Living in a fool’s paradise - non-compete and non-solicitation clauses in an employment contract.

In my previous article I wrote about the dispute between Nykaa Fashion and their former Chief Business Officer Gopal Asthana. In its arbitration petition, Nykaa has not only alleged breach of confidentiality but also alleged that employees of Nykaa were poached by Gopal Asthana to work with the rival competitor Tata Cliq.

In most employment contracts, the employer will stipulate that after termination of employment, the employee for a period of 6 months / 1 year will not take up employment with a rival competitor or will not set up a business in competition with the employer. There will be another clause which stipulates that the employee will not poach or divert the employer’s clients and entice employees to leave the employer.

The question therefore is this: What is the worth of non-compete and non-solicitation clauses in an employment contract?

Whenever someone makes available a superior product or service which is in high demand and profitable, there are others who seek to emulate the product or service. Success attracts competition. Any new entrant in the market, to be able to create a niche for itself, has to compete with the existing players, by approaching the same customers and the same set of employees who have expertise in that particular field. Non-compete and non-solicitation clauses in employment contracts are inherently anti-competition. These clauses are inserted by employers in the fond hope and belief that the employer’s business will be protected and that any breach by an employee can be prevented by approaching a court of law.

At the time of exit from employment, an employee need not quake in her boots when she is threatened with the enforcement of a non-compete or no-solicitation clause. Courts in India have while interpreting such clauses have relied upon Section 27 of the Indian Contract Act and repeatedly held that they are void as they are agreements in restraint of trade.

Section 27 of the Indian Contract reads as under:

"27.    Agreement in restraint of trade, void. - Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

  Exception 1. - Saving of agreement not to carry on business of which goodwill is sold. - One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the Court reasonable, regard being had to the nature of the business."

 The Hon’ble Bombay High Court in Taprogge Gesellschaft MBH v. IAEC India Ltd. AIR 1988 Bom 157  has held that Section 27 of the Contract Act  is enacted as a matter of public policy of India, and does not create any personal right, which can be waived. In Jet Airways (I) Ltd. vs Mr. Jan Peter Ravi Karnik 2000(4)BOMCR487, the facts disclosed that airline pilots employed with Jet Airways left their employment and joined the services of Sahara Airlines. The Hon’ble Bombay High Court rejected the application for injunction interalia on the ground that the restriction is unconscionable, one sided, unreasonable and not for the protection of any proprietary interest of the employer.

Here is some of the relevant case law:

-        M/s Gujarat Bottling Co. Ltd. & Ors vs The Coca Cola Co. & Ors AIR 1995 SUPREME COURT 2372

-        Percept D'Mark (India) (P) Ltd. Vs. Zaheer Khan (2006) 4 SCC 227

-        Wipro Ltd. v. Beckman Coulter, 2006 (2) CTLJ 57 (Del)

-        Embee Software Pvt. Ltd. v. Samir Kumar Shaw & Others, AIR 2012 Cal 141

-        Navigators Logistics Ltd. vs Kashif Qureshi & Ors - AIRONLINE 2018 DEL 1483

-        Manipal Business Solutions Private Ltd vs Aurigain Consulants Private Limited - I.A. 9496-9497/2022, IN CS(OS) 190/2022 – Delhi HC

However, there is an exception. So long as the employee has contracted to work for a fixed term/period, she must during the contracted period refrain from leaving her employment and taking employment with a competitor. The Supreme Court, in Niranjan Shankar Golikari Vs. Century Spinning & Manufacturing Co. Ltd. AIR 1967 SC 1098 was concerned with a suit for injunction to restrain the employee, who had agreed to serve the employer for a fixed period. In the facts of that case, it was found that the employee was privy to the special process invented / adopted by the plaintiff and of which the employee was trained and had acquired knowledge. The employee who had left employment prior to the contracted period was thus restrained from joining employment of a competitor for the remaining period for which he had contracted with the plaintiff in that case.

On cessation of employment, an employee is free to take up employment with anyone. The expertise, knowledge and skills of an employee are obviously more valued by a competitor of the former employer. There are additional difficulties with regard to non-poaching of clients. Irrespective of whether an ex-employee has poached a customer or not, a customer is well within his rights to favor any one with his business and cannot be compelled to be a customer for life of only one entity. It goes without saying that healthy competition and market forces will determine the choices made by clients and employees and not restrictive clauses of non-compete and non-solicitation.

-        Advocate Sandeep H. Parikh