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Trade Secret Violation – A Hypothetical Indian Case Scenario

BananaIP Counsels > Intellectual Property  > Trade Secret Violation – A Hypothetical Indian Case...

Trade Secret Violation – A Hypothetical Indian Case Scenario

The image depicts the text 'Trade Secret' on a piece of paper. The post is about a trade secret misappropriation case. to read more click here.
This post was last published on January 23rd, 2012.

India has emerged as one of the important markets for information technology services and services involving business processes. With the constant development of industries in India, the growth of intellectual property has been exponential and so with it, the increasing need for providing better enforcement techniques to protect IP. India already has various statutes for the protection of patents, trademarks, copyrights, designs etc. But existing and rising industries/businesses are generating a lot of information which is confidential in nature and processes as well as technical know-how which qualify as trade secrets and as such, these companies as well as those which want to outsource such information to India can’t help but wonder about the nature and strength of protection made available for the same in India.

Looking at the US, where there exists a model UTSA (Uniform Trade Secrets Act) adopted by many states with their own modifications, we can see that the existence of a statute makes it easier to enforce trade secret protection. But in a country like India, where there is no statute for the protection of trade secrets and confidential information, do we resort to the existing ‘prevention is better than cure’ motto or is there a scope for other modes of remedy available in case of misappropriation of trade secrets/confidential information?

In a recent instance, a former employee of Dow chemical co. was sentenced to five years in prison for stealing trade secrets and selling them to Chinese companies [U.S. v. Liu, 05-cr-00085, U.S. District Court, Middle District of Louisiana (Baton Rouge)]. He was also made to forfeit $600,000 and pay a fine of $25,000.

The employee, Wen Chyu Liu also known as David W. Liu used to work as a research scientist for Dow chemical co. and during his tenure had access to secrets related to manufacturing of chlorinated polyethylene or CPE used in the making of Vinyl siding, electrical cable jackets, and industrial hoses. Evidence produced in the court showed that he had paid current and former employees to obtain information which he knew was of ‘immense value’ and thereafter marketed the same in China.

The sentence was handed down by Judge James J. Brady of the US district court at Baton Rouge, Louisiana. The crime was held as conspiring to conduct trade secret theft. This comes after previously a former Dow Agrosciences LLC researcher Kexue Huang was sentenced to seven years and three months in federal prison for stealing of trade secrets by a U.S. District Court at the southern district of Indiana (Indianapolis).

Now, if the same matter were to fall under the jurisdiction of Indian Courts, how different would the sentence be?

Unlike in the US state of Louisiana, where §1431(4) under chapter 13-A which has adopted the model UTSA defines ‘trade secret’, in India, there is no statute that provides a definition for the same. The draft Innovation Bill of 2008 (which is still due to be passed by the Parliament) defines ‘confidential information’ under Section 2(3) which could provide some sort of relief/remedy under sections 10-13 of the Bill but it does not hold value until it is enacted.

The TRIPS agreement puts down the following criteria for information to qualify as confidential information or a trade secret:

•    It must not be generally known or readily accessible by people who normally deal with such type of information
•    It must have commercial value as a secret
•    The lawful owner must take reasonable steps to keep it secret.

India, being a signatory to the TRIPS agreement, in the absence of a statute, refers from time to time to this agreement for remedial measures regarding various aspects of law as well as for purposes such as upgrading its existing statutory provisions or while introducing a new statute.
The Courts in India have defined a trade secret as ‘some protected and confidential information which the employee has acquired in the course of his employment and which should not reach others in the interest of the employer. However, routine day-to-day affairs of the employer which are in the knowledge of many and are commonly known to others cannot be called trade secrets. A ‘trade secret’ can be formulae, technical know-how or a peculiar mode or method of business adopted by an employer which is unknown to others.’ [Ambiance India Pvt. Ltd. v. Shri Naveen Jain (122 (2005) DLT 421)]
From time to time, Indian courts have relied on common law principles like in the 2011 decided case of Emergent Genetics India Pvt. Ltd. v. Shailendra Shivam and Ors. (2011(125)DRJ173) wherein they referred to the principle laid down in the case of Coco v. A.N. Clark (Engineers) Ltd, (1969) R.P.C. 41 which held that ‘The “quality of confidence” highlights trade secrets to be a legal concept. With sufficient effort or through illegal acts rivals may access trade secrets (confidential information). However, if the ‘trade secret’ or information owner proves that reasonable efforts were made to keep the information confidential, it (the information) remains a ‘trade secret’ and is legally protected. If, on the other hand, ‘trade secret’ owners cannot establish reasonable efforts to protect confidential information, they risk losing the quality of confidentiality of the information even if its information is obtained by rivals without permission”.
The Courts in India have also relied on Seager v. Copydex Ltd, (1967) 1 WLR 923, where they upheld the principle that “the essence of this branch of the law, whatever the origin of it may be is that a person who has obtained information in confidence is not allowed to use it as a springboard for activities detrimental to the person who made the confidential communication, and spring-board it remains even when all the features have been published or can be ascertained by actual inspection by any member of the public”[American Express Bank Ltd. v. Ms. Priya Puri, (2006(110)FLR1061)].

However, with respect to the remedy available in case of a breach of confidence and misappropriation of confidential information/trade secrets, the methodology has always been based on the principle laid down under Section 27 of the Indian Contract Act, 1872 as required measures are to be taken by the owners of the trade secret to protect its confidentiality, through contractual/other measures. The Indian Courts, however, have not limited the scope of remedy available in case of breach of confidence and misappropriation to just breach of contract but there are no strict penal laws for the same either. In order to widen the scope of relief provided by the above statutes, and pave way for a stronger and more specific statute, the courts have brought in the principles of equity and in particular, the ‘springboard principle’ in conjunction with existing statutes in determining these cases.
In the above-mentioned matter, Liu was a former employee and he had paid former and current employees to obtain information which he knew was of value through his knowledge when working with Dow Chemical Co.

Now, Liu, being a former employee, the remedy available to Dow Chemical Co. in India would totally depend on the contents of the employer-employee agreement in view of the principle under Section 27 of the Contract Act, the value of which was discussed by the Supreme Court of India in the case of Superintendence Company of India (P) Ltd. v. Krishan Murgai (1980 SCR (3)1278) where the court held with respect to  ‘Agreements of service, containing a negative covenant’ that they ‘are enforceable, the reason being that the doctrine of restraint of trade never applies during the continuance of a contract of employment and applies only when the contract comes to an end. While during the period of employment the Courts undoubtedly would not grant any specific performance of a contract of personal service, nevertheless Section 57 of the Specific Relief Act clearly provides for the grant of an injunction to restrain the breach of such a covenant, as it is not in restraint of, but in furtherance of trade’.

The court, however, held that this was subject to analyzing into the object of the clause because if such clause is directed towards restraint of trade then it would be void by virtue of Section 27 of the Contract Act.

In the U.S., it was established that,

a)    The value of the confidential information was realized through Liu’s position in the company
b)    Liu misused this knowledge and illegally managed to obtain such confidential information
c)    He marketed the information to companies in China.

We can see, that the underlying principles adopted by US law, has the same founding principles as mentioned in the TRIPS agreement which is referred to by Indian law to establish theft of trade secret, but the remedy available in India would be different.
In India, with respect to the Liu case, the remedy thus available to Dow Chemicals Co. would be:
•    Injunction by virtue of Section 57 of the Specific relief Act
•    Compensation by virtue of Section 73 of the Indian Contract Act, from Liu for loss/damage incurred as a result of breach of contract.

Though however, since the trade secret in question has already been passed on to third parties, as per the principle followed by Indian Courts, the confidential property of the information is lost. Thus, the question, for business proprietors and companies in India holding trade secrets or confidential information or companies outsourcing confidential information to India (including trade secrets) remains, is this remedy enough?
Author: Shravan

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  • A. B. Suraj
    Monday, January 23rd, 2012 at 2:54 PM

    What about the latest amendments to IT Act and IPC on “data protection”? Would they not address issues of trade secret protection to some extent?

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