The famous novel Charlie and the Chocolate Factory by Roald Dahal and its eccentric owner Willy Wonka, tiny men-Oompa- Loompas and the honest child Charlie are well known. What is interesting is that the owner of the chocolate factory (Willy Wonka) fired all his employees due to fear of industrial espionage and instead hired tiny men, Oompa- Loompas. Willy Wonka had no fear of his trade secrets being leaked by Oompa- Loompas as they were happy to work so long as they get their favourite food cacao beans. To continue his operations and protect his trade secrets Wonka organises a contest to find an honest child, Charlie to handover the operation of factory to him. The entire story is fascinating.
In the real world you can’t find Oompa- Loompas and fire all employees for the fear of losing your trade secrets. Some would say Charlie(s) are hard to find as well. Thus making it challenging to protect your trade secrets
Broadly, any confidential business information which gives an enterprise a competitive edge may be considered a trade secret. It could be a formulae, practice, design, process or compilation of information. In some cases it may concern inventions or manufacturing processes that do not meet the patentability criteria and therefore can only be protected as trade secrets. In food industry, it is common for businesses to closely guard their formulae or method of manufacture that they want to keep secret e.g. COKE formula or KFC secret recipe. The trade secret for service industry are the business methods, information they collect about their customers, relationships they develop, prepare bespoke reports to service their clients and capture interaction with their customers on a database to tailor solutions. The information collected and stored is valuable and qualifies for protection as a trade secret.
The importance of Trade Secrets in today’s world can be ascertained from the fact that even the TRIPS has mandated trade secret protection and its definition states that any person lawfully in control of secret information can prevent its unauthorised disclosure, acquisition or use in a manner contrary to honest commercial practices.
Thus for information to qualify as a trade secret, it should fulfil these conditions:
- It must be a secret;
- It has a commercial value; and
- It has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.
Practical tips to protect trade Secrets
Listed below are some mantras that businesses can adopt proactively to protect trade secrets:
- Label the information as “confidential” so that they are always aware that they are dealing with confidential information and should keep it secret as a part of their contractual obligations.
- Restrict access to database, servers, computer programmes that store trade secrets to limited personnel.
- Ensure access to servers is password protected and suitable notice displayed on computer screens when entering the sensitive zone.
- Educate employees on why keeping trade secrets are important for business.
- Review employees’ contracts to ensure that they are appropriately worded and relate to their job profile in terms of handling of trade secrets.
- Sign non-disclosure agreement with any third party that you share any commercial business information either to form an alliance or explore a business opportunity including your vendor.
Restrictive Covenants in Employees contracts
It is common for employers to enter into an agreement with employees that limits the employee’s right to take confidential information when they leave, either voluntarily or as the result of being terminated. The employers also want to restrict their competitors from hiring away employees and soliciting their customers. Thus properly drafted employment agreements that contain confidentiality terms and various non-compete clauses are commonly used by businesses.
The question that businesses do ask is whether non–compete clauses that restrict employees right to seek employment and/or do business in the same field are enforceable? The primary concern being they are in the form of restraint of trade which is not permissible as per section 27 of the Indian contract Act. Section 27 of the Indian Contract states that:
Click here to view image.
Thus for all other situations it would seem that restrictions would be treated as void. In the absence of codified law to protect trade secrets, the courts in India have been taking differing views on what is reasonable restriction that can be imposed by employers to protect their trade secrets. The case laws discussed below will show balance to be tilted in favour of employees. However courts are also taking the view that restrictions during the employment period when the employee is bound to serve his employer exclusively cannot be regarded as restraint of trade.
The Supreme Court way back in 1967 observed that negative covenants may be valid if they are reasonable. In Niranjan Shankar Golikari v. Century Spg. & Mfg. Co., Ltd. AIR 1967 SC 1098, a foreign producer collaborated with a local tyre cord yarn manufacturing company on the condition that it would maintain secrecy of all technical information and that it obtains corresponding secrecy arrangements from its employees. The Defendant was appointed for a period of five years and was given training on the condition that during this period he shall not serve anywhere else (in a competing industry) even if he left the service earlier. The agreement was held to be valid. In the present case, the restrictive covenant was with regard to time and nature and location of employment.
In subsequent cases the courts have taken stricter view of the restrictive covenants and held that they are violative of Section 27 of the Contract Act and thus are unenforceable.
In Superintendence Company of India v. Krishan Murgai 1980 AIR 1717, the plaintiff company possessed trade secrets in the form of techniques and clientele. Mr Murgai was employed as a branch manager and one of the clauses of the terms and conditions of employment restricted him neither to serve any other competitor nor carry on his own business in similar line for two years at the place of his last posting. The Supreme Court held that a contract, which had for its object a restraint of trade, was prima facie void.
This stand was again affirmed in Desiccant Rotors International Pvt Ltd v. Bappaditya Sarkar & Ans I.A. No.5455/2008, where the Delhi High Court had to decide a non-compete clause signed by a senior manager. The manager joined as a Director with a direct competitor of his old employer in spite of the existing contract. The court while accepting the argument that he had access to the trade secrets of the company, nevertheless ruled that in the clash between the attempt of employers to protect themselves from competition and the right of employees to seek employment wherever they choose, the right of livelihood of employees must prevail.
Protecting trade secrets in Commercial transactions
In the Gujarat Bottling v. Coca Cola Company AIR 1995 SC 2372, Coca Cola entered into a bottling agreement with Gujarat Bottling Company. However, Gujarat Bottling Company transferred its shares to some companies which had agreements with Pepsi. Coca Cola dragged Gujarat Bottling to court on the basis of the non-compete clause with Gujarat Bottling according to which Gujarat Bottling could not carry out any of these services with other brands during the subsistence of the agreement. The court held that a negative stipulation contained in the franchise agreement restraining the franchisee from dealing with competing goods was to facilitate the distribution of the goods of the franchiser and could not be regarded as a restraint of a right to trade.
In John Richard Brady And Ors v. Chemical Process Equipments P. Ltd. and Anr AIR 1987 Delhi 372, the plaintiff invented a “Fodder Production Unit” (FPU) and for indigenous production of the same sought supply of thermal panels from the defendant and during negotiations shared technical material, detailed know-how, drawings and specifications with the defendant concerning the FPU. The defendant agreed to supply thermal panels but did not comply with it and started making their own FPUs. The plaintiffs filed a suit alleging misappropriation of know-how information, drawings, designs and specifications disclosed to the defendant. The Court held that even in the absence of an express confidentiality clause in the contract, confidentiality is implied and that the defendant is liable for breach of the confidentiality obligations.
Trade secrets and Copyright protection
The Delhi High Court in Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors. 130 (2006) DLT 330, concluded the plaintiffs had a prima facie case in respect of the data which was taken by the defendants and restrained the defendants from using such data.
The plaintiffs were running a law firm where the defendants were earlier working. It was alleged that one of the defendants came to the office of the plaintiffs after a dispute arose between the parties after the office hours and downloaded 7.2 GB of database of plaintiff's crucial data. The plaintiffs' also claimed that the defendants stole even the hard copies comprising of over 10 proprietary drafts of the plaintiffs. The plaintiffs prayed for protection of their exclusive data under the Indian Copyright Act, 1957.
The defendants claimed ownership of the copyright in the work done by them while they were in the organization of the plaintiff. This was refuted by the plaintiffs who contended that they had spent a substantial amount of money in training skills, computer network, specialized and customized software, law library, office infrastructure, etc., and therefore, the work of the defendants in fact belonged to the plaintiffs.
Although the Court did not restrain the defendants from carrying on a similar service per se, it definitely recognized the protection that needed to be afforded to the plaintiffs under law and to that extent there was a restraint on the use of information by the defendants after their employment term.
In Tech Plus Media Private Ltd vs Jyoti Janda & Ors, CS(OS) 119/2010 & IA No.920/2010 (pronounced by the Delhi High Court on 29th September, 2014) the Court while dealing with allegation of breach of copyright by a former employee alleged to have copied database of customers and their contact details, as well as entities which could be targeted for subscription later, held: For compilation of data to be protected by copyright, it must be demonstrated that the creator not only exercised labour and capital, but also sufficient skill and judgment such that it is not a mere mechanical exercise. The court ruled compilation/database in this case was nothing but collection of email addresses and cannot be afforded copyright protection. The court, at the same time, admonished the practice of using Copyright Act to harass former employees.
Zee Telefilms Ltd. v. Sundial Communications Pvt. Ltd. 2003(27)PTC457(Bom)
The Bombay High Court observed that the law of breach of confidence is different from the law of copyright. The law of breach of confidence is a broader right than the statutory right of copyright. There can be no copyright on ideas or information and it is not infringement of copyright to adopt ideas of another provided there is no substantial copying of the form in which the ideas are expressed. But if the idea or information has been acquired by a person under such circumstances that it would be a breach of good faith to publish them and he has no just cause for doing so, the court may grant an injunction on the ground of breach of confidence.
The distinction between copyright and law of breach of confidence is of considerable importance with regard to unpublished manuscripts submitted and not accepted for publication or use. Whereas copyright protects material that has been reduced to permanent form, law of breach of confidence may even protect oral confidential information.
To Sum up:
The judicial position on restrictive or negative covenants in a contract can be summarised as below:
- During the term of employment, an employee is expected not to engage in any other work and must not divulge any trade secrets of the employer.
- Generally speaking, negative covenant prohibiting the employee from joining other competitors are valid and enforceable during the term of employment.
- Post employment restraints i.e. restricting employee’s right to seek employment and/or doing business in the same field as employer have been held to be violative of Section 27 of the Contract Act.
- In cases where employer seeks to enforce a general restrictive covenant against an employee to join a competitor and makes vague assertion that the employee had access to confidential information that is subject of copyright, it may not find favour with the court. However, if there is a specific example of confidential business information that was in control of the departing employee or had access to, the courts are more willing to grant injunction to stop the information being used for a new venture or employer.
- Non-solicitation clause between the contracting parties by itself does not amount to restraint of trade, business or profession and would not be hit by Section 27 of the Contract Act.
- The courts are inclined to take a liberal view of a negative covenant in commercial contracts, partnership contracts, franchise contracts etc when compared to employer- employee contracts.