Non-Compete Clauses: What Employers and Employees Should Know

Introduction

In my opinion, every business has trade secrets to protect. It could be a certain type of marketing strategy, or a client list. It could be proprietary information that gives the business an edge over its competitors or even the reason why the business is located where it is. Basically, the trade secret can be as varied as the various types of businesses themselves. However, one thing they all will have in common is the need to protect such trade secrets or information. The success of business organizations often depends on how well they keep sensitive or confidential information and that is why employers use various forms of protections to make sure sensitive information is protected.

Freedom of labour movement is a hallmark of any healthy capitalist society, and so businesses are always hiring and firing. However, with this comes inherent risks. One of the main ones is an employee becoming a competitor in the same market or an employee going to work for a competitor. What this means is that such an employee would have at his disposal, confidential and sensitive information from their former employers they can use to their advantage in their new business or with their new employers. This is where non-compete clauses/agreements come in as employees have used this to protect their businesses.

Non-Compete Clause in Employment Agreements

So, a non-compete clause can also be referred to as a “covenant not to compete” or a “non-solicitation clause” and it can be used as a clause in an agreement or as a standalone agreement. I will be focusing on them in employment agreements.

A non-compete clause is basically a clause in an agreement wherein an employee consents not to engage in a similar occupation as the current employer or to divulge confidential information belonging to the current employer. Such clauses are usually utilized by employers when hiring employees that will handle sensitive information for the business or when the organization intends to invest in the employee (by way of training and the likes) and the organization wishes to recoup back its investments in such an employee by ensuing the employee stays on for a certain number of years.

Non-compete clauses can form a major part of employment agreements and the restrictions are usually in two phases. One phase is during the pendency of the employment, while the other phase continues to operate after the termination of the employment (at least for some years). The main thing however, is that such clauses will restrict the right of the employee to engage in a particular type of business activity within a specified locality and within a given time frame.

Generally, phase one is easy to enforce and less complex to litigate or fight. However, the problem starts with the enforcement of phase two. In reality, the employee is no longer employed to the employer and some have argued such an employee should not be bound by such “restraints of trade”. I will argue however that an organization deserves to protect itself against any employee that could potentially sabotage its business.

Pros & Cons

Before we talk about the enforceability of non-compete clauses under Nigerian law, lets look at some of the advantages and disadvantages of non-compete clauses.

The most obvious advantage is that it can prevent valuable employees from leaving to work with a competitor. If an employee should leave or start their own competing business, a non-compete clause can also save businesses from the loss of key customers. Another advantage is that it helps protect trade secrets and it retain valuable employees. With a non-compete clause in an employment agreement, employees may be less likely to leave.

Significantly, one of the major disadvantages is that non-compete clauses have limitations. The law requires some limitations on non-compete clauses: they must be reasonable in length of time, geographic area, and scope of subject matter. Also, they can be costly to enforce. In order to enforce the clause, you have to sue the breaching party. If the former employee cannot pay a judgment, or you cannot establish damages, you may expend a great deal of time and energy to obtain a worthless judgment.

Enforceability Under Nigerian Law

Generally, the courts are always cautious in giving effect to non-compete clauses in employment agreements. One reason for this is the power imbalance between and employer and an employee with the employer wielding far more power in such instances. Another major reason is that as a general legal principle, clauses or covenants in restraint of trade are unenforceable. However, such clauses are enforceable if they are proven to be reasonable in scope, nature and content and they have regard to the interest of the general public.

The Supreme Court judgment in Koumoulis v. Leventis Motors ltd [1973] NSCC 557 serves as a strong precedent and has essentially defined Nigerian case law over the years when it comes to non-compete clauses/agreements. In the case, the Supreme Court held that; “Generally all covenants in restraint of trade are prima facie unenforceable at common law. They are enforceable only if they are reasonable with reference to the interest of all parties concerned and of the public”. In determining what constitutes reasonableness, the court considered: The nature of the business, trade or occupation; the geographical area affected and the given period it is to continue.

There are other cases wherein the courts dealt with the issue of non-compete clauses like in Overland Airways Limited v Captain Raymond Unreported suit no: NICN/LA/597/2012 and Jam5 Vee Gee (Nigeria) Limited v Contact (Overseas) Limited [1992] 9 NWLR (Pt. 266) 503. Following several judicial pronouncements, the National Assembly then passed the Federal Competition and Consumer Protection Act of 2019 (FCCPA). With the enactment of the FCCPA, the principles governing non-compete clauses/agreements in Nigeria are codified under Nigerian law.

Section 59 of the FCCPA prohibits agreements that restrain competition. However, Section 68 (1)(e) states that;

“Nothing in this Act prohibits- a contract of service or a contract for the provision of services in so far as it contains provisions by which a person, not being a body corporate, agrees to accept restrictions as to the work, whether as an employee or otherwise, in which that person may engage during or after the termination of the contract and this period shall not be more than two years”.

What this essentially means is that a non-compete clause/agreement is only valid as long as it does not exceed two years. This also means that no matter how reasonable such restriction might be, if it surpasses two years, it becomes unenforceable.

Implications & Consequences

The major implication of a non-compete clause in an employment agreement is that the employee will be prohibited from working with a competitor of the employer for two years after the termination of the given employment. Another implication is that the employee is prohibited from disclosing confidential information gained from the previous employer or even using such information for business activities. Yet another implication is that employee will be prohibited from poaching clients or staff of the former employer.

Furthermore, when an employee breaches a non-compete clause, there are several remedies available to the employer. One of such is damages, as the former employer can sue for damages due to the business losses occasioned by the breach of the non-compete by the former employee. Another remedy available to the employer is to ask the court for an injunction against the former employee and to enforce the non-compete. What this means is that if successful, the courts will direct the former employee to leave their current employer due to a breach of the non-compete clause.

Conclusion

In conclusion, what is abundantly clear is that as I stated at the beginning of this article, there is a clear power imbalance between employers and employees when it comes to non-compete clauses and this is why the courts have been cautious in deciding cases involving non-compete clauses/agreements. There is therefore need to properly balance the interests of the employer and employee in order to prevent unreasonable restraints of trade.

Employers need to draft the non-compete clauses in employment agreements narrowly in order to meet the requirements set out in the FCCPA and employees also need to read and understand what they are getting into.

Most importantly however, both parties need to employ the services of a lawyer.

 

Adeola Onikoyi is an experienced corporate solicitor that can be reached via [email protected]