Agreement in restraint of trade void u/s 27 Indian Contract Act 1872. A non-compete clause in the guise of confidentiality clause can not be enforced-Delhi HC

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Agreement in restraint of trade void u/s 27 Indian Contract Act 1872. A non-compete clause in the guise of confidentiality clause can not be enforced-Delhi High Court

Agreement in restraint of trade void

ABCAUS Case Law Citation:
1005 2016 (08) HC

Brief Facts of the Case:
The Plaintiff was a private company engaged in the business of providing a wide range of Data Recovery, Data Migration and Data Erasure Solutions to its clients in India and abroad. It was alleged that the defendants by virtue of their employment with the Plaintiff had access to Plaintiff’s confidential data, information, trade secrets and know-how and they are now using the same for securing the business from the Plaintiff’s clients by approach the Plaintiff’s customers and soliciting work from them.  According to the Plaintiff, this act of the defendants was breach of the “Confidentiality and Invention Assignment Agreement” and “Employee Confidentiality Agreement” entered into by them with the Plaintiff company. It was contended that as per the said agreements, defendants were only restrained from carrying on the competing business and that too for a limited period and therefore, the subject clause was reasonable and in terms of the said agreements, the Plaintiff was entitled to relief by way of an injunction.

It was also alleged that the defendants had stolen the Plaintiff’s client list containing phone numbers and contact details of its clients, and defendants were using the same for their business. It was further stated that the defendants had also not returned the laptop provided to them during their employment.

It was submitted that the client list prepared by the Plaintiff was its proprietary information and, therefore, the defendants must be restrained from using the said list and/or approaching the Plaintiff’s customers.

The defendants denied having any confidential information pertaining to the Plaintiff. They submitted that names of large customers of the Plaintiff were advertised on its website and therefore, were in public domain. It was further submitted that business market relating to data recovery and data migration is limited and the names of almost all customers requiring such services are known in the market and can be found on the  internet by using search engines such as google.com.

It was also submitted by the defendants that the said laptop/tablet was not returned because their dues had not been cleared. It was submitted that there was no confidential or technical data available on the said tablet which was anyway in non-working condition. Further, the software and other tools used by the Plaintiff for rendering services were not the proprietary software of the Plaintiff but are licensed software.

It was also contended by the defendants that they could not be restrained from carrying on their business or approaching the customers as any such restrictive covenant in the Agreements would be void by virtue of Section 27 of the Indian Contract Act, 1872.

Observations made by the High Court:

The High Court opined that information which is otherwise available in public domain could not be considered as confidential information and no injunction restraining the use of such information can be issued.

The Court observed that there was no evidence to remotely indicate that any particular data base of the Plaintiff had been removed or copied by the Defendants and the only valid grievance of the Plaintiff was that the defendants have approached the Plaintiff’s customers.

Regarding the contention that even though the names of the customers and/or persons looking for services may be available in public domain, the contact details of the concerned persons would not be easily ascertainable. The Court observed that even assuming the same to be true, the defendants cannot be restrained from approaching the customers since the identity of the customers is known. Also the Defendants could on their own also find out the details of the relevant persons. The fact that the Defendants have approached some of the Plaintiff’s customers did not establish that the defendants were using any proprietary information of the Plaintiff. The Defendants also cannot be prevented from using the experience and knowledge which is gained by them during the course of employment with the Plaintiff.

Thus the court was of the view that the case was essentially not one of infringement of copyright but one for enforcement of a non-compete clause as per the Confidentiality and Invention Assignment Agreement.  However as per the said agreement itself there was an exception if the employee can prove carrying on the business activity without using of any confidential information. Thus in the absence of the the element of confidentiality, the Plaintiff was essentially seeking a restraint on trade which would be void by virtue of Section 27 of the Indian Contract Act, 1872.

The Court rejected the contention of the Plaintiff company that the restriction to carry on competing business was for a limited time only and was therefore, reasonable and enforceable. It was observed that a covenant in restraint of trade in the guise of a confidentiality clause,must be held to be void by virtue of section 27 unless restriction is reasonable as per the exception to section 27 itself.

Agreement in restraint of trade void

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