Time To Re-Look At S.27 Of Indian Contract Act To Protect 'Trade Secrets': Calcutta High Court

The Calcutta High Court has recently upheld an injunction order passed against former employees of a law firm restraining them from divulging confidential information and trade secrets gathered during the course of their employment. 

The Court further opined that sharing of such information and communication would not only be unethical but would also constitute a breach of the confidentiality clause in the service contract causing serious prejudice to the law firm. 

A Bench comprising Justice Soumen Sen and Justice Ajoy Kumar Mukherjee observed, 

"The plaintiff as a professional body may not have any trade secrets per se but the persons who were/are in employment of the plaintiff would certainly be privy to privileged information and any sharing of such information and communication would not only be unethical but also a breach of the confidentiality clause which may result in serious prejudice and harm that may be caused to the clients of the plaintiff firm and may expose the plaintiff firm to civil and criminal consequences."

Pertinently, the Court underscored that there is a need to have a fresh look at Section 27 of the Indian Contract Act considering the changing times in order to ensue that nobody is allowed to take advantage of trade secrets and confidential information for their own gain. Section 27 stipulates that an agreement restraining a person from carrying on a lawful profession, trade or business same or similar in nature is void to that extent unless it falls within express exceptions (of sale of goodwill) engrafted in Section 27.

Opining that a balance needs to be maintained between the right to freedom of trade and protection of trade secrets, the Court remarked, 

"The time has possibly come to have a re-look at Section 27 of the Indian Contract Act since times have changed and there is a necessity to impose some restrictions and recognize negative covenants in service contracts especially where it involves specialized knowledge as it must live up to the present needs. While freedom of contract and trade need to be upheld, they must also be balanced. No one should be allowed to take advantage of the trade secrets and confidential information developed by an individual and uses it for their own gain and when confronted, take the shelter of this section. Confidential information and trade secrets are required to be protected by law."

It was further opined that although there is no specific legislation in India to protect trade secrets and confidential information, nevertheless, Indian Courts have 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 of contractual obligation.

The Court further observed that in India a person can be contractually bound not to disclose any information that is revealed to him/her in confidence. It was further averred that courts in India have upheld such a restrictive clause in a technology transfer agreement, which imposes negative covenants on the licensee to not disclose or use the information received under the agreement for any purpose other than that agreed to in the said agreement.

"The essence of this branch of law whatever the origin may be, is that a person who has obtained information in confidence is not allowed to use it as a spring board for activities detrimental to the person who made the confidential communication. Protection of confidential information proceeds and depends on the principle of equity that, he who has received information in confidence shall not take unfair advantage of it. The confidant must not make use of it to the prejudice of him who gave it without obtaining his consent. It is well-settled that information imparted in confidence would be protected", the Court elucidated further. 

Reliance was also placed on the Supreme Court decision in Saltman Engineering Co. v. Campbell Engineering Co. Ltd wherein it was held that the maintenance of secrecy, according to the circumstances in any given case, either rests on the principles of equity, which is to say the application by the court of the need for conscientiousness in the course of conduct, or by the common law action for breach of confidence, which is in effect a breach of contract.

The Court noted that the Trial Court had passed an ad interim order of injunction on July 14, 2021 which was subsequently extended from time to time. It was opined that the extension of the ad interim order was made mechanically and could be prejudicial to the appellant. 

Accordingly, the Court upheld the injunction order by opining that it cannot be said that the trial court has overstepped its limit or did not follow the accepted guidelines in passing the ad interim order of injunction.

However, in order to ensure that the injunction order is not misconstrued as it was appears to be widely worded to cover issues beyond the scope of the confidentiality and non compete clauses, the Court modified the interim order as the following, 

"Accordingly the ad interim order is modified by 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."

Background 

In the instant case, the Court was adjudicating upon a set of appeals from the order of the concerned trial Court wherein an ad interim injunction was passed on July 14, 2021 and subsequently extended from time to time. 

The appellants Dr. Sudipta Banerjee and Dr. Indira Banerjee had been working as qualified patent professionals in L.S. Davar and Company, a reputed Intellectual property firm since 1st June, 1994 and 1st September 1994 respectively until their resignations in June 2020. The other appellant Arpita Ghosh was working as an office assistant of L.S. Davar & Company since 2010 until she resigned on 22nd January, 2021. All of them joined thereafter another firm by the name of P.S. Davar and Company. 

On the allegation that the appellants are divulging the confidential information and trade secrets acquired during their course of employment in L.S. Davar & Company, in clear breach of the confidentiality agreement, L.S. Davar and Company filed a suit before the concerned Trial Court praying inter alia for declaration that the defendants namely, Dr. Sudipta Banerjee, Dr. Indira Banerjee and Arpita Ghosh are in express breach of their contractual obligation with the plaintiff arising out of their terms and conditions of service with the plaintiff. An ad interim injunction had also been sought restraining the appellants from divulging further confidential information. 

Case Title: Dr. Sudipta Banerjee v. L.S. Davar & Company & Ors

Case Citation: 2022 LiveLaw (Cal) 128 

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