Analysing Restraint of Trade: Navigation of non-solicit clauses in contemporary employment contracts

Introduction : The most significant asset for any company, in the knowledge governed economy, is human capital. The loss of key employees not only leads to talent loss but also diverts customers in a direction away from the company. Originally, a lot of emphasis was put on non-compete clauses to defend their presence in the market post the termination of key personnel. However, with a strong statutory and judicial response towards such non-compete clauses, the evolved mechanism for ensuring stability and goodwill for a company, are non-solicitation clauses. 

Despite the commonness of non-solicit clauses these days, the fact that these have led to considerable litigation cannot be ignored. The most debated question put forth in this concerns the balance between the right of an employee to carry out trade/profession of choice with the right of the employer to protect trade secrets and shield the customer base. This blog aims to engage in a meaningful discussion on non-solicit clauses in employee agreements, while emphasizing on the statutory framework, judicial precedents, drafting challenges as well as strategies for the same. 

Legal Provisions

Indian Contract Act, 1872

The primary provision that deals with restrictions imposed on an employee post termination of services, is Section 27 of the Indian Contract Act, 1872. The provision elucidates upon the principle that any agreement that restricts an individual to carry out a lawful profession, trade, business, shall be void to the extent of such restriction. The sole exception provided within the provision itself, is the sale of goodwill. 

This leads us to an understanding that the Indian law considers post termination non-compete clauses as void per se, without diving into whether the restriction has any element of reasonableness or not. Unlike India, many jurisdictions use a ‘rule of reason’ approach to evaluate the correctness of geographic or temporal restrictions that non-compete clauses may impose. To summarize the Indian law on post-employment contracts, the same is clear in terms of negative response towards the same.

International Perspective : Common law countries like UK and many US state jurisdictions view both non-compete and non-solicit clauses from the lens of the doctrine of reasonableness. Such a clause attains enforceability when the courts believe that the same is needed for safeguarding business interest and if it is not in violation of public interest of any kind. 

However, upon an analysis of the regulatory trends globally, one may lean towards the understanding that banning of post-employment non-compete clauses is the choice for most countries. The sole reason for the same is labour flexibility in the market. But the question to be addressed here is, how do business protect legitimate interests in jurisdictions where non-compete clauses are statutorily or administratively prohibited? The answer lies in non-solicit clauses, which serve as a recourse for companies to protect themselves while not imposing a blanket prohibition on employees’ fundamental right to work.

Legal Analysis

Difference between non-compete and non-solicit clauses

Unlike non-compete clauses, non-solicit clauses do not address competitive employment. The former restricts a terminated employee from joining hands with a competitor or with setting up a competitive business by himself. The latter, on the other hand, only restricts the employee from engaging in active soliciting of the current employees or clients of the concerned organization. This serves as an alternative to non-compete, given that the same is prohibited in the Indian jurisdiction in the form of an express statutory provision. 

Judiciary in India, has clearly made out a difference between the two, that is, a complete ban on trade (non-compete) and a targeted restriction (non-solicit). Non - solicit clauses are, ordinarily, not included within the ‘restraint of trade’ provisions under the Indian contract Act, 1872, and thus are technically legal in the country. This is, however, subjected to the idea that such clauses shall not be an implicit way of pushing the employee into unemployment, something that the non-compete clauses were prohibited for. 

Scope, Duration, Judicial Scrutiny

The evaluation of post-employment non-solicit clauses relies on certain key factors. These include the following:

• Scope: Non-solicit clauses that are drafted broadly to prevent contact from any employees and clients irrespective of the fact whether the concerned terminated employee has, during the period of employment, engaged with or managed them in any manner, are usually considered invalid by the courts. As per the Indian judiciary, there needs to be a direct relationship between the concerned employee’s duties and the clients or the co-employees.

• Duration: The primary aim of such clauses is the ensure that sufficient time has been acquired by the company to regain stability and smoothly transition business relationships. The duration of non-solicit clauses must reflect this aim. Ideally, such clauses which impose restrictions for a period ranging from 6 to 12 months are considered as viable in the eyes of law. However, when the same restriction extends to a number of years, then the restriction may come within the purview of Section 27 of ICA.

• What constitutes Solicitation: One of the most crucial aspects of interpretation of these clauses is the distinction between active solicitation and passive hiring. The former is what constitutes a violation of such a clause. An illustration of the latter may be when a former co-worker approaches the departed employee about his new business. Here, since there has been no prior inducement or targeting on part of the ex-employee, such conduct shall not be brought within the understanding of a breach or violation of a non-solicit clause.

Evidentiary and operational challenges with case laws

Disputes associated with non-solicit clauses come with a series of challenges especially in terms of proof of the breach. The primary aspect which the employer needs to establish is active enticement or persuasion on part of the ex-employee to take away clients and co-employees. Only upon the proof of such activity, the employer gets entitled to injunction or damages as relief. It is pertinent to note that the mere employment of the co-workers of a terminated employee at a parallel new firm, may not always constitute a violation of such clauses. 

Moreover, courts have time and again p\reiterated that restricting the ex-employee from using the skill and experience gained by him throughout the employment period, may go against the fundamental right to work. Therefore, the courts are inclined to choose and support employee transition over such restrictive clauses unless and until the employer has been able to prove conduct including use of confidential client lists, or trade secrets of the company, or gain access to databases etc.

Relevant Case laws

1. Niranjan Shankar Golikari vs Century Spinning and Manufacturing Company Ltd., 1967 SCR (2) 378: The case holds importance in distinguishing between restrictions imposed on employees during and post the termination of employment. The Supreme Court clarified in its judgment that the negative clauses operating while the employment subsists, shall not attract the applicability of Section 17 of the Indian Contract Act, 1872 unless these are solely one-sided and completely disadvantageous to the employee. 

2. Percept D’Mark (India) Pvt. Ltd. vs Zaheer Khan & Anr., AIR 2006 SC 3426: The principle of Section 27 of ICA extending to all restrictive clauses post the termination of an employee, was reiterated by the Supreme Court in this case. The Court clarified that restraint of trade is confined to the employment obligations only and any such clauses leading to the same post employment shall not be enforceable.

3. Desiccant Rotors International Pvt. Ltd. vs Bappaditya Sarkar & Anr. 2009 SCC OnLine Del 1926: In a landmark ruling of the Delhi High Court, the non-solicit clauses were expressly held to be enforceable and not in the nature of restraint of trade. The court confirmed that non-compete clauses, post-employment, are not enforceable for their nature restricting trade, but non-solicit clauses cannot be treated in a like manner.

4. Wipro Ltd. vs Beckman Coulter International SA, 2006 (131) DLT 681: Addressing the extent of enforceability of non-solicit clauses, the Delhi High Court held that it is important to read such clauses in context. The clauses of such nature which are included in the employment contract need to undergo strict scrutiny so as to ensure that the right of work of the employee is not getting unduly restricted.

Practical implications

The judiciary’s approach towards non-solicit clauses have introduced to us certain considerations from the perspective of both the employee and the employer, these include:

For Employee: It is very important for a terminated employee to engage in a thorough check of the nature of non-solicit obligations that need adherence before engaging in any new venture independently or with a competitor. This is relevant to understand what may be permissible, for example, general outreach on professional platforms may be viewed with neutrality and hence allowed by such clauses, but targeted outreach to some clients in specific may trigger a violation of the imposed obligation.

For Employer: It has been observed throughout that the court’s approach towards the clause depends on the scrutiny of how restrictive it is. Thus, from the viewpoint of an employer, it may be extremely important to ensure that the drafting of the clause is not so broad that it starts acting as a non-compete clause within the definition of Section 27. Companies need to maintain a balance between reasonableness of such clauses along with stricter confidentiality norms including Non-Disclosure Agreements to safeguard their crucial information.

Conclusion

It may be conclusively understood that non-compete clauses remain unenforceable in India as well as across many jurisdictions in the world. Thus, the recourse that organizations choose to protect the company goodwill and crucial data relies on the usage of non-solicit clauses. Since both these clauses come within the scrutiny of Section 27 of ICA, it becomes important for the employer to realise that the drafting of such clauses need careful consideration.

Drafting Suggestions:

1. Express definition of “solicitation”: Since this is the point that makes or breaks a case of breach, it is very important to clearly lay down what conduct may or may not constitute as solicitation.

2. Specification of temporal and geographic limitations: The most important aspect of such a restriction is in mentioning a reasonable timeline to which such restriction extends along with a specific geographic area to whose markets such restriction extends to.

3. Express mention of targets: To tailor the scope of such a clause, it may be relevant for a company to expressly define the clients that the employee had direct professional relationship with and the employees that were directly under his supervision, over the past 12 months of his employment with the company 

4. Insertion of a severability aspect: This is important to preserve the non-solicit clause while allowing the court to strike down any overly broad aspect of the clause or to modify the same to some extent. 

5. Place the Clause strategically: Non-solicit clauses shall be placed with the other section of the agreement dealing exclusively with confidentiality and trade secrets so as to reinforce the idea that the objective of the clause is to protect crucial organization data.

Author: Sanskriti Bishnoi in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

End Notes

1. Indian Contract Act, 1872, s. 27.

2. Niranjan Shankar Golikari vs Century Spinning and Manufacturing Company Ltd., 1967 SCR (2) 378.

3. Percept D’Mark (India) Pvt. Ltd. vs Zaheer Khan & Anr., AIR 2006 SC 3426.

4. Desiccant Rotors International Pvt. Ltd. vs Bappaditya Sarkar & Anr. 2009 SCC OnLine Del 1926.

5. Wipro Ltd. vs Beckman Coulter International SA, 2006 (131) DLT 681.

6. E-merge Tech Global Services Pvt. Ltd. vs M.R Vindhyasagar, C.S. No. 258 of 2020, High Court of Judicature at Madras.

7. Hi-Tech Systems & Services Ltd. vs Suprabhat Ray & Ors., AIR 2015 Cal 26.

8. Modicare Ltd. vs Gautam Bali & Ors., 2019 SCC OnLine Del 10511.