The Innovation Bill, 2008, and Trade Secrets: Part I

A previous post on this blog looked at some of the important provisions in the National Innovation Bill, 2008. I now look at the impact which the Bill may have on the important area of protection of trade secrets. In particular, this post will deal with (a) the nature of the protection granted under the Bill, (b) the subject-matter entitled to protection, and (c) the duties cast on third parties who have received any confidential information.

The Nature of Protection:

Typically, claims concerning protection of trade secrets are brought to enforce confidentiality agreements, or on the grounds of the tort of breach of confidence. Equitable obligations often tend to arise in this regard – for instance, directors of a company are under a fiduciary duty to the company; and one of the duties of directors as fiduciaries is to prevent misuse of corporate information and to refrain from using corporate information for their personal benefit.

Provisions in connection with trade secrets are found in Chapter VI of the Innovation Bill, titled “Confidentiality and Confidential Information and Remedies and Offences”. The draft Section 8 (1) allows parties to “contractually set out the terms and conditions governing rights and obligations in respect of confidential information, including with a view to maintain confidentiality and prevent misappropriation.” On the face of it, this does not alter the position of law – parties were always, it would seem, able to do this.

It is interesting to note that in cases where such contracts existed, the employee could try to avoid the contract on the basis of Section 27 of the Indian Contract Act (contracts in restraint of trade). Indeed, several decisions have attempted to draw a line between “restrictions” on employment and protection of employers’ rights. Section 16 of the draft Bill says that the provisions of the Bill would have effect “notwithstanding anything inconsistent therewith contained in any other law.” One possible argument is that a conjoint reading of Sections 8 (1) and 16 would mean that agreements between parties concerning rights and obligations in respect of confidential information cannot be challenged under Section 27 of the Contract Act.

This argument, however, is not fully convincing – Section 8 uses the words “contractually set out” and not “set out by agreement”. It appears then that any agreement in this connection must nonetheless be a valid contract under the Indian Contract Act. With this interpretation, it is clearly possible to avoid any conflict between Section 8 of the Innovation Bill and Section 27 of the Contract Act. One may then conclude that Section 8 (1) of the Bill does not change the existing legal position.

Further, the Bill does not do away with the non-contractual basis for the protection of confidential information. Section 8 (3) says that notwithstanding anything in sub-section (1) “parties may nevertheless enforce any rights in Confidential Information arising in equity or as a result of circumstances imparting the obligation of confidence.” This, it appears, would cover equitable and tortious claims arising under breach of confidence.

The addition in this scheme is in terms of Section 8 (2) which – subject to the contract between the parties – gives the appropriate government the power to set out the terms and conditions governing the rights and obligations of parties in respect of confidential information. Thus, the specific enumeration of the rights and obligations of parties is left for a later stage.

What is protected?

Having looked at the nature of the protection of trade secrets, I now turn to the important aspect of the subject-matter of protection. What exactly is “confidential information” which can be protected under the Bill?

It might be useful in this connection to look at the US position. In the US, laws protecting trade secrets are enacted by the states, but most such laws are based on the model Uniform Trade Secrets Act linked here.

Under this model US draft (which has been adopted by 46 states), a “trade secret” is defined as “information, including a formula, pattern, compilation, program device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

This might very well be compared with the rather similar Section 2 (3) of the Indian Innovation Bill which defines “confidential information”.

“Confidential Information means information, including a formula, pattern, compilation, program device, method, technique or process, that: (a) is secret, in that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within circles that normally deal with the kind of information in question; (b) has commercial value because it is secret and (c) has been subject to responsible steps under the circumstances by the person lawfully in control of the information, to keep is secret.

It is debatable whether “information” is to be treated as property. In the US, in addition to the model Trade Secrets Act, trade secrets are protected under the Economic Espionage Act which, under some circumstances, makes “theft” of confidential information a crime. This might lend credence to the view that confidential information is “property”. Under (English) common law principles, the protection of confidential information is looked at as an equitable right rather than a property right. In such circumstances, it might be necessary to be cautious before borrowing straight from the US position.

However, the definition in the Innovation Bill also appears to be based (more than the US model law) on Article 39.2 of the TRIPs agreement. A note on Article 39.2 on the WTO website says, “The Agreement does not require undisclosed information to be treated as a form of property, but it does require that a person lawfully in control of such information must have the possibility of preventing it from being disclosed to, acquired by, or used by others without his or her consent in a manner contrary to honest commercial practices. “Manner contrary to honest commercial practices” includes breach of contract, breach of confidence and inducement to breach, as well as the acquisition of undisclosed information by third parties who knew, or were grossly negligent in failing to know, that such practices were involved in the acquisition.” The definition in the Bill is thus consistent with the nature of the right sought to be protected.

Impact on third parties:

Moving on to another aspect, Section 9 of the Bill says that when confidential information been received by a third party without the consent of the complainant, “obligations of confidentiality and equitable considerations” may also create rights and obligations in respect of the confidential information. The tort of misappropriation was originally developed in American Courts to impose liability on third parties for the use of trade secrets. English Courts have followed this lead; but have held third parties to be liable only when the information is both unknown in public, and is known to be confidential by the defendants (Fraser v. Thames Television, [1983] 2 All ER 101; reference may also be made to Vandana Pai and Ramya Seetharaman, “Legal Protection of Trade Secrets” [2004] 1 SCC Jour. 22 linked here.) Under Section 9, this common law position is unchanged.

Conclusion:

The full text of the draft Bill is available online here. So far as the matters discussed in this post are concerned, it appears that the Bill does not radically change the existing legal position.

There is a strong case for a more flexible approach leaving the matter to the Courts. In the absence of any specific delineation of rights and obligations in the Bill itself, however, the issue is likely to generate greater debate after the Bill in enacted and the specific principles are notified in separate Rules (in accordance with Section 8, sub-section 2). The danger, of course, is that the Rules would impose a degree of rigidity which would not suit the equitable nature of the rights in question. It is therefore worth asking whether a statutory model of protection is necessary. Even if a statutory model is appropriate, it needs to be considered whether the principles governing the rights and obligations of parties should be a matter left for the Rules. Perhaps, it would be better if broad terms and conditions were set out in the Bill itself. First, there is the possibility of the Bill once enacted being challenged on grounds of excessive delegation. Secondly, it will be easier to debate these terms and conditions in the Bill itself, rather than waiting for specific Rules. Of course, there may be a need for Rules to take into account the needs of specific industries – that should not prevent general principles being laid down in the Bill itself.

The second part of this post will look at some of the potentially controversial parts of the Bill, including the ‘public interest’ exception and the power of the Court in connection with the payment of ‘reasonable royalties’.

(I would like to thank Mr. Shamnad Basheer for his useful suggestions regarding this post)