Competitive employment ban: Void for restraint of trade?

It is not uncommon for an employer to agree with his employee on restrictive employment covenant barring the latter from accepting a competitive employment after he resigns or retires from his employ. An issue then arises whenever such an employee assails the validity of the covenant on grounds of public policy. The validity of contracts in restraint of trade, however, is to be judged according to the circumstances by taking into account the interest, first, of the public which is deprived of the restricted party’s industry and, second, the interest of the party himself who is precluded from pursuing his occupation and, thus, being prevented from supporting himself and his family. Whether a covenant prohibiting competitive employment will be upheld as valid and enforceable in court will depend on the reasonableness of such covenant – if it is not unreasonable or oppressive, or an undue or unreasonable restraint of trade. In one case, an employer engaged in the manufacture of ladies’ embroidered underwear for export prohibited his employee from entering into or engaging himself, or permitting any other person under his control to enter into or engage, in a similar or competitive business anywhere within the Philippines for a period of five years, considering that such employee had access to all parts of the employer’s establishment, including its business methods and business connections. After the employee severed his employment, he became a manager of an underwear company engaged in the same class of goods as that of his previous employer with the same export market. The Supreme Court affirmed the covenant as valid, as it did not constitute an unreasonable restraint of trade (Ollendorff vs. Abrahamson, 38 Phil 585 [1918]). Although not involving an employee, a similar restrictive covenant was held valid, in the 2005 case of Consulta vs. Court of Appeals, et al., (453 SCRA 732). Here, a managing consultant of a company engaged in the health care business was prohibited from engaging in activities, or becoming affiliated in any capacity with other companies or organizations, which compete or have the same business as the company he was providing consultancy services to within one year from date of the termination of his services. The Supreme Court once again affirmed that such a stipulation was valid as it did not absolutely prohibit the consultant from engaging in any other business, or from being connected with any other company, for as long as the business or company did not compete with the company he was providing consultancy services to. The Court concluded that the exclusivity provision was a reasonable restriction designed to prevent acts prejudicial to one’s business interest.

In the recent 2006 case of Rivera vs. Solidbank Corp. (G.R. No. 163269, April 19, 2006, First Division), an issue was brought to the Supreme Court involving the validity of a covenant entered into by a manager of a bank prohibiting the latter from seeking employment with any competitor bank or financial institution within one year from the date of his retirement. The Supreme Court, through Justice Romeo J. Callejo Sr., refused to affirm as valid the said covenant in the absence of evidence to prove the reasonableness thereof. On its face, the High Court observed that the post-retirement competitive employment ban is unreasonable because it has no geographical limitations. Although the period of one year may appear to be reasonable, the matter of whether the restriction is reasonable or not cannot be ascertained with finality solely from the terms and conditions thereof. Thus, the Court ruled that, in a case where an employee assails such covenant as against public policy, the employer has to adduce evidence to prove that the restriction is reasonable and not greater than necessary to protect the employer’s legitimate business interest. In ascertaining whether a restrictive covenant is valid and enforceable or not, the court must have before it evidence relating to the legitimate interest of the employer which might be protected in terms of time, space and the types of activity proscribed. In determining whether the contract is reasonable or not, the following factors will be considered by the courts: (a) whether the covenant protects a legitimate business interest of the employer; (b) whether it creates an undue burden on the employee; (c) whether it is injurious to the public welfare; (d) whether the time and territorial limitations are reasonable; and (e) whether the restraint is reasonable from the standpoint of public policy.

A competitive employment restriction may not pass the test of reasonableness if the duties of an employee would not give him an insight into the general scope and details of his employer’s business. Such a covenant will be arbitrary and wholly unnecessary for the protection of the employer.

(The author is the Resident Partner of the Cebu Branch of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW). He is also a Professor of Labor Law at the University of San Carlos College of Law, Cebu City. He may be contacted at tel. no. (032) 2311449; fax no. 032-231-3614.)