` A restaurant’s recipe may be either a “formula,” “method,” or “process” and can be legally

protected as a trade secret so long as (1) the owner takes reasonable steps to keep the
information secret, and (2) some independent economic value is derived from the
information.

The Nooks and Crannies Case

The case of Bimbo Bakeries v. Botticella[1], is an example of how a national bakery
company stopped one of its top employees who had access to the company’s secret
bread recipes from working for its competition.

The Alternative: Trade Secrets

Labeling something a trade secret is a common safety measure taken by
businesses. Some examples of trade secrets include Coca-Cola's Coke recipe
as well as KFC's fried chicken batter. According to Steve O'Donnell, an
intellectual property lawyer in Lancaster, PA, the definition of a trade secret is
"something not generally known that gives the business some advantage over
competitors." Since most recipes are simply variations on a previous
incarnation of a dish, and since a recipe usually doesn't produce something
totally unexpected, protecting your best recipes as trade secrets is an ideal
alternative to the patenting process.

When you're the chef of a small business, protecting a trade secret is as easy
as never telling anyone your recipe. However, when your operation is larger or
if you're looking to franchise or market a food product, the steps you must
take to protect your trade secret become more complex, and therefore more
expensive.

"Many employees are required to sign some confidentiality agreement when

they're hired, stating that they know they can't divulge any secrets they learn
during their employment," says O'Donnell. "If that employee then quits and
tries to use that secret information, they could be hit with an injunction and
possibly monetary damages.

Dumpling Daughter v. Dumpling Girl

It seems the key to a perfectly crafted dumpling isn’t just in the stuffing, it’s also in
the name. In a case that rumbled the Boston food scene last year, Nadia Spellman,
owner of popular casual Chinese restaurant, Dumpling Daughter, brought charges
against two of her ex-employees, former assistant Jie Lin and chef Ying Yao Xiong.
Spellman claimed the two ex-employees pilfered her original recipes to establish
their own dumpling venture, Dumpling Girl.
According to Spellman, as Dumpling Daughter serves dishes based on recipes
which have been passed down through her family for generations, the fundamental
concept and uniqueness of Dumpling Daughter is inextricably tied to preserving the
integrity, and thus, secrecy of her family’s recipes. Upon discovering that Lin and
Xiong had opened up Dumpling Girl, a restaurant she claims has a “virtually
identical” name, branding, trade operations, recipes and menu, she filed a federal
case of trademark infringement against Dumpling Daughter.

The case set out that Xiong and Lin deceivingly used the in-depth knowledge the
pair acquired of Dumpling Daughter’s operations in order to create Dumpling Girl. At
the crux of the claim were the 41 out of 52 Dumpling Girl menu items that arguably
shared an alarming similarity to Dumpling Daughter’s. Indeed, it is striking to
compare the two establishments’ menus. Take the restaurants’ ramen offerings;
perhaps uncoincidentally, Dumpling Girl’s menu description of its “Pork Ramen” is
exactly the same as Dumpling Daughter’s “Three Day Pork Ramen,” save for one
less exclamation mark.

Dumpling Daughter Dumpling Girl

Three Day Pork Ramen Pork Ramen

NOT the instant kind!!!!!! Classic pork broth,

NOT the instant kind!!!!! Classic pork broth, fresh
fresh ramen noodles, pork belly, soft egg,
ramen noodles, pork belly, soft egg, bamboo,
bamboo, red pickled ginger, kombu seaweed,
red pickled ginger, kombu seaweed, scallions.
scallions.

Fortunately, the case of double dumplings has now been settled. Dumpling Girl has
since undergone a rebranding with a new name, Star Dumplings, and an altered
menu which excludes most of the “copycat” menu descriptions in the firing line
during the lawsuit. Had Spellman required her employees to sign non-disclosure
agreements (NDAs) which clearly stated that her secret recipes must remain as
such, perhaps the whole dispute could have been prevented or at least more swiftly
handled.

Torchy’s Tacos v. Texas Taco Co.

 Torchy’s Tacos is an Austin, Texas, institution that has no trouble attracting
customers from all over the U.S. After all, even President Obama swung by in March
this year to grab a bite of the restaurant’s distinctly flavored tacos. However back in
2007, Torchy’s found itself in a bit of hot sauce when it noticed some of its customers
tagging images from Texas Taco Co. on Instagram.

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Pune Fried Chicken (PFC) Pune Fried Chicken (PFC) have almost become
synonymous with the protection of confidential information. This type of
agreement is basically a legal contract that expressly prohibits the
disclosure or use of proprietary information without permission.

But what makes a non-disclosure valid and legal?

Although not often accepted by venture capitalists and most startup-up

investors, non-disclosure agreements are normally popular in companies
that are highly prolific in coming up with new inventions and innovations
(such as Apple, Hewlett Packard and Microsoft), startups, enterprises that
operate on trade secrets such as Coca-Cola and KFC and other

Non-disclosure agreements are usually signed before parties start

negotiations for joint ventures, potential licensing relationships, distribution
relationships, independent contractor relationships and also found in
franchising arrangements, employment hiring situations and merger and
acquisition processes.

The party who signs an NDA makes a legal promise not to share
information that is marked confidential to unauthorized persons. Any
failure to keep this promise can be prosecuted like any other breach of
contract.

Generally speaking, a non-compete agreement that is not too restrictive in

terms of length of time covered and the amount of territory covered is more
enforceable. As an example, the six months to two years recommended
earlier is rarely seen as too restrictive.

A non-compete agreement is a written legal contract between an

employer and an employee. The non-compete agreement lays out binding
terms and conditions about the employee's ability to work in the same industry
and with competing organizations upon employment termination from the
current employer.
Generally, the non-compete agreement states that the employee may not
work for a competing firm for six months to two years following the
employment end. In a recent consultation, however, the employer asked a
potential employee to sign a non-compete agreement that barred his children,
grandchildren, spouse and other relatives from working in the same industry
for all time.

A noncompetition agreement means you agree not to directly compete with your former
employer for a reasonable length of time and within reasonable geographic limits. In other
words, you’d violate a noncompete agreement if you took a job at the only widget
manufacturer in your state, learned all you could while there, quit and then tried to start your
own widget company across the street.

A nondisclosure agreement means you agree not to disclose things the company may
consider to be proprietary or confidential, such as information about new products,
technology, business plans, financial information, models, sketches and so forth. It doesn’t
mean you can’t work for a competitor; it simply means you can’t use proprietary or
confidential information you learned or obtained from the former employer with a new
employer.

It is now standard practice for companies to include 'non-compete'

provisions in contracts of employment. It restricts an employee from
competing with the employer or joining a competitor during the term of the
employment and for a period thereafter. But, are such provisions
enforceable?

Non-compete provisions for the term of employment are not regarded

'restrictive covenants' under Indian law. However, having such provisions
applicable after a person leaves the organisation is against the Indian
Contract Act, and, therefore, not enforceable.

Section 27 states that any agreement that restrains anyone from 'exercising
a lawful profession, trade or business' is void. Courts have interpreted it on
the presumption that all employees are alike and will not have the ability to
injure the company when furthering a lawful profession. Any restraint on
the employee, reasonable or otherwise, is treated as void.

So, currently, Indian companies make a distinction between 'key'

employees and 'non-key' employees. Key employee contracts provide for a
non-compete restraint during employment along with either a 'garden
leave' or a fixed-term clause.

A 'garden leave' clause requires an employee to spend notice period at

home, prohibiting him from joining a competitor, while receiving
remuneration. Also, courts have ruled that, while it is not possible to stop
an employee from leaving, he can be restricted from joining a competitor
during the term of employment. A fixedterm contract is for this purpose.
Another clause is the employee bond. An employee, having received
training, is required to work with the company for a period. If not, he would
be liable to pay a fixed amount as compensation.

Enforceability of non-compete obligations on consultants is debatable. The

expression 'lawful professional' used in Section 27 has been interpreted to
include both consultants and employees. Therefore, a consultant who
agrees to provide services to a single client on a fulltime basis could be
subject to non-compete obligations.

f you choose to leave an employer with whom you have a covenant not to compete,
the employer may do nothing. In this case be sure to come to some kind of
agreement with the employer so you can do what you want. Additionally be sure to
get the employer to release you from your non-compete agreement with a signed
document.

On the other hand, the employer may sue you and go to court seeking what is called
an "injunction" or restraining order to prevent you from violating your agreement.
Because a violation of a non-compete agreement can cause an employer immediate
harm, the court will often use expedited procedures in these cases. Once your
employer requests an injunction or restraining order it may only be a matter of days
or weeks before you have a hearing scheduled before a judge. You may have very
little time to retain an attorney and discuss your case with that person, so make sure
that you enlist the help of an experienced employment lawyer as soon as you know
that your employer is challenging your actions.

f you choose to leave an employer with whom you have a covenant not to compete,
the employer may do nothing. In this case be sure to come to some kind of
agreement with the employer so you can do what you want. Additionally be sure to
get the employer to release you from your non-compete agreement with a signed
document.

On the other hand, the employer may sue you and go to court seeking what is called
an "injunction" or restraining order to prevent you from violating your agreement.
Because a violation of a non-compete agreement can cause an employer immediate
harm, the court will often use expedited procedures in these cases. Once your
employer requests an injunction or restraining order it may only be a matter of days
or weeks before you have a hearing scheduled before a judge. You may have very
little time to retain an attorney and discuss your case with that person, so make sure
that you enlist the help of an experienced employment lawyer as soon as you know
that your employer is challenging your actions.

Indian law is therefore very clear and strict on this point, any such non compete
agreement shall not be binding on the parties and the same shall be null and void. By
using the term void ab initio, for such type of agreements it has shown that it has kept
such non compete clause in the agreements beyond consideration. Indian courts have
also consistently refused to enforce post termination non compete clauses in
employment contracts as “restraint of trade” is impermissible under section 27 of the
Indian Contract Act-1872, and have held them as void and against the public policy
because of their potential to deprive an individual of his or her fundamental right to earn
a living.
However considering the developed social, legal, and corporate circumstances, and the
required confidentiality and the integrity of the employments, the judiciary has inclined its
view towards giving some regard to the non compete agreements. In the case of
‘Niranjan Shankar Golikari Vs the Century Spinning and Manufacturing Company Ltd.’ ,
the Hon’ble Supreme Court observed that-“restraints or negative covenants in the
appointment or contracts may be valid if they are reasonable”. Further in one case
- V.F.S. global services Pvt. Ltd Vs Mr. Suprit Roy, 2008(2) Bom CR 446, the Bombay
High court established the principle that a restraint on the use of trade secrets during or
after the cessation of employment does not tantamount to a “restraint on trade” under
section 27 of the Act and therefore can be enforceable under certain circumstances. In
the case of Mr. Diljeet Titus, Adv Vs Mr. Alfred A Adebare & Ors 2006(32)PTC 609 (Del),
Delhi High court held that “The real test was the degree of employment control to
determine whether it was a contract of service…” .
Like these there are several other judgements of various High courts which have laid
down certain tests or guidelines to check the validity and legality of imposition of
restrictions on such non competing agreements. It shows that Indian courts may in
certain circumstances enforce confidentiality agreements intended to protect an
employer’s proprietary rights.
Keeping in view, the increase in cross border trade and an enhanced competitive
climate in India, confidentiality, non compete and non solicitation agreements are
becoming increasingly popular, especially in the IT and technology sectors. A huge
number of out sourcing and IT companies are including confidentiality, non compete and
non solicitation covenants in agreements with their employees, with terms ranging from
a few months to several years after the employment relationship is terminated. The
companies claim that such restrictions are necessary to protect their proprietary rights
and their confidential information. In the same way, foreign companies doing business in
India often seek to include confidentiality, non compete and non solicitation covenants in
their agreements with senior management and employees, as is customarily done in
certain abroad countries.
Although section 27 of the Indian Contract Act states that all agreements in restraint of any
profession, trade or business are void, the current trend as per various judicial
pronouncements leads to the conclusion that reasonable restraint can be
permitted to some extent and does not render the contract void ab initio.
Reasonable of restraint depends upon various factors, and the restraint in order
to prevent divulgence of trade secrets or business connections has to
be reasonable in the interest of the parties to ensure adequate protection to the
covenantee. On careful analysis of section 27 keeping in view the exception
provided with it, it can be safely concluded that the section implies that, to be valid
an agreement in restraint of trade must be reasonable between the parties and
consistent with the interest of the public. So the question arises as to

1. What is public policy and

2. what is reasonable
It is to be widely discussed regarding the public policy. It is illusive, varying and
uncertain. It is difficult to give precise definition of the term public policy. Concept of
public policy is capable of expansion and modification. It is the province of the judiciary
to expound the term “Public policy”. There are several guidelines given by the judiciary
to determine as to what is public policy and what is not. Some of these can be
expressed as – any agreement tending to injure the public interest or public welfare is
against the public policy. Further it can include as to – whatever tends to injustice of
operation, restraint of liberty, commerce and natural or legal rights, whatever tends to
the obstruction of injustice or violation of statutes and whatever is against good morals
can be said to be against Public Policy. What agreements are actually against the public
policy and what are not, is totally the discretion of the courts.
So far as the term “Reasonable” is concerned, simply in general understanding it means-
“according to reason”. Whatever a reasonable man would do using common sense and
knowledge, under the given circumstances, will account as reasonable. Therefore the
test of reasonability depends on the facts and circumstances of each case. Whether an
agreement containing non compete clause is valid and suitable to restrain, or not, is also
a total discretion of the courts and which is varying based on the facts of the case.
To validate such non compete clauses certain reasonable restrictions may be imposed
like:

i. Distance: Suitable restrictions on employee prohibiting them to practice same

profession within a stipulated distance, the stipulation being reasonable.
ii. Time limit: If there is a reasonable time provided in the clause then it will fall
under reasonable restrictions.
iii. Trade secrets: the employer can put reasonable restrictions on the letting out of
trade secrets.
iv. Goodwill: Article 27 of the Indian contract Act provides an exception on the
distribution of goodwill.
In addition to this the Judiciary uses the tool of ‘Injunction’ to prevent a third party from
releasing confidential information, using trade secrets etc. & ‘compensation’.
Certain efforts have also been made by the Legislators to substantiate the confidentiality
etc. such as – Section 72 of I.T. Act-2000, deals with breach of confidentiality & privacy
and any breach will attract imprisonment up to two years, or fine of Rs. One Lac.
CONCLUSION
Although such Non compete clauses are valid in foreign countries, but in regard to the
Sphere of the Indian judiciary, it does not find such wider and effective scenario like that
in foreign countries. Article 21 of the Constitution of India guarantees the right to
livelihood and since it is a fundamental right it is held to be inviolable. This makes the
enforcing of non compete clauses in India even more difficult. At the same time it is also
very pertinent to be considered that, the time and the circumstances-socio, legal,
economical & corporate, have changed and developed in India and Abroad to a greater
extent and in order to fill the lacunas of law and the developed circumstances, social
engineering (Social engineering is a beautiful concept propounded by Roscoe Pound –
social engineering is a means of trying to control human behaviours with the emphasis
of laws. This principle is based upon the thought that laws are a deterrent to future
crimes. As written by the Roscoe Pound in the ‘Jural Postulates’, he lays the foundations
for assumptions in which a civilized society should be able to live…) is required to be
done. The recent trends of the Indian Judiciary tending to validate the non compete
clauses to the reasonable and justful extent in the various agreements as discussed
above is an attempt to that effect and are commendable.
I

n India the traditional approach to any covenant in restraint of trade is that it is prima facie
void, and may be enforced only if it can be justified as reasonable in the circumstances, by
reference both to the public interest and interest of the parties. There are, however, some
important differences in the approach of the courts in deciding the question of such
reasonableness depending upon whether the covenant has been given in the context of
commercial transaction or as a part of an employment contract. However, whether dealing
with a non-compete clause in a commercial transaction or any employment contract, there
are no defined rules or fixed parameters to decide that what may be the extent of
acceptance of such clauses and therefore each case turns on its own facts.

Non-solicitation obligations post-termination of employment may be enforced in limited

circumstances, based upon the facts of each individual case. For example, they were
upheld in the Desiccant case, in which the High Court did allow an injunction against the
manager prohibiting him from soliciting Desiccant’s customers and suppliers to stand in
effect. In the V.F.S. case, however, relief for breach of non-solicitation obligations was denied on
the basis of vagueness of the relief claimed.

Confidentiality obligations post-termination of employment will similarly be enforced in

limited circumstances so long as they remain reasonable and limited in time and scope
and the employer can support that the information is confidential and proprietary to
it. Indeed, while denying enforcement of the garden leave in the V.F.S. case, the Bombay High
Court established the principle that a restraint on the use of trade secrets during or after
cessation of employment is not tantamount to a “restraint on trade” under Section 27 of the Act
and therefore can be enforceable under certain circumstances. This case and others show that
Indian courts will in certain circumstances enforce confidentiality agreements intended to protect
an employer’s proprietary rights. But the courts remain sensitive to the possibility that employers
may try to use these covenants as a back-door means of restraining employees from exercising
their trade and will place an extremely high burden of proof on employers seeking to enforce
these provisions. In the Desiccant case for example, the court held that a marketing manager
could not be deemed to possess confidential information and that his written declaration to that
effect in his employment agreement were meaningless; the court rejected Desiccant’s claim to
enforce the confidentiality obligations of the manager.
The author can be reached at: ras@legalserviceindia.com
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