NON-COMPETE CLAUSE IN THE EMPLOYMENT CONTRACTS & SOME IMPORTANT CASE LAWS

 NON-COMPETE CLAUSE IN THE EMPLOYMENT CONTRACTS & SOME IMPORTANT CASE LAWS

Non-compete clauses are still very much part of employment contracts in India, despite being unenforceable under the law.

In April 2024, the US Federal Trade Commission banned such clauses for US workers.

WHY NON-COMPETE CLAUSE IS

 INSERTED IN THE EMPLOYMENT

 CONTRACTS IN INDIA?

Non-Compete clause typically restrict an employee’s ability to join a competitor for a certain period after quitting and are aimed at preventing employees, predominantly those at the top level, from joining with the business rivals. Companies also say such clauses are needed to ensure security of company’s data, trade secrets , its customers being attracted by their competitors.

Companies allege non-compete clauses are against the provisions of Indian contract Act.
It is argued that non-compete clauses keep wages low, suppress new ideas, and rob the Indian economy of dynamism.

DATA PRIVACY

Industries where non-compete clauses are more

 .prevalent include information technology (IT), IT-

enabled services (ITeS), tech, finance, healthcare

 and professional services where employees often

 deal with sensitive information, client

 relationships and there’s intense competition for

 talent. Of late, it has spilled over to micro, small

 and medium enterprises (MSMEs) as well.

A primary goal for including non-compete clauses is to safeguard proprietary information, protect trade secrets and intellectual property.

INDIAN CONTRACT ACT

Section 27 of the Indian Contract Act  1872

 prohibits agreements that put  restrictions on

  trade. Article 19(1)(g) gives every citizen of India

 freedom of trade and profession.

NIRANJAN SHANKAR GOLIKAR VS

. THE CENTURY SPINNING COMPANY

However, in the landmark case of Niranjan Shankar Golikar vs. The Century Spinning Company , the Court started acknowledging the non-compete clause by introducing the concept of ‘the rule of reasonableness’.

IMPORTANT CASE LAWS ON NON-

COMPETE CLAUSE

Superintendence Company of India (P) Ltd. vs. Krishan Murgai (1980)	Supreme Court of India underscored the significance of upholding the delicate balance between an employer’s legitimate business interests and an employee’s fundamental right to pursue their chosen profession. This landmark judgment set a significant precedent, establishing the principle that non-compete clauses must be tailored to strike a fair balance between the employer’s need for protection and the employee’s right to pursue their livelihood. In this case , an employee was restricted from working with competitors in Delhi for two years post-employment. The Supreme Court held such a restraint as void and unenforceable.
Percept D’Mark (India) Pvt. Ltd. vs. Zaheer Khan & Anr (2006)	Whether the non-compete clause for the period of 3 years was valid under Section 27 of the Indian Contract Act of 1872. The Bombay High Court held that a non-compete clause that prevented a cricketer from endorsing any competing brands of the company for three years after the expiry of the contract was valid and enforceable. However , in 2006, Supreme Court refused to enforce non-compete clause that prevented prominent Indian cricketer Zaheer Khan from joining their rival for a specific period after the agreement ended.
Orchid Pharma Ltd.  vs. Hospira Healthcare Pvt. Ltd. (2019)	In this case, Competition Commission of India (CCI) observed that a non-compete clause should be reasonable in terms of the duration, the scope, and the geographical area of the restraint, so as to ensure that it does not result in an appreciable adverse effect on competition.
Diljeet Titus, Advocate vs. Alfred A. Adebare and Ors.2006	The Delhi High Court held that sensitive workplace information can be covered even during the post-employment period.
Niranjan Shankar Golikari vs. The Century Spinning and Manufacturing Co. (1967)	The Supreme Court held that a negative covenant during the period of employment  when the employee is bound to serve his employer exclusively are not to be regarded as restraint of trade and do not fall under Section 27 of Indian Contract Act.
𝗪𝗜𝗣𝗣𝗥𝗢 𝘃𝘀. 𝗖𝗢𝗚𝗡𝗜𝗭𝗔𝗡𝗧 𝗧𝘂𝘀𝘀𝗹𝗲	After a 20-year-long career at Wipro, Jatin Dalal moved to Cognizant (Wipro’s IT rival) as their CFO in September 2023. Wipro filed a lawsuit against Dalal for breaching the non-compete clause in his employment contract. Wipro sought from Cognizant ₹25 crore in damages for the contravention of Non-Compete clause. Wipro argued that Dalal’s new role at Cognizant, a direct competitor, would inevitably involve using sensitive information acquired during his tenure at Wipro. Dalal’s legal team pushed for arbitration, and the parties settled recently as Cognizant paid Rs 4 Crores to Wipro.

INFOSYS STAND ABOUT THE CLAUSE

Infosys has called the clause a standard part of employment contracts in many countries in which it operate. They are added to protect client confidentiality and safeguard other legitimate business interests. Infosys has justified the contentious clause. It says this is a standard business practice in many parts of the world to protect confidential information. It also says such controls are needed to protect the “confidentiality of information, customer connection, and other legitimate business interests.”

Infosys also pointed out that the conditions are fully disclosed to all job aspirants before they decide to join Infosys. They do not have the effect of preventing employees from joining other organizations for career growth and aspirations, the software major claims.

CONCLUSION

In Cognizant Vs Wipro case , how a confidentiality clause will protect everything from trade secrets to customer lists for an employer.If the other party begins competing against you unfairly, you can rely on the contract to seek injunctive relief to stop the behavior.

The governing body for non-compete clauses is Section 27 of the Indian Contract Act of 1872, which says that every agreement is void if it’s restraining someone from exercising a lawful profession, trade or business. However, non-compete clauses are mutually agreed upon and allowed in some exception cases. Therefore, it can be concluded that non-compete clauses require a balanced approach to save the interests of both the employer and employee.