One of the most critical aspects of any business is its trade secrets and confidential information. Unfortunately, the protection of trade secrets and confidential information is often overlooked. To begin with, we need to understand what the trade secrets and confidential information of a business are and how we can protect them from reaching the hands of the competitors.
According to the World Intellectual Property Organisation, Confidential Business Information is any confidential business information that provides an enterprise with a competitive edge and is considered a trade secret, including sales methods, distribution methods, consumer profiles, advertising strategies, lists of suppliers and clients, and manufacturing processes.
As per the provisions of the Agreement on Trade-Related Aspects of Intellectual Property Rights, confidential information constitutes as the following:
the information must not generally be known or readily accessible to persons that normally deal with that kind of information;
it must have commercial value because it is secret;
the owner must have taken reasonable steps to keep it confidential.
Trade secrets are a category in “Confidential Information”. Confidential information of value, being secret and providing competitive advantage on its possessor, for example, customers/clients data, future business strategy, deliberations at a meeting of the board of directors of a company, etc. may be confidential, but they do not confer a competitive advantage over business rivals; however, the secret formula for manufacture a product, or a secret process, or molecule, or ingredient of a product or which enhances the performance of a product, being of value, and providing an advantage, is classified as a trade secret.
In Hi-Tech Systems & Services Ltd. v/s. Suprabhat Ray and Ors. [AIR 2015 Cal 261], the Court further held that “A trade secret or a business secret may relate to financial arrangement, the customer list of a trader and some of the information in this regard would be of a highly confidential nature as being potentially damaging if a competitor obtained such information and utilized the same to the detriment of the giver of the information. Business information such as cost and pricing, projected capital investments, inventory marketing strategies and customer’s lists may qualify as his trade secrets. The Courts need to find out if the information that were acquired during the course of their employment are now being used as the springboard to enable the said respondents to exploit such database in the course of their business.”
Depending upon the nature of the business operated and the transactions being entered into with another entity, the parties may specify which information being disclosed by them under a transaction needs to be protected to prevent any loss resulting from unwarranted disclosure.
How can we protect our trade secrets and confidential information? – By entering into a Non-Disclosure Agreement or incorporating a non-disclosure clause in the principal agreement where appropriate.
Non-Disclosure Agreements (“NDA”) are of the following three types:
Unilateral NDA – is one where there is only one Disclosing Party (party disclosing the trade secrets and confidential information) and one Receiving Party (party receiving the trade secrets and confidential information) example a company discloses its trade secrets to its employees or external consultants, a company discloses marketing secrets to an ad agency, or a tech business discloses a new product to a software engineer;
Bilateral NDA – is where both parties are Disclosing Parties as well as Receiving Parties example when an innovator and manufacturer are considering working together; and
Multilateral NDA – is where three or more than three parties are involved, with at least one or more of the parties are Disclosing Party(ies) to the other Receiving Parties.
A good time to introduce the NDA in your business would be in the following events:
a. Entering into a business deal;
b. taking expert’s advice on a new product;
c. starting a new project;
d. investigating a possibility of investment with other party;
e. providing employment;
f. signing a contract worker for a sensitive project;
g. dealing with sensitive client information; and
h. discussing commercially sensitive information with other party, etc.
The NDA not only covers the period of a principal agreement but can also extend over a period of two to five years post the termination of the principal agreement.
A Disclosing Party(ies) are required to prove and can recover the actual damages incurred upon unauthorised use of confidential information.
In India, in Homag India Private Ltd. v Ulfath Ali Khan, the Karnataka High Court has ruled that there is an exception to Section 27 of the Indian Contract Act, 1872 that is to maintain the confidentiality and restriction on carrying on business for a limited period is permissible.
In Fairfest Media Ltd. v. ITE Group, the Calcutta High Court held that “Business information such as cost and pricing, projected capital investments, inventory, marketing strategies and customer lists may qualify as trade secrets.”
Similarly, in John Brady v Chemical Process Equipments Private Limited, the Delhi High Court held that irrespective of whether there is a contract in place or not, no one is allowed to benefit and unfairly gain from using the information received in confidence.
Non-compete obligations arising out of potential unauthorised use of confidential information post-termination of employment may be enforced under certain circumstances, based upon the facts of each case. In Desiccant Rotors International Pvt Ltd v. Bappaditya Sarkar & Anr, the Delhi High Court opined that in case of conflict between the employer’s interests of non-competition and the employee’s right to seek employment for livelihood, the latter should prevail. Such clauses that impose a blanket restriction on an employee seeking employment post-termination are considered contrary to public policy under Section 27 of the Indian Contract Act, 1872; therefore, it is necessary to word such clauses reasonably to ensure enforceability in India.
Having a NDA is advantageous for various reasons few being:
helps in classifying elaborately “Confidential Information” and “Trade Secrets”;
legally binds the Receiving Party(ies) to maintain secrecy and protect the “Confidential Information” and “Trade Secrets” received;
recourse and relief in the event of a breach is binding upon the parties to the NDA;
draw the timeline up to which the Receiving Party(ies) is/are obliged to maintain the secrecy. This period could be beyond the effective period of the NDA itself;
claim compensation and damages to the aggrieved party (which is mostly the Disclosing Party); and
deciding that if the dispute is to be referred to the Arbitrator or the appropriate Court in the event of a breach.
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