India Law Journal

Introduction

In today's post-recession economy, Indian companies cannot merely sit around waiting for creative bolts of inspiration. There is a strong necessity to embrace innovation in totality. Innovation today is a reliable, measurable process that yields dependably positive business results.

The growth of Indian industry since the nineteen-nineties has bolstered India’s image as a potential industrial powerhouse. In order to crystallise this potential, India has already by-and-large established a strong intellectual property (IP) regime. Concurrently, the need for the statutory recognition and protection of ‘confidential information’ has been felt in all sectors.

It is with this background that the Department of Science and Technology (DST) has introduced the Draft National Innovation Act, 2008 (the Draft Act), which is likely to be taken up for debate in the Parliament soon.

The preamble to the Draft Act presents three main objects. Firstly, to ‘facilitate public, private or public-private partnership initiatives for building an Innovation support system to encourage Innovation’, secondly to ‘evolve a National Integrated Science and Technology Plan’ and thirdly, to ‘codify and consolidate the law of confidentiality in aid of protecting Confidential Information, trade secrets and Innovation’. The Government had originally in 2007 taken a decision to draft a legislation to give a fillip to research and innovation and position India as a leader in the 21st century. The DST thus, by endeavouring to introduce the Draft Act, has not only striven to achieve that goal, but also laid down an efficacious framework for codification of Indian trade secret law.

This paper first analyses the provisions of the Draft Act regarding the first two objects, while making relevant references to the existing Indian policies and law; in Part II. In Part III, this paper analyses the common law and contractual basis of ‘confidential information’ and trade secret law, and makes reference and comparison to the international regime regarding the same.

Disambiguation: Analysis of Provisions

The Draft Act includes a characteristic definition of ‘Angel Investor’ which is ostensibly based on the concept of an affluent individual or group who/which provides capital for a business start-up. Another definition worth mentioning is that of ‘Innovation’. By way of the definition and the explanatory note provided, it is clear that the definition has intentionally been limited to enhancement of measurable economic value by processes directed towards achieving technical advance. ‘Invention’ in the Patent Act 1970, contrarily, means any new and useful (i) art, process, method or manner of manufacture; (ii) machine, apparatus or other article; and (iii) substance produced by manufacture. Therefore the word ‘Innovation’ is limited in ambit and refers merely to commercialisation of the invention itself. Moreover it applies to only significant technical advance.

In Chapter III, Section 3 lays down provisions for an Integrated Science and Technology Plan (the Plan), which is to be presented by the Ministry of Science and Technology in February of every year. The Plan shall contain collated information and policy initiatives and general measures, inter alia including any or all of the following:

Provisions for restructuring and revamping universities and institutions of sciences, technology, engineering or mathematics; and promoting public-private partnerships (PPP) in relation to education. This adds value to the ongoing discussion on PPP for educational institutions. Several commentators have argued on the question of viability and/or necessity of PPP for educational institutions. This writer submits that allowing such PPP will definitely be in the interests of the public at large, and will allow the setting up of world-class educational institutions in India in the field of technology, which is indubitably required. The Union Human Resources Development Minister, Mr. Kapil Sibal recently announced that the Public Private Partnership (PPP) model is being looked at for some of the Innovation Universities that are to be set up by the Government. Significantly, the 11th Five Year Plan proposes the establishment of 14 such universities aimed at world-class standards.
Provisions for Special Innovation Zones and ‘globally competitive research facilities and centres of excellence’. Previously, the Science and Technology Entrepreneurship Park (STEP) programme was initiated in1984 and managed by the National Science and Technology Entrepreneurship Development Board (NSTEDB), DST. The STEP programme was initiated to provide a re-orientation in the approach to innovation and entrepreneurship involving education, training, research, finance, management and the government. Currently there are 13 STEPs which are in functional existence.
Facilitate multi-lateral or bi-lateral cooperation and treaties with other countries in the fields of science, technology, mathematics and engineering, finance, management, and law.
A ‘National Science and Technology Commission’ may be established in order to achieve the purposes sought to be achieved vide the Plan.

The Draft Act thus lays down the pinions upon which science and technology innovation can rest in India. The Plan shall contain extensive scrutiny into the necessary steps to be taken every year in order for development in technology. Reference may be made to prior programmes introduced by the DST, such as the Home Grown Technology Programme (HGTP) in 1993, the Technopreneur Promotion Programme (TePP) in 1998-99, the National Innovation Foundation (NIF) started in 2000 and the Technology Development and Demonstration Programme (TDDP) in 1992; which are along similar lines.

Chapter IV lays down ‘Special measures for low cost technologies’ in Section 4 and ‘Incentives for Angel Investors’ in Section 5. In the former section, rules for waiver of research and development fee, short term and long term tax benefits (including waiver of capital gains tax ), fiscal incentives (set out in Schedule I to the Act) and recommendations for the amendment of the Finance Act or Income Tax Act, shall be made by the Appropriate Government. In the latter section, similarly, stipulations such as waiver of stamp duty on issue of equity capital and transfer of physical shares, fiscal incentives, and giving recommendations for waiver of long term and short term capital gains are listed out as incentives which are to be enforced for Angel Investors.

Fiscal benefits have been recommended in the past for Angel Investors by several commentators. Angel Investors who put their money into young, unquoted companies are given encouragement worldwide in the form of tax incentives. The inclusion of these incentives is a move in the right direction as far as investment policy for start-ups is concerned. In the US, in the past decade, more than 20 states have implemented programmes to attract or retain investment capital by way of income tax credits. As state legislatures have the latitude to choose the parameters for any policy incentive, no two programmes are identical.

Among these, Hawaii is the most liberal, providing a 100% tax credit known as the High Tech Investment Tax Credit. Similarly, angel investors in the UK invest an average of Ł42,000 due to the varied incentives provided to them. In Asia, Singapore and Hong Kong have several programmes that allow the governments to co-invest in start-ups, along with various tax incentives for angel investors.

Funding necessarily involves sharing in the risks of the enterprise and has to have the character of equity even if it may not always look like it. In the interest of innovation, it is imperative that Angel Investors are provided with such concessions as the Draft Act empowers the Government to provide, as per the global trend.

Section 6 which is also part of Chapter IV deals with ‘Facilitating Measures’, which are those measures that are to be implemented by the Appropriate Government in order to facilitate the provisions of the preceding sections. These include measures to regulate Special Innovation Zones; to provide assistance for registration or exemption from taxes; to provide assistance for establishing liaison offices ; to set up local administration within the Special Innovation Zones inter alia to facilitate registration of client enterprises ; to set up Universities for technology; to encourage Innovation by providing fiscal incentives, waivers, or remissions on stamp duty, and legal services in aid of Innovation, among other incentives.

Chapter V, on Private and Public-Private Partnerships contains Section 7 titled ‘Exchange or market place for trading in Innovation’. This section first deals with the setting up of an electronic exchange or physical market place by the Central Government for commercialisation of information on or the result of Innovation, including trade in intellectual property rights. It is to be noted that already several foreign private technology exchanges exist online; hence this is a welcome measure. Secondly, vide this section, the Central Government is also required to facilitate fiscal policy changes for small and medium scale enterprises (SMEs); or government directions for financial institutions regulated under the Reserve Bank of India (RBI) Act or as Non-Banking Financial Corporations (NBFCs) in order to provide for developmental finance; including the option of concessional interest rates, which will be well-received as a policy reform.

Confidential Information

The Draft Act dedicates the entire Chapter VI to confidentiality. The definition of ‘Confidential Information’ is unambiguous, albeit unavoidably subjective, and includes terms such as ‘has commercial value’ and ‘has been subject to reasonable steps… to keep it secret’. At common law, to ascertain whether information has been received with an obligation to keep it secret, an objective test with subjective terms is applied. The definition in the Draft Act appears to have been lifted verbatim from the definition of ‘undisclosed information’ in Article 39 of the WTO Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement. Prior to the drawing up of the TRIPS agreement, a number of developing countries questioned the rationale of including trade secrets in it. What they contended was that even though trade secrets are creation of human intellect and hence intellectual property, they are not a right.

In the US too, until recently, trade secret protection was based on common law principles, and hence there was no statutory definition of ‘confidential information’ or ‘trade secret’. The recent 2002 Restatement of Unfair Competition defines ‘trade secret’ as ‘a trade secret is any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.’ While in the United States, trade secrets are not protected by law in the same manner as trademarks or patents, they are protected under state laws. Most states have adopted the model trade secret law known as the Uniform Trade Secrets Act (UTSA). Under the UTSA, trade secrets are defined as:

nformation, 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 persons who can obtain economic value from its disclosure or use, and
- is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.’

It can be seen that the definition of trade secrets in the Draft Act is thus consistent with generally accepted legal definitions such as those contained in the UTSA and the TRIPS; and is hence comprehensive.

Section 8 of the Draft Act recognises the contractual right of parties to set out terms and conditions in respect of confidentiality. In India as well as globally, it is already common practice to enter into confidentiality and non-disclosure contracts with employees to prevent them from disclosing trade secrets or confidential information. However, according to the provisions of the Indian Contract Act, 1872, any agreement in restraint of trade is void.

Despite this, certain restraints are permitted such as agreements consisting of non-disclosure and non-compete clauses, as long as they are reasonable geographically and do not go beyond the duration of the employment itself. The Draft Act however, significantly also provides for confidentiality arising from non-contractual relationships; ‘[a]rising in equity or as a result of circumstances imparting an obligation of confidence.’

At common law, the term ‘breach of confidence’ was first used not in relation to a contract in Saltman Engineering Co v Campbell Engineering Co . In Peter Pan Manufacturing Corp v Corsets Silhouette Ltd , the duty not to use information of a process was extended to circumstances where information was given by one trader to another and the latter made use of it to compete with the former. Pennycuick, J. in Peter Pan held that:

‘[t]he manufacture and sale of brassieres of styles ... involves confidential information, and therefore, the defendants are not entitled to manufacture those styles. From that it follows as a matter of right that the plaintiffs are entitled to their option to claim damages in respect of such invasion of their rights as already taken place, or alternatively, an account of the profits made by manufacture and sale of brassieres in invasion of their rights.’

Similarly, the Delhi High Court recently in Diljeet Titus v Alfred Adevare & Ors protected the works done by the defendant in the plaintiff’s law firm as an employee of the firm for the benefit of clients of the plaintiff under their contract of service. The following is an extract from the judgement given by S K Kaul, J., in the said case:

‘[t]here can be little doubt that the information between a client and his advocate has the necessary quality of confidence and when it is imparted there is an obligation of confidence. The defendants have not worked for the clients but for the plaintiff and thus when they take away the duplicate information, there is unauthorized use of information. ... [a] Court must step in to restrain a breach of confidence independent of any right under law. Such an obligation need not be expressed but be implied and the breach of such confidence is independent of any other right as stated above.’ (emphasis supplied)

Therefore, it is apparent that even if there is no contracted obligation to maintain confidential information as secret, there is an inherent obligation to do so at common law. Before the Draft Act there was no statutory recognition of the obligation of keeping confidential information secret. However, the Draft Act now effectively codifies the equitable obligation of confidentiality at common law.

Section 10 provides remedies to protect and preserve confidentiality and orders to prevent threatened or apprehended misappropriation. Section 11 lays down three exceptions to misappropriation of Confidential Information: (a) availability of the information in the public domain, (b) the information has been independently derived, and (c) disclosure of the information is held to be in public interest by a court of law. Significantly, Section 12 is an extensive section providing for preventive or mandatory injunctions restraining the misappropriation of confidential information. An injunction, being an equitable remedy, is generally only issued when other remedy at law (such as damages) is inadequate. Mandatory damages on proof of breach of confidentiality are also provided for in Section 13. Finally, the Section 14 provides immunity for acts done in good faith, or purporting to do so.

In the US, trade secret theft is not only punishable by civil law, but is also now ‘criminal behaviour’ as defined by the Economic Espionage Act of 1996. While the Draft Act does not attempt qualify theft of trade secrets as a criminal offence, this concept of criminal liability may be incorporated by the introduction of certain further penal provisions vide amendment to the Draft Act, before or on introduction in Parliament.

Conclusion

The Hon’ble Prime Minister of India, Dr. Manmohan Singh, on the introduction of the Science and Technology Policy 2003, appositely stated ‘[S]cience must grapple with the key challenges facing the country today. … We need new science and technologies, new priorities and new paradigms to address these fundamental challenges.’

The wheels of India’s entrepreneurial activity are just beginning to turn. While investment in innovation is the need of the hour, it is disheartening to see that the country is still underperforming relative to its real innovation potential. The Draft Act, once enacted, will prove vital in order for India to achieve such potential. Further, by encoding substantive provisions in relation to protection of trade secrets, the Draft Act will go a long way in creating an effective trade secrets regime in India.