In this Blog Post, Abhiraj Thakur, a student of NALSAR University of Law writes about non-disclosure clauses in employment contracts. As the name suggests, these clauses are for the protection of the confidentiality of the employer, but over the years, it has become a tool for exploitation for the employees. The post also highlights how the courts have interpreted such clauses.

Employment contracts are designed to secure the rights of both the employer and employee during the period of employment and even after that. Employment contracts are drafted in a manner as to accrue maximum benefits by protecting and minimizing the employers’ liability and ensuring that the employees are not exploited and their work is used to the maximum satisfaction. Employment contracts are mainly used in the legal domain as proof of employment, assigning of liability and as a distinction of the subsisting relationship between two or more contracting parties. The idea of an employment contract is that the purpose and requirements of drawing up such a contract is pre-determined and anything that arises out of this contract would have an impact on the relationship.

Various clauses are inevitable in this type of contract and the Non-Disclosure Clauses are among them. These clauses have bewildered legal intelligentsia for a long time, and hence it becomes necessary to analyze the purpose and interpretation of such terms by the judiciary.

Purpose of Non-Disclosure Agreement

The purpose of Non-Disclosure Agreements is to protect the business interests of individuals and firms. NDA’s are implemented both during the period of employment and after termination of the employment contract in order not to allow the flow of trade secrets and confidential information. Non-Disclosure Agreements have become an essential part of Employment contracts, considering the diversification and specialization that has taken place over the last 30-40 years.[1] With increasing variegation of ideas, business tactics, patents, discovery and inventions, there has been a simultaneous increase in restrictions placed on how the same is used by corporations to protect their business interests and provide a competitive advantage.

Employees are made to sign NDA’s to ensure that employers are not in a position of a disadvantage after the termination of employment contracts. Even during the existence of the employment, employees are expected to maintain confidentiality.

Construction of the Agreement

Non-Disclosure Agreements in India typically have 15-20 sections that vary based on the firm’s requirements and classification of information. Two sections are most pertinent in this; which is regarding identification of confidential information and non-disclosure of the same which is complemented by exceptions, waivers, and remedies. The confidentiality of information section deals with what documents, data, and intelligence would be considered confidential by the firm; this essentially covers any knowledge production that takes places during the tenure of the employee with the firm. NDA’s also prevent the usage of this by the employee in the future by patenting such works or by adding a supplementary restrictive covenant regarding ownership of works. NDA’s typically prevent the unauthorized usage of sensitive information[2] and hence it also puts limits on the kind of interaction that employees can have with third-parties while carrying out business transactions.

NDA’s are comparable to Standard-Form Contracts, in that they have a universal structure in the corresponding domains and have similar application throughout. The negotiability of NDA’s is low considering that prospective job-seekers have no options other than to “take it or leave it”. Also, given that they are large-scale contracts[3] and firms cannot be expected to hand out contracts individually, they fall under this ambit. Hence, NDA’s are built to cover a wide array of information that has any potential for the growth of the firm. Ideally, the sensitivity of the information is not included in the agreement as a classification of information isn’t as important as the information itself. The distinction as to whether something is confidential or not depends on a test of reasonability[4] which is based on general practices of business and transaction in a domain.

Case laws and interpretation

In Burlington Home Shopping Pvt. Ltd. v. Rajnish Chibber,[5] it was held that the usage of a database built by the employer during the tenure of the employee was a violation of the NDA that was signed between them and would also fall under copyright infringement. To reiterate R. C. Lohati J, the access to the database and client detail by the employee even after termination of the employment contract was a breach of the Non-disclosure Agreement because it would harm the business interests of the employer. A tangent to the same is provided in Sec. 2 (6) of the Copyright Act, 1957[6] which classifies databases as a literary work whose making involves substantial effort and time.

In Diljeet Titus v. Mr. Alfred A. Adebare and Others,[7] a case that enunciated not only on NDA’s but also what type of relationship would qualify as a contract for service and the ownership of information, it was decided by Sanjay Kishan Kaul, J. that NDA’s form an essential part of employment contracts as they protect the copyrights that is created during the subsistence of the contract. Albeit the relationship was one of partnership and profit-sharing, the defendant had the duty to not disclose information created because of the nature of it and the kind of benefits it accrued to the plaintiff and in not placing restrictions on the flow of this, there would significant damage to the plaintiff and an undue advantage to the defendants.

The case of American Express Bank Ltd. v. Ms. Priya Puri[8] dealt with the issue of NDA’s, in that they restrict the right to the profession under Art. 19(g) of the Constitution. While the plaintiff sought the enforcement of a post-employment contract, the defendant complained of the NDA being used to coerce her into continuing with her job with the plaintiff. It was held that mere possession of confidential information would not violate the NDA and does not inhibit the defendant from taking up another job with a competing firm and that there would be a breach of the NDA only if the information is used to the advantage of the defendant.

Even in the case of Abhinav Gupta v. The State of Haryana,[9] a similar decision was meted out by HarbansLal J. where it was held that breach of NDA occurs only when there is communication of intelligence to a third-party. The case was regarding the offense of hacking which is under the purview of Sec. 66 of the IT Act, 2006. It was held that the copying of information from the employer to the personal email ID of the appellant was in furtherance of the act of passing it on to third-parties and hence there was a breach of the NDA. This case, albeit restricts itself to the criminality of hacking, is relevant because of classification of information.

Analysis of application across jurisdictions

Given that NDA’s are Standard-Form Contracts, they remain the same across various jurisdictions like the UK, USA, and India. NDA’s are most prominent amongst white-collar jobs where there is the highest flow of information and the same forms the basis for all trade, given that data and knowledge have ascendency over any physical work. Hence, there is dominance of patents and copyrights as protective devices in this field. As it is not possible to patent everything that a firm produces, restrictive covenants are used to limit the passing on of trade secrets. NDA’s are increasingly used as knowledge production becomes more exclusive.

Thus, we see that there isn’t any ambiguity or inherent problems with the construction of such clauses in general employment agreements, rather these terms become problematic when they are exploited by companies for their benefit at the detriment of their employees and hence infringe on free practice and efficient employment. Though Indian courts do factor in exceptions according to factual conditions and terms of the negative covenant, in most cases such clauses are found unenforceable as they’re seen to be violating Sec. 27 and Art. 14 of the Constitution of India as well as creating a situation of ‘economic terrorism’ or that of ‘bonded labor’.[10] Jurists across the globe believe that Non – Compete clauses are very restricting in terms of employees being able to carry out trade or even earn a livelihood as a huge chunk of power starts resting with the employers because of these clauses and reduces efficiency as well as the motivation for employees to be a functioning part of such businesses.

Even though there is considerable debate about legality of restrictive covenants under Sec. 27 of the Indian Contract Act, 1872[11], there is substantial precedent set in the case of NDA’s. Their validity has been accepted and they are used almost universally. In India, there has been some distinction between what is considered confidential information and trade secrets.[12]Although this distinction remains pertinent while deciding liability; for theoretical purposes, trade secrets fall under ambit of confidential information because they are exclusively available to a particular firm.

[1]Moral awareness and ethical predispositions: Investigating the role of individual differences in the recognition of moral issues.Reynolds, Scott J.Journal of Applied Psychology, Vol 91(1), Jan 2006, 233-243.

[2]Ten Tips for Non-Disclosure Agreements in Asia, http://www.acc.com/legalresources/publications/topten/ttfnaia.cfm (last visited Mar 20, 2016)

[3]A.J. Kerr, Imposed Terms in Standard Form Contracts, (1981) 98 SALJ 15.

[4]See supra note 2.

[5]61(1995)DLT 6.

[6]INDIAN COPYRIGHT ACT 1957, http://www.ircc.iitb.ac.in/webnew/Indian Copyright Act 1957.html (last visited Mar 21, 2016)

[7]130(2006)DLT 330.

[8](2006)IIILLJ 540 Del.

[9]2008Cri LJ 4536.

[10] As observed in Pepsi Foods Ltd &Ors vs. Bharat Coca- Cola holdings Pvt Ltd

[11]Contract Of Service And Restrictive Covenants  – Employment and HR – India, http://www.mondaq.com/india/x/295626/employee+rights+labour+relations/Contract+Of+Service+And+Restrictive+Covenants (last visited Mar 21, 2016)