An issue which keeps popping up in Indian litigation is whether it is possible for employers to restrain former employees from using customer lists after leaving employment. These legal actions are usually based in copyright law or contractual agreements that have clauses on confidentiality and restraints against post-employment competition.
In a recent judgment by Justice Endlaw, in the case of Navigators Logistics Ltd v. Kashif Qureshi & Ors. the above issues are decided in favour of former employees in a thoroughly reasoned judgment. The lawsuit was filed by an employer against former employees on the grounds that they had left employment with a confidential customer list and had began to compete in violation of the non-compete clause. As with most of his judgments, Justice Endlaw refrains from citing foreign precedents but cites a copious number of Indian judgments – the mission appears to have been to deliver a knockout judgment on the issue and he has clearly suceeded.
The judgment was also a bit of a pleasant surprise for me, because Justice Endlaw cites a recent article of mine published in the Journal of National Law University Delhi on the issue of protection of confidential information under Indian law. Hopefully, that citation takes me one step closer to academic nirvana.
The copyright issue in customer lists
On the issue of copyright infringement in the list of customers, Justice Endlaw rejects the employer’s argument on two grounds. The first was the fact that employer failed to make out a case in the pleadings that there existed a copyright in the customer lists. In the past, some courts have protected customer lists as compilations, which are identified within the definition of literary works of the Copyright Act. Compilations have however been the subject of much uncertainty after courts across the world began to move beyond the ‘sweat of the brow’ test to establish the ‘originality’ of a work. Originality is a precondition to establishing the copyrightability of a work. A work that lacks originality cannot be protected. Justice Endlaw distinguishes these precedents, where customer lists have been declared as copyrightable works, on the grounds that those judgments were delivered prior to the Supreme Court’s judgment in the now famous EBC case.
In the EBC case, the Supreme Court followed its peers around the world by moving away from the ‘sweat of the brow’ test to judge originality, to a test that required some minimum degree of creativity and skill & judgment (the test isn’t very clear). This standard does not automatically disqualify compilations from copyright protection but definitely makes it more difficult to establish originality in compilations.
According to Justice Endlaw’s holding in this case, plaintiffs will have to establish in the pleadings, the technique/criteria used for compiling the list of customers. In other words, unless the plaint makes out a case for originality in the compilation, the judge can reject the lawsuit for failure to make out a case for copyright infringement.
The second copyright related issue dealt with by Justice Endlaw is regarding the requirement of publication in Section 13 as a prerequisite for copyright protection. There is not much discussion on this point in the judgment but his honour concludes that because the pleadings have not disclosed that the list was published as required under the law, no copyright can subsist in it. Similarly, Justice Endlaw also points out, as another disqualifying factor, the fact that the author of the list has not been mentioned in the pleadings. Together, these three factors contributed to the court’s assessment that the copyright claim deserved to be dismissed for failure to even establish whether a copyright existed in the customer list. In Justice Endlaw’s assessment, “The reliefs claimed by the plaintiff on the basis of copyright thus have no chance of success in the suit and the plaint is liable to be rejected, insofar as on the premise of copyright.”
If all High Courts adopt this standard for pleadings, it will force IP lawyers to dramatically improve the quality of their pleadings or at any rate, make room for lawyers who know how to draft pleadings.
Can customer lists be considered confidential?
The second prong of the judgment was on the issue of whether customer lists can be considered confidential information and thus covered by the confidentiality clause in the employment contract.
Most employees in the course of their business will necessarily have to deal with customers and it is but obvious that when these employees quit, they will try to conduct business with these same customers. The logical strategy to stop such solicitation of such clients is to include in the contract a clause pertaining to non-solicitation but the legality of these clauses is doubtful because of the prohibition in Section 27 of the Contracts Act against non-compete clauses. Most Indian litigants try to stop such solicitation by suing for breach of confidentiality in the customer list as well as seeking enforcement of the non-compete clause on the grounds that the former employee joining the competition will lead to breach of the confidential customer list.
On the issue of confidentiality, the contact details of customers are usually found in the public domain and in most fields of commerce there are only so many customers who can be serviced. Any person working in the field is likely to know of all the customers in a particular field.
Like with the copyright analysis, Justice Endlaw finds fault with the manner in which the pleadings have been drafted, concluding the following:
“….it was incumbent for the plaintiff to, in the plaint, plead how the data etc. in which confidentiality is claimed is different from data of any other entity engaged in such business and what is secret about the same and what steps besides the clause aforesaid in the letters of appointment of defendants no.1 to 8 have been taken by the plaintiff to maintain secrecy / confidentiality thereof. The plaint in this regard is vague and cannot be put to trial. The whole purpose of pleadings in a civil suit is to let the opponent know the case to be met and which crystallizes ultimately in issues on which the parties go to trial. If such rules of pleadings are not to be adhered to, it will result in a fishing and roving enquiry and enable a party to the suit to secure a victory by springing a surprise during the course of trial.”
Notwithstanding the flaws in the pleadings, Justice Endlaw then proceeds to anyway examine whether customer lists can be confidential given that most people in the industry would be aware of the customers in that field especially when the contact details are publicly available or known to the former employees. He concludes that it is not possible to claim confidentiality in every customer list especially in this day and age of trade/business directories and that the onus is on the plaintiff to establish the economic or commercial value of the customer list.
The non-compete issue
The final issue was regarding enforcement of the non-compete clause and whether such a clause would be void in light of Section 27 of the Contracts Act. Technically, confidential information and non-compete clauses are two separate issues but thanks to a historical misunderstanding in the Golikari case the two have been conflated. In the Golikari case, decided by the Supreme Court in 1967, the court grant an injunction restraining a former employee of the plaintiff from joining the defendant for the duration of the contract with the plaintiff (despite the employee resigning) on the grounds that enforcement of the non-compete clause was the only way to restrain the employee from disclosing confidential information to the new employer.
Ideally, the court should have dealt with the non-compete and confidentiality issues separately because both are separate cause of actions. Non-compete is about whether an employee can compete with a former employer by joining the competition or setting up his own business. Confidentiality is an entirely different issue and is breached not by joining the competition but by actually disclosing information that was supposed to be confidential. You can breach a non-compete clause but still not breach confidentiality.
The Golikari decision was incorrect because the court presumes confidentiality is automatically breached when the employee joins the competition and thus grants a pre-emptive injunction restraining employee from joining the competition. There was however no evidence to suggest that the employee had breached the contractual obligation of confidentiality. Ideally the SC should have concluded that the non-compete clause was in violation of Section 27 and denied an injunction restraining the former employee from joining a new job on the grounds that there was no evidence to suggest possible breach of confidentiality.
Interestingly, there are a number of High Court judgments which have simply ignored the Golikari judgment and have refused to grant pre-emptive injunctions on the grounds that the former employee may breach confidentiality in the future. While he doesn’t mention it expressly, Justice Endlaw quietly follows the precedents of these High Courts by declaring the non-compete void due to Section 27 of the Contracts Act and avoids conflating this issue with the confidentiality issue which he had previously decided against the plaintiff.
Since the non-compete was void and the pleadings failed to establish a prima facie case of copyright infringement and breach of the confidentiality clause, Justice Endlaw dismissed the lawsuit without sending it for trial. Hopefully this judgment will deter employers from trying to intimidate their former employees against joining the competition or setting up their own businesses. More competition is a good thing for innovation and wages.