Facing a Surprise Non-Compete Clause: How Should My Friend Handle This Legal Dilemma?

Dear All,

This is regarding one of my close friends. He worked with a multinational company for 8 years and received 3 promotions. He left the company on July 31st, 2024, and joined a startup in the same segment. Now, his ex-company has added a non-compete clause of 5 lacs in his FNF. He should be receiving 2.1 lacs after all adjustments, but due to the 5 lacs clause, they are demanding 3 lacs. Therefore, we will need your advice, and if we pursue a legal case, it will take longer.

Please note: While others, juniors, and seniors who left and joined my friend, received FNF and the relieving letter, and in the appointment letter, there was a non-compete clause for everyone.

Regards,
Rakhi

Understanding Non-Compete Agreements

A non-compete agreement is a legal agreement or clause in a contract specifying that an employee must not enter into competition with an employer after the employment period is over. This depends on the agreement between the employee and employer. If the agreement period is not completed, then the employer may demand compliance with the terms.

Hi, I would suggest your friend consult a labor advocate as the demanded amount is huge and not realistic.

Legality of Non-Compete Clause in Employment Contracts

According to Section 27 of the Indian Contract Act, 1872, an agreement by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is, to an extent, void. This means that non-compete clauses are not legally enforceable in India, as they are considered to be in restraint of trade and against Section 27 of the Indian Contract Act. However, there are some exceptions and circumstances where a non-compete clause may be valid and enforceable, such as:

During the term of employment, you may restrict the employee from engaging in any activity that is directly or indirectly in competition with the employer's legitimate interests.

After the termination of employment, an employee may be restrained from using or disclosing any trade secrets, confidential information, or proprietary data of the employer, as long as the duration, scope, and geographical area of the restraint are reasonable and do not impose a question of livelihood on the employee.

The doctrine of "the rule of reasonableness" is applied by the court to decide whether the restrictions are valid or not. A non-compete clause may also be valid and enforceable if it is part of a sale of goodwill or a partnership agreement where the seller or the outgoing partner agrees not to carry on a similar business within a specified area and time to protect the buyer or the remaining partners from unfair competition.

The courts have the discretion to examine each case on its own merits and decide whether a non-compete clause is reasonable and necessary to protect the legitimate interests of the parties involved.

Source: https://blog.ipleaders.in/legality-o...ent-contracts/

Non-compete clauses in India

Non-compete clauses are not legally enforceable in India. The Indian Contract Act states that any agreement that restricts trade beyond the term of employment is void and unenforceable.

Further, any clause or condition inserted at a later date is illegal. This much can be opined in the absence of your appointment letter. It is better to consult a lawyer.

Dear Rakhi,

Your question is not clear to me. What is this 2.1 lakhs and 5 lakhs? Are they offering to give 3 lakhs more to him if he accepts the Non-Compete clause?

Please clarify the matter so we can understand what they are asking.

Mr. Laxmi Narayan

Understanding Non-Compete Clauses and Trade Secrets

Sec. 27 specifies the terms under which a non-compete is allowed. It is only applicable when there is a sale of goodwill by the person who intends to compete with the company. In all other cases, the courts are likely to deny enforcement.

Difference Between Non-Compete and Trade Secret Protection

The exception that you have attempted to explain is not a non-compete clause but rather the protection of trade secrets, typically covered under a Non-Disclosure Agreement (actual or implied). Just last week, the Delhi High Court issued an injunction preventing a former director from approaching the customers of his former company or poaching its employees, as it would constitute a misuse of trade secrets.

Therefore, the former company can prohibit him from using trade secrets (such as information about customers, etc.), but cannot prevent the employee from utilizing his knowledge, even if acquired during his tenure at the previous company. For instance, if he acquired knowledge on how to repair a specific machine, he can continue to work on similar tasks using that knowledge. However, it would be impermissible to infringe on any patents held by the previous company based on his acquired knowledge.

It is pitiable conditions for the members providing insights on the case-related issue because the poster never described his case well or provided the lines/copy of the appointment or any agreement signed. Therefore, no concrete suggestions are being offered by the elite members.

Case citation reference

Just below is the case citation inserted for reference:

Similarly, while deciding a contractual issue, the Honorable Supreme Court in Superintendence Company of India (P) Ltd. v. Krishan Murgai, the bench was to consider a claim for injunction post-cessation of employment. The Honorable Apex Court, while holding that a contract which has an object restraining trade is prima facie void, also observed that even if the restrictive covenant was to include cessation of employment at the volition of the employee, there could be no post-employment restriction under Section 27 of the Act. In the year 2006, a two-Judge Bench of the Supreme Court in Percept D'Mark (India) (P) Ltd. v. Zaheer Khan & Ors refused enforcement of a post-employment restriction on the grounds of the same being barred by Section 27 of the Act.

Therefore, the judicial pronouncements lead to the conclusion that reasonable restraint depends upon various factors, and the restraint to prevent the divulgence of trade secrets or business connections has to be reasonable in the interest of the parties to ensure adequate protection.

Prabhat-ji, I think we use the forum to increase our knowledge, and in this case, we are discussing how far a Non-Compete Agreement can go and still be valid in law. Thank you for your inputs.

I think he should negotiate with the company if the term/clause has been included in his contract while others have already received their FNF. This situation is discriminatory and unfair. Therefore, it is suggested to engage in negotiation by highlighting these issues. By doing so, this matter could be resolved without resorting to court proceedings.

Dear All,

A small clarification to make the matter clear:

After all adjustments, my friend was to receive 2.1 lakhs in his FNF, excluding gratuity. Now, they have added a competition clause of 5 lakhs, deducting 2.1 lakhs and asking for the remaining 2.9 lakhs for settlement. Additionally, the company he has recently joined was not even in existence when he joined 8 years ago; it is somewhat of a startup. This seems to be a vindictive move as the company wanted to retain him, and he chose to leave.

"There was a clause in the appointment letter, and no other signed documents, which states:

Non-compete clause - You shall not carry on or be engaged in any trade or business similar to that of the company during your service with the company and for a period of 2 years following the termination of the contract, within India or abroad, including joining any competing organization from a similar trade.

You shall be liable for any breach of the obligations arising from the aforementioned non-compete clause and shall indemnify and hold harmless the company against any losses incurred as a result of a breach of these obligations by you."

Enforceability of Non-Compete Clauses Under Indian Law

I have already stated, and I will repeat: Section 27 of the Indian Contract Act specifically disallows any contract in restraint of trade or profession except in the case of the sale of goodwill of a business. So the clause is not enforceable.

Timing and Consent for Clause Introduction

Second, no such clause can be inserted after the person has left. If it was introduced while he was working, it would need his consent in writing anyway. But even then, the clause is unenforceable.

Company Status Irrelevant

The fact that the company is new, old, or a startup does not matter in the above context.

Legal Recourse and Financial Considerations

He needs to engage a lawyer who will send out a legal notice and, if necessary, file a case against the company for the recovery of his money. I hope he understands that such a course is generally expensive. One additional point, his PF, Gratuity, etc., are not subject to any deduction for this or any other clause.

Dear colleagues,

Let me understand this point clearly: Rakhi stated this in the query - "Now his ex-company has added a non-compete clause of 5 lakhs in his FNF. He should be getting 2.1 lakhs after all adjustments, but after the 5 lakhs clause, they are demanding 3 lakhs."

What is now given to understand here? This 'non-compete clause of 5 lakhs' was not there 'originally' but 'now introduced afresh' on resignation and FNF settlement. Is my understanding correct? If so, the question arises, insistence on 5 lakhs is an afterthought and probably didn’t form part of the terms of appointment at the time of joining but only introduced now. Whether agreed upon, signed as a document is not known. I would ask Rakhi to clarify this fact first before we freeze our opinions about the acceptability of the Rs. 5 lakh demand.