Intellectual Property Protection in Indian Employment Contracts : Striking a Fair Deal for Employers and Employees

INTRODUCTION

The freedom to trade, also known as the right to conduct business or engage in commercial activity, is a fundamental economic right that allows individuals and corporations to freely participate in trade. It encompasses the freedom to start a business, conduct transactions, buy and sell goods and services, and engage in economic activities. This right is recognized and protected in various international human rights norms and legal frameworks. The right to trade is frequently seen as a part of larger rights, such as the rights to employment, property, and economic growth. These rights are acknowledged in a number of international human rights treaties, such as the International Covenant on Economic, Social, and Cultural Rights (ICESCR) and the Universal Declaration of Human Rights (UDHR), In India, the freedom to trade is considered a fundamental right under Article 19(g) of the Constitution, as well as under Article 301, which ensures that trade, commerce, and intercourse throughout the country are free from unnecessary restrictions.

1-protection of proprietary information during the course of employment

The enforceability restrictions of employment agreement depends on the terms of the contract and the timing of its violation. Before the termination of the employment contract, the non-compete provision is valid and can be enforced by law. This means that an employee is restricted from engaging in competing activities during their employment period as agreed upon in the contract.

The same was clarified by the Supreme Court in Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan and Anr, furthermore in “Niranjan Shankar Golikari vs The Century Spinning And Mfg. Co”. the court opined those certain restrictions placed on employees during their employment, which prevent them from working for other employers or engaging in certain trades or businesses, are not considered as limitations on their freedom to work. As this restriction don’t prevent the employee from their right to trade.

In simpler terms, during the period of employment, a non-compete clause or restriction on the employee in an Indian employment agreement is legally binding. It restricts the employee from engaging in competing activities while working for the company. However, once the employment contract comes to an end, the non-compete clause loses its enforceability, and the employee is free to pursue opportunities in the same field without any restrictions.

2-protection of proprietary information after the course of employment

It may be the case that the employee while working in the same field of business as that of the Employer post the termination of his employment and thereby come up with inventions of a patentable nature, which develops on any technology developed in the course of employment in the previous tenure, then a question arises as to whether the contractual clauses of the terms of employment prevent the employee form filing any patent in the same field for the future?

The Law of Contracts prima facie prohibits non-compete clauses. Every agreement that prevents a person from engaging in a lawful profession, trade, or business of any type is, to the degree that it does so, void, according to Section 27 of the Contract Act. Additionally, post-termination non-compete clauses in employment contracts have consistently been rejected by Indian courts as invalid and against public policy because they have the potential to deprive a person of their fundamental right to pursue a livelihood and are therefore prohibited by Section 27 of the Contract Act.

The apex court in “Niranjan Shankar Golikari” case held that not all non-compete clauses can be considered prima facie prohibited, and the court further also held as long as an agreement’s scope is fair, it would be enforceable.

The following was a question was also discussed and was clarified by Bombay High Court in Tapas Kanti Mandal v. Cosmo Films Limited 2018,

Tapas Kanti Mandal had worked as a manager in the Research and Development department of Cosmos Films Ltd, a multinational BOPP supplier. Before starting his job, Mandal signed various documents, including a secrecy agreement with a non-compete clause that prohibited him from working for a competitor for three years after leaving the company.

However, Mandal abruptly resigned and planned to work for another company covered by the non-compete clause. Cosmos Films Ltd argued that Mandal had acquired valuable knowledge and trade secrets during his employment, including information about products, manufacturing processes, projects, and future plans. They believed Mandal should be bound by his contractual obligations to protect this intellectual property and refrain from benefiting a rival company.

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Nevertheless, the Bombay High Court ruled in Favor of Mandal, stating that any clause in an employment agreement restricting an employee’s right to work in their chosen profession after leaving the company is unenforceable. The court emphasized the importance of employees’ freedom to pursue their careers and utilize their skills and knowledge without undue restrictions. They acknowledged that while Mandal may have acquired valuable information during his employment, it did not justify impeding his professional opportunities elsewhere.

Then the subsequent question arises: what about the rights of the employers? what remedy do they have to stop and restrict their employees from disclosing valuable and inherit secret and valuable data about the company, here there are 2 clauses which prevents the misappropriation of valuable information:

A non-disclosure agreement (NDA) is a legal agreement that forbids the parties from discussing any of the material it covers. The purpose of an NDA is to establish a private connection between the parties in order to safeguard any kind of proprietary or confidential information or trade secrets. An NDA safeguards confidential corporate information as a result.

In India, there is no specific law or statute that deals with protection of trade secrets. Trade secret rights, however, are enforced by contract law (Indian Contract Act, 1872) or through an action for breach of trust brought under common law.

If the information or knowledge is covered under trade secret the employer can restrict the employee to use the information or knowledge even after the course of the employment is concluded.

The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) is another document that India has signed. TRIPs give members the freedom to create regulations that forbid the unauthorized use and disclosure of particular information, as well as the same was further clarified in the various judgments in Indian courts provided that this “information” should satisfies the following requirements:

It must be secretive in the respect that it is not widely known among or easily available to those inside the circles that typically deal with the type of information in issue, either as a whole or in the specific arrangement and assemblage of its components;
There should be some commercial worth attached to the secrecy;
The person legally in charge of the information has taken what are considered to be reasonable measures to keep it secret.

Non-solicitation agreement

In India, for a clause of non-solicitation for being enforced needs to follow certain requirements which are:

Reasonableness: The agreement should be reasonable in terms of its duration, geographical scope, and the nature of the restrictions imposed. It should not excessively restrict the employee’s right to seek employment or engage in their profession.
Protection of legitimate interests: The non-solicitation agreement must be aimed at protecting the employer’s legitimate business interests, such as confidential information, trade secrets, customer relationships, or specialized knowledge.
Specificity: The agreement should clearly define the activities or actions that are prohibited, such as soliciting clients or employees, and specify the duration of the restriction.
Voluntary and supported by consideration: The agreement must be entered into voluntarily by both parties, and the employee should receive some form of consideration, such as a benefit or compensation, in exchange for agreeing to the restriction.

If these conditions are met, Indian courts have inclined to enforce the non-solicitation agreements.

CONCLUSION

Intellectual property protection in Indian employment contracts requires a delicate balance between the rights of employers and employees. While non-compete clauses are valid and enforceable during the course of employment, they lose their enforceability after termination, allowing employees the freedom to pursue their chosen profession. Indian courts take a strict view on post-employment restrictions that impede an employee’s right to work, emphasizing the importance of their professional opportunities and skills. However, employers can still protect their proprietary information through non-disclosure agreements (NDAs) and trade secret rights, enforced through contract law or common law actions. Although India lacks specific laws for trade secret protection, contractual obligations and reasonable measures serve as safeguards. The regulatory framework aims to strike a fair balance, ensuring both employers and employees are treated equitably and their intellectual property rights are protected. It is crucial for parties to carefully consider the enforceability and implications of contractual clauses to ensure a fair deal for all involved.

Author : Abizer Merchant, A Student at Symbiosis law school Pune. in case of any queries please contact/write back to us via email to [email protected] or at IIPRD.