Can Former Employees Be Restricted From Sharing Trade Secrets? Law Needs A Fresh Look, Says High Court

A dispute between senior attorneys at a Kolkata-based law firm has rekindled an age-old debate under contract law.

The ongoing litigation between patent law attorneys Sudipta Banerjee and Indira Banerjee and their erstwhile firm LS Davar & Co. has led the Calcutta High Court to suggest a relook at restrictive agreements under the Contract Act, 1872.

But first, the backstory.

The firm LS Davar & Co. has accused the Banerjees of divulging confidential information and trade secrets acquired during their course of employment, namely electronic records, proprietary drafts of precedents, agreements, forms presentation, legal opinions, action plans and strategies, client information, fee schedules, etc.

The firm sought an injunction from the high court against its former employees, who it says had signed confidentiality and non-compete agreements.

The Banerjees relied on Section 27 to make their case saying the injunction by the trial court prevents two experienced patent attorneys from discharging their professional work. The provision voids every agreement which restrains anyone from exercising a lawful profession, trade or business of any kind.

They contended that there's no allegation that any material document, data—electronic or otherwise—was retained by them after resignation and that it was used to make wrongful gain.

Relying on the Supreme Court’s rulings, the Banerjees argued that a restrictive covenant extending beyond the term of the contract is void. And that the confidentiality clause does not preclude them from using skills which they learnt by experience while at the firm.

Whether any information was divulged will be determined during the trial. For now, the Calcutta High Court has injuncted the Banerjees from divulging or sharing confidential information, gathered during the course of their employment, until the case is decided on its merits.

In doing so, the high court underscored the necessity to impose some restrictions and recognise negative covenants in service contracts, especially where it involves specialised knowledge as it must live up to the present needs.

Most service contracts have restrictive covenants extending beyond the term of employment. Over the years, courts have had to determine whether such restraints fall foul of Section 27.

In an era of high attrition and movement of teams across organisations, the ability to enforce confidentiality and non-compete covenants adequately and in a balanced manner becomes very important, Akil Hirani, managing partner at Majmudar & Partners, said.

Agreeing with the high court’s suggestion, Hirani points out that Section 27 and its various judicial interpretations need to be given a careful relook.

The 13^th Law Commission had pointed out that Section 27 was envisaged at a time when India’s trade was underdeveloped, and its objective was to protect trade from restraints. But that’s not the case anymore and a more liberal attitude can be adopted by acknowledging reasonable restraints, the commission had said in its report.

This was in 1958. 64 years later, the high court is reiterating the same need.

Anand Desai, managing partner at DSK Legal, however, said that over the years, courts have laid down the law clearly — that non-compete, before the term of employment, cannot be enforced except in very limited exceptions recognised in law.

But confidential information, trade secrets continue to be of value to an entity, it’s permanent, and an employee cannot abuse that, he said.

The onus to prove that restrictive covenants in the contract don't violate Section 27 rests on the employer.

Most recently, the Karnataka High Court has laid down that it must be shown that:

• The covenant operates for a restricted period/areas.

• Pertains to information that is exclusive, nuanced and shared with the confidence that the employee shall use such information only for the benefit of the employer and maintain fidelity.

• The restraint will not tantamount to restraining the employee from using his own acumen or skillsets.

These tests will perhaps need to be met by the firm LS Davar & Co. as the case progresses before the Calcutta High Court, which has emphasised in its interim order that confidential information and trade secrets are required to be protected by law.

Hirani suggests that these exclusions should be built into Section 27, such that employees who divulge either are made liable. Until that happens, employers must be wary of boilerplate confidentiality clauses, he said.

"Most agreements have boilerplate confidentiality clauses, which often times don’t work. If confidential information of the employer is appropriately described, then an employer can more easily prove in a court what it is that the new employer is doing basis the trade secrets transferred by the employee."