Are non-competition agreements anticompetitive?

A non-competition agreement or clause in a contract, by its nature, restricts an individual’s ability to compete in a particular industry or field for a certain period of time. It may also restrict an individual’s ability to work for a competing company or prevent would-be entrepreneurs from forming competing businesses.

Legality in the Philippines

A non-competition agreement will state that an employee shall be prohibited from being employed, participating in, and having any involvement and interest in any activity, business or entity, including one that they themselves establish, that is engaged in the same activity or business which competes with the employer.

In the Philippines, there is no law specifically prohibiting such non-competition agreements. On the occasion when the Supreme Court has been called to decide upon their legality, the court has decided to allow or disallow such agreements taking into consideration the following factors:

a. Whether the covenant protects a legitimate business interest of the employer
b. Whether the covenant creates an undue burden on the employee
c. Whether the covenant is injurious to the public welfare
d. The time and territorial limitations contained in the covenant are reasonable
e. The restraint is reasonable from the standpoint of public policy.

(Rivera vs. Solidbank Corp, G.R. No. 163269, April 19, 2006)

In the case of Tiu v. Platinum Plans Phils. Inc. (PPI) (G.R. No. 163512, 28 February 2007), the Supreme Court declared that a non-involvement clause is not necessarily void for being in restraint of trade for as long as there are reasonable limitations as to time, trade, and place.

In that case, Tiu was a senior assistant vice president of PPI with a five-year contract which included a non-involvement clause where she agreed that she will not engage in or be involved with any corporation, association or entity, whether directly or indirectly, engaged in the same business or belonging to the same pre-need industry within two years from her separation. However, soon after she left PPI, she was employed with another company in the same industry as PPI.

The Supreme Court ruled that Tiu violated the non-involvement agreement ordering her to pay PPI damages. The court considered that the restriction carried a time limit of only two years and it limited the prohibition to work for another company to a specific trade, that of any pre-need business similar to PPI’s.

These limitations were found to be reasonable as to time and place.

There are cases where the Supreme Court had declared non-competition agreements invalid.

In one of the earlier cases on record, the Supreme Court struck down a non-competition clause as constituting an unreasonable restraint of trade and as against public policy for having no definite time limit as the ex-employee was prohibited from engaging in any business or occupation in the Philippines for five years without the permission of the employer. (Ferrazzini v. Gsell, 1916)

There is also the case where the employee was prohibited from engaging in any business similar to that of his employer for a period of one year. In that case, the Supreme Court declared the restriction void because the employer was found to be engaged in various business activities while the employee’s work was only dealing with the purchase and export of abaca. (G. Martini, Ltd. v. Glaiserman)

Outside the Philippines

With regards other jurisdictions, it is notable that Chile, India, Russia, Mexico, Vietnam, Germany, Israel, Sweden and Brazil are some countries which have for the most part prohibited non-competition clauses..

Recently the issue of non-competition agreements has become a hot topic in the USA.

The Federal Trade Commission (FTC) has proposed to impose a ban on non-compete clauses which will prohibit employers from imposing non-compete provisions on their workers.

In its statement, the FTC claims that the practice of imposing noncompetes upon workers is widespread and often exploitative, having the effect of suppressing wages, hampering innovation, and blocking entrepreneurs from starting new businesses. It estimates that 18 percent of US workers are covered by non-competition agreements and that banning non-compete clauses could increase wages by nearly $300 billion per year, expand career opportunities for about 30 million Americans and save consumers about $148 billion in health costs yearly. Further the FTC estimates that there could be double the number of companies in the same industry founded by a former worker.

Noncompetes also harm competition in the labor market by blocking workers from pursuing better opportunities with better wages and conditions. It also harms employers and businesses by preventing employers from hiring the best available talent which they need to build and expand.

Noncompetes also hinder innovation and business dynamism by preventing would-be entrepreneurs from forming competing businesses and inhibiting workers from bringing innovative ideas to new companies. This ultimately harms consumers such as in markets with fewer new entrants and greater concentration where consumers can face higher prices. (https://www.ftc.gov/news-events)

Philippine Competition Act

Here in the Philippines, we have Republic Act No. 100667, otherwise known as the Philippine Competition Act (PCA) which was enacted fairly recently in 2015. It is the country’s primary competition law which defines, prohibits, and penalizes anti-competitive practices, with the aim of enhancing economic efficiency and promoting free and fair competition in trade, industry, and all commercial economic activities. By virtue of this law, the Philippine Competition Commission was created and it is the agency mandated to implement the PCA and the main authority on competition-related matters in the country.

Section 15 of the law prohibits abuse of dominant position by an entity by engaging in conduct that would substantially prevent, restrict or lessen competition, some acts of which are:

a. Imposing barriers to entry or committing acts that prevent competitors from growing within the market in an anti-competitive manner
b. Imposing restrictions and conditions not to deal with competing entities, where the object or effect of the restrictions is to prevent, restrict or lessen competition substantially

The Philippine Competition Act, or anti-competition law, is a relatively new but growing field in the country.

With regards non-competition agreements, would they be considered  anticompetitive or an act of abuse of dominant position if such a restriction were imposed by a dominant market player, even if the restrictions provide for reasonable limitations as to time, trade and place ?

For example, what if company X, the biggest coffee retail chain in the country, prohibits its employees from being employed by or to be connected with other coffee shops for one year after separation or, if the biggest BPO company would impose the same restriction on its employees depriving other BPOs in the country access to  a skilled talent pool of workers. Other companies in the industry will be deprived of competent workers needed to expand their business or fthey will need to spend time and resources to train workers.

The restrictions may also hinder innovation and business dynamism by preventing would-be entrepreneurs from forming competing businesses and inhibiting the formation of innovative ideas.

To its credit, the current administration has appointed excellent, highly-skilled, and respected people to lead the Philippine Competition Commission, which on its own already has professional and skilled staff and personnel.

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, teaches law at the MLQU School of Law, and an Arbitrator of the Construction Industry Arbitration Commission of the Philippines. He may be contacted at [email protected] The views expressed in this article belong to the author alone.)

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