Introduction
In employment agreements, confidentiality, Non-solicitation and Non-compete clauses are carefully drafted to protect the interest of the employer and aid in serving as a sword against those who commit breach of these clauses. Usually, these are used to act as a barrier for the co-founders, key managerial personnel or senior employees of a company from starting a competing business or joining a competitor.
In a recent case of Kenrise Media Pvt. Ltd., vs Mr. Ashish K Mishra dated 3 June, 2021, Karnataka High Court dismissed the appeal of a company which was filed against a co-founder who prima-facie used the confidential information, joined a competitor and took a few employees of the company too. This is a case wherein the company failed to enforce Confidentiality, Non-solicitation and Non-compete clauses in court.
In this article, the Author will walk you through the stepwise facts, discussion on each clause, relevant judgements, order of this case and a few takeaways from the judgement.
Factual Matrix
About parties: Kenrise Media Pvt Ltd (“Kenrise/ 1st Appellant”) filed a case against one of its co-founder Mr. Ashish K. Mishra (“Mr. Ashish/ 1st Respondent”) and three staff writers (“Writers/ 2nd to 4th Respondents”). Kenrise runs an online news platform known as “The Ken” which publishes news stories pertaining to technology, start-ups, developments in the healthcare sector and on other topics.
Claim: Kenrise claimed that the Writers resigned along with the co-founder Mr. Ashish and they took with them the confidential information and business know-how of Kenrise. They made an unauthorized use of such information for setting up a new competing venture by name “The Morning Context” (5th Respondent).
Agreements executed: Agreements between Kenrise and Mr. Ashish are Executive Employment Agreement, Shareholders Agreement, Share Subscription Agreement and an Exit Agreement. Agreements between Kenrise and the Writers are employment agreements.
Clauses in question: Kenrise has claimed that the co-founder Mr. Ashish along with the Writers has breached the following clauses:- (i) Indemnity, (ii) Non-competition, (iii) Non-solicitation, and (iv) Confidentiality.
Grounds of the Complaint and their findings
1. Breach of confidentiality
Kenrise allegations and Respondents submissions: Below are the evidences by Kenrise as to how the co founder and Writers committed breach of confidentiality clauses, and the submissions made by the Respondents:
| Kenrise allegations | Respondents submissions |
| Co-founder Mr. Ashish forwarded to his personal email an attachment which was at the very heart of Kenrise’s operation and management, and disclosure of such information would provide a blueprint for any other organization which is attempting to set up a similar subscription-lead business. | It is not pointed out by Kenrise as to what confidential aspects of the alleged unique business model were revealed by Mr. Ashish. The documents on which Kenrise is relying upon are either available on the public domain or are within the personal knowledge of Mr. Ashish from his years of professional experience. Reliance was placed on the matter of M/S. Stellar Information Technology Private Limited – vs- Mr. Rakesh Kumar wherein Delhi High Court held that the information which is already available in the public domain cannot be considered as confidential information and no injunction for use of such information can be issued. |
| Mr. Ashish sent an email to his wife on setting up a subscription based news platform based on his experience and learnings with Kenrise. | His wife intended to start a blog on pregnancy and the contents of the email have been misinterpreted by Kenrise as the said email does not even mention the word ‘subscription based news platform’ |
| Various other alleged incidents of disclosure of confidential information and diverting it into the competitive entities. | Kenrise has failed to prove that it has suffered an injury and is adversely affected by the alleged use of the said information by any of the respondents. |
Findings of the Court:
What is confidential information? Court first dealt with the issue of what constitutes confidential information. Reliance was placed on a leading decision of the British Court on this aspect in the case of Coco -vs- A.N. Clark (Engineers) Limited wherein it was held that (i) something which is public property and public knowledge cannot per se provide any foundation for proceedings for breach of confidence. (ii) The second requirement is that the information must have been communicated in circumstances importing an obligation of confidence. (iii) Thirdly, there must be an unauthorized use of the information to the detriment of the person communicating it. Thus, information cannot be termed as confidential information merely because it is claimed by a party.
The information disclosed is not confidential: The court examined the information which was alleged to be confidential by Kenrise and concluded that nothing in those documents was creative or unique arrangement of data and it is very difficult to arrive at a prima facie conclusion that the said documents contain any confidential information. Moreover, Kenrise has not even prima facie demonstrated that any loss was caused to them due to the alleged act of the co-founder of revealing alleged confidential information.
2. Breach of Non-Solicitation
Kenrise allegations and Respondents submissions: Below are the evidences by Kenrise as to how the co founder and Writers committed breach of non-solicitation clauses, and the submissions made by the Respondents:
| Kenrise allegations | Respondents submissions |
| Kenrise claimed that the co-founder and Writers indulged in inter se solicitation for leaving the employment. The resignation of the Writers was announced by the co-founder Mr. Ashish on his twitter account even prior to their official resignations. | Respondent relied upon the provisions of Section 27 of the Indian Contract Act, 1872. It was submitted that no service covenant can be extended after the termination of service by the appellant. Relying upon a decision of the Apex Court in the case of Superintendence Company of India (P) Ltd -vs- Krishan Murgai6, it was submitted that unlike an agreement which is of a goodwill of business type of contract, post service terminal restrictive covenants are void as per Section 27 of the Contract Act. The co-founder made an announcement on his twitter endorsing the abilities and talent of the Writers, with a view to create an alternative opportunity for them.. |
Findings of the Court: At the time when the Writers had tendered their resignations, the co-founder was not concerned with the fifth respondent ‘The Morning Context’. Co-founder’s wife is a Chartered Accountant and she was a founder director of the fifth respondent in her own right.
Therefore, even assuming that the co-founder had prior knowledge about the decision of the Writers of resigning from their employment, it is very difficult to understand which clause of the agreement executed by Kenrise has been breached.
3. Breach of Non-Competition
Kenrise allegations and Respondents submissions: Below are the evidences by Kenrise as to how the co founder and Writers committed breach of Non-Competition clauses, and the submissions made by the Respondents:
| Kenrise allegations | Respondents submissions |
| Kenrise claimed that the Co-founder and the Writers decided to surreptitiously set up Fifth Respondent “The Morning Context” | Non-compete clauses of the Exit Agreement not only aim at binding the Co-founder from pursuing his career for an arbitrarily long duration of three years, but it also seeks to restrict him from doing business in any part of the world. Therefore, this clause is illegal. The co-founder has not participated in the establishment of competing business and he is merely an employee of the Fifth respondent and he is working in the capacity of a content writer. |
Findings of the Court:
- Analysis of Section 27:
Extract of Section 27: “27. Agreement in restraint of trade, void. – Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.
Exception 1.- Saving of agreement not to carry on business of which goodwill is sold. – One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the Court reasonable, regard being hard to the nature of the business”.
Test of reasonableness: Reliance was placed on the decision in the matter of Mason v. Provident Clothing and Supply Co. Ltd. wherein it was held that all covenants in restraint of trade partial as well as general are prima facie void and they cannot be enforced unless the test of reasonableness is testified. It was also urged that while an employer is not entitled to protect himself against competition per se on the part of an employee after the employment has ceased, he is entitled to protection of his proprietary interest viz. his trade secrets, if any, and a business connection.
The test of reasonableness which now governs the common law doctrine of restraint of trade has been stated in CHITTY ON CONTRACTS, 23rd Edn., Vol. I, p. 867: “While all restraints of trade to which the doctrine applied are prima facie unenforceable, all, whether partial or total, are enforceable, if reasonable.”
Conclusion: Under section 27 of the Contract Act, an agreement which contains a restraint clause, restraining a person from exercising a lawful profession, trade or business of any kind is void. There is one exception to the said rule. The exception is in a case where a good-will of a business is sold. Only in such a case, an agreement to restrain such a person from carrying on a similar business can be enforced.
- Applicability of Section 27 in the instant case:
The Exit Agreement did not provide for payment of any amount towards goodwill. It is very difficult to draw an inference that any amount was paid towards goodwill to the first respondent. Therefore, any clause in any of the agreements executed by the co-founder which restrains him from exercising a lawful profession as an author or editor, trade or business, will be void in view of Section 27 of the Contract Act. Such clauses were not enforceable.
- Judgement:
By acting as an employee/editor of “The Morning Context”, it cannot be said that the Co-founder has committed any breach of contractual obligations.
Key Takeaways
The above discussed clauses are found in almost all kinds of contracts, yet there is ambiguity as to the enforceability of these clauses. The basic objective underlying these disputable boilerplate clauses is to ascertain the legal position of both the parties. These clauses have been developed over the years demonstrating the best practises followed in the legal industry with respect to the allocation of typical risks.
Nevertheless, in case of a breach of these clauses, evidence and legal provisions play a crucial role in enforcing these clauses.
The onus of proving a breach of these clauses is on the non-defaulting party which has to demonstrate the confidentiality of the information and how it has suffered loss. However, establishing breach of non-solicitation which is a Post service-terminal clause is no cakewalk. Moreover, in order to enforce non-compete clauses, Section 27 of Contract Act and relevant case laws are a great defence for the defaulting party.
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