How can entrepreneurs enforce non-disclosure agreements with employees?

Because of the huge amount of competition in the business world, protecting confidential information has become a necessity. For Entrepreneurs, Non-Disclosure Agreements (NDAs) are powerful legal tools that help them secure their Intellectual Property, Trade Secrets, etc. But the question of the hour is – How does an entrepreneur ensure that these agreements are enforceable under Indian Law?

Let’s begin by first giving brief information about what a Non-Disclosure Agreement is. – It is a legally binding agreement where an individual agrees not to disclose, misuse or share confidential information to a third party. Thus, these contracts are used to protect the sensitive information related to the business.

Legal Validity of NDAs in India:

NDAs are enforceable in India under the Indian Contract Act, 1872. The agreement must not impose unreasonable restrictions, and an employee’s right to earn a livelihood must be protected as in Article 19(1)(g) of the Indian Constitution. Thus, simply stated, the restrictions must be reasonable, and the main aim of such restrictions must be to protect the business interests.

To enforce an NDA, the entrepreneur, as an employer, can claim compensation in case of breach, where the courts generally decide the compensation amount based on the Indian Contract Law if the same is not already agreed upon. But it’s generally advised to add the same under the “Remedies for breach” clause in the contract to claim the pre-decided compensation and for better and faster resolution of a dispute. In such agreements, to ensure enforceability, certain other clauses can also be added by the entrepreneur, like –

1. Defining Confidential Information:

This clause will set the tone of the NDA. In short, it will define the types of information that will be considered “confidential” under the agreement. It includes confidential information like client databases, internal reports, financial records, product designs, business plans, etc. All this must be specifically stated, and adding the right information helps the entrepreneur in enforcing the NDA in the long run.

2. Obligations of the Employee:

This will highlight what an employee must do or must not do. This includes information like the employee must not disclose any confidential information, such as information related to the future launch of a product. Apart from that, it might also include the agreement for the employee not to replicate, misuse, or destroy the confidential information.

3. Duration of Confidentiality:

This clause is highly important and must be added in an NDA as it will specify the term for which the employee will keep the information confidential. The entrepreneur can either add a duration, like for 5 years, etc., or they can even add an everlasting confidentiality clause for the protection of their sensitive trade secrets. And that will be on the courts to decide whether some data or secrets, etc., require infinite confidentiality or not. While deciding the same, the courts will look at factors like would that disclosure would cause harm to the business or not, or if the information qualifies as a sensitive trade secret, etc.

4. Exclusions of Confidentiality:

This clause simply gives clarity on the information which is not covered under the NDA, like the information that is already available to the public, or becomes or might become pubic without the breach of NDA, or any information which is said to be disclosed as per a court order, etc.

5. Remedies for Breach:

As stated earlier, this is one of the most important clauses as this one provides all the remedies to the entrepreneur/employer in case any information is disclosed by an employee against the prior agreed NDA.

Courts can stop the employee from further disclosure of sensitive information in the form of a remedy commonly known as an injunction. Apart from that, monetary damages can be claimed in such a clause, even a sub-clause about the termination of employment can be added to the same, where, in case of disclosure of information that is specifically mentioned under the NDA, the employment must be terminated immediately. An entrepreneur can even add the clause about getting the legal costs from such an illegally disclosing employee.

6. Dispute Resolution and Jurisdiction:

This clause clarifies that in case of any sort of dispute because of breach of the NDA, there is clarity on where and how the dispute will be resolved. Like, will the dispute be first referred to alternative ways of settling the matter through arbitration, mediation or simply through civil courts? Well, the best way to settle such a dispute is through Arbitration as it not only reduces the burdens on the courts, but also provides a speedy solution.

7. Non-Compete or Non-Solicit Clauses:

These are optional but can be added by an entrepreneur to prevent any employee from working for a competitor for a certain period. This restriction can be imposed to the extent that it could cause harm to a business. Simply stated, the restriction must be reasonable. Indian courts generally disfavour the post-employment restrictions unless the restriction is for a reasonable period or its scope or jurisdiction restricts the employee to not competing in specific regions only. If you want more information on the same and want to get your NDA drafted, do reach out to us through the “Contact Us” section on the website.

How to Enforce in Case of a Breach:

In case an employee violates the NDA, an entrepreneur, in this situation, has access to both civil and criminal remedies depending on the nature and the gravity of the breach.

1. Civil Remedies:

These reliefs can be claimed under the Indian Contract Act, 1872. Relief in the form of an injunction can be given to prevent the further disclosure and misuse of information temporarily or permanently.

Monetary damages can also be claimed as compensation. These can be claimed for the actual losses incurred as well as any indirect losses due to such disclosure. E.g. Loss of revenue because of such disclosure is the actual loss, but any missed collaboration or partnership opportunity because of such disclosure is an indirect loss.

2. Criminal Remedies:

These are only available in case of any serious breach that involves any fraudulent activity or some form of digital theft. Under Section 72 of the IT Act, 2000, a penalty of up to Rs 5 Lakh or imprisonment of up to 3 years can be imposed on unlawful disclosure of any information obtained during a legal contract.

In BNS, 2023, the S.316 covers Criminal Breach of Trust by employees or agents and the same is punishable with imprisonment up to 5 years or fine or both.

As a practical example for both situations, we can take the situation where an ex-employee steals a customer database and sells the same to a competitor may face civil injunctions, monetary claims and criminal prosecution under the laws as stated above.

Conclusion:

Thus, we can say that NDAs are tools that are highly beneficial to entrepreneurs for managing risks involved with their intellectual property, trade secrets, etc. But, to make such NDA’s work, these must be precise, legally sound and enforceable. Courts always uphold the well-drafted NDAs.

When these agreements are made based on the needs of the business model and are supported by the right legal remedies and preventive practices, they act as the first line of defence for the employers against data theft, reputation damage and competitive loss.

Pro tip- Always consult a qualified legal professional to draft or review your NDA before bringing in any employees into your organisation or bringing them on a project that includes highly sensitive data.