Non-compete restrictions are the tool most commonly used by employers to protect their proprietary interests following the end of an employment relationship, particularly in the case of C-suite employees.
However, non-compete restrictions which apply beyond the term of an employment relationship are generally unenforceable in India. Nonetheless, they are still included in employment agreements as a deterrent.
Under Indian law, non-compete provisions are legally enforceable only:
- during the term of an employment agreement; and
- in the case of a sale of goodwill.
In the latter case, the restrictions must be reasonable in terms of duration and geographical extent.
The above legal framework begs the question of how employers can protect their interests in India.
Unlike other jurisdictions (eg, certain US states) where it is possible to enforce non-compete provisions in exchange for employee stock ownership or other forms of monetary consideration, a similar structure in India would not achieve the same result. Employers would possibly be able to recover the monetary value of the consideration paid, but they would not be able to stop an employee from joining a competitor.
However, where an employee terminates a fixed-term contract and joins a competitor before the expiry of the fixed period, the employer can stop the employee from joining the competitor during the remainder of the fixed period. This restraint will be enforceable only where trade secrets have been shared with the employee and these are at risk of exposure. Thus, the employer must be able to demonstrate that such risk is tangible.
That said, this does not mean that employers have no recourse whatsoever. Rather, they can protect themselves through other means, including by:
- implementing robust non-disclosure agreements;
- imposing restrictions on soliciting clients, vendors and employees and using company assets; and
- monitoring employee use of company assets.
In today's competitive environment, employers must be prudent when structuring their employment contracts. Given the significance of C-suite positions, contracts for such positions should be watertight with adequate safeguards to protect the company against the potential risks of misappropriation of proprietary rights.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
