Legal Remedies available against Former Employees running Competitive Business while adopting Illegal and Unlawful Means: Lawyers Advice
Former employees pose a grave threat to any Corporation or Organisation whereby it is widely seen that they indulge into illegal and unlawful activities from client poaching, data leakages, selling trade secrets and Intellectual Properties (IP), disseminating false and wrong information specially on social media platforms and entering into same business. This affects the Corporation in both monetary terms and non-monetary terms and causes illegal and wrongful damages, injuries and losses to their previous Employer.
It is inevitable during the course of employment that an employee is not made to handle confidential data and information for their assignments. Such employees gradually become aware of existing trade secrets, databases and working mechanisms which may not be known to the public.
It becomes dangerous when these employees choose to leave or terminate their work contracts and out of malice, leak information and choose to defame their former employers in an attempt to offload business and use unfair competition practices to harm the reputation of their former employers using social media, etc. and try and poach customers.
In such situations, it becomes vital for an employer to know what legal remedies are available and what laws they can turn to, to counter this menace.
Laws against Former Employees in India for committing illegal and unlawful activities against their previous Employer and Company are:-
From the onset, it is specified that under the Indian Law, that data theft is not an inaccurate term and thus, under Indian Law, an offence called “Data Theft” i.e. theft of Data, does not exist.
Indian Penal Code (IPC), 1860: –
Section 378 of the Indian Penal Code, 1860 explains Theft as: –
Theft – Whoever, with the intention of fraudulently taking away any movable property from the possession of any individual without the consent of that individual, moves such property in order to complete such taking, is said to have committed theft.
Section 22 of Indian Penal Code, 1860 explains “movable property” as: –
Except land and things connected to the earth or permanently fastened to anything which is fixed onto the earth, the words “movable property” are designed to also contain within their definition, corporal property of any description.
The biggest risk to company data, comes from employees using or handling such data during the course of their employment and from other independent contractors trusted with the data to perform certain assignments or specific tasks. The most recurring practice adopted by such employees is to sell this data to competitors, saving them due to lesser effort, time and costs invested in creating their own databases or purchasing the same from the market.
Section 405 explains Criminal Breach of Trust as: –
Criminal Breach of Trust – Any individual, who has been trusted with some property fraudulently converts to his own use or misappropriates that property, or fraudulently uses or disposes the property off, in contravention of any law proposing the manner in which such trust is to be discharged, or of any legal contract, expressed or implied, which he has made while executing such trust, or purposefully makes another person to do so, is said to have committed criminal breach of trust.
It is critical to note that Section 405 refers to property and not just movable property, therefore, the word “property” cannot be restrictive in nature. This means that data would be covered within the domain of “property” as per Section 405 I.P.C.
Section 408 explains Criminal Breach of Trust as: –
Criminal Breach of Trust by clerk or servant – Any individual, acting as a clerk or servant or hired as a clerk or servant, and having been trusted in such capacity with any property, or with any dominion over any property, commits Criminal Breach of Trust in relation to that property, will see punishment of imprisonment of either description for a period which may be extended to seven years, and will also be liable to pay fine.
As far as employees acting as data criminals are concerned, Section 408 IPC, is a legal remedy, that can act as a strong weapon of deterrence, considering the punishment is imprisonment of up to 7 years alongside paying of fine.
Section 469 explains Forgery as: –
Forgery for Purpose of Harming Reputation – Any individual, who commits forgery, having knowledge that such forging of documents or electronic records, will damage the reputation of any party or having knowledge that it will be used for such damage, will see a punishment of imprisonment of either description for a period which may be extended to three years, and will also be liable to pay fine.”
Section 499 explains Defamation as: –
Defamation – Any individual, who by way of words either intended to be read or spoken, or by visible representations or by signs, issues or creates any accusation related to any person with the intention of harming, or having reason or having knowledge to trust that such accusation will damage the reputation or character of such person is said to be defaming that person.
Nevertheless, a simple defamatory statement does not count as defamation. The statement being made publicly via publications or social media is a pre-requisite to establish defamation.
Indian Contract Act, 1872
Section 73 clearly lays down that the aggrieved party having suffered since the other party broke their contractual obligations, can ask for compensation for damages or loss caused to them by the non-performance of contract.
Information Technology Act, 2000: –
Section 43 of the IT Act makes a liability on every individual, who accesses or secures access to any computer or downloads, extracts or duplicates any information or data from such computer or assists a third party in obtaining access to such computer, without the authorization of the owner of such computer,. Furthermore, the person involved may have to face imprisonment or fine or both, if such an act is committed with a malafide intention.
Section 65 of the IT Act gives liability in cases of meddling with the computer source documents. Moreover, Section 66 of the IT Act gives the remedy in offences related to hacking. Additionally, Section 72 of the IT Act provided penalty in the case of a breach of confidentiality.
Even if the employee contends that section 72A necessitates the person accused under section 72A to have had secured access to any sensitive personal data while rendering any service under their lawful contract and that such an employee was not directly providing any service and did not directly make a contract with the client, even in that case, as per the interpretation of section 72A, it can be believed that there was a lawful contract between a client and the employee, that the employee was providing services to the client as per such contract and the employee did have access to the client’s sensitive personal data whilst rendering services to the client under the terms of his employment contract.
Indian Copyright Act, 1957
Section 2 (o) of the Copyright Act 1957 protects any database, which comes under the purview of the definition of the term literary work.
Non – Solicitation Agreements
Non-solicitation clauses are an example of negative covenants in contracts. The companies emphasize that such limitations are essential to safeguard their proprietary rights and their confidential data. A non-solicitation clause is designed to place a restriction on an employee of a company, to stop him from soliciting the customers or employees of a company, during and after termination of employment.
Important Case Laws on the Matte
In the case of R.K. Dalmia v. Delhi Administration, (AIR 1962 SC 1821), the Hon’ble Supreme Court held that the term “property” cannot be restricted to movable property particularly when it is utilised in the absence of any qualifications under Section 405 or other section of IPC.
In Burlington Home Shopping Private Limited v. Rajnish Chibber (61 (1995) DLT 6), the Hon’ble Delhi High Court while preventing an ex-employee from using the client list in a database entirely owned by the employer held that a compilation of addresses built by devoting labour, skill, time and money constitutes a literary work meaning the author has a copyright. As per the judgement made by the Court, it can be said that such databases of employers qualify as ‘literary work’ are protected under the Copyright Act.
In the important case of Wipro Ltd vs Beckman International (2006 (3) ARBLR 118 Delhi), the Hon’ble Delhi High Court stated that a non-solicitation clause is not void and held that a non-solicitation clause is a reasonable restriction and is not barred by Section 27 of the Indian Contract Act, 1872. The court explained that a non- solicitation clause will prevent contracting parties from poaching each other’s employees and customers but the restriction does prevent employees from joining another company.
In the case of Niranjan Shankar Golikari v. the Century Spinning and Manufacturing Company Ltd. (1967 AIR 1098), the Hon’ble Supreme Court allowed an injunction limiting a former employee of the plaintiff from joining the defendant, even after the employee resigned, on the justification that execution of the non-compete clause was the only way to prevent the employee from leaking confidential information to the new employer. The court’s decision was based on the pretext that the court assumed confidentiality is inevitably infringed when the employee joins a competitor and thus, a pre-emptive injunction was granted restricting the employee from joining the competitor.
In the case of Tata Value Homes Ltd v. Nityanand Sinha (Suit (L) No. 1040 of 2015), the Hon’ble Bombay High Court agreed while granting an injunction, with the employer’s beliefs and took note of the fact that the Defendant had, through his posts on social media, made accusations on the employer for engaging in unethical conduct.
The Court did not find any cause to have confidence that these comments were made with bona fide faith. Furthermore, the Court felt that the accusations appeared were made with a personal vendetta in mind. Another viewpoint considered by the Court was that any damage to reputation could not be settled through financial compensation; thus, the employee’s freedom of speech was curtailed through an injunction.
Important legal points to remember to tackle menace of former employee: –
• Contracts with employees must contain appropriate clauses by which confidential information or data, as defined in the contract itself, is entrusted by the company or employer to the employee.
• The handing over of data, should be clearly restricted in the contracts with employees and other independent contractors to effectively discourage any data criminals and to responsibility to ensure that data crimes are not committed.
• Due to the lack of a proper statute in India supervising data protection, it is essential for the employers that a contractual obligation is imposed upon their employees which is enforceable and has the ability to restrict employees from exploiting confidential data. Therefore, effective drafting while taking into consideration the above-mentioned laws, may be a key mechanism to safeguard employer’s trade secrets.
• Employees should be made to give a written Undertaking & Indemnity Bond promising not to do any act of omission or commission which is a breach of contract or trust, including transferring, selling, giving access to any individual, sending, taking back-ups, copying, removing, moving, disclosing or using the data, other than in the method as explicitly approved by the Company.
• Additionally, it is prudent to execute paperwork like receipt of resignation letter or termination letter with the employee while incorporating post-termination confidentiality commitments of the employees, alongside an undertaking that the particular employee has retained in his possession, any confidential data that belongs to the employer.
• In situations where the employer is aware of an outgoing employee joining a competitor, it may be wise that the employer issues a letter to any such competitor, defining any contractual obligations levied upon any outgoing employee with respect to the confidential information belonging the employer.
• In the situation that an employee still leaks information and breaches trust dishonestly or publicly defames with mala fide intention, the employer has the right to file a criminal complaint as per any of the above-mentioned sections of the IPC.
• An employer also is well within their capacity to file a civil suit in case the former employee violates the above-mentioned section of the Copyright Act or IT Act or if the former employee violates their obligations as per the non-solicitation clause in their contract and can recover money for the damages, injuries and losses suffered.
In conclusion, trade secrets or confidential information are such important assets of business that an employer will seek to protect at any cost as it is directly connected with the working of the employer in the world of business. In the absence of a specific statute governing such issues, it is a must for employers to adopt a very careful approach while drafting the confidentiality clauses and ensure that the same is capable of being enforced as and when needed.
Furthermore, non-solicitation agreements drafted while keeping in mind existing provisions of law can be critical to prevent poaching of clients by ex-employees. The law also has adequate provisions set in place to prevent malicious defamation being done by former employees.
Authored By: Adv. Anant Sharma & Parinay Gupta