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The Baffling Case of Infosys Non-Compete Clause: A critical analysis

SURANA & SURANA > SSIA  > The Baffling Case of Infosys Non-Compete Clause: A critical analysis

The Baffling Case of Infosys Non-Compete Clause: A critical analysis

The Baffling Case of Infosys Non-Compete Clause

SARA SURESH, Associate, RE & Corporate

During the month of April 2022, there were extensive discussions over the legality and enforceability of Non-Compete clauses among the IT workforce.

Media Reports stipulates that the IT giant corporation, Infosys, had been summoned by both the Central Labour Commissioner and Karnataka Labour Department over the incorporation of Non-Compete clauses in their Employment Agreement.  According to the media reports, Infosys has been working with both the Central and State Government with regard to their Non-Compete issue.  Howbeit, the media has remained inactive and dormant over the issue for quite some months.

In this article, let’s break down what the issue is about and its legal standing in India.

What’s the debate about?

A complaint was filed by the Pune based IT Employee Union, Nascent Information Technology Employee Senate (NTES), a non-governmental organization with the Ministry of Labour and Employment and Ministry of Corporate Affairs seeking the removal of Infosys Non-Compete clause in their agreements, on the basis that it is “…arbitrary, unethical and illegal…” as per the Indian Contract Act, 1872.

The media reports indicates that the Non-Compete clause under review, restricts an ex-employee of Infosys from working for (a) the same customer across the rival firms with whom they have worked for the past 12 months during their stint with Infosys; and (ii) a ‘Named Competitor’ if the employment with such Named Competitor involves working with a customer with whom the employee has worked with in the last 12 months of their employment with Infosys.  These restrictions shall apply for a period of 6 months, subsequent to the termination of the employment with Infosys.  Albeit, this matter is yet to find a closure.

Legal take in India

Non- Compete restrictions on former employees are enforceable in several jurisdictions such as UK, US (except California), empowering companies to implement their non-compete provisions.  The English Courts through the case of Mitchell v. Reynolds[1], held that agreements which are in restraint of trade, shall be legal, based upon the reasonability of the cases.

However, the position of Indian Law with regard to this issue is not entirely settled.  Section 27 of the Indian Contract Act, 1872 states that “every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void”.  

The Hon’ble Supreme Court of India in Niranjan Shankar Golikari v. Century Spinning Mills[2], upheld the Non-Compete clause of the employment contract thereby preventing the shift supervisor, i.e., the employee from joining the competitor during the term of the employment contract.  The Court further held that a negative covenant can be enforced only if it is reasonable and not excessively harsh and one-sided.  This ratio was further applied by the Hon’ble Supreme Court in Superintendence Company of India (P) Ltd v. Krishan Murgai[3].  In line with the precedents, it can be concluded that Non-Compete clauses shall be enforceable, only if it is reasonable during the term of the agreement and the restrictions which apply after the employment has ceased are void and in that event, reasonability is not a test.  Consequently, the Non-Compete stipulations which comes into force after employment becomes unenforceable in terms of the Indian Contract Act.

Nevertheless, unfazed, the Indian Courts have upheld and enforced the other restrictive covenants, such as non-solicit obligations and confidentiality.

The Non-solicitation clauses which prevents a party from soliciting each other employees, clients and customers were legally justified by the Delhi High Court in the case of Wipro Limited v. Beckman Coulter International SA[4], whereas, it was held that it is not hit by Section 27 of Indian Contract Act, 1872.

The Delhi High Court in Mr. Diljeet Titus v. Mr. Alfred A Adebare and Ors[5], granted an injunction to the petitioner against their former partners from using their Confidential Data.  The Calcutta High Court in Hi-Tech Systems and Services Ltd v. Suprabhat Ray and Ors[6], prohibited the Senior Employee from divulging confidential Information and from working with a customer of the Employer on the basis that the employee had access to the key secrets of the Employer and it could be used to compete with or detrimental to the employer.  Be that as it may, the Supreme Court has not ruled on that exception and the position is still subject to review, to that extent.

Analysis: Restraining the Restraints

Earlier jurists of India found the law relating to the Non-Compete clauses vehemently unjustifiable. In Bholnath Shankar Das v. Lachmi Narain[7], the Divisional Bench of the Allahabad High Court incisively held that, “It is unfortunate that Section 27 of the Indian Contract Act… seriously trenches upon the liberty of the individuals in contractual matters affecting Trade”.  

The Law Commission of India in its 13th Report[8] commended that Section 27 “….was enacted at a time when trade was yet undeveloped and the object underlying the section was to protect the trade from restraints…but today, trade in India does not lag far behind that in England or the United States and there is no reason why a more liberal attitude should not be adopted…we recommend that Section 27 be suitably amended to permit reasonable restrictions”.

Various arguments were propounded in favour of Non-Compete clauses claiming these clauses were basically incorporated (i) to protect critical and sensitive information including client data; (ii) to promote innovations while preventing the rivals from playing off with the trade secrets and (iii) the companies might be disinclined to invest in workers if the new skilled employees can carry forward their skills to competition. Furthermore, the restraint is applicable only for a specific period of time and not eternally. 

Every business or entity stands in the chance of losing paramount valuable knowledge, contacts, connections and in the worst scenario, the trade secrets (which constitutes the cornerstone of its development), when its employee is hired by its competitors. Although, the Non-Disclosure and Non-Solicitation clauses intends to protect all the personal or business related information of a company, it does not entirely protect the employer and it does not achieve the object of Non-Compete clauses, which prevents the employee from selling the Employer’s / Company’s intellectual capital in their intended field for a specific interval during which their skills might diminute and the connections might wane.

What’s the way forward?

The legal jurisprudence in India, as of today, does not validate a Non-Compete Clause beyond the term of the employment contract.  Certain questions such as whether the employees of Infosys had access to any confidential information and whether the customers whose data was available, to the employee while in employment with Infosys takes objection to the new employment or business of that employee needs to be addressed in this particular issue of Infosys. However, at present, the issue has subdued into silence and there has been no recent updates on the same. The wisdom, intelligence and practicability of India’s earlier Jurists and Executives were not sufficient to effectuate changes legally.  In any case, absolute bars against the Non-Compete clauses were contemplated to be illogical and groundless back then. They still continue to be and a more liberal attitude needs to be adopted with regard to the Non-Compete clauses. It is time to revisit this issue by taking into consideration the 13th Law Commission Report in 1958, amidst the changing economic affairs and globalism.

[1] Mitchell v. Reynolds, All ER Rep 26.

[2] Niranjan Shankar Golikari v. Century Spinning Mills, AIR 1967 SC 1098.

[3] Superintendence Company of India (P) Ltd v. Krishan Murgai, (1981) 2 SCC 246.

[4] Wipro Limited v. Beckman Coulter International SA, (2006) 3 Arb LR 118 (Del).

[5] Mr Diljeet Titus v. Mr. Alfred A Adebare and Ors, 2013 SCC OnLine Del 3086

[6] Hi-Tech Systems and Services Ltd v. Suprabhat Ray and Ors, 2015 SCC OnLine Cal 1192.

[7] Bholnath Shankar Das v. Lachmi Narain,  AIR 1931 All 83.

[8] 13th Report, Law Commission of India, 1958.

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