The unregistered asset: protecting trade secrets from misuse by former employees in India

Indian courts have also developed a framework to determine whether information qualifies as a trade secret. This framework is in line with Article 39 of the Agreement on Trade-Related Aspects of Intellectual Property Rights, otherwise known as the TRIPS Agreement, to which India is a signatory. The Bombay High Court in Beyond Dreams Entertainment v Zee Entertainment Enterprises,^[2] dealt with an interesting case at the intersection of copyright law and confidentiality. The Court clarified that while copyright is enforceable against the world at large, the obligation of confidence operates only against the specific person(s) with whom the confidential information has been disclosed. In this case, the plaintiffs, a production company, had shared a concept note for a proposed television show with the defendants, a broadcasting company, with a view to it being telecast. When negotiations broke down, the plaintiffs alleged that the defendants had launched a rival show based on their concept note, thereby infringing their copyright and being in breach of confidence. The Court recognised three elements necessary for a successful claim: (1) the information must be shown to be confidential, (2) the circumstances in which the information was imparted should have created an obligation of confidence on the defendant and (3) the information was used or threatened to be used without authorisation from the plaintiff. On the first element, the Court held that the confidential information must be capable of identification, must be original and must be sufficiently developed to be realisable as an actuality.

Although Beyond Dreams arose from a commercial negotiation rather than an employment dispute, it remains relevant to employers seeking to protect copyright-protected assets, such as software source code, technical documentation and creative works, from misuse by departing employees. Under the Copyright Act 1957, copyright in works created by an employee in the course of their employment ordinarily vests in the employer. Accordingly, while ownership may be clear, misuse by a former employee may still give rise to a claim. For example, copying source code, retaining technical documentation or recreating proprietary software architecture for use at a new employer may amount both to copyright infringement and to a breach of confidence, exposing the employee to liability on both grounds.

The Bombay High Court’s decision in Bombay Dyeing and Manufacturing Co Ltd v Mehar Karan Singh^[3] provides a useful framework for employers seeking to document and protect their trade secrets proactively. In this case, the plaintiff company claimed that its defendant director had breached the confidentiality clause of his employment agreement that prohibited him from divulging confidential information during his term of employment at the company or thereafter. The defendant director of the company was alleged to have disclosed confidential information by email to a competitor that had subsequently employed him.

Drawing on US jurisprudence, the Court identified a set of factors relevant to determining whether information constitutes a trade secret, including the extent of its disclosure within and outside the business, the safeguards adopted to preserve its secrecy, its commercial value to the owner and its competitors, the investment made in developing it and the time and cost a competitor would incur to replicate it. These factors provide employers with a practical framework for designing effective trade secret protections.

It is important to note that the courts have also clarified some limits to trade secret protection. In Star India Private Limited v Laxmiraj Seetharam Nayak and Anr^[4] it was clarified that skill and experience obtained by an employee during their term of employment that is carried forward is not protectable as an employer’s trade secret. In Bombay Dyeing^[5] too, the Court clarified that information that anyone who had been in the company’s employment for some time would know, and other information available in the public domain or could be anticipated by a prudent businessperson in the relevant field, would not amount to a trade secret.

Trade secrets vs confidential information

While the terms ‘trade secret’ and ‘confidential information’ are frequently used interchangeably, there are differences between the two. Trade secrets must be commercially valuable and provide a competitive edge, in addition to not generally being known or readily ascertainable in the relevant industry, and they must be the subject of active and consistent secrecy measures by its owner. Confidential information, by contrast, is a broader category encompassing any information imparted in circumstances that give rise to an obligation of confidence, including business strategies, client lists, pricing structures and personnel data, even where such information may not qualify as a trade secret.

Protecting trade secrets through contracts

Modern employment relationships are increasingly varied and fluid. Such relationships may be short-term or non-traditional and may involve employees who have previously worked with competitors or may do so in the future. Furthermore, as several kinds of intellectual property rights are required to meet the standards of novelty and originality in order to obtain statutory protection, unauthorised disclosures of such information by former employees may undermine a company’s claim to protection. Consequently, protecting confidentiality becomes especially important. Employers can, therefore, use contractual safeguards to reduce the risk of departing employees misusing trade secrets.

Non-disclosure agreements (NDAs) and confidentiality clauses in employment agreements are the principal means for trade secret protection. Courts have affirmed that confidentiality clauses in employment agreements, as well as NDAs executed between an employer and the employee, are generally not considered to be in restraint of trade and are enforceable.^[6] It has also been recognised that such agreements help protect a company’s competitive edge by preventing the disclosure of its modus operandi and trade practices that are an inseparable part of the business.^[7]

In line with the judicial principles discussed above, NDAs and confidentiality clauses must be drafted in a manner that identifies, with specificity, the categories of information that the employer regards as secret and competitively valuable. A sweeping clause that encompasses all kinds of information will not suffice. Further, while post-employment confidentiality obligations that survive termination of the employment relationship are prudent, they must be narrowly drafted, as any agreements that are in restraint of trade are void under Section 27 of the Indian Contract Act 1872. Accordingly, broad non-compete or non-solicitation clauses that extend indefinitely or for unreasonably long durations are likely to be unenforceable, even where they are included ostensibly for the purpose of protecting trade secrets.

Internal measures and policies

Contractual protections should be supplemented by robust internal measures, which serve both as a practical deterrent and as a source of evidentiary support for any subsequent dispute.

For instance, maintaining a confidential information register — a documented, regularly updated inventory of the specific information treated as a trade secret, the personnel authorised to access it and the commercial rationale for its protection — provides evidence that the employer has taken active steps to maintain secrecy, and may prove indispensable in any ensuing dispute.

Additionally, comprehensive access controls and exit protocols, including role-based access restrictions, monitoring of data transfers and revocation of credentials upon termination of the employment contract, can reduce the risk of disclosure.

Conclusion

The Indian legal framework for protecting trade secrets is multilayered, but fragmented due to the conspicuous absence of a dedicated statute. Consequently, employers must extrapolate from judicial decisions in this area and principles of common law and equity to understand the contours of trade secret protection in India. However, Indian courts have developed a well-grounded framework. Once the existence of a trade secret is established and its constituent elements are satisfied, they have demonstrated a willingness to grant relief. At the same time, the courts have drawn principled limits, declining to protect general skill and experience acquired during an employment relationship and refusing to enforce overbroad restraint-of-trade clauses. Beyond civil remedies, trade secret misappropriation may attract criminal liability under the new criminal code in Indian known as Bharatiya Nyaya Sanhita 2023 for acts such as criminal breach of trust, theft by a clerk or servant of the employer’s property, cheating or dishonest misappropriation of property. Additionally, India’s Information Technology Act 2000 penalises breaches of confidentiality and privacy, as well as the disclosure of information in breach of a lawful contract in cases involving digital data and electronically stored proprietary information. Together, these mechanisms, when supplemented by employers through the use of NDAs, confidentiality clauses in employment agreements and operational safeguards, provide robust protection for trade secrets.