In this blog post, Shubham Khunteta, a student of National Law University Odisha, writes about important agreements entered into by businesspeople to prevent their talented human resource from job hopping and to save their business from any unfair competition. It specifically talks about Non-Solicitation and Non-Poaching agreements which are very crucial for any business.

Introduction

Today, we are living in the age of competition where to succeed in the market; people tend to use shortcuts to sustain themselves, get achievements and earn laurels. There is a general tendency of people to prevent others from carrying on their work either necessarily or unnecessarily depending on the loss they might portend to. But, here we are not concerned with each and every tendency of such persons except the tendencies to interfere, damage other persons by certain revelations that might be the core way of the operation of the person, of poaching certain personnel to enrich oneself unjustifiably with the secrets of the person. The core exchange and principle here is “unjustifiable enrichment” at the cost of others.

By persons, I am referring to individuals like professionals or other employees, companies, firms, etc. In this paper, we will be talking about the rights of the persons to prevent something which they consider to be detrimental to their interests.

For example, when individuals are terminated from their employment and subsequent to that these individuals carry out certain activities similar to or related to that of their ex-employment, either directly on their own by starting a similar activity or indirectly by selling or supplying certain trade secrets or confidential information for consideration of job or other benefits from the future employer, which they, during their course of employment gathered and collected. Similarly, employers may, under the garb of prevention of such trade secret or confidential information prevent the employee, for fixed period post-termination, from taking up a job in a similar employment corporation so as to reduce compromise of such sensitive information. This might trigger a violation of the employee’s constitutional rights of life, liberty and his statutory right to employment)[1].

These things are observed in day-to-day commercial activities where one person often tries to protect one’s interest, whether reasonably or unreasonably, as the case may be. In law, disputes often arise on issues which pertain to violations of the nature of constitutional and statutory rights of individuals, statutory rights of companies and firms to protect their interests by preventing and forbidding other persons like employees, partners, et al. from copying or imitating the firm’s unique copyrighted documents or spill the beans of a patented product. Business owners enter into agreements with other companies/firms to forbid poaching of each other’s employees that may come under the grey area of Competition law as concerns regarding concentration of competition mount up.

In the above-introduced section, the significance of the term ““reasonability” in actions and “compliance with directions of law or agreements entered into” erupts. Now, the question that would be dealt with below concerns the validity of above arrangements, principles of law followed by the adjudicating authorities to differentiate between the reasonable and unreasonable restrictions imposed in the contractual arrangements and the impact that befalls on the affected parties.

The two prominent clauses often entered into by the companies and the firms-

1. With their employees (Non-solicitation clause)
2. With the other similar businesses of businesses and firms (Non-poaching clauses)

Non-Solicitation Agreement

This clause is usually entered into as a part of a contract of employment or agreement b/w partners. It is entered into for the purpose of restraining the other party, i.e. an employee/former employee or a partner from solicitation of customers and employees of the company for his benefit and against the interest of the company during and post-employment. The clause is imperative to companies as it is often seen that the employees pursue and persuade the clients and other employees of the company to endanger the employer’s business unjustly and enrich himself at the employer’s expense. Enforceability of such clauses is a question of fact depending and varying on case to case basis.

Now, the question that arises for contemplation is- What constitutes reasonable and legal non-solicitation clauses?

The solution lies in the interpretation of the clause with reference to cases.

Standards to establish non-solicitation

• Merely approaching customers and employees of the previous employer would not be read as solicitation until actions are done or orders are placed under such representation.[2] Such actions and orders would be borne out by records.
• The validity of such clauses can be adjudged from the restrictions imposed as regards distance, time limit, protection and non-usage of trade secrets and goodwill.
• Acts of solicitation committed by alleged persons like former employees take such active shape that it prompts the customers of the former employer to discontinue their contract with the former employer and enter into a contract with the former employee or inhibit other persons from entering into the contracts with the former employer[3].
• The clause would not be reasoned as being in restraint of trade under Sec 27 of the Indian Contract Act liable to be void unless the same is unconscionable or wholly one-sided. The character of such a clause is also reckoned from the form of contract and superiority of persons making it.

It implies that negative covenants like non-solicitation clauses may be acknowledged as void in case of a contract of employment post-termination between the employer and the employee as these contracts are usually standard form contracts where one party is at an inferior bargaining position as they can either take the employment or leave the employment whereas this might not be the case in partnership agreements as each party here negotiates with the strengths of their positions.[4].

• In GEA Energy System India Ltd. v. Germanischer Lloyd Aktiengesellschaf[5], the dispute was related to an agreement b/w two joint partners. The Plaintiff here sought to prevent the defendant, who terminated the JV agreement, from setting up a similar business in India. The Madras High Court considered it to be partial restraint as the JV agreement didn’t absolutely restrain the defendant from carrying on any business. But, the significant point also considered by the court here in addition to partial restraint to strengthen and validate the plaintiff’s submission was that the JV partners had equal bargaining power and the terms weren’t one-sided.
• Sec 27[6] [of the Indian Contract Act] does not restrict reasonable non-solicitation agreements post-termination of employment. These agreements entered into between the employer and the employee should not hamper the growth of employee but should, however, secure the interests of the employer.

Non-Poaching Agreement

This agreement is executed between two employers in which they consent not to solicit or poach each other’s employees. This agreement accentuates the significance of human resource in the constantly evolving society. Human resource is the backbone of any organization which can rally or derail the progress of any business.

Satisfaction of such resource, especially the highly qualified professionals guiding the direction of business, is usually manifested by the business in the form of high remuneration and various incentives which help them in the realization of their goals. If this human resource is not properly acquainted and provided with the proper amenities required by them, then it might lead to them changing their jobs and consequently affecting the interests of the business. The competitors often lure this human resource through various means, which might foil the progress of the company and affect it badly. To prevent it, businesses often enter into such agreements with their competitors to prevent such mishaps and to carry out their business as flexibly as they can without fear of such allurement or voluntary switching of jobs of the employees.

Non-poaching agreement per se does not violate Section 27 of the Contract Act as it does not limit an employee from seeking and/or applying for any job/employment. What this class of agreement does instead is simply command that one competitor should seek the consent of the other before hiring that other competitors’ employee/s.

In a case[7], the Delhi high court opined that the defendant holding confidential information and data of a bank can’t be an excuse and the veil to curb the defendant’s rights to seek and search for better employment. The injunction, as demanded by the plaintiff, will perpetuate forced employment. It would create a situation of ‘once a customer of plaintiff, always a customer of plaintiff.’ Such agreements would constrict the professional and intellectual freedom of the employees.

The doctrine of restraint of trade does not apply during the employment but comes in the picture after the employment contract comes to an end. In a case[8], it was held by the Supreme Court that a man is entitled to exercise any lawful trade or calling as and where he wills, as long as it is not against public policy or interest. But the court added a rider to it as an exception that when an employee might reveal the confidential information of the previous employer, such clause is justified. 

In a case[9], the Delhi high court held that the negative covenants clause like ‘restriction from engaging or undertaking employment for 12 months post-termination’ perpetuates economic terrorism and creates conditions feasible for ‘bonded-labor.’ Such clauses violate Section 27 of the Indian Contract Act and thereby are unenforceable and void. Interchangeability of service is not an accepted norm of service jurisprudence, and an injunction can’t disallow employee’s right to terminate their contracts. Seeking an injunction was only with the extraneous motive to prevent employees from changing employers. Rights of employees to have better conditions and job opportunities elsewhere can’t be curtailed.

Usually, such agreements are also alleged by the parties to be violative of The Competition Act, 2002 especially, Section 3 which prohibits agreements that are anti-competitive in nature and have adverse effects on competition in India. However, non-poaching agreements usually don’t fall under Sec. 3 because it does not ban lateral hiring, but as a substitute, sets guidelines to be followed in case of such hiring[10]

Conclusion

It is understood that both the individuals and businesses grapple in the competitive environment and try to offset and lever the liability to the maximum possible extent through certain agreements. Here, the law only comes with an iron hand when the protection turns into the exploitation of others, unreasonableness trumps reasonability and affects the fundamental and core interests and rights of others which are highly cherished and guarded by law. Absolute restriction in the economic activities would stand the scrutiny of law and is liable to be quashed whereas partial restriction would stand the tests of reasonability and the doctrine of restraint on trade.

So, ultimately, one can protect oneself without infringing on the rights of others. Adjudication authorities often try to strike a balance between the commercial interests of business as well as economic rights of individuals and arrive at a decision by measuring it on the yardstick of reasonableness, equity, and interests of the affected parties.

Footnotes

[1] <http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Employment_Contracts_in_India.pdf>accessed on 13/6/2016

[2] FLSmidth Pvt.ltd. v M/s.Secan Invescast (India) Pvt.ltd (2013) 1 CTC 886

[3] Embee Software Pvt. Ltd. v. Samir Kumar Shaw AIR 2012 Cal 141.

[4] Wipro Ltd. v. Beckman Coulter International SA 2006 (3) ARBLR 118 (Delhi)

[5] (2009) 149 CompCas 689 (Madras)

[6] See, Sec 27 of Indian Contract Act, 1872

[7] American Express Bank Ltd. Vs. Ms. Priya Puri (2006) IIILLJ 540 Del

[8] Gujarat Bottling vs. Coco-cola company AIR 1995 SC 2372

[9] Pepsi Foods Ltd. and others vs. Bharat Coca-Cola Holdings Pvt. Ltd. and Ors. (1999) IILLJ 1140 Del

[10] <http://www.manupatra.co.in/newsline/articles/Upload/091CA8F9-A438-4323-9170-7BC5182387F5.pdf>accesed on 13/6/2016