Neill, LJ., while deciding the landmark case of Faccenda Chicken Ltd v. Fowler[1]  observed that, information is graded into 3 tiers. The first tier includes information which is already in the public domain and could be used by the employees post-service. The second tier covers confidential information which the employee cannot use or disclose during the period of employment without breaching his duty of fidelity to his employer, but which, in the absence of an express non-disclosure term, could be used post-service. The third tier includes only specific trade secrets which the employee cannot disclose or use during or after employment even in the absence of an express non-disclosure agreement. Thus, the law balances the interests of employers by preserving confidential information and trade secrets on one hand and those of the employees by protecting their ‘skills’ and assets.

InPhase Power Technologies Ltd. V. ABB India[2]

Facts in brief:

The present case is an appeal against an order of the Civil & Sessions Judge wherein an order was passed directing InPhase Power Technologies Ltd. (hereinafter referred to as “InPhase” or “the Appellants”)  to pay damages of Rs.5,50,00,000/- for breach of trust and infringement of ABB’s intellectual property  along with an injunction restraining InPhase from:

  • misappropriating or distributing ABB's confidential information
  • infringing ABB’s patent (bearing patent no.206766)
  • infringing ABB's trademark "PQC STATCON";.

InPhase is a private limited Company formed by the former employees of ABB India (hereinafter referred to as “ABB” or “the Respondents”), holding significant posts at the Company. In ABB’s application for injunction, InPhase was alleged to have:

  1. misappropriated information for the making of a patented product of Dynamic Reactive Power Compensator,
  2. Consequently infringing ABB’s Patent (Patent No. 206766) and
  3. Infringed ABBs’ trademarks STATCON and PQC STATCON during the marketing, distribution, and sale of their products by InPhase.
  4. ABB also alleged that the directors of InPhase had formed a competitive establishment ie: InPhase Power Technologies Ltd. , while they were still employed under ABB India which was evident inter alia from the use of @inphase as the domain names even before they had resigned. The Court observed that InPhase’s contentions against these allegations were untenable and there was no apparent need to interfere with the Judgement of the Lower Court and hence upheld its order.

Respondents Contentions: (ABB India Ltd.)

ABB’s contentions for the grant of injunction were three-fold. Firstly, the InPhase Power Technologies Ltd. was formed by the former employees of ABB before the termination of their employment with the Company, and during this time they had misappropriated vital information which was required for the making of their patented product (the Dynamic Reactive Power Compensator bearing Patent No.206766). This gave way to their second contention which was that there was blatant infringement of their patent by constructing a product substantially similar to ABB’s patented product. Thirdly, that InPhase's Trade Mark IPC 150-SCOM is similar to plaintiff's Trade Mark STATCON and PQC STATCON thereby amounting to trademark infringement.

Appellants Contentions: (InPhase Power Technologies Ltd.)

InPhase contented that the learned Judge of the Lower Court erred in not taking into account the important modifications made by them in the product which makes it vitally different from the ABB’s product showcasing the classic difference in the machines manufactured by the Respondents and Appellants to be that the Appellants' machine contains a harmonic filter, which is absent in plaintiff's machine.

They replied to the allegation of trademark infringement on the grounds that STATCON is a fairly generic word, plaintiff has not sought to register the same and hence injunction cannot be granted against it.

The Appellants contended that they cannot be curtailed from carrying on trade or business merely on the grounds that trade secrets and information is capable of being exploited. InPhase placed their reliance on American Express[3] case wherein the High Court of Delhi observed, "Freedom of changing employment for improving service conditions is a vital and important right of an employee which cannot be restricted or curtailed on the ground that the employee has employer's data and confidential information of customers which is capable of ascertainment on behalf of defendant or any one else by an independent canvass at a small expense and in a very limited period of time."

Observations of the Court:

In the present case, the Hon’ble High Court of Karnataka held that the contentions made by InPhase were frivolous as it was fairly known that mere modifications of improvements in a patented product can be ignored if they do not significantly change it or its use. Their contention about the email ids being fraudulent was said to be legally weak and there was no other contention significant enough for the Court to interfere with the decision of grant of injunction by the Lower Court and thereby upheld the Order.

The Court also placed reliance upon a case[4] cited by ABB India Ltd. wherein it was observed that “a person, who obtained information in confidence, is not allowed to use it as a "springboard" for activities detrimental to the persons who made the confidential communication, it was held that breach of confidential information depended upon the broad principle of equity that he who receives information in confidence shall not take unfair advantage of it.” 

On a careful analysis of the law on the point, the Court observed that, what follows is that an ex-employee may be restrained from using the information in his possession and acting in a manner which can be detrimental to the interest of the Respondent.

Take Away/ Conclusion:

Protecting propriety Rights of the Employer:

This case re-instates the need and importance of the non-compete agreements between the employer and the employee. Since the last few decades, there have been numerous changes in the commercial setup, widening of commercial boundaries and the ease with which employees today float through the market. This has contributed towards considerable evolution in the Court’s view upon the matter making it clear that the non-compete agreements cannot be totally done away with. Superficially these agreements may be considered to be in restraint of trade, but upon closer perusal it is clear that they significantly protect the propriety rights of employers. The skills, experience and contacts in which the employee bathes during his employment cannot be solely accorded to his own intelligence and understanding as the employer also contributes to the same.

Consideration of Reasonability:

Upon proper and stringent construction of Section 27 of the Indian Contract Act, 1872 it is observed that it does not hold within its ambits certain agreements pertaining to the right to protect trade secrets, the right to non-disclosure of vital information and the rights in consequence when the employee terminates his employment to join another establishment or create his own. It would be a narrow and primitive idea to put a blanket ban over all clauses of a non-compete agreement-expressed or implied. A measure of reasonability could be the extent of time that the clause/agreement covers, the geographical distance within which the agreement applies.[5] The injunctions restricted to time, nature of employment and area cannot be thought to be wide, unreasonable or unnecessary.[6] An employee must not disclose or misappropriate confidential information but this doesn’t restrain the employee from totally abandoning work at a competing or similar establishment.

It is hence safe to say that a non-compete agreement which protects the employer against the use of his own information to a purpose detrimental to him is enforceable insofar as it does not restrict the economic domain of the employees. Agreements which compel employees to totally abandon working in a competing organization are in contravention with the Section 27 of the Indian Contract Act, 1872 and will not be enforceable but those seeking to protect the propriety interests of the employer will be enforceable.

Interesting Fact:

Recently, InPhase Power Technologies Private Limited filed a complaint before the Competition Commission of India against ABB India Ltd. on the ground of abuse of dominant position. Interestingly, CCI ruled in favor of InPhase, ordering the Director General to conduct an investigation on the matter and submit the report in this regard. InPhase had alleged that ABB is abusing its dominant position, in the relevant market, to restrain the sale of InPhase's product.

We shall keep an eye on the developments in the competition matter in light of this present Judgement of Karnataka High Court. [Article on the competition case is available here]