A Single Bench of the Madras High Court on August 20, 2020 in the case of M/s Lifecell International Private Limited (“Applicant”) v. Vinay Katrela (“Respondent”), O.A. Nos. 599 and 600 of 2018, interpreted the law pertaining to agreements in restraint of trade and confidentiality while deciding upon an application for granting interim measures under Section 9(ii)(c)(d)(e) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

Brief facts of the case:

The Applicant is in the business of testing, processing, preserving and storage of umbilical cord stem cells collected at the time of birth of the child. The Applicant entered into a franchisee agreement with the Respondent, on a non-exclusive basis for a period of 3 (three) years, commencing from October 10, 2016 (“Franchisee Agreement”).  

The Franchisee Agreement comprised a ‘Non-Compete’ clause, reproduced below:

“Clause 12.1: During the term of this agreement and for a period two (2) years following the expiration, nonrenewal or other termination of this Agreement, the Franchisee, any of its associates or partners or relatives, any of its Directors or employees or relatives of such Directors or employees and professional consultants shall not compete with the Company by conducting or involving in any manner in any business of similar nature as that of the company's business. To the extent that this covenant “not to compete” is determined by any court of competent jurisdiction to be unduly broad in scope or application, it is the intention of the parties in the said event that this covenant “not to compete” be interpreted to the broadest extent legally permissible and that this covenant “not to compete” shall not be deemed unenforceable in its entirety. The Franchisee shall also not employ or cause to be employed any personnel of the company either during the term of the agreement or within two years after termination of this agreement, or that of any other Franchisee in the business or any of the Company's vendors or Clients, without the prior written approval of the Company. In case of any breach, with respect to this clause, the Company reserves the right to cause the Deposit to be forfeited and also claim such damages as it may deem fit from the Franchisee.”

The said Franchisee Agreement was terminated by the Applicant with effect from May 22, 2018. Thereafter, it has been alleged by the Applicant that the Respondent, has violated the confidentiality agreement as well as the non-compete clause in the Franchisee Agreement by divulging information to the Applicant`s competitor vide email dated May 24, 2018 i.e. after the termination of the Franchisee Agreement. The Applicant thus, approached the court, by filing an application under Section 9(ii)(c)(d)(e) of the Arbitration Act, pending initiation of arbitral proceedings.

Per contra, the Respondent contended that, enforcing a non-compete or non-disclosure clause will restrain the Respondent from carrying on in a business, which is no longer carried on by the Applicant and the same is, unreasonable and violative of Section 27 of the Indian Contract Act. Further, they also contended that non-compete and non-disclosure clauses are void in law and therefore, the application for interim relief is liable to be dismissed.

Decision of the court

The Madras High Court while placing reliance on the judgment of the Supreme Court rendered in the case of Niranjan Shankar Golikari v. Century Spinning and Manufacturing Company Limited, CDJ 1967 (SC) 078, observed that there cannot be an absolute restraint post termination of the employment or in the instant case, the Franchisee Agreement. 

The Madras High Court, while noting the significant difference in enforcing restraint against an agent or a franchisee, held that, the franchisee who is well versed in his trade shall be permitted to carry on his avocation, otherwise, he will be erased and his livelihood will be at risk. The court also enumerated that the knowledge acquired by a person during his employment as agent, due to his efficiency and intelligence is personal to him and his ability to persuade or canvas or communicate with the parties cannot be said as a property of his principal; nor there can be any restraint from using his individual skills after termination of relationship. However, the court also laid down that if, for a particular purpose, a specialized training is imparted at the cost of the company, with regard to the trade secrets, it is a special knowledge given in confidence by the employer to its employee or agent and such special secrets regarding the trade shall not be divulged to rival parties as it will be detrimental to the future prospects of the principal. Thus, the Madras High Court held that, the restriction can only be in respect of the trade secrets or the business dealings which is developed suiting the prospects of the company and hence, cannot be divulged. 

The Madras High Court, thereafter, in the light of the aforesaid, analyzed the facts and circumstances of the case and concluded that, the Respondent was liable for divulging of confidential information of the Applicant`s business and also, defined the scope of “trade secrets” to include business information, such as cost and pricing, projected capital investments, inventory marketing strategies and customer's list.

The court thus, while relying on the judgment rendered by the Calcutta High Court in the case of Hitech Systems and Service Limited v. Suprabhat Ray and ors., 2015 SCC OnLine Cal 1192, granted interim relief to the Applicant till the arbitration proceedings are completed and left the questions pertaining to reasonable restriction on trade and breach of the Franchisee Agreement, to be decided by the arbitral tribunal. 

Please find a copy of the order here. 

This update has been contributed by Arka Majumdar (Partner) and Kunal Dey (Associate).