Non-Compete Agreements – Purpose, Principles, Purview& Provisions

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Background 

Any new hires of a company generally need to sign a non-compete agreement. A boiler-plate non-compete mostly restricts the new employees or hires from setting up a similar business in the same city or restricts them from joining any rival company for a specified period of time after their contractual agreement with the original company is terminated or ended.

Why exactly are such non-competes necessary in the first place? What clauses are there in such corporate agreements? When can their clauses be triggered? How are these clauses enforced? If one doesn’t get a preliminary understanding of these questions then it would be difficult to know the legal niceties further on. For eg:- Did you know that in California, non-compete agreements are unenforceable and if your new employers makes you sign one, then you can sue him or her.

What exactly is a non-compete agreement? – Defining the conceptual scope

Basically, a Non-Compete Agreement or NCA is a legal agreement between two parties, i.e., the employer and the employee. As their name suggests, such agreements prohibit the signee or the employees from competing with their employer for a set period of time after the completion of their employment. Just like Non-Disclosure agreements, these agreements may also include some confidentiality clauses to restrain the leaving employee from revealing any confidential information or trade secrets to a third party or their future employer.

The entities that are signatories to such agreements are generally new employees but they may include outside consultants or hired contractors. This agreement is signed at the start of their term. But the enforcement of such agreements differs from jurisdiction to jurisdiction and at some places, the employers may even be needed to give a base pay to the ex-employee for the duration of their non-compete validity.

These agreements make sure that the ex-employees do not engage in any indirect competition as well. Since they remain binding even after the employment period ceases to exist, they give the parent company a buffer period to fortify themselves without having any market share being snatched from their hands by some rival company that employs the ex-employee. Some non-compete agreements even prevent the leaving employee from getting another job in the same field or in a rival company, if they voluntarily leave their position instead of letting their contract expire.

NCAs even specify some other terms in their clauses that mandate no competition against the ex-employer. These contractual obligations may specify either the duration of no competition, the market of no competition or the geographic location. NCAs are also referred to as a ‘restrictive covenant’.

General Use of NCAs – Identifying the markets or industries

NCAs are agreements that are pretty standard in the corporate world. Especially in India, they’re commonly used and made to be signed across a broad spectrum of markets and industries. From TV media to Sports Teams, every employer would want their star performer to stay with them and in case he or she doesn’t, then they would not want them competing against their ex-employer. This is a reasonable cause that exists commonly, throughout all jurisdictions.

Although Non-Compete Agreements are ever present, they seem to be strictly worded and enforced in some specific industries. These industries are the ones where there is utter market saturation and they also involve disclosure of proprietary information to the employees. Therefore, NCAs are mainly used and enforced in the Information Technology or the IT industry, the fast-food chain or manufacturing sector and financial conglomerates like private banks and hedge funds.

The common thread that seems to be woven across all these industries is that there are too many competitors and an ex-employee working for the rival can basically act as a clone to one’s business model. The unique corporate identities of companies would get dissolved within the crowd if NCAs are not enforced strictly in such sectors.

The period of operation of NCAs

Any non-compete agreement is functional for the period of the signee’s employment and starts right from the beginning of their term. It goes on to extend beyond the termination of their contractual term if it includes some post-termination clauses within its fold. But Indian courts have held some of such agreements to be void-ab-initio if such clauses included restriction from trade. To buttress their rationale the courts generally put forth the reasoning that such contracts contravene the Section 27 of the Indian Contract Act, 1872. Moreover, such contracts are also held to be against public policy as they infringe the fundamental right of livelihood of the signatories. But as regards to other post-termination clauses, such as jurisdictional or market prohibiting provisions which offer limited leeway to the ex-employees thereby allowing them to practice their profession elsewhere, the agreements stand rock solid in court, if they’re drafted accordingly.

Core components of a Non-Compete Agreement

Just like any other corporate document, a non-compete agreement also has some basic clauses that are common in all types of such agreements. These are standard format provisions for all NCAs. Some of these clauses include the following:-

Firstly, the parties to the contract. Similar to any other contractual agreement, the parties to the Non-Compete Agreement are the first ones to be specified in it. This is done so as to clarify the signatories of the document and any new entity needs to sign such a document freshly so as to make it clear what their role is going to be.

Next, the non-compete agreement also specifics the duration of its validity. This clause basically concretizes the time period for which the agreement would remain enforceable. The time period should be a reasonable one, and for ensuring that the leaving employee is awarded fair opportunities to earn his or her livelihood.

Now moving on to the specifics, a non-compete agreement should specify the type of work which the employee is forbidden to do post his or her retirement or termination of contractual agreement.

On top of this, one has to be very specific in mentioning the damages in case the terms and conditions embedded within the agreement are breached. Disobeying the mandate of NCAs should always hold a deterrence value. If any leaving employee infringes the provisions of non-compete agreements then he or she would be open to be sued by their previous employer for any and all compensatory damage that would be caused due to such contravention. Therefore, the damage must be specified and types or range of damages should also be noted while drafting a NCA.

Lastly, if a civil dispute arises between the parties, i.e., between the employer and the ex-employee then they would require a proper and appropriate forum to settle it. Therefore, provisions must also be mentioned in the NCAs which specify whether the dispute resolution would happen in the court of proper jurisdiction or would it be settled via arbitration. If it is the latter then the number of arbitrators, duration, and other important things which are circumferential to arbitration should also be mentioned to ease the process.

And obviously, to authenticate all of these clauses, the NCA should be signed by both the parties in presence of witnesses so as to bind themselves legally and mutually, in such a valid contract.

Concluding Remarks

To conclude the write-up, now it is necessary to look at the fact that Indian Courts are not as liberal as courts in other jurisdictions are, as regards to the enforcement of NCAs. The restrictions that are put forth in these aforementioned clauses, must be stated with a reasonable frame of reference as opposed to a vengeance-oriented strict and narrow draft. The courts would throw out such claims on the first hearing and the object of the agreement would get turned on its head.

Of course, having said this, it is also pertinent to note that, with the new trends of socio-legal and corporate relations, the integrity of short-lived employment is necessary to be protected contractually. Thereby the need and necessity of NCAs has risen even more today.