Non-compete or non-solicitation or confidentiality clauses are included in agreements to deal with the mechanics of the same and are relevant to most transactions. Albeit its popularity, enforcement of these clauses is a different story altogether. We have penned the principles behind the enforcement of these clauses in light of an interesting Bombay High Court case, Kenrise Media Pvt. Ltd v Ashish K. Mishra, MANU/KA/2167/2021 (Kenrise Case).

The Kenrise Case is an appeal by Kenrise Media Pvt. Ltd. (Kenrise) that runs and operates on subscription basis an online news platform known as ‘the Ken' along with 3 co-founders of Kenrise (collectively the Appellants) against a former co-founder (R1), the wife of R1 (R2), 3 former employees (Staff Writers), Slowform Media PTE. Ltd (Slowform Singapore) and Slowform Media Pvt. Ltd (Slowform India).  

The submissions and arguments by Kenrise primarily involved the judicial interpretation of breach of confidential, non-compete and non-solicit obligations stemming from:

  1. a share subscription agreement and shareholders' agreement executed amongst, inter alia, the Appellants and R1 (Investment Agreements);
  2. employment agreements executed by Kenrise with R1 and the Staff Writers respectively; and
  3. an exit agreement1 entered into amongst the Appellants and R1 (Exit Agreement).

Summary of Allegations

It was alleged by the Appellants that during the negotiations of the Exit Agreement, the respondents set up a new venture called the ‘the Morning Context' by using unauthorized sensitive information pertaining to the customers, subscribers and business vendors of Kenrise.2

It was alleged that the steps to develop the Morning Context was in March 2019 itself, 5 months prior to the exit of R1 from Kenrise. It was also alleged that R2, who happens to be the director of Slowform India, received information from R1 about Kenrise with a view to commercially exploit the said information.

Four interlocutory applications were filed by the Appellants praying for an injunction restraining the Morning Context from commercially exploiting information, soliciting services, engaging in or conducting the same business as that of Kenrise. The Appellants also sought damages.

Breach of Confidential Obligations

The evidence on record showed that R1 had sent emails to his personal account and to R2, containing information of Kenrise, inter alia, details of corporate customers with revenue figures, details of the patrons, names of authors, the number of subscriptions generated and whether subscriptions were annual or quarterly (Confidential Information).

It was alleged that the Confidential Information “was at the very heart of Kenrise's operation and management and that disclosure of such information would provide a blueprint for any other organization which is attempting to set up a similar subscription-lead business”.

In order to answer the question of breach of confidential obligations, the Bombay High Court (Court) first considered what would constitute confidential information. In order to determine this, the Court relied upon the leading decision of the British Court, Coco v A.N. Clark (Engineers) Limited, (1968) F.S.R. 415, which, inter alia, held that the information must "have the necessary quality of confidence about it”. Accordingly, the Court held that:  

“If the information is a public property and is in public knowledge and such information is shared, it cannot be said it will lead to a breach of confidence. Secondly, that information must have been imparted in circumstances importing an obligation of confidence. In a given case, the obligation of confidence need not be express but it can be implied. Thirdly, there must be an unauthorized use of that information to the detriment of the aggrieved party or to the detriment of a third party whom the aggrieved party wishes to protect.”

It was observed by the Court that:

  1. the details of the patrons were captured in the Investment Agreements and would therefore not per-se constitute confidential information;
  2. the name of authors, the number of subscriptions generated, etc. were available on the website of Kenrise and did not constitute creative or unique arrangement of data to qualify protection under the Indian Copyright Act, 1957; and
  3. no evidence was produced by the Appellants to show that:
    1. the model of online platform of Kenrise was unique. Further, there were several news platforms based on subscription such as the Wall Street Journal, Business Standard, the Economic Times Prime, etc.; and
    2. any information which is confidential information of Kenrise was received by R1 or the Staff Writers and that the same was used by them to cause detriment or prejudice to Kenrise or any other person whom Kenrise intended to protect.

The Court therefore concluded that there was no breach of confidentiality obligations by R1 or the Staff Writers.

Breach of Non-Compete Obligations and Non-Solicitation Obligations

Non-compete and non-solicit obligations of R1 were provided under the employment agreement executed between Kenrise and R1 as well as the Exit Agreement, wherein R1 was restricted from competing with Kenrise or soliciting its employees, customers or vendors to leave Kenrise, for a period of 36 months from termination of employment of R1.

Non-Compete and non-solicit obligations of the Staff Writers were provided in the employment agreements executed between Kenrise and the respective Staff Writer, and were similar to the non-compete and non-solicitation obligations of R1. The employment agreement for Staff Writers further provided that Staff Writers shall not seek employment with a company whose business competes with Kenrise's business.

Obligations as such are in the nature of post-contractual covenants/restrictions governed under Section 27 of the Indian Contract Act, 18723 (Contract Act) and the Court relied upon the judgement of the Apex Court in Percept D'Mark (India) Pvt. Ltd v Zaheer Khan and another, (2006) 4 SCC 227, which enunciated that -

“The legal position clearly crystallised in our country is that while construing the provisions of Section 27 of the Contract Act, neither the test of reasonableness nor the principle of restraint being partial is applicable, unless it falls within express exception engrafted in Section 27”.

The Court observed that ”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 person from carrying on a similar business can be enforced.”

Further, the Court observed that there was no prima facie material on record to show that:

  1. there was any breach committed by R1 in respect of the non-solicitation covenants (in fact, the Staff Writers had joined the Morning Context at a time when R1 was still associated with Kenrise);
  2. the Morning Context was a competitor of Kenrise's news platform; and
  3. the good-will of Kenrise was sold by R1 pursuant to the Exit Agreement.

The Court accordingly concluded that there is no merit in the Appellants' case and that a prima facie case was not made out.

Conclusion

The Kenrise Case is a fact centric case, where the Appellants failed to establish a prima facie case, which is one of the key ingredients required for a court to grant injunction. As regards balance of convenience and irreparable loss tests, i.e., the remaining ingredients of an injunction, the Appellants failed to establish these as well. Since the Appellants had prayed that damages be granted to them due to the breach of the post-contract covenants by respondents, it was evident that the alleged breaches could be compensated for by money. Thus, there was no irreparable loss suffered. Further, no case was made out to show that the balance of convenience was in favour of the Appellants and irreparable loss would be caused to them in case an injunction is not granted by the Court.

The Kenrise Case explains the position of Indian law with regard to post-contractual covenants under Section 27 of the Contract Act, i.e. that they are null and void. The exception to this is in cases where the good-will of the company is sold and the seller agrees to refrain from carrying on a similar business, within specified local limits, so long as the buyer or the good-will holder carries on a like business. Further, the specified limits must appear reasonable to the court with regard to the nature of the business.

The key take-away from the Kenrise Case is that even though post-contractual obligations are drafted in almost all transactional contracts or otherwise, they may not always be enforceable and would ultimately be subject to the law of the land. Therefore, such covenants must be drafted  in light of the Contract Act and other applicable laws, to ensure that such provisions are actually enforceable.

Footnotes

1 It is alleged in the plaint that R1 created an unprofessional work environment. It is further alleged that instead of terminating the services of R1 with a view to ensure a productive work environment and to ensure the sale of Kenrise's share onwed by R1 to the Appellants, the Appellants and R1 executed an exit agreement.

2 Slowform India, the subsidiary of Slowform Singapore, ran and operated ‘the Morning Context' i.e., a new portal that had similarities to the Ken.

3 Section 27 of the Indian Contract Act, 1872 states that every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void with the exception of cases where the good-will of the business is sold.

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