Reassessing Non-Compete Covenants: Jurisprudence, Global Shifts, and Practical Alternatives
Non-compete clauses, also known as covenants not to compete, are standard in employment contracts, as they serve as a measure of protection in the contemporary business environment. These clauses essentially restrict the employee from entering into a competing business after their employment ends for a specified period. Black Law Law Dictionary defines a non-compete clause or agreement as “A promise, usually in a sale-of-business, partnership, or employment contract, not to engage in the same type of business for a stated time in the same market as the buyer, partner, or employer.”
Essentially, these agreements are signed between an employer and employee on the terms that the employee, regardless of being terminated or resigned, shall not work for a competitor after their term is over. This restriction can either be only for a limited period or a certain geographical location, or a particular market. Businesses use non-compete agreements to safeguard their intellectual property, their trade secrets, or even their operational method (unique to them), which gives them a competitive edge in the market. With the absence of such a contract or clause, former employees could use the confidential information or source clients from the previous employment, to benefit the competing business or even launch a venture of their own, which could be detrimental to the company. Thus, non-compete clauses form an essential part of the hiring process to secure the Business’s competitive edge. This may involve a restriction on working for a direct competitor, or a specific market, or a specific geographical area, or for a specific duration.
However, non-compete clauses can also significantly restrict employees by limiting their chances to seek better employment opportunities. The imposition of a long wait period can also force an employee to leave the industry altogether. Further, a survey by the U.S. Department of the Treasury’s Office of Economic Policy found that most of the employees restricted by non-compete clauses do not have access to any trade secrets or confidential information, thus are unnecessarily restricted, weakening their bargaining power. Therefore, it is seen that non-compete clauses primarily benefit the employer’s leading to their growing unpopularity. Further, their enforceability remains convoluted.
ENFORCEABILITY OF NON-COMPETES: INDIA AND BEYOND
As Per Section 27 of the Indian Contract Act, 1872, which states that “An agreement by which anyone is restrained from exercising a lawful profession, or trade or business of any kind is to that extent void, unless they fall within the narrow exception carved out by the statute”. The essence behind the statute is that an individual shall not be restrained from practising lawful trade, and any clause or agreement restricting an individual from doing so shall be declared to be void unless it falls under the exception. This principle aligns with “Article 19(1)(g) of the Indian Constitution, which guarantees citizens the fundamental right to engage in any profession, trade, or business of their choice”. However, this right, akin to other fundamental rights, is not absolute, and there exist certain exceptions. The Hon’ble Supreme Court has consistently adopted the view that: Negative Covenants or Non-Compete Clauses can only be exercised to the extent that they are: Reasonable and protect the legitimate interest of the buyer. The general consensus by the Indian Courts being that these restrictions are valid during the course of employment and not violative of S.27 of ICA, 1872, as it ensures that the employee serves exclusively to the employer and therefore, not acting as a restraint of trade, rather crucial for the interests of the employer. In such circumstances also, the court has clarified the restraint cannot be more than necessary and must be reasonable
The conundrum arises with the enforcement of negative covenants beyond the course of employment. The Apex Court, in the landmark decision, of “Niranjan Shankar Golikari”, upheld non compete agreements during the term of employment; however clarifies that such restrictions beyond the term of employment as invalid. Additionally, in the case of “Krishan Murgai”, the court established that, non-compete clauses extending beyond the term of employment are void under S.27. Further, the consistent approach adopted by High Courts has been that post employment, non-compete clauses are void, the reasoning being that the interests of the “Right to livelihood of a person must prevail over the interests of an employer”
However, it must not be considered that post employment non-compete clauses are entirely unenforceable, the Delhi High Court in the case of Wipro Ltd, has upheld that: Employees who had already joined a competitor could not be stopped from working there, as doing so would amount to adding an unfair restriction to their contract, which goes against Section 27 of ICA. However, the court could still allow a ban on future poaching of clients or staff, considering it a fair and reasonable limitation. Additionally, in the case of “Affle Holdings Pte Limited v Saurabh Singh”, the Delhi High Court held that non-compete clauses beyond the term of employment are void and not enforceable.
Although the Indian jurisprudence so far has not favoured post-employment non-compete contracts, another exception observed is “the sale of goodwill”. The Courts have generally upheld non-compete agreements between a seller and buyer of a business post-employment, if those restrictions relate to selling the goodwill as part of the business. Courts tend to uphold non-compete clauses when the restricted area is limited and proportionate to the industry’s standards. For example, in “Ozone Spa Pvt. Ltd. v. Pure Fitness & Ors”, the Delhi High Court barred the defendants from setting up a business near the plaintiff’s premises, citing the transfer of goodwill
Thus, it is observed that non-compete clauses are not encouraged in India, and their enforceability also dwells in ambiguity. It is interesting to note that similar skepticism against non-compete agreements is also seen at the Global Stance. To substantiate the same, in the US, the FTC recently attempted a sweeping ban on almost all non-compete Agreements nationwide. However, this sweeping rule has faced significant legal pushback and was ultimately struck down in federal court, with its future now uncertain under the Trump administration. Additionally, the United Kingdom has also shown an intention to limit non-compete clauses post-employment duration to only three months to promote greater competition and flexibility among workers. Courts in countries like France, the Netherlands, and Sweden frequently strike down or narrow clauses that lack clear limits or place an undue burden on workers.
These indicate a broader skepticism towards non-compete clauses. Additionally, owing to the ambiguity around the enforceability of post-employment non-compete clauses, many companies have adopted alternatives to non-compete clauses.
ALTERNATIVES TO NON-COMPETE
Garden leave involves an employee being asked to stay away from work during their notice period while still receiving their salary. While this isn’t very common in India yet, some industries are starting to adopt it because it helps prevent sensitive information from being shared, gives the company time to manage client handovers, and can be easier to enforce than standard non-compete agreements.
However, the Bombay High Court, in the case of Suprit Roy, the Bombay High Court held that the mere payment of salary during garden leave does not amount to an extension of the employment contract, and such clauses could still fall foul of Section 27 as they operate in restraint of trade. Despite this, garden leave clauses continue to be widely practised across corporate India. That said, Indian courts remain more inclined to enforce restrictive covenants in the form of non-disclosure of confidential information and non-solicitation of clients or employees, which are seen as reasonable and necessary to protect legitimate business interests.
Author:– Shreyamsi Brahma, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or IP & Legal Filing.
References:
1. The FTC’s Noncompete Ban Was Long Overdue, HARV. BUS. REV. (May 2024), accessible at: https://hbr.org/2024/05/the-ftcs-noncompete-ban-was-long-overdue. (last visited June 2025).
- Trump Administration Halts Appeals of Rulings Blocking FTC Noncompete Ban, OGLETREE DEAKINS (2024), accessible at: https://ogletree.com/insights-resources/blog-posts/trump-administration-halts-appeals-of-rulings-blocking-ftc-noncompete-ban/. (last visited June 2025).
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- The Indian Contract Act (1872), §27 (India).
