Philippines: Recent Developments in the Validity and Enforceability of Non-Compete Clauses in the U.S., U.K., Australia, and the Philippines

In the last two (2) years, non-compete agreements have come under intense scrutiny in the United States (“U.S.”), the United Kingdom (“U.K.”), and Australia. With the recent issuance of the U.S. Federal Trade Commission (“FTC”) of its final rule that nearly bans all forms of non-compete agreements in the U.S., last year’s announcement by the UK government to limit the length of non-compete agreements to three (3) months, and identification by the Australian government of non-compete agreements as hampering job mobility, Philippine jurisprudential and legislative thinking on non-compete agreements may likewise change in the years to come. Thus, employers and employees alike in the Philippines may need to take a closer look at these developments in order to prepare themselves for any change in the Philippine legislative and policy framework on non-compete agreements.

In particular, on 23 April 2024, the U.S. Federal Trade Commission (“FTC”) issued a final rule banning nearly all non-compete clauses throughout the United States.[1] The final rule was published on the Federal Register on 7 May 2024 and will go in effect on 4 September 2024.[2] The final rule comprehensively prohibits employers within the jurisdiction of the FTC to enter into non-compete clauses with workers on or after the final rule’s effective date on 4 September 2024. As for existing non-compete clauses that were entered into before the final rule’s effective date on 4 September 2024, the FTC adopts a different approach for senior executives than for other workers. Specifically, for existing non-compete clauses with workers, the final rule would render these unenforceable on or after the effective date. In contrast, the final rule would allow existing non-compete clauses with senior executives (defined as those earning over $151,164 annually and whose position entails policy making) to remain in force even after the effective date.[3]

Meanwhile, although the UK government has yet to make good any of its proposed reforms about a year ago, or on 12 May 2023, to limit the length of non-compete agreements to three (3) months,[4] the UK’s Competition and Markets Authority (“CMA”) has nonetheless published a research report on 25 January 2024, which generally found that there is evidence post-termination non-compete clauses in employment contracts are common in the UK. Given this, CMA Chief Executive Sarah Cardell states that such a “widespread prevalence of non-competes across the economy could act as a barrier to job switching.”[5]

Similarly, in the Australian Government’s 2023 Employment White Paper published on 25 September 2023, non-compete agreements were identified as exerting a “chilling effect” that discourages employees from switching jobs, hampering competition, wage growth, and business innovation and productivity.[6]

Based on these developments, there seems to be an increasing trend in different jurisdictions to regulate non-compete agreements, which, historically, have been legally allowed as reasonable restrictions on an employee’s ability to pursue business, work, or any other activity that competes with their employers.

In the Philippines, however, this recent trend against non-compete agreements is yet to be seen, at least in its legal and jurisprudential framework. Instead, as of writing, prevailing Philippine case law confirms that non-compete agreements are legally valid and binding in the country as a contractual stipulation under Philippine civil law, and not under its labour code. This is because the Philippines consider non-compete agreements as a species of the parties’ contractual autonomy or freedom to 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.[7] It is also for this reason that non-compete agreements are properly enforced before the regular courts in the country, and not before its labour tribunals.

Although Philippine legal thought on non-compete agreements is more rooted in civil law than social legislation, the Philippine Supreme Court is mindful of the need to balance the interests of employers and employees. Thus, in the case of Rivera v. Solidbank Corp.,[8] the Philippine Supreme Court established that for a non-compete clause to be valid and enforceable, the following factors shall be considered: (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. These factors are tested on a case-to-case basis, and, thus, a nuanced and deep understanding of Philippine case law is necessary for one to fully appreciate its fullest contours.

For example, in Tiu v. Platinum Plans Phil Inc.,[9] the Philippine Supreme Court ruled the non-compete agreement therein was valid because the limitation as to time was only two (2) years from the date of the employee’s separation from his employer, and the limitation as to trade was valid since the employee is only prohibited from engaging in any pre-need business akin to that of Platinum Plans. Meanwhile, in Century Properties v. Babiano and Concepcion,[10] the validity of a non-compete agreement was affirmed even though it has no geographical limitation.

With respect to its civil law characteristics, in Portillo v. Rudolf Lietz., Inc.,[11] the Philippine Supreme Court affirmed that the breach of a non-compete agreement is a civil law dispute, and not a labour law issue. Thus, in Elliot v. Pope,[12] the Philippine Supreme Court even ruled that restrictive covenants are valid even against successors-in-interest, which is characteristic of contracts under Philippine civil law principles. In particular, the Supreme Court held that since the petitioner therein, Elliot, acquired a property from a company that executed a non-compete clause stipulating not to operate a hotel, dive shop, or restaurant within 200 meters from another entity; then, being mere assignees of said property, Elliot was also bound by the non-compete clause as a successor-in-interest.

Likewise, being a contract rooted in civil law, the Philippine Supreme Court ruled in CB Richard Ellis Philippines, Inc. v. Lynch[13] that the liability for the payment of liquidated damages on account of violation of a non-compete clause cannot be offset with wages in an employment contract, as this is not the “debt” contemplated under the exception provided for under Article 1706 of the Civil Code, in relation to Article 113 (c) of the Labour Code.

As shown above, and in contrast to the developments in the U.S., U.K., and Australia, Philippine law continues to maintain that restrictive covenants, such as non-compete clauses, are valid provided there is a reasonable restraint of trade for the part of the employee, and that it is reasonable as to time and/or geographical limitations, but not necessarily as to all indicators. The guidelines provided by the case of Rivera v. Solidbank and its subsequent applications are still leading and would serve as a good measure to ensure validity of restrictive covenants in employment contracts.

Although the Philippines continues to adhere to the validity of such restrictive covenants, it is still advisable for Philippine employers and employees to keep themselves abreast of key legal developments and to prepare for any shifts in Philippine legal regime and policies.

Villaraza and Angangco provide comprehensive and strategic representation to businesses and employers who find themselves lost in navigating the Philippine legal landscape when enforcing non-compete agreements and other restrictive covenants.

[1]      See https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes (last accessed 15 July 2024).

[2]      See https://www.federalregister.gov/documents/2024/05/07/2024-09171/non-compete-clause-rule (last accessed 15 July 2024).

[3]      See https://www.federalregister.gov/documents/2024/05/07/2024-09171/non-compete-clause-rule (last accessed 15 July 2024).

[4]      US Trade Commission Votes To Ban Non-Compete Clauses. 2024. Available at: https://www.personneltoday.com/hr/ftc-non-compete-ban-us/

[5]      See https://www.gov.uk/government/speeches/the-cmas-research-on-competition-and-uk-labour-markets (last accessed 15 July 2024).

[6]      See https://treasury.gov.au/review/competition-review-2023/non-compete-clauses (last accessed 15 July 2024).

[7]      Art. 1306, The New Civil Code of the Philippines

[8]      G.R. No. 163629, 19 April 2006

[9]      G.R. No. 163512, 28 February 2007

[10]     795 SCRA 67 (2016).

[11]     G.R. No. 196539, 10 October 2012

[12]     G.R. No. 237474 (Notice), 23 April 2018

[13]     G.R. No. 256180 (Notice), 14 September 2021