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As a result of the dearth of express legislation, the current and longstanding Philippine standard on the enforceability of employment non-compete agreements is largely based on Supreme Court precedents.

These rulings interpret the principle of contractual autonomy under the Civil Code of the Philippines. They allow contracting parties 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.

Century-old jurisprudence

In Ferrazzini v Gsell (1916), the Supreme Court first held that an agreement prohibiting an employee from entering into the employ of any enterprise in the Philippines within five years from termination is unenforceable.

The court reasoned that the contract ¡°is clearly one in undue and unreasonable restraint of trade and therefore against public policy; is limited as to time and space but not to trade; is not necessary for the protection of the (employer)¡±; and ¡°would force the (employee) to leave the Philippines in order to obtain a livelihood¡±.

In Ollendorff v Abrahamson (1918), the court considered the agreement of an employee not to enter into, or engage himself directly or indirectly in, a similar or competitive business to that of the employer anywhere within the Philippines for a period of five years from the contract date.

Unlike the blanket ban in Ferrazzini, this restriction was limited to similar or competitive businesses.

The court adopted ¡°the modern rule that the validity of restraints upon trade or employment is to be determined by the intrinsic reasonableness of the restriction in each case, rather than by any fixed rule, and that such restrictions may be upheld when not contrary to the public welfare, and not greater than is necessary, to afford a fair and reasonable protection to the party in whose favour it is imposed¡±.

It further held that the restraint imposed in the contract was not unreasonable.

In G Martini (Ltd) v Glaiserman (1918), similar to Ollendorff, the contract provided that the employee ¡°shall not engage in any business, either for himself or others, similar to the business carried on by his present employer, or in which his employer may be engaged at that time, for one year at least¡±.

The court, however, held that the contract was void and the limitation on the future activities of the employee was not reasonably necessary to the protection of the employer, considering:

1. 1. The evidence presented that the employer corporation was engaged in a ¡°great many branches of commercial activity¡± and the ¡°prohibition laid upon (the employee) is not limited to any particular branch of (the employer¡¯s) business¡±; and
   2. The prohibition was applicable even if the employee resigned because of the misconduct of the employer.

In Del Castillo v Richmond (1924), the court reaffirmed the reasonableness standard, holding that: ¡°In all cases like the present, the question is whether under the particular circumstances of the case and the nature of the particular contract is, or is not, unreasonable. Of course, in establishing whether the contract is a reasonable or unreasonable one, the nature of the business must also be considered.¡±

Current jurisprudence

The validity and enforceability of non-compete agreements was revisited in Rivera v Solidbank Corp (2006). The court cited Ferrazzini and remanded the case to the trial court to determine whether the following restrictive covenant was reasonable: ¡°I hereby expressly undertake that I will not seek employment with any competitor bank or financial institution within one year from 28 February 1995.¡±

The Supreme Court observed that, ¡°on the face of the undertaking, the post-retirement competitive employment ban is unreasonable because it has no geographical limits¡±.

It directed the trial court to consider:

1. 1. Whether the covenant protects a legitimate business interest of the employer;
   2. Whether the covenant creates an undue burden on the employee;
   3. Whether the covenant is injurious to the public welfare;
   4. Whether the time and territorial limitations contained in the covenant are reasonable; and
   5. Whether the restraint is reasonable from the standpoint of public policy.

In Tiu v Platinum Plans Phils, Inc (2007), the Supreme Court cited Ferrazzini, G Martini (Ltd) and Del Castillo, and held that ¡°a non-involvement clause is not necessarily void for being in restraint of trade as long as there are reasonable limitations as to time, trade and place¡±.

Until the legislature intervenes, the above-mentioned judicial standards shall continue to govern the validity and enforceability of non-compete agreements.

This article is intended for information purposes only and does not constitute legal advice circumstances warrant.

Gerardo Maximo V Francisco is a partner at MTF Counsel in Metro Manila

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