The Non Compete Clause-A A +A
By Kelvin Lee
Question of Law
Wednesday, October 16, 2013
ONE matter that is often brought up in the business world is the Non-Compete clause. The Non-Compete clause is a clause in an employment contract which prohibits the employee from entering into a competing business or to be employed by a competitor. Typically such clauses apply both during and after employment with the company. For the period after employment, there is usually a reasonable time limit of a few years.
The reason why a non-compete is required in most corporations is to safeguard trade secrets, methodologies and other confidential knowledge that an employee may have gotten while employed. It is but a logical way of protecting the corporation.
However, there are some who have questioned the validity of the non-compete clause as being offensive to public policy. This issue was laid to rest by the Supreme Court, in Tiu vs. Platinum Plans,( G.R. No. 163512, 28 February 2007) wherein they upheld a 2-year non-compete clause as valid and enforceable.
The issue in the Tiu case was whether or not a non-compete clause, or a non-involvement clause as it was called in that case, was valid. The petitioner Tiu, worked for one company and upon leaving that company, was subsequently employed by a competing company within the time period covered in the clause.
As explained by the Supreme Court, the arguments for and against the non-compete/non-involvement clause were:
Plainly stated, the core issue is whether the non-involvement clause is valid.
Petitioner avers that the non-involvement clause is offensive to public policy since the restraint imposed is much greater than what is necessary to afford respondent a fair and reasonable protection. She adds that since the products sold in the pre-need industry are more or less the same, the transfer to a rival company is acceptable. Petitioner also points out that respondent did not invest in her training or improvement. At the time she joined respondent, she already had the knowledge and expertise required in the pre-need industry. Finally, petitioner argues that a strict application of the non-involvement clause would deprive her of the right to engage in the only work she knows.
Respondent counters that the validity of a non-involvement clause has been sustained by the Supreme Court in a long line of cases. It contends that the inclusion of the two-year non-involvement clause in petitioner's contract of employment was reasonable and needed since her job gave her access to the company's confidential marketing strategies. Respondent adds that the non-involvement clause merely enjoined her from engaging in pre-need business akin to respondent's within two years from petitioner's separation from respondent. She had not been prohibited from marketing other service plans.
The Supreme Court, after taking into consideration the above arguments, held that a non-involvement clause is “not necessarily void for being in restraint of trade as long as there are reasonable limitations as to time, trade and place.” (Tiu, id).
In the Tiu case, the non-involvement clause was valid because it had a two year time limit and it only prohibited Tiu from engaging in to any pre-need business similar to the former employer.
More importantly, the Supreme Court explained that a contract’s stipulations have a binding effect as they have the force of law upon the parties. Specifically, Article 1159 of the Civil Code provides that “obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.” The Supreme Court reasoned that since the parties freely agreed upon and entered into the contract with the non-compete clause, it has “has the force of law between them, and thus, should be complied with in good faith.” (Id.)
It should be noted however that the Supreme Court was categorical in that there should be reasonable limitations as to time, trade and place. And under the Tiu case, what was considered reasonable was the two year time period. The Supreme Court had no objection to a restraint in trade as to a competing business, subject to such limitations as discussed in the Tiu case.
To summarize then, a non-compete clause (or non-involvement clause as it was called in the Tiu case) is valid, subject to specific limitations.
The moral of the story then is the same thing I have always espoused in previous columns. Before signing any contract, even a supposedly pro forma employment contract, make sure you read its contents first. After all, contracts, freely agreed upon, have the force of law between the parties.
The opinions expressed herein are solely of Atty. Lee. This column does not constitute legal advice nor does it create a lawyer-client relationship with any party. You can reach Kelvin at firstname.lastname@example.org
Published in the Sun.Star Davao newspaper on October 17, 2013.