The Missing Shield of Trade Secrets Of Neobanks In India

Neobanks have emerged as a technology driven entity which are not only cost-effective but also consumer friendly. Neobanks rely on AI driven fraud detection systems for modelling finance by algorithms. They have no physical branches unlike banks which makes operational activities of neobanks easier and cost-effective. As India is developing country, neobanks have been a ray of hope for millions of citizens without physical banking facilities. Proprietary algorithms in neobanks are catalysts for technology-driven India that rely on credit scoring and fraud detections. All these algorithms are termed as trade secrets which are the core pillar of intellectual capitals as they give banks a competitive edge without any public availability. These intellectual assets intertwined with trade secrets rely on technology and innovation which make its piecemeal protection mandatory in order to safeguard the interest of consumers. Although India has contract laws and Data Protection Act to safeguard the data(algorithms), it lacks legislation pertaining specifically to safeguards of trade secrets.

 AMBIGUITIES IN NEOBANKING OPERATIONS: TRADE SECRETS

Presently, India lacks a specific legislation on trade secrets due to which the courts have to rely on pre-existing laws and precedents related to the law in question regarding trade secrets. Although not specifically protecting trade secrets, section 43 and Section 72 of Information Technology Act (hereinafter IT Act),2000 penalize unauthorized access and breach of confidentiality. Similarly, in case of infringement of data by any employee, section 27 of Indian Contract Act,1872 can be invoked which allows reasonable restraints during employment. The court in Niranjan Shankar Golikari v. Century Spinning & Manufacturing Co. Ltd. (AIR 1967 SC 1098), has laid down the foundation for protection of trade secrets in India. Although it has not explicitly addressed the issue for specific legislation and focused on contractual obligations like employment clause; it has played a vital role in highlighting the importance of trade secrets.

Unlike other countries like US, Singapore, China, EU; India lacks the specific legislation on trade secrets which has led to lack of protection of rights of consumers, proprietors and investors. Where the noebanks are visualised as the future of developing country (India), such representation on national and global level could hinder its participation level. This inaction has unfortunately triggered the confidence of people. Although India is a member of the World Trade Organisation (hereinafter WTO), which makes it bound by TRIPS (Trade-Related Aspects of Intellectual Property Rights), yet it has no law which creates a gap between international commitments of a country. Section 39.2 of TRIPS specifically refers to protection of undisclosed information. 

All the three pillars stated in TRIPS (The secrecy, commercial value, reasonable step towards maintenance of secrecy) collectively protect trade secrets at global level. Similarly, the US has its own specific law named “Defend Trade Secrets Act (DTSA), 2016” to deal with protection of trade secrets in both civil and criminal nature. It is known for “Inevitable Disclosure Doctrine” as it has power to restrain the employee from taking a new Job under the same work domain as they consider that if an employee is joining new company especially of competitors, there is high possibility of trade secrets being getting linked even though unintentionally.

In PepsiCo v. Redmond (1995), US Seventh Circuit Court of Appeals followed the same doctrine where employee could restrain even though no actual theft has occurred from joining new company. This highlights how the US Government has taken step towards protection of digital innovations in highly competitive market. In sectors like Neo banking, where operational activities are carried by algorithms the leakage of personal information is likely high where the laws of country could play an integral role as done by U.S. laws which had allowed companies to even seek injunction. This in turn, boosts the competition and safeguards the rights which uplift the economy of the country.

IS LEGALITY OF TRADE SECRETS CALL OF HOUR?

Safeguarding the trade secrets plays a vital role in the success of neobanks and consumer rights. In case, the information stored in neobanks in the form of algorithms, AI models or simply put, consumer personal information got leaked or stolen it could have a devastating impact on both proprietary and consumer rights. It could potentially encourage the competitors to take short turns towards replicating proprietary tools without incurring any expenses which could erode fair competition and raise unfair practice. On the other hand, trust of consumers could erode due to lack of security. This together will lead to minimization of investment from investors as it could appear to be a technology vulnerable fintech. Unlike Patents, trade secrets do not require disclosure to the public which makes them more compatible to protect models, datasets, etc. In India, this risk is amplified by lack of specific legislation on trade secrets which make it rely on other laws example- Contract Law, Breach of Confidentiality, Data Protection Laws, etc which are comparatively slow and broad to resolve the disputes in this sector. Due to which, recognition of trade secrets as component of IPR is need of hour. The recognition of this could firstly, give conceptual as well as legal clarity to companies to protect the confidentiality of their businesses and secondly, open trade would be encouraged in lieu of protection of data.

The multiple agencies have echoed the urgency of a comprehensive legal framework for trade secrets. After taking into consideration the long standstill gap between the specific legislation, Law Commission of India under the Ministry of Law and Justice released 289^th report on 5^th March, 2024 titled “Trade Secrets and Economic Espionage”.  The report broadly highlights the two main issues- Prevention of confidential public information by means of compulsory licensing for protecting public trust and secondly, enactment of special reliefs like Permanent or temporary injunction, ex-parte injunctions, relief on misrepresentations, etc. The Law Commission in its report has also argued that ‘trade secrets’ must be open to interpretation in lieu of advanced technology so that emerging tech-based industries could fit under its ambit. Furthermore, special emphasis has been laid on TRIPS which India must adopt to make the law on trade secrets more evolving and rigid. The report has analysed how the reliance on pre-existing laws or precedents which are not itself specific to trade secrets is into practice which has led to fragmented protections of rights in counter to digital innovations and data flows. In short, the 289th Law Commission Report highlights the urgent need for a dedicated Trade Secrets Act. It has noted urgency of India’s own domestic law to match with standards set by other countries like US, EU, Singapore, China, etc.

RECOMMENDATIONS FOR SAFEGUARDING TRADE SECTRETS

The major step taken by the Law Commission by enacting the 289th report towards raising concerns over lack of legislation on trade secrets has come out to be a comprehensive proposal for dedicated Protection of Trade Secrets Bill, 2024. Although the act has laid down a foundational stone, balancing the interest of investors and competitors is yet another challenge among the government. To address the legal ambiguities in India, the first requirement is to provide clear definitions of terms such as “trade secrets’’. India must adopt a statutory regime that encourages AI-based technology and data protection in the country. India could take recommendation from Jurisdictional laws of other countries like U.S. ‘s ‘Defend Trade Secrets Act (DTSA), 2016’, EU’s Trade Secrets Directive (2016/943), China’s  Anti-Unfair Competition Law (Amended 2019). Furthermore, confidentiality provisions could be added in trade secret litigation which could address hesitation of parties for disclosure of confidential information.

 CONCLUSION

India, even though one of the most developing economies in world lacks comprehensive legislation on trade secrets. This have led to creation of trade barriers related to intellectual rights which has possibly reduced the global investment in country. Furthermore, absence of trade secret protection act exposes businesses to risk of intellectual leakage by eroding their market value because there is always a risk left in business towards their employees’ mobility. Given India’s aspirations to adopt technological operational activities and Neo banking, it is essential to establish a legislative framework specifically for ‘trade secrets’ to balance the data protection and interest of the public at large, where countries like the U.S. and EU have played an outstanding role. This will enhance the global trade and facilitate cross border import-export of fintech. Remedies like injunction, could provide legal recourse to the victim of trade secret misappropriation thereby, enhancing the cross-border trust and international relations between countries. Certain terms like trade secrets, confidentiality clause, breach of trade secret, etc must be explicitly be defined in order to enhance the investor’s confidence. India could take lessons from countries who had already adopted the law and adapt it according to socio-economic conditions of own country.

Author: SALONI RANI, in case of any queries please contact/write back to us via email to [email protected] or at IIPRD.