V.V Sivaram And Others v. Foseco India Limited, Pune

JUDGMENT

1. The defendants are in appeal, challenging the grant of an order of temporary injunction restraining them from manufacturing or selling or in any manner dealing with any product similar or identical to a product of the plaintiff, respondent herein, known as Turbostop, a contoured impact pad which is used in steel plants to withstand the impact of molten steel that is poured into a vessel called Tundish, in casting and processing of steel. The contoured impact pad prevents the molten steel from perforating the tundish and enables the controlled containment and flow of steel.

2. The parties are referred to by their rank before the Trial Court for convenience. The facts of the case as narrated by the parties are as follows.—

The plaintiff is a company incorporated under the Companies Act, 1956 and was established in the year 1958. It is engaged in the manufacture of specialty chemicals and allied products pertaining to Foundry and steel industry. It has its own research and development wing engaged in developing newer processes and innovative technologies. The plaintiff is part of the FOSECO Group of Companies, which carry a worldwide reputation. The group, including the plaintiff, holds patents for several products. One such product is “Turbostop”, which is a specially designed and engineered “Contoured Impact Pad” (CIP). Till the invention of “Turbostop” the normal process in casting of steel was that molten steel would flow from a ladle and hit a flat impact pad kept at the bottom base of the vessel known as Tundish. The flow of steel after hitting the impact pad was not susceptible to control, this affected the time upto which the molten steel could be retained in the Tundish. Unless the molten steel could be retained for an ideal time — the non-metallic inclusions would not float and would not be capable of removal, resulting in poor quality steel. With Turbostop this difficulty was overcome. It is a novel product developed after original research work over several years. The FOSECO group of companies have developed the capability to manufacture Turbostop to cater to the needs of any kind of steel plant. As the size and shape of Tundishes vary, the temperature of molten steel, casting speed and grades of steel depending upon the particular plant. This knowledge is available after extensive research. The design specifications and materials going into the manufacture are usually unique and not available in the public domain.

3. “Turbostop” was invented in the year 1990 and patent was granted in the United States of America. For newer versions, patent applications are said to be pending both in the USA and India. Turbostop was introduced in India in the year 1992.

4. Defendants 1 and 2 are ex-employees of the plaintiff. Defendant 1 was employed as Senior Product Manager in the year 1988. He left the Company in the year 2002, opting for voluntary retirement. He was by then Group Product Manager. In the course employment he had access to confidential information pertaining to several products, including Turbostop. Even though he was engaged in marketing - he was possessed of detailed information of the products and had access to the data.

5. Defendant 2 joined the plaintiff in the year 1988 as Senior Product Engineer. He resigned voluntarily in May 2002. At that point of time he was Group Product Manager Tundish Products. He had worked as Market Development Manager of the plaintiff and had detailed knowledge and information about the products of the plaintiff, including Turbostop.

6. There was a contractual obligation on the part of defendants 1 and 2 not to make use of the confidential information acquired by them in the course of employment. They were also not to compete with the plaintiff in any of its businesses for a period of 5 years after cessation of their employment. Defendants 1 and 2 worked at Bangalore, where a branch of the plaintiff is situated.

7. Defendant 3, the Proprietor of Ravitejus Industries, was introduced by defendant 1 to the plaintiff and defendant 3 recommended that part of the manufacturing process of plaintiffs products could be contracted out to defendant 3. Accordingly, there was a manufacturing contract between defendant 3 and the plaintiff. Defendant 3 was hence provided with detailed information pertaining to the products of the company, such as specifications, formulae, manufacturing process, quality parameters etc. Therefore, defendant 3 was bound under the contract with the plaintiff, to maintain confidentiality regarding information gathered by him during the tenure of the contract and that he would not compete directly or indirectly with the plaintiff, in its business during the period of the contract and for 5 years after expiry of the agreement.

8. It is the plaintiff's case that in May 2002 defendant 2 resigned from the Company. In the same month the manufacturing contract with defendant 3 came to be terminated, in view of the plaintiff's Tundish product line business being transferred to one Vesuvius India Limited. Immediately, thereafter the plaintiff-company had introduced a Voluntary Retirement Scheme for its employees. Defendant 1, as it was seen in retrospect, with a definite design of carrying out a master plan of establishing a rival business organisation marketing products identical to that of the plaintiff, in conspiracy with defendants 2 and 3, opted for voluntary retirement on 22-10-2002. And on 28-10-2002 defendant 4-Company was incorporated with the wives of defendant 1 and defendant 3 as promoters. For all purposes it was run by defendants 1 to 3. This is apparent from the fact that defendant 3. Defendant 1 along with defendant 2 and his wife soon were appointed as directors of the Company. The main objectives of defendant 4-Company was to carry on business in metallurgical industries and as dealers in metallurgical chemicals and products, same as that of the plaintiff.

9. Jindal Vijayanagar Steel Limited (JVSL) was a major customer of the plaintiff's products. All the Tundishes in the entire steel plant of JVSL were fitted with Turbostop. The same were specially designed for JVSL after sustained study and trial. Defendants 1 and 2, by virtue of their employment with the plaintiff were closely associated with the marketing of the product to JVSL and were privy to detailed information in this regard. Significantly, just prior to the suit the plaintiff had learnt that defendants 1 to 3 as part of defendant 4 have offered to supply the very product, at a much cheaper price, to suit JVSL's requirements and have in fact started supplying the same. The plaintiff has learnt that the product supplied to JVSL is identical in all respects to Turbostop.

10. It would be phenomenal for such a product to be developed, manufactured and supplied by a Company within months of its incorporation. The unerring presumption therefore is that the defendants are blatantly manufacturing with the know-how obtained from the plaintiff and selling Turbostop under a different name.

11. The surreptitious manner in which the defendants are marketing the product is apparent from the fact that the website of the defendants does not disclose that any product similar to Turbostop is manufactured by them. In the exchange of notices however, it is not denied that such a product is in fact marketed by them. However, it is sought to be contended that information about the product is available in the public domain and it cannot be held to be exclusive to the plaintiff.

12. The plaintiff contends that defendant 4 is promoted by defendants 1 to 3 and is only a facade for them to carry on the business utilising confidential information pertaining to the plaintiff. Defendants 1, 2 and 3 have breached their contractual obligations to maintain confidentiality of information.

13. Defendants 3 and 4 in association with defendants 1 and 2, manufacturing products based on information acquired through them is illegal.

14. Plaintiff has reserved its right to claim relief against defendant 3 in respect of violation of contractual obligations in arbitration proceedings - in the suit the relief claimed is outside the contract and is in equity.

15. The plaintiff alleges violation of copyright, in that the design and drawings of Turbostop supplied to JVSL are original works, belonging to the plaintiff.

16. The defendants contend that defendant 4 is an independent entity and the alleged cause against it cannot be pleaded synonymously with the plaintiff. Defendant 1 is said to have filed a suit in O.S No. 5040 of 2003 challenging the dominant marketing position of the plaintiff. The defendants claim misjoinder of action. As defendant 3 again has his own status as an independent contractor who was engaged by the plaintiff and the contract terminated midway. It is contended that patents are strictly territorial and existence of foreign patents is of no relevance. In any event the plaintiff is existing from the steel operation business and the fact that services of many of its employees are terminated, including that of defendants 1 and 2, is a case in point, the information as regards CIP is a matter of public knowledge and all the more obvious to skilled persons in the industry. The naming of the product as Turbostop is only an attempt to appropriate a generic name for the product. Even before the plaintiff introduced Turbostop in the Indian market during 2000 similar products were being sold worldwide. The plaintiff has not produced any Indian patent. The existence of a foreign patent in the name of the plaintiff's foreign patent is irrelevant.

17. The Trial Court has found that the contention of defendants 1 and 2 that they had not received information regarding the manufacturing process of Turbostop during the course of their employment was incorrect and could not be believed, from the material on record. And though there was no material to show that defendant 3 had received any such information as regards manufacture from the plaintiff, the inevitable presumption, when the defendants 1 to 3 formed defendant 4 and began to manufacture CIP similar to Turbostop, was that such information was received through defendants 1 and 2 by defendant 3. Even in the absence of the written agreement, which the plaintiff claimed to be missing, binding the defendants 1 and 2 not to compete, the Trial Court has held that there was material to show that they were to maintain confidentiality with regard to information received during their employment. Therefore, the Trial Court found a prima facie case for the plaintiff. The patent application of the plaintiff pending with the authorities was held inconsequential in the Trial Court holding that the relief of injunction is based on a breach of agreement regarding confidentiality of information. And accordingly the Trial Court had granted an order of temporary injunction as prayed for.

18. Sri R. Muralidharan appearing for the appellants contended that the order of the Trial Court is opposed to Section 27 of the Indian Contract Act, 1872, which forbids all restraint of trade. The Counsel submits that the judgment runs counter to the judgments of the Supreme Court in Niranjan Shankar Golikari v. Century Spinning and Manufacturing Company Limited . AIR 1967 SC 1098 and Superintendence Company Of India (P) Ltd. v. Krishan Murgai. . 1981 2 SCC 246. And reliance was placed on a judgment of the Madras High Court in the case of R. Babu v. TTK LIG Limited . 2004 2 CTC 284 Mad.., where in similar circumstances as in the present case an order of injunction was refused.

19. It was contended that the Trial Court has failed to appreciate that the plaintiff had not made out a prima facie, case. In that, the plaintiff had not demonstrated that there was a trade secret involving Turbostop and that the defendants had illegally obtained such trade secret.

20. It was contended that the Trial Court has overlooked the fact that the defendants 1 and 2 were not part of the team of the plaintiff in charge of the manufacture of Turbostop. And even if there was a trade secret their involvement in the marketing division or tundish division were not positions where such trade secrets could be usefully gained.

21. It was contended that the Trial Court failed to appreciate that the US counterpart of the plaintiff had introduced Turbostop in the US in 1990 and no Indian patent was applied for in India. As and when the 1990 US Patent Application was published, the disclosure about Turbostop enlarged the technology into the public domain. Patents are strictly territorial and the existence of a US patent is not relevant for the purpose of determining a trade secret case in India.

22. It was contended that the Trial Court has erred in accepting certificates of one Mr. A.K Lahiri and Dr. Y. Sahai in support of the plaintiff's case that certain information about “Turbostop” may be a trade secret. These documents not having been presented along with the plaint and sought to be pressed into service at the stage of arguments on the application, placed the appellants at a disadvantage and could not be looked into.

23. It is contended that the appellants had in the alternative undertaken that they would maintain separate accounts in respect of their product “TIAP” which is alleged to be a replica of “Turbostop” and therefore prayed any alleged loss to the plaintiff could adequately be compensated by the defendants.

24. Sri V. Srinivas Raghavan appearing for the respondent would stress that the crux of the case is that confidential information pertaining to the company is made known to employees of the company and contractors only in connection with the business of the company, and for the purpose of aiding the company in panning its business. That the law imposes an obligation on the employees of the company to maintain confidentiality of all such information. This obligation is independent of any other contractual obligation that may be imposed expressly by the company.

25. It is contended that information pertaining to the design, drawing, shape, specifications, components, materials, method of manufacture pertaining to the contoured impact pad manufactured by the plaintiff is highly confidential information. Such information is not available in the public domain as contended by the appellants. Further, it would take years of research and huge investments to produce a similar product as the Turbostop. It is contended that Turbostop designed for any particular steel plant by the plaintiff would be unique both in terms of shape, ingredients, process of manufacture and qualities. It is not conceivable that a Turbostop could be replicated for a particular steel plant without extensive study, research and investment.

26. The defendants acting in concert have manufactured and supplied a product identical to Turbostop to a long standing client of the plaintiff. This is not denied by them. Except that the product is known as TIAP. This was possible only by utilizing confidential information obtained during employment with the plaintiff. Even assuming that such information was available in the public domain - they were not entitled to use that information as a “spring board” to launch their business.

27. The admitted sequence of events in defendants 1 and 2 leaving the services of the plaintiff and gravitating together with defendant 3, on cue, to form defendant 4-Company and to commence manufacture of a complex product such as Turbostop, is a co-incidence leading to an unerring presumption that they were completely reliant on confidential information obtained during the course of their employment not only in the manufacture of the product but in identifying the customers whose specific needs could be satisfied.

28. Sri Srinivasan relied on the following authorities—

Western Engineering Co.… v. Paul Engineering Co.… . 1983 3 All E.R 413.. The plaintiffs were owners of copyright in certain drawings of tools for the manufacture of leather punches. One Mr. Ransom had furnished the drawings to the defendants with instructions to make such tools - the drawings were to be treated as confidential and were not to be used for purposes other than the specific contract. The defendants had however, detained the drawings and converted them to their own use by constructing from such drawings tools for the manufacture of leather punches and sold the same on their own account.

29. In the action, the defendants by their defence, denied the existence of the alleged copyright.

30. The Court held that the main part of the claim is based on breach of confidence in respect of which a right may be infringed without the necessity of there being any contractual relationship. In other words, if two parties make a contract, under which one of them obtains for the purpose of the contract or in connection with it some confidential matter, then, even though the contract is silent on the matter of confidence, the law will imply an obligation to treat that confidential matter in a confidential way, as one of the implied terms of the contract, but the obligation to respect confidence is not limited to cases where the parties are in contractual relationship. If a defendant is proved to have used confidential information directly or indirectly obtained from a plaintiff without consent, express or implied of the plaintiff, he will be guilty of an infringement of the plaintiff's rights.

31. Reliance was also placed on the case of John Richard Brady v. Chemical Process Equipments Private Limited . AIR 1987 Del. 372.. In this case the plaintiffs were seeking to injunct the defendants from manufacturing and selling machines which were an imitation and reproduction of design of the plaintiff's machinery and being based on designs and drawings in which the plaintiff had a copyright, and since the defendants were in fact acting in breach of confidence in misusing information and know-how disclosed on condition of strict confidence.

32. The Court while relying upon and quoting extensively from Saltman's case held that the plaintiff was entitled to an order of injunction.

33. Reliance was also placed on the cases of Laxmikant V. Patel v. Chetanbhat Shah . AIR 2002 SC 275 and Satyam Infoway Limited v. Sifynet Solutions Private Limited . AIR 2004 SC 3540.

34. In reply, Sri Muralidharan contended that the cases cited by the respondent are not relevant for the reason that the defendants were engaged in divisions of the plaintiff which were well removed from and alien to the manufacturing and research division of the plaintiff and hence the confidential information available by virtue of employment was not in the nature of a trade secret as would enable them to manufacture or replicate a product, which is admittedly of much sophistry. In this regard the Counsel relies on the case of American Chain and Cable Company Inc. v. Avery - Supreme Court of Connecticut . 1964 143 USPQ 126.. The plaintiff claimed that the defendant is a company formed by its former employees and that they have misappropriated plaintiff's trade secrets. Injunction was refused. The Court held that the reliefs claimed would prevent the defendant from pursuing their occupations and would entirely stifle competition. An employer is not forever and in the absence of a binding agreement, and in the absence of an appropriation of property, and injury based on breach of confidence does not establish a cause of action.

35. Reliance was also placed on the case of Emery Indus Inc. v. Cottier - United States District Court of Ohio . 1978 202 USPQ 829. This was an action seeking to injunct the defendant from working for his present employer who was engaged in the same field of work as the plaintiff. The Court held that an injunction prohibiting the defendant from working for any length of time would cause injury especially since he can be employed only in the particular field of work.

36. On these rival contentions the appeal is considered on merits. Insofar as the contention that the order of the Trial Court is opposed to Section 27 of the Indian Contract Act, 1872, is concerned, the section is general in its terms and declares all agreements in restraint of trade void. The consistent view of the Courts in interpreting the section has been that any restriction operating during the subsistence of the contract, whether of employment or otherwise, did not attract Section 27, unless the contract was one-sided. Section 27 is attracted to restrictions operating after the termination of the contract. Under the section, restrictions on an employee are completely void unless limited to the duration of the agreed service; restrictions that operate while the employee is serving have never been regarded as in restraint of trade. (See: Niranjan Shankar Golikari's case; Gujarat Bottling Company Limited v. Coco Cola Company . AIR 1995 SC 2372; V.N Deshpande v. Arvind Mills Company Limited, Ahmedabad . AIR 1946 Bom. 423.; Taprogge Gesellschaft Mbh…Plaintiff; v. Iaec India Ltd.…Defendant. . AIR 1988 Bom. 157.; Makhanlal Natta v. Tridid Ghosh . AIR 1993 Cal. 289. and Sociedade de Fomento Industrial Limited v. Ravindranath Subraya Kamat . AIR 1999 Bom. 158.).

37. In Gujarat Bottling Company Limited's case, a negative stipulation and restriction in a franchise agreement was confined in its application to the period of subsistence of the agreement and hence not a restraint of trade so as to attract the bar of Section 27 of the Contract Act. In the instant case, defendant 1 opted for voluntary retirement in the year 2002 and defendant 2 voluntarily resigned from service in the same year. In my opinion this amounts to the defendant's unilateral repudiation of contract of service and hence the contract would be binding. But the circumstance that the plaintiff seeks to rely not so much on an express contractual obligation but an implied term to protect the plaintiff's right which is enforceable. Apart from the view of the Delhi High Court in John Richard Brady's case, following Saltman Engineering Company's case, the commentary on Indian Contract and Specific Relief Acts - by Pollock and Mulla, Twelfth Edition at page 816 subscribes to the view that disclosure of confidential information, after cessation of employment by an employee can be restrained. In my opinion, in the instant case the restraint being limited to the defendants manufacturing and marketing a product similar to Turbostop and not in respect of the main activity of the defendant's business generally - would neither result in injustice or be inconsistent with Section 27 of the Act. The other contentions on behalf of the appellant touching on the facts and circumstances of the case are prima facie held against the appellant by the Trial Court. In my opinion the order of the Trial Court can neither be said to be arbitrary or capricious and being informed with cogent reasons, the same is to be upheld.

38. The appeal is accordingly dismissed.