Sponsored thought leadership: Non-compete covenants in Philippine employment agreements – current views and future direction

With the global war for talent and ‘star’ employees being branded as assets, non-compete agreements have emerged as a contentious subject for most industries.

Non-compete agreements are employment contracts that limit the ability of an employee to join or start a competing firm after a job separation.¹ Parenthetically, these agreements limit the post-employment opportunities of employees within a set industry over a certain period of time.

Global research has suggested an increase in both interest and caution from both governments and private enterprises on non-compete agreements due to concerns over whether labour markets have become less competitive because restrictive agreements are preventing employees from engaging with employers within the same industry.²In the Philippines, however, companies are starting to consider enforcing their non-compete clauses through court action.

Instructions are sparse from the Philippine Supreme Court, through case law, on the validity, interpretation, and application of non-compete agreements. The Philippine local courts, thus, remain malleable on how they will rule on the validity of these agreements.

Article 1306 of the Philippine New Civil Code provides that parties to a contract may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

Relatively, article 1159 of the same Code also provides that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Courts cannot stipulate for the parties nor amend their agreement where the same does not contravene law, morals, good customs, public order or public policy, for to do so would be to alter the real intent of the parties, and would run contrary to the function of the courts to give force and effect thereto. Not being contrary to public policy, non-compete agreements, even in relation to employment, has the force of law between them, and thus, should be complied with in good faith.

In 1994, the Philippine Supreme Court in Dai-Chi Electronics Manufacturing vs Villarama,³ has declared that non-compete agreements with a stipulation that a violation thereof makes the employee liable to his former employer for damages, refers to post-employment relations of the parties, thus falls outside the jurisdiction of labour tribunals. A claim to recover damages for the violation of a non-compete agreement is a cause of action that falls under the realm of Civil Law, and therefore rests upon regular courts.

The Philippine Supreme Court in the Dai-Chi case carves out a distinction between the contractual obligations of parties during the lifespan of an employment relationship, and after its severance. The Philippine Labour Code was initially interpreted to allow the employer or the employee to seek refuse under labour tribunals for the entire universe of money claims arising from an employment relationship, the terms of which are expounded in an employment contract. The Dai-Chi ruling, however, removes from the jurisdiction of labour tribunals the enforcement of monetary claims for the violation of the non-compete clause in employment agreement, precisely because it already covers the post-employment relations of parties.

The Philippine Supreme Court has had limited occasion to review and rule upon validity of a non-compete agreement in an employment contract. In Rivera vs Solidbank Corp.,⁴ the Supreme Court emphasised that courts are burdened ‘to carefully scrutinise all contracts limiting a man’s natural right to follow any trade or profession anywhere he pleases and in any lawful manner.’ Thus, in determining whether the contract is reasonable or not the restriction of trade, the trial court should consider 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) whether the time and territorial limitations contained in the covenant are reasonable; and (e) whether the restraint is reasonable from the standpoint of public policy.

In the Riveracase, it was held that the post-retirement competitive employment ban on a bank employee is unreasonable because it has no geographical limits; the employee is barred from accepting any kind of employment in any competitive bank within the proscribed period on one year. On the other hand, in Century Properties vs Babiano and Concepcion,⁵the Supreme Court upheld the non-compete clause contained in the employment contract notwithstanding the absence of a specific geographical limitation, even finding that such clause affords a fair and reasonable protection to the employer.

The jurisprudential teaching is that the employer is burdened to establish that a restrictive covenant barring an employee from accepting a competitive employment after retirement or resignation is not an unreasonable or oppressive, or in undue or unreasonable restraint of trade, thus, unenforceable for being repugnant to public policy. 

It would thus seem that although there are now considerations in the determination of the validity of an employment agreement’s non-compete clause, there remains no hard and fast rule laid down by the Supreme Court on the ‘reasonable’ criterion. The vague overarching consideration of ‘public policy’ remains the controlling factor, thus con-compete agreements must not appear repugnant thereto.

Tiu v Platinum Plans Phils. Inc.,⁶a case promulgated a year after Rivera, succinctly ruled that a non-involvement clause is not necessarily void for being in restraint of trade as long as there are reasonable limitations as to time, trade, and place. The primary consideration by the Philippine Supreme Court in that case is that the restriction in the non-compete agreement carried a time limit of only two years and it limited the prohibition to work for another company to a specific trade.

It would appear that local courts will determine the validity of a non-compete agreement in an employment contract on a case-by-case basis. The general trend, however, appears to favor the enforcement of restrictive covenants, as long as they fit the considerations set in the Rivera and Tiucase.

A recent study by the World Law Group ⁷revealed that in most of the jurisdictions, non-compete agreements are enforceable at least in certain respects, to the extent they are necessary for the protection of the employer’s legitimate interests and comply with a certain number of requirements. In the United States, there appears to be a trend towards limiting, if not banning, the use of non-compete restrictions on workers at both the state and federal levels because they stifle ‘innovation’.⁸ In 21 July 2021, US President Biden issued an Executive Order on promoting competition in the US economy in which the Federal Trade Commission was ordered to restrict the unfair use of non-compete clauses that may unfairly restrict worker mobility.

Moving locally, the trend in the Philippines, running quite counter to other jurisdictions, seems to be the protection of business interests via litigation against former employees. Philippine case law is slowly but surely becoming more robust in shaping a legal landscape that is more favourable to employers, while having an overarching consideration of ‘public policy’ Employers should carefully monitor legal developments and also shore up their internal business protection practices to prevent issues from arising from the enforcement of non-compete agreements.

The firm, Villaraza and Angangco, provides comprehensive and strategic representation to businesses and employers who find themselves lost in navigating the Philippine legal landscape when enforcing the non-compete clauses in their employment agreements and contracting arrangements. We have an ongoing representation for one of the leading events agencies in the Philippines in a case involving the enforcement of restrictive covenants, ie., non-competition and non-disclosure clauses, stipulated in its former employees’ employment agreements. This is an intricate legal dispute involving the enforcement of non-competition and non-disclosure clauses against their former employees who transferred to an entity engaged in direct competition with their business and solicited business from a number of their key clients.