The non-compete clause in business contracts requires caution
"Clauses agreed upon without due care may bring penalties to companies"
The non-compete clause is a contractual obligation widely used in the business universe and can be perfectly valid and applied to different types of contracts, whether they are governed by labor law, commercial law and even antitrust law. However, a non-compete provision must meet certain requirements, otherwise, it may be declared null, abusive, or worse, result in the application of significant fines to companies.
An agreement not to compete is a restriction whose objective is to avoid the use of information or knowledge acquired or developed during employment or as a result of entering into the contract in question that would facilitate or benefit the competition or lead to the signee becoming a competitor. As said, the clause is valid, once certain limits have been met.
The clause in Labor Law
In labor contracts, the clause can be agreed to during and even in the rescission of the employment relationship and establishes restrictions on the worker in practicing acts that represent a disadvantage to the employer, for example, the diversion of the clientele after the contractual rescission.
Due to the lack of specific legislation regarding the matter, the application and legality of the clause are controversial. However, the Second Chamber views the provision as valid if (i) its duration is reasonable, (ii) there is a consideration greater than 30% of the salary for the worker during the time the obligation is maintained and (iii) ) it has a territorial limit.
The clause in Commercial Law
In the commercial sphere, the clause is usually contained in contracts of sale and purchase of mercantile establishments with the purpose of conferring upon the buyer the conditions necessary for him to enjoy the direct and indirect benefits of the acquisition, assuring him the transfer of the full value of the goods, including material goods and incorporeal assets, such as the know-how and the value of the point of trade.
This clause has been accepted by the Civil Courts whenever it was limited in time, space, object, and was not excessive, mainly in regards to a contractual penalty.
The clause in the Antitrust Law
The antitrust law also recognizes the validity of the non-compete clause, and the use of that convention in business concentrations is quite frequent.
To be acceptable, the clause must be necessary and be directly related to the viability of the business acquired by the buyer. Hence, the duration of the clause, its content and its geographical area of incidence cannot exceed what is considered reasonably necessary to achieve this purpose.
It is also important to emphasize that the non-competition clause, depending on the way it is written, can be derived from an exclusivity clause. An example is when the supplier grants licenses on intellectual property rights related to the distribution of goods or services. Such agreement usually contains a combination of clauses relating to exclusive distribution, as well as a non-compete clause.
In this case, the clause can present more serious issues. Vertical restrictions such as this when agreed upon by companies with a high market share can be considered illegal, leading the relevant authority to impose a fine of up to 10% of the company's sales.
It is true that the non-competition clause is an excellent mechanism for the protection of investment and property against unfair competition and must thus be recurrent in business contracts.
However, the wording of these clauses is still an open matter in the jurisprudence regarding the extension of the aforementioned limits. It must be written according to the characteristics of the specific case, the freedom to contract, and criteria of reasonableness and proportionality strictly related to the viability of the business, otherwise, it may be invalid or imply penalties for the company that imposes it.
For these and other reasons, it is highly recommended that at the time of drafting the non-compete clause attention to detail is paid to the legality of the contractual restrictions.
By: Deborah Batista, BLP Attorney
Deborah has over 6 years of experience in the legal field. She specializes in Competition & Antitrust, Business Law, and Advertising, Marketing & Consumer Protection. In the Competition & Antitrust practice area, her experience includes the analysis of cartel investigation cases, the abuse of power positions, and complex operations of mergers and acquisitions amongst companies. Likewise, she has participated with Brazilian authorities in the elaboration and drafting of guides to prevent anticompetitive behaviors, legislation, and worked on proposals of changes and updates to Brazilian competition legislation.
Article published by El Financiero on October 28th, 2017.