Non-solicitation in employment agreements: Understanding enforcement issues and pitfalls

Restrictive covenants have become a vital part of standard employment contracts in India. Restrictive covenants usually consist of non-solicitation, non-compete and confidentiality clauses. These covenants are essential for any employment contract where the employer is seeking to safeguard vital trade secrets, business interests and confidential information to ensure that the employer can stay competitive after the exit of such employee.

Indian courts have been careful in scrutinizing such restrictions in employment contracts and generally hold restrictions which force an employee to either work for the present employer or be forced to idleness to be in restraint of trade under section 27 of the Indian Contract Act, 1872 (“Contract Act”). This has led to courts striking down post-termination non-compete clauses, including garden leave clauses for short periods of three months as void under section 27 of the Contract Act. On the other hand, courts have been more amenable towards enforcing non-solicitation clauses in order to safeguard trade secrets and protect confidential information of business owners.

The Delhi High Court, in a recent judgement of M/S. MGI (India) v. M/S. International Design and Engineering Solutions, upheld the enforceability of a non-hire clause in a consulting agreement between two companies. The court followed its own reasoning laid down in Wipro Limited v. Beckman Coulter International SA, which held that non-solicitation clauses between two companies or competitors have to be construed liberally, rather than as a restriction in an employer-employee contract. This indicates that courts tend to uphold stand-alone non-solicitation clauses between two parties who are on more or less an equal footing.

However, in cases involving enforcement of non-solicitation clauses in employer-employee contracts, courts have been far more cautious in granting injunctive relief. Courts have tended to provide injunctive relief against ex-employees when the ex-employees have not only solicited the clients of the employer but also breached obligations pertaining to confidentiality, non-disclosure of trade secrets or infringement of intellectual property rights. In the case of Hi-Tech Systems & Services Ltd. v Suprabhat Ray and Ors., the ex-employees had set up a competitive business and were utilising the confidential information and trade secrets of the ex-employer to solicit clients for their business. The Calcutta High Court restrained the ex-employees of a company from enticing existing customers and clients of the company to breach their contracts with the company.  The court further held that the ex-employees could carry on a competitive business provided that they did not utilize any confidential information or trade secrets of the ex-employer.

More recently, the Madras High Court, in E-merge Tech Global Services v.  M.R. Vindhyasagar, awarded damages to an ex-employer and restrained the defendant, who was an ex-employee, from soliciting business from the clients of the employer. It was further held that the defendant had breached the non-solicitation and confidentiality obligations and that the defendant had used the goodwill and relationship developed with the primary client of the employer to float his own company. This resulted in the ex-employer suffering major losses as the client solicited by the ex-employee was the principal source of revenue for the ex-employer.

The approach of the Madras and Calcutta High Courts shows a tendency to balance concerns for freedom of trade and employment against protection of trade secrets and business interests. It also raises questions specifically in regard to start-up founders – if a person leaves employment to start a competitive business, can such person be absolutely restrained from soliciting clients from his/her ex-employer? Moreover, can clients be restricted from approaching such an ex-employee if they have an already established contractual and business relationship with the ex-employer?

Courts have recently begun to address this issue. In reaching the opposite decision to  the Hi-Tech Systems case, the Delhi High Court, in the case of Modicare Limited v. Gautam Bali, held that unlawful interference with business or enticement to commit a breach of contract with a plaintiff is not enforceable in a court of law, neither contractually nor involving the law of tort.

This was further reiterated in Manipal Business Solutions Private Limited v. Aurigain Consultants Pvt. Ltd. The court in this case vacated an injunction order which had restrained the ex-employees from carrying on any business in violation of a non-disclosure agreement that prevented from soliciting any present or prospective client of the employer.

The court held that “any new entrant in the market, to be able to create a name and niche for itself, will have to compete with the existing prayers by approaching the same customers and the same cache of employees who have gained knowledge and experience in the field concerned.” The court in the same case further stated that,

“...no line can be drawn between such employees/customers approaching the new entrant and the new entrant approaching them. It would be virtually impossible to determine what caused the breach of the existing contract between an employee and his employer, for him to enter into a new contract with the competitor, i.e., whether it was on his own volition or on being enticed by the new entrant.”

This shows that in the absence of a breach of confidentiality clauses, trade secrets or infringement of intellectual property rights, courts generally refrain from enforcing non-solicitation clauses against ex-employees. Even in the cases where breach of confidentiality is alleged by an employer, the mere inclusion of customer or client names within confidential information is not sufficient. The courts may look into the nature of obtaining and creating such customer databases and whether it was obtained through skill and judgement so as to warrant its nature to be ‘confidential’ and whether the ex-employee has utilised such confidential information to the detriment of the employer. Hence, from the perspective of employers, non-solicitation clauses have to be drafted with specificity and clarity with respect to clients and employees to ensure their enforceability. This would require the inclusion of the main or specific clients of the employer whose loss is likely to cause irreparable damage to the employer, in accordance with the decision of the Madras High Court in E-merge Technologies v. M.R. Vindhyasagar. Employers should also be careful about including excessively broad non-solicitation agreements that prohibit the employee from approaching any client of the employer. It is now settled law that such a clause is liable to be struck down for being in restraint of trade under section 27 of the Contract Act.

Non-solicitation clauses can have positive effects in protecting the business interests when enforced between business competitors. However, in the case of employer-employee contracts, they can often pose a hurdle for potential start-up founders seeking to build a business after leaving employment. In this context, the recent jurisprudence of the Delhi High Court has become a boon for future start-up founders and a bane for current employers. While employees can benefit from getting free of overly broad restrictive non-solicitation and non-compete clauses (since they are held to be void for being in restraint of trade), employers have to be careful while drafting non-solicitation clauses. The analysis of judicial precedents on the issue indicates that courts will generally refuse injunctions for enforcing non-solicitation in the absence of breach of confidentiality, trade secret or infringement of intellectual property rights.  Even when breach is shown, courts are likely to grant injunctive relief only in the event the employer proves that the balance of convenience is in its favor. The court may still award damages even where injunctive relief is not granted based on the facts and circumstances of each case. The approach of the Delhi High Court, especially in the Modicare and Manipal Business Solutions cases, shows a willingness of courts to ensure market competitiveness and entry of new players in the market. The developing jurisprudence on the limitation of broad restrictions on post-termination non-solicitation clauses is thus beneficial for both customers as well as new businesses entering the  market.

About the authors: Ritika Ganju is the Managing Partner of Rise Legal. Milind Sharma is an Associate at the Firm.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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