A practical guide to protecting and enforcing trade secrets in India as new bill on the horizon

India’s evolving stance on protection of trade secrets

India’s position on protection of trade secrets has undergone significant evolution over the years. During the initial negotiation phase of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement (1987–1993), India did not oppose the inclusion of trade secrets and confidential information within its purview because the Indian judicial framework was in conformity with the proposed obligation. However, at subsequent stages, India took a principled stand against the inclusion thereof as intellectual property (IP) owing to the absence of public disclosure, which is the basis of other IP. Since then, however, India has come a long way. With economic liberalisation and a series of policy changes, several reforms have been made to open the country’s economy and to promote the ease of doing business, including softening the stance on trade secret protection.

Well-intentioned attempts were made first in the draft National Innovation Bill 2008 and thereafter in the National Intellectual Property Rights Policy 2016, highlighting the gaps in existing laws and underscoring the need to bring adequate legislation on trade secrets to India. In 2017, the Department of Legal Affairs and Legislative Department prepared a draft bill and forwarded a reference to the Law Commission to ensure a thorough evaluation. In pursuit of this reference, the Law Commission released its 289th report on ‘trade secrets and economic espionage’ in March 2024. Along with the report, the Law Commission introduced the Protection of Trade Secrets Bill 2024 (the Trade Secrets Bill).

While such reformative policies and legislation have been proposed and are being considered, in the interim, the protection of trade secrets and confidential information continues to be regulated under existing Indian legislation and common law principles.

What does India protect as trade secrets?

Echoing the definition under article 39 of the TRIPS Agreement read with the jurisprudence developed by the Indian courts, the newly proposed Trade Secrets Bill 2024 defines trade secret as being any information:

• not known (secret) to persons that deal with such kind of information (secrecy);
• deriving commercial value on account of being secret (commercial value);
• subject to reasonable steps to keep it secret by the holder or owner (precautions); and
• disclosure of which is likely to cause damage (damage due to disclosure).

As for the criteria that such information ought to possess, the definition proposed in the Trade Secrets Bill appears to have trickled down from the various decisions by Indian courts. Pertinently, the first three criteria of secrecy, commercial value and precautions were covered by the Hon’ble Bombay High Court in the landmark judgment of Bombay Dyeing and Manufacturing Co Ltd v Mehar Karan Singh (2010 SCC OnLine Bom 1243).

The fourth criteria of damage due to disclosure was covered by the Hon’ble Delhi High Court in American Express Bank, Ltd v Priya Puri (SCC OnLine Del 638), citing Lansing Linde, Ltd v Kerr ((1991) 1 All E.R.418), which held that ‘a trade secret is information which, if disclosed to a competitor, would be liable to cause real or significant harm to the owner of the secret’. The use of the phrase ‘likely damage’ in the Trade Secrets Bill suggests that damage due to the disclosure of trade secrets need not be actual.

How do existing regulations in India protect trade secrets?

In the absence of any codified sui generis legislation in India, the Indian trade secrets protection framework largely depends upon provisions within existing statutes and judicial precedents. For contractual matters, essentially barring employees, consultants or agents, protection is primarily derived from the Indian Contract Act. Additionally, and alternatively where there is no written contract in place, trade secrets have been protected by courts in India under the laws of equity.

In addition to the above, certain acts of misappropriation of trade secrets and confidential information are criminally charged and made punishable under Indian criminal laws, and the Information Technology Act in cases involving electronic records.

Protection through contracts

Indian courts have upheld clauses in contracts that impose obligations on an employee or a licensee to not disclose or use the information received under the agreement for any purpose other than that stated in the respective contract. However, the Indian Contract law specifically prohibits a clause that would amount to restraint on competitive trade, or to carry on a person’s lawful profession, trade or business, or include information in the public domain. Accordingly, a service covenant that extends beyond the termination of service under the law is void.

Notably, such negative covenants can operate through the period of contract of employment or engagement. These are not regarded restraint of trade and, therefore, cannot be claimed as being void.

Specifically in relation to employer–employee disputes, courts in India have further held that an employee is not prevented from acquiring knowledge during his or her time and using it in the future employment, and all that is prevented is disclosure of confidential information to a competitor or any third party. However, where the information is held to be confidential and proprietary, courts have held the employee would be liable, if he or she misappropriates such information. The Trade Secrets Bill also culls the experiences and skills acquired by an employee during normal professional practice as an exception, and categorically excludes it as not being a trade secret.

Protection under equitable principles

It has been settled by numerous decisions, one of them being Tarun Wadhwa v Saregama India Ltd (2021 SCC OnLine Bom 13993), that in the absence of a contract safeguarding trade secrets or confidential information, an obligation exists in equity and arises when confidential information is shared in circumstances where the recipient knows, expressly or impliedly, that the information received is confidential. This ‘obligation of confidence’ prevents the recipient from misappropriating the information so received with knowledge of confidentiality and accordingly.

The obligation of confidence rests not only on the original recipient, but also on any person who received the information with knowledge acquired at the time or subsequently that it was originally given in confidence, as held in Zee Telefilms Ltd & Film & Ors v Sundial Communications Pvt Ltd (2003 SCC OnLine Bom 344).

Evidently, there have been legislation and principles regulating the protection and enforcement of trade secrets and confidential information in India, and while the Trade Secrets Bill is a welcome move, it does not take away the existing ecosystem for trade secrets protection already in place.

What amounts to misappropriation of trade secrets or breach of confidence in India?

In the notable case of Beyond Dreams Entertainment Pvt Ltd & Ors v Zee Entertainment Enterprises Ltd & Anr (2015 SCC OnLine Bom 4223), the following three elements were laid down for establishing misappropriation, placing reliance on several earlier decisions:

• The information must be of confidential nature (ie, secrecy of the information under contention must be established). Meeting with this criterion also includes assessing whether the information qualifies as a trade secret.
• The recipient of the information must be under an obligation of confidentiality. This obligation may be express or implied by virtue of the relationship or circumstances under which the information has been received, or otherwise with the knowledge that the owner desires to and has taken measures to keep the information confidential.
• Information is used or threatened to be used without authorisation by such person. Legitimate fear that the information would be without authorisation disclosed or used also gives rise to a cause of action in India.

For breach of confidence, through a series of cases in India, the courts in India have affirmed the four-fold test laid down in the landmark English case CMI Centers for Medical Innovation GMBH and Anr v Phytopharm PLC ((1999) Fleet Street Repons 235). In an action based on breach of confidence, the plaintiff must:

• identify clearly the information relied on or alleged as being a trade secret or otherwise confidential;
• show that it was handed over in circumstances of confidence;
• show how it was information that had to be treated as a trade secret; and
• show that it was used or threatened to be used without consent.

The Bombay High Court in Rochem Separation Systems v Nirtech Pvt Ltd vide an order dated 30 March 2023, held that there must be clear-cut, specific descriptions and data with the court pertaining to the information in which the plaintiff claims confidentiality, and in absence of this information, the court would have no bases for examining the dispute.

According to the new Trade Secrets Bill, the following shall amount to misappropriation of information:

• acquisition of a trade secret by a person without the consent of the holder;
• use or disclosure of trade secret without the consent of the holder; or
• acquisition, use or disclosure of a trade secret by a person who knew or ought to have known that the trade secret was obtained from another person who was using or disclosing the trade secret unlawfully.

While the above definition covers information received both with and without the consent of the owner or one who has been authorised by the owner, it fails to cover a scenario where there is ‘threat to use’ by a lawful or unlawful recipient or ‘legitimate fear of disclosure’ of the trade secret for pre-emptive actions by the owner.

Enforcing trade secrets in India

In India, trade secrets can be enforced by way of commercial civil litigation either by a specific performance of an enforceable contract or on the basis of the principle of equity, through a common law action for breach of confidence. Alternatively, or additionally, criminal proceedings may also be initiated where the penal consequences are desired for breach or misappropriation.

In a civil action, matters involving trade secrets fall within the definition of ‘commercial disputes’ and, therefore, a commercial suit may be initiated. Being time-bound and well defined in terms of the stages, the nature of documents and the procedure in general, a commercial suit can be wrapped up within 1.5–2 years’ time. The Trade Secrets Bills also clarifies that trade secrets shall be the subject matter of a commercial suit.

• Limitation: the limitation period in a civil case not specifically defined, such as breach of confidence, is three years from the date on which the cause of action arose. However, the limitation period for suits of tortious claims is one year. So, where misappropriation of trade secret is alleged as a tort, it is important to be mindful of the latter period. Further, where the misappropriation or breach is a recurring or continuous one, so is the limitation period, with every new cause of action.
• Forum: while the Indian civil law allows for a suit to be instituted at a place where the cause of action has arisen or where the defendant is based or does business, the Trade Secrets Bill proposes an additional forum, whereby a suit may be filed at the plaintiff’s place of business in India. This offers significant benefits for the holders of trade secrets since such an additional forum that is convenient to them prevents the hassle of running around the country to file suits.
• Confidentiality of proceedings: in the case of Pawan Kumar Goel v Dr Dhan Singh and Another (2023 SCC OnLine Del 8651), non-disclosure of confidential information and trade secrets of the process of manufacture was requested, and accordingly, a confidentiality club was instituted by the Delhi High Court to access the information.

Several high courts in India now have enacted rules allowing for the formation of confidentiality clubs to maintain the secrecy of confidential information in IP disputes. There are also instances where redacted copies are allowed to be filed with the court while the court itself gets access to unredacted copies under sealed cover, to ensure that confidentiality of a trade secret is maintained.

The Trade Secrets Bill recognises this requirement during litigation and specifically directs courts to preserve secrecy of the subject matter by reasonable means. Such reasonable measures could include formation of confidentiality clubs allowing only certain people (usually judges, advocates and external experts) to access confidential information and documents or sealed cover submissions made under strict court-monitored confidentiality.

Remedies

Injunctive relief

The courts in India have been prompt in providing relief in IP matters, including suits on the misappropriation of trade secrets or confidentiality breaches. The primary relief in such cases is perpetual injunction. However, given that such cases require immediate intervention, the courts have been prompt in granting interim injunctions as well, including injunctions on first date of the hearing or ex parte ad interim injunction in appropriate cases.

Seizure of evidence being trade secrets

Given the peculiar requirement of IP cases, and more particularly cases involving the use of trade secrets by an adverse party, it becomes significant, and the courts have been receptive to motions for court-appointed commissioners. The motion when granted allows visits and inspections of an adverse party’s premises for the discovery of documents, seizure thereof and preserving of goods, documents or other evidence taken into custody that are then kept under the court’s supervision until the matter brings to light substantial evidence that can assist the courts in deciding the matter.

The ultimate remedy as regards seized evidence includes orders for the destruction of documents, materials or electronic files in the possession of the misappropriating party that contain trade secrets or confidential information. Additionally, any goods or products whose conception, features or manufacturing features are based on the subject trade secret are also directed to be destroyed.

Costs and damages

The plaintiff may seek damages of different types depending on the facts and circumstances of the case. Where actual loss is caused, and actual profits are made by the defendant from misappropriation or breach, then compensatory damages may be sought. In an instance of extreme mala fide and bad faith conduct by the defendant, aggravated damages may be sought. Where the intent is to deter others and set an example out of the defendant, punitive or exemplary damages may be sought. Additionally, costs incurred in acting against such adverse parties may also be claimed as relief.

The Trade Secrets Bill now incorporates all such remedies, and specifically envisages that an order of injunction can be passed ex parte, for discovery of documents, preserving of goods, restraining the defendant from disposing off assets, etc.

Defences available against allegations of misappropriation or breach

In cases of trade secret misappropriation, confidentiality of the information is the most essential ingredient that needs to be established. For instance, in the case of Prof Dr Claudio De Simone & Anr v Actial Farmaceutica & Ors (2020 SCC OnLine Del 476), wherein the plaintiffs had acquired a patent in the United States for partial information relating to its innovation that later expired, the Delhi High Court held that all the information relating to the functioning and the operation of the innovation was presumed to have been disclosed in the patent.

Further in several instances, the Indian courts have held that common business information such as client lists cannot be protected as trade secrets. The mere existence of a client list does not confer proprietary rights over it in a way that would prevent former employees from using it, unless there is evidence that the list is compiled through proprietary methods, or that it holds specific commercial value that could harm the business if disclosed. Courts have time and again held that not all facts or general knowledge gained during employment should be considered trade secrets or confidential information specially that can be easily acquired through observation, independent canvassing or minimal effort.

The proposed Trade Secrets Bill builds on these principles and introduces several exceptions where the acquisition of trade secrets would not be deemed unlawful. These are: independent discovery, reverse engineering, operation of a contract, operation of law and other honest commercial practices.

Further, the Bill creates an exception for whistleblowers who disclose trade secrets or confidential information with the bona fide intention of exposing illegal activities, or in good faith to protect public interest.

Action against issuance of groundless threats

Due to the confidential nature of trade secrets, there exists a risk that a trade secrets holder, for example, an employer, may unnecessarily harass an employee or any other person with unfounded threats of instituting legal proceedings against them. The Trade Secrets Bill proposes to provide a significant remedy to adverse parties against potential misuse in the form of an action against issuance of groundless threats by providing for a declaratory suit that can be instituted against the person making such threats and obtaining an injunction as well as damages against him or her, as may be suitable. However, where the trade secrets holder after due diligence commences an action for misappropriation, this provision or an action instituted under this provision would become infructuous.

Compulsory licensing of trade secrets

The Trade Secrets Bill provides for compulsory licensing of trade secrets in cases of national emergency or extreme urgency involving substantial public interest, including situations of public health emergencies and national security similar to that in patents. The government has the power to direct the holders of trade secrets to issue compulsory licences to third parties (under strict obligation of confidentiality) or to the government itself at a licence fee fixed with regard to the nature and value of the trade secret, and the expenditure incurred by the holder of trade secret in developing and maintaining the trade secret.

The inclusion of this provision is particularly significant in emergencies or pandemics, such as covid-19, where the traditional licensing of patents might not be sufficient. Often, organisations protect valuable parts of their innovations not just through patents, but also through trade secrets, which can be crucial for the optimum functioning of certain technologies or processes. In such cases, compulsory licensing of the patent alone becomes insufficient to work the desired product or process. Therefore, the ability to compel access to trade secrets ensures that the government can address emergencies comprehensively.

Recommended cautionary steps for safeguarding trade secrets in India

Organisations must endeavour to establish a mechanism that robustly safeguards their trade secrets. Some of the cautionary steps and best practices include the following:

• Identification and classification of information protectable as a trade secret: the organisation must be careful to not file patent or copyright applications or make public disclosure otherwise for information or data that they intend to protect as a trade secret.
• Limiting access to the information: primarily, organisations should endeavour to create and maintain a pool of limited persons that have access to the information depending on their work. Organisations should additionally establish technological safeguards, including secure digital storage systems, access controls and cybersecurity measures, to prevent unauthorised access or disclosure. Further, establishing contractual obligations is a must.
• Confidentiality and non-disclosure agreements: such agreements with clear restrictive covenants are necessary for restraining the misappropriation and disclosure of trade secrets.
• Due diligence before sharing information with third parties: organisations should perform due diligence before sharing information to ensure that the recipient has the necessary and strong safeguards in place to maintain the secrecy of trade secrets and confidential information.