Non-Compete Covenants in Employment Contracts

Traditionally, the domestic courts have refused to enforce non-compete covenants in employment contracts following the termination of a job. The rationale for refusing to do so was that such covenants effectively deprived individuals of their right to livelihood and trade. Nevertheless, the courts have been inclined to enforce non-compete covenants during the period of employment as not being in restraint of an employee’s right to trade and livelihood.

In the recent past, however, the courts have shown an inclination to enforce non-compete covenants which apply to the post-termination period, provided the injunction or restraint is sought for the purpose of protecting the employer's interests. Those interests of employers which are considered to be entitled to protection are proprietary information such as trade secrets, business connections and secret manufacturing processes. However, the employer is required to prove that the employee acquired such information in the course of his or her employment and that such information would be compromised if the employee was permitted to work in a competing business of a similar nature.

Moreover, the courts' inclination to enforce non-compete covenants at the post-termination stage is particularly strong in cases where the employee seeks to terminate his or her existing employment contract for the sole purpose of being employed with a competing business. In practice, the inclination to protect proprietary information through non-compete covenants is greatest in the information technology, know-how, pharmaceutical and biotechnology industries, which have recently contributed significantly to the Indian economy.

For further information on this topic please contact Anand Prasad or Biraj Tiwari at Trilegal by telephone (+91 11 5163 9393) or by fax (+91 11 5163 9292) or by email (anand.prasad@trilegal.com or biraj.tiwari@trilegal.com).