In part one of this article, we discussed when and how multinational companies can use a noncompetition agreement on their highly skilled employees to protect their confidential information and other intellectual property. In particular, we described five key factors to consider before rolling out noncompete covenants around the world.
In part two, we analyze how noncompetes differ around the world on a region-by-region basis.
Europe: It May Cost You
In continental Europe, noncompetes are typically allowed to protect a company’s legitimate business interests, with some exceptions. There are no common EU-wide legal minimum requirements, but there are some commonalities.
In the EU, you may want to consider the following factors to determine whether a restriction will be enforceable, based on the laws in the specific jurisdiction: (1) limitations on geographic scope; (2) limitations on duration — typically no longer than two years; (3) requirements of the legitimate business interest of the employer; and (4) support for ongoing compensation during the noncompete period. Employers are often shocked by the last factor and its array of implications.
The approaches to restrictive covenants in Europe can vary. At one end of the spectrum, Russia generally prohibits post-termination restrictions such as noncompetition and nonsolicitation agreements. At the other end, the UK generally allows post-termination restrictions, provided that they are reasonable and proportionate to the legitimate business interest that is being protected.
A noncompete agreement in Europe can also cost you. Several EU countries require separate, post-termination compensation in addition to any other termination payments.
In Germany and Sweden, a company will usually be required to pay at least 50% and 60%, respectively, of the employee’s compensation during the restricted period. Employers in France, Italy and Hungary will usually be required to pay 33% of the employee’s salary (or more) during the noncompete period, or more under any applicable collective bargaining agreement.
As a general rule, an employer in the EU cannot pay such consideration upon hire or during employment, e.g., as a sign-on bonus or as part of the employee’s regular salary. Rather, the consideration must usually be paid as separate cash consideration during the restricted period.
Some European countries prohibit employers from unilaterally waiving a noncompete once it is signed, often as a part of the employment agreement. This prohibition is presumably designed to discourage companies from imposing such restrictions too broadly, since the company will be required to pay for it if the ex-employee does not go to a competitor.
Spain and Italy both restrict the right of an employer to unilaterally waive a noncompete restriction. In France, employers are permitted to unilaterally withdraw from the noncompete covenant only if the noncompete or the applicable collective bargaining agreement specifically allows for such unilateral withdrawal. By contrast, the U.K. allows employers to waive the noncompete unilaterally at any time, and does not require separate compensation during the restricted period.
Americas: The Melting Pot
In the Americas,1 post-termination noncompete and customer nonsolicitation provisions are typically unenforceable and require extra effort on behalf of the employer.
Canada recently shifted from an employer-friendly jurisdiction to a jurisdiction where post-termination restraints are increasingly difficult to enforce. Noncompetes are generally permissible if they restrict the employee's activities as minimally as possible and go no further than necessary to protect the employer's legitimate business interests.
Courts will generally not enforce noncompetes against mere employees where a nonsolicitation covenant would have been sufficient. Customer and employee nonsolicits are thus more likely to be enforced than a noncompetition agreement since they generally do not restrict the employee's ability to earn a living.
However, it is important to note that some employers include such provisions, even when unenforceable, for psychological reasons as they can have a deterrent effect and create a sense of moral obligation on the part of an employee.
Latin American jurisdictions vary in their implementation of post-employment noncompetes. In Mexico, the Federal Constitution guarantees individuals the freedom of work, and noncompete and nonsolicitation restrictions are unenforceable. In Argentina, by contrast, noncompetes and nonsolicitation agreements supported by separate consideration are often used and enforceable, and an employer can seek both damages and injunctive relief.
Neither Brazilian nor Argentine law specifically regulate noncompetes, which results in significant enforcement differences. In Brazil, for instance, noncompetes of six to 12 months are regularly enforced (if properly supported by consideration), and some courts upheld restrictions of up to 24 months. On the other hand, Argentine courts regularly enforce restrictive periods of two to five years, and some courts upheld restrictions of up to 10 years under certain circumstances.
In Latin America, where a noncompete agreement is enforceable, separate consideration is usually not required. But note that in Argentina, employees who are subject to a noncompete agreement must be paid separately, and such consideration is more than a nominal amount.
Asia: The Rule of Reason (Usually)
In Asia, many countries permit noncompete agreements, with the notable exceptions of India and Malaysia. Some of the common factors for determining whether post-termination noncompetition and nonsolicitation covenants are enforceable are whether they are (1) reasonable in the light of the facts; (2) supported by adequate consideration; and (3) protecting a legitimate business interest.
In Australia, the noncompetition agreement must protect a legitimate business interest, such as confidential information or business contacts, and be reasonable in geographical scope, restricted activity and duration (typically no more than one year). Hong Kong has similar restrictions, and it is generally difficult to restrict post-employment activities for more than six months.
In Singapore, although the legal requirements are broadly similar to many other jurisdictions, in practice they are often found to be unenforceable unless they meet certain relatively strict requirements. Noncompetes in Singapore must be shown to protect the legitimate proprietary interests of the employer, and go no further than is reasonably necessary to protect those interests, especially in duration and geographical area of coverage.
Separate, post-termination consideration during the restriction period is typically not required in Asia with the notable exception of China. Noncompete agreements in China are generally limited to senior management or senior technical staff, and employers are usually required to pay 30% to 60% of the employee’s salary during the noncompete period, depending on the local city or provincial requirements.
In Korea, additional compensation is not legally required, but is usually a key factor that courts consider in determining whether the restriction is reasonable and therefore enforceable, especially in cases where the employee does not have access to the company's trade secrets or other confidential information.
The original was published on Law360 on 11 February 2020.
1 Please note that this section does not address restrictive covenants in the US Please see, "The Delicate Nuances In New State Noncompete Laws" on Law360.