Enforceability of secrecy clauses in India - What is ‘reasonable’?- Interesting read

Enforceability of secrecy clauses in India - What is ‘reasonable’?

Krishna & Saurastri Associates LLP

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India December 6 2016

It is widely known that trade secrets or confidential information do not receive statutory protection in India, and the same are typically protected contractually vide non-disclosure agreements (“NDA”) and/or secrecy clauses embedded within a master agreement. Due to the increased focus on protection of trade secrets in commercial transactions and employment/service contracts, it is important to explore the validity and enforceability of non-disclosure or secrecy obligations during the term and post the termination of such contracts.

 Earlier decisions of the Hon’ble Supreme Court and other subordinate judicial fora in India indicate that the key issues debated upon while deciding the validity and enforceability of secrecy clauses post-termination inter alia include, i) whether confidential information or a trade secret sought to be protected under a secrecy clause is indeed a secret and ought to be treated as such; ii) whether the obligation of non-disclosure can survive the termination of the contract; iii) if the said obligation can survive the termination, then for how long?

Two recent cases from the Kolkata High Court address the issue of validity and/or enforceability of secrecy clauses post-termination of an agreement.

It is interesting to note from earlier decisions as well as the decisions discussed hereunder, that typically the Courts have upheld the survival of secrecy or nondisclosure obligations post termination that are ‘reasonable’. However, meaning of the term ‘reasonable’ either in terms of restrictions or time frame has not yet been settled by Courts in India. The decisions of the Hon’ble Kolkata High Court passed in 2015 discussed below may act as illuminators on this issue.

In Hi-Tech Systems & Services Ltd. v/s. Suprabhat Ray and Ors. [AIR 2015 Cal 261), the Plaintiff, a company that manufactured and sold technologically advanced highly engineered products and equipments for the power and process sector industries had employed the Respondents who were obliged to keep confidential all information and material provided to them during their employment with the Plaintiff, and thereafter until a period of three years from the date of termination/resignation vide a code of conduct/human resource policy circulated to them during the course of their employment. Soon after the resignation by the Respondents, the Plaintiff learned that the Respondents had started a competing business and solicited the Plaintiff’s clients using valuable data and information illegally procured from the Plaintiff’s database. As a result of such finding, the Plaintiff filed an application before the Hon’ble Kolkata High Court praying for an order of injunction restraining the Respondents from divulging and/or using in any manner the Plaintiff’s computer database containing confidential information and trade secrets.
After hearing both the parties the Court held that- “The respondents by reason of their employment were in possession of all the confidential information and trade secrets such as prices, clientele, database, the exact requirements and other confidential information attached to the trade which the said respondents are not entitled to reveal.

The Court further held that -
“A trade secret or a business secret may relate to financial arrangement, the customer list of a trader and some of the information in this regard would be of a highly confidential nature as being potentially damaging if a competitor obtained such information and utilized the same to the detriment of the giver of the information. Business information such as cost and pricing, projected capital investments, inventory marketing strategies and customer’s lists may qualify as his trade secrets. The Courts need to find out if the information that were acquired during the course of their employment are now being used as the spring board to enable the said respondents to exploit such database in the course of their business.”

Even further, the Court was pleased to restrain the Respondents from utilizing trade secrets and confidential information of the Plaintiff and from acting as a sales agent of the Plaintiff’s client for a period of three years from resignation/termination of the employment as stipulated in the said code of conduct/human resource policy. Furthermore, although the Court held that its order shall not prevent the Respondents from carrying any business, which maybe same and/or similar to the Plaintiff, it added a condition that the same should be carried out without using and/or utilizing the database and trade secrets of the Plaintiff in course of their business, thus protecting the trade secrets of the Petitioner.

In the matter of Fairfest Media Ltd. v/s. ITE Group Plc [2015(2) CHN (CAL) 704], the Petitioner, a company engaged in the business of organizing travel trade shows entered into a NDA on March 15, 2013 for a period of six months with the Respondent in the anticipation of entering into a Joint Venture Agreement at a later date. As per the said NDA, the recipient was required to keep the information confidential and not disclose directly or indirectly the said information for a period of two years after the termination of the NDA. The information supplied to the respondent related to matters concerning marketing strategy, customer base, costing and profitability for organization of travel trade show. Thereafter, due to various issues, the negotiations between the parties broke down, which resulted in the Petitioner filing an application before the Hon’ble Kolkata High Court for restraining the Respondent from sharing any confidential information received by it for the period stipulated under the NDA.

Upon hearing the parties, the Hon’ble Court held that “Business information such as cost and pricing, projected capital investments, inventory, marketing strategies and customer lists may qualify as trade secrets” and passed an injunction restraining the defendant from sharing any information concerning marketing strategy and customer base received from the Petitioner until the time stipulated under the NDA i.e. for a period of 2 years from the date of expiry of the NDA September 30, 2015, thus, enforcing the secrecy clause as stipulated in the NDA between the parties.
The ruling in both the above decisions suggests that Courts may not be impervious to enforcing secrecy clauses post-termination of an agreement. In the cases mentioned above, an obligation of secrecy surviving for two to three years post termination of an agreement was enforced without any objections as to the time frame, which could be construed to mean that such a time frame may be considered reasonable. However, it would be premature to conclude that the law is settled on what are reasonable restrictions that can be enforced in a secrecy/non-disclosure clause post termination of an agreement.

With the growing importance of trade secret protection and enforcement, it would be a welcome move by the Courts to settle the law.

Reference:http://www.lexology.com/library/detail.aspx?g=98706055-fa60-4fb1-b548-1ab467983816&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2016-12-07&utm_term=