Employee confidentiality clauses- An Indian perspective

Employees make an organization, and almost all the theorists in management tend to concur that employees are assets with appreciating value unlike most other assets. Yet at the same time, employees are not as riveted to an organization as the other assets.

The value of an employee appreciates with learning, training, knowledge, and experience gained from his or her association with an organization. The organization on the other hand, naturally tends to preserve its knowledge imparted onto an employee and one of the basic tools used by organisations all the over the world to preserve this ‘knowledge’ is by way of strong employee agreements further bolstered by confidentiality clauses. The organisations, however, try to use the concept of ‘one size fits all’ and tend to use same employee agreements throughout the world regardless of the differences in the legal position of various countries. A recent judgment by the High Court of Delhi in Sungro Seeds Ltd. v Dr. S.K. Tripathi & Ors. (CS(OS) NO. 1163 of 2013) highlights how the legal position in India sways away a little from the jurisprudence of many other countries in respect of enforcement of employee agreements.

The most prominent feature in the Indian law relating to restrictive clauses in an employee agreement is Section 27 of the Indian Contracts Act. Section 27 makes void i.e. unenforceable, every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind. The High Court of Delhi in Sungro case cited Modicare Ltd. v Gautam Bali, (2019 SCC OnLine Del 10511) in which the Supreme Court juxtaposed the Indian law with the law of the United Kingdom (UK) and held that under the common law in England, restraints of trade, whether general or partial, may be good if they are reasonable or reasonably necessary with reference to public policy or for protection of interest of covenantee. However, in India, agreements in restraint of trade are governed by Section 27 and the question of reasonableness of restraint is outside the purview of Section 27.

In Sungro case the plaintiff pleaded, amongst other things, that its ex-employees, who were arrayed as defendants 1 and 2, have violated their employment agreement and their new employer knowingly misappropriated and acquired plaintiff’s confidential information relating to breeding strategies, soil conditions for breeding etc. The Plaintiff had pleaded that to protect its sensitive and confidential information relating to the product and product development know-how, varieties, hybrids, parent lines, breeding strategies and associated know-how and trade secrets, it requires its employees to enter into an employment agreement and undertake not to disclose any such sensitive and confidential information to any third party during the course of employment and at any time thereafter.

The plaintiff developed a new hybrid variety of cauliflower SCFH-130 and applied for its registration under the Protection of Plant Variety and Farmer’s Rights Act, 2001 (PPVFR Act) that would recognise plaintiff’s ownership on this new hybrid variety. During pendency of plaintiff’s application of registration, the plaintiff found that another company Nuziveedu Seeds Ltd. is also selling a new hybrid cauliflower under the name ‘Riya’, which according to the plaintiff had the same characteristics as that of plaintiff’s new hybrid named as ‘Katreena’. For this reason, the plaintiff filed this suit against Nuziveedu Seeds Ltd., arrayed as defendant no.3, and against plaintiff’s ex-employees for passing confidential information relating to the new hybrid ‘Katreena’ to defendant no.3. The plaintiff also alleged that defendant no.3 indulged in unfair competition by wrongfully exploiting the plaintiff’s valuable confidential information, trade secrets, copyright and other intellectual property rights.

The court held that since an application for registration of plaintiff’s new hybrid cauliflower ‘Katreena’ is pending, the plaintiff cannot maintain a suit to restrain the defendants from infringing the rights which are yet to be conferred on the plaintiff on the grant of registration. On the question of misappropriation of confidential information, the court held:

“…if the Courts were to accept, without any statutory regime, the plaintiff’s blanket assumption that it is possessed of confidential information in something, which plainly, is part of the material resource of the community, the Court would overstep the mandate of the Constitution, in its anxiety to protect such a perceived right.”

Based on the above-mentioned reasons, the court in this case rejected the suit for lack of cause of action. The court also referred to various case laws in respect of the clauses in an employee agreement relating to confidential information and post-employment restrictive clauses to arrive at this decision, which are discussed hereinafter.

It is important to mention here that India does not have statutory law recognising confidential information or trade secrets unlike other IP rights such as Patents, Copyright, Trademarks etc. In Navigators Logistics Ltd. v Kashif Qureshi (254 (2018) DLT 307), the court even held that confidential information and trade secrets are not equated to property in India.

However, courts, and no less than the Supreme Court, have recognized the importance of protecting confidential information and having restrictive clauses. In Niranjan Shankar Golikar v Century Spinning & Manufacturing Co. Ltd. (AIR 1967 SC 1098), a two Judge Bench of the Supreme Court held that since employee was privy to the special process invented/adopted by the plaintiff and of which the employee was trained and had acquired knowledge, that employee can be restrained from joining employment of a competitor for the remaining period for which he had contracted with the plaintiff.

The position taken by the Supreme Court in Niranjan case is to be weighed with the reasonableness of the restrictive clauses vis-à-vis Section 27 of the Contracts Act, although what is reasonable depends on the facts of each case. In Percept D’Mark (India) (P) Ltd. v Zaheer Khan ((2006) 4 SCC 227), another two Judge Bench of the Supreme Court found that there was no fixed term for which either of the employees had agreed to serve the plaintiff and the employment contract restrained them to not compete with the plaintiff for one year after ceasing to be employee. Thus, it was held that these terms were found to be void under Section 27 of the Contracts Act.

The applicability of confidentiality clauses on the information that can be protected under different statutory laws such as Patents, Copyright, Trademarks etc. was also discussed in Sungro case. The court cited the findings in Navigators Logistics case that if confidentiality and secrecy are claimed in the same works in which copyright was claimed and the claim for copyright stood negated, there could be no claim for the same right by pleading confidentiality and secrecy as the same would amount to creating a new right.

Reference was also made to Akutate Internet Services v Star India Pvt. Ltd. (2013 SCC OnLine Del 3344). In this case the plaintiff alleged that the defendants entered into an agreement with the plaintiffs to provide Know-How of plaintiffs’ ‘De Simone’ formulation and after knowing the Know-How from the plaintiffs the defendants cannot indulge in making and marketing the product as ‘De Simone Formulation’. Since the plaintiffs’ ‘De Simone Formulation’ had no patent in India, the court held, “The said Know-How, without patent being applied for with respect thereto, was in public domain and by conduct of the defendants the status thereof cannot be changed and the same cannot be conferred rights as are permitted to be conferred under the statute i.e. Patents Act, only in accordance with the provisions thereof…”

In view of the above findings by various courts, the High Court of Delhi in Sungro case held that the since the rights of the plaintiff had not crystallised under PPVFR Act or any other right statutorily recognised in India, there cannot be a blanket assumption of confidentiality. In view of the findings in Sungro case and discussion of various case laws, employee agreements require a separate treatment as far as laws in India are concerned. Some of the important considerations are that any clause restraining an employee’s right to trade, profession or business would be held as void under Section 27 of the Indian Contracts Act even if an employee agrees to the same. Thus, protective clauses should be drafted keeping in mind the law laid down by the Supreme Court in various cases. In addition to that, any intellectual property that has been applied for registration under PPVFR Act, Patents, Trademarks, Copyright and Design laws could not be claimed as confidential. The clauses of the employee agreement should distinguish the information that has been withheld by the employer as confidential as against the one applied for registration under any of the above laws. It is thus, important to customise employee agreements in India so that the same remain enforceable and do not end up as a dead letter even though signed and accepted by the employer and employees.

Article by Manisha Singh and Varun Sharma

Article was 1st published on Lexology.