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Competition Agencies : About Non-Compete Clauses in Employment Contract

6 février 2023, 09:44

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Competition Agencies : About Non-Compete Clauses in Employment Contract

 

On 5 January 2023, the US Federal Trade Commission (FTC)  issued a Notice of Proposed Rulemaking (NPRM) to prohibit employers from entering into non-compete clauses (clause de non-concurrence) with its employees.

The rule proposal follows recent FTC settlements with three companies and two individuals for allegedly illegal non-compete agreements imposed on workers, as according to the FTC the non-compete clause/agreement constitute unfair methods of competition under Section 5 of the FTC Act.‎

 

What are non-compete clauses?

A non-compete clause or agreement is a clause in an employment contract which prohibits an employee from working for a competitor after the termination of a contract of employment. These agreements also prohibit the employee from revealing proprietary or confidential information to any other parties during or after employment.

Employment contracts normally specify a certain length of time during which the employee will be barred from working for a competitor after the termination of their contract of employment. This type of clause allows businesses to mitigate the risk that an ex-employee will bring its confidential and proprietary information, technology or clients data base or information to a competitor post their employment contract.

The validity and enforcement of a non-compete clause vary by jurisdiction and may in certain jurisdictions require the former employer to keep paying the ex-employee a base salary during the non-compete period.

United Kingdom

As a general rule, a contractual term restricting an employee's activities after termination of employment in UK will be void for being in restraint of trade and contrary to public policy, unless the employer can show that:

  • It has a legitimate proprietary interest that the term protects
  • The scope and duration of the non-compete clause is reasonable, having regard to the interests of the parties and the public interest.

 

Avoiding competition per se will not be considered a legitimate interest. Rather protecting trade connections with customers, trade secrets, and other confidential information; the stability of the workforce; and the goodwill in a business, would be considered as legitimate interests.

The Court will look at a non-compete clause on a case to case basis to determine whether such clause should be enforced. The court will take into account factors such as the roles and seniority of the employee, the nature of the employer’s  business, etc.

If a non-compete clause is found to be too wide by the Court, it is likely that such a clause will be declared void in its entirety. However, based on a recent judgement, the Court has introduced the principle of ‘blue pencilling” whereby a minor amendment to a non-compete clause can render such clause reasonable and be enforceable.

In the recent case of Tillman V Egon Zehnder Limited [2019] UKSC 32, Ms Tillman who worked for Egon Zehnder Limited, a search and recruitment company, had a non-compete clause in her employment contract whereby she was not allowed to  “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company”.

Ms Tillman argued that this non-compete clause was too broad since it carried an unreasonable restraint, specially by restricting her from being “interested in any” competitor which would mean that she will also be prevented from holding shares in a competing company.

The Supreme Court considered the Blue Pencil Test (BPT) and upheld the validity of the clause after removing the words “or interested” in order to ensure that the remaining restriction was no wider than necessary to protect the company’s legitimate business interests of Egon Zehnder Limited.

Germany

In Germany, whilst employed, an obligation of loyalty binds the employee to this employer. The law provides for employees not to compete with their employer during their term of employment. However, once an employment has been terminated, the employee is free to compete with former employers as German statutory law does not provide for a general post-termination non-compete obligation.

Should an employer wish to prevent an employee from joining a competitor,  the employer has to agree on a post-contractual non-compete covenant with the employee and such covenant is enforceable if it meets the criteria below as enumerated by German statutory law to be enforceable.

The convenant must be:

  • In writing and bears original signatures;
  • Limited in its territorial application and covered area of business.
  • Limited to a maximum of two years;
  • Provide for a compensation of at least 50% of the employee's most recent remuneration which has to be paid to the employee for every month of the agreed term of non-competition.

A mere post-contractual non-disclosure agreement and non-solicitation agreement, on the other hand, is valid without compensation. However, there exists a fine line between a non-disclosure, non-solicitation and a non-competition covenant.

Hong Kong

In Hong Kong, in the absence of any specific  legislation regarding non-compete clauses, the courts enforce non-compete clauses only if they are necessary to protect the legitimate interests of the employer, and are reasonable in all the circumstances.

France

As is the case in Germany, under French law, the employee owes an obligation of loyalty whilst being employed, but once his employment ends, the employee is free to join a competitor or start his own business which may be in competition with a former employer. However, the employer may impose a non-compete clause on an employee but certain stringent conditions as set by case law must be met, in the absence of any statute relating thereto.

The non-compete covenant must: -

  • be essential to protect the company’s legitimate interest;
  • be limited in its geographical scope and in its duration;
  • take into account the specificities of the duties performed by the employee;
  •  provide for sufficient financial compensation.

 

Mauritius

Mauritius follows  French jurisprudence in matters of non-compete covenants. Time and again the Court has stated that it will enforce non-compete clauses.

There are three pre-requisites for a non-compete clause to be valid, namely:

(a) they are restricted in time and space

(b) they are not too wide in scope as to prevent the employee from earning a living, and (c) that their maintenance was fundamental to protect the legitimate interest of the business of the employer.

[See case of Sew Kwan kan & Another v Happy World Centre (2008) SCJ 301, Mauvilac Industries Ltd V Anseline C.E.C (2018) SCJ 356, Nabridas Ltd V Coombes [2018] SCJ 142, amongst others]

The only element which our Courts have refused to import “wholesale” from French case law is the matter of compensation for the period during which the non-compete remains valid.  In the recent case of Nabridas (supra), the Court reiterated that “Contrepartie financière” does not form part of our jurisprudence.  Justice Gulbul-Mungly stated “It is based on the provisions of the Code de Travail in France and cannot be imported wholesale in our law. Such an additional precondition to the validity of a restrictive covenant for the payment of an “indeminisation” by way of a contrepartie financière, may not be readily imported into our law in the absence of any legislation to that effect”.

 

INTERNATIONAL SCRUTINY OF NON-COMPETE CLAUSES IN THE LABOUR MARKET GROWS

Following the Covid 19 Pandemic which has resulted in a tight labour market across the world,  non-compete clauses are now being closely scrutinised by Competition Agencies or from a competition law perspective, as a means of restricting employees from securing higher pay and preventing businesses from being able to compete and therefore act in breach of competition law.

 

Following  Brexit and  Covid 19 Pandemic, the UK government has recently consulted on the use and possible reform of non-compete clauses, in an attempt to promote competition, innovation and economic recovery. The UK government is considering imposing an outright ban on, or statutory limits on the duration of, non-compete clauses. Though the consultation has ended, the results are still awaited.

There is also indication of the move of the EU Competition Agency to increase their scrutiny on non-compete clauses and no poach agreements. The EU competition commissioner, Margrethe Vestager, recently stated that such agreements “restrict talent from moving where it serves the economy best… [and are] effectively… a promise not to innovate”.

The US FTC is already ahead in regulating non-compete clauses from an anti-trust angle. It recently settled several cases for allegedly illegal non compete clause in violation of section 5 of the FTC Act with respect to unfair methods of competition and have forced them to drop these non-compete restrictions imposed on thousands of employees.

The two companies mentioned in FTC’s complaints are: (1) Prudential Security Inc and Prudential Comman Inc and (2) Glass Container Manufacturers, O-I Glass, Inc. and Ardagh Group S.A

In its complaint, the FTC said the two affiliated Michigan-based companies Prudential Security, Inc. and Prudential Command Inc and their owners, Greg Wier and Matthew Keywell, exploited their superior bargaining power against low-wage security guards, by imposing non-compete clauses, which prohibited them from working for a competing business within a 100-mile radius of their job site for two years post their employment with Prudential and to pay a penalty of $ 100,000 for alleged violation of the non-compete clause.

Prudential went to the extent of suing its former employees and security guard companies in an attempt to block those workers from accepting jobs with a higher pay.

Under the FTC Order, the two companies and their individual owners have been banned from enforcing, threatening to enforce, or imposing noncompete restrictions on any current or past workers and to notify all the relevant workers that they are no longer bound by the non-compete restrictions.  In addition, they have been prohibited from imposing noncompete restrictions in any of their other business ventures, including any future business ventures.

Glass Food and Beverage containers is a highly concentrated market in the United States and new entry in the market in very difficult according to the FTC because of the need for skilled and experienced people in glass container manufacturing. The FTC issued complaints against the two largest manufacturers of glass food and beverage containers in the United States, O-I Glass, Inc. and Ardagh Group S.A as the companies were using non-compete clauses in their employees’ contracts of employment and the FTC noted that the companies’ use of noncompete restrictions is likely to impede the entry and expansion of rivals.

O-I Glass, Inc. According to the FTC, the company used non compete clauses to ban its employees from working for, owning, or being involved in any other way with any business in the United States selling similar products and/or services without the prior, written consent of O-I Glass, for a period of one year post their employment.

In its complaint, the FTC mentions that Ardagh and two of its U.S. subsidiaries, which manufacture glass food and beverage containers, imposed noncompete restrictions on employees to ban them , for two years after leaving Ardagh, from directly or indirectly performing “the same or substantially similar services” to those the worker performed for Ardagh to any business in the United States, Canada, or Mexico that is “involved with or that supports the sale, design, development, manufacture, or production of glass containers” in competition with Ardagh.

The Relief Ordered by the FTC prohibit the companies and, where applicable, their individual owners from enforcing, threatening to enforce, or imposing non competes against any relevant employees. By virtue of the Order, the companies were additionally:

  • banned from communicating to any relevant employee or other employer that the employee is subject to a non-compete agreement;
  • required to void and nullify non-competes clauses without penalizing the relevant  employees;
  • required to provide copies of the order to current and past employees
  • required to provide a copy of the complaint and order to current and future directors, officers, and employees of the companies who are responsible for hiring and recruiting; and
  • required for the next 10 years, to provide a clear and conspicuous notice to any new relevant employees that they may freely seek or accept a job with any company or person, run their own business, or compete with them at any time following their employment.

 

 

The Proposed FTC Rule

The proposed FTC rule for which public comments have been sought, will broadly ban non-compete clauses. It provides that it is an unfair method of competition:

  1.  for an employer to enter into or attempt to enter into a non-compete clause with a worker;
  2. For an employer to maintain with a worker a non-compete clause;
  3. for an employer to represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.‎

The exception to the proposed rule applies to individuals selling a business entity, ownership interests in a business entity, or all of a business entity’s operating assets where the individual restricted by a non-compete clause was a substantial owner, member of partner in the business entity as they agreed to the non-compete agreement.

The proposed rule would require employers to rescind all existing non-compete provisions within 180 days of publication of the final rule, and to provide current and former employees notice of the rescission.

 

Application of the Competition Act in Mauritius

From a Competition law perspective, Mauritian Legislators have given a blanket exoneration to employers from the application of the Competition Act with regard to “Any practice of employers or any agreement by which employers are parties insofar as it relates to the remuneration, terms or conditions or employment of employees.”

This provision in the law has far reaching implications in terms of restrictive practices in the Labour market. A non-compete clause is among more severe anti-competitive behaviours but will not be considered as anti-competitive in Mauritius and therefore may not be scrutinised by the Competition Commission.  

Given the current trend worldwide, policy makers should in consultation with all stakeholders consider whether our statutory provisions relating to non-compete clauses should be revisited.

In the meantime, employers therefore should be cautious when drafting a non-compete clause in an employment contract to strike the right balance between the protection of legitimate business interests and the freedom of an employee to work for a competitor after termination of its contract of employment.

 

 

 

 

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