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News article23 June 2022

Employee obligations in India: Confidentiality obligation and non-competition

The modern globalised society offers, for an ever-increasing number of employees, the opportunity to move from job to job more regularly than ever before. Workers change companies, move to another country, return to their first job, etc… Simultaneously, our world has become a society of information, and data as information, knowledge and know-how is now the gold of the 21st centuries, in many cases being more valuable for a company than material goods.

These two evolutions in our modern society raise issues related to the treatment of information obtained by employees during their employment, specifically regarding their obligations of confidentiality and that of non-competition imposed onto them when they eventually move on to another job. It is important that European SMEs be aware of the stake of these issues and their relevance in our today’s society. The management of these are essential in order to protect the employer’s business and to promote competitiveness within society. Indeed, having an ex-employee disclose a company’s confidential information or competing against it using confidential information gained during his or her employment can be highly detrimental to its survival and development.  

It must be pointed out that the Indian legislation concerning these clauses differs on some points from the European approach, although the European approach to these topics is not fully harmonised. EU SMEs interested in conducting business in India – either by having a local presence in India or working with Indian partners – must be aware of the differences between India and European laws in order to ensure that their interests are duly protected.

 

The “restraint of trade” doctrine in India

First of all, it is important to know that the questions of confidentiality obligations and non-compete clauses imposed upon ex-employees are dealt with under the “restraint of trade” doctrine in India. According to this doctrine, each individual should be free to follow his trade and use his skills in a legal manner without interference from others.

Thus, according to the Indian Contract Act S.27, contractual terms that restrict an individual’s freedom to work for others or carry out his business is considered void if it is unreasonable. Such restriction includes barring a person from creating a business in a particular field, or working in the same field as the employer within a certain geographical area for a set period of time after that person has left the employer’s services.

One of very limited exception however is in the case of a business owner selling his firm along with its goodwill. The goodwill reflects the accumulated business reputation, what makes clients come back to a business, so it is earned over time in the course. This effectively means that Indian law allows restraints of trade to stop individuals from selling a business to then set up direct competition.

 

Restraint of trade and employees in India

During employment, non-compete and confidentiality obligations are both legal and enforceable because they are not considered a restriction of trade: the employee is not barred from doing his work, though he is restricted in the sense that he may only be doing it as part of his employment.

However, once the employee has left a company, things are different.

First, non-compete clauses are prohibited after the term of employment. While non-compete clauses are permissible during the time of employment – which seems quite logical as they are not considered “restraint of trade” – Indian law does not accept the validity of such restrictions once the employee-employer relationship has ended.

In that case, the employer must be attentive to not insert in the employment contract this type of clause coming into effect after the end of employment because they run the risk of being ineffective.

On the other hand, confidentiality obligation which extend beyond the time of employment may be enforceable, as long as the covenant does not restrain the employee from engaging in his trade or profession. Certain elements must be kept in mind in order to ensure such covenant is legal and enforceable. Firstly, the information subject to the confidentiality obligation must be clearly identified and defined in the agreement: it should not be general and its characteristics must be known. Furthermore, the information must be secret, that is to say it should not be easily accessible to the general public and cannot be freely used without specific access and consent from the company holding the information. Finally, this information must be relevant in the sense that it concerns the company’s business and have commercial value.

 

How this doctrine is applied to obligations imposed upon employees and ex-employees

These rules can be illustrated by two cases which were decided before the High Courts of Karnataka and of Bombay that deal with the legality of both of these clauses in the employment contract.

In the case of Vfs Global Services Private v Mr. Suprit Roy, (2007), Mr. Suprit, in his employment contract was prohibited from working with any of his employer’s competitors or to begin a new business during the period of employment and up to two years after the end of employment. Mr. Suprit also had the obligation to maintain specific confidential information that only Vfs Global Services (his ex-employer) possessed. After some years of work at a position in which he had access to some of the Vfs Global Services’ sensitive trade information, he resigned. However, his ex-employer brought a legal action against him because, according to him, he had disclosed company’s’ confidential information to competitors and had solicited customers and employees once he had left for his own gain.

First, the judge made clear that a clause prohibiting an employee from disclosing commercial or trade secrets is not in restraint of trade. So, he did grant and injunction against Mr. Suprit to restrain the ex-employee from divulging any confidential information.  He took this opportunity to reaffirm the required content of NDAs for them to be enforceable: the information must not be secret, it must be defined precisely and its characteristics must be known. Since all of these elements were satisfied in this case, the judge held that the covenant against the ex-employee was enrorceable.

Second, concerning the non-compete clause, the judge held that obstructing an employee who has left the service from obtaining employment anywhere is not fair and proper, including in the context of a garden-leave clause. In fact, in the event a restriction is for a duration extending beyond the contract period, such restriction will not be enforceable and void.

 

In the second case, Homag India Private Ltd v Mr Ulfath Ali Khan (2012), Mr. Ulfath joined the Homag Company and had access to confidential information concerning customers (he was aware that this information was secret and valuable to his employer). After some years he decided to resign. The issue was that it was discovered that during the time he was working for Homag Company he sent various emails to its competitor, IMA AG Asia Pacific society which contained at least some confidential information held by Homag Company. Furthermore, M. Ulfath had signed an employment contract with this IMA AG before had resigned from Homag Company.

The reasoning of the judge is of particular interest because, according to him, Mr. Ulfath had every right to approach his employers’ competitor but was not allowed to disclose confidential information as it was detrimental to the interest of his employer. Furthermore, the judge stated that Mr Ulfath also had every right to work for a competitor once his term of employment with his previous employer had come to an end, and there was nothing Homag India Private Ltd could do about this specific point. In this case as in Vfs Global Services Private v Mr. Suprit Roy, while confidentiality clauses were found to be enforceable, non-compete clauses were not.

 

These cases illustrate the enforceability of confidentiality agreements and the way in which Indian law differentiates between an employee’s responsibility towards his employer to maintain confidentiality of a company’s trade secrets, and his liberty to work with or for another company of his choosing once he has left employment.

This is somewhat different the European framework EU SMEs are used to. EU SMEs should know that while the best practices they are used to follow in Europe are valid in India regarding confidential information, they may not be so when it comes to non-compete clauses. The main difference with the legislation of India is that, in Europe, non-compete clauses are generally authorised (to a limited extent) both during and after the employment contract.

 

Conclusion

While the need to deal with matters related to confidentiality and access to sensitive information is clear for European SMEs wherever they are working, they must be aware of the differences between Indian and EU legislation in order to manage risks in the best possible way and prevent potential problems with ex-employees.

The essential points to keep in mind in this respect are the following:

  • First, the importance of the redaction of the confidentiality clauses within employment contract, which must precise and rigorous. 
  • Second, during the course of employment non-compete clauses are legal and enforceable, whereas after employment they are illegal in India. 
  • Third, confidentiality clauses are legal as long as they do not hinder the exercise of one´s profession. 

 

Protecting confidential information for SMEs: Best Practices

In the light of the above, this is a good opportunity to remind some best practices which EU SMEs seeking to grow internationally (and locally as well – trade secrets know no barriers).

First and foremost, companies must identify the valuable information which they hold and treat them accordingly by ensuring their confidentiality.

Secondly, they should implement an internal policy regarding confidentiality with various tools in order to protect information that is needed to preserve competitive advantage. All people with access to this information should be identified. Both technological protection measures and/or contractual measures can and should be set up:

  • concerning technological protection, SMEs should put in place relatively simple mechanisms such as password or automated control to enable security personnel to trace any additions or changes back to the originator. They could store trade secrets where access is allowed under authorization only for the personal that needs to know or create employee’s badge policy to restrict access to specific areas. It would also be wise to make use of anti-virus, anti-spyware software system and to apply a clean desk policy.
  • concerning contractual measures, SMEs could redact various agreement like confidentiality, non-compete or non-solicitation clauses when possible and relevant. These clauses decrease the risk of disclosure of confidential information, safeguard it in order to prevent the consequences that may stem from the departure on an employee or be sure that an employee agrees not to solicit a company’s clients or customers for his own benefit or for the benefit of a competitor after leaving company.

When it comes to contractual tools such as NDAs, it should not be forgotten that some conditions are required concerning the form (written form and the activity must be specific and restricted) and the content (indication of a specific geographical limitation, of the length…) Likewise, it is advisable to include in the agreement a clause regarding remedies in case of breach in order to protect the employer with financial penalties or judicial actions to make enforcement easier. 

A final aspect is particularly relevant: the good management of these protection tools. Companies should establish internal administration procedures in order to raise awareness amongst its workers about the importance of protecting confidential information and their obligation regarding their employee in this respect. Indeed, employees should be informed about the company’s trade policy, they should know how to act both inside and outside the company and be reminded of their confidentiality duty once they leave the company. Failure to do this could seriously hamper the effects of any of the above-mentioned measures. 

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Publication date
23 June 2022