protection of confidential information between employer and employees

8/9/2019 Protection of Confidential Information Between Employer and Employees

1/21Electronic copy available at: http://ssrn.com/abstract=2214559

1

PROTECTION OF CONFIDENTIAL INFORMATION BETWEEN

EMPLOYER AND EMPLOYEES

Gargi Chakrabarti*

Law of confidential information is a branch of intellectual property law which protects the

secrecy of information. Information needs to qualify as a confidential one and mostly it is

important in a commercial or industrial context. Employer employee relationship is very

special situation regarding law of confidential information, as during employment employers

are ought to share some confidential information with the employees and employees are

subject to the duty of confidentiality to protect the secrecy of such information. Sometimes

employers put restrictive covenants as a contract of employment which includes some clauses

valid even at post-employment period. There must always be a balance between the interests

of employers and employees and that needs to be maintained in both ways. India is yet to come

up with the specific legal regime for the protection of confidential information, especially in

the view of its ever-growing industrial and commercial activities in the global market. The

provisions and suggestions are mentioned in this article which is good for the Indian

employers to follow to protect their confidential information and to exist in this competitive

scenario.

Key Word: confidential information, employer employee, Intellectual Property rights.

I. Introduction ................................................................................................................................................................... 2

II. Definition and Nature of confidential information.................................................................................. 2

III. Position in United Kingdom.................................................................................................................................. 4

A. During employment obligation in UK......................................................................................................... 4

A. Post employment obligations .......................................................................................................................... 7

B. Faccenda case regarding confidential information............................................................................ 9

B. Position in United States of America .............................................................................................................. 11

C.

Springboard Doctrine ............................................................................................................................................. 15

D.

Indian Position

Need for Change ................................................................................................................... 16

E.

Conclusion ..................................................................................................................................................................... 21

* Gargi Chakrabarti, Researcher, Centre of Intellectual Property Right Research & Advocacy,

Ministry of Human Resource Development, National Law School of India University, Bangalore.


2/21Electronic copy available at: http://ssrn.com/abstract=2214559

Gargi Chakrabarti

2

I. INTRODUCTION

The success of any corporation or organization mainly depends upon sensitive processes

and technological supremacy; but trade secret is another important matter which needs

protection to maintain the competitiveness in the market. The employers are keen to take

all forms of protective measures for safeguarding such confidential information from any

kind of misuse. The area of law which deals with laws of confidence is concerned with the

secrecy of information and tries to protect the same. Firstly, that information must have a

necessary quality of confidence, so it should not be in the public domain. In a commercial or

industrial context this might be a trade secret. To test that the information has necessary

quality of confidence there are some elements that should be scrutinised, so there is a need

to evaluate the value of the information to the company and to its competitors and to

capital or effort spent for generating the information; and on the other hand the effort of

the competitors to use that information. Protection of confidential information in terms of

employees in this age of information technology is crucial to protect any new formula,

product, technology, customer lists, or future business plans.

In the global marketplace, Indian corporations are often obligatory to meet the terms with

foreign laws and are likely to be exposed to responsibility for breach of confidential

information or trade secrets of their business partners or third parties. In India there is no

specific legislation for confidential information, but in this article provisions of UK and US

law are described elaborately to clear the concept of protection of confidential information

under employer and employee relationship.

II.DEFINITION AND NATURE OF CONFIDENTIAL INFORMATION

A new form of intellectual property has gained recognition in recent years is known as

Trade secret and it is this form of intellectual property with which we are concerned here.

Trade secret can be defined as information having commercial value, which is not in the

public domain, and for which reasonable steps have been taken to maintain its secrecy.The


3/21

Vol. I Indian Journal of Contemporary Laws Issue 1

3

TRIPS has given three essential conditions which is to be fulfilled before considering an

information as trade secret. Firstly, such information must be secret, i.e. not generally

known or accessible to the persons within the circles that deals with the kinds of

information in question. Secondly, such information must have commercial value. Lastly,

such information must be subject to reasonable steps by its owners to keep it secret.

The Uniform Trades Secrets Act, 1970 also provides for the definition of trade secrets,

which is as follows:- Information, including a formula, pattern, compilation, program device,

method, technique, or process, that: (i) derives independent economic value, actual or

potential, from no 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 (ii) is

the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Importance of trade secrets in industrial economy is increasing rapidly with the industrial

inflation and this is because the quick change of technology involves more information and

thus stricter law is required to protect confidential information in the form of trade secrets

for maintenance of competitiveness as well as to encourage invention and innovation.

Protection of valuable trade related information from misuse by any employee is a big

challenge for the employers as well as for the lawmakers. Compared to other forms of

intellectual property rights, it has some practical positive factor; like there are no

bureaucratic delays and no multiyear waits for government grants, such as those for

patents. Trade secret rights, in contrast, can be established by the agreement between the

interested parties. A trade secret right starts upon the formation of the idea in some

concrete form, and persists as long as secrecy is preserved. Protection of information which

does not qualify to be protected as intellectual property within the legal framework of

Intellectual Property Laws can also be protected by Trade Secrets. It also has the advantage

of being lasting forever, again, as long as secrecy is maintained. There are some negativeaspects of protection of information as a trade secret. It is a volatile form of protection, and

it terminates when secrecy is lost. Also, it requires constant vigilance for better protection.


4/21

Gargi Chakrabarti

4

III. POSITION IN UNITED KINGDOM

In the United Kingdom case law based interpretation of properties of confidential

information is quite concrete and commendable. First major case was Saltman EngineeringCo Ltd v. Campbell Engineering Co Ltd1. While delivering the judgment Lord Green M.R.

described the nature of confidential information as The information to be confidential,

must, I apprehend apart from the contract, have the necessary quality of confidence about it,

namely it must not be something which is public property or public knowledge. On the other

hand, it is perfectly possible to have a confidential document, be it a formula, a plan, a sketch,

or something of that kind, which is the result of work done by the maker upon materials which

may be available for the use of anybody; but what makes it confidential is the fact that the

maker of the document has used his brain and thus produced a result which can only be

produced by somebody who goes through the same process.

Lord Greene also said that the obligation of confidence is not limited to cases having

contractual relationship; law will always prevent the abuse of information. Lord Megarry

had given the working formula for application of law of confidence in the case of Coco v AN

Clark (Engineers) Ltd.2According to him the doctrine of confidence required three elements

Firstly, information must have the quality of confidence; Secondly, information must havebeen imparted in importing an obligation of confidence. Thirdly, there must be

unauthorised use of that information to the detriment of party communicating it. Certain

types of information can be considered to be confidential in nature because the subject is

one which, in normal circumstances, would generally not be disclosed to the public. Any

type of information could qualify as being confidential in nature not just information which

highly complex, valuable or technical in nature.

A.

DURING EMPLOYMENT OBLIGATION IN UK

1[1963] 3 All ER 413

2[1969] RPC 41


5/21


5

The general law allied to breach of confidence forbids an employee from using the

information which can be recognized as the possessions of his/her employer in a way

which is directly or indirectly harmful for the employers business. Moreover, it is alsoimpossible for an employer to keep the important trade related information secret from all

the employers, especially who are holding higher designations and responsible for the

proper functioning of the company. There are some express duties, as in case of the

contract of employment and some implied duties which are not expressed in a contract, but

still bind the employees in a duty of confidence in an employment relationship. The

contract of employment includes the provisions dealing with nature and scope of duty of

confidence imposed on the employee by the employer. This contract of employment is

subject to the general rules of contract, section 1 of the Public Interests Disclosure Act 1998

and s.439J of the Employment Rights Act 1996 are important in this respect. It is important

that express terms of contract should have a clear and an unambiguous statement to

strengthen the duty of confidentiality. This would also focus the employees attention on

the importance of not misusing confidential information for the benefit of himself/herself

or any third party. The duty imposed on employees is illustrated by Hivac v. Park Royal

Science Instruments Ltd.3 the plaintiffs competitor, was retrained from employing Hivacs

employees. The employees had been working for the defendant in their spare time and

there was no proof that they had disclosed any confidential information, still the Court of

Appeal accepted that there was a potential risk that this could happen.

In the absence of a contract with an express clause relating to the duty of confidentiality,

the courts have suggested that employees are under implied duty of confidentiality to their

employer during employment. That duty of confidentiality prevents employees disclosing

the information, especially which might potentially do any harm to the employer. It also

3[1946] 1 All ER 350


6/21

Gargi Chakrabarti

6

prohibits the employee from deliberately setting out to obtain information for his own or

someone else's use after the services come to an end. InAttorney General v. Blake4the Court

of Appeal stated that,the employer is entitled to the single minded loyalty of his employee.

That employee must act in good faith; he must not make a profit out of his trust; he must not

place himself in a position where his duty and his interest may conflict; he may not act for his

own benefit or the benefit of a third party without the informed consent of his employer.That

is why it is a breach of the obligation to remove a customer list or deliberately to set out to

memorise it with the intent of later using it, i.e. post-employment period. So, it can be

considered that the exploitation of information is just extension of original breach of faith.

In this situation employer should be concerned to ascertain whether the employee is

engaged in wrong doing in relation to the information. Criminal law is not applicable in that

situation, but the employer will therefore need to look to civil liability. On the other hand, if

the same list has come into the employee's hands or head as a matter of course and no

special effort has been made to retain it, either physically or mentally, the employee is free

to disclose or use whatever is later recalled of the list, without being in breach of the duty.

Departing employees are of special interest to the employer and also for their rival

companies. The information about the enterprise which they take away with them often

makes them prime targets for competitors who will profit by that information.

Technological developments constitute a double-edged sword for enterprises in this

respect. While the use of technology may help the enterprise to improve its commercial

position, such reliance correspondingly increases the loss that will flow from a leakage of

information about that technology to a competitor.

A certain element of inconsistency, however, is introduced by two recent decisions. In

Independent Management Resources Pty Ltd v Brown5and Balston Ltd v Headline Filters Ltd6

4[1998] 1 All ER 833

5[1987] VR 605.


7/21


7

it was held that employees had not breached their duty of fidelity by spending their last

days of employment preparing for future (and competitive) business activities. In the

former case the defendant was employed by the plaintiff, a public relations consultant. One

of the plaintiff's major clients decided to terminate the plaintiff's engagement and call for

tenders. The defendant obtained a copy of the client's brief, on which tenders were to be

made. She then resigned from the plaintiff's service and successfully tendered for the

client's work. In the Supreme Court of Victoria, Marks J held that the plaintiff had done

nothing to fraudulently undermine her employer. Similarly, in Balston the defendant,

while serving out a period of notice to end his employment with the plaintiff, bought a

company off the shelf which he intended to (and did) establish as a rival supplier of glass

microfibre filter tubes. He also contacted one of the plaintiff's customers to inform it of his

new venture, a move which resulted in the customer placing an order with the defendant's

company. Although Scott J considered that an arguable case for breach of the duty of

fidelity existed, he was clearly inclined to discount such a conclusion. He stressed that

during the relevant period the defendant was only technically still employed and

commented that if he had still been actively employed the position might have been

different.

A. POST EMPLOYMENT OBLIGATIONS

In spite of the general law provisions, employees leaving their employer and setting

themselves up in competition with employer cant be stopped. Moreover, there is no

regulation of law or equity that prevents a company or individual from looking out a

competitors employees and offers them employment, provided that there is no breach of

the employees covenant. Once the employment is terminated usually employers include

some clauses called restrictive covenant in their contract of employment according to

which the employee will not permitted to work in the same industry for a specified period

of time. Even in the absence of such a clause the courts employ certain limited obligations

6[1987] FSR 330.


8/21

Gargi Chakrabarti

8

on the ex-employees to make use of information acquired during course of employment.

While employers tries to protect themselves by putting in restrictive covenants, the law

also feels that employees should be free to make use of the personal skills, knowledge,

experience and abilities gained during course of their employment. The restraint of trade

clause will only be enforceable if it is appropriately limited as to time, geographical

applicability and scope of activities.

In Fellows v. Fisher7a restrictive covenant imposed to restrain a conveyancing clerk on a

year contract from working in the legal profession for five years in Walthamstow and

Chingford, was too broad in scope, in geographical coverage as well as in duration, so the

court dismissed the restraint. But in Polylina v. Finch8 the court held that the clause

prohibiting the defendant from doing any competitive trade or business with plaintiff forone year to be valid. In case of Mont v. Mills,9 though the defendant had signed the

agreement and taken a large amount of money as well, for not joining another company in

same industry for one year; when he failed to keep the promise and joined the competitor

company the claimant sought an injunction. But the Court of Appeal held that the

agreement was unenforceable on the basis of unjustifiable restraint of trade. So, it is clear

that law would permit an employer to buy restraint but the public policy was clearly

protecting the public interest in competition and proper use of an employees skills.

In some cases a lifelong obligation of an employee subsists, as in the case of Attorney

General v. Blake,10 where defendant being a member of intelligence service was not

permitted to disclose any official information gained during employment for life.

Sometimes a company, while restraining an employee from entering into similar

employment, often place employees on garden leave, in which the employee remains as a

7[1976] QB 122

8[1995] FSR 751

9[1993] FSR 577

10[1998] 1 All ER 833


9/21


9

paid employee for a specified period of time, as in case of Credit Suisse Asset Management v.

Armstrong.11

B.

FACCENDA CASE REGARDING CONFIDENTIAL INFORMATION

In this regard it is worth mentioning about the case of Faccenda Chicken v. Fowler.12Fowler

was the sales manager of Faccenda Chicken Ltd., who adopted the unique sales policy. After

resignation he started his own business with the same sales policy in the same area using

some sales information and from FCL five other salesmen joined him. FCL initiated legal

action against them. The Court of Appeal in giving judgement has divided the information

into three categories and mentioned specifically about the obligations of the employees

regarding them. Firstly, information which is trivial in character and easily accessible to

public sources which the employee has the liberty to disclose it, even during service.

Secondly, information which is confidential but which once learned in the head of the

employee becomes part of his own skill and knowledge. During employment he cannot use

or disclose such information but that allows him to use his full skill and knowledge for his

own benefit, even in competition with his employer after employmentLastly,specific trade

secret which an employee cannot use or disclose even though not in service.

Further in the Faccenda case, the Court of Appeal said whether information amounts to a

trade secret or not would be decided considering four factors: Firstly, the nature of

employment. Secondly,the nature of information. Thirdly, whether the employer expressed

the confidentiality of the information to the employee? Fourthly,whether information can

easily be isolated from other information which the employee is free to use or disclose. As

Faccendaand subsequent cases show, it may be very difficult for an employer to prove that

11[1996] ICR 882

12[1985] 1 All ER 724


10/21

Gargi Chakrabarti

10

information has been kept sufficiently secret for it to be unavailable for the employee's use

when the period of service ends. The Court of Appeal rejected the claim on the basis that

neither the information about prices nor the sales information as a whole had the degree of

confidentiality necessary to support the plaintiff's case. Particularly important factors in

this decision were that much of the information in the package was acknowledged by the

plaintiff not to be confidential at all, that the information was not restricted to senior

employees, being known to van drivers and secretaries; at quite junior level, and that the

plaintiff had failed expressly to instruct its employees as to the confidentiality of the

information.

In FSS Travel & Leisure Systems Ltd v. Johnson13, it was stated that it is critical to distinguish

the trade secrets that the employer could claim as his property from the skill, experience,know-how and general knowledge that the employee could regard as his property, as only

the former could be subject to an obligation. The courts have also been particularly

concerned to ensure that employers who seek injunctions to restrain the use of confidential

information should be able to specify what is secret and what is not. Failure to do so may

result in the claim being rejected, even where it is apparent that some genuinely

confidential information must be involved. The employer's difficulties in establishing a

breach of the duty of confidentiality do not end with the need for specificity. In recognition

of the interest of both employees and the public generally in mobility of labour, the courts

have adopted an overriding principle that certain information is never protectable at the

suit of employers. This information is variously described as the employee's subjective

knowledge or know-how or stock of knowledge. In A. C. Gibbons Pty Ltd v. Cooper14 a

technician who serviced dishwashers was allowed to use knowledge of his former

employer's customers to set up in competition without inquiry as to whether he could

practicably have worked as a technician for another firm if precluded from using that

13[1999] FSR 505

14(1980) 23 SASR 269.


11/21


11

information. Again, in Ormonoid Roofing and Ashphalts Ltd v. Bitumenoids Ltd15 an

employee was entitled to disclose to his new employer details of the plaintiff's machine;

there was no evidence to show that such disclosure was crucial to his future employment.

To summarise then on the post-employment duty of confidentiality: assuming that an ex-

employee has not breached the duty of fidelity in acquiring information in the course of

employment, that information may be freely used if it is not truly confidential to the

employer, lacking the element of secrecy; or it constitutes know-how. The latter category

includes not only information which the ex-employee needs to be able to use in order to do

a trade, but also information which cannot practicably be separated from the employee's

other knowledge and which is thus not considered amenable to a specific injunction

restraining its use or disclosure.

B.POSITION IN UNITED STATES OFAMERICA

In the United States of America it is found that employees liability is seen in the same way

as in United States. But the U.S. context is mostly based on the trade secret which is the

third category of information according to Faccenda classification. The misappropriation of

trade secrets is now a federal criminal offence in the United States, after the enactment of

the Economic Espionage Act of 1996. All states have civil statutory or common law trade

secrecy laws. Many also have criminal laws prohibiting the misappropriation of trade

secrets. However, prior to the passage of the Economic Espionage Act, there was no

uniform federal criminal law of trade secrecy.

The Economic Espionage Act defines a trade secretas any financial, business, scientific,

technical, economic or engineering information. It lists a number of types of information

that are included as trade secrets, whether tangible or intangible and regardless of howthey are stored, compiled or memorialised physically, electronically, graphically,

photographically or in writing. In order for information to qualify as a trade secret, the

15[1930] 31 SR (NSW) 347


12/21

Gargi Chakrabarti

12

owner must have taken reasonable steps to keep it secret. In addition, the information

must derive actual or potential independent economic benefit from not being generally

known to the public. That value must also be derived from the information not being

readily ascertainable by the public through proper means. The Act makes the different

forms of economic espionage.16

In the U.S., employers take either of two precautions to restrain the departing employees

from using or disclosing the information; taking the employees agreement not to engage in

post employment competition and to upon departure, seeking to enjoin the employees

disclosure or use trade secrets imparted by the employer. According to U.S. approach there

should be a balance in the legal protection of information to provide benefit to the society

as a whole from the technological improvements.

In Cybertek Computer Products Inc. v. Whitfield, plaintiff was engaged in the business of

furnishing computer related services to the life insurance industry. Defendant Whitfield

was one of the founding officers of the plaintiff. He had purchased shares in the plaintiff

and was involved in the design and development of plaintiffs new on-line business

computer system, the Auto/Issue System. He had management responsibilities initially

and then he was a senior analyst of designing, programming and testing. Whitfield had

signed an Employee Non-disclosure Agreement, the agreement mentioned that he would

not at any time disclose to anyone outside of plaintiff any information about plaintiffs

products related to design, use or development of products. Afterwards he resigned and

16Economic Espionage Act :(a) the stealing, unauthorised appropriation, taking, carrying away, concealment

or obtaining of a trade secret by fraud, artifice or deception; (b) the unauthorised copying, duplication,

sketching, drawing, photographing, down-loading, uploading, alteration, destruction, transmission, delivery,

sending, mailing or communication of a trade secret; (c) the receiving, buying or possession of a trade secretknown to have been stolen, appropriated, obtained or converted without authorisation; (d) attempting to do

any of the acts described in items (a)-(c) above; and (e) conspiring to commit any of the offences described in

items (a)-(c) above.


13/21


13

joined the defendant company, Tracor, for the development of an insurance on-line new

business system called Trac/70 which had come in competition with plaintiffs Auto/Issue

System. Plaintiff always had taken certain special security measures for confidentiality

purpose, Tracor had found to be taken similar steps related to security. Plaintiff contended

that Whitfield had disclosed the trade secrets and confidential information regarding

Auto/Issue System. In the course of trial court had found that the confidentiality agreement

was valid and was an important factor for consideration. Court had also held that issues

related to design and development of Auto/Issue System constitutes trade secret or a

highly confidential matter and Whitfield had breached his confidential duty to plaintiff.

In that case it was found to be difficult to define trade secret in a highly technical area such

as computer software programmes. Section. 757 of the Restatement of Torts defines tradesecret by a simple definition, which widens the scope by stating that exact definition of

trade secret is not possible. Certain factors are given to determine existence or non-

existence of a trade secret, such as the extent of information known by others outside the

employees of the business, the extent of measures taken to guard the secrecy of the

information, the value of information, the effort and expense involved in developing it and

the ease with which the information can be acquired by the employer. The general concept

of a technical matter is not protectable as trade secrets. But some cases like the case of

Winston Res. Co. v. Minnesota Mining & Mfg. Co. had established that a combination of

general concepts could amount to a trade secret. Likewise in this case the court found that

combination of general concepts which was utilized and developed in Auto/Issue System

constituted trade secrets. Whitfield had not taken any actual documentation of information

or physical material related to Auto /Issue system so he denied any disclosure of

confidential information. But court held that there were substantial similarities in

Auto/Issue System and Trac/70 and plaintiff presented evidences that similar choices of

design were utilized by defendant and it was proved to be copying rather than independent

development. Whitfield as well as Tracor were held liable of misappropriation of trade

secrets under s. 757 of Restatement of Torts.


14/21

Gargi Chakrabarti

14

Sometimes customer list also qualify as trade secrets as in the case of Webcraft

Technologies Inc v. McCaw;17McCaw was a former sales representative and she had signed

an employment agreement with Webcraft which restricts the disclosure of trade secrets

and the agreement defined the trade secret as including names of Webcrafts customers

and pricing information and other information or data related to Webcrafts business

which is not publicly known. The evidence showed that Webcraft spend enormous time

and effort to prepare customer list and it included special information of customers

operations and need. So, court held that Webcrafts customer list could be taken as trade

secrets and protected thereon.

Two types of covenants are relevant: the nondisclosure agreement and the covenants not

to compete. In Cybertek, Court had given importance on the nondisclosure agreement andin Morrison Metalweld Process Corporation v. Valent, Court had given importance on

covenants not to compete. In Iroquois Industries Corporation v. Popik, defendant Popik had

to sign an employment agreement containing both nondisclosure covenant and covenant

not to compete, however, court noted that the prevention of competition, per se, is an

unreasonable purpose which render the covenant unenforceable. In Pepsi Co Inc. v.

Redmond, plaintiff Pepsi Co. sought a preliminary injunction against defendant William

Redmond to prevent him joining in Quaker Oats Co. Redmond was general manager in

Pepsi Co. of Northern California Business Unit and had signed a nondisclosure agreement

with PepsiCo. But when he joined Quaker violating the agreement, Pepsi Co. sought him

because he knew a number of trade secrets. The court held that Redmonds new job posed

a clear threat of misappropriation of trade secret but ultimately plaintiff had failed to prove

any indication that the defendant would ever use any confidential information, finally

Redmond was ordered to join Quaker but court prevented him forever from disclosing

Pepsi Cos trade secrets.

In Reed Roberts Associates Incv. Strauman,defendant Strauman signed a covenant not to

compete that he would as employee, owner, partner, agent, stockholder, director or officer

17[1987] 674 F. Supp. 1039


15/21


15

of any business of type and character like Reed within certain geographical area for a

period of three years after employment. But violating the covenant he started his own

business in the same municipality. Reed alleged Strauman, but Reed was more concerned

about Straumans knowledge of particular business operation and there was no wrong

doing for which Strauman should be prohibited from using his knowledge; so, judgment

went against Reed. The decisions of these two cases create a confusion regarding validity of

both types of restrictive covenants and open up different questions related to the interest

of employer. In order to determine whether the duty of confidence has been breached, it is

necessary to determine the scope of the obligation.

The scope of obligation is tested via the limited purpose test, which implicate that when

implication is imparted for a limited purpose, then it may give rise to an obligation ofconfidence. Where information is supplied for some specific purpose, then it should not be

used for the other purposes. In case of Smith Kline & Frenchv. Department of Community

Health SK&Fhad supplied the information concerning the drug as a part of application to

the Dept. of Community Services. But the Department of Community services used that

information to determine whether it should authorize another company to sell a related

drug. SK&F applied for the injunction to stop the use of data supplied by them. But Federal

Court of Australia denied grant of injunction and held that scope of obligation did not

restrict the department use of that information as it was the old practice and according to

the court it was necessary to have regard to the effect of the legal framework within which

the parties were dealing. Simon Brown L.J. stated that reasonable person test is a test

useful for determining the duty of confidence, but it did not give the guidance to the scope

of obligation of confidentiality. To consider the scope of obligation of confidentiality, Simon

Brown L.J. said that the touchstone by which to judge the scope of the duty and whether or

not it has been fulfilled or breached is his own conscience, no more and no less.

C.SPRINGBOARD DOCTRINE


16/21

Gargi Chakrabarti

16

In addition to not making any unauthorised disclosure, the employee must not make use of

the confidential information in an unfair manner. Therefore, he must not use the

information as a springboard for other activities which may give the recipient an unfair

advantage over or be detrimental to the employer of the information. In such cases, a court

may grant an injunction to stop the employee from using it for a period which is calculated

to offset the unfair advantage the employer would otherwise have had. This is called the

springboard.

The springboard doctrine recognizes that often what makes information confidential is the

fact that the maker of the document has used his brain and thus produced a result which

can only be produced by somebody who has gone through the same process. When an

employee misuses confidential information, they generally avoid having to go through thesame laborious, time consuming process, thereby gaining an unfair advantage over other

competitors who must go through that process to achieve the same result.

D.INDIAN POSITION NEED FOR CHANGE

With the change of time and nature of business, there is a need for a well defined law to

protect trade secret and confidential information. Trade Related Aspects of Intellectual

Property Agreement provides Protection of Undisclosed Information under Section 7

(Article 39). US have already implemented Uniform Trade Secrets Act to protect their trade

secret and confidential information within US territories or on the internet, outside of the

US. It is denoted as a federal criminal offence in the US, with that US has Espionage Act.

European Union also enacted data protection law to ensure non-disclosure and misuse by

their employees. Now India also needs a structured provision to protect confidential

information. In case of India confidentiality agreement is already exists, but it should not bebroader than its necessity, otherwise it will be fall under the category as void contract. An

employer cant impose a restriction to the employee from utilizing employers skill,

aptitude and general technical knowledge. Even Section 27 of Indian Contract Act, 1872

states any agreement in restraint of trade is void. According to judicial decision any


17/21


17

employer cant prevent any employee from working with the competitor of previous

employer.

Employer is entitled to put injunction to prevent misuse of confidential information. But if

that misuse has already happened, at that time injunction cant be granted to protect the

employers interest, only in such cases employer is entitled for damages which go against

fair competition. Even no injunction should be granted if an employee obtained the

information independently from the market. Last few decades India witnessed a common

acceptance of the concept of Non- Compete Clause by employers, the origin of the concept

can be tracked back since mid nineteenth century. Following instruments used to use by

the employers to restrict the employees to enter into same type of business or to join any

competitor company with the important information.

Restriction on starting a competing business;

Restriction on working with enterprises operating in the relevant market;

Restriction on working in the relevant geographic market;

Restriction on soliciting the clients of the employer;

Restriction and in majority of cases, a complete prohibition

With these restrictions the clause also used to cover the time period after the cessation of

the employment contract. In India this clause is regulated by the provisions of section 27 of

the Indian Contract Act 1872. But the Indian Courts have the view to treat such clauses as a

concept of equity than a contract. For better understanding, there is a need to consider the

judicial precedent laid down by the Indian Courts.

The Supreme Court of India dealt with such a contractual issue in Superintendence

Company of India (P) Ltd. v. Sh. Krishan Murgai,18 in this case the question is raised that

whether a post-service restrictive covenant would come within the mischief of section 27

18AIR 1980 SC 1717


18/21

Gargi Chakrabarti

18

of the Contract Act. The court held that such a contract was prima facie void because it was

based on the object of the restraint of trade. The Delhi High Court in Foods Ltd. and Others

v.Bharat Coca-Cola Holdings Pvt. Ltd. & others19observed, It is well settled that such post

termination restraint, under Indian Law, is in violation of Section 27 of the Contract Act. Such

contracts are unenforceable, void and against the public policy. What is prohibited by law

cannot be permitted by Court's injunction.

The judgment of the Supreme Court in Percept D'Mark (India) Pvt. Ltd. v. Zaheer Khan and

Anr.20, clarifies the legality of such clauses. The Court observed, Under Section 27 of the

Contract Act (a) a restrictive covenant extending beyond the term of the contract is void and

not enforceable. (b) The doctrine of restraint of trade does not apply during the continuance

of the contract for employment and it applied only when the contract comes to an end. (c) Asheld by this Court in Gujarat Bottling v. Coca Cola (supra), this doctrine is not confined only to

contracts of employment, but is also applicable to all other contracts.

VPS Global vs Supreet Roy,21is another landmark judgment. In this case employee resigns to

join another company and employer suit against employee to get injunction on employees

joining. Here, confidential information was not defined, therefore suit was dismissed. So,

inference is that, there is a need of proper definition of confidential information in India;

otherwise it is unfair to stop employees from joining any other company. Not only that, in

the contract or the memorandum the clauses of confidential information which employee

has to follow should be clearly specified.

In view of the aforesaid observations, it can be interpreted that while dealing with

difference of opinion relating to such non-compete clause under an employment

agreement, the Indian courts have regarded as the pre-termination period of the

191999 VAD (Delhi) 93

20AIR 2006 SC 3426

212008 (2) Bom CR 446


19/21


19

employment separate from the post termination period of the employment. Whilst the

courts have been understanding about the application of the non-compete clause, they have

marched some extra mile to make sure that such clause supposed to have no effect after the

ending of employment and have held that such clause would fall within the mischief of

section 27 of the Indian Contract Act, 1872.

However, the Supreme Court in Niranjan Shankar Golikari v.The Century Spinning and Mfg.

Co. Ltd.22had given a broad explanation to section 27 of the Contract Act and clarified the

matter further that not all non-compete clause become useful after the termination of the

employment agreement are prima facie prohibited and held. Court held, a negative

covenant that the employee would not engage himself in a trade or business or would not get

himself employed by any other master for whom he would perform similar or substantiallysimilar duties is not therefore a restraint of trade unless the contract as aforesaid is

unconscionable or excessively harsh or unreasonable or one-sided. Therefore, in order to

meet the criteria for being enforceable by law, it is important to guarantee that restriction

imposed by the employer is logical and not harsh on the employees. It may not be out of

place to specify that the restrictions to the extent of non-solicitation and/or non-

disclosure may be viewed as an exception to this rule. Though the non-solicitation clause

may be prima facie viewed as negative in nature, they are valid and enforceable by law. The

Delhi High Court in Wipro Limited v.Beckman Coulter International S.A.23held that a non-

solicitation clause does not amount to a restraint of trade, business or profession and

would not be hit by Section 27 of the Indian Contract Act, 1872 as being void. Similarly, in

Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare and Ors.24,the Delhi High Court clarified

that confidential information of the employer can be protected even in the post

employment period. Protection of valuable information and trade secrets requires multi-

22AIR 1967 SC 1098

23131 (2006) DLT 681

24130 (2006) DLT 330


20/21

Gargi Chakrabarti

20

disciplinary solutions, because it is including intellectual property, labour and employment,

privacy and data security and commercial litigation. Moreover, different types of wrong

doing is involved with it; like theft, bribery, espionage, misrepresentation, breach of

contract, inducement to breach a duty, network attacks etc. In India, statutory provisions,

apart from contract, are specific relief, damages, arbitration and conciliation for dispute

settlement, search and seize order, precautionary impoundment.

Garden Leave is the clause where employee used to give a long term notice to the

employer before his resignation, the employer at that time pays full remuneration to

restrain that employee from competition. Especially United Kingdom use this concept for

employer as a substitution to the non-compete clause. In India this clause is not a common

tool for employers. Recently, the Bombay High Court in VPS Global Services Private Limitedv. Mr. Suprit Roy25 laid down that to obstruct an employee who has left service from

obtaining gainful employment elsewhere is not fair or proper. Further the court also pointed

out that the clause is prima facie in restraint of trade and is hit by section 27 of the Contract

Act. Privacy issues relating to computer system are under the purview of Information

Technology Act, 2000. This Act contain certain provisions for stored data, nowadays data

protection is a problematic issue for the business houses, financial institutions and the

governmental bodies so as to give adequate protection to their huge databases. These days

companies are relying on the contract law as a useful means to protect their information.

The corporate houses enters into several agreements with other companies, clients,

agencies or partners to keep their information secured to the extent they want to secure it.

Agreements such as non circumvention and non-disclosure agreements, user license

agreements, referral partner agreements etc. are entered into by them which contains

confidentiality and privacy clauses and also arbitration clauses for the purpose of resolving

the dispute if arises. Employees are under seizing, as employers routinely use software to

access employees e-mail and their movements.

252008 (2) Bom. C.R. 446


21/21


21

E.CONCLUSION

The courts, in attempting to reconcile the conflicting interests of employers and employees,

have produced a balance that is ill-conceived and inequitable. The criticism is centered on

the appropriate method of protecting confidentiality. In the view of unavailability of Indian

Law specifically related to Confidential Information, it can be recommended that, though

Law of Contract can very much handle confidential information easily, still some special

provisions regarding protection of confidential information will be good and appreciable.

Regarding the context of new technologies and up-coming industries, like softwareindustry and pharmaceutical industry, protection of confidential information is of immense

importance. Basic programming language in software application and web-developing or

drug manufacturing method and principle in pharmaceutical industry, are not protected by

intellectual property law. But when a group of people are working in a research and

development unit of a specific company, they are engaged in development of a process or a

method as a team. If any one person leaves that team, he has that development process in

his memory; he may use that information unintentionally as his skill and knowledge even

for a competitor company. It is not mentioned in the case law how far this thing is

justifiable, is a moot question. Businesses are going global and confidential information

protection is becoming an important issue for whole world. Though there is no enactment

in India in terms of confidential information some of the tools previously this article

discussed to safeguard the confidential information. The adequate and effective protection

of confidential information would be necessary for success of business ventures in the long

term for any business to exist in this increasingly competitive world.

protection of confidential information between employer and employees

Documents