The Proposed Trade Secrets Bill, 2024: Legal Framework and Economic Impact
Intellectual Property Law has evolved rapidly in past decades due to scientific and technological development. The most significant changes can be witnessed in Business models and software patents.[1] Intellectual Property creates the right balance between creator and public welfare, leading the economy to flourish with great ideas and society to prosper.[2] There are different intellectual property rights (IPRs), such as copyrights, which are concerned with expression, patents, inventions, and trademarks, concerned with the brand’s identity and goodwill.[3]
Trade Secret is the latest entrant to the large ambit of IPRs due to its inclusion as a protected subject matter in the TRIPS agreement. There is no certain definition of a Trade secret. Still, it is generally the formula, practice, process, compilation of designs, etc., used by an individual or business to gain a competitive advantage in the market.[4] Organizations like Coca-Cola and KFC have trade secrets that they go to lengths to protect. Trade Secrets are the first line of defense for any organization. Patents are preceded, followed, and accompanied by them.[5] The theory of trade secrets has been developed through the principle of common law torts such as unjust enrichment, breach of confidence, unfair competition, misappropriation, and unauthorized access to plaintiff’s property.[6]
India is experiencing rapid economic growth due to innovations such as artificial intelligence (AI) and start-ups. The research data and results cannot be given copyright because they are at the initial stage of development; thus, any minor changes will be detrimental to the organization and slow down the country’s growth. Therefore, protecting the trade secret to balance innovation and economic development is crucial. The Law Commission 289th report- “Trade Secret and Economic Espionage,” has recommended the adoption of Sui generis legislation to protect the trade secret. Here, I’ll first discuss the key legal provision recommended by the commission in the report for compulsory licensing and then compare it with the current common law regime of trade secrets.
KEY PROVISION AND HIGHLIGHTS OF THE BILL
The Bill comprehensively defines trade secrets borrowing from the TRIPS agreement. The information must:
- Remain undisclosed and not be easily accessible.
- Hold economic value.
- Be kept confidential through reasonable measures instituted by its proprietor.
- Disclosure of such information will lead to damage.
The Bill is candid about the rights and duties of owners of trade secrets. Thus, individuals or organizations with trade secrets have a defined legal framework under which they may operate to keep and administer their confidential information. Such legal clarity is crucial in fostering innovation and economic growth.
Rights of Owners of Trade Secrets
- Utilization and Disclosure – Owners of trade secrets have the right to use their confidential information for manufacturing, business strategies, and the development of technology. In addition, the owners may disclose such information to employees, business partners, or third parties in accordance with a confidentiality agreement in order for further legitimate business purposes.
- Licensing and Commercialization – In trade secrets, the proprietor can grant licenses to others using their intellectual property, thereby earning money while keeping it confidential. This ensures the safety of the crucial information even when third parties use it.
- Legal action for unauthorized use – Trade secret owners can protect their intellectual property by using lawsuits against people who illegitimately use their confidential information. This operates as an obstruction to stop deliberate and unintentional access and unauthorized storage and distribution of proprietary information.
Responsibilities of Trade Secret Holders
To maintain legal protection over their trade secrets, owners must take reasonable steps to protect their trade secrets, like physical security controls, cybersecurity protocols, and binding confidentiality agreements with relevant parties. The trading secrets must comply with contract law and other laws relating to labor, among others, to avoid conflict or forced disclosure.
Misappropriation and Legal Remedies
The Bill defines misappropriation as the wrongful acquisition, use, or disclosure of a trade secret where such secret was acquired by improper means. To address these violations, it offers civil remedies, namely Injunctions and Monetary Damages.
Whistle-blower Protection and Public Interest Exception
The Bill aims to ensure ethical business practices through whistle-blower protections. A person who discloses illegal activities by revealing trade secrets in good faith is not liable for any legal consequences. The Bill also acknowledges that public interest may sometimes demand the disclosure of confidential information. Thus, specific circumstances permit the disclosure of trade secrets if they lead to substantial public benefit or safeguard public safety.
Compulsory Licensing
One essential element of this Bill enables the government to enforce access to trade secrets by law in particular cases (Section 6):
- National Emergencies
- Public health crises
- Other critical public interest scenarios
The government may require the owner of a trade secret in such circumstances to license it to third parties or to itself to promote public welfare while disposing of intellectual property rights.
Alternative Adjudication Mechanism through Commercial Courts
The Bill introduces an alternative adjudication mechanism by allowing cases of trade secret misappropriation to be heard in Commercial Courts under the Commercial Courts Act, 2015 (Section 13). However, it does not override existing legal avenues, such as common law remedies for breach of confidence or trust, which remain available to affected parties. The driving force behind this provision is that trade secrets are perceived as valuable commercial assets and the Commercial Court resolution, which constitutes an expedited process with a streamlined procedure, means the disputes are resolved quickly and efficiently.
Protection Against Unfounded Legal Threats
According to the Law Commission, trade secrets do not give monopoly rights exclusively to their owners as traditional intellectual property does, as they can be obtained lawfully through independent discovery, reverse engineering, and other means; trade secrets cannot be regarded as proprietary assets in the same way as patents or copyrights. Unlike other intellectual property laws, trade secrets must not be publicly disclosed for protection. By explicitly listing lawful methods of acquiring trade secrets (Section 4), the Bill reinforces that trade secrets are not absolute property rights. Thus, criminal threats to deter competition will no longer be effective under this legal framework. Employers do this to scare former employees from moving to competing firms by equating confidential information with property.[7]
COMPARISON WITH THE CURRENT COMMON LAW REGIME
Much of the trade secret litigation in India arises from employer-employee disputes, often based on terms of employment contracts. Although some Indian courts recognize an implied duty of fidelity, it has been only briefly referred to in judgments. Employers often bring breach of confidence claims even when there are confidentiality agreements. This leads to confusion between contractual and equitable duties, as equitable claims can be challenged on grounds such as delay.[8] A huge legal concern is the enforceability of non-compete clauses, the tool under which employers restrain former employees from:
- Venturing into the competition by starting another business or
- Joining a competitor company.
Employers argue that employees possess confidential business information, which would violate confidentiality and non-compete clauses. In contrast, employees cite Section 27 of the Indian Contract Act of 1872, which invalidates agreements restraining lawful trade or profession, except for reasonable restrictions related to goodwill sales. Strictly construed, the clause may seem to vitiate all other restrictive covenants limiting a man’s freedom to enter or join his employer’s competitor. But the rulings of courts have complicated this picture. One ruling by the Supreme Court in Niranjan Shankar Golikari v. Century Spinning & Mfg Co[9], an employer who trained him in special manufacturing techniques. He was contractually obligated to the employer for five years of employment. An employment contract combines trade secrecy with a non-competition provision. Clause 17 forbade employee competition against him for the remainder of the time under the initial agreement, even if the employee quit his job early in the term. The clause also required the employee to pay liquidated damages plus training costs on an early exit. He left the company before the contract could be completed to join a competing company. The employer sued for damages and injunction not to work in the competitor firm until the agreed term was due to end in 1968. The Supreme Court dismissed the employee’s appeal and accepted the employer’s case, holding that the non-compete clause was fair and valid because it only applied to the terms of the employment agreement. The injunction was required to restrain the employee from divulging the confidential methods acquired while working.
Such logic, arguing that an employee cannot work for a competitor without breaching confidentiality, is flawed.[10] A subsequent Supreme Court judgment in Superintendence Company of India v. Krishna Murgai[11], distinguished between Negative covenants during employment (which are allowed) and Negative covenants after employment (which are void under Section 27[12]). Further, the bill also states that skills and experience acquired by an employee as part of standard professional practice do not constitute trade secrets (Section 2(f)), which bars courts from making any such assumptions, and the employees will enjoy the freedom of job switching without undue restrictions.
The Compulsory Licensing of trade secrets can be a bargaining chip that forces companies to negotiate more equitable prices. Public health crises provide a situation where the government can use Compulsory Licensing on both patents and trade secrets against vaccine producers who do not obey price reduction requests. The threat of commercial setbacks and exposure of proprietary information causes businesses to set lower market prices. The government benefits substantially from this move compared to big pharmaceutical companies when it implements it.[13] The above-mentioned bill ensures proper protections for trade secrets, encouraging businesses to invest in research and development.[14] Attracts foreign investors by establishing stringent legal safeguards, facilitates technology transfer and international collaborations, and boosts economic growth by helping companies protect their competitive edge, leading to higher market stability, increased productivity, and job creation.[15]
In India, a case that highlighted the conflict between trade secrets and freedom of expression was Petronet LNG Ltd. v. Indian Petro Group[16]. The Delhi High Court held that news reporting was in the public interest and that granting an injunction would have undermined free speech. The court noted that such restrictions on speech would be warranted only if publication posed a serious threat to a company’s business or commercial viability. The Law Commission, referring to this case, has also expressed the restriction of freedom of expression under the guise of trade secrets protection because it falls squarely within the provisions of Article 19(1)(a) of the Constitution.[17]
The indefinite lifespan of trade secrets makes them different from patents and copyrights since it creates uncertainty between fostering innovation and supporting public information access.[18] However, the bill mentions certain exceptions, such as disclosure of secrets in the interest of the public and whistleblowers, which can provide a remedy to this indefinite lifespan of trade secrets.
The proposed bill checks and balances corporate profit and public welfare. However, insufficient enforcement measures for compulsory licensing for trade secrets do not provide a complete and effective tool. The bill is valid in setting out clear criteria for trade secrets, that renders exemptions, as well as effective remedies against misappropriation, all despite its slight flaw.
In this regard, the pressure from stakeholders seems to render a dedicated law on Trade Secrets inevitable. On the other hand, the eventual structure of such legislation is a mystery. With the eventual influence left upon the shoulders of implementation and judicial interpretation, it has provided the base for developing trade secret protection in creating a pro-innovation business environment. Going forward through the legislative process, refinements and the eventual passage are keenly going to be monitored by businesses, policymakers, and industry leaders.
Author: Tejash Kumar, in case of any queries please contact/write back to us via email to [email protected] or at IIPRD.
REFERENCES
D.S. Sengar, Protection of Trade Secrets and Undisclosed Information: Law and Litigation, 53 (2), JOURNAL OF THE INDIAN LAW INSTITUTE, 254, 255 (2011).
EDWARD KHAN, INNOVATE OR PERISH: MANAGING THE ENDURING TECHNOLOGY COMPANY IN THE GLOBAL Market 336 (Wiley, 2006).
Law Commission, Trade Secret and Economic Espionage, (Law Com No. 298 of 2024) at 189.
Mark A. Lemley, The Surprising Virtues of Treating Trade Secrets as IP Rights, 61 (2), STANFORD LAW REVIEW, 311, 316 (2008).
MICHAEL SPENCE, INTELLECTUAL PROPERTY chap. 6 (Oxford University Press, 2007).
Prashant Reddy T., The ‘other IP right’: Is it Time to Codify the Indian Law on Protection of Confidential Information?, 5 (1), Journal of National Law University Delhi, 1, 16 (2018).
Vikrant Ranna, Gaurav Goswami, Safeguarding Secrets: 22nd Law Commission’s push for Trade Secrets in India, BAR AND BENCH, (Jan. 30, 2024, 12:15 PM), https://www.barandbench.com/law-firms/view-point/safeguarding-secrets-22nd-law-commission-push-for-trade-secrets-in-india.
WIPO, https://www.wipo.int/portal/en/index.html. (last visited Jan. 30, 2024).
Yogesh Byadwal, Law Commission’s 289th report- Trade Secret and Economic Espionage, SPICY IP (Jan. 30, 2024, 12:15 PM), https://spicyip.com/2024/05/law-commissions-289th-report-trade-secret-and-economic-espionage.html.
[1] D.S. Sengar, Protection of Trade Secrets and Undisclosed Information: Law and Litigation, 53 (2), JOURNAL OF THE INDIAN LAW INSTITUTE, 254, 255 (2011).
[2] WIPO, https://www.wipo.int/portal/en/index.html. (last visited Jan. 30, 2024).
[3] MICHAEL SPENCE, INTELLECTUAL PROPERTY chap. 6 (Oxford University Press, 2007).
[4] Supra note 1 at 255.
[5] EDWARD KHAN, INNOVATE OR PERISH: MANAGING THE ENDURING TECHNOLOGY COMPANY IN THE GLOBAL Market 336 (Wiley, 2006).
[6] Mark A. Lemley, The Surprising Virtues of Treating Trade Secrets as IP Rights, 61 (2), STANFORD LAW REVIEW, 311, 316 (2008).
[7] Prashant Reddy T., The ‘other IP right’: Is it Time to Codify the Indian Law on Protection of Confidential Information?, 5 (1), Journal of National Law University Delhi, 1, 16 (2018).
[8] Ibid.
[9] Niranjan Shankar Golikari v. Century Spinning & Mfg Co, AIR 1967 SC 1098.
[10] Supra note 7 at 12.
[11] Superintendence Company of India v. Krishna Murgai, AIR 1980 SC 1717.
[12] The Indian Contract Act, 1872 § 27, No. 9, Acts of Parliament, 1872 (India).
[13] Yogesh Byadwal, Law Commission’s 289th report- Trade Secret and Economic Espionage, SPICY IP (Jan. 30, 2024, 12:15 PM), https://spicyip.com/2024/05/law-commissions-289th-report-trade-secret-and-economic-espionage.html.
[14] Vikrant Ranna, Gaurav Goswami, Safeguarding Secrets: 22nd Law Commission’s push for Trade Secrets in India, BAR AND BENCH, (Jan. 30, 2024, 12:15 PM), https://www.barandbench.com/law-firms/view-point/safeguarding-secrets-22nd-law-commission-push-for-trade-secrets-in-india.
[15] Ibid.
[16] Petronet LNG Ltd. v. Indian Petro Group, (2009) 158 DLT 759.
[17] Law Commission, Trade Secret and Economic Espionage, (Law Com No. 298 of 2024) at 189.
[18] Supra note 6 at 353.