This article is written by Hemal Shah who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.

Introduction 

In this era of globalization, where the success of any corporate largely depends upon sensitive processes, technological supremacy, and trade secrets, the employers are keen to take all forms of protective measures for safeguarding such confidential information from any kind of leakage. As a result, these issues have led to the widespread adoption of the’ Non-Compete Clause’ of numerous work arrangements and other types of agreements prohibiting workers and/or former employees from undertaking a comparable career or trade with the employer’s rival following the termination of employment. Employers use such statutory conditions as a mechanism (more commonly as a precedent requirement for employment) to place on workers any or more of the following restrictions:

• Restriction on starting a competing business;
• Restriction on working with enterprises operating in the relevant market;
• Restriction on working in the relevant geographic market;
• Restriction on soliciting the clients of the employer;
• Restriction and in majority of cases, a complete prohibition on disclosure the trade secrets or confidential information;

These clauses may also state, in addition to certain limitations, the time during which such restrictions may be effective until the expiration of the employment contract.

Enforceability of non-compete (case law study)

The Television News Channel (‘News Channel’) has recently filed a lawsuit against its News Broadcaster, preventing it from engaging in similar work with any other television channel until the expiry of the term of its Employment Agreement; from allowing its name, image or voice to be associated with any other news channel during that period; and for the recovery of INR 2,00,10,000 in damages. 

Since the last 14 years, the News Channel has been investing huge amounts of money and time on grooming the broadcaster and creating her reputation as one of the popular faces of the News Channel. The Court noted, however, that the exclusive rights over the talents and expertise gained over the years by the broadcaster cannot be bestowed on the News Channel purely on the basis that they contributed or promoted the same.

Only the News Channel had the power to cancel it, as per the Employment Arrangement. This right was not, but for medical purposes, extended to the broadcaster. The length of the deal was three years, after which it was extended for another three years, and so on. Before the expiry of that duration, however, the broadcaster communicated its intention of terminating the deal. The News Channel heard that the broadcaster was going to enter a rival news channel and filed this complaint as a result. A detrimental clause in the agreement between the parties prohibited the broadcaster from entering / representing any other news channel before the last day of the duration of the News Channel agreement. This clause was invoked by the News Channel to restrict the broadcaster.

The Court noted, however, that because the employment arrangement between the parties had ended, it was not necessary to prevent the broadcaster from entering into another agreement. It claimed that such a limitation would only be possible until the work arrangement begins. It held that the broadcaster would stay idle if the temporary constraint was granted. The News Channel further claimed that if it decided not to partner with any rival news channel, it would have to pay the broadcaster the emoluments as provided for in the Deal. It further narrowed down the derogatory covenant by encouraging her to engage in backstage operations rather than becoming the channel’s news presenter/face. The Court did not approve this to say that it would be damaging to “bench a professional for as long as 10 to 11 months, able to inflict permanent damage affecting a professional’s mental and physical health and future prospects.”

The Court’s assessment, before passing a temporary judgement, of the balancing of conveniences is clear in this situation. It noted that not having the broadcaster to work on the screen would negatively impact her goodwill and business presence, and if an interim order were passed against her, such a loss will not be monetarily covered. The Court has observed that neither the factor of irreparable harm nor the balance of convenience (which both warrant the grant of temporary relief) is in favour of the News Channel and has thus denied the motion for an interim injunction.

Validity and reasonableness of such restriction

Section 27 of the 1872 Indian Contract Act allows for a trade restraint arrangement. It states that to that effect, any arrangement by which any person is prohibited from practising a legal occupation, trade or company of any kind is void. 

In the landmark case of Percept D ‘Mark (India) Pvt., the Supreme Court of India Section 27 of the Indian Contract Act, 1872 it was decided that if a restrictive clause in the agreement is framed in such a manner that it continues even after the duration of the contract has expired, then such a contract in the contract would not be enforceable. 

Furthermore, the Supreme Court has observed that this principle also extends to all contracts, and not merely to contracts of work, with regard to duties occurring after the expiration of the contract. In the Niranjan Shankar Golikari vs The Century Spinning And Mfg case, however the Apex Court has already reported. Co., because if a trade restriction against the employee prevents the employee from bargaining during the term of employment against the employer, then such an arrangement is legitimate and enforceable in relation to the conduct of the employee during the time of employment.

Garden leave clause

An employee must send a long-term notice to the employer in advance of his resignation from work under a ‘Garden Leave’ clause and the employer gives him full remuneration in return for this time that he is restrained from competing. 

In compliance with this provision, the notice needed for the employee to terminate his job may be extended to one year with the company retaining the right to compel him not to attend work after serving the aforementioned notice for any period. 

Therefore, after three months, the organisation might potentially put him on garden leave. While this principle is a common instrument used by employers in other parts of the world, particularly the United Kingdom, as a replacement for the non-compete clause, it still lacks legal protection from the Indian courts. 

Recently, in VFS Global Services Private Limited v. Mr. Suprit Roy the Bombay High Court established that it is not fair to prevent an employee who has left service from obtaining gainful employment elsewhere” The Court also found out that the provision applies prima facie to the prohibition of commerce and is affected by section 27 of the Contract Act.

Ideal non-compete clause

Note- The reader is requested to take appropriate legal guidance before framing such clauses and under no circumstances, shall this clause be termed as legal advice in any form or manner and the author shall not either directly or indirectly be liable for any loss caused.

Non-Compete–

1. Executive acknowledges that during his employment relationship with, or through his involvement as a member or stockholder of, any Related Company, Executive has and will become familiar with trade secrets and other Confidential Information concerning such Related Companies, and with investment opportunities relating to their respective businesses, and that Executive’s services have been and will be of special, unique and extraordinary value to the foregoing entities. 
2. Therefore, Executive agrees that, during the Employment Period and for a period of two years thereafter (the “Non Compete Period”), he will not directly or indirectly own, manage, control, participate in, consult with, render services for, or in any other manner engage in any business, or invest in or lend money to any business (in each case, including on his own behalf or on behalf of another Person) which constitutes or is competitive with (including, without limitation, by competing for the same subscriber or customer base) any business conducted by any System owned or managed by any Related Company (as and where such Systems are operated or managed or are proposed to be operated or managed by the Related Companies during the Employment Period, or as of the end of the Employment Period if the Employment Period has then ended) (any such business, a “Competitive Business”). 
3. The Executive has no direct involvement in any aspect of such Competitive Business. By initialing in the space provided below, the Executive acknowledges that he has read carefully and had the opportunity to consult with legal counsel regarding the provisions of this Section.

How to negotiate the non-compete clause

• It is pertinent for the employee to understand that the position of the employee in the company the roles and responsibilities and the amount of data that is been exchanged between the parties Let’s just say for example that a receptionist gets hired in the company and the data processed is limited to the roles and responsibilities provided by the company. The same receptionist decides to be part of another company for a completely different position, the data that was in control of the receptionist shall not be very important data that requires protection and hence the scope of services play a large role while negotiating such clauses.
• It is also pertinent to mention for the employees to understand about the geographical locations. Non-compete clauses do not primary mention about the restriction in companies but also mention about the restrictions in the geographical locations all together
• The organisations now have been a little liberal when it comes to the non-compete clause it is per that apparently is in the employees can ask for a waiver from the current employers and can see the advantage of joining to another industry

Conclusion

While such non-compete provisions are applicable in foreign countries, their scope and the defence opportunities are pretty narrow in nature. The right to livelihood is assured by Article 21 of the Constitution of India and because it is a constitutional right, it is held to be inviolable. This makes it much more difficult to impose non-compete provisions in India. 

There is no delusion that non-competitive deals are legitimately enforceable and would be the most powerful mechanism to neutralise a leaving employee’s challenge if fair limitations are enforced that do not prohibit his/her right to work and trade. In this era of accelerated globalisation and industrialization, the non-compete arrangement proves to be a knight in the shining armour for companies that could shield their rights and trade secrets from being passed on to rivals if an appropriate written agreement is in force that addresses the main facets of the security of proprietary knowledge and trade secrets combined with non-competitors.

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