[By Siddh Sanghavi]
The author is a student of National Law University Odisha.
Introduction
The 22nd Law Commission on 5th March 2024 came out with its 289th report on “Trade Secrets and Economic Espionage”, wherein it suggested the need for special legislation to protect trade secrets and prevent economic espionage. The Law Commissiosn based on the report also came out with a draft bill titled the Protection of Trade Secrets Bill.
A trade secret is a type of intellectual property that is a confidential business secret and is not generally known or easily accessible. Trade Secrets are considered to be economically valuable because of their secrecy.
India is under an international obligation to protect Trade Secrets. Article 39 of the TRIPS agreement (Agreement on trade related aspects of intellectual property rights) mandates the state to protect “undisclosed information”. The risk of protection of trade secrets and economic espionage has affected businesses for a long time. From the 1983 Star Wars Case, wherein an employee tried to steal the script of the upcoming star wars movie, to the attempted breach of the secret Coca- Cola formula.
This blog analyses the current regulations in India to protect trade secrets vis- a- vis the need for specialised legislation, it analyses the provisions of the draft bill, and gives suggestions for the same.
Inadequacy of current Laws to protect trade secrets
India does not have a specific statute or act protecting trade secrets. Currently, Trade Secrets in India are protected mainly through Non-Disclosure Agreements between parties and provisions of the IPC and Information Technology Act 2000 (IT Act), which provide for criminal sanctions. These acts do not provide any special procedure to protect the rights of the trade secret holder nor do they provide any comprehensive set of relief that will be available in case of any leak of trade secret. The question also arises as regards to civil remedies to protect trade secrets in the absence of a contract or in cases of breach by a third party.
Civil Remedies
Indian courts, in the absence of a contract provide for protection of trade secrets based on equity principles and common law action for breach of confidence. For example in the case of Richard Brady V. Chemical Process Equipment Pvt Ltd the Delhi High Court granted an injunction even in the absence of a contract citing its broader equitable jurisdiction. Granting of injunction has been one of the main remedies used by courts in India to give protection for leak of trade secrets.
Further, in cases of violation of NDA or leak of trade secret, there is currently no special procedure outlined through which remedy can be sought through the court system. Usually if a company wants to claim damages or seek compensation it will have to go through the long and tedious court process, which itself might lead to disclosure of the trade secret and cause more harm than good.
Criminal Remedies
With regards to criminal remedies, currently, when cases of Economic Espionage and trade secrets are registered the accused are usually charged with sections of Theft, trespass, dishonestly receiving stolen property and Cheating.
However courts are hesitant to apply IPC to cases of economic espionage. For example in the case of Pramod, Son of Lakshmikant Sisamkar V. Garware Plastics and Polyester {Pramod case}, the Bombay High Court refused to use criminal sanctions against certain engineers who had taken certain documents from their employers and opened a new company. The court held that since the allegedly stolen documents haven’t been used and the new company wasn’t operational criminal sanctions couldn’t be imposed. This leaves the aggrieved with almost no recourse to criminal charges against the accused.
Trade secret protection clauses have also been indirectly incorporated in the IT Act. When economic espionage is carried out through electronic means criminal remedies have been provided under the IT Act. For instance in Mphasis BPO Fraud case in 2005, the IT act was used to give punishment when there trade secrets were stolen due to unauthorised use of computer resources.
Section 43 of the IT Act read with Section 66 prohibit unauthorised use of computer systems and breach of electronic devices without authorisation. The punishment provided under these sections is imprisonment upto 3 years and a maximum fine of Rupees 5 Lakhs.
However, the penalty prescribed is not at all adequate since trade secrets when stolen may cause losses of millions and billions rupees to the aggrieved company who has invested a substantial amount of capital in the research of proprietary technology. This disproportionality between the loss caused to the company and penalty imposed needs to be rectified when cases specific to corporate espionage are involved. Calling for a specialised legislation for protection of trade secrets.
Furthermore, in the absence of a specialised legislation, when cases arise, judges rely on precedents and interpretation of the provisions of the IPC and IT Act in their applicability to protect trade secrets to address the problem. This leads to greater confusion and lack of reliability in the legal framework.
Further clarity regarding the law can only be ensured through a special law dedicated towards outlining the rights, restrictions and remedies for trade secret holders.
Analysis of the Draft bill
The draft bill is definitely a step forward in providing a comprehensive framework for the rights and responsibilities of the trade secret holder. The draft bill now provides for an all-inclusive legislation, stating the various rights and duties of the holder, including the right to license and commercialise the trade secret to use it as a stream of revenue. It also provides that any misappropriation of the trade secret will allow the holder to initiate legal action.
While the right to license a trade secret was first governed by general contract law. An express statutory recognition of this right of the holder, along with an attached remedy in case of misuse is definitely more favourable for businesses in India.
Many countries like the UK, USA, and France among others have long had a separate law for protection of trade secrets. A 2016 study conducted by the American Enterprise Institute found a positive correlation between strong trade secret protection laws and R&D spending by companies.
The benefit of having a separate trade secret law can be best seen in the United States. The Defend Trade Secrets Act (DTSA) established a uniform definition of a trade secret across federal courts. This has led to improved clarity and predictability of trade secret laws, which is currently lacking in India.
Suggestions and recommendations for the draft bill
Mandatory licencing of trade secrets
A notable feature of the bill is the issue of compulsory licensing. The bill allows the central government to mandate the holder of the trade secret to grant licenses to third parties or to the government. This can be done in cases of national emergencies and public health crisis.
After the COVID- 19 pandemic compelling the sharing of licenses of trade secrets has been considered to be essential to not only address COVID- 19 but also future pandemics. Compulsory licenses for trade secrets become extremely important to ensure equitable access to necessary tools in case of health emergencies. This mechanism for mandatory licensing can also be found in the TRIPS agreement.
This provision for mandatory licensing although a step in the right direction, needs to be elaborated further with sufficient safeguards since a government mandated sharing without adequate safeguards will discourage innovation and investment.
Additional provisions have to be added to ensure fair compensation to the original developer. Provisions should be incorporated in the draft bill to ensure a fair compensation to the developer either by payment of royalties or through a lump sum payment. Further, mandatory licenses should always be for a specified duration. Limiting the duration to a specific period after which the trade secrets exclusivity returns to the owner. This will help balance both the individual rights of the holder as well as the larger public interest.
Incorporation of Criminal Sanctions in the draft bill
The law commission when dealt with the question of adopting criminal remedies in the draft bill, stated that specific remedies need not be incorporated in the new draft bill since the provisions of the IPC and the IT Act should suffice.
However as reasoned above, punishment as well as the fine provided in the IPC and IT Act is not sufficient when compared to the economic loss that has been caused to a company.
The application of these acts to protect trade secrets may also become a challenge since these acts were not made with the intention that they be applied for the protection of trade secrets. For instance while the offence of cheating may be applicable in some cases, it doesn’t capture the nuances of misappropriation specific to trade secrets. This results in non- uniformity of application of the law resulting in ambiguity.
Many countries like the USA, France, and Canada have specifically provided for criminal sanctions. This highlights the severity and seriousness of the offence. Including them in India, aligns us with international frameworks and standards. Incorporating criminal provisions in the bill will also discourage legal ambiguity when businesses want to pursue criminal actions.
Pursuing Civil Remedies through commercial courts
The draft bill now provides for the aggrieved to seek civil remedies through the commercial courts, which have been incorporated by the Commercial Courts Act 2015. It is a welcome initiative that the draft bill provides for pursuing civil remedies through commercial courts while ensuring adequate protection for ensuring secrecy and protection of trade secret. Faster Resolutions, judges with specialised knowledge on commercial law, confidentiality are just few of the advantages of resolving trade secret disputes through commercial courts.
Trade secret litigation will often involve highly confidential information. Commercial courts can duly implement stricter procedures to safeguard sensitive information and they have also been empowered to do the same under the Section 9 of the draft bill.
It is also important to note that the Commercial Courts Act provides for a specialised mechanism for cases involving MSME’s. The fact that MSME’s require more trade secret protection than others has also been recognized in report. Since MSME’s are one of the major stakeholders in trade secret protection, ensuring a level playing field for them will be beneficial.
Conclusion
The protection of trade secrets in India, is directly related to promoting ease of doing business. To invite substantial foreign investment in the country and ensure a ‘technology transfer’, there must be a strong law which inspires confidence and precludes any ambiguity.
The current laws regarding trade secrets are scattered and difficult to navigate. A statute will provide clarity and help businesses understand their rights and obligations. It will also increase trust in the legal system especially for MSME’s and start- ups who rely heavily on trade secrets and also can’t spend a large amount on compliance and legal costs.
Although the bill proposed by the Commission is only a draft and lacks certain provisions and safeguards, it is a positive step that the Law Commission has recognised the need for a specialised legislation to protect trade secrets.
The bill has been currently recommended to the government, and it will likely take a call on the viability of having a separate trade secret law in the upcoming months.