As multinational companies compete for highly skilled employees around the world, they are often confronted with a deceptively simple question: Do they impose a noncompetition agreement on their employees?
This article is part one of a two-part article addressing how multinational companies can use a noncompetition agreement on their highly skilled employees to protect their confidential information and other intellectual property. In part two of this article, we will analyze how noncompetes differ around the world on a region-by-region basis.
A recent, high-profile case that illustrates the potential pitfalls and issues with such agreements is Tillman v. Egon Zehnder Ltd. The UK Supreme Court in 2019 overturned a Court of Appeal decision that had found a former employee’s noncompete agreement unenforceable on the grounds that it was overbroad and could not be remedied by removing the unenforceable language.
Instead, the Supreme Court surveyed over 100 years of jurisprudence on the issue, and found that a poorly drafted noncompete restriction could be saved by deleting the words "or interested" from the agreement, and that the remainder of the noncompete restriction was otherwise enforceable.1
Noncompetition agreements are designed to protect the legitimate business interests of a company. They are typically found in employment contracts — especially outside the US — or proprietary information and inventions agreements. Restrictive covenants typically prohibit an employee or ex-employee from working for a competitor, performing competitive activities (noncompetition), or soliciting the company's employees, customers, suppliers, distributors, etc. (nonsolicitation).
There is no simple answer to whether or how to impose a noncompete agreement on your employees around the world. These are the five key factors that you should consider before rolling out a noncompete agreement on a global basis.
The protection of a company’s IP rights should be balanced against the employee’s right to make a living.
A restrictive covenant contains an inherent tension between a company’s need to protect its proprietary information and other intellectual property, and the employee’s right to make a living by working for a competitor. On the one hand, companies are increasingly trying to use restrictive covenants, especially noncompete agreements, in order to protect their confidential information and intellectual property. On the other hand, many courts and legislatures around the world are pushing back against overbroad and excessive covenants.
This tension plays out in a variety of ways in different jurisdictions. Some, like California, generally prohibit or disfavor noncompetes.
Some require that separate consideration be paid during the term of the noncompete. Others place limits on the duration, scope or the type of employee that can be restricted. All of the limits on noncompetition agreements arise from this tension between protecting a company’s legitimate business interests and the right of an employee to earn a living.
One size does not fit all.
There is no such thing as a global restrictive covenant that is compliant and enforceable in every jurisdiction around the world. The basic structure and terms of a restrictive covenants vary significantly by jurisdiction.
Violating the local requirements will typically render the entire covenant unenforceable. For example, nominal or reasonable consideration that is paid during employment is typically sufficient in the United States. Several jurisdictions, such as Argentina, Belgium, China, France and Germany require separate payment during the post-termination restriction period. Such post-termination payments can range from 30% to 70% of the employee's salary.
Geographical scope of time limitations will also vary, and can depend on the type of employee. In a 2013 case in Hong Kong, the court found that a one-half-mile geographical restriction for a hair stylist was excessive and unenforceable, presumably because most people in Hong Kong will not travel more than one-half of a mile to get their hair cut.2
The duration of the restriction can also vary depending on the country. In the UK, a two-year limitation will usually be considered unreasonable, whereas in China a noncompete of up to two years is permitted as a matter of law. Although Singapore does not prohibit noncompetes on junior employees per se, in practice it is very rare for a court to find any significant restrictions on a junior employee’s ability to work for another company to be reasonable.
Noncompetes should be kept separate from employee’s global equity awards.
We generally recommend that equity awards granted by an offshore issuer (typically a US company) be kept separate from the employee’s terms and conditions of local employment. If structured correctly the company may argue the equity is not part of local compensation, and therefore should not be included in the calculation of local labor benefits, including severance.
In addition, there are certain jurisdictions where keeping equity separate from local employment will avoid income tax withholding and employee and employer social charges, which would not otherwise be the case. Since a restrictive covenant and a noncompete in particular are a part of an employee’s terms and conditions of employment, we recommend they not be included in an employee’s equity award for the reasons set forth above.
Another problem with including a noncompete covenant in an employee equity award is the risk the offshore issuer will be considered a local employer by a court in the jurisdiction where the employee works. A global equity plan will typically have a choice-of-law provision that is designed to require that all disputes as to the equity plan be resolved in the issuer’s home jurisdiction. But a local restrictive covenant creates a risk that the entire plan and equity awards granted thereunder will be subject to the jurisdiction of a local court where the employee works.
Adding a restrictive covenant in an equity award can also be problematic in countries that require that additional consideration be paid to the employee during the term of the noncompete in order for it to be valid. Under German law for example, post-termination noncompete agreements are unenforceable unless the employees receive 50% of their last remuneration including voluntary gratification, and equity alone is not considered sufficient consideration because of its volatile economic value.3
To the extent that a company has a strong preference for including a restrictive covenant in a global equity award, we suggest that it be limited to a forfeiture of future vesting, and not attempt to claw back awards that have already vested or been exercised. Inserting a provision to allow for specific enforcement, injunctive relief or other liquidated damages would not be recommended for the reasons discussed above.
Noncompetes can be difficult to enforce.
Noncompete agreements can be notoriously difficult to enforce. The ability to obtain relief by way of an injunction or damages can vary tremendously across jurisdictions and even within countries. Detecting a breach can be difficult in the first place, and the time from detection to enforcement (absent immediate, equitable relief) can render the restrictive covenant moot.
Since actual damages can be difficult to prove, liquidated damages clauses can sometimes be used, where permitted and within the requirements of local law. If the breach involves the theft of confidential information or trade secrets, employers may consider engaging with the local authorities on a possible criminal complaint.
Don’t impose a noncompete unless you are serious about enforcing it.
When it comes to restrictive covenants, local restrictions abound. It is critical for restrictive covenants to be localized if global employers want them to ever be locally enforceable. Most countries have developed a local understanding of what is considered reasonable under local law. A noncompete provision considered reasonable and enforceable in France may be considered unreasonable and unenforceable in Germany.
Although some countries will adjust the content of a poorly drafted provision to make it work — often referred to as blue penciling — like the U.K. for instance, most foreign jurisdictions will strike entirely broad or unclear restrictive covenants.
Companies will sometimes say that they want to impose a uniform, global restrictive covenant purely for its deterrent effect, knowing that it will likely be unenforceable since it is not tailored to a specific jurisdiction. This is a mistake.
If a restriction is worth imposing, it should be properly tailored under local law so that it is enforceable. Imposing an unenforceable or poorly drafted restrictive covenant can have the opposite effect. A restriction that is not consistent with local law signals that the company is not serious about enforcing it, and can undercut an employer’s credibility in a local court in the event of any dispute.
In part two, we will discuss certain country-specific and global trends for non-U.S. employee restrictive covenants.
The original was published on Law360 on 10 February 2020.
1 See Tillman v. Egon Zehnder Ltd.  UKSC 32.
2 See Union Gain Ltd. v. Chu Wilton Lucas , DCCJ 2383/2013 (29 August 2013), Judge Wilson Chan.
3 An alternative to restrictive covenants in equity awards is to make the former employee a consultant for a period of time following his or her employment, during which he or she may not compete against the company.