How enforceable is your Non-Compete clause?

By Himanshu Joshi, for Legal Corner LLP. Himanshu is a final year student of NALSAR University of Law, Hyderabad.

(The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) if you would like me to review your employment contract or existing non-compete so as to get legal advice that is specific to your business needs).

All employers like to protect their interests- there’s almost always a non-compete clause in their employment contracts and the moment an employee leaves their employment and starts to work with someone they met during the course of their employment, the employer may want to enforce the non-compete clause and stop the employee from working there. But how enforceable do you think your non-compete clause is?

A non-compete clause is a restrictive covenant tailored to restrict an employee from pursuing any similar kind of business activity that can cause detriment to his/her former employer. It is a specifically designed tool in modern commerce, aimed to protect the employer’s interest.

Enforceability of Non-Compete Clause in India- A case study

The Supreme Court of India, while dealing with this in Superintendence Company of India (P) Ltd. v. Sh. Krishan Murgai, examined whether a post-service restrictive covenant would fall within the mischief of section 27 of the Indian Contract Act. This section makes any agreement restraining someone’s trade or profession void and such agreement can’t be enforced. Thus, the court in the Superintendence case held that a contract, which had for its object a restraint of trade, was prima facie void.

In Wipro Limited v. Beckman Coulter International S.A the High Court of Delhi held that a non-solicitation clause does not amount to a restraint of trade, business or profession and would not be hit by Section 27 of the Contract Act as being void. Similarly, in Mr. Diljeet Titus, Advocate v. Mr. Alfred A. Adebare the Delhi High Court clarified that confidential information of the employer can be protected even in the post-employment period.

A different and more liberal interpretation has been observed by the Supreme Court in Niranjan Shankar Golikari vs. The Century Spinning and Mfg. Co. Ltd., where the Court clarified that not all non-compete clauses are prima facie prohibited and held, “a negative covenant that the employee would not engage himself in a trade or business or would not get himself employed by any other master for whom he would perform similar or substantially similar duties is not therefore a restraint of trade unless the contract as aforesaid is unconscionable or excessively harsh or unreasonable or one-sided“.

Some reasonable restrictions which can be placed to make a non-compete clause enforceable have been illustrated by the Madras High Court in the case of FL Smidth Pvt. Ltd. v. Secan Invescast (India) Pvt. Ltd.

• Geographical location- Often a non-compete is phrased in a way to restrict the employee from engaging with the third party which is a potential competitor in a particular location.
• Trade Secrets- A non-compete can be in place to protect trade secrets or such intellectual property in the commercial interest of the employer.
• Time Duration-If the non-compete is in place for a stipulated period of time then it is acceptable to place such restrictions
• Goodwill- Agreements providing sale of goodwill are valid and enforceable. This is an exception to Section 27 of Indian Contract Act, provided in the Section itself.

Therefore, in order for a Non-Compete clause to be enforceable by law, it is important to ensure that restriction imposed by the employer is reasonable and not unduly harsh on the employees.

Non-Competes in the US

On the same line of logic, in the United States, the scope of the restriction is a significant determinant of whether a court will enforce the restriction. In New York, for example, a non-compete clause (1) must be no greater than is required for the protection of the legitimate interest of the employer (i.e., it must be narrowly tailored); (2) must not impose undue hardship on the employee; and (3) must not be injurious to the public. To enforce a non-compete clause, the employer must satisfy each prong of the test.

Non-compete clauses that are geographically limited to a region, city, or neighborhood are more likely to be enforced. So are clauses that are temporally limited. In addition, a narrowly drafted non-compete clause will usually be limited to a specifically defined industry or role within that industry—for example, trading in a particular sector of the securities market.

Moreover, under the “employee choice” doctrine, a post-employment agreement that conditions the availability of a post-employment benefit (like health insurance or severance pay) on compliance with a non-compete covenant is presumptively reasonable.

A non-compete is therefore perfectly valid during employment but its enforceability gets tricky and must be crafted with caution so as to be considered a reasonable restriction on the employee thus making it enforceable.

We are well experienced in drafting employment contracts and customizing restrictive covenants. Please email me at chetana@legalcornerllp.com for tailored employment agreements or if you wish to set up a free consultation