CHAPTER 1: INTRODUCTION
- The necessity of research
Non – compete agreement (hereinafter referred to as “NCA”) is one of the popular terms in an employment contract in which the employers prevent their employees from doing certain things against employers’ legitimate interest. Because of the great speed of the economy development, the human resource is very important which directly impacts on the success of business. Additionally, the mobility of employment and the rapidly developing technology have become main challenges facing the employers. Therefore, the employers intentionally expect to agree on the NCA in the labor contract for a purpose of maintaining the stable human resources and protecting their commercial interests. On the other sides, the employee may suffer some such damages caused by the restriction of the NCA, for example, the difficulty of looking for a higher paid job and the guaranty of their stable life during the restriction period.
Most of the developed countries have had the legal framework for the NCA in which its validity is obviously determined by reasonable test. Therein, the NCA can be valid in the case of satisfying entirely the legal requirements; otherwise, it will be unenforceable. The mainstream of this test is about the reasonableness of the restriction and the balance benefit between employers and employees rule. Consequently, the employers cannot take advantage of the NCA to push the employees in such a difficult situation despite their dominant position and big control power in the negotiation of the labor contract. In return, the employees are bound by their promises and strictly perform the contract.
As far as developing country is concerned, the NCA has been considered as a new term and has not regulated in any labor law. In practice, the NCA is utilized day by day but is variously agreed in such a confused way. It is suggested that developing country should create the legal framework of the NCA in which the rule of balance benefits between employer and employee is an essential kernel of enforcement of the NCA.
Respect to the concrete situation in Vietnam, it is the great changes in Vietnam labor field that the Labor Code 2012 has taken effect since May 1, 2013. Therein, NCA which is initiative stipulated in the law. It lays the foundation open a development of labor law in Vietnam. However, this provision indirectly regulates NCA in detail and may lead to the confused application practices. Since the Labor Code 2012 is about to be amended and supplemented, NCA is in need to be concerned.
For the reasons mentioned above, the topic “Study on Non-compete Agreement in labor law in EU and experience for Vietnam” is favored as the author’s graduation dissertation. Because of the limitation of time and wide scope of the topic, it’s hard for an author to offer a profound study covering entire relating issues. However, the author shall do the best to provide a deep analysis on certain particular issues. All comments and advice are always welcomed to help the author improve the dissertation for better contribution to Vietnam labor law.
- The purpose of the dissertation
First of all, the dissertation shall provide the literature research on the general knowledge of NCA with the intention of turn out the nature of the NCA and the necessary in governing the NCA. Secondly, the governance of NCA in Labor Law of several countries is summarized and analyzed in order to make the proposal for Vietnam legislation.
- Delimitation of the dissertation
- Delimitation of the study
I divide mechanisms of my dissertation into 2 groups including internal and external mechanism. External mechanisms base on the legislation of some developed countries in Europe, some states of the United States of America and is the summary the typical of governing the NCA with many examples. Meanwhile, internal mechanisms base on the legal theory to explain the necessary in promulgating guidance to governing the NCA. Therein, this dissertation does not present the reality and practical methods in the enforcement of the NCA.
- Delimitation of material
The dissertation mainly studies the Labor Code no.10/2012/QH13 adopted by the National Assembly at its 13th Session and taken effect on May 1, 2013; Vietnamese Civil Code No.33/2005/QH11 and Vietnamese Competition Law No.27/2004/QH11.
Respect to the foreign references, “Non-compete clause – An international guidance of Ius Laboris from global Human Resource Lawyers is listed. Another important materials consulted is the Reports of 16th Meeting of European Labor Court Judges on 4 September 2006.
Besides that, I also refer to materials of legal major and published on reliable legal journal and website such as the website of International Labor Organization (hereinafter referred to as “ILO”) available at http://www.ilo.org/global/lang–en/index.htm.
- Delimitation of time
The dissertation is studied on legislation and other material which were the last updated on…
For the dissertation’s objective mentioned above, the author will combine various kinds of method mainly including analytical method, synthetic method, and the comparative method.
- Synthetic method is used mainly in chapter 2 of this dissertation in order to provide an overview of the NCA such as its definition, classification and the general characteristics by synthesizing information from various sources.
- Comparative and analytical methods are mainly used in chapter 3 and 4. The comparative method is used to compare legislation of European countries with other. This is an effective method to find out the similarities as well as the differences between them. On the other hand, an analytical method is mostly used in chapter 5 to analyze Vietnamese legislations in order to find shortcomings and suggest the proposal for the governance of the NCA.
- Meaning of the dissertation
In spite of the limitation on time and wide scope of the topic, the author expects the dissertation will be the summary of NCA in the labor law with much interesting information. Moreover, this dissertation provides the interpretation why the NCA should be enforced. By acquiring the experiences of the international legislation of NCA, this dissertation suggests the proposal for the governance of NCA in Vietnam concrete situation.
Finally, I hope that this dissertation is meaningful of the development of Vietnamese labor law and Vietnamese legislation as a whole.
- The literature review of research
- The literature review within Vietnam’s territory
There are few direct types of research on the NCA in Vietnam. One of such minority studies is the dissertation entitled “Creating the legal framework for NCA in labor law” by Vu Dinh Khoi. The study provided general knowledge on the definition, characteristics, and essence of the NCA through legislation of some countries in the world and find out shortcomings for Vietnam legislation.
- The literature review in the world
The NCA has been studied for a long time by scholars all over the world, especially in developed countries. It was noticed as an important and popular issue by the publication of “Non-compete clause – an International Guide” of Global Human Resources Lawyers (Ius Laboris) in 2010.
Moreover, ILO held several discussions about the legislation of the NCA. Therein, the 16th Meeting of European Labor Court Judges on 4th September 2006 which is the landmark in creating the legal framework of the NCA in the European Union. These reports of judges are the meaningful legitimate resources not only for research but also for the application of the NCA in practice.
- The structure of the thesis
The thesis is divided into three chapters, as defined below:
Chapter 1: Introduction
The chapter shall give a quick outlook of the dissertation. Through chapter 1, the author wants to show the necessity of the research and the purpose of the dissertation as well.
Chapter 2: Overview of Non-compete Agreement in Labor Law
This chapter shall provide a comprehensive view on the studying history, definition, classification and general characteristics of the NCA. Especially, the remaining part shall explain why the NCA should be governed as well as the necessity to enforce this clause in labor field in order to support for presenting the international governance of the NCA in chapter 3
Chapter 3: Non-compete agreement in Labor Law of European Union countries
The main content of this chapter is the governance of the NCA in some European countries. Therein, this chapter shall provide an overarching view of the legal backgrounds, legal requirements and settling disputes methods. Respects to the enforcement of NCA, its legislations create a reasonable test which includes four important factors: limitation of time, geographic location, industry, and consideration.
Chapter 4: Non-compete Agreement in Labor Law of United States of America
This chapter shall provide the legal backgrounds, legal requirements and the governance of the NCA in some typical states of United States of America. This study is fundamental analysis together with the analysis of the European Union in chapter 3 above so as to find shortcomings for Vietnam and create the proposal in chapter 5.
Chapter 5: Non-compete agreement in Vietnamese Labor Law – Practice and the proposals
Firstly, this chapter shall introduce Vietnamese legislation which relates to the concept of NCA in Vietnam. Then, it will analyze and interpret the necessity to promulgate a legal document governing NCA. Finally, the chapter shall present the proposal for Vietnam legislation of NCA as detailed as possible.
CHAPTER 2: OVERVIEW OF NON – COMPETE AGREEMENT IN LABOR LAW
- Definition of the NCA
In generally, NCA is one of the popular terms in employment contract between employer and employee. NCA is usually used by the employer to delay the ability of the employee to work for competing company in order to prevent an employee from doing certain things against employer’s legitimate interest.
There are various ways to call the non–compete agreement based on countries and legal fields such as restrictive covenant, competition restriction agreement or covenant not to compete. A “Covenant” is a solemn promise to make a contractual undertaking in which the covenanter makes a promise to a covenantee to do (affirmative covenant) or not to do some actions (negative covenant). “Restrictive covenant” is used usually in land law meaning a written agreement that limits the use of property for specific purposes and regulates the structures that may be built on it. “Competition restriction agreement” is defined as a term in the concept of competition in commercial market’s keychain. About labor field, we have “covenant not to compete” and “non–compete agreement” meaning an agreement made as part of a contract for employment in which the covenanter agrees not to compete with the covenantee in a particular area for a specified time.
However, referring to Non–compete Clause – An International Guide of Global Human resources Lawyers which is a high-value document and well-known material for researchers in labor field, the author would like to use the term “Non – compete agreement” in this dissertation with the meaning mentioned above.
The definition and regulation about the NCA can be found in some articles in-laws of many countries.
Restrictive covenants, including the NCAs, are enforceable in Italy which is operative after the termination of the employment contract. A non-compete covenant is enforceable after the termination of the contract in order to prevent the former employee from entering into service with potential competitors. Employer and employee can enter into a non-compete agreement either at the beginning (probationary period) or during the employment relationship or after its termination pursuant to Article 2125 of Italian Civil Code.
Moreover, Article 38 of Danish Contract Act stated that:
“If by reason of competition, a person has agreed not to carry on a specified form of activity or business or not to enter into employment in such a business, the agreement is not binding on him if the terms relating to time, place or other circumstances go beyond what is necessary to avoid competition or unreasonably restrict the person’s access to employment”.
The above provision can be explained that NCA can only come into force if the terms are reasonable and necessary to protect benefit of another party.
Besides, Article 23 and Article 24 of China Labor Law regulate that:
“An employer and an employee may include in their labor contract confidentiality include a non-competition provision on the labor law or confidentiality agreement and agree to pay financial compensation to the employee on a monthly basis during the non-compete period after the termination or revocation of the labor contract. If the employee breaches the non-compete provision, he shall pay liquidated damages to the employer in accordance with the stipulated terms. The personnel subject to non-compete obligations shall be limited to the employer’s senior management, senior technicians and other individuals with confidentiality obligations. The scope, geographical limitations, and term of the non-competition obligations shall be agreed upon by the employer and employee, and they shall not violate any laws and regulations.”
In generally, NCA is a term in labor contract stipulated by focusing on the legal conditions of enforcement one in most law across countries. Based on those provisions in the law, the concept of NCA is interpreted by many experts and attorneys. According to the authors of “Choice of Law and Employee Restrictive Covenant”, “Non-compete agreement are often drafted as part of a basic employment contract or are included in a separate document that is reviewed and signed at the beginning of a term of employment. Essentially, the NCA ensures that upon the termination of the employment period, the former employee will not engage in activities that place him/her in direct competition with their former employer.”
However, NCA is not defined in Vietnam laws. The concept of competition is mentioned in some articles of competition law fields such as competition restriction (regulated in article 8 of Vietnamese Competition Law 2005) or unfair competition (regulated in article 3 of Vietnamese Competition Law 2005). Vietnam’s point of view is that NCA in labor areas is contrary to the public interest and the freedom right to work of employees, therefore, the NCA is still considered as a new term in labor contract and is unenforceable in most of the cases in Vietnam. Vietnamese labor law was only mentioned about non-disclosure clause or confidential agreement, which is also a kind of the NCA.
After all definitions of NCA discussed above, a concept of NCA can be as follow:
The non-compete agreement which is a restrictive covenant is agreed by both employers and employees so as to prevent employees from doing certain things against employer’s legitimate interests in a certain period of time or in particular geographic location.
- General Features
In order to distinguish the NCA in labor fields from other legal fields and building up the legislation to govern this clause, NCA can be considered with 5 typical characteristics as below:
Firstly, the NCA is established by employers and employees. The employee must have enough capacities individual and the employer must satisfy the legal requirements of commercial entities. These agreements must depend on another contract, such as labor contract. It is believed that employment relationship is dependent labor in which employers generally have the upper hand in control and manage their employees. Employers have their advantages in negotiation with their employees-to-be who need a job. Therefore, this characteristic can be used to distinguish NCA from other contract relationship.
Secondly, the ultimate objective of the NCA is to help eliminate the risk of confidential information becoming available to the competition, in other words, preventing employees from doing a certain thing that against or compete with employers’ business. In many countries, those benefits must be required as “a legitimate proprietary interest” which means employers cannot seek to prevent the employees in general. It is a legitimate interest of the employers to prevent former employees from appropriating aspects of the employers’ goodwill such as confidential information or knowledge of and influence over the employers’ customers. Therefore, employers usually expect to bring the NCA in labor contract and take the initiative in drafting this agreement.
Thirdly, in order to come into force, the NCA should be stipulated reasonably based on “reasonableness” limits the geographic scope, duration, and professional scope. When determining the reasonableness of those elements, the court commonly depends on the characteristic of other components of the NCA including the employer’s legitimate business interests, the necessary in preventing the competition from other parties and not contrary to public policies. Therefore, the enforceability of the NCA is based on each case in such flexible way.
Fourthly, the NCA is unenforceable prime facie in almost countries because it is regarded as contrary to public interests. For example, the NCA is enforceable in most states of USA but in a small minority of states such as California, the NCA is unenforceable. However, such clause can be enforced in certain circumstances when it satisfies the legal conditions of validity. This issue will be represented in detail in chapter 2.
Last but not least, the NCA can be in both written form and unwritten form. In practice, most countries require the NCA must be in writing to make it clear, certain and unambiguous.
There are numerous criteria to classify the NCA. The NCA can be classified base on the matter of restraint or base on the time of restraint.
Firstly, according to the restraint subject, there are 4 common types of NCA: traditional non-compete agreement, non-solicitation or non-poaching agreement, and confidentiality agreement.
The traditional non-compete agreement prohibits employees from engaging in employment with a competitor of former employers or doing something in the same line business against the benefits of the former employer. However, this agreement, must not, but its wording, “prevent the employee from earning a living”. The restriction imposed by a non-competition clause includes 3 elements: time (a precise duration), place (a definite territory) and category of work. Therefore, a non-competition agreement must define the field or category of work prohibited, the territory over which this prohibition will apply and the duration of the restriction. Accordingly, the traditional non-compete agreement must only be used in reasonableness that does not greatly exceed in necessary for protecting the employer. In practice, it is very difficult to understand and demonstrate “the same line business” and “competitor of former employer” because of the various regulations in different countries.
Non-solicitation agreement also known as the non-poaching agreement is an agreement which is used to prevent an employee from initiating a business contract with customers from the former employer or using the information that such employee can learn to solicit others. In order to prevent the stealing away of a customer of ex-employer, a non-solicitation agreement may state that employee who is about to learn certain information promises not to use it to solicit others. A non-solicitation agreement may say, employee agrees not directly or indirectly, alone or on behalf of another, to provide services to, call upon, solicit, sell, divert, take away, delivery to, accept business or orders, or otherwise deal with the past, present, or prospective customers of ex-employer, or assist anyone else in doing so. There will likely be limits to the scope and duration of the agreement. The agreement will spell out the scope by explaining the geographical limits of the promise. The agreement will spell out the duration by explaining the length of time for which solicitation is prohibited. In other words, the employee cannot leave the job with clients list and solicit them when they move to work for another company, especially competitor of ex-employer.
Confidentiality agreement is also called non-disclosure agreement in which employee is forbidden from disclosure any strategic information of the company. This strategic information can assume many forms: unique know-how developed by the business, customer lists, price lists, proprietary invention and other information that hostile to the benefits of the employer. The use of this agreement is more essential when an employee has directed access to sensitive information, especially in the faster-developing technology. Therefore, the legislation normally favors in the enforcement of this agreement for the purpose of protecting the competition in a commercial environment, encouraging the development of technology in individual and economy as a whole.
Secondly, according to the restraint time, there are 2 types of NCA: during the employment period and after the termination of the labor contract.
During the employment period:
In this case, the NCA is effective only within the employment period. Employer and employee are voluntary enter into any term of a labor contract based on their own willingness such as non – compete clause, confidentiality agreement, provided that such agreement does not violate the principles of law. This rule forbids the employee from performing anything hostile to the benefits of the employer during the employment period. Notably, the employee is not prohibited from doing another job during their spare time in general. However, they must not work for a rival employer, if it causes a serious damage to the fundamental business of ex – employer. In contrast, if an employee simultaneously works for two or more companies, the NCA is preferred to apply in order to reduce the conflict benefits between employers. Therefore, employee and employer are bound by their promises and keep in mind other party’s advantages while conducting the contract. As long as the contract is forced during the term of the labor contract, the employee is obligated not to compete with the employer. It can be believed that the interest of employer is defended sufficiently. However, the court may consider that whether the NCA infringes the rule of protecting the employee’s rights or not. Especially, the court will disfavor the NCA in term of the employee has to face a choice of “work or starve” at the time employee enters into the labor contract. It is generally agreed that employment is a dependent relationship in which employer has a higher position to control the negotiation of the NCA. Since employee needs a job, the employer can push employee in order to impose the NCA on the employee. However, employee only is bound by such NCA in the term of the labor contract. In common, the validity of NCA will be expired as the term of such labor contract. Considering the enforcement of NCA, in comparison with “after the termination of a labor contract”, “during the employment period” is easier to accept with without any examination. Also, it rarely leads to the conflict or difficulty in the demonstration.
After the termination of a labor contract:
Due to the fact that the NCA also binds the parties even though the labor contract is terminated, the NCA is designed after the termination of the labor contract in order to protect a stable human resource and prevent sensitive information from being leaked out. It seems to be an infringement upon the freedom right to work of the employee. Therefore, the court should strictly consider this agreement with h reasonable test of limitation on time, geographic location, and professional scope. In general, it is very hard for the employer to enclose this clause since the employee is no longer under control.
There are several legal problems with applying the NCA after the termination of a labor contract. It is considered that whether a sufficient employment relationship exists after the termination of a labor contract. It is suggested that the employment relationship is ended based on the terms of the labor contract since the employment relationship is derived when employee and employer enter into such contract. On the contrary, some people think that after the termination of the labor contract, the relationship between employee and employer still exist continuously. The concept of the employment relationship is so large that includes the relationship raised directly, inherent in the hiring of employees and the relationship directly affects the employment relationship. As a result, the relationship relevant to the NCA can be considered as a later relationship. However, in all jurisdictions, there are some duties that survive the end of the employment, most notably duties concerning business and trade secrets. These duties will only provide limited protection, hence express non-competes are usually desirable. In this dissertation, the author supports the second point of view when making the proposal for the governance NCA in Vietnam.
Another legal issue relating to the NCA after the termination of the labor contract is whether the third party is bound by the NCA or not. In different countries, this problem will be stipulated in a different way, but quite similar in balancing the benefits of the parties.
- Roles of the NCA
Because of the developing of technology and the mobility of employees, employers have to face many difficulties in protecting their confidential information or stabilizing their human resources. Respect to the employer, human resource is considered as an essential key for an employer to get a successful business. Therefore, the NCA has become a popular term of the labor contract and played an important role in the development of employment relationship since the NCA is one of the effective ways to serve, at first, employer purposes.
Regarding the employees, the NCA is considered as a strict restriction which violates the freedom right to work of an employee in the first view. However, if it is governed by law, the interest of contracting parties will be balanced and no party can take advantage of this agreement. An employment relationship will develop stably and impartially with a legitimate application of the NCA. Besides, the NCA is a meaning tool to defend the fair competition in commercial market because it prevents the rival from abusiveness of employee such as leaking out the confidential information of former employer.
- The development of the NCA
The NCA was early created by the guilds in a 15th and 16th century in England where the basic of the legal system was common law and later expanded the effects to some areas and has become widespread labor agreement currently.
At a Medieval time in England, since the Lords and the landowners had the power of handling the trade tax, the guild, which was an organization of craftsmen and workers, was established with intention of protecting the benefits of its members. They were divided into three basic groups comprising the master, the journey, and the apprentice. The master and the journey would enter into a contract in which the master would provide training in exchange for the apprentice for about seven years in general. At the end of the period, the trainee graduated to become a journeyman. In this contract, the master would prefer the additional advantage of being able to prevent the journeyman from competing against him in his community because of the movement in labor markets, the trade secret would be leak out. As a result, they attempted to enforce the NCA to prohibit the journeyman to go to another town to practice his craft.
However, such agreements were disfavored by the courts because the contract was contrary to the social policy at that time in which the property and goodwill were transferred freely. Furthermore, the “Black Death” plague had made the change of labor market in which the demand if workers were very high. It was such an extent that being unemployed was illegal for anyone under the age of 60. Therefore, the NCA which restrains someone from being employed was likewise illegal.
There were many cases related to dealing with the NCA. One of the earliest records of this agreement was Dyer’s case in the early of 1414. A London practitioner prohibited his apprentice from pursuing his trade in the same city for six months following his apprenticeship. In this case, the court stated that the NCA was unenforceable. According to some commentators, the result produced two fundamental pillars of employment law. The first was a policy in favor of retaining skilled labor in the public domain. The second pillar promoted the right of all individuals to seek a livelihood. The same decision remained unchanged until 1614 when a court ruled that “at common law, no man could be prohibited from working in any lawful trade”. It could be understood that a restriction could be enforceable if it was limited to a specific geographic location and a reasonable duration.
Almost a hundred years later, this exception had become the rule in the case of Mitchell v. Reynolds in 1711. Reynolds, a baker, agreed to rent his bakery for 5 years. In return, Mitchell pledged Reynolds a bond worth 50 pounds on the condition that Reynolds would not resume his trade within St. Andrew Holborn Parish for 5 years. However, Reynolds breached the agreement. So, Mitchell sued him for breaching the contract.
In this case, the Lord Smith L.C said:
“It is the privileges of trader in a free country, in all masters not contrary to law regulate his town mode of carrying it on according to his own discretion and choice if the law must be obeyed. But no power short of the general law ought to restrain his free discretion.”
The restraints on trade were illegal; however, the court still recognized that a part of this agreement under certain circumstance might be enforceable. These were the landmark of the development of enforcing NCA in labor contract based on restraints of trade doctrine.
In the early of 19th century, restraints of trade and interference with individual liberty of action might be justified by the special circumstances in particular case. For instance, in Nordenfelt v. Maxim Gun Co. case, a Swedish inventor promised on the sale of his business to an American gun maker that he “would not make guns or ammunition anywhere in the world in would not compete with Maxim in any way”. The Lord Macnaghten ruled that part of this agreement was enforceable; however, other parts could be invalid. Because the court considered that the concept of “anywhere in the world” was an unreasonable restraint for Maxim in any way. This case made the beginning to articulate the determination of the “reasonableness” in restraints of the labor contract. That was not only reasonable in reference to the interest of the parties concerned but also reasonable in relation to the interests of the public. It was so framed and so guarded as to afford adequate protection for the employer in such no way injurious to the public. In the mid-nineteenth century, the change in economy contributed to the enforcement of NCA. The economy was transferred into capitalist model. It led to competition and mobility of labor that still were recognized as one of the most important factors in the development of the economy. As a result, the court began to shift their emphasis to the freedom of contract.
This approach in England was confirmed by the House of Lord in Mason v. the provident Supply and Clothing Co. In this case, Mason was a salesman for a clothing company which has branched all over England. He agreed not to assist in a similar company for 3 years within a 25-mile radius from London. It was decided that the areas were too much. The court stated that Mason had only a minor role in a small part of London. The Court considered that these restrictions in area and time must not be wider than they are reasonably necessary for the protection of business. Especially, as capital began to organize into large and powerful interest, it was just a matter of time until the exception swallowed the rule. Accordingly, a vast majority of courts still were inclined towards the early common law’s refusal to enforce the NCAs. This trend became more effective in some areas, otherwise, American in particular.
At the beginning of the 20th century, most American courts were beginning to apply general contract principles and a “reasonableness” standard was developed to evaluate the enforceability of the NCA. It is interesting to note that during this period of history, the Congress passed the Sherman Anti – Trust Act, which prohibited restraints on trade. Although seemingly applicable to post-employment non-compete, the Sherman Act was rarely used to challenge this non-compete. Moreover, a “rule of reason” had been developed by courts applies the Sherman Act. Nonetheless, the scope of adjusting in this law only relates to the competition in a commercial environment and the subjects of competition law were the economic entities. At this time, there was not any law of competition in labor field, but with Sherman Act, the court continued to expand the enforcement of NCA.
Over the last 50 years, the law of NCA has been evolved by the development of the economy. Even though the nominal standard of evaluation NCA has not changed much over the last 100 years, the way in which the standard is applied has. The “disfavor of non-competes” is still given lip service by the court. However, it is clear that judges are much more open to enforcement NCA on a case-by-case basis. At the end of the 20th century, the capital was much more organized than it had been 150 years ago. In addition, the political influence of organized labor has eroded in favor of a “pro-business lobby” which could not be ignored in the evolution of the law of NCA.
Moreover, there has been the shift from an industrial and manufacturing economy to a service and knowledge economy globally. In addition, it is widely believed that the change in the understanding of human capital and ownership of intellectual property have contributed to a willingness to enforce restrictions on employees. The most important example is trade secrets which are quickly becoming the linchpin of non-compete analysis like any other concepts in-laws. Finally, NCA has been adjusted and enforced in certain circumstances and a reasonable test created by the court.
In conclusion, NCA might affect to the public benefits, so they have not been favored by the court. Nonetheless, the essential lesson of history is the impact of the economy and society, the law of non-competes is improved gradually. The evolution is presently occurring faster and more complexity than ever before. The law is struggling to keep pace and should look for the most sensible way of enforcing NCA instead of disfavoring this agreement.
- Enforcement of the NCA
For a long time ago, NCA was not enforced by the court. In most of the cases regarding NCA, the employee was bound by many others certain circumstances in which they have to fulfill an obligation of demonstrating that this clause is reasonable to protect their benefits. However, there are numerous reasons why NCA should be enforced by legislation nowadays.
- Social – economic reasons of enforcement of the NCA:
Firstly, the mobility of labor force is much more than ever before. Since the economy grows dramatically with a lot of new companies established, there are numerous job offers for employees. Besides, the quality of employee is getting better. Employees can improve their knowledge, skills, and experience to make them more competitive and attractive in the ever-changing workplace. Hence, employees will be enticed by attractive invitation jobs such as with higher salaries, greater bonuses and better career path derived from competitors of the employer. In the event of lacking a strategy to promote longevity of employment, the employer cannot maintain a stable labor force in the company. Because of the promptly increasing mobility, the majority of employers believe in the NCA that can prevent their human capital from leaving and their confidential information from being revealed. Unfortunately, they are aware of the public policy that disfavors the NCA. However, this is still a useful solution to reduce the mobility of employee. As mentioned above, the free labor market has led to an increasing employee’s mobility, so that employees are less likely to remain their loyalty when they are offered better opportunities by rival employers. Even though the legislation has well-established law dealing with the duty of loyalty, it is not enough to protect a legitimate interest of employers without enforcement of the NCA, especially after termination of the labor contract.
Secondly, the development of technology is incredible and it has become a huge barrier for employers to protect their trade secrets. “With the advent of small laptops connect with the internet and tiny cell phone, the employer can literally work anywhere”, it pushes the employer facing serious difficulties in keeping their confidential information. For example, the risk for unauthorized theft and misappropriation of confidential trade information has increased exponentially. It is described voraciously that the development of technology has made these unlawful deeps are done with the sophisticated manner and more dangerous.
Thirdly, while it is no secret that the growth in litigation has declined somewhat in recent years, many employers may be surprised to learn that litigation involving the NCA has increased dramatically over last decade. The figure showed that lawsuit filings “rose a scant 5 percent in 2009, down from 9 percent in the previous year as economic pressures kept plaintiffs’ activity in check” and “the number of new cases brought in 2009 rose from 266,055 in 2008 to 279,391”. The number of new cases has been increasing significantly, compared with the number of published statistics. It is because almost the trial court decisions go unpublished, just in rarely certain circumstances. Those statistics demonstrated that there are actual the NCA in practice which demands to be enforced by law.
Finally, the competition is one of the typical features in a commercial market that every company worries about when starting up a business. If sensitive information of the company is held by the competitive company, the holder obviously has better competitive advantages. Furthermore, it also leads to an unfair competition act in the market. Accordingly, the enforcement of the NCA can diminish the risk of unfair and unequal competition behavior; in other words, promote the development of the commercial environment.
- Principles of law supporting for the NCA
- Principle of free and voluntary undertaking and agreement
In modern law, there is an existence of the empty place in legislation that no provisions can cover all legal issues about the rights and obligations of contractual parties. The legislation only provides a ground of such rights and obligations upon which contractor are able to expand more. It will become enforceable between parties and they have to fulfill their obligations. Therefore, the principle of free and voluntary in the agreement has become a fundamental rule of contract law. According to this rule, the law creates the legal framework for the contractual party to freely agree on any term in the contract as long as there is a meeting of their minds in order to let them achieve their purpose when they set up the contract. Particularly, in labor law, the employment contract is an agreement in which a person undertakes to carry out work for another person in exchange getting a payment of remuneration, under specific conditions. Applying this rule, the contractor can enable to any term which is consented by another party as long as not violate the law. Therefore, the NCA can be forced due to the mind’s intersection between the contractual parties. Otherwise, if employees agree on the concept of the NCA and decided to sign an employment contract with an employer, the court should consider enforcement of the NCA. Actually, most countries provide that consensus of contractual parties becomes one of the valid conditions of the NCA. In modern law, the legislation opens the flexibility and freedom for employers and employees to come into the NCA. Explaining for this point of view, the employee who is a senior manager or someone who keep confidential information of the company is bound by this clause in general. Indeed, they are also knowledgeable workers that have a profound understanding of the rights and obligations, especially the right to enter into a contract. Consequently, it is unappreciated and conservative to claim that the NCA is break up employee’s interest. Conclusively, the labor law should apply the principle of free and voluntary in agreement for supporting to the governing NCA and create the legal framework for this agreement instead of prohibition.
- Principle of pacta sunt servanda
Pacta sunt servanda is a general oldest p and principle in both international law and private contract law. The concept of this rule is that contracts and clauses are laws between parties, so they are bound by their promises. It requires that each party must seriously perform their obligations with all their goodwill and ability, in a word, means “agreements must be kept”. Therefore, in the event that the NCA is voluntarily and freely engaged and not contrary to the public policy, they have to fulfill their obligations. As pointed out above, it can be argued that the unenforceable NCA is contrary to the principle of “pacta sunt servanda”
- Principle of balance benefits
The principle of balance benefits is originated from the conflict theory which admits the existence of a conflict between different parties of any relationship in society. As a result, it is impossible to eliminate this conflict. Instead of this, the conflict will be resolved by balancing benefits of relevant parties in a certain situation within publish interests.
In the legal field, this principle is tendentiously used to appraise and consider the reasonableness also harmonize the benefit between employers, employees, and society with the purpose of improving the employment relationship. In many legal systems, most of the law governing the NCA also ensure and comply with this concept of this rule as below:
Firstly, respecting the appreciate benefits of employer basis on protecting their fundamental rights and obligations, it is satisfied with the purpose of NCA that protects a legitimate interest of employer from the immediate compromise or potential competition of rival employer. Nevertheless, the enforcement of employer’s interests is expanded to lead to the narrowing rights of the employee and the benefits of other commercial entities. Therefore, in many countries, consideration is required by law and becomes one of a valid condition of the NCA. For example, a company expects to prevent trade secret from being leaked out by an agreement with their employees that they cannot work for a competitive company for a year after the termination of their labor contract. By applying this rule of balance benefits between contracting parties, the employers has to give a consideration relevant to and equal to the benefit that particular employee is received by this restriction.
Secondly, NCA is not contrary to the public policy. The NCA not only limits the job opportunities of employee and their mobility in labor market but also affects social benefits. The social benefit can be understood as an advantage that anyone such as customer as individual or community as a while entitle come in for the fruits of labor or enjoy in public policy.
Actually, the NCA can restrain a person from getting the best out of dedication of employee, especially in medicine, education or legislation. Besides, human resource is considered as one of the social benefits effectively utilized in order to contribute to the development of the community. Hence, the law generally does not enforce the NCA if such NCA restricts the social benefit.
Briefly, the principle of balance benefits is considered as the most important rule that affects to the judgment when the court determines the reasonableness of the NCA.
- Principle of protecting employer’s interest in labor law
In an employment relationship, the employer is defined as the person who hires employees and performs the normal functions such as assigning tasks, providing the means and giving instruction for an employee to carry out, supervising the productivity, paying wages, assuming risks, making profits and so on. Most of these functions presumed that employer is a predominant party in the employment relationship. However, in the social developing process, these advantages are gradually trending toward balancing the benefit of the parties in cooperation and equality.
Accordingly, it is necessary for protecting the employers’ interests, especially the advantages that they expect to be preserved by the NCA as a consequence of the following reasons. Firstly, no longer as before, the employee knows how to struggle so as to protect their legitimate interest. Particularly, in order to intensify their customer first. It pushes the employer in an insecurity situation that faces with competition increment of the rival employer in their business. Secondly, in various countries, legal rights of the employer are stipulated narrower than an employer that derives from an employer has stronger controlled power in the employment relationship. Finally, the business of employer plays the important role that contributes to producing material wealth, fostering the development of economic, creating the opportunity jobs and raising the living standards. As an indispensable contractual party, if the employer cannot gain enough the benefits and rights provided by the law, perhaps they and other potential investors will not proceed with their investment to solve the demand of work. Hence, protecting employer’s interest is also considered as one of the appropriate resolutions that solve and harmonize public interest. This rule states that the employer entities to request employees and other entities to respect their benefits and rights, claim damages and ask authorities for intervention and protection.
Pursuant to this concept, it is impossible that the employer agrees on the NCA in the labor contract in which their business interests will be preserved particularly.
Currently, human resources constitute part of a business capital and are an important element of its success. For making the successful business, the employer frequently invests in the training of his/her employees and shares the sensitive information with them during the employment period. Consequently, whenever the employee leaves the enterprise, not only is it the loss of this investment  but this employee can also compete against the former employer by taking advantage of the secret in business or using the training skills on behalf of the competitor.
Hence, the NCA has become a popular term that the employer intentionally expects to agree in employment contract so as to protect his/her interests. Therefore, laws should provide a legal framework that all agreements must be complied with and cannot surpass rather than prohibit this clause.
However, while the NCA has become more and more popular, the use of the NCA has increased rapidly and sophisticatedly, the law which governs those employment agreements has become inert and quite different from state to state and country to country.
Therein, the enforcement of the NCA is gradually changed from the failure of enforcement in prima facie toward to be forced in a certain case. Additionally, the governance of the NCA is quite similar on the basis of that the rule is actually applied.
Thus, chapter 2 will present both the differences and similarities in governing method used to adjust the NCA. Therein, this research will focus on the reasonableness test of the NCA by reference to some legal provisions in many countries of the European Union such as German, France, Italia, Spain, Denmark, and so on. In these countries, the NCA is indirectly stipulated in law and can be enforced by the court.
CHAPTER 3: NON – COMPETE AGREEMENT IN LABOR LAW OF EUROPEAN UNION’S COUNTRIES
- Legal background of the NCA
In European Union (EU), no treaties or directives specifically mention the NCA in labor field. There is only an instrument namely Council Directive 86/653/EEC of December 18, 1986, on the coordination of the laws of the Member States relating to the prohibition of competition for self-employed commercial agents. Pursuant to this act, the contractual parties can only agree not to compete for two years. However, this Directive is applied to the commercial entities in the commercial market. Its subject matter is the relationship between two or more employers and is not extended to cover employment relationship. This is only one instrument which concerns the NCA and the employees. It is the Charter of Fundamental Rights of the EU, which became effective on December 1, 2009.
Article 15 of Charter of Fundamental Right of the EU provides that: “Everyone has the right to engage in work and to pursue freely chosen or accepted occupation”. In this context, global companies do business in Europe cannot reply on a comment set of rules governing the validity and the implementation of the NCA provisions. They must act on a case by case basis and take into consideration the specific local laws where their workforce is located.
In many countries of EU, there are no legal reports that whether any provision directly mentions on – competition clauses in its Constitution. However, various constitution rights relate to issues of enforcing the NCA as follow:
Firstly, it is not binding on – compete agreement. It is said that freedom of occupation is one of the most important constitution rights. Pursuant to section 18 of the Constitution of Finland, everyone has the right to work and freedom to engage in commercial activity. As provided by this provision, an employee can earn his/her livelihood by the employment, occupation or commercial activity of his/her choice. The non-compete is considered to reduce the employee’s freedom of right to work. Examples of some rights relevant to the freedom of occupation are the duty and right to work and earn a minimum income (Spain), the protection of work (Italy), and so on.
Secondly, it is about binding non – compete agreement. It is said that duty of loyalty is a concept mentioned during the term of the employment contract. The duty of loyalty is an obligation not to carry out any activity that may compete with the employer and generally regarded as a legally implied term of the employment contract.
For example, according to Article L.1221-1 of the French Labor Code, the general duty of loyalty prohibits an employee from competing during the term of employment.
Pursuant to Article 2105 of Italian Civil Code, the duty of loyalty is also prescribed to prevent an employee from competing against an employer during the term of the employment contract. In addition, other constitutional rights also refer to support for the NCA such as freedom of trade and commerce, freedom of contracts, prohibition of unfair competition practices.
Besides, Declaration of Rights of People and Citizens in 1789 of France (Declaration des Droits de I’hommeet du citizen) said that “Person free to do anything that does not harm another person, property basic right, freedom of occupation”. This provision creates a legal space in which the contractual parties are able to set out a sound NCA as long as it is not harmful to another person. Because of this right, the employer can require the employee to comply with employer’s obligation contained in the NCA and also ask the court to enforce this clause. Another right is the property ownership including intellectual property like trade secrets. Based on this right, the employer has a reasonableness of undertaking any actions for the purpose of protecting his/her legitimate interest by the NCA. Finally, the most important rule is balanced benefit between the parties which is a fundamental principle for not only setting up a NCA by the contractual parties but also taking the enforcement or disfavor in this clause by the court.
In conclusion, many statutes directly and indirectly relate to the NCA. Despite the disfavor by some provisions or legal principles, the NCA is not only unforbidden in most of the European countries but also can be enforced in certain circumstances. Actually, many laws provide in details a number of specific requirements that an NCA in an employment contract must satisfy to be enforceable. These are a form of contract, the capacity of parties and a “reasonable test” which are some relevant factors including consideration, limitation about duration, geographic location and industry that the court will consider.
- General legal requirements of the NCA
- Capacity of the contractual parties
In general, there is no defined provision which requires certain minimum ages when a person can enter into an NCA. As an NCA is a contractual obligation, the fundamental principles of contract under common law will be applied. It provides that a person who is or over 18 years old is considered to have a full capacity, so such person is able to sign a binding contract of employment which can include an NCA. In theory, a minor is not able to enter into the NCA by himself or herself, except it is necessary for the minor’s benefits. Some countries which allow a minor who is 15 years old to agree to the employment contract also require the consent of his/her parents.
In addition, each country in EU requires other conditions of capacity that contractual parties shall satisfy when they enter into an NCA. For example, in Luxembourg, there is a minimum salary which is regulated in Statute around EUR 47,875.60 (in 2010). The law provides that if not – compete agreement which is made by an employee who earns less that such minimum salary will be invalid.
Pursuant to Article 38, Section 2 of Contract Act in Norway, NCA cannot be agreed upon by an employee who does not have managerial positions. However, there are some exceptions. For instance, the NCA can be binding between employer and employee who is not a manager but has knowledge of employer’s client list, trade secrets or confidential information which can make an advantage for any information’s holders.
In France and German, there is another condition that an employee who is a professional such as doctor, lawyer, accountant, etc. can be excluded from the NCA.
- Written form
In some legislation, the NCA can be enforced only if there is a written clause in labor contract and a copy of such contract must be given to the worker. For example, in Article 74 of German Commercial Law:
“An agreement between the principal and the commercial clerk which after the termination of the employment restricts the clerk in his trading activity (prohibition of competition) shall be in writing and shall be delivered to the clerk in the form of a document containing the stipulated conditions signed by the principal.”
In a typical NCA, the context of term “must be clear, certain and not vague”, so it is important to specify the NCA as accurately and unambiguously as possible. That is the main reason for recommending a written agreement. Actually, written form can avoid the risk of misunderstanding about the meeting of mind between the contractual parties and support of the contractual parties to easily burden of proof. If the wording is unclear, the principle of interpretation will weigh in favor of the employee because the employer is generally considered as a stronger party and will often has the control power in negotiation of the NCA, also the one who selected the language.
On the other hand, some countries such as Austria, Netherlands, Ireland, Belgium, Slovenia, United Kingdom and Iceland do not require written form. It can be written or oral form. In some countries, it also implies a covenant when the employee is acting in bad faith if the employee uses trade secret or confidential information at his new job. It is the same in Norway, but for the purpose of evidence, written form is commonly recommended.
- Reasonable Test of NCA
- Time limit of the NCA
The NCA cannot be enforced unless it is supported by a reasonable term of restriction that is adequate to employment period and cannot run for too long after terminating the labor contract. Actually, it is quite difficult and ambiguous to determine how long is too long in the post – employment context, but it is frequently based on two issues which consist of in law and in fact.
About “in law”, it means that the law stipulates an extreme of duration after termination. For example, the non-compete covenant cannot be extended beyond a period of two years in Germany and in Ireland “non-compete clause generally not enforced for more than 6 months”. In many countries, the legislation draws a distinction between a skilled worker who is trained and more professional than other types of workers referred to as unskilled workers. One example is two years for the former and six months for the latter in Spain Labor Law. In Italy, the duration does not exceed to five years for managers and three years for other types of workers and the limitations of territory and subject matter should not effectively prevent the employee from working at all during the dring of the obligation not to compete pursuant to Article 2125 of Italian Civil Code. If the NCA provides a longer period, it will be automatically reduced to the statutory maximum one in case the court uses blue pencil doctrine or may be invalid in other situations.
In another hand, about “in fact”, restriction time which is determined pursuant to “in fact” is not imposed by a statutory time but depends on a specific employment situation case by case. Consequently, the longer the term of time an agreement covers, the more difficult this clause will be enforced. For example, “five-year” term is more likely to be unreasonable than “five-month” term. The question of how long a reasonable time of the NCA will be assessed in each individual case by applying the rule of balanced benefits between parties hence, it totally depends on the court’s decision.
There are various factors which can be taken into account to determine the reasonableness of duration such as the position of the employee in the business employer. The court also endeavors to strike a balance benefit between the parties that the length of time is not beyond the need of protecting the legitimate interest of employer as well as does not strictly prohibit an employee from freedom of working rights. In practice, the duration of NCA is generally allowed not to exceed two years.
Notably, if the NCA is designed during employment period, the term of limited time will not cover “non-work period such as holidays or over a period of leave”, except for the fact that the both employer and employee have agreed on the extension.
- Geographic location
The NCA must reasonably limit the geographical location that is frequently required by most of the countries in EU. In comparison to the limitation on time, geographic location is not stipulated in the law. However, it is addressed usually in each individual case based n the rule of balanced benefits between the contractual parties. In order to assess the reasonableness of a geographic area in non-compete clauses, the court will take into consideration various elements. For instance, the size of the employer’s business may become a factor when the size of the area is specified.
Consequently, the more specific a geographical area is agreed, the more possible it is to enforce NCA in the employment contract. Furthermore, the geographical limitation is narrow or broad depending on the type of business. If the employer who is in various industries and worldwide operation such as a multinational company or international company, it is very difficult for them to demonstrate the need for protecting their interests.
Additionally, it is also complicated for the court to determine the appreciated limitation of geography, especially in the case that the employer does a business which is distributed by many channels or via the Internet.
As two factors of limitation said above, the industry, in which the employees use their skills to work, is also one of the important elements in the enforcement of NCA. It is widely believed that most courts gradually tend to consider the department that the employee used to work in a new employment contract if it is similar to the old one in former employment. For example, a non-compete agreement is agreed that an accountant cannot be employed for any departments of a rival company. In other words, it is possible for the former employer as long as his/her job is not relevant to the previous department, such as human resource executive or a salesman. However, if in the new labor contract, the accountant is employed for working in the financial department, the court will favor them rather than the former employer, except the employer can demonstrate sufficient evidence of their damages caused by the employee’s performance.
The NCA is usually considered as a mutual contract which means a promise in an exchange for certain performance. Generally, this is a financial amount that employers shall pay the employees so that the employees can keep their promise. This is considered to make the balanced benefits between the employer and employee. The court will refuse to enforce the NCA if it is not supported by an adequate amount of money. In the international NCA content, the financial amount is regulated in different ways in different countries.
Firstly, it is referred to as “contractual consideration in common law systems and staying out of the game of compensation in civil law systems”
Consideration is one of the important elements that cannot be absent in most contracts in common law. It means “something of value given by both parties to a contract that induces them to enter into the agreement to exchange mutual performances”. The NCA is a new promise, so some countries require a new consideration for both cases “in during employment period” and “after terminating labor contract”. In the first case, the employee has to not compete against the former employer because of loyalty obligation. However, the NCA creates a restriction on the employee’s working right so that the employer shall pay an amount of money for the employee besides giving the job, training or promotion for the purpose of the ensuring employment’s living. In the second case, the employment relationship is also finished at the time of contract termination. Therefore, if the employer wants to prevent the employee from doing something, the employer must exchange something of value as a consideration to the employee.
Common law jurisdiction tends to require a contractual consideration where the parties can agree and undertake contract freely and ambiguous. The court will examine whether the consideration is agreed by both parties and whether it violates any general rules of consideration in precedent and in law or not. However, another one which is more important í that consideration must be adequate to restrict the right to work and find a new job within employee’s specialization. What is adequate will depend on the certain circumstances, but will be relevant to the limitation on duration, geographical location, and industry. In general, the smaller the field of competition, the lower the consideration should be.
Different from the Common law, Civil Law jurisdictions require a staying out of the game compensation. It is said that the NCA after termination of the labor contract would be enforced rather than during employment period and this post-term non-compete exists out of the employment relationship, as “staying out of game”. Many different jurisdictions in civil law systems require a minimum compensation in the NCA. In Germany, according to Article 74 of the Commercial Law, an NCA is binding only if it provides for financial compensation which amounts to at least 50% of only the employee’s most recent contractual remuneration paid during his employment.
In France, compensation is mandatory in NCA but is not determined by statutes. The minimum amount can be determined by the applicable collective bargaining agreement. If there is no provision in this, a financial amount ranging from 30% to 50% of the employee’s monthly salary is generally regarded as reasonable. In Italy, a non-compete covenant is binding only if it provides for a financial compensation. Similar to French law, no amount is specified in the civil code. The accepted practice is that the amount of consideration ranges from 15% to 35% of the current salary of the employee.
Secondly, the payment method of compensation is stipulated variously in different countries, but it can be summarized as the following two options.
The compensation can be paid as a lump sum or each month. For example, pursuant to Article 64 German Commercial Law, the employer shall pay compensation for an employee at the end of each month after the termination of the labor contract and any agreement by virtue of which the payment is to be later is void. In addition, some countries provide combination between these methods to ensure employee’s living during restricted period. In Denmark, the compensation must be paid as a lump sum for the first three months of the effective date of termination and subsequently each month during the remainder of the restricted period. Particularly, the employer can seek to reduce compensation in case the employee gets a new job which does not breach the non-compete contract. Besides, in Italy the non-competition clause is null and void unless a specific consideration (to be pay on top of normal salary) is granted to the employee that “the compensation can be either a fixed sum or a percentage of the annual salary and can be paid during the relationship, as a lump sum at the end of the relationship, or in monthly installments following the termination pursuant to the Article 2125 of Italian Civil Code.
Thirdly, about the meaning of “pay”, it can include all salary components, e.g. the taxable value of any company car, mobile phone and other benefits in kind as well as performance-based payment such as bonus schemes. Nevertheless, in Italy, compensation, which is paid after termination of the employment contract b y a single payment or by several installments during the non-compete period. It “will not be subject to social security contribution and is subject to slightly more favorable tax rate”. Notably, compensation must be separated from salary. For example, if salary is 1000 USD/month, the employer has to design another 200 USD/month as restrictive covenant consideration.
Finally, the majority of countries in EU do not have a definite provision in which the employee may be exempted from the financial amount. In general, there are some situations that can be considered. For example, in France, there only two circumstances where the employer does not undertake payment, which is when the employee violates the non-compete clause and the employee dies. In Germany, the employee is not entitled to demand the compensation for any period during which the employee is serving a prison sentence. In Luxembourg, if the non-compete agreement provides for payment of consideration by the employer, such employer may only unilaterally refuse to comply with the agreement if that option is clearly indicated in the contract. If the contract does not allow, the employer can only do so with the employee’s consent.
In conclusion, in spite of being governed differently, it is widely admitted that the NCA will be unenforceable if it lacks consideration or compensation. Comparing with other factors such as limitation of territory, time and industry, the financial amount is an economic and practical solution because it gets the purpose of balancing the benefits between employer and employee. Therefore, the court frequently attaches much importance to consider financial amount when they examine the reasonableness test of the NCA.
- “Garden Leave Clause”
“Garden Leave” clause is one effective term of avoiding the difficulties caused by the severity of the reasonable test of the NCA. Garden Leave is the term given to a situation whereby an employee is required by the employer to remain away from work to serve a period of notice at home (or “in the garden”) before his/her resignation. During this period, the employer does not obligate to provide work for the employee. The employee continues to receive all salary and benefits but is prohibited from engaging employment with a new employer until the garden leave period has expired. This term is very commonly found in the contracts of professional and managerial employees in the United Kingdom and some European countries. Garden Leave most often arises where an employee gives notice to his/her employer who in turn does not want the employee to come into work for the period of his/her notice or to go and work for a competitor or set up a competing business.
There are some differences between NCA and Garden Leave. Firstly, if garden leave is agreed and enforceable, the court allows the expiry date of the labor contract is expanded according to the garden leave period. Hence, it seems that the employment relationship is not totally absent from labor contracts because the employee’s status is considered as a current employee under garden leave clause. Secondly, under garden leave, the money obligation of the employer is full payment of salary and other benefits such as unemployed insurance, accident insurance and so on. Meanwhile, in the case of applying the NCA, the employer has to fulfill the obligation of payment consideration which is agreed by the parties or is stipulated by the law. It seems that the protection of benefits of an employee in garden leave is better than one in the NCA. Therefore, garden leave clause is frequently enforced by the court.
However, garden leave clause causes the negative effects on the employees that not only deprive them of the chance to get a better-paid job but also make them being out of employment for a lengthy period because their competition in employment market may be greatly reduced. Therefore, the length of resignation notice period is generally six months and not longer than one year.
- Blue pencil and red pencil
Blue-pencil doctrine is one of the legal concepts in common law that the court finds out a portion of the contract is unenforceable but the other parts of the contract are enforceable and then, they can reserve the reasonable parts which continue to reflect intentions of the contractual parties. Blue-pencil test is commonly used to resolve the case related to the NCA. It is a practical problem that when the employer and employee agree on this clause which exceeds the framework set up by the law, the court will use the blue-pencil test with three conditions as below:
Firstly, the unenforceable provision must be capable of being removed without the necessity of adding or modifying the wording of the remaining one. Secondly, the remaining terms must continue to be something which employer gives value to employee (adequate consideration or compensation). Thirdly, the unenforceable provision must not change the character of the contract that is created at the beginning of entering into a contract, in such a way that it changes the kind of contract.
However, some countries, such as Austria, allow the contractual parties to exclude blue-pencil test if they want to reserve an agreement as a whole. Blue-pencil is different from the reform of a clause because the court is not able to modify nor amend any wording of provisions. In brief, applying blue-pencil doctrine is more flexible for the court to resolve the litigation that complies with the statutory provision in law and reserve the intentions of contractual parties.
On the contrary, red pencil doctrine means that the court cannot modify an NCA which is agreed by the contractual parties. Pursuant to the statutory provision provided by the law, the court has to consider NCA comprehensively then make a decision that non-compete is entirely valid or not. In other words, the court cannot enforce for a part even though that satisfies the requirements of law in such flexible way. For example, the law provides that the limitation of restrictive time is no longer than one year. However, the contractual parties agree with three years. In this case, the court immediately declares that this agreement is invalid and does not reduce this duration to one year. Therefore, most of EU countries are not in favor of red-pencil doctrine in the method of settling the dispute.
In theory, both employee and employer are not prevented from going to the court to enforce an NCA. However, in practice, there are very few reasons for an employee to initiate legal proceedings against the employer. They often request the court to declare that the NCA is voided or file for injunction relief to hold compensation. Normally, the employee will simply begin working for another business or doing something against the employer, then the employer goes to the court to try to ask the enforcement of NCA. In the majority of EU countries, if the employee does not comply with the obligations which are contained in the NCA, the employer may claim for damages by some specific performances such as injunction, penalty or damages.
The injunction is the most typical response which is usually used by employer and employee when one of them undertakes a harmful action against the other party’s benefits. An injunction is a court order requiring a person to do or cause doing a specific action. It is used “early in a lawsuit to maintain the status quo by preventing a defendant from becoming insolvent or to stop the defendant from continuing his/her allegedly harmful actions”. Whether or not an injunction will be granted varies with the facts of an individual case. If the plaintiffs expect the court to apply for an injunction, they have to show the sufficient and persuasive evidence in which some defendant’s actions have been performed, which cause threatening of damages. The court has a discretionary power to make the applying of injunction decision in the case of necessary. In this case, one of the important factors is frequently taken into account. An injury is considered irreparable when it cannot be adequately compensated by an award of damages. For instance, if the loss can be calculated in the amount of money, there is no irreparable injury. Furthermore, the court issues an injunction may, in the exercise of its discretion, modify or dissolve it at a later date if the circumstances have no warrant for applying for an injunction. There are several types of an injunction such as Preliminary or temporary injunctions, preventive injunction, mandatory injunction, a permanent injunction.
In generally, if the employee breaches the non-compete contract, the former employer can ask the court to apply for temporary injunctions in order to stop the infringement and prevent the loss from rising or increasing until there has been a trial or other proceedings. As pointed out above, a temporary injunction will be granted by the court depending on whether the former employer can substantiate the claim as a breach of the NCA. A temporary injunction differs from a “temporary restraining order” which is a short-term or stop-gap injunction is issued to spend a hearing on applying for a temporary injunction. After the trial, the court may issue a “permanent injunction” which makes the temporary injunction a lasting rule or dissolve (cancel) the temporary injunction.
- A penalty clause
As the result of the difficulty in calculating losses, a penalty clause can be included in the non-compete contract so as to set out a reasonable estimate of the damage that would be caused by a breach of the contract. If the parties have agreed, the employer is automatically entitled to ask for amount referred to in penalty without having to prove actual harm or financial loss. Nevertheless, they have to substantiate employee’s infringement. The court will assess the reasonableness of penalty amount by considering the severity of the breach as well as the proportion of agreed penalty and the breach. Moreover, the court also has the power to reduce the amount of agreed penalty which cannot be excluded by the agreement of the contractual parties. Whether a penalty clause can eliminate an additional claim for damages or not, it is depended on the agreement in contract and provision in the law. If it is allowed, the employer is entitled to the amount specified in a penalty clause, without prejudice to pay any further compensation if damages which exceed the amount of the penalty are awarded.
“Claim for damages” is considered as a fundamental right for the contractual party to return a loss that they have been suffered by the other party. Under common law, the party who claims damages must fulfill a burden of proof of obligation first. Consequently, when an employee breaches the contract, the employer can claim for damages. The employer must prove that the breach of the contract has performed by the employee, as well as prove the loss suffered and a casual relationship among these elements above. The big practical problem in damages is that it will often be very difficult for the employer to substantiate a loss which has been suffered. Calculating the loss is rarely easy since the indicators that employer would typically use, such as turnover, are also affected by factors other than the employee’s breach of a contract. Moreover, future losses are even harder to quantify.
There are several examples in some countries which combine with these mentioned about remedies.
In France, in the case of breach, the employer is entitled to stop the payment of the financial compensation and obtain reimbursement, seek a preliminary injunction to forbid the employee to cease working for his new employer, sue the employee for damages. The contract can provide for a penalty in case of the non-compete breach by the employee.
In Italy, if the employee is in breach of the NCA, the former employer is entitled to ask a compensation for any damages suffered. Generally, the damages are predetermined by the employment contract in a penalty clause. A former employer may also seek an injunction to stop the employee from performing the same activity for a competitor.
In Germany, if the employee is in breach of a valid non-compete provision, the employer may turn to a labor court for a temporary injunction against that employee. The labor court can order a former employee not to compete its former employer and can also require the employee to pay damages to his/her former employer. A penalty clause is enforced by German labor courts.
- The responsibility of new employer regarding NCA
The rights and obligations of the NCA are only binding for the contractual parties like employer and employee, so the third party, the new employer is not bound by this agreement. Notably, the new employer has no contract with the former employer and there is no employment relationship between them. Nonetheless, in specific situations, for example getting the customer’s list by fraud, they may be liable jointly and severally for employing an employee who is violating this restriction in his/her labor contract with the former employer if the new employer knows the violation. The specific situations can be stipulated by the law or determined by the court. It is possible for a former employer to claim damage based on the principle that anyone who causes damage to others is responsible for the caused damage. However, if only based on the fact of employing, it can be considered not reasonable enough for a former employer to sue the new employer. The court will consider many other factors relevant to the causal link between the action of the new employer and the damage which former employee is suffered. For examples:
The Netherlands: “if the new employer profit from the employee that violates his non-compete clause, the new employer can be liable. The former employer can claim damages from the new employer based on unlawful action.”
Belgium: if the employer cannot know that the employee that he hired is the one who is restricted by a non-compete clause, the new employer does not have any responsible for the happening. However, if the new employer hired such employee so that he can get the confidential information, there might be a special circumstance can implicate such employer.
- Dismissal, Insolvency, and Transfer of Undertaking
Liability of employer for payment for compensation in case of dismissal is one of the important issues usually raised in practice. In general, there are two circumstances. Firstly, the termination of employment by dismissal manner is based on situations that are relevant to the employer. The NCA will be declared invalid. The employee is not bound by his/her promise and the employer has to fulfill their payment obligation if the employee is dismissed by the employer with illegal reasons as follows: the employer unilaterally terminates the employment contracts because of the re-organization or redundancy; the employer gives the dismissal notice which breaches the announcement time, or the dismissal reasons are not raised by the employee’s fault and it is not stipulated clearly in disciplinary or collective bargaining in the company. Contrary to the first case, if the employee is dismissed by the employer because of his/her fault, the NCA can be invalid and the employer does not pay any compensation for the employee.
About the insolvency and transfer of undertaking of the company, there are some examples as below:
The Netherlands: the non-compete agreement remains valid if the employer is bankrupt. However, the non-compete clause may become invalid of the employee petitions the Court to ask for the mitigation or null such non-compete clause. If the company is transferred, the non-compete clause will bind the transferee which is regulated in Article 7:622 of the Dutch Civil Code. In the event that there is no consent of the transferee about the non-compete clause in, the transferee and the employee can enter into a new non-compete clause.
Germany: according to article 613a of German Civil Code, “the non-compete clause will bind the transferee”.
Spain: according to article 44 of the Worker’s Statue on rights and obligations of the parties in the procedure of transfer, “all rights and obligations of both employer and employee, would be automatically transferred to the transferee, including the non-compete agreement.
- Change of work
During employment period, the employee can be promoted to a higher position or transferred to other departments in the business of the employer. In these situations, it is argued that whether the NCA continues to bind the contractual parties or not. In most cases dealing with this issue, the court opines the NCA is no longer applied if the employee has undergone a change of job without having agreed on a new NCA. The court frequently considers two questions: firstly, whether there has been an important change of employee’s job and secondly, whether this change influences negatively the employee’s position on the labor market or not. When the court considers the first question, they will take the difference between the previous job and current job into account. The difference can be determined based on the change of remuneration, social position, contents of work, the responsibility of the new job, etc. For example, the promotion from junior to the senior manager will be assessed as a logical and foreseen move on the employee’s career path in general; hence, it is not considered as an important change. However, if a sales manager is transferred to a board of directors, it will most likely be seen as an important change because it is a special promotion and creates a strong responsibility and right for the employee. Therefore, the former NCA is void and must be renegotiated and agreed to reply on the respect for conditions and requirements contained in this clause if the employer expects to keep this restriction. This action can be undertaken in written form and should be signed by both employer and employee.
Despite the fact that the NCA is enforceable differently from country to country, it is quite similar to the basic rules like balanced benefits between the parties and legal requirements such as a limitation on time, territory, professional and consideration or compensation, remedies, etc. Therein, the imposition on employers pay the financial amount for their employer during the restrictive period is considered as an essential legal requirement for application of the NCA in practice.
It is evident for the necessity as well as the feasibility of the enforcement of the NCA. Even there are some differences in terms of the cultural-economic conditions among European Unions, United States and Vietnam, we can understand more about the differences in enforceability among states in the United States with the next chapter.
CHAPTER 4: NON-COMPETE AGREEMENT IN UNITED STATES
- Legal background of the NCA
A non-compete agreement is a contract between employee and employer that prevents employee at a certain company from going to work for a competitor of ex-employer within a certain period of time after the termination of the labor contract between the employee and employer.
In some states, the enforcement of the NCA is determined by statute, while in others it is determined exclusively by case law. Some states refuse to enforce the NCA, or refuse to enforce the NCA that contain any unenforceable provisions (“red-pencil” doctrine), although a majority of states will modify overbroad NCA to render them enforceable (“blue-pencil” and “equitable reform” doctrines).
NCA has social benefits in some situation, such as:
NCA is used to protect confidential information such as customer lists, trade secrets, which can promote innovation or improve one’s business.
Due to the decreasing of the employee’s movement from company to company, NCA can increase employer’s incentives to provide costly training to improve the quality of its employee.
However, there are also several disadvantages of the NCA as below:
Firstly, after a non-compete is signed, the bargaining power of employee is reduced which can probably lead to the lower salary.
Secondly, signed NCA can somehow induce employees to leave their occupations entirely, foregoing accumulated training and experience in their fields.
Thirdly, reduced job churn caused by non-competes is itself a concern for the USA economy. Job churn helps to raise labor productivity by achieving a better matching of employees, company and facilitate the development of industrial clusters like Silicon Valley,
Lastly, in some cases, NCA restricts employees from finding a new job even after being fired with no cause; in such cases, it is difficult to say that NCA protects the social benefits.
- The development of the NCA
Together with the flow of history of the NCA mentioned in Chapter 2 in this dissertation from the beginning time from the Dyer’s Case of 1414 in the UK, the development of the NCA in the USA has a lot of improvement.
The intermittent reweighting of employer, worker and public interests continued as the 19th century wore on. By 1841, although most English courts still rejected general NCA, some began to enforce them as business globalized. A trend toward pro-employer policy continued in 1853 when the Queen’s Bench ruled that the burden of showing unreasonableness rested on the employee rather than the employer. In 1875, the court ruled that while contracts mush remains reasonable, a central value of the liberal economic philosophy permitted men of sound mind to enter arrangements as the saw fit. Increasing emphasis on freedom of contract was evident in the Rousillon v. Rousillon (1880), the court, in this case, allowed the NCA. The court said that in the event that the NCA was reasonable in scope at the negotiation, changing economic circumstances should not bar enforcement.
As English courts were moving toward pro-employer policies, United States courts started developing their own body of common law. In 1851, Lawrence v. Kidder, a case before the New York Supreme Court, established a precedent that the state’s priority was to deter monopolies. The court reasoned that as far as possible, the state must ensure that all citizens be permitted to work. Therefore, the court viewed agreements which barred individuals from practicing their occupations based on state or territory boundaries as unlawful.
A Pennsylvania court made an important distinction in 1866 between the sale of “handicraft” and the sale of “property”. The Pennsylvania court deemed restriction on the property much more reasonable than restrictions on the use of an employee’s skills. This distinction laid the foundation for the landmark Supreme Court decision in Oregon Steam Navigation Co. v. Winsor (1874). The California Steam Navigation Company subsequently sold it to Winsor, who at the time of sale was engaged in the navigation of water in Washington. The sale was subject to a condition (among others) that Winsor would not operate the boat in California for a period of ten years. The court upheld the condition, nothing that there was no injury to the public. 
The New York Court of Appeals echoed the opinion of the Supreme Court in 1887 when it ruled in favor of a non-compete clause which restricted selling matches in the states of Nevada and Montana. The Court found that the condition was a “partial” restraint even though it covered the entire state of New York, while nothing that the distinction between “general” and “partial restraints.
Non-compete policies of the United States began diverging across states by the end of the 19th century. Notably, the California legislature rendered non-competes generally unenforceable. Outside of legal opinions, the most influential American documents on contract are the “Restatement of Contracts” of 1932 and its revision in 1979. Though non-binding these writings, published by the American Law Institute, codify case law. Both version of the Restatement of Contracts state that restraints are unlawful if they unjustly benefit employers and impose an undue hardship on the employee or public – reflecting the opinion in Horner v.Graves. The second Restatement of Contracts protects the employee further by increasing the standard by which an employer must demonstrate a legitimate need for non-compete protection.
- The enforcement of the NCA
The enforcement of the NCA is different among states in the USA. As a general rule, courts will enforce the NCA, within limits. California is an exception to this rule, where state law prohibits the NCA except in narrow circumstances, such as in connection with the sale of a business. However, there are some relevant terms defined below:
Non-compete contract: a contract that delays or in some other way restrict an employee’s ability to compete with its ex-employer.
Consideration: a benefit received by a signatory to a contract. Generally, both parties must receive consideration in order to valid a contract. Consideration commonly includes property or promises of specific actions. In the case of a non-compete, consideration may sometimes refer to wage increases, promotions or continued employment (sometimes including hiring).
Protectable interests: these are the aspects of the relationship between employer and employee that provide the legal motivation for a non-compete agreement. They vary state to state but frequently include trade secrets, confidential information, goodwill, and/or client relationships. Some states additionally provide protection for special training.
Red-pencil doctrine: doctrine prevailing in some states requiring the courts must declare an entire NCA void if one or more of its provisions are found to be defective under state law or precedent.
Blue-pencil doctrine: doctrine prevailing in some states requiring that courts delete the provision of an NCA that render it overbroad or otherwise defective, retaining the enforceable subset of the contract.
Equitable reform: also called as reformation: doctrine prevailing in some states requiring that courts may rewrite a non-compete contract so as to render it non-defective. Unlike blue-pencil doctrine, this may entrain insertions of new text.
Currently, nearly all states will enforce non-compete agreements to some extent. Within those states, NCA may be banned in a variety of way that varies from state to state.
At first, to be enforceable, non-compete agreements require adequate consideration just like all contracts. Since the non-compete agreement is about the employment, the consideration therein is the job. During the time of employment after signing such contract, some states will allow continued employment to meet the requirement of the consideration. Other states, however, demand the employer to offer additional consideration in the form of a bonus, increased pay or another benefit. In such states, the employee can have a viable defense to enforcement if such employee was asked to sign the NCA after she was hired but was not provided any addition consideration to the employer.
Besides, rather than declaring specific contracts completely enforceable or unenforceable, courts in certain states may alter the contracts themselves. In those states, judges may declare portions of a contract void but other parts to be valid under what is called “blue pencil doctrine”.
In other states, an “equitable reform” or reformation” doctrine allows judges to amend the language in question to generate an enforceable contract consistent with the original intent of the existing contract but in some case, this doctrine is confusingly referred to as “blue-pencil” doctrine. This allows more flexibility than the blue-pencil doctrine and increases the likelihood of a non-compete being upheld in some form, all else equal. It may also encourage the company to take risks in the writing of contracts, including provisions likely to be struck down. On the opposite end of the spectrum, some states simply do not allow any judicial modification of contracts, but instead, hold that any unenforceable provisions render the entire contract unenforceable. This is sometimes known as “red-pencil” doctrine.
These days, there are several changes in the enforcement of the NCA among states in the USA. Several states have recently altered their approaches to the enforcement of the NCA. Notably, Georgia amended its constitution in 2011 to allow for increased enforcement of the NCA. Other states have altered their statutes to extend or limit the reaches of non-compete, as with a recent statute in Alabama that more explicitly explains what is and is not a valid protectable interest. Like Alabama, Oregon passed a statute that defines more clearly the bounds of a non-compete. As of 2016, new NCA in Oregon will be limited to a maximum of 18-month duration. Also in 2016, Hawaii banned non-compete agreements for technology jobs, and New Mexico banned non-compete agreements with respect to the labor contract of health care jobs.
In other states, legislators have recently proposed significant changes. In New Jersey and Maryland, bills were proposed that would render non-competes unenforceable for any workers eligible to receive unemployment compensation. State legislators in Massachusetts, Michigan, and Washington have proposed that non-compete is made almost unenforceable in their states. Finally, Senators Franken and Murphy have proposed that companies shall be prohibited from entering into non-compete agreements with employees making less than 15$ per hour.
- Misusage of the NCA
In chapter 2 of this dissertation, the author has already mentioned about good aspects of the NCA and the supporting principle of the NCA as well.
In this part, misusage of the NCA will be listed to show how employees may be disadvantaged by the NCA and how some states and state legislatures are attempting to address this issue.
- Involuntary NCA
Employees who are deemed to possess trade secrets (especially low salary employees) are compel forced to sign the NCA.
Since an employer asks low salary employee to sign the NCA, it may effectively limit the ability of such employee to bargain for higher pay because the signed NCA can make such employee more difficult to find new jobs. It also can be an obstacle for low salary employee who may not have marketable skills outside of their occupation.
Because it seems that such NCA is unlikely to have the social benefit of protecting trade secrets when applied to low salary employees, some states proposed and Oregon has passed the legislation which restraint the enforceability of non-competes for employees under a certain income threshold. In New Jersey and Maryland, bills were proposed although they did not make it out of committee that would render the NCA unenforceable for any employees eligible to receive the unemployment compensation.
Washington and Idaho have introduced bills that would limit the reach of non-competes by designating certain employees who are more likely to have inside knowledge and trade secrets given their position as “key employees” or by rending void unreasonable NCA.
According to Oregon Rev.Stat. 653.295, it is stated that:
“NCA are voidable and may not be enforced by Oregon court unless several conditions are met. Examples of those conditions include, with limited exceptions, (1) when the employee’s gross salary and commissions, calculated on an annual basis, at the time of the employee’s termination equal more than median family income for a family of four as calculated by the Census Bureau for the most recent year available at the time of the employee’s termination, and (2) when particular compensation is paid to the employee during the period in which the employee is restricted from working”.
In Idaho (Idaho Code Section 44-2701), in 2008, Idaho passed a law that restricts non-competes to “key employees”. “Key employees” are those who “by reason of the employer’s investment of time, money, trust, exposure to the public, or exposure to technologies, intellectual property, business plans, business processes and methods of operation, customers, vendors or other business relationships during the course of employment, have gained a high level of inside knowledge, influence, credibility, notoriety, fame, reputation or public persona as a representative or spokesperson of the employer, and as a result, have the ability to harm or threaten an employer’s legitimate business interest.”
- Less leverage to bargain of the NCA
Employees are asked to sign the NCA only after accepting a job offer when they have already declined other offers and thus have less leverage to bargain.
The Treasury report says that at least 37 percent of employees are asked to sign non-compete agreements after accepting a job offer. In the case where job offers have already been accepted, employees often have less leverage to bargain, in part because they may have already turned down other job offers. However, in many states, even if an employee was not made aware of a requirement to enter the NCA when such employee was hired, courts have enforced a covenant signed after employment commenced. Besides, nearly half the time, the non-compete was not presented to employees until or after the first day at work.
In New Hampshire and Oregon, non-compete agreements may be rendered void for lack of consideration when employers fail to include them in the original terms of employment. Requiring that non-compete contracts be provided along with job offers and not after an offer is one possible solution to protect workers. In the case of internal promotion, states could require that employers provide employees with non-competes before the employee begins the new position.
For example, the Rev.Stat.653.295 of Oregon that Oregon passed a law requiring the company to make clear in offer letters if employees will be expected to sign non-compete agreements in 2015. The non-compete must be provided at least 2 weeks before employment or with bona fide advancement.
New Hampshire (Senate Bill 351): In 2014, New Hampshire passed a law that requires that “non-compete agreements that are executed as a condition of employment should be provided to potential employees prior to the acceptable of an offer of employment. Otherwise, the non-compete will not be enforceable against the employee.
- The unclear implication and enforceability of the NCA
Employees are often poorly informed about the existence and details of the NCA that they need to sign as well as the relevant legal implications. Additionally, in states where the NCA is unenforceable like California, employees may be not aware of the NCA enforceability. States could consider taking steps to ensure that important details on the NCA such as the duration and geographic scope of the contract, be clearly explained to workers.
- Overly broad or unenforceable NCA
Some companies ask employees to sign NCA which is entirely or partly unenforceable in a certain jurisdiction. For example, California employees are asked to enter into non-competes at a rate slightly higher than the national average (19 percent), despite the fact that, with limited exceptions, NCA is unenforceable in California.
There are three main approaches which have just mentioned about that states are taking to address unenforceable or overly broad contract, which vary greatly in terms of the incentives they provide employers: red-pencil doctrine, blue-pencil doctrine and equitable reform.
For example about states that apply red-pencil doctrine as below:
Virginia: although the Supreme Court of Virginia has not expressly ruled on the courts’ power to blue-pencil doctrine an NCA, several Virginia courts have declined to blue-pencil NCA, several Virginia courts have declined to blue-pencil NCA (Landmark Tech., Inc v. Canales, 454 F.Supp. 2d 524, 529 (E.D. Va. 2006); Better Living Components, Inc. v. Coleman, 62005 WL 771592, at *5 (Va. Cir. Ct. Apr. 6, 2005)). In addition, some courts have found that blue pencil provisions permitting judicial modification in NCA is invalid or discouraged under Virginia Law (Lasership Inc. v. Watson, 2009 WL 738887, at *9 (Va. Cir. Ct. Aug. 12, 2009); Pace v. Ret. Plan Admin. Serv., Ltd., 2007 WL 5961432 (Va. Cir. Ct. Sept. 28, 2007)).
Nebraska: the Nebraska Supreme Court has refused to blue-pencil doctrine or reform NCA when certain elements are overly broad or vague. For example, in 2015 case Unlimited Opportunity, Inc v. Waadah, the Court found that the geographic scope of the NCA was too broad and thus refused to enforce it. (Unlimited Opportunity, Inc v. Waadah, 290 Neb. 629 (2015)).
- NCA without “consideration” designed by employers
Employers designing NCA which is not provided “Consideration” that is above and beyond continued employment.
In the majority of states, when a non-compete is offered to an existing employee after the original offer of employment, continued employment is sufficient consideration for a non-compete to be enforceable. “Consideration” in this context refers to a benefit received by the signatory of a contract for a non-compete such as increased pay or more training. Even for states that recognize continued employment, questions often arise about how long employment must continue to count as sufficient consideration. In addition, in the case where a worker with a non-compete is searching for a new job, the non-compete combined with a lack of severance pay can create hardship for that individual.
Currently, some states require that firms provide some “consideration” above and beyond continued employment such as pay raises, training, and promotions to workers who sign a non-compete after they have already worked for a firm for some amount of time. Just 11 states do not view continued employment as sufficient consideration “for the signing of a non-compete in this circumstance and in DC, Illinois and Mississippi continued employment only counts as consideration if it is for a certain period of time.
- Difficulty to find a new job caused by signed NCA
In some cases, employees are prevented from finding a new job even after being fired without cause due to the signed NCA.
In several states, NCA is binding even to employees who are fired without cause (like layoff). The bargaining power of that worker can be particularly negatively affected when employers have the ability to unilaterally determine whether the worker may continue to be employed anywhere in his or her occupation. The requirement of having been fired “without cause” would prevent employees from easily evading an NCA obligation through behavior calculated to force an employer to discharge them.
While very few states have legislation prohibiting the enforcement of non-competes when an employee is fired without cause, in some states, courts have found that there is no “legitimate business interest” in an NCA when the employer initiates the termination without cause. In this case, the NCA is rendered unenforceable.
For example, in New York, according to the judgment in Arakelian v. Omnicare Inc. 735 F.Supp.2d 22, 41 (S.D.N.Y. 2010), the court affirmed that New York courts will not enforce NCA if the termination was involuntary stating that “enforcing a non-competition provision when the employee has been discharged without cause would be “unconscionable” because it would destroy the mutuality of obligation on which a covenant not to compete is based.
- Detrimental effect of restricting consumer choice
In some circumstances, NCA can have a detrimental effect on health and well-being by restricting consumer choice.
In some instances, NCA through imposing a restriction on free trade can interfere with consumer ability to acquire critical goods and services. Several states will not enforce NCA where a “public interest” exists in the consumption of critical goods and services. Depending on the state, courts have recognized the importance of preserving the physician-patient relationship and have exempted them from being bound by an NCA (Delaware, Illinois, Tennessee, Texas, and Massachusetts). Yet in many states, no physician exemption exists. These states generally move forward limitations on enforceability and in some cases, outright exemption.
For examples, in Delaware, according to 6 Del. Code Article 2707 “Any covenant not to compete provision of an employment, partnership or corporate agreement between and/or among physicians which restricts the right of a physician to practice medicine in a particular locale and/or for a defined period of time, upon the termination of the principal agreement of which the said provision is a part, shall be void..”
In some cases, NCA can play an important role in protecting businesses and promoting innovation. They can also encourage employers to invest in training for their employees. However, as detailed in this report, NCA can impose substantial costs on workers, consumers and the economy more generally.
- Choice of Law in NCA cases
Because the determination of which law governs the non-compete is often dispositive of whether it will be enforced, employers often identify in the agreement the state law that governs the agreement and where any disputes must be resolved. A provision that identifies the applicable law is referred to as a “choice of law” clause. Similarly, a “choice of forum” provision or “forum selection clause” refers to a provision that sets forth where a dispute must be resolved. However, choosing a law and forum provides no comfort if the court hearing the dispute refuses to honor those choices. Just as with the substantive law applied, courts take differing views as to whether the choice of law and forum specified in the agreement will be respected.
The enforceable of the NCA is different among states. California law favors employees, while Ohio law recognizes and protects most employer interests. Thus, the law that a court chooses to apply to NCA case is different based on states.
Generally, courts apply their own law to contracts made of performed in their state. However, the court must use “choice of law” rules to decide what law to apply to contract cases involving parties or performance in more than one state. Choice of law rules generally requires the court to apply the law of the state that has the greater “contracts” to the lawsuit or the greater interest in the settlement.
If parties agree on the law to govern their contracts, courts usually apply that law, unless the state whose law the parties picked has no connection to the lawsuit, or the strong public policy of the court’s own state prohibits if from applying the other state’s law. Similarly, courts enforce the parties’ agreement on the location of the court, known as a forum selection clause, unless the agreement was the result of fraud, is unreasonable at the time of litigation or deprives a litigant of his or her day in court.
Historically, most courts applied the law of the state where the parties performed the contract since the place of performance bears the most significant relationship to the contract. States that adopt the Restatement of Laws approaches, such as New York, Ohio, and Texas, however, examine the intention of the parties and decide which state has the most substantial contracts with the agreement and the parties. The substantial contract includes the:
- Place the contract was made
- Place where the negotiations took place
- Place where the contract was to be performed
- Location of subject matter of the contract, and
- Domicile, residence, place of incorporation, and place of business.
According to the Restatement (second) of Conflict of Law section 188 (1971), New York groups these contacts and identifies their “center of gravity”.
Pennsylvania together with California applies the law of the state with the most significant interest in the issue. However, California shall not apply the law of any state other than California if the law of the other state does not bear some substantial relationship to the parties or the contract and the law of the other state violates a strong policy of California.
Since California Business and Professional Code section 16600 banning the NCA is a strong public policy, California courts will usually not apply the law of a state that enforces the NCA meaning that California employer cannot run away from the ban of California about non-compete by selecting another states’ laws. For example, a California court applied California non-compete law to a non-compete performed in California, despite the fact that the employee was outside of the state, recruited a non-California resident for California employment and choose to apply the law of New York.
California will not, however, prevent a court in another state from enforcing a non-compete involving a California employee. Even though an important California public policy is at stake, California’s respect for the jurisdiction of other state’s courts prevents it from overriding the operation of their courts.
Florida takes a relatively inflexible approach. Florida will apply the law of the state where contracting parties executed the contract unless such contract is about the performance of service
Most states accept the parties’ selection of the law that governs their agreements. States that adopt the Restatement Conflict of law in 1971 such as Ohio, Pennsylvania, and Texas will apply the law chosen by the parties, unless either:
“The chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or
Application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state.”
More difficult questions generally arise when assessing whether the chosen state’s laws conflict with a fundamental public policy of the forum state and whether the forum state has a materially greater interest in the matter. Here, approaches vary considerably by state. Many courts, like those in Virginia and Pennsylvania, will generally enforce an NCA even if it would be unenforceable under the law of the forum state. These courts recognize that rejecting a choice of law provision on public policy grounds should be the exception, not the rule. If courts determined that a fundamental public policy was violated any time there was a conflict between the chosen law and the forum’s law, the exception would swallow the rule.
Yet, that is precisely the approach taken by other states, like Alabama and California, which purportedly follow the Restatement but in fact, will not enforce an NCA that would be unenforceable under its own laws.
These different approaches which can and do result in divergent outcomes demonstrate the critical importance of where a lawsuit is filed. Different courts will weigh the competing public policy interests differently, leading to different results as to which law to apply and whether the NCA will be enforced. Because of the importance of the forum deciding the dispute, it is a best practice to include a forum selection provision, which states where any dispute must be resolved, in the NCA. An employer will generally want to and probably should select the courts in the state where they are headquartered as the forum for resolution of any dispute unless that forum is particularly hostile to non-competes and a different state’s law was chosen to govern the agreement. But, if the employee has rarely worked at or visited that location, particularly if he or she is a relatively low-level employee, there is a question as to whether a court will enforce such a provision.
- California law on the NCA
- The California rule and its application
California and also Montana, North Dakota and Oklahoma do not agree with the general rule that NCA is enforceable if it is reasonable in purpose and scope. There was one time that California courts enforced contractual restraints on NCA as long as it was reasonable in purpose and scope. However, 1872, California adopted a public policy favoring open competition and rejecting the common law “rule of reasonableness”, with certain exceptions. California Business and Professional Code section 16600 states that:
“Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
Section 16600 evinces a settled legislative policy in favor of open competition and employee mobility. It ensures California people have a right to pursue any lawful employment and enterprise that they want. NCA is unenforceable in California even if it is reasonably limited in time and geographic scope.  Section 16600 prohibits even a narrow NCA of a profession, trade or business unless such NCA falls within the trade secrets or statutory exception. The NCA is not the only void in California but also an employer can be responsible in tort for the unlawful termination if an employee is fired due to his refusal to sign the NCA.  Such rule holds even if the agreement contains a choice-of-law or similar provision. Such rule is applied to protect employees who do not know their rights under California law that such NCA that they signed in unenforceable.
Regulation mentioned in section 16600 is applied for those NCAs after the termination of employment. During the term of employment, of course, each employee owes a common-law duty of loyalty to the employer precluding the employee from competing with the employer in any way, whether be soliciting them employer’s customers or employees, by using the company’s confidential information or otherwise.
According to the California Supreme Court on Cont’l Car-Na-Var Corp v. Moseley, 24 Cal. 2d 104, 110 (Cal.1944):
“Every individual possesses as a form of property, the right to pursue any calling, business or profession he may choose. A former employee has the right to engage in a competitive business for himself and to enter into competition with his former employer, even for the business of those who had formerly been the customers of his former employer, provided such competition is fairly and legally conducted.”
Also, “the interests of the employee in his own mobility and betterment are deemed paramount to the competitive business interests of the employers, where neither the employee nor his new employer has committed any illegal act accompanying the employment change.”
Besides, employers cannot avoid the application of the California rule by inserting a choice of law provision into the labor contract in order to choose the law of another state to govern disputes arising out of the agreement. Section 16600 of California Business and Professional Code will be applied regardless of any choice-of-law provision if the employment is carried out in California. According to Application Group, Inc. v. Hunter Group, Inc., 61 Cal. App. 4th 881 (Cal. Ct. App 1998), the out-of-state non-compete agreement signed by a California employer and an out-of-state worker who quit his job and had a new job in California was invalidated by California court. Meaning, California courts refuse to enforce NCA even thought it was valid in another state in which it was entered due to the current residence of such employee that he planned to move to California to have a new job.
Recently, according to California Southern District Court in Arkley v. Aon Risk Services Company, Inc., 2012 U.S Dist. LEXIS 96300 (C. D. Cal. June 13, 2012), it is stated that California law applied to the Illinois employment agreements because California’s “strong policy interest” in employee mobility outweighs Illinois’s stated interest of fostering predictability for companies. The court further reasoned that California has a strong interest in “enforcing its laws to protect California – resident employees”. The court stated that even though all three plaintiffs had many business connections with Illinois state, they were residents of California and had their main offices in California before and after they switched jobs. Therefore, the Court said that such NCA is unenforceable.
- Trade secrets exception
Firstly, NCA by employees not to use or disclose their employer’s trade secrets is valid in California. It is fully enforceable in California for the agreements not to use or disclose confidential information, trade secrets of the company during and after the term of employment.  California court also enforces “not-to-solicit-customers” agreement which together with non-disclosure agreement so-called “trade secrets” exception to Section 16600 arises from the California common law prohibition against “unfair competition” found in tort law which is separate from contract law. Unfair competition includes the use of trade secrets, such as confidential customer lists, to solicit clients. Hence, under the law of unfair competition, California courts will enforce agreements that prohibit the solicitation of former clients and the misuse of trade secret information.
Employees are prohibited to do business with any company that related to the confidential information and trade secret that employees got during the time working with former employer and to soliciting any business from any entity that did business with the former employer during the working term of such employees according to court’s decision in Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514 (Cal. Ct. App. 1997).
However, the employer can not prohibit an employee from using or disclosing non-trade secret information simply by called such information a trade secret in the Non-disclosure agreement (confidentiality agreement). The Court’s decision in American Paper, 183 Cal. App. 3d at 1325 stated that “An agreement between employer and employee defining a trade secret may not be decisive in determining whether the court will so regard it”. Therefore, at first, the employer should acknowledge employees about the trade secret that they are dealing with. Then, the courts are disinclined to enforce agreements requiring employees to keep confidential vaguely defined information the company later decides it would like to protect. According to Motorola, Inc. v. Fairchild Camera & Instrument Corp., 366 F. Supp. 1173, 1185 (D. Ariz. 1973), the court applied California law and refused to enforce the agreement in which employees agreed to “maintain strictly confidential during and for two years after my employment all information of the company which is of a confidential or secret nature”. Besides, the protected information is defined in the agreement, it should be coupled with an acknowledgment by the employees that the information is owned by the employer, is secret, is the subject of reasonable efforts by the employer to keep it secret, and has value because of its secrecy.
Therefore, the non-disclosure agreement or confidentiality agreement should provide that the employee will not use or disclose the information during or after employment, and should expressly provide that the employee’s obligations extend until the information becomes generally known through proper means. It should also require the return of all notebooks, documents, computer disks, and the like upon the termination of employment.
A non-disclosure agreement or confidentiality agreement is a useful tool to help the employer to get rid of the fear of prevailing information due to the unenforceability of NCA. By acknowledging employees of the existence of trade secrets, the employer diminishes the risk of inadvertent disclosure to others and serves to deter the employees (and their now employer) from using the information. Also, such agreement helps to eliminate disputes and misunderstanding about the trade secret status of confidential information. Last, a contractual obligation to preserve the secrecy of information is evidence of the employer’s “reasonable efforts” to maintain the secrecy of its confidential information and thus helps to establish its status as a trade secret under the Uniform Trade Secrets Act.
However, “trade secrets exception” has been suggested to section 16600 whereby an NCA could be upheld if its purpose is to protect trade secrets. In The Retirement Group v. Galante, 176 Cal. App. 4th 1226 (Cal. Ct. App. 2009), a dispute arose between investment advisers and their former employer over customer contact information. An agreement that defined confidential information of The Retirement Group to include the client information in its database, and required advisers to not disclose or use this information except as provided by the agreement was signed when adviser entered into an independent contractor relationship with Retirement Group. When Galante and other advisers left The Retirement Group to work for a competitor company, they also consult their clients at The Retirement Group to move in order to retain the adviser’s services and to designate their new employer, rather than The Retirement Group, as their securities brokerage.
The Retirement Group claim that “(1) the departing advisers misappropriated confidential information from The Retirement Group’s database, which allegedly constituted trade secrets, and (2) the advisers were using the information to solicit existing The Retirement Group clients and others prospective customers to place their accounts with The Retirement Group’s competitor, in violation of their agreements”. The Court stated that customer lists can qualify for trade secret protection under unfair competition law and the Uniform Trade Secrets Act and also pursuant to Civil Code section 3426, a former employee may be prohibited from using trade secret information to solicit their former employer’s customers. The Court finally held that section 1600 bars enforcement of NCA without exception since such trade secret protection was not available for The Retirement Group’s client contact information because The Retirement Group did not dispute that names and contact information of existing customers were readily available from independent third-party sources such as rival brokerages.
- Statutory Exception
California Business and Professional Code section 16601 and 16602 mentions about the statutory exception to section 16600 which may enforce the NCA.
California Business and Professional Code 16601 states that:
“Any person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity, or any owner of a business entity that sells (a) all or substantially all of its operating assets together with the goodwill of the business entity, (b) all or substantially all of the operating assets of a division or a subsidiary of the business entity together with the goodwill of that division or subsidiary, or (c) all of the ownership interest of any subsidiary, may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.”
California Business and Professional Code 16602 states that:
“(a) Any partner may, upon or in anticipation of any of the circumstances described in subdivision (b), agree that he or she will not carry on a similar business within a specified geographic area where the partnership business has been transacted, so long as any other member of the partnership, or any person deriving title to the business or its goodwill from any such other member of the partnership, carries on a like business therein.
(b) Subdivision (a) applies to either of the following circumstances:
(1) A dissolution of the partnership.
(2) Dissociation of the partner from the partnership.”
On August 24, 2012, a California Court of Appeal clarified when an employment agreement can satisfy the “sale of business” exception to California’s general ban on post-employment NCA. According to Fillpoint, LLC v. Maas, 208 Cal. App. 4th 1170 (2012). The Court held that when a stock purchase NCA already adequately protects the goodwill of the sold business, any inconsistent and additional NCA in a related employment agreement with the purchasing company may not be enforceable. The holding signals that a signed NCA does not automatically qualify for the “sale of business” exception simply because it is part of the same transaction as a stock purchase agreement.
The Court of Appeal held that the trial court erred by reading the stock purchase and employment agreement separately. Rather, when these types of agreements are entered into at or around the same time, they should be treated as one transaction. Nevertheless, reading these two agreements as part of the same transaction did not automatically render both covenants enforceable and subject to the Section 16601 business purchase exception. Because the NCA in Maas’s stock purchase agreement’s additional and different protection was overly broad and unenforceable. In summary, the Court stated that an NCA in an employment agreement, even when absent from the parallel stock purchase agreement, could fall within the exception if it was, in fact, entered into as consideration for the sale of business.
In according to California Business and Professional Code 16602, the NCA between partners will be enforceable when the partnership is dissolved or dissociated with regarding accountants, attorneys and physicians professionals.
The enforceability of the NCA in the USA is different from state to state. In general, NCA should be granted by a valid consideration in which employee receive something in consideration with the promise not to compete. Most of the states in the USA recognize and enforce the NCA in several ways. Even in a few states which ban or prohibit NCA such as California, NCA still can be enforceable in limited circumstance. It is evident for the necessity as well as the feasibility of the enforcement of the NCA.
CHAPTER 5: NON-COMPETE AGREEMENT IN VIETNAMESE LABOR LAW – PRACTICES AND THE PROPOSALS
1. Legal background of the NCA in Vietnam
The NCA is considered as a new term in labor contract, but there are several provisions in Constitutions as well as some laws such as Law on Competition in Vietnam which indirectly stipulates about the NCA.
Firstly, one of the constitutional rights is stipulated in Article 57 of Constitution of Socialist Public of Vietnam 2013 that “the State shall protect legal rights and interests of the workers and employers and provide favorable conditions for the construction of progressive, harmonious, and stable labor relationship”. Based on this constitutional right, the employees are supported to undertake some actions in order to protect their legitimate benefits in business activities. The NCA, to some extent, satisfies with this purpose, particularly in the labor field.
Secondly, at the first blush, Law on Competition in Vietnam provides the definition of competition restriction agreement which seems as the meaning of the NCA because of the similarity in purpose. However, based on the detailed description of the competition restriction agreement, the contents of this kind of agreement seem to be different from the NCA. Firstly, the competition restriction agreements are performed by enterprises while the subjects of the NCA are employee and employer. Secondly, the essential contents of actions in this agreement are the fixing good or service prices, the restriction of entering the market or developing business. They are irrelevant to the contents of the NCA such as prohibiting an employee from working for a rival, taking advantage of employer’s confidential information.
Article 3.4 of Vietnam Law on Competition states that:
“Unfair competition acts mean competition acts performed by enterprises in the process of doing business, which run counter to common standards of business ethics and cause damage or can cause damage to the State’s interests, legitimate rights and interests of other enterprises or consumers.”.
Also, refer to Article 39 of Vietnam Law on Competition that:
“Unfair competitive practices in this Law comprise:
1. Misleading instructions;
2. Infringement of business secrets;
3. Coercion in business;
4. Defamation of another enterprise;
5. Causing disruption to the business activities of another enterprise;
6. Advertisement aimed at unfair competition;
7. Promotion aimed at unfair competition;
8. Discrimination by an association;”
According to those mentioned articles, although the subject of unfair competition acts is also the enterprise, actions which are stipulated in clause 2, 4, 5, 10 are relevant to the concepts of non-compete:
“2. Infringement upon business secrets;
4. Discrediting other enterprises;
5. Disturbing business activities of other enterprises;
10. Other unfair competition acts according to the criteria determined in Clause 4, Article 3 of this Law and prescribed by the Government.”
These actions can occur in the labor field, in other words, can be performed by employees. Nonetheless, pursuant to the Vietnam Law on Competition, the employees are only entitled to sue the new employer of their ex-employees, not those ex-employees, in the case of having the above infringements even though the employee directly performs the unfair competition. Briefly, the concepts of non-compete under the VCL relate to commercial market rather than a comprehensive review about competition, especially in the labor field.
According to Vietnamese Civil Code 2005, it seems that only the fixed relationship between parties at the contracting time is taken into consideration. There is only one article about the relationship between parties after the termination of the contract mentioned in Civil Code 2005:
If agreed by parties or provided by law, a seller has the obligation to provide a warranty for the object for sale and purchase for a certain period, hereinafter referred to as the warranty period.
The warranty period shall be calculated from the time when the purchaser has the obligation to accept the object.”
Even though Civil Code should govern obligations arising from signed contract between parties, regulations with regarding the relationship between parties after the termination of contracts such as NCA and non-disclosure agreement have not mentioned yet.
With respect to regulating non-compete in Vietnamese Labor Code 2012 (“Labor Code 2012”), there are some provisions which mention the NCA. According to Article 23.2 of this Code:
“In case the employee doing works directly related to the business secret, technical know-how as prescribed by law, the employer is entitled to reach a written agreement with the employee on the contents and term of business secret, technical know-how protection, the interests and compensation for the employee‟s violations.”
This provision only mentions non-disclosure agreement which presents obviously the purpose of preventing secret information from being leaked out. Compared with the Article 29 of the draft of the Labor Code 2012 (“Draft”) which is publicized in 2010:
“In case the employee doing works directly related to the business secret, technical know-how as prescribed by law, the employer is entitled to require the employee to keep secret information by an agreement in the labor contract. This agreement is regulated about compensation obligation in case of breach the contract and duration which does not exceed 3 years from termination contract date and during this period, the employee cannot work any job, or any position that produce the product against former employer”.
The LC 2012 has not kept the content of time-limit and restrictive actions as suggested in the Draft. Perhaps the legislators thought that if the provision above was approved, it may cause a contradiction with the right to freedom to work of employee stipulated in Article 10.1 of the Labor Code 2012 and the right to conclude with multiple employers in Article 21 of the Labor Code. As a result, although the Labor Code 2012 to some extent regulates the NCA, the content of the NCA in the Labor Code 2012 is still so narrow and ambiguous.
- The necessity of recognizing and expanding the NCA in Vietnamese labor law.
2.1. The ambiguous of current regulations about NCA
Firstly, as analyzed above, although the LC 2012 has provided a kind of the NCA in Article 23.2, the stipulation of this provision is so fragile. It leads to the difficulties in applying of the NCA in practice and resolves the disputes of the NCA as well. For instance, the NCA is indirectly regulated in the VCL but the subject of this law is the relationship between employers and employees, not extend to the employment relationship between employers and employee. Hence, it is difficult to the former employer who is willing to protect its interests. Actually, the contracting party breaches the NCA is often the employee, the former employees are entitled to sue the new employers, not their ex-employee, under the VCL. Furthermore, according to the VCL, the former employers can start proceedings against the new employer if they could show the obvious and sufficient evidence which are actual damages in general. On the contrary, based on the NCA in labor law, the employer can prevent the breach of the NCA right at the time of occurrence. Meanwhile, there is only one provision that relates to a non-disclosure agreement in the LC 2012. This provision is too narrow and unclear; as a result, it cannot cover comprehensively all types of the NCA.
2.2. The unclear of settlement dispute procedure
Secondly, the settlement of disputes of NCA is confused. There are so far two points of view regarding the NCA dispute resolution which shall be discussed in the next section.
On the first viewpoint, some people opine that settling disputes of the NCA belong to civil procedure. They think that an employment relationship does not exist after termination of the labor contract, so whatever disputes arisen from individual transactions would be resolved by Vietnamese Civil Code (“CC”). Nevertheless, pursuant to Article 122.1 of the Vietnamese Civil Code, the NCA is invalid because this clause infringes one of the statutory conditions of civil transactions which is “The objective and contents of the transactions are not contrary to the law and social morals”. The content of “contrary to the law” is explained that the NCA violates the right to work for the employee as prescribed in Article 10.1 of the LC 2012.
On the second viewpoint, settling disputes of the NCA is one kind of labor disputes because there is employment relationship in the NCA.
As a result, the labor disputes settlement will be applied. Therein, employers can dismiss employees when their behaviors are harmful to employers‟ interests, for instance, leaking out their trade secrets to competitors. In order to apply the dismissal, the employer must register the internal labor regulations (ILRs) at the Department of Labor, War Invalids, and Social Affairs at the provincial level (“DOLISA”) or at the Ministry of Labor, War Invalids and Social Affairs (“MOLISA”). However, dismissal on the ground of violating the NCA is frequently treated illegally because it is contrary to the right to freedom to work of the employees. Briefly, one legal issue should be governed by only one law, so it is necessary to create a legitimate unification of settling disputes in the NCA.
2.3. The importance of balance benefit
The purpose of the NCA complies with the rule of balance benefit of employer and employee which is one of the important rules in labor law. Therein, the law protects not only employee but also employer. The NCA plays an important role to protect the legitimate interests of the employer when an employee takes advantage of their confidential information, trade secret and customers list. However, the labor law does not provide any defined provision of enforcing the NCA. Consequently, the employee does not receive any benefit during restriction time and the employer cannot sue employee when he/she breaches the agreement. Hence, promulgating a law which governs the NCA can fill a gap in legislation.
The NCA is used variously by the employer. In practice, the NCA is written in numerous forms such as labor contract, internal labor regulations, or collective labor agreement. Therein, labor contract which is a popular form is intentionally designed as a term of an individual labor contract. However, the NCAis often designed as an independent contract which is separated from the labor contract. In these circumstances, it relates to a non-disclosure agreement which is one of the types of the NCA. Despite differences in form, the NCA is agreed in written form.
In the contents of non-compete, it is stipulated in disorder. For example, the limitation of restrictive time can be one year, three years or five years from the date of terminating labor contract, just as the employer wishes. Referring to the enforceability of the NCA, employers are in favor of drafting directly the non-disclosure within labor rules so as to protect their confidential information from being leaked out. It is considered as a statutory obligation that the employee must comply with when he/she starts working for the employer.
Briefly, the NCA has been used by the employers because of the demand of protecting their interests in the business. However, there is no unification of both the forms and the contents of the NCA. It leads to the necessity for setting a legal framework of the NCA.
Finally, the economic policy of Vietnam is open and more and more harmonizes with the economy worldwide. As a result, the number of foreign investors comes to Vietnam has being increased rapidly. As pointed out in chapter 3, the NCA is popular with the business activities in developed countries and its legislation has created the obvious legal framework of this contract. Thus, promulgating legal documents which govern the NCA is appropriate to the assimilating international economy process, especially encourages foreign investment. The foreign employers will feel secure when they decide to invest in Vietnam because its legislation provides a full legal framework not only for their commercial actions but also for their human resource management. Besides that, by acquiring shortcoming from other countries and applying in the concrete situation in Vietnam, it will lead to the improvement of its legislation and the harmony between Vietnamese legislation and another in global.
- Case study
The ongoing case is about the Hoa Sen Group, its former CEO Pham Van Trung and his new company NKG.
Pursuant to the public announcement of HSG on April 18th, 2012, HSG said that during the time working for HSG as a senior officer, former CEO Phan Van Trung signed an agreement with HSG which stated that:
“For a period of 36 months from the termination of the employment, I will not be allowed to provide information, confidential information; cooperate, produce, engage in any business activity using customers’ information, price list, products’ feature.” or else he should be responsible for an amount of penalty money.
However, just only seven months after the termination of the labor contract, Pham Van Trung worked for NKG as a General Director.Therefor, HSG also mentioned to NKG in the announcement that:
“In the event that NKG refuses to terminate the employment contract with respect to mentioned person, NKG is considered to collude with such person for an unfair competition in order to damaged the legitimate right of HSG”
The restriction of a company to its former employees is non-binding according to Vietnamese law despite its reasonableness. Article 35.1 of Vietnam Constitution 2013 stated that “Citizen has the right to work and to select career, job, and workplace”. Besides, article 5.1 of Vietnam Labor Code 2012 mentions that “Citizen has the right to work and to select career, job, and workplace”. Subsequently, the right of freedom to work of citizen is governed and protected by law meaning that no any individuals, the enterprise has a right to prohibit a legitimate person to conduct them right to work. Accordingly, the announcement of HSG that prohibit Pham Van Trung to work for other company pursuant to the said above agreement between Pham Van Trung and HSG and the announcement to NKG about the termination of the current labor contract between NKG and Mr.Trung are contrary to the regulations mentioned above.
Since there are several opinions about the validity of such agreement in according to Vietnam legislation, in order to avoid the voidness of such agreement in the labor contract, employees are asked to sign an independent NCA like the agreement in the case mentioned above.
The question arising from this case is about the validity of such agreement. Vietnamese Labor Code is believed to be good at protecting employees in order to balance parties and create stable labor relationship. However, regulations to protect employers are still ambiguous and indirected through the governing of employee’s obligation. Therefore in order to protect their own interests, employers usually add into labor contract some provisions about working conditions, condition to terminate contract and compensation of unilateral termination of the labor contract.
Legally, an agreement made by parties in order to perform its right and obligations shall be governed and protected by laws if it is not contrary to laws. The agreement is not violent to the right of freedom to work mentioned in Labor Code because at the time of the agreement between Pham Van Trung and HSG, Pham Van Trung had fully right to negotiate, deal and decide to sign the. Since Pham Van Trung signed his contract voluntarily, he should be responsible for his agreement. In the lights of the relationship between principles of Civil Law and Labor’s one, the agreement between Pham Van Trung and HSG is considered to be enforceable pursuant to the Principle of free and voluntary undertaking and agreement mention in Article 3.2 of Vietnam Civil Code 2005. Besides, the sanction regulated in such agreement does not prohibit Pham Van Trung to conduct his right of freedom to work. Pham Van Trung could choose whether paying compensation or following the agreement. Therefore, the agreement about the rights and obligations between Pham Van Trung and HSG is considered to be enforceable since it does not violate principles of Labor law and also comply with regulations of the Civil law.
In practice, there was a case between Ram and Saitex company heard by People Court of Duc Hoa District that enforced the agreement that prohibited employee from working directly or indirectly for a competitor after the termination of the labor contract between such employee and employer. Pursuant to the labor contract between Ram and Saitex company, Ram did not allow to work directly or indirectly for any competitive individual or company of Saitex within one year from the day of termination the labor contract. However, right after his termination, Ram started to work for a competitor of Saitex company. People Court of Duc Hoa District considered that agreement between Ram and Saitex company is a civil transaction. Therefore, base op Civil Law, Court said that at such agreement was made legally and enforceable. As a result, Ram was asked to comply his restriction for a year after his termination mentioned in such agreement.
Due to the various opinions of the judgment mentioned in those cases above and the necessity of recognizing and expanding the NCA in Vietnam labor law mentioned in section 2 of this Chapter, NCA should be recognized in Vietnamese legislation in order to create the legal framework of the contract and also protect the interest of both parties.
- Proposal for the governance of the NCA in Vietnamese labor law
Based on the draft of Law on amendments of and additions to a number articles of the Labor Code published in the early of 2017, there is no significant amendment with regarding the regulation of non-compete agreement. The proposals discussed below will refer to the current Labor Code – Vietnam Labor Code 2012.
4.1. To amend and implement some articles of the LC 2012
The government is believed that it should promulgate a new decree which on the NCA in order to make it is effectively enforceable in practice. This suggestion is based on the following reasons.
Firstly, the LC 2012 has taken into effect since May 1, 2013. The amendment a law procedure is so serious and complicated that it takes a lot of time to amend and implement some articles of this Code. Hence, it does not immediately respond to the high demand of governing the NCA. Promulgating new decree is considered as an effective solution to resolve the confusing application of the NCA in practice.
Additionally, the promulgation of the new decree is a legal performance which complies with the Article 242 of the LC 2012: “The Government and the competent authorities shall stipulate in detail and make guidance of the implementation of articles and clauses in the Code”. Actually, since the effective date of the LC 2012, many decrees have been published alternatively to make the guidance of applying articles in this Code. As pointed out above, although a part of the NCA is stipulated in Article 23.2 of the LC 2012, this provision does not cover all legal issues of the NCA. It is also not obvious enough for the court as well as the contractual parties to understand and utilize legitimately.
- The suggestions for contents of the decree on the NCA
- Limitations of the NCA
The duration, the geographic location, and the industry are three important elements that the Government should intentionally stipulate in order to balance the benefit between employee and employer. Regarding the limitation of time, it is generally agreed that if the NCA is bound during employment period, the restrictive time will be equal to the length of employment. However, it is quite difficult and ambiguous to determine how long is too long in the post-employment context. As pointed out in chapter 2, some countries distinguish between a skilled employee and non-skilled employees. According to a report of General Office for Population Family Planning “Labor and work in Viet Nam 2011” among 51.4 million employees, about 15.6% of them were skilled employees. It seems necessary in the stipulation of different times for two types of employees.
Therefore, based on the real situation in Vietnam, the Government should provide certainly a maximum time that the contractual parties can agree. As discussed in previous part, the draft of the LC 2012, some drafters suggested that “Restrictive time does not exceed 3 years from the termination date of labor contract”. Unfortunately, it was excluded when the LC 2012 was adopted. In author‟s opinion, the Government should acquire the spirits of this proposal and use it in the concrete situation of NCA.
However, by referring to other legislations of EU countries, the duration should not exceed one year rather than three years because the speed of developing technology is so fast that one year is enough for an employer to renew his/her ideas of business.
- Consideration for the non-compete agreement
In the light of NCA in the USA mentioned in chapter 4, NCA should be granted by a valid consideration in which employee receive something in consideration with the promise not to compete.
If the NCA is applied after the termination of the labor contract, the Government should impose paying a financial amount on the employer for their employees. This obligation is necessary for ensuring employee’s living. During restriction periods, the employee obtains a job more difficulty because he/she is bound by NCA which limits their opportunity to find a job such as professional department, geographic location. Thus, it occurs a question that how much money is adequate to the loss of employee during restriction time. It is intangible to calculate a financial amount. By reference to other countries, the Government can define a minimum amount which is paid based on following two options:
Option 1: The employer shall pay a lump sum at the end of terminating labor contract, which must not be lower than the salary of (number) months.
Option 2: The employer shall pay a financial amount of at least 50% of the listed contractual salary received monthly by employees after terminating labor contract.
In addition, the Government should consider the payment obligation of the employer in case of termination of the non-compete contract. Generally, if the contract is bilaterally terminated, each contractual party does not perform continuously his/her obligation.
However, if the contract is unilaterally terminated, whether the employer shall pay the employee or not will depend on the legitimacy of terminating. Another important legal issue is that it is considered as a serious breach of the contract if the employer does not fulfill the payment of financial amount obligation. Consequently, the employee is entitled to unilaterally terminate the non-compete contract also claims for damages.
- Form of the NCA
The wording of NCA must be written accurately and unambiguously in order to avoid the conflicts when contractual parties undertake this contract. Moreover, it supports them to show evidence in settling disputes. Hence, written form is highly recommended for most of the legislations in the NCA area. Although Article 22.3 of the LC 2012 requires that non-disclosure agreement shall be in writing, the new decree should define that all types of the NCA must be in writing.
In addition, the NCA shall be written separately from labor contract. Because of protecting his/her interests, an employer is a person who initiative and intentionally designs non-compete clause in labor contract. During the negotiation of employment contract process, the employer is usually considered as a dominant position. They can abuse this clause or also bind the employee with other expensive obligations in case of scarce job opportunity. As far as the employee is concerned, he/she does not pay attention to the NCA when he/she enters into labor contract because he/she needs a job and lacks legal knowledge. If the NCA is included as a term in labor contract; the employee is more likely to skip the detail of this clause.
On the contrary, if the NCA is a separate contract, it will grab employee‟s attention and require them to consider seriously this restriction before entering to the labor contract. He/she can see the importance of NCA and may get the consultation of another one. Briefly, the NCA should be stipulated in written form which is separated from labor contract.
- Termination of the NCA
The Government should stipulate which cases of terminating NCA are and whether contractual parties have the right to unilaterally terminate this agreement or not. According to some provisions in relation to the termination of the labor contract in the LC 2012, the author of this thesis suggests some examples:
“Cases of terminating NCA:
1. The valid time of contract expires or both parties agree to terminate the NCA.
2. The employee is condemned to imprisonment, to death according to the legal judgment and decision from the Court.
3. The employee dies, is declared dead, restricted or loss capacity of civil acts by the Court.
4. The employer being individual dies or is declared dead, restricted or loss capacity of civil acts by the Court, the employer not being individual stops the operation.
6. The employee unilaterally terminates the non-compete contract as prescribed in Article 37 of Vietnam Labor Code 2012 and Article ….of this Decree.
7. The employer unilaterally terminates the non-compete contract as prescribed the employee due to changes in the mechanism, technology or for some economic reasons, or merger, separation of enterprise, cooperatives without the renewal non-compete contract.
8. The change of labor policy which restricts the employer and employee to enter into a non-compete contract according to the decision of the official agency.”
“The right to unilaterally terminate the non-compete contract of the employees
1. The employee is entitled to unilaterally terminate the contract sooner in following cases:
a) The employee or their family encounters difficulties and the severity of labor market that he/she cannot continue to be performed.
b) The employer violates the payment of financial amount pursuant to Article ….of this Decree.
2. When unilaterally terminate the non-compete contract as prescribed in Clause 1 this Article, the employee must notify the employer in advance at least 45 working days.”
“The right to unilaterally terminate the non-compete contract of the employer:
The employer is entitled to unilaterally terminate the contract sooner in following cases:
a) The employee regularly fails to complete the promise according to the contract.
b) The employer gives the employee an announcement of terminating the contract at least 45 working days in advance.”
In order to enforce the NCA, most of the legislations also stipulate remedies which provide the legitimate manners for contractual parties to protect their interests by themselves and by asking the court. Generally, there are various actions that the contractual party of the NCA can apply when the other party breaches the contract. By acquiring experience of these countries and applying to the concrete situation in Vietnam, the Government should create a framework of remedies for the employer and employee in the non-compete contract. For example: asking the court for declaring the invalidity of the non-compete contract; applying temporary injunction to prevent the infringement of the other party; claiming for damages or setting up the penalty clause.
Additionally, the Government should stipulate whether applying penalty excludes claiming for damages or not. If the employer and employee agree on penalty clause in the non-compete contract, they are not allowed to claim for damages in case of the similarity in the breach of the contract. Finance is not the problem of the employer who is an enterprise, but the employee is different. The employee is an individual entity, so his financial resource is limited in comparison to the employer as a company. In the majority of practical cases dealing with the NCA, the employee who initiative breaches the contract are the defendant. It is feasible and appreciates the financial condition of the employee that such employee is able to comply with the compensation and pay for a penalty.
3.3. Settlement disputes of NCA
3.3.1. Authority and order
Disputes of the NCA are considered as personal labor disputes because they are raised from the contract between the employer and the employee in the individual.
According to Article 200 of the Vietnam Labor Code 2012, there are two authority agencies which are competent to settle individual labor disputes. These are the Labor Mediator and the People’s Court. Pursuant to Article 201 of Vietnam Labor Code 2012, the individual labor disputes must be settled by the mediators before bringing to the courts, except some certain cases. Disputes of non-compete contract do not belong to these exceptions, so the Decree should stipulate obviously the authority and procedures of settling these disputes. Because of the complication of disputes related to the NCA, it should be directly settled by the court without the pre-court mediation procedures.
3.3.2. Method of settling disputes
In settlement of disputes process, there are two main types of methods which can be applied to resolve the case related to the NCA. There are “blue pencil” and “red pencil” method. In most of EU countries, the law of NCA provides that the court applies “blue pencil” because this method allows the court to settle the dispute in such flexible ways. If a part of NCA infringes the statutory provision, the court can modify the remaining part which satisfies all requirements of the law. “Blue pencil” is an effective solution in which it not only protects the complying strictly with the law but also maintains the intention of the contractual parties. On the contrary, “red pencil” doctrine means that the court cannot modify an NCA which is agreed by the contractual parties. Pursuant to the statutory provision provided by the law, the court has to consider the NCA comprehensively then make decisions if the noncompete is entirely valid or not. For example, the law provides that the limitation of restrictive time is not longer than one year. However, contractual parties agree on three years. In this case, the court immediately declares that this agreement is invalid and does not reduce this duration to one year. Therefore, I recommend that the Government should be in favor of blue pencil doctrine in the method of settling dispute instead of “red pencil”.
The NCA is considered as a new term in the labor contract in Vietnam. Vietnamese legislation provides some provisions which are relevant to the concept of competition or the content of NCA such as non-disclosure agreement. However, it is so unclear and ambiguous that leads to the confusion on applying NCA in practice. The NCA is designed in various forms and contents. Actually, the benefit of the employees is not ensured, for example, a financial amount supporting for their living during the restriction period, so they initiative breach the contract.
Because of lacking legal framework regarding NCA, it is very difficult for an employer to protect their interests. By acquiring from the governance of NCA in many countries, the proposal provides several suggestions to amend some articles in Vietnam Labor Code 2012 also to adopt new decree which is guidance for implement NCA in detail.
The mainstream of these solutions is the rule of balance the benefit between employer and employee and appreciates to the concrete situation in Vietnam.
The non-compete agreement is one of the popular terms in an employment contract in which the employers prevent their employees from doing something against them. Most of the developed countries have made the legal framework in which the validity of the non-compete agreement is obviously determined by reasonable test. The mainstream of this test is about the reasonableness of balanced benefit between employers and employees. Therein, the non-compete agreement can be valid in the case of satisfying entirely the legal requirements of the law, otherwise, it shall be unenforceable. However, in many developing countries such as Vietnam, the non-compete agreement has been considered as a new term and has not regulated in any labor law. In practice, the NCA is utilized day by day but is variously agreed in such confuse way. It leads to the high demand of promulgating a law which governs the non-compete agreement.
Due to the combination of the research process on internal and external materials and analyze and summarize methods, the thesis acquires some results as below
Respect to theory, the dissertation is presented obviously the typical knowledge of the non-compete agreement. It is not only the definition, classification and general characteristics but also and the fundamental rules supporting for enforcement of this clause. Besides that, this dissertation gives a detail description of the international governance of the non-compete agreement in some European Union countries with supporting doctrines and principles. Moreover, regulations about the enforcement of the non-compete agreement in the United States are analyzed for the comparison among states. Regulations about the non-compete agreement in California are mentioned as an example for the unenforced non-compete agreement together with several exceptions for the enforcement of the non-compete agreement under California legislation.
Respect to practice, the dissertation describes the legal background of Vietnam laws with regarding the non-compete agreement. Besides, several cases related to the non-compete agreement are studied for the improvement of Vietnam current laws on the NCA. The dissertation also provides some suggestions of governing NCA through acquiring knowledge and applying in Vietnamese concrete situation. The proposal presents numerous solutions which are considered as effective ways to enforce the NCA also settle disputes relating to the non-compete agreement. Therein, the suggestions focus on amending some articles in the LC 2012 and promulgating a new decree regarding the NCA.
Because of the limitation on time and scope of this dissertation, the proposal might uncover all legal issues of the non-compete agreement. Even though there is no amendment with regarding to non-compete agreement mentioned in the draft of Law on amendments of and additions to a number articles of the Labor Code published in the early of 2017, the author expects this dissertation will contribute to set up a legal framework of the non-compete agreement in which the employers can protect their legitimate interests and the employee’s benefits is also protected which leads to the development of employment relationship on individual and Vietnamese labor law as a whole.
 Vu Dinh Khoi (2011), Creating the legal framework for non-compete agreement in labor law (Xay dung khung phap ly cho thoa thuan han che canh tranh trong linh vuc lao dong), University of Law in Ho Chi Minh city
“Restrictive covenant”, Black’s Law Dictionary 2nd Ed
“Covenant not to compete”, Amy Hackney Blackwell, The essential law dictionary (2008), Sourcebooks Inc.
 Gillian Lester and Elizabeth Ryan, Choice of Law and Employee Restrictive Covenants: An American Perspective, 31 Comp. Lab. L. & Pol’y J. 389 (2009), Available at: http://scholarship.law.berkeley.edu/facpubs/736
 Goggin, Nicole, “Non-Competition Agreements: A Discussion to Eliminate Their Use” (2014). Honors Theses. Paper 27
 Ius Laboris (2010), Non-compete clauses – An international Guide, Global Human Resources lawyers, page 59.
 Goodwill: the benefit of a business having a good reputation under its name and regular patronage. Goodwill is not tangible like equipment, right to lease the premises, or inventory of goods. It becomes important when a business is sold, since there can be an allocation in the sales price for the value of the goodwill, which is always a subjective estimate. Included in goodwill upon sale may be the right to do business without competition by the seller in the area and/or for a specified period of time. Sellers like the allocation to goodwill to be high since it is not subject to capital gains tax, while buyers prefer it to be low because it cannot be depreciated for tax purposes like tangible assets. (available on http://legal-dictionary.thefreedictionary.com/goodwill, last visited on 12/11/2016)
 This information derived from Australia common law, in Non-compete clauses – An International Guide, Global Human Resources lawyers, page 21.
 Ius Laboris (2010), Non-compete clauses – An international Guide, Global Human Resources lawyers, page 335.
 Aaron D. Hall, http://jux.law/what-is-a-non-solicitation-agreement/
 Vu Dinh Khoi (2011), Creating the legal framework for non-compete agreement in labor law (Xay dung khung phap ly cho thoa thuan han che canh tranh trong linh vuc lao dong), University of Law in Ho Chi Minh city.
 Simon Deakin and Gillian S.Morris (2005), Labor Law 4th edition, Hart publishing, Oxford & Portland Oregon, 06/04/2005, page 345.
 Ius Laboris (2010), supra footnote 9, page 18
 Textbook of Labor Law (2011), Ho Chi Minh City University of Law, page 27.
 See at 5.1 in chapter 2
 W.Andrew (Andy) Arnold, Non-compete history, http://www.scnoncompetelawyer.com/short-history-of-non-competes/, last visit on Dec 30th 2016.
 The Law and Economics of Post-Employment Covenants: A Unified Framework 11 Geo. Mason L. Rev. 357 (2002)
 Black Death plague: affected all walks of life from the rich to the poor and people thought that the plague was God’s punishment and in 1382 the Black Death returned to Europe in a weaker epidemic although it took an especially heavy toll in Ireland. By the end of the century it is estimated that 75 million people died. This occurred in England in 14th century that caused the population around 1300 in England was around 5 million, in 1400 it was around2.5 million. (The Time Travellers Guide to Medieval England, 2008, Ian Moritimer)
 The Dyer’s case, Y.B. Mich. 2 Hen. 5, fol. 5, pl. 26 (1414).
 Dan Messeloff, Giving the Green Light to Silicon Alley Employees: No-compete Agreements between Internet Companies and Employees under New York Law, Fordham Intellectual Property, Media and Entertainment Law Journal, (vol. 11, issue 3, 2001), at 710-711.
 W.Andrew (Andy) Arnold, supra footnote 18
 Sri Lakshmi (2012), Non-compete agreement, Altacit Global.
 Restraint of trade is a common law doctrine relating to the enforceability of contractual restrictions on freedom to conduct business.
 Sri Laakshmi (2012, supra footnote 22
 The Law and Economics of Post-Employment Covenants: A Unified Framework 11 Geo. Mason L. Rev. 357 (2002)
 W.Andrew (Andy), Arnold (2013), supra footnote 18
 Deena C.Knight, Employee mobility is changing the face of today’s workplace, Office solution, 9th September 2009.
 Steven M.Guierrez, Joseph D.Neguse and Steven Colis (2010), The human limits of human capital: An overview of noncompete agreements and best practices for protecting trade secret fom unlawful misappropriation, Employee Relations Law Journal Summer, Aspen Publisher.
 Erin Marie Daly (2010), Weak economy slows litigation growth, Employment Law 360, Jan 4th 2010, available at https://www.law360.com/articles/141372/weak-economy-slows-litigation-growth, last update on 2017/01/02.
 Chile, Denmark, France, German, India, etc., at Ius Laboris (2010), Non-compete clauses – An international Guide, Global Human Resources lawyers.
 https://en.oxforddictionaries.com/definition/pacta_sunt_servanda last update 01/20/2017
 See Aharon Barak, Proportionality: Constitutional Rights and Their Limitations (New York: Cambridge University Press, 2012) at 175.
 The principle of proportionality has been recently advocated in the U.S. See E. Thomas Sullivan & Richard S. Frase, Proportionality Principles in American Law: Controlling Excessive Government Actions (Oxford: Oxford University Press, 2009) at 6, who provide an overview of the long-standing acceptance of proportionality in western countries and argue that “every intrusive government measure that limits or threatens individual rights and autonomy should undergo some degree of proportionality review”.
 Textbook of Labor Law, supra footnote 16, page 35, 36.
 Norman D.Bishara (2006), Covenant not to Compete in a Knowledge Economy, Balancing Innovation from employee mobility against legal protection for human capital investment.
 Available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A31986L0653 (last updated on Jan 26th 2017)
 Article 20 of Council Directive 86/653/EEC of 18 December 1986:
- For the purposes of this Directive an agreement restricting the business of a commercial agent following termination of the agency contract is hereinafter referred to as a restraint of trade clause.
- A restraint of trade clause shall be valid only if and to the extent that:
- It is concluded in writing; and
- It relates to the geographical area on the group of customers and the geographical area entrusted to the commercial agent and to the kind of goods covered by his agency under the contract.
- A restraint of trade clause shall be valid for not more than two years after termination of the agency contract.
- This article shall not affect provision of national law which impose other restrictions on the validity or enforceability of restraint of trade clauses or which enable the courts to reduce the obligations on the parties resulting from such an agreement.
 Available at http://ec.europa.eu/justice/fundamental-rights/charter/index_en.htm last updated on Jan 26th 2017
 Judge Stevent Adler (2006), President at National Labor Court, General report Non-competition clauses (Covenants not to compete) in Labor contracts, XIV Meeting of European Labor Court Judges, 4 September 2006.
 In Austria, Iceland, Slovenia, German and Finland sec.18; Italy art 4, Norway sec.110
 Ius Laboris (2010), supra footnote 7, page 113.
 It is summarized by refer to Ius Laboris (2010), Non-compete clauses – An international Guide, Global Human Resources lawyers.
 Ius Laboris (2010), supra footnote 7, page 199.
 Ius Laboris (2010), supra footnote 7, page 223
 Ibid, page 112
 Ibid, page 19
 General Report about Non-competition clause in labor contracts at 14th Meeting of European Labor court judges on September 4, 2006.
 However, in India, the court has time and again struck down non-compete clauses in employment contracts which restrict the ability of an employee to seek employment in competition with the employer after termination of employment contract. Not only have the courts struck down non-compete clauses which completely restrain an employee after termination of employment but they have also struck down any arguments as to reasonableness and the principle of partial restraint with respect to post-employment non-compete clauses.
 Pursuant to Section 74a of the Germany Commercial Law
 General Report about Non-competition clause in labor contracts at 14th Meeting of European Labor court judges on September 4th 2006.
 Ius Laboris (2010), supra footnote 7, page 275
 Global HR Hot Topic (2012), Non-competes and other restrictive covenant in a foreign jurisdiction.
 Ius Laboris (2010), supra footnote 7, page 227
 The prohibition of competition is only binding if the principal undertakes to pay for the period of prohibition a compensation which for each year of the prohibition amounts to at least half of the contractual payment last received by the clerk.
 Ius Laboris (2010), supra footnote 7, page 117
 Ibid, page 96
 Ibid, page 96
 Ibid, page 179
 Ibid, page 117
 Article 74c of German Commercial Law said “the clerk is not entitled to demand the compensation for any period during which he is serving a prison sentence.”
 Ius Laboris (2010), supra footnote 7, page 201
 However, in Luxembourg, the law does not require the payment of consideration.
 David Horner and Elizabeth Carter (2011), Severance of restrictive covenants – the use of the court’s “blue pencil” only extends so far, available at http://www.bristows.com/news-and-publications/articles/severance-of-restrictive-covenants-use-of-the-courts-blue-pencil-only-extends-so-far/
 http://legal-dictionary.thefreedictionary.com/injunction last update on Feb 10th 2017
 Preventive injunction: an injunction directing an individual to refrain from doing an act is preventive, prohibitive, prohibitory or negative. This type of injunction prevents a threatened injury, preserves the status quo, or restraint the continued commission of an ongoing wrong, but it cannot be used to redress a consummated wrong or to undo that which has already been done.
 Mandatory injunction: although the court is vested with wide discretion to fashion injunctive relief, it is also restricted to restraint of a contemplated or threatened action. It also might compel specific performance of an act. In such a case, it issues a mandatory injunction, commanding the performance of a positive act. Because mandatory injunctions are harsh, courts do not favor them, and they rarely grant them. Such injunctions have been issued to compel the removal of buildings or other structures wrongfully placed upon the land of another.
 Permanent injunction: a permanent injunction or perpetual injunction is one that is granted by the judgment that ultimately disposes of the injunction suit, ordered at the time of final judgment. This type of injunction must be final relief. Permanent injunction are perpetual, provided that the conditions that produced them remain permanent.
 Ius Laboris (2010), supra footnote 7, page 102
 It is summaried by reference to Ius Laboris (2010), Non-compete agreement – an international guide
 Referred to the Non-compete Clauses in labor contract of Netherlands in the 14th Meeting of European Union Labor Court Judges on Sept 4th 2006, available at http://www.ilo.org/wcmsp5/groups/public/—ed_dialogue/—dialogue/documents/meetingdocument/wcms_159968.pdf
 Referred to the Non-compete Clauses in labor contract of Belgium in the 14th Meeting of European Union Labor Court Judges on Sept 4th 2006, available at http://www.ilo.org/labadmin/info/WCMS_150912/lang–en/index.htm
 However, in Poland, change of work does not influence the non-compete agreement
 US Department of the Treasury (March 2016), Non-compete Contracts: Economic effects and Policy Implications.
 The Dyer’s Case, Y.B.Mich. 2 Hen. 5, fol. 5, pl. 26 (1414).
 Blake (2015), Judge rejects settlement in Silicon Valley wage case,The Wall Street Journal, page 641, see at https://www.wsj.com/articles/judge-rejects-settlement-in-silicon-valley-wage-case-1407528633
 Tallis v.Tallis, I El. & B.391, 118 English Report 482 (Queen’s Bench 1853).
 Printing & Numerical registering Co. v. Sampson, L.R. 19Eq 462 (1875).
 Rousillon v. Rousillon, 14 Ch.D. 351 (1880).
 Blake (2015), Judge rejects settlement in Silicon Valley wage case, The Wall Street Journal, page 644, see at https://www.wsj.com/articles/judge-rejects-settlement-in-silicon-valley-wage-case-1407528633
 Lawrence v. Kidder, 10 Barb. 641 (N.Y. Supreme Court 1851).
 Blake, supra note 95.
 Keeler v. Taylor, 53 Pa. 467, 470 (1866).
 Diamond Match v. Roeber 106 N.Y. 473 (1887)
 Neil Klingshirn (2009), Unclock non-compete agreement: Keys to escape, see at http://www.myemploymentlawyer.com/wiki/Overview-of-Non-competition-Agreements-in-the-United-States.htm
 Fenwick and West LLP, Summary of Covenants not to compete: A Global Perspective.
 Lawrence F.Carnevale and Judith A.Lockhart (2014), United States: Inside: Factors Affecting the enforceability of Non-compete agreements, Inside Counsel, available at http://www.mondaq.com/unitedstates/x/284208/Contract+of+Employment/Inside+Factors+Affecting+the+Enforceability+of+NonCompete+Agreements
 US Department of the Treasury (March 2016), Non-compete Contracts: Economic effects and Policy Implications.
 The White House Washington (May 5th 2016), Non-compete Agreement: Analysis of the Usage, Potential Issues, and State responses, page 7.
 See http://house.mo.gov/billtracking/bills151/billpdf/intro/HB0597I.PDF http://www.njleg.state.nj.us/2012/Bills/A4000/3970_I1.HTM, http://mgaleg.maryland.gov/2013RS/fnotes/bil_0001/sb0051.pdf https://malegislature.gov/Bills/189/House/H1701, http://www.legislature.mi.gov/(S(eemdorjddeyzki1vwou5lszu))/mileg.aspx?page=GetObject&objectName=2015-HB-4198, http://app.leg.wa.gov/billinfo/summary.aspx?year=2015&bill=293 for Missouri, New Jersey, Maryland, Massachusetts, Michigan, and Washington, respectively.
 See http://www.franken.senate.gov/files/documents/150604MOVEsummary.pdf for the proposed federal bill.
 Referred to the White House Washington (May 2016), Non-compete Agreements: Analysis of the usage, Potential Issues and State Responses.
 The White House Washington (May 5th 2016), Non-compete Agreement: Analysis of the Usage, Potential Issues, and State responses, page 9.
 Marx, Matt, and Lee Fleming. 2012. “Non-compete Agreements: Barriers to Entry…and Exit?” In Innovation Policy and the Economy, Volume 12, 39-64. Chicago: University of Chicago Press.
 The White House Washington (May 5th 2016), Non-compete Agreement: Analysis of the Usage, Potential Issues, and State responses, page 9.
 Marx, Matt, and Lee Fleming. 2012. “Non-compete Agreements: Barriers to Entry…and Exit?” In Innovation Policy and the Economy, Volume 12, 39-64. Chicago: University of Chicago Press
 The White House Washington (May 5th 2016), Non-compete Agreement: Analysis of the Usage, Potential Issues, and State responses, page 12.
 The White House Washington (May 5th 2016), Non-compete Agreement: Analysis of the Usage, Potential Issues, and State responses, page 13.
 Connie N. Bertram, Choice of law and forum selection in Non-compete agreements.
 Neil Klingshirn, Choice of Law in Non-compete Cases (2010), available at news.acc.com/accwm/downloads/Cooley_011113.pdf
 Frame v.Merrill Lynch, Pierce, Fenner & Smith, Inc., 20 Cal. App. 3d 668 (Cal. App. 1st Dist. 1971)
 Lafarge Corp v.Travelers Indem. Co., 927 F.Supp. 1534 (M.D.Fla.1996)
 Article 561, Section 187 of the Second Restatement of Conflict of Law (1971).
 See Scott, 732 F. Supp. At 1042 – 43
 See Edwards v. Arthur Andersen LLP, 44 Cal.. 4th 937, 952 (Cal. 2008)
 See D’Sa v. Playhut, Inc., 85 Cal. App. 4th 927 (Cal. Ct. App. 2000).
 See Diodes, Inc v. Franzen, 260 Cal. App. 2d 244, 255 (Cal. Ct. App. 1968)
 See, e.g., Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 20 Cal. App. 3d 668, 673 (Cal. Ct. App. 1971); Scott, 732 F. Supp. At 1039 – 41.
California law on restrictive covenants and trade secrets, available at https://www.americanbar.org/content/dam/aba/events/labor_law/2013/03/employment_rightsresponsibilitiescommitteemidwintermeeting/4_orrick.authcheckdam.pdf
 See, e.g., Muggill v. Reuben H. Donnelley Corp., 62 Cal. 2d 239, 242 (Cal. 1965); Am. Credit Indem. Co v. Sacks, 213 Cal. App. 3d 622, 633-34 (Cal. Ct. App. 1989).
 See at Gordon v. Landau, 49 Cal. 2d 690, 694 (Cal. 1958)
 Neil Klingshirn, California Non-competition Law, Unclock Non-compete agreement: Keys to escape, available at http://www.myemploymentlawyer.com/unlock-non-compete-agreements-keys-to-escape
 California law on restrictive covenants and trade secrets, available at https://www.americanbar.org/content/dam/aba/events/labor_law/2013/03/employment_rightsresponsibilitiescommitteemidwintermeeting/4_orrick.authcheckdam.pdf
Uniform Trade Secrets Act, available at www.uniformlaws.org/shared/docs/trade%20secrets/utsa_final_85.pdf
 California law on restrictive covenants and trade secrets, supra footnote 135
 See at Ret. Grp v. Galante, 176 Cal. App. 4th 1226 (Cal. Ct. App. 2009)
 See at Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564, 577 (Cal. Ct. App. 2009, see at https://www.courtlistener.com/opinion/2256462/dowell-v-biosense-webster-inc/
California Business and Professional Code section 16601, available at http://codes.findlaw.com/ca/business-and-professions-code/bpc-sect-16601.html
 California Business and Professional Code section 16602, available at http://law.justia.com/codes/california/2011/bpc/division-7/16600-16607/16602
 California law on restrictive covenants and trade secrets, supra footnote 135
 See at Bay Radiology Medical Associates v. Asher, 220 Cal.App.3d 1074, 1083 (1990),
 Vietnam Competition Law has taken effect since Jan 07, 2005
 Article 8 of Vienam Competition Law 2005 and Article 14, Article 15, Article 16, Article 17, Article 18, Article 19, Article 20 and Article 21 of Decree 116/2005 which is the guidance of articles of Vienamese Competition Law 2005.
 Article 8: Competition restriction agreement include:
1. Agreements on directly or indirectly fixing goods or service prices;
2. Agreements on distributing outlets, sources of supply of goods, provision of services;
3. Agreements on restricting or controlling produced, purchased or sold quantities or volumes of goods or services;
4. Agreements on restricting technical and technological development, restricting investments;
5. Agreement on imposing on other enterprises conditions on signing of goods or services purchase or sale
contracts or forcing other enterprises to accept obligations which have no direct connection with the subject of such contracts;
6. Agreements on preventing, restraining, disallowing other enterprises to enter the market or develop
7. Agreements on abolishing from the market enterprises other than the parties of the agreements.
 Article 41.Infringement upon business secrets Enterprises are forbidden to perform the following acts:
1. Accessing and collecting information belonging to business secrets by counteracting the security measures applied by lawful owners of such business secrets;
2. Disclosing, using information belonging to business secrets without the permission of owners of such business secrets;
3. Breaching security contracts or deceiving or taking advantage of the trust of persons having the security duty in order to access, collect or disclose information belonging to business secrets of owners of such business secrets;
4. Accessing, collecting information belonging to business secrets of other persons when such persons carry out procedures according to law provisions concerning business, carry out procedures for product circulation, or by counteracting the measures applied by State agencies, or using such information for business purposes, application for licenses related to business or product circulation.
 Article 43.Discrediting other enterprises Enterprises are forbidden to discredit other enterprises by performing acts of directly or indirectly issuing untruthful information badly affecting the latter‟s reputation, financial status and business activities.
 Article 44.Disturbing business activities of other enterprises Enterprises are forbidden to disturb lawful business activities of other enterprises by performing acts of directly or indirectly preventing, disrupting the latter’s business activities.
 “The employee is entitled to work for any employer at any place that the law does not prohibit”.
 “The employee the employee may conclude contracts with multiple employers as long as they can ensure the implementation of the concluded contents”.
 Vu Dinh Khoi (2011), supra footnote 1, page 63
 Article 5.2 of Vietnam Labor Code 2012 mentions that
“2. Workers shall have the following obligations:
a) to perform the employment contracts, collective bargaining agreements;
b) to comply with labour discipline and internal work regulations, to follow lawful management orders of the employer;
c) to comply with regulations of the laws on social insurance and health insurance.”
 “Article 3. Basic principles of civil law
1. Every person shall be equal in civil relations, may not use any reason for unequal treatment to others, and enjoy the same protection policies of law regarding moral rights and economic rights.
2. Each person establishes, exercises/fulfills and terminates his/her civil rights and obligations on the basis of freely and voluntarily entering into commitments and/or agreements. Each commitment or agreement that does not violate regulations of law and is not contrary to social ethics shall be bound by contracting parties and must be respected by other entities.
3. Each person must establish, exercise/ fulfill, or terminate his/her civil rights and/or obligations in the principle of goodwill and honesty.
4. The establishment, exercise and termination of civil rights and/or obligations may not infringe national interests, pubic interests, lawful rights and interests of other persons.
5. Each person shall be liable for his/her failure to fulfill or the incorrect fulfillment of any such civil obligations.” See at http://hethongphapluatvietnam.com/law-no-91-2015-qh13-dated-november-24-2015-the-civil-code.html
 In Dong Nai Province.
 Article 23.2 of Vietnam Labor Code:
“In case the employee doing works directly related to the business secret, technical know-how as prescribed by law, the employer is entitled to reach a written agreement with the employee on the contents and term of business secret, technical know-how protection, the interests and compensation for the employee‟s violations.”
 General Office for Population Family Planning(2011), Labor and work in Viet Nam 2011
 “Article 125. Forms of settlement of violations of labour disciplinary regulations
2. Deferment of wage increase for no more than 6 months; demotion.
3. Dismissal.” available at https://www.ilo.org/dyn/natlex/docs/MONOGRAPH/91650/114939/F224084256/VNM91650.pdf
 Ibid. “Article 126. Application of dismissal as a disciplinary measure Dismissal shall be applied by an employer as a means of disciplinary measure in the following circumstances:
1. Where an employee commits an act of theft, embezzlement, gambling, intentionally causing injury, using illicit drug inside the workplace, disclosing technological or business secrets or infringing the intellectual property rights of the employer, or commits acts which are seriously detrimental or posing seriously detrimental threat to the assets or interests of the employer;
2. Where an employee who is subject to the disciplinary measure of deferment of wage increase recidivates while the disciplinary measure is not yet repealed; or where an employee was demoted as a labour discipline and recidivates; Recidivism means an employee recommits the same breach of labour disciplinary regulations while the disciplinary measure has not been repealed in accordance with Article 127 of this Code.
3. Where an employee has been absent from work for 05 accumulated days in 01 month or 20 accumulated days in 01 year without a proper reason.
Proper reasons include: natural calamities or fires; the employee or his/her family member suffers from illness with a certification by a competent health care institution; and other reasons as stipulated in the internal work regulations.”
 Available at https://www.ilo.org/dyn/natlex/docs/MONOGRAPH/91650/114939/F224084256/VNM91650.pdf last update on 25/4/2017
Cite This Work
To export a reference to this article please select a referencing stye below:
Related ServicesView all
Related ContentAll Tags
Content relating to: "Business Law"
Business Law, often referred to as commercial law, is concerned with all laws and issues that could impact the creation and operation of a business. These issues can relate to tax, employment, intellectual property, contracts and more.
The Motives and Effects of Mergers and Acquisitions in U.S.
The Motives and Effects of Mergers and Acquisitions in U.S. Banking Industry: Case Study of JP Morgan Chase & Co. and Bank One Corporation Abstract Mergers and acquisitions (M&A) has been a...
Duty to Manage Conflicts of Interests: Analysis of the Law
Duty to Manage CONFLICTS — is the law clear to Comply? Introduction In January 2018, Australian Securities and Investments Commission (ASIC) issued Report 562 Financial advice: Vertically integ...
DMCA / Removal Request
If you are the original writer of this dissertation and no longer wish to have your work published on the UKDiss.com website then please: