Brief note on the law of trade secrets

B. Jyoti Kiran♠

INTRODUCTION

In the commercial world, confidential information can be very valuable. Much business
information may be of value to others in the same line of business, which has generated the
information would obviously like to prevent its competitors from discovering and using this
information. Before the advent of modern statutory intellectual property right protection, an
obvious way of protecting information and ideas was by maintaining their secrecy. The
courts gradually begin to attach legal consequences to confidential relationships and, in the
nineteenth century, the equitable action for breach of confidence begins to develop rapidly.
Secrecy is the touchstone upon which an action for breach of confidence is based; effort is
needed to ensure the continued maintenance of such secrecy. Where the confidential
information is employed in a product or process which itself is made available to the public,
if it can be extracted from the product or process through reverse engineering, there can be
no action against the reverse engineer for breach of confidence.
Confidential information or trade secret may be protected not only in equity and by
contract, whether express or implied, but also in tort by means of actions for inducing
breach of contract and conspiracy to induce breach of contract. Although, this is the subject
of both academic and judicial dispute, it is argued by some that confidential information is
a form of property right and may be protected as such. 1
In the multiplicity of different types of actions, and the fact that the Courts have at
times tended not to specify clearly which jurisdictions they are relying upon in reaching their
decision, which has created a degree of uncertainty in this area of law. In case of The
Attorney General v. Guardian Newspapers & Others2, Sir Nicolas Browne Wilkinson

♠
The author is a student at NLIU, Bhopal.
1
Gurry, Breach of Confidence (OUP 1984 ), Chap. IID.
2
[1987] 1 W.L.R. 1248 at 1263.
stated “The principles upon which the law of confidential information is based have never
been clarified and remain, to my mind, obscure”.
In this project our endeavour is to analyse what re trade secrets and to study the
contractual relationship of non-disclosure of trade secrets between an employer and
employee.

WHAT ARE TRADE SECRETS?

The Courts have not limited themselves by any attempt to try to define what type of
information is confidential. When considering this in the case of Faccenda Chicken Ltd. v.
Fowler3, Lord Justice Neill said it “ is clearly impossible to provide a list of matters which
will qualify as trade secrets or their equivalent. Secret processes of manufacture provide
obvious examples, but innumerable other pieces of information are capable of being trade
secrets, though the secrecy of some information may be short lived.”
Trade secret usually means information, including a formula, pattern, compilation,
program, device, method, technique, or process, that derives independent economic value,
actual or potential from not being generally known to, and not being readily ascertainable by
proper means by, other person who obtain economic value from its disclosure or use.
A trade secret is information whose value to its possessor depends on its not
becoming generally known- examples includes customer lists, business plans, and
manufacturing processes. Trade secret law defines the rights that the possessor of trade
secrets has against those who have obtained the secret wrongly – as a result of breach of
contract, an employee’s violation of his duty of loyalty, or a trespass. Unlike patents or
copyrights, trade secret law does not normally provide protection against someone who has
obtained the secret without the consent of the owner but without violating his legal rights-
by, reverse engineering a product that embodies the secret.
Trade secret law gives the victim of wrongful appropriation the right to collect
damages based on the value of the secret - the victim’s loss, the appropriator’s gain, or a
‘reasonable royalty’. It also gives the victim of a wrongful appropriation the right to enjoin

3
[1987] Ch. 117 at 138, CA.
innocent third party from using the secret, providing that to do so does not impose serious
costs on them. A third party who has acquired a secret under circumstances in which he
neither knew nor should have known that it has been misappropriated and has taken actions
in reliance on being able to use the secret may continue to use it.

NEED FOR THE PROTECTION OF TRADE SECRETS

Robert A Spanner in his book, Who Owns Innovation- The Rights and Obligations of
Employers and Employees, published in 1984 in the U.S said:
The old adage ‘knowledge is power’ is coming to have its commercial counterpart in
the more sordid but equally valid aphorism ‘information is money’. In a nation that is
entering the so-called post-industrial information society, information has quite
literally become Capital.4
The dependence of economics on possession of land or machinery and the importance of
that dependence is now out weighed by the importance of that dependence upon what
might be called ‘intellectual capital’. Economics, which have the knowledge to produce
things more efficiently, to develop new technology to do this and to improve efficiency
overall, gain the competitive edge. Intellectual Capital or ideas are paramount to this, As
soon as an idea is shared with the third party, it is open to attack. It is essential that trade
secrets can be protected against disclosure and that the courts impose this obligation to hold
such information confidential.
If this prohibition on releasing information had no exceptions, then economics
would stagnate, and so the courts have balanced these two opposite ends of the spectrum. In
general, the Courts will not allow information, which has been disclosed in confidence to be
used in a way that is inconsistent with the purpose for which the information was imparted.
On the other hand, no one will be prevented from using information, which is
already in the public domain. If someone can prove that they have independently carried out
their own research in developing a product, the courts will not grant an injunction stopping

4
Quoted by Paul Lavery in his book, Commercial Secrets (1996, Roundhall, Sweet and Maxwell)
them from using that product even if another company has already developed it. No one can
be stopped from ‘reverse engineering’ a product, i.e no one can be stopped from purchasing
at market value any product in the market place and working backwards to find out how it is
manufactured. Furthermore, the courts have allowed an employee to use his skill and
experience, which he has gained while, employed; this is as opposed to using the secret of his
former employer.

HISTORICAL BACKGROUND OF TRADE SECRET

The world’s oldest Written Code of Laws, the Hammurabic Code of 2100 B.C, which
apparently ordered the loss of an eye for those who were caught with forbidden secrets. In
Roman Law, an action existed in relation to the corruption of a slave, which arose most
often where a Roman citizen had persuaded the slave of a competitor to give him his
master’s commercial secrets. Prior o the 18th Century, the Government in England took a
very paternalistic attitude and the economy was strictly regulated. The Guilds, set up to
govern various trades, had strict rules setting out who could receive certain information or
trade secrets. During the 18 th and 19th Centuries however, economic policy
Became permissive and leissez-faire was the order of the day. The City and the Guild groups
became less powerful and manufactures had to seek new remedies and the Courts gradually
introduced the action for the breach of confidence.
In the case of Webb v. Rose 5 an injunction was granted to stop the defendant from
printing the plaintiff’s father’s drafts. In Pope v. Curl 6, Mr. Pope obtained an injunction
restraining Mr Curl, a bookseller, from selling a book called Letters from Swift, Pope and
Others as long as the book contained letters in Mr. Pope’s name.
Although initially the action for breach of confidence related to information in
written form, over the years the law advanced and protected not just the matters of
copyright, but also specifically, the underlying confidence of the information, which was

5
(1732) 98 ER 924.
6
(1741) 26 ER 608.
imparted. Take for instance take the case of, Prince Albert v. Strange 7, where the
defendants were stopped from publishing etchings owned by the Royal Family, which had
been left with the a printer to have copies made.

TRADE SECRET v. PATENTS

The protection of trade secret differs from that conferred by a granted patent in that it does
not give its creator any monopoly right which can be enforced generally against third party.
The fact that certain information used in a publicly available product is confidential will not
afford any protection if that information is discovered by a third party through reverse
engineering or by the independent development of the same technology.
In this light, where a product is developed which embodies secret, though
unpatentable, know-how, the commercial advantage which the originator of the product
obtains does not come from his being able to prevent imitation by reliance on a monopoly
right but rather from the lead-time, which the originator secures by being the first in the
market.
Confidential information, unlike patents does not have a limited life span during
which it is protected. Confidential information can continue to be protected for so long as it
remains outside of the public domain. This period of protection, while indefinite in duration,
is not necessarily perpetual. In the case of Attorney General v. Jonathan Cape Ltd.8 , Lord
Widgery C.J. stated that there must be a limit in time after which the confidential nature of
information will expire. What this limit will be depends on the particular nature of the
information in question.
As a patent has to be published and the patentable invention must be must be
sufficiently described in the specification, protection by the means of preserving confidence
is an alternative, and not an additional, protection. It is not uncommon, however, for a core

7
(1849) 1 Mac & G 25.
8
[1976] Q.B 752 at 771
invention to be subject to patent protection, while additional pieces of information, which
may be necessary to put the invention into marketable form, are protected by means of
maintaining confidentiality. Before a patent application can be considered, there will usually
be a research and experimentation stage during which the maintenance of the secrecy of the
information generated will be critical to the protection of it.
Finally, trade secret law provides protection for an inventor whose invention, while
patentable, is not worth the cost of patenting. An invention of only modest value may still
qualify for a patent - but it may not be the worth the substantial cost of getting one. Trade
secret protection, on the other hand, is cheaper, ceteris paribus, the lesser valuable the secret,
the less the efforts that will be made to steal it.9
The U.S Supreme Court has held in the case of Compco v. Day-Brite Lighting,
Inc.10 that a state cannot use trade secret law to provide the equivalent of patent protection.
However, it also held in yet another case of Kewanee Oil Company v. Bicron
11
Corporation , that state trade secret law is not entirely pre-empted by patent law. It has
rejected both the arguments that trade secret interferes with the objectives of the patent law,
by inducing inventors to keep their inventions secret rather than patenting them, and the
argument that unpatentable secrets deserve no protection. That is the right result,
economically speaking, in part because trade secret law fills in important gaps in the all-or-
none scheme of protection provided by patent law.

TRADE SECRET v. COPYRIGHT

Unlike in the case of patents, a work may be a copyright work and confidential at the same
time. If, for example, an employee were to misappropriate a hard copy of the source code of
one of his employer’s programs which had been kept secret by his employer and were to use
that source code to reproduce the programs elsewhere, he could be liable both for
infringement of copyright and for the breach of confidence.

9
Friedman David D., ‘Trade Secret’ (1998), The Economics of Intellectual Property, Volume III, An Elgar
Refrence Collection, Cheltenham, U.K.
10
376 US 234 (1964).
11
416 US 470(1974)
 It is, however, a pre-condition of liability for copyright infringement that the
infringer should perform without authorisation a defined “restricted act”, the most usual of
which is reproduction. There are no defined limits with respect to trade secrets.
Further, for their to be no copyright infringement there must be copying of the
form 12 of the source code and not merely the idea behind the source code. In contrast, an
action for breach of confidence is concerned with the substance of the information and not
simply with its particular form of expression.
It is clear that an idea or concept, in addition to the expression of that idea or
concept, may be protected as trade secret. In the Australian case of Talbot v. General
13
Television Corporation Pvt. Ltd. Harris J., specifically rejected the proposition that an
obligation of confidence could not cover concepts or ideas. This principle was applied in
14
Fraser v. Thames Television, where the idea of a series about a female pop group with
three members was held to be capable of protection as confidential information as “ the
content of the idea was clearly identifiable, original, of potential commercial attractiveness
and capable of being realised in actuality”.

EMPLOYEES AND TRADE SECRETS

The problem for employees and confidential information can be summarized in two points
(i) Employees who become ex-employees can know too much.
(ii) Ex-employees still need to be able to earn a living.

Employees learn much about the organization and management of a business. They need
information about the business in order to their jobs. Some information can be mundane,
some information is sensitive like pricing and some can be highly confidential like future
product plans or unique manufacturing process or product specifications. An employer may
want to be able to exercise some sort of control over this sort of information after an
employee has left.

12
M.S Associates Ltd. v. Power [1988] F.S.R. 242.
13
[1981] R.P.C. 1
14
[1983] 2 All E.R. 101.
 Additionally, because an employee handles all sorts of information daily, the
distinction between what is confidential and what is not confidential can become blurred.
Further more when employees become ex-employees they are usually still only qualified to
do the same sort of work but somewhere else. If the ‘somewhere else’ is with a competitor
of the former employee then problems can arise. On the one hand the ex-employee needs to
be able to use general skills and knowledge acquired during former employments and on the
other the former employer will want to stop any information being given to the competitor
which may increase competition or damage business.
Thus, there are two main questions to address
(i) When the ex- employee’s obligation to keep information begins and when does it end?
(ii)What information of a former employer can an ex-employee make use of when engaged
with a competitor?

Imposing obligation on employees

An employee can be obliged to keep information confidential:
(i) impliedly by law during the period of employment.
(ii) expressly by the contract for the duration of employment.
(iii) expressly by contract for the period following termination of employment.

Implied obligation of the employee

Even though nothing may be expressly agreed, orally or in writing, every employee owes the
employer an obligation to act in good faith during the period of employment this includes
keeping confidential information confidential.
The case of Normalec Ltd v Britton held that the consequences of breach of an
employee’s duty of good faith can be dire. In that case the employee used the employer’s
customer information to build up his own business, and build the business up whilst still an
employee. The end result was that the court decided the employee should lose the whole
business to the employer.
The employee only owes the duty of fidelity whilst employed. The duty comes to an
end on termination of employment. Additionally the courts recognize a right of any person
to use and to exploit for the purpose of earning a living all the skill, experience and
knowledge at the employees disposal, including that acquired in the course of previous
employments. This does not mean the employee can make use of any information for
personal benefit. It will be seen that trade secrets will still be protected but other information
may not. However the problem can be in deciding what is confidential and what is not.

Express obligation in a contract of employment

Instead of relying on an implied obligation it is better to have an express written agreement,
such as in the employment contract. If the express agreement does not deal with the
question of confidentiality after employment has ceased then the employee will be free to
make use of all general skill, experience and knowledge acquired whilst in the employer’s
employ (other than trade secrets). Thus,
§ In any contract with an employee the employer should ensure the question of
whether any obligation of confidentiality is to continue after cessation of
employment is dealt with.
However, this in itself is not enough
(i) Firstly it does not prevent the employee working for a competitor.
(ii) Secondly it does not deal with what information is to be treated as confidential.

Restrictions on future employment

It is possible to include an employee’s contract a non-competition clause to be operative
following cessation of employment. This requires
(i) The employer must have a legitimate interest to protect in imposing the obligation.
(ii) The restriction must not be unreasonable either in duration or geographical extent.
The first of these requirements is normally easily fulfilled. If the employee cannot
work anywhere else because of the restraint but there is no real justification for the
protection for the employer then it can be unenforceable. Similarly, if the restriction is
broader than is required to protect the employer’s interests, either geographically or in
relation to what kinds of work the employee can engage in then it may be unenforceable.
Whether a clause is too broad in any particular case depends on the facts. Thus for
employers should -
(i) Take care with drafting restraint clauses in employee contracts and for employees.
(ii) Read their employment contract carefully before they sign it.

What information is to be treated as confidential

Where there is no express obligation

If there is no express contractual agreement, the employee is free to make use of any
information unless it was clear it was a trade secret. It Faccenda Chicken Ltd v. Fowler15, the
Court of Appeal said that the following points should be taken into account in deciding
whether or not any particular item of information was covered by the implied obligation
(i) If the employee regularly handled confidential information then he or she can be expected
to recognize confidential information more readily than other employees.
(ii) The nature of information-can it properly be classified as a trade secret?
(iii) Was it clear from the steps the employer took to protect confidential information that
the information concerned was confidential?
(iv) How easy is it to distinguish the information from other information supplied to the
employee?

Where there is an express obligation

Where there is an express contractual obligation, there still the problem of defining what
information is to be kept confidential. A clause, which is too broad or vague, may be of little
help. At the same time it may be difficult to define in a contract clause every kind of
information that is to be kept confidential. Thus, contract terms are only part of a scheme of
protection, which must include day-to-day measures.

15
[1987] Ch 117
Employees, confidentiality and ownership of intellectual property

The law of confidentiality may override the legal rules governing who is the owner of
intellectual property rights. In British Symphon Co.Ltd.v Homewood 16, Roxburgh J said:
“Now…would it be consistent with good faith, as between master and servant, that, he
should in that position be entitled to make some invention in relation to a matter concerning
a part of the plaintiff’s business and keep it from his employer, if and when asked about the
problem, or even sell it to a rival and say: ‘Well, yes, I know the answer to your problem, but
I have already sold it to your rival’. In my judgment, that can not be consistent with a
relationship of good faith between a master and a technical adviser. It seems to me that he
has a duty not to put himself in a position in which he may have personal personals reasons
for not giving his employer the best advice, which it is his duty to give if and when asked to
give it.”
The above quotation does not apply to employees like the tea-boy or the toilet
cleaner. It applies to ‘technical advisers’. However, the term technical adviser should not be
taken too literally. The same principle could apply to a wide variety of employees whose
ordinary duties necessarily involve the creation of various intellectual property rights.

The employment cases

The first case is which arose was Meadox Medicals v VPI Ltd and Denis Cummings
and George Goicoechea17. This is a case, which was heard before Mr Justice Hamilton in
1981. Mr Cummings and Dr. Ghad worked for Meadox Medicals in the US, and during that
employment had access to know-how and trade secrets relating to the development of what
was called a woven double velour graft which was used as replacement artery. The
gentlemen resigned from Meadox Medicals, became employee of a French company, left
that company and within a year of having left Meadox Medicals, had set up their own
company in Shannon manufacturing arterial prosthesis. The court gave a lengthy judgment

16
[1956] RPC225
17
High Court, 27 April 1982, unreported.
and was satisfied that it was ‘highly improbable if not inconceicable’ that the product could
have been conceived within the time without the benefit and knowledge and confidential
data required by Dr G and Denis Cummings in the course of their employments by the
plaintiff. Both gentlemen had signed confidentiality agreements with Meadox and the court
was satisfied that they were in breach of those agreements.

In Faccenda Chicken v. Fowler18, the plaintiff sold fresh chickens and in 1973
employed Mr.Fowler as a sales manager. At his suggestion, the company adopted a method
of selling fresh chickens from refrigerated vans. Over the years, sales information,
customer’s names and addresses, routes and prices charged and so on were gathered. In
1980, Mr Fowler left and set up his own business in exactly the same area, doing exactly the
same thing, together with five of the salesman from Faccenda Chickens. None of the
employees had a restrictive covenant in their employment contract. Goulding J.who heard
the case, said that there were three categories of information:
(i) public information which is not protected;
(ii) skill and experience which is not protected but can be restricted by contract;
(iii) trade secrets which are protected.
He found that Fowler and the others had acquired skill and experience, not secret
information, and he refused to grant an injuction.
19
In yet another case of Lawrence David Ltd. V Ashton, the plaintiff
manufactured vehicle bodies and employed Mr Ashton as a sales director. His contract of
employment said that he would not, during or after employment, disclose to anyone any
information relating to the plaintiffs or their customers or divulge any trade secrets, and that
he would not be involved for two years after his employment in the design, development,
manufacture or supply of similar products. Mr Ashton was fired and he went to work for a
competitor. The plaintiffs sought damages for breach of contract and an injuction to stop
Mr Ashtons use of confidential information and to enforce the restraint of trade-clause. The
court of Appeal refused the injunction against disclosing confidential information, because it

18
[1985] 1 All ER 724.
19
[1991] 1 All ER 385.
was not possible to define the confidential information or the trade secrets, which the
plaintiff sought to protect.
This case makes it clear that it is very important that the employee knows precisely
what it is he may and may not do, and emphasizes the importance of clarity in the drafting of
such contracts.
The case of House of Spring Gardens v. Point Blank Ltd 20 involves the development of
a bullet-proof vest by an inventor who entered into agreements with Point Black Ltd. to
manufacture the vest from him. The relationship broke down. It was agreed that the
inventor would get royalties from any further contract of the supply of vests by Point Blank
Ltd, particularly to the Libyan authorities. The defendant did not pay any royalties. The
inventor claimed for breach of contract and copyright, and also claimed an injunction for
breach of know-how and abuse of confidential information. Costello J granted the
injunction and the supreme court upheld his decision. Costello’s judgement gives a very
good analysis of the U.K. case and points out that he is enunciating the law in Ireland in
relation to confidential information for the first time. Costello J’s rules are, firstly, decide if
there is a relationship between the parties, which imports confidence, and secondly, decide
whether the information can properly be recorded as confidential.

Contract
The type of the role of contract as a means of protecting confidential information cannot be
understated. Drawing up a contract can help to create a degree of certainty by forcing the
parties to address precisely what they consider requires protection, as well as the means by
which they wish to secure such protection. Further, the very act of specifying the need for
confidence can give rise to a relationship, which may be protected by an equitable action for
breach of confidence in addition to that for breach of contract. Contractual protection of
confidential information is used in many circumstances. Employment contracts generally
contain provisions imposing an obligation on the employee, both during and after the
termination of employment, not to disclose or to use, other than for the purpose of his

20
[1984] IR 611.
employer’s business, confidential information which has been made available or which is
developed during the course of the employment.
These provisions are often supported by terms requiring the return of all confidential
materials at the termination of the contract, combined with a provision requiring
confirmation that all such information has been returned and that no copies ha ve been
retained.
Although it always advisable to state expressly in writing the obligations of any party to
whom information is disclosed, it is well established that the existence of an express term is
not always a necessary pre-condition to the exercise of the contractual jurisdiction. Thus,
where no express term imposing an obligation of confidence has been included in a written
contract, it may be implied “in order to give the transaction that effect which the parties
must have intended to have and without which it would be futile”. Indeed, the implied
contractual jurisdiction has been applied in circumstances where the parties have not entered
into any express terms at all.
In relation to employment contracts, the courts have made full use of the employee’s general
duty of fidelity imposes the following obligations on an employee:
(a) The employee is bound not to disclose, nor to use for purposes which are inconsistent
with his employer’s interests, confidential information received by him in his capacity as an
employee.
(b) The employee must not compete with his employer during the subsistence of the
employment relationship.
(c) The employee is bound to disclose to his employer valuable information which he
receives as an employee and which is not known to his employer.
The law relating to the protection of confidential information in employment contracts was
examined by the Court of Appeal in the case of Faccenda Chickens Ltd. v. Fowler and
others. Lord justice Neill, after a detailed examination of the authorities, summarized the
principles governing the protecting of confidential information by such contracts as follows:
(a) where the parties are, have been, linked by a contract of employment, the obligations of
an employee are to be determined by the contract between him and his employer.
(b) in the absence of any express term, the obligations of the employee in respect of the use
and disclosure of information are the implied terms.
(c) while the employee remains in the employment of the employer the obligations are
included in the implied term which imposes a duty of good faith or fidelity on the employee.
This will vary according to the nature of contract.
(d) the implied term which imposes an obligation on the employee as to his conduct after
the determination of employment is more restricted in it’s scope than that which imposes a
general duty of good faith.
(e) the obligation not to use or disclose information after the determination of the contract
of employment only covers information which is of ‘a sufficiently high degree of
confidentiality as to amount to a trade secret”. It does not extend to information given to or
acquired by the employee during his employment which is only “confidential” in the sense
that an unauthorized disclosure of such information to a third party while the employment
subsisted would be a breach of the duty of fidelity.
These principles show the importance of all necessary steps ,while a contract of
employment is still subsisting ,to ensure that an employee takes away with him as little
information as possible which is considered to be value to the employer .Anything which
purports to protect information which is not a trade secret or the equivalent is likely to be
held by the courts to be an unreasonable restraint of trade and ,hence unenforceable .Since
the ones is on the party who is seeking to rely on the restrictive covenant to prove its
reasonableness ,it is important that considerable care is taken is drafting the covenant .
That principle that must govern the drafting of a covenant is that the restraint must do no
more than afford “adequate protection to the legitimate interests of the party in whose
favour it is granted “.Such “legitimate interests “has been held to include the protection of
confidential information and of business goodwill ,but very little else.
In particular, the courts has been careful to limit the protection afforded to an
employer to information which is separable from the general skills and know –how an
employee acquires simply by virtue of the fact of doing the job .It has therefore, been held to
be contrary to the public policy to attempt to debar an employee after the termination of his
employment from using:
 “The general skill and knowledge which an employee of any ability must necessarily
obtain as opposed to knowledge of any matter and skill in any process in which (the former
employee) could be said to have any property at all.
Trade secrets which are “as real and objective as the possession of material goods
“have been distinguished from the skill and expertise which is the subjective “equipment of
the workmen come part of himself “and which is mot protective by Lord Justice Cumming
who said that:
“… The court seeks to respect the rights of servants to advance in their chosen trade and
profession, and in this connection to promote the public interest by changing their
employment, and also to promote the public interest by better use of the servant’s personal
aptitudes, experience and skill”.
The principles concerning the protectability of confidential information after
termination of employment even though the defendant may have been using the information
for purposes other than those of competing with the plaintiff.
Contractual protection of confidential information is by no means limited to
employment contracts. Most software licenses, particularly those where access to source
code of programmes or support documentation is provided, contain confidentiality
provision. Indeed, a common means of ensuring confidentiality is by holding back the
source code and giving the licensee a degree of assurance by placing it on deposit with a
third party who has instructions to release the source code in the event of, for example the
insolvency of the licensor or the licensor’s failure to provide proper maintenance of that
software. This is commonly known as an ‘escrow’ arrangement.
Although it is clear that an implied contractual term or equitable duty to maintain
confidence may be imposed in pre-contractual negotiations, it is usual to enter into a
confidentiality agreement to formalize matters. In all these cases, however, the enforceability
of the contract will be as good as the confidential nature of the information in question, and
ability of the confider of such information to demonstrate the misuse of such information by
confide, both of which can sometimes be difficult to do.
The limitation of contractual protection of confidential information are obvious.
Contractual protection, for example, is inherently limited when it comes to affording
protection against third parties as privity of contract only permits relief against the parties to
the contract. Although there may be tortuous relief where the third party has induced the
confident to breach his contractual duty to maintain confidence, this will not be the case
where the third has not actively induced the breach but is merely a passive recipient.
Consequently, the equitable jurisdiction has proved to be an important supplement to the
contractual jurisdiction.
POSITION IN INDIA

In India no specific statutory protection is available for trade secrets or confidential

information. Protection may be obtained in common law civil actions enforcing private
contractual rights or asserting a breach of confidentiality, which is considered a claim in
equity. Trade secrets can be protected through contractual agreements with inclusion of
confidentiality, non-disclosure and non-competitive covenants. Indian Contract Law,
however has its limitations Sec 27 of ICA 1872, states that subject to the sole exception that
the seller of a businesses goodwill may agree to a reasonable restriction of the seller’s trade,
“[e]very agreement by which any one is restrained from exercising a lawful profession, trade
or business of any kind is to that extent void.” Under Indian law, a restraint to operate a
competitive business during employment is valid, but if the restraint operates after the expiry
of employment, it is illegal and void.
Take for instance the case of Superintendence Company Of India (P) Ltd., v.
Sh. Krishan Murgai,21 where two substantial questions were raised : (a) whether a post-
service restrictive covenant in restraint of trade as contained in clause (10) of the service
agreement between the parties is void under Section 27 of the Indian Contract Act ? and (b)
whether the said restrictive covenant, assuming it to be valid, is on its terms enforceable at
the instance of the appellant-company against the respondent. The appellant-company
carried on business as valuers and surveyors, undertaking inspection of quality, weighment,
analysis, sampling of merchandise and commodities, cargoes, industrial products, machinery,
textiles, etc. It ha d established a reputation and good will in its business by developing its
own techniques for quality testing and control and possesses trade secrets in the form of

21
1981-(002)-SCC -0246 -SC
these techniques and clientele. On March 27, 1971 the respondent was employed by the
appellant-company as the Branch Manager of its New Delhi office on terms and conditions
contained in the letter of appointment issued to him on the same date. Clause (10) of the
terms ad conditions of employment placed the respondent under a post-service restraint that
he shall not serve any other competitive firm nor carry on business on his own in similar line
as that of the appellant-company for two years at the place of his last posting. The said
clause ran thus :

“(10) That you will not be permitted to join any firm of our competitors or run a business of
your own [in similar lines] directly and/or indirectly, for a period of two years at the place of
your last posting after you leave the company.”

On November 24, 1978 the appellant-company terminated the respondent's services with
effect from December 27, 1978. Thereafter the respondent started his own business under
the name and style of "Superintendence and Surveillance Inspectorate of India" at New
Delhi on lines identical with or substantially similar to that of the appellant-company. On
April 19, 1979 the appellant-company brought a suit in the High Court claiming damages on
account of the breach of the negative covenant contained in clause (10) and for permanent
injunction restraining the respondent by himself, his servants, agents or otherwise, for
carrying on the said business or any other business on lines similar to that of the appellant-
company. The learned Single Judge took the view that the negative covenant, being in partial
restraint of trade, was reasonable inasmuch as it was limited both in point of time (two years)
as well as the area of operation (New Delhi which was his last posting) and, therefore, was
not hit by Section 27 of the Contract Act. It was held by the Hon. Supreme Court that on a
true construction of cl. (10) of the agreement, the negative covenant not to serve elsewhere
or enter into a competitive business does not, arise when the employee does not leave the
services but is dismissed from service and the wrongful dismissal is a repudiation of contract
of service which relieves the employee of the restrictive covenant.
 22
In the case of Monogram Mills Ltd. And Others, v. The State Of Gujarat,
the respondent company manufactured tyre cord yarn at its plant at Kalyan known as the
Century Reyon. Under an agreement dated January 19, 1961 Algemene Kunstzijde Unie of
Holland and Vereinigte Clanzstoff Fabrikan AG of West Germany agreed to transfer their
technical know-how to the respondent company to be used exclusively for the respondent
company's tyre cord yarn plant at Kalyan. Clause 4 of that agreement provided that the
Century Rayon should keep secret until the termination of the agreement and during three
years thereafter all technical information, knowledge, know-how, experience, data and
documents passed on by the said AKU and VCF and the Century Rayon should undertake
to enter into corresponding secrecy arrangements with its employees. The respondent
company invited applications for appointments for Shift Supervisors. The respondent
company offered the appellant the post of a Shift Supervisor in the said tyre cord division
stating that if the appellant were to accept the said offer he would be required to sign a
contract in standard form for a term of five years. The appellant accepted the said offer
agreeing to execute the said standard contract. Clause 9 of the agreement provided that
during the continuance of his employment as well as thereafter the employee shall keep
confidential and prevent divulgence of any and all information, instruments, documents, etc.,
of the company that might come to his knowledge. Clause 17 provided that in the event of
the employee leaving, abandoning or resigning the service of the company in breach of the
terms of the agreement before the expiry of the said period of five years he shall not directly
or indirectly engage in or carry on of his own accord or in partnership with others the
business at present being carried on by the company and he shall not serve in any capacity,
whatsoever or be associated with any person, firm or company carrying on such business for
the remainder of the period. The appellant received training from March to December 1963
and acquired during that training, knowledge of the technique, processes and the machinery
evolved by the said collaborators as also of certain documents supplied by them to the
respondent company which were to be kept secret and in respect of which the respondent
company had undertaken to obtain secrecy undertakings from its employees. The appellant
remained absent from the work without obtaining leave .He went and joined another

22
AIR (1976) SC 2177
company, which was Rajasthan Rayon Company at Kotah, which was also manufacturing
tyre cord yarn. The respondent company filed a suit in the Court an injunction restraining
the appellant from serving in any capacity and a perpetual injunction restraining him from
divulging any or all information, instruments, documents reports, trade secrets,
manufacturing process, know-how, etc., which may have come to his knowledge. Counsel
for the appellant raised the following three contentions:

(1) That the said agreement constituted a restraint on trade and was therefore opposed
to public policy,
(2) That in order to be valid and enforceable the covenant in question should be
reasonable in space and time and to the extent necessary to protect the employers'
right of property, and
(3) that the injunction to enforce a negative stipulation can only be granted for the
legitimate purpose of safeguarding the trade secrets of the employer.

The Court held that, “There is also nothing to show that if the negative covenant is enforced
the appellant would be driven to idleness or would be compelled to go back to the
respondent company. It may be that if he is not permitted to get himself employed in
another similar employment he might perhaps get a lesser remuneration than the one agreed
to by Rajasthan Rayon. But that is no consideration against enforcing the covenant. The
evidence is clear that the appellant has torn the agreement to pieces only because he was
offered a higher remuneration. Obviously he cannot be heard to say that no injunction
should be granted against him to enforce the negative covenant, which is not opposed to
public policy. The injunction issued against him is restricted as to time, the nature of
employment and as to area and cannot therefore be said to be too wide or unreasonable or
unnecessary for the protection of the interests of the respondent company.” The Courts
typically applies a stricter level of scrutiny to contracts for the provisions of services than to
contracts solely for the sale of business.
 In the case of Mrs Manju Bhatia And Another,v. New Delhi Municipal
Council And Another23, "breach of trust" is stated to be the disclosure by an employee of
trade secrets and other confidential information obtained by him in the course of his
employment . In yet another case of Alembic Chemicals Works Co. Ltd. v.
Commissioner Of Income Tax, Gujarat,24 it was held that “.... The specific characteristics
of the industrial microbial strains, media, and fermentation conditions cannot be described
in detail since these facts are considered trade secrets. The origin of strains, and general
principles of culture maintenance, fermentation equipment, innoculum preparation, media,
and fermentation conditions for penicillin and cephalosporin production, are public
knowledge and can be reviewed.

The Courts held that the trade secrets are protected against misuse irrespective of the
existence of a contract, express or implied, based on the broad equitable principle that a
person who has received information in confidence shall not take unfair advantage of it
because of the duty to maintain confidentiality or the duty to fidality. The Courts will not
restrain such disclosure if the information is divulged in the public interest to one who has
an interest in receiving it. The Common law remedies of injunction and damages (including
infringement profits) are available in the breach of confidentiality action.

23
1997-(SC2)-GJX -0860 -SC
24
1989-(SC2)-GJX-0216-SC
 BIBLIOGRAPHY

Books Referred:

§ Pearson H, Miller Clifford, Commercial Exploitation of International Property, 1990,

Blackstone Press Ltd., London.
§ Cotter A, Intellectual Property Law: Professional Practice Guides,2003, Cavendish
Publishing, London.
§ Baker & Kenzie M, Guide to Intellectual Property in the I.T Industry, 1998, Sweet
and Maxwell, London.
§ Bauchoux Deborah , Intellectual Property- The Law of Trademarks, Copyrights,
Patents, Trade Secrets, 2000, West Legal Studies- Thompson Learning, New York,
U.S.A.