is onerous and has practical difficulties, coupled with the apprehension that information holders may have in sharing protected information.
Overall, the LCR contemplates the broad framework of the proposed legislation, including provisions on exceptions, limitations, remedies, etc., and a draft bill titled ‘The Protection of Trade Secrets Bill, 2024’ has also been annexed to the LCR.[xxi] This Bill attempts to codify acquisition, use and disclosure of trade secrets and legal proceedings thereof. Whether the codification of the law on trade secrets is required to balance the interests of the industry, innovators and the public is still up for debate. However, given the exalted status of trade secrets and confidential information in Industry 4.0, the Commission’s attempt to draft a definitive legislation on trade secret holder’s rights, lawful acquisition/ use, compulsory licensing, relief, confidentiality, etc., may prove to be formative.
The complete text of the LCR may be accessed at https://lawcommissionofindia.nic.in/report_twentysecond/.
[i] 27. Agreement in restraint of trade, void. — Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. Exception 1.—Saving of agreement not to carry on business of which good-will is sold.—One who sells the good-will of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the good-will from him, carries on a like business therein, provided that such limits appear to the Court reasonable, regard being had to the nature of the business.
[ii] LCR, 102.
[iii] Ambiance India (Private) Limited v. Naveen Jain (2005) 81 DRJ 538.
[iv] (2021) 88 PTC 423.
[v] LCR, 108.
[vi] Anil Gupta v. Kunal Dasgupta ILR (2002) 1 Del 250.
[vii] Anindya Mukherjee v. Fowler (1985) 1 All ER 724.
[viii] 17.4, Report No. 161, Government of India, National Intellectual Property Rights Policy, Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, May 2016.
[ix] LCR, 141.
[x] LCR, 148-149.
[xi] LCR, 151.
[xii] LCR, 156.
[xiii] LCR, 158.
[xiv] LCR, 163.
[xv] LCR, 169.
[xvi] LCR, 170.
[xvii] LCR, 176-196.
[xviii] 39(2): 2. Natural and legal persons shall have the possibility of preventing information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices so long as such information:
(a) is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;
(b) has commercial value because it is secret; and
(c) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.
[xix] 23. What considerations and objects are lawful, and what not.—The consideration or object of an agreement is lawful, unless— it is forbidden by law; or is of such a nature that if permitted, it would defeat the provisions of any law; or is fraudulent ; or involves or implies injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.
[xx] 113- Description of Suit: Any suit for which no period of limitation is provided elsewhere in this Schedule. Period of Limitation: Three years. Time from which period begins to run: When the right to sue accrues.
[xxi] LCR, 198-204.
