Confidentiality or Non-Disclosure Agreements

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This article is written by Nimisha Srivastava, a student of  GNLU.

What is a non-solicitation clause?

Non-solicitation clauses are restrictive covenants in contracts. The companies assert that such restrictions are necessary to protect their proprietary rights and their confidential information. In today’s business situation of high rivalry and quick switching employees, numerous employers resort to restrictive covenants to ensure themselves against the competition.  A non-solicitation clause is meant to put a restriction on an employee of a company, to prevent him from soliciting the employees or customers of a company, during and post-termination of employment.

Are the non-solicitation clauses legally enforceable in India?

The enforceability of non-solicitation clauses in India is very subjective. Indian courts have consistently refused to enforce post-termination non-compete clauses in employment contracts. These clauses imply a “restraint of trade” that is clearly barred by Section 27 of the Indian Contract Act, 1872. They are also seen as being against public policy because of their potential to deprive an individual of his or her fundamental right to earn a livelihood. The general trend in judiciary is that, the clauses operating during employment are valid and those operating post employment are invalid. The enforceability of the said clause depends on the facts and circumstances of each case.

Judicial pronouncements

A Delhi High Court judgment in Wipro Ltd vs Beckman International[1] said that a non-solicitation clause is not void. The facts of the case were that the respondent was hired by petitioner as sole and exclusive distributor of its products. The agreement they agreed upon contained a non-solicitation clause to be operative for two years after the termination of agreement.  They had worked together for nearly 17 years. Respondent in lieu of launching their direct operations in India published an advertisement which sought applications from prospective employees and specifically mentioned that persons having experience in handling petitioner’s products or similar ones. Petitioner considered this advertisement as a breach of the non-solicitation clause.

In this particular case, the Delhi High Court held that non-solicitation clause is a reasonable restriction and is not hit by Section 27 of the Indian Contract Act, 1872. The court drew a distinction on enforceability of non-solicitation clause based on the relationship between parties. While construing a restrictive or negative covenant and for determining whether such covenant is in restraint of trade, business or profession or not, the courts take a stricter view in employer-employee contracts than in other contracts, such as partnership contracts, collaboration contracts, franchise contracts, agency/distributorship contracts, commercial contracts. The reason being that in the latter kind of contracts, the parties are expected to have dealt with each other on more or less an equal footing. Non- solicitation clause will put a bar on the contracting parties from inducing each other employees but the restriction does not put a bar on employees to join the respondent company. The restriction is put on the petitioner and the respondent and, therefore, has to be viewed more liberally than a restriction in an employer-employee contract. In this case no injunction was granted in favour of petitioner for their employees who have joined the respondent’s company in response to their solicitation.

In American Express Bank Ltd. v. Priya Puri,[2] the Bank asked for an injunction to limit the ex-worker from utilizing or revealing any data and competitive innovations identifying with the business and operations of the Bank and to solicit and induce any of the clients of the Bank. The Delhi High Court noticed that such a directive will encourage the plaintiff to make a circumstance, for example, “once a customer of American Express, always a customer of American Express “. The court further noticed that freedom of changing employment for improving service conditions is a vital and important right of an employee which cannot be restricted or curtailed on the ground that the employee has employer’s data and confidential information of customers which is capable of ascertainment on behalf of defendant or anyone else, by an independent canvass at a small expense and in a very limited period of time.

The Delhi High Court[3], allowed an injunction against the plaintiff prohibiting him from soliciting respondent’s customers and suppliers. However the court rejected the plaintiff’s claim to enforce confidentiality obligations on the manager. According to Court, a marketing manager could not be deemed to possess confidential information and that his written declaration to that effect in his employment agreement was meaningless.

In this case, the employee agreed that for two years following the termination of his employment, he would be bound him to maintain confidentially, and preventing him from competing and soliciting respondent’s customers, suppliers and employees. Expressly embodied in the employment agreement was an acknowledgement by the manager that he was dealing with confidential material of respondent, including know-how, technology trade secrets, methods and processes, market sales and lists of customers.

In V.F.S. Global Services Ltd. vs. Mr. Suprit Roy[4], however, relief for breach of non-solicitation obligations was rejected on the basis of vagueness of the relief claimed. In another case before Madras High Court[5], it was held that merely approaching customers of a previous employer does not amount to solicitation until orders are placed by such customers based on such approach. The Madras High Court laid down the standard to establish non-solicitation:

Solicitation is essentially a question of fact. The appellant should prove that the respondent approached their erstwhile customers and only on account of such solicitation, customers placed orders with the respondent. Mere production of quotation would not serve the purpose. It is not as if the appellant is without any remedy. In case the Court ultimately holds that the appellant has got a case on merits, they can be compensated by awarding damages. The supplies made by the respondent to the erstwhile customers of the appellant would be borne out by records. There would be no difficulty to the appellant to prove that inspite of entering into a non-disclosure agreement, respondent have solicited customers and pursuant to such solicitation they have actually supplied castings. When there is such an alternative remedy, question of issuing a prohibitory injunction does not arise.”

The Secan Invescast judgment states that such clauses may be valid if reasonable restrictions such as distance, time limit (reasonable time frame), protection and non-usage of trade secrets and goodwill are imposed on former employees.

In a recent 2014 judgment by Calcutta High Court, Embee Software Pvt. Ltd. v. Samir Kumar Shaw[6], the court held that ‘acts of soliciting committed by former employees takes such active form that it induces the customers of the former employer to break their contract with the former employer and enter into a contract with the former employee, or prevents other persons from entering into contracts with the former employer’ cannot be permitted.

Implications for investors

Investors, especially foreign investors need to be aware of  Section 27 of Contract Act and the judicial trend that follows. This will help them in structuring employment contracts and relationships with Indian management. The restrictive covenants for confidentiality, non-solicitation, non-competition will be valid and enforceable during the term of employment. The same is not the case for post-employment time period. Courts generally favour the employee regardless the provisions are reasonable in scope and duration. Non-solicitation obligations post-termination of employment may be enforced in limited circumstances, based upon the facts of each individual case.

[1] 2006 (3) Arblr 118 Delhi

[2]  (2006) Iiillj 540 Del.

[3] Desiccant Rotors International Pvt Ltd V. Bappaditya Sarkar & Anr. Manu/De/1215/2009

[4] 2008 (2) Bomcr 446

[5] M/S. Fl Smidth Pvt. Ltd. Vs. M/S. Secan Invescast (India) Pvt. Ltd. MANU/TN/0103/2013

[6] Air2012cal141

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