Validity of Non-Solicit, Non-Compete and Non-Poaching Agreements

 

Non-Solicit and Non-Compete Agreements are no longer uncommon. In order to protect their interests, employers enter into such agreements with their employees at the time of commencing the employee-employer relationship. This period is such that, the employer is in a position of advantage, and the employees, usually blinded by the light of prospective employment do not peruse their employment contracts even if they do, they do not raise objections to any clauses as their power of negotiation is quite limited. This leads to a situation wherein an employee signs a contract which casts several obligations upon him, some of which usually extend beyond his period of employment. Such obligations are usually in the form of non-compete and non-solicit agreements. Much has been written and said on the invalidity of such clauses, however this has not pushed such agreements out of existence. This article, seeks to analyse the extent to which non-solicit and non-compete contracts may be enforced in the favour of the employer and the manner in which such contracts should be drafted to ensure that they enjoy the protection of law.

A variation of Non-Compete and Non-Solicit contracts are Non-Poaching contracts. Non-Poaching contracts, are entered between employers, who agree to not hire employees of their competitors, unless certain formalities, like serving of notice period, etc. have been completed. The major points of difference in Non-Poaching contracts are that they are executed between employers and they impose no direct restrictions on employees.

The constitution of India affords to every citizen, the right to practice a profession of his choice. The Courts have aggressively protected this right as can be observed through many cases. Capturing the essence of the courts’ stance in such cases, the Delhi High Court stated that, “No employee can be confronted with a situation where he has to either work for the present employer or be forced to idleness.[1] Further, negative covenants which outlast the validity of the contract, do not enjoy the same protection enjoyed by covenants which are valid during the term of the Agreement. Whilst making the choice in protecting employers from competition and protecting the employees right to livelihood, it is only prudent that courts protect the later.[2] However, it is not accurate to say that, the Courts would never afford protection to employers.

The Delhi high court, recognising the employer’s right to protect its business interest, upheld an injunction which restricted a former employee from soliciting the business of his former employer. This judgement demarcates the thin line between the validity and invalidity of non-solicit and non-compete agreements, it may be inferred that, an agreement, wherein an employee is restricted only from soliciting the customers or suppliers of his previous employer, would not be void as it would not render an employee jobless as he would still be free to approach other customers and make a livelihood. Employers need to keep in mind this principle while drafting as well as attempting to enforce such agreements. The restraint present in the contract needs to be present in such a manner that it does not hamper the employees right to employment as a whole.

Whilst, establishing the validity of Non-Compete or Non-Solicit agreements, It would not be sufficient for an employer to prove that he would suffer from competition due to a former employee’s conduct, it must be established that only due to the former employee’s solicitation, the customers of the employer chose to end their relationship with the employer and take their business to the former employee.[3] Additionally, for a restraint to be reasonable in the interest of the parties, it must afford no more than adequate protection to the party in whose favor such restraint is imposed. Even a weak restraint which protects an important interest is unjustifiable if a weaker restraint could serve the purpose.[4] Thus, one primary condition that needs to be met in a non-solicit or non-compete agreement is that, such agreement needs to be reasonable and fair, it should not cover a larger geographical area or be for a time longer than necessary to protect the employer’s interest.

It needs to be proved that such restraint is necessary for the protection of the genuine interests of the employer, for instance, an employer can obtain an injunction restricting a former employee from divulging trade secrets or confidential information, if it can be established that such trade secrets and confidential information are being used by the employee for his own benefit.[5] An employer can prohibit lawfully his employee from accepting an employment wherein he is likely to utilize the information of secret process and trade secrets acquired by him during the course of employment.[6]

As far as Non-Poaching contracts are concerned, In Wipro Limited v. Beckman Coulter International, the contract between the parties prohibited them from soliciting each other’s employees. It was held that this part of the agreement was not affected by Section 27 of the Indian Contract Act as the restrictions placed on the parties, only prohibited them from enticing the other party’s employees to end their current employment and join them and did not place any prohibitions on the employees themselves. Thus, with regard to Non-Poaching agreements, until they prescribe the conditions to be met during lateral hiring, and do not prohibit lateral hiring altogether, they would not be considered as agreements in restraint of trade. Non-Poaching agreements, which prohibit lateral hiring altogether, will also be considered anti-competitive and will be void under Section 3 of the Competition Act, 2002 as they would adversely affect the competition in the market.

While the court has consistently held non-compete clauses to be unlawful to the extent of restraining an employee post-termination of employment, companies seek to enforce tortious interference by the employees and seek injunctions from the court. In the case of American Express Bank Ltd. v. Ms. Priya Malik[7], the court addressed the issue as to whether an injunction can be passed against an employee because of a breach of a non-compete clause. The court observed that a non-compete clause retraining rights of an employee to seek and search for better employment cannot be curbed by an injunction even on the ground that she has confidential data as in the facts and circumstances of the American Express Bank case. While terming non-compete clauses as ‘economic terrorism’, the court in the case of Pepsi Foods Ltd. & Ors. V. Bharat Coca-Cola Holdings Pvt. Ltd. & Ors[8] declared that the freedom and the prospects of the employees cannot be curtailed.

It can be observed that, as far as restraints in employment contracts extending beyond the term of employment are concerned, the scales are heavily tilted in the favor of employees. This is also since, in most cases, the employment contracts drafted are one sided, ignorant of the fact that section 27 of the Contract Act, aggressively protects the right of every individual to pursue any profession, trade or business of his choosing, by declaring every agreement interfering with this right as void. Thus, only employment agreements, which cast a fair restraint on the employee would have a chance of being upheld by the courts.

The important aspects that need to be kept in mind is that, any restraint on an employee which would restrict him from obtaining an employment of his liking after the termination of the contract should be avoided.

The employer has the right to protect his relationship with his customers and suppliers and he can restrain an employee from soliciting business from its customers and suppliers to his detriment. Further, the employer also has a right to protect its trade secrets and confidential information, and thus an employee can be restrained from using the trade secrets and confidential information to compete with the employer or procure any breach of contract by a vendor/supplier/customer.

Employers need to keep in mind that, it is a cardinal principal of common law that those who seek equity must do equity. Thus, employers need to ensure that the restrictions cast upon employees, especially the ones that extend beyond the period of employment are reasonable, fair and in line with the principles set forth above in order to avoid unfruitful litigation.

– Karan Narvekar, Associate

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

[2] Desiccant Rotors International Pvt Ltd v Bappaditya Sarkar & Anr., Delhi HC, CS (OS) No. 337/2008

[3] Embee Software Private Ltd v. Samir Kumar Shaw & Ors. 2012(3) CHN 250

[4] Pollock, Frederick and Dinshaw Mulla, The Indian Contract and Specific Relief Acts. 14th ed. Noida, LexisNexis, 2012.

[5] Homag India Pvt. Ltd. vs. Mr. Ulfath Ali Khan and IMA AG Asia Pacific PTE. Ltd M.F.A.No.1682/2010 C/W M.F.A.No.1683/2010

[6] Pollock, Frederick and Dinshaw Mulla, The Indian Contract And Specific Relief Acts. 14th ed. Noida, LexisNexis, 2012.

[7] American Express Bank Ltd. v. Ms. Priya Malik, (2006) IIILLJ 540 DEL

[8] Pepsi Foods Ltd. & Ors. V. Bharat Coca-Cola Holdings Pvt. Ltd. & Ors, 81 (1991) DLT 122

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