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Non-Compete Clause

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1. Summary

  • A non-compete agreement in an employment contract is valid.
  • The NDA should cover confidential matters only.

2. Concept

A non-compete clause is a contractual stipulation whereby one party is prohibited from competing against the other contracting party in a similar activity for a certain period.

A non-compete clause is valid as a post-employment restriction.

A non-compete clause “with a stipulation that a violation thereof makes the employee liable to his former employer for liquidated damages, refers to post-employment relations of the parties.” (Portillo v. Lietz, G.R. No. 196539, 10 October 2012)

3. Prohibition on competing

What the similar activity may be will depend on the wording of the clause.

The clause may stipulate that the employee is prohibited from joining a direct competitor of the employer. It may also be worded to being prohibited form engaging in a similar business or undertaking against the employer. Or, for the many non-compete clauses, it may cover both future employment and business.

4. Duration

The duration of the prohibition against competing cannot be the lifetime of the employee. This is because it will run against public policy. The employee should not be permanently barred from earning a livelihood where she may be good at.

On the other hand, the law does not set or prescribe a limitation on the duration. The only limitation imposed on such clauses is that it should be reasonable in that industry or business.

Thus, it is possible that the duration may be during the employment period only. Alternatively, the non-compete may extend even after leaving employment, such as after (one) 1 year and others for up to (two) 2 years. It is possible that the duration may be longer. The key is for the employer to prove that such duration is reasonable in their industry should the employee challenge the duration in court. These industries may include research and development, pharmaceutical development, and so on.

5. Employment contract, company policies, CBA

The above discussions may be superseded by any stipulation favorable to the employee via an employment contract, company policies, collective bargaining agreement, or analogous thereto.

References

  • R.A. 386, a.k.a. Civil Code (under the law on contracts)
  • Jurisprudence or Supreme Court Decisions (as cited above)
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