Introduction
Retaining talent and protecting sensitive proprietary information are important considerations for a business. Employers usually incorporate restrictive covenants such as non-compete and non-solicit in employment contracts. On April 23, 2024 the Federal Trade Commission of the United States of America issued a "final rule" "banning non competes nationwide"1. Indian courts have also been reluctant to uphold non-compete provisions after the termination of employment of an employee, while being more willing to uphold non-solicit clauses in an employment agreement after termination of employment.
Non – compete clauses and their enforcement
A typical non-compete clause has two parts. First, where the non-compete prevents the employee from working for a competing business during the term of employment with the original employer. Second, where post termination of employment the employee is restricted from working with a competitor.
Indian Courts have consistently held that during the subsistence of the employment contract, non-compete is enforceable. In Niranjan Shankar Golikari2, the Supreme Court held that a negative covenant is not in restraint of trade if such a restraint was willfully created for the period of employment stipulated by the employment contract, unless such a restraint can be proven to be unconscionable or excessively harsh or unreasonable or one sided. In Makhanlal Natta v Tridib Ghosh3 also the Court restrained the Defendant from joining a competing business during the term of the Defendant's employment contract. In Kumar Apurva v Value First Digital Media4, the Shareholder's Agreement signed by the Appellant stipulated that the non-compete would apply as long he held securities in the company. The Appellant had joined a competitor business as a CEO while being a shareholder of the company. The Court restrained the Appellant from joining competitive business or directly/indirectly soliciting employees as long the agreement was in force. The Court found that the Appellant was offered an option to sell his shares which he had declined.
A non-compete restriction post-termination of the employment contract encounters challenges in enforceability because of Section 27 of the Indian Contract's Act 1872 ("Section 27"), which states:
"Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void."
Any arrangement which renders the employee idle and unemployable would attract Section 27 and is thereby liable to be struck down5. While in some instances courts have recognized the need to have a more liberal framework for enforcing non-compete restrictions post termination of employment agreement to protect employers' interests, courts found that Section 27 bars a more liberal framework. In Krishan Murgai6 where the common law origins of a non-compete contractual clause was explored, Justice Sen identified two elements to the clause (a) is the clause 'restraint' and (b) if so, whether it is reasonable and justifiable in public interest. The conclusion that was that such an active omission of the second element in Section 27 was intended to bar an enquiry whether the restriction was reasonable.
Section 27 has a statutory exception – when goodwill of a business is sold a reasonable form of non-compete protection is permissible. Accordingly, a seller may agree with the buyer not to compete with the business that was sold. Courts may assess the reasonableness of such restraint. Examples of permissible restrictions include not carrying on a business within specified local limits for a reasonable time period. It should be noted, however, that if the non-compete restriction in a sale involving the transfer of goodwill creates a complete embargo on seller's employability, it is unlikely to be upheld7. In Affle Holdings8 the Court observed that the SPA was undertaken with the intent to acquire the business and the goodwill of the company. The Court found that the 36-month long non-compete was reasonable and enforced the non-compete clause. In Arvinder Singh v Lal Pathlabs9, however, the Court allowed the petitioners to work as Pathologists and Radiologists but not in a manner which would amount to carrying on the business by corporatizing themselves which would result in direct competition with the respondents.
Non-solicitation clauses and their enforcement
Indian courts have been more liberal in enforcing non-solicitation restrictions than non-compete restrictions. Employees or ex-employees actively soliciting clients causing clients to break their relationship with the employer/former employer and enter into a contractual relationship with the soliciting employees has been found to be unlawful. In Wipro Limited v Beckman Coulter International10, parties had a non-solicitation agreement. Wipro was the exclusive distributor for Beckman in India for seventeen years. After the termination of the distributorship, Beckman released an advertisement for hiring. After Beckman's advertisement, several employees resigned from Wipro and joined Beckman. The non-solicitation clause provided that general advertisement and general means of recruitment would not amount to solicitation., Beckman's advertisement, however, stated that experience handling Beckman Coulter products would be a distinct advantage in the selection process. Wipro was Beckman's sole distributor for the previous 17 years and only Wipro employees would have had the relevant experience highlighted in Beckman's advertisement. The Court found that such advertisement amounted to impermissible solicitation, and restrained Beckman from soliciting any more employees. The Court ordered Beckman to compensate Wipro for breach of the non-solicitation clause. The Court, importantly, observed that the restriction is cast on parties to the non-solicit agreement, which cannot be used to withhold employees from transitioning into another job even if it occurs as a result of impermissible solicitation. Another important principle, articulated in FL Smith11, is that mere solicitation is not enough for establishing a ground for relief, the party being solicited should have left the previous relationship as a result of the solicitation.
Employers may seek to prevent solicitation by claiming that the employees being solicited are privy to confidential or proprietary information. However, it is to be noted that courts apply a high threshold while determining if certain information is confidential/proprietary. In Eastern Book Company v D B Mobak the Court stated:"(i) to claim copyright in a compilation, the author must produce the material with exercise of his skill and judgment which may not be creativity in the sense that it is novel or non-obvious but at the same time it is not a product merely of labor and capital; and, (ii) that the exercise of skill and judgment required to produce the work must not be so trivial that it could be characterized as a purely mechanical exercise."12 In Zee Telefilms13 the court stated:"(a) the information relied upon must be clearly identified; (b) the handing over of such information must have been in the circumstance of confidence; (c) the said information must be of a type which can be treated as confidential; (d) it must have been used without license".
In Embee Software14, the Court found that the petitioner used proprietary software and developed unique methods to service each of its clients. The respondents who were former employees who serviced the petitioner's clients had knowledge of the proprietary technology and unique methods that the petitioner used. The court found that the respondents' knowledge of petitioner's proprietary information put them in a position to approach the petitioner's clients (and poach them away) and allowed injunction to the petitioner. In Transformative Learning Solutions15 where the Court granted injunction, the petitioner used sophisticated, judgment based and complex marketing and advertising techniques to create its client database. On the other hand, in American Express v Priya Suri16, the petitioner sought to prevent the respondent (an ex-employee who managed the petitioner's clients) from soliciting business from the petitioner's clientele. The court found that the petitioner's customer list could not be regarded as either copyrightable or confidential, as this information is available on a casual basis within the firm.
Conclusion
Indian courts have been willing to enforce a non-compete restriction during the term of the employment contract, and not after the term of the contract. Indian courts recognize employers' interest in protecting against unauthorized disclosure of their proprietary information. For availing the protection offered to proprietary information, an employer would need to satisfy that the information in question the satisfies stringent and specific threshold/conditions that the courts have laid down for confidential/proprietary information. An Indian court has also restrained active and targeted solicitation of employees possessing a specific set of skills where the parties involved had a non-solicitation agreement.
This article was first published in Lexology.
Footnotes
1 Press Release of the FTC dated April 23, 2024.
2 Niranjan Shankar Golikari vs The Century Spinning And Mfg. Co. 1967 AIR 1098.
3 AIR 1993 CAL 289.
4 ARB.A. No. 2 of 2015.
5 Chem Academy Pvt. Ltd. vs. Sumit Mehta and Ors. MANU/DE/3082/2021.
6 Superintendence Company of India v Krishan Murgai 1980 AIR 1717.
7 Le Passage to India Tours & Travels (P) Ltd. v. Deepak Bhatnagar 2014 SCC Online Del 259.
8 Affle holdings Pte Limited v Saurabh Singh 2015 SCC OnLine Del 6765.
9 Arvinder Singh and Ors. vs. Lal Pathlabs Pvt. Ltd. and Ors. MANU/DE/0936/2015.
10 ARBLR 118 Delhi, 2006 (2).
11 FL Smidth Pvt. Ltd. v M/s. Secan Invescast (India) Pvt. Ltd (2013) 1 CTC 886.
12 (2008) 1 SCC 1.
13 Zee Telefilms Ltd. and Film and Shot v. Sundial Communications Pvt. Ltd. (2003) 27 PTC 457 (Bom).
14 Embee Software Private Limited v Samir Kumar Shaw 2012 SCC Online Ca l 3094.
15 Transformative Learning Solutions v Pawajot Kaur Baweja 2023 SCC Online Del 5296.
16 (2006) IIILLJ 540 Del.
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