“The law must strike a balance between the employer’s right to protect trade secrets and the employee’s right to earn a livelihood.”
A company’s trade secrets are one of its most important assets. This can include proprietary formulas, business strategies, processes, customer lists, etc., and any number of other pieces of confidential business data. Importantly, these elements put your companies at a competitive edge that can ensure long-term success. However, with rising employee mobility, corporate espionage, and more businesses constantly being compromised successfully or unsuccessfully, protecting one’s trade secrets can be a real challenge. Employment contracts and non-compete clauses are among the key tools available to employers to protect hard-won assets these assets are so valuable they need protection.
Overview: trade secrets protection
Confidential business information that gives the company an advantage in trade is trade secrets. In India trade secrets are governed under Sec 27 of the Indian Contract Act, Personal Data Protection Bill 2019, Sec 72 of It Act 2000, and Sec 316 of BNS 2023 Breach of Trust provisions. trade secrets are protected from unfair appropriation and unauthorized disclosure to others by anyone. The Defend Trade Secrets Act of 2016 (DTSA) gives a federal cause of action for the theft or misappropriation of trade secrets in the United States. The EU Trade Secrets Directive harmonizes the laws of EU member states on trade secrets and therefore provides protection also on a European level.[1]
Examples of trade secrets include:
- Formulas (e.g., Coca-Cola recipe) original to the proprietor
- Business strategies
- Client lists
- Manufacturing processes
Trade secrets protection is important because it enables businesses to maintain a competitive edge, nurture innovation, and, more importantly, maintain the confidentiality of sensitive information. For instance, often trade secrets are such things as a customer database, a software code, a marketing strategy, or maybe a production technique. One of the reasons companies are particularly sensitive to losing their trade secrets is that as they are intangibles, they can easily be stolen through employee turnover or corporate espionage.
So, companies mitigate such risks through the use of legal frameworks like employment contracts or non-compete clauses to make sure this former employee will not exploit proprietary information.
Employment contracts in the protection of trade secrets
They are a central way to functionally protect trade secrets. Specifically, these contracts are legally, binding agreements between the employer and employee, on terms and conditions and of course confidentiality.
Incorporation of Confidentiality Clauses: Every employment contract will contain a confidentiality clause that forbids employees from revealing or using the company’s trade secrets, either at the time or upon the expiry of employee tenure. Such clauses are essential for preventing the disclosure or misuse of sensitive business information. Confidentiality clauses usually include what is considered “confidential information,” and what duties are owed to the employee regarding such information. For example, in Vfs Global Services Private Limited vs Mr. Suprit Roy 2007: Under the Bombay High Court, trade secrets and confidential information are protected by restrictive covenants that are reasonable and do not unreasonably restrict employees’ right to work outside.[2]
Employee Obligations: If an employee gives a confidentiality agreement, they are legally supposed to protect a company’s trade secrets. Typically, this obligation carries beyond the term of employment, i.e. in cases where the employee leaves the employer, he is obliged neither to disclose his nor disclose any confidential information he or she has ever collected during his or her employment duration. It protects the employer’s intellectual property and the employer’s sensitive business data.
Moreover, nearly all employment contracts (which is how you’d lose your job at most employers) require employees to return company property, including documents, software, and any physical items containing proprietary information when the employment is terminated.
Enforceability of Employment Contracts: Laws of the jurisdiction of the contract are particularly important in the enforceability of employment contracts and confidentiality clauses. So, confidentiality clauses in India are enforceable as long as they don’t go against public policy which includes an unreasonable restriction of an employee’s right to work. These clauses are generally enforced by the courts unless they are held to be overly broad or vague.
It shall be recorded under the Indian Contract Act, of 1872, that all the agreements, not illegal and unreasonable, can be enforced. However, the contract must be clear and precise in the terms of the contract. In the cases of Niranjan Shankar Golikari v. Century Spinning and Manufacturing Co. Ltd. (1967 AIR 1098) During the period of employment, the Supreme Court upheld the validity of restrictive covenants such clauses may be enforced only if they protect the employer’s legitimate business interests.[3]
Non-compete clauses: a good tool in the protection of trade secret
In employment contracts, non-compete clauses are frequently included to stop former employees from misusing proprietary information for the benefit of their former employers by working for competitors or starting up in the same industry. Guaranty clauses are meant to protect the interests of business, but they have to be written with caution to ensure there is no infringement of employee’s rights.
Definition and Purpose
A non-compete clause limits former employees from competing head-to-head for the same period and in the same area after they leave the employer. These clauses also serve to prevent employees from using trade secrets or insider knowledge learned during employment to undo the former of an employer’s good faith efforts.[4]
A clear instance where the non-compete clause can be utilized in protecting the employer’s business interest against the employee was seen in Balvinder Singh vs. State of Haryana 2003 (10) SCC 132 If the restrictions post-employment are in nature of the non-compete clause, they do fall under the restriction of trade under Section 27 of the Indian Contract Act except when protecting proprietary interests i.e., trade secrets.[5]
Scope and Limitations
Non-compete clauses can be effective but if we can enforce them, the scope and duration must be reasonable. Such clauses come up before courts to make sure they are not an unreasonable restraint on the employee’s freedom to work. For instance, if an employee cannot compete in the whole country for five years, a non-compete clause is going to be considered too large.
In general, according to Section 27 of the Indian Contract Act, of 1872, Indian law invalidates any agreement which limits trade or business. But courts have upheld the noncompete clauses in cases in which the restrictions were judged to be reasonable and not injurious to the individual’s right to earn a living.
Legal Validity of Non-Compete Clauses
The enforceability of non-compete clauses differs substantially in many jurisdictions. In the United States though, some states like California are very employee-friendly and you can’t have non-compete clauses. Yet in such industries as technology and healthcare, trade secrets are commonly enforceable.
In India, the validity of a non-compete clause depends on how reasonable the duration, geographic scope, and type of employment restricted by an employee is. The public interest and the person’s ability to carry on his profession, shall not be prevented by non-compete clauses under the Indian Contract Act, 1872.
Balancing employee rights with employer interests
Employers do indeed have a legitimate interest in protecting their trade secrets, but no agreement to keep that trade secret should impinge upon an employee’s right to earn a living or to move freely between employers.
1. Overreach in Employment Contracts: Too restrictive non-compete clauses can prevent employees from seeking employment and career advancement. For example, a company could include a clause that bars an employee from working for a competitor in any form and consider such a clause to be excessive and unenforceable. Non-compete clauses should be kept as bounded and defined as possible within the period and scope.
2. Employee Mobility and Career Opportunities: The law generally requires fair and reasonable non-compete clauses, but because employees are often unable to accept a significantly reduced salary in return for tying their labour for a certain period, excessive restrictive non-compete clauses may force employees to forfeit their career growth opportunities. But in industries where skills are highly transferable technology, media, science, etc. an impossibly broad non-compete clause is an undue restriction on an employee’s ability to work.
3. Legal Protections for Employees: Labor laws and the courts want to protect employees from overly restrictive agreements that would limit too severely an employee’s freedom to work. So, under Labor Law in India, restrictions on employees to work in a profession after employment are scrutinized under the judiciary.
Employer’s best practices to protect trade secrets
To provide solid protection for trade secrets, employers should strictly pursue best practices with employment contracts and non-compete clauses.
1. Drafting Effective Employment Contracts: specifically, and unambiguously, employers should craft provisions for confidentiality in employment contracts, contours of confidential information should be defined, as well as what duties employees have towards such information.
2. Crafting Enforceable Non-Compete Clauses: Reasonable duration, geographic scope, and types of employment restricted should be the terms of non-compete clauses. These clauses have to be tailored to the business, in nature, and to the employee’s position in the company.
3. Employee Training and Awareness: Employees should be taught at the employer’s expense about the importance of protecting trade secrets and the consequences of violating confidentiality agreements.[6]
The protection and challenges of trade secrets using employment contracts and non-compete clauses
1. Jurisdictional Differences: However, trade secret protection laws are very different from one jurisdiction to another. As an example, trade secret protection is stronger in the US than it is in some other areas. Employers must be aware of the legal standards in their jurisdictions.
2. Enforcing Non-Compete Clauses: In jurisdictions where non-compete clauses often are heavily scrutinized, the clauses themselves can be hard to enforce. Even if these clauses are enacted, employees may take these clauses to court and, if the employer shows that the clause is reasonable and necessary to protect trade secrets, the employer may win.
3. Remote Work and Global Talent Pool: Growing more remote to accommodate the global talent pool, and enforcing confidentiality agreements and non-compete clauses, can get difficult.[7]
Conclusion
Non-compete clauses and employment contracts are essential to protecting trade secrets, which are such an important aspect of the success of businesses. So, employers need to write such agreements carefully, balancing business needs on the one hand with the obligation to work on the other. Employers can ensure that what they create is safeguarded while ensuring an ethical and fair working culture for their workers if they do so by making sure their employment contracts and non-competing clauses are clear, reasonable, and legally sound.
By following the trade secrets best practices and regarding local laws, businesses can be assured that their trade secrets will remain protected against unauthorized disclosure and exploitation.
[1] iPleaders, Legality of Non-Compete Clause in Employment Contracts, iPleaders Blog, available at https://blog.ipleaders.in/legality-of-non-compete-clause-in-employment-contracts/ (last visited Dec. 3, 2024).
[2] VFS Global Services Pvt. Ltd. v. Roy, (2007) (India).
[3] Niranjan Shankar Golikari v. Century Spinning & Mfg. Co. Ltd., (1967) A.I.R. 1098 (SC) (India).
[4] Legal Kart, Non-Compete Clause and Its Enforceability in India: In-Depth Analysis, Legal Kart, available athttps://www.legalkart.com/legal-blog/non-compete-clause-and-its-enforceability-in-india-in-depth-analysis#:~:text=Businesses%20crafting%20these%20clauses%20must,ensure%20mutual%20growth%20and%20success (last visited Dec. 3, 2024).
[5] Balvinder Singh v. State of Haryana, (2003) 10 S.C.C. 132 (India).
[6] Dentons, Trade Secret Protection: Overview and Best Practices, Dentons, available at https://www.dentons.com/en/insights/alerts/2023/august/7/trade-secret-protection-overview-and-best-practices (last visited Dec. 3, 2024).
[7] iPleaders, Legality of Non-Compete Clause in Employment Contracts, iPleaders Blog, available at https://blog.ipleaders.in/legalityofnoncompeteclauseinemploymentcontracts/#:~:text=A%20non%2Dcompete%20clause%20is%20a%20clause%20in%20an%20employment,enforceability%20depends%20on%20various%20factors (last visited Dec. 3, 2024).
Author: Beradar Akash, a 5th year BBA LLB student of Christ Academy Institute of Law Bangalore.
