What is a Confidentiality Agreement
A confidentiality agreement is one of the most common agreements that is used in India or outside India. A confidentiality agreement is also known as an NDA (non-disclosure agreement). Many a times NDA is also known as a confidentiality and non-disclosure agreement (CNDA). The purpose of this subscription service is to keep certain information secret and from unwanted disclosure to third parties. The NDA is an agreement between two or more parties wherein the parties agree that the information contained (may be in written form or oral) will not be disclosed to any third party or may be also subject to other restrictions , for example, the recipient of the information can use the information only for restricted purposes and not for any other purposes. In some cases, the parties keep information secret or not to be disclosed after the termination of the engagement. Thus, when we examine the provisions, the duration or time when it has been made secret is one of the major aspects of such agreement or subscription.
Law Governing Confidentiality Agreement in India
The legal framework governing confidentiality agreements in India is fairly comprehensive, providing both employers and employees with rights and remedies in the event of a breach. Confidentiality obligations are primarily governed by contract law, which means the Indian Contract Act, 1872 (the "Contract Act"). Section 27 of the Contract Act sets out the general principle that ‘every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.’ However, the manner in which Section 27 has been interpreted by Courts has produced a body of jurisprudence which continues to clear the mist surrounding what constitutes a reasonable restraint of trade and what constitutes a restriction that is unconscionable in nature.
In the context of confidentiality obligations, Courts have permitted post-termination restraints (for a specified period of time) in circumstances where it was deemed essential, but have struck down unreasonable post-termination restraints that go against public policy.
The Indian Penal Code, 1860 (the "IPC") deals with punishment for breach of trust and misappropriation of property. Depending on the facts of the case, an employee who profits from the use or disclosure of confidential information by breach of his/her duty may be liable under the IPC.
The Information Technology Act, 2000 (the "IT Act") provides for protection of electronic data under the general law and also criminalizes the breach of confidentiality and privacy. The IT Act is applicable to "Consequential breaches" of contracts of limited duration (since the IT Act tries to cover liabilities for breach of confidentiality beyond the contract period) that relate to transfer of confidential information, including emails, passed through secured systems, networks and platforms. These may include RESERVATION certificates, medical report cards and birth and marriage certificates. The IT Act also imposes penalties for breach of confidentiality and privacy.
The Unfair Competition Act, 2006 (the "Competition Act") is applicable to "violations of rights against passing off" and "misrepresenting to the public, including the competitors, the nature, characteristics, origin, properties or the quality of one’s own goods, service or business". While the Competition Act does not directly deal with breach of confidentiality, the rights under the Competition Act may be invoked in an action for passing off against a competing agent who uses the confidential information of the other party to his advantage or has misused the confidential information of the other party.
Certain aspects of confidentiality are also covered by criminal laws, such as under the Indian Penal Code, the Copyright Act and the Official Secrets Act.
Types of Confidentiality Agreements
As a preliminary step before entering into any formal agreement or arrangement, companies invariably execute a confidentiality agreement in order to keep negotiations between them "Privileged" and to create a binding obligation on the parties to maintain confidentiality and not to disclose the same to third parties. These confidentiality agreements are executed in two main forms i.e. either as a unilateral agreement or as a mutual agreement.
Unilateral Agreement
In a unilateral agreement, only one party is bound by an obligation of confidentiality. Obligations arise on the Company/Disclosing party to protect the disclosed information from disclosure, damage, destruction, loss, etc. However, a Unilateral agreement does not prohibit the Company from using or exploiting the Confidential Information.
Mutual Agreement
In a Mutual agreement, generally both parties agree to not disclose the information to third parties and to otherwise protect it. In addition, obligations also arise on the Company/Disclosing party not to use any confidential information for the same purposes other than the purpose for which it had been disclosed. While Unilateral agreement works better for circumstances where a party is seeking investment or entering into a contract with a supplier or service provider, a mutual agreement is most useful for transactions which are complex and require a party to have access to information of a company, but at the same time may require the Company to disclose some of its confidential information.
Key Clauses for Indian Confidentiality Agreements
Definition of Confidential Information: Most confidentiality agreements will contain a definition of confidential information, which is often divided into two types of information – oral, and written or recorded. The agreement may specify that information is considered confidential from the time it is disclosed, however, in India it is important to note that the information should not be in the public domain at the time of disclosure, otherwise the protection usually granted will not apply.
Obligations: A confidentiality agreement commonly places a positive obligation upon the recipient (the party receiving the confidential information) to keep the information confidential and a negative obligation upon the disclosing party, to prevent the leakage of confidential information.
Duration: The agreement typically contains a provision defining the duration of confidentiality obligations. It is common to have a fixed duration (for example, five years), however, it is advisable in each case to have the duration depend on the nature of the confidential information, and the market circumstances, in order to determine the appropriate duration of confidentiality obligations.
Drafting Your Confidentiality Agreements
Obtaining a confidentiality or non-disclosure agreement is typically one of the first steps taken by businesses when considering sharing confidential information with potential partners, investors, vendors, licensors, licensees, and others. While these agreements are often considered to be standard form documents, it is essential to carefully review and negotiate all of the terms to be mutually acceptable to both sides, and to reflect the specific nature of the confidential information disclosed and the specific circumstances. The parameters of the term "confidential information" have been previously discussed (see our prior blog post here). Beyond this, it is important that the obligations and rights of the parties are clearly set forth. Drafting conformity to the following standards may help in addressing areas that could cause the agreement to be interpreted as being overbroad, thus reducing its enforceability against the party to be bound:
• Define terms of the agreement to the extent appropriate (including even defining what "confidential information" means in terms of what is and what is not regarded as confidential . )
• Be clear about the purpose of the disclosure and use of any confidential information
• Clarify that no right or license is granted in regard to the subject confidential information
• To the extent appropriate, specify the consequences of breaching the obligations in the agreement
• Include obligations of the parties regarding return of confidential information
As with any type of agreement, the general rule of thumb is "if it’s not written down, it’s not law." It is tempting to admit everything into the agreement, but such admissions can render the provisions contained in the agreement so overbroad so as to make them unenforceable in some jurisdictions (the law of which may sometimes be unclear in regard to what makes an agreement supervened to such a degree as to render it unenforceable). To the extent possible under the circumstances, one would want a confidentiality agreement to also be compliant with the law of the jurisdiction in which those individuals who will be disclosing and receiving confidential information reside/are located and/or where the business is organized/where the business’ registered office is in. Frivolous frivolous litigation regarding purported violations of confidentiality agreements are not unheard of.
Enforcement of Confidentiality Agreements in India
The primary process for enforcing a confidentiality agreement is through civil suit before the appropriate court on the civil side. A litigant can approach the desired court for an order prohibiting the disclosure of its confidential information, for an injunction restraining the receiver from using the said information, and/or for redressing other forms of injury. Such forms of injury include the plaintiff’s loss of goodwill and reputation as a result of the disclosure. As a precursor to the civil suit, a suit can be filed for a temporary injunction, which is very similar to an ex-parte or summary injunction/enforcement. The important question regarding interim injunctions in India is whether there exists a prima facie case in favor of the Plaintiff against the Defendants, as well as whether the balance of convenience lies in the Plaintiff’s favor.
One of the difficulties with enforcing an NDA in India or initiating legal proceedings in the case of any breach thereof is proving that confidential information has actually been passed to a third party. Since NDAs are private agreements, documented evidence of a breach must be used to enforce a remedy afore-mentioned. Often these remedies take the form of preliminary or interim injunctions, as they prevent the party from disclosing information until the case is resolved.
In India, the Supreme Court has taken a position in Shreeram Finance Company Limited v. Mahindra & Mahindra Limited that a prima facie case may be established by demonstrating not only that [the Plaintiff’s] trade secret or confidential document has been disclosed to another party without permission, but also by demonstrating that the information was disseminated to a person who had no duty to keep it secret. In order to obtain a permanent injunction (a remedy which can only be granted following a final judgment by a court), the burden to prove that confidential information has been disclosed lies with the Plaintiff.
Common Myths about Confidentiality Agreements
When it comes to conducting or transacting business in India, there are a number of factors that deserve careful attention. One area that is often misunderstood is the area of confidentiality agreements, also commonly referred to as Non-Disclosure Agreements (NDAs) or non-disclosure and confidentiality covenants. These agreements, which are entered into between two parties, are intended to protect proprietary and confidential information that may be exchanged during the course of a business relationship.
There are a number of misconceptions that exist around the concept of a confidentiality agreement in a transaction or business relationship. Below, we attempt to clarify some of these:
1. Terms like "owners", "rights", "title", "exclusive", "in perpetuity", "perpetual", etc., are included. This is a misconception that may stem from a reading of the agreement’s English version. In practice, the Indian legal system focuses more on how the agreements are implemented and executed, rather than linguistic embellishments in the contract. The Indian legal system is very laid-back in enforcing the strict interpretation of contractual clauses, unlike the U.S. legal system, which has a strict attitude towards contracts.
3. It has become fairly common practice for enterprising lawyers to draft NDAs that seek to cover any and all intellectual property that a party may have. In addition to covering trade secrets, such NDAs curtail both parties’ freedom of carrying on their businesses in the country. Such clauses have been found to be onerous and courts have struck down such clauses in agreements. In addition, Hitherto, the typical clause in NDAs in force in the Indian sub-continent is that "the receiving party shall not copy, disclose or otherwise use, in full or in part, or in any other manner, any of the Confidential Information, material or documents supplied or disclosed to it or acquired by it." Such clauses, in their literal interpretation, have been deemed over-reaching. On reading between the lines, an NDA is meant to prohibit a party from violating the confidentiality terms, especially when the agreement is studied in the context of the stated objectives.
New Developments and Case Law
In recent times, there have been a number of enforcement actions in relation to confidentiality agreements. For instance, the High Court of Delhi in Interdigital v. Xiaomi Corporation & Ors (CS (Comm.) 97/2019) held that all the necessary elements of a confidentiality agreement were duly present and therefore, enforced an agreement to protect proprietary information including trade secrets of the plaintiff in the face of infringement.
However, the rationale of recent decisions remains to be seen. In one case where a party sought injunction against a business such as a competing business in the nature of e-commerce from utilizing elements of a software source code created by them, the Court refused the injunction . The decision was based on the idea that trade secret was not material in the business of e-commerce as it was not the business but merely a minor part is involved. In this case, Facebook Inc. v. Jeshan Hurzook & Anr., the Delhi High Court refused Facebook’s application seeking ad-interim injunction against two Nigerian individuals operating in India for the alleged misappropriation of its trade secrets or proprietary data on its platform.
In SAP v. InMobi Pte Ltd. market scenarios, particularly in India, may lead to differing analyses than in other jurisdictions. In a jurisdiction like India, where restrictive covenants are frowned upon, a detailed employment agreement could balance these considerations in a manner most suited.