Employers often incorporate a Non-compete clause, and other restrictive clauses such as non-disclosure and non-solicitation, in the employment agreement to grow their business and protect their confidential information and trade secrets.
By putting the non-compete clause in the employment agreement, an employer intends to prevent an employee from performing the following activities after leaving the company:
- Starting a competing business or advising a family member or relative, who is in a similar line of business
- Joining a competitor company
Upon a breach of the non-compete clause, the employer may seek advice on the legal recourse.
However, Indian courts prioritize the protection of rights of an employee seeking employment over protecting the interests of the employer trying to protect itself from the competition.
Courts have generally held that the right to livelihood of the employees must prevail over the interests of the employer, in spite of an existing agreement between the employer and the employee.
Further, Courts consider any form of post-employment restraints as limiting the economic mobility of employees and their freedom of choice of work and livelihood.
Such restraints would be unfair to employees as they would be prohibited from using their enhanced skills, more knowledge, and increased expertise to advance the industry further.
While determining the validity of non-compete or other restrictive covenant in the employment contract, courts consider various factors such as the bargaining power of each party, the reasonableness of restrictions, time, place and manner of restriction, etc.
Here are some examples of court cases in India for disputes about non-compete clauses:
Kumar Apurva v. Valuefirst Digital Media Pvt. Ltd. at the Delhi High Court
The company filed a lawsuit against the former CEO for violation of non-compete and non-solicitation clauses in employment contract as well as Share Holder Agreement (SHA) for the equity given to him.
The court, upholding the decision of the Arbitral Tribunal, restrained the CEO from carrying any activity which is competitive to that of company, and also from soliciting, interfering with, disturbing or attempting to disturb the relationship between the company or subsidiary and third party, including any customer or supplier of the company or subsidiary.
Earlier, the Arbitral Tribunal, which the CEO approached against the company, observed that
- SHA is not a contract between the employer and the employee but between the CEO, promoters, and investors of the company.
- The non-compete clause in SHA do not amount to restraint of trade and would not be hit by Section 27 of the Contract Law
- As long as SHA continues, the non-compete (and non-solicitation) clause would continue to bind the CEO
Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan & Anr at the Supreme Court of India
The Supreme Court held that
- a restrictive covenant extending beyond the term of the contract is void and not enforceable
- the doctrine of restraint of trade does not apply during the continuance of the contract of employment, and it applies only when the contract comes to an end
- the doctrine of restraint of trade is not confined to contracts of employment but is also applicable to all other contracts
Ozone Spa Pvt. Ltd. v. Pure Fitness & Ors. at the Delhi High Court
The court restricted the defendants from establishing, running or setting up any competing business in an area that falls within a range of 4 kilometers from the premises of the Plaintiff.
Although, Section 27 states that all agreements in restraint of any profession, are void, so long as an employee does not have the motive to cheat, mistrust or cause irreparable loss to the company, trade or business.
Hence, reasonable restraints are permitted, and they do not render the contract void.