A Division Bench of the Calcutta High Court (“Court”), in the case of connected appeals in Dr. Sudipta Banerjee v. L.S. Davar & Company, [FMAT 735 of 2021, FMA 1266 of 2021. FMAT 736 of 2021, dated April 5, 2022], has examined the issue of wrongful dissemination of trade secrets post-termination of employment and observed the need to relook into negative covenants of employment agreements beyond the scope of Section 27 of the Indian Contract Act, 1872 (“Act”).

Background:

In the instant case, allegations were made against the appellants, who were earlier associated with the respondent’s organization (a law firm) prior to their joining a rival law firm, of divulging confidential information and trade secrets acquired during their course of employment in the respondent.

Upon the respondent procuring an injunction order against the appellants, whereby appellants were ‘restrained from acting or continuing to act, from disclosing, divulging, or utilizing confidential, electronic records, data and information, regarding various activities of the plaintiff company, including trade secrets in any manner whatsoever to anybody else, by themselves or through their men or agents…’, an appeal against the injunction order was filed by the appellants.

Judgment:

Protection of trade-secret basis attorney-client privilege

The High Court observed that whilst there is no specific legislation in India to protect trade secrets and confidential information, the courts of India have time and again upheld trade secret protection on basis of principles of equity, and at times, upon a common law action of breach of confidence, which in effect amounts to a breach in contractual obligation. The remedies available in case of a breach of trade secret, as observed by the Court, was to obtain an injunction thereby preventing disclosure of trade secrets and return of all confidential and proprietary information and compensation for any losses, due to disclosure of trade secrets.

With specific reference to the factual circumstances in the instant case, whilst the Court deprecated the practice of mechanically extending the tenure of the injunction order, it noted that no order has been passed against the appellants restraining them from carrying on their profession.

Interestingly, the Court went on to restraining the appellants from disclosing; divulging or sharing confidential information gathered during the course of their employment in any manner whatsoever till the disposal of the injunction application on merits on the basis of attorney-client privilege.

Need for relook at Section 27

In so far as scope and ambit of Section 27 of the Act is concerned, the Court noted that the Indian law on restraint of trade is dissimilar to the most modern phases of the English Rule, as Indian law is stricter and invalidates many agreements which would otherwise be allowed by English Common Law, as it does away with the distinction observed in English Cases between partial and total restraint of trade and makes all contracts falling within its terms void unless they fall within certain necessary exceptions. The Court further went on to note that, while construing the provisions of Section 27 of the Act, neither the test of reasonableness nor the principle of restraint being partial is applicable.

After noting that the Indian law has failed to keep pace with the developments in so far as restraint of trade is concerned, Court noted that time has possibly come to have a re-look at Section 27 of the Indian

Contract Act on account of the changing times and there being an increased need to recognize negative covenants in service contracts, especially where it involves specialized knowledge. The Court noted that while freedom of trade and contract need to be upheld, they must be balanced and that no one should be allowed to take advantage of the trade secrets and confidential information developed by an individual and use it for their own gain.

Argus View:

The decision is a unique one, as the Court had to rely on attorney-client privilege to protect the confidentiality of the information, which privilege is only specific to the legal profession. Court could have taken a leaf out of a single bench decision of the Calcutta High Court itself, in the case of Hi-Tech Systems & Services Limited v. Suprabhat Ray [G.A.1738 of 2014, decision dated June 17, 2015], where the injunction against ex-employees of a non-law firm organisation was granted to protect trade secrets and confidential information.

Please find attached a copy of the order.

This update has been contributed by Arka Majumdar (Partner) and Vikram Chaudhuri (Associate).

Argus Knowledge Centre is now on WhatsApp! Send us a message on +91 8433523504 to receive updates from our Knowledge Centre.