Friday, November 16, 2012

Non-Competition Clauses in Employment Contracts

Employment contracts often contain a non-compete clause which purports to restrict an employee’s future conduct. Historically, non-compete covenants have been regarded as unlawful restraints on trade and, hence, were unenforceable in most jurisdictions. However, increasingly the need to protect the employer’s legitimate business interests is being widely recognized.

Partial Restraint May Be Valid

While a clause constituting a blanket bar on the employee from joining any other employer would still be an unlawful restraint, a partial restraint genuinely aimed at protecting the employer’s legitimate business interests would be considered valid in some jurisdictions. The covenant must balance the protection of the employer's business interests against the employee's right to earn a living.

A partial restriction could be better justified by an employer if its scope is limited and satisfies the following criteria:
  • it is aimed at protecting the assets, information, or skills acquired by the employee during the course of employment (e.g., a high premium intellectual property, customer list, source code etc.); 
  • it is applicable only for a clearly defined and limited period (rarely exceeding three years);
  • its applicability is narrowed down to certain geographical locations; and
  • it is made industry-specific.
In other words, the restriction on the employee’s right to compete should be no greater than what is necessary and lawful to protect the employer’s business interests.

Measures to Address the Breach of Covenant

A breach of the covenant can be contractually addressed by explicitly stating that the employer has the right to sue the breaching employee for compensatory damages (including loss of profit). In some jurisdictions, it is possible to seek an injunction from the court to restrain the employee from joining a competitor pursuant to a non-compete clause in the employment contract.

Under Omani law, Article 50 of the Commercial Code states that a merchant, X:

(a) cannot induce the workers of merchant Y to assist X in enticing clients away from Y; and
(b) cannot induce the workers of merchant Y to leave Y’s employment and enter into X’s employment and disclose to X the secrets of Y.

The law regards these acts as unlawful trade practices warranting compensation. Although this legal provision is intended to address a business to business scenario and not an employer-employee relationship, an aggrieved employer could attempt to seek recourse in the Courts based on this provision.

To conclude, the validity of a non-compete clause is not addressed by the Omani labour law. However, we believe that the Courts in Oman may, in future, be willing to find in favour of employers who rely on non-compete clauses.