Track: Contracts and Negotiations
#302
Illuminating Cross-border
Noncompete Agreements
Presented in cooperation with Morgan, Lewis & Bockius LLP
Matthew Howse, Partner, Morgan, Lewis & Bockius LLP
Kevin Norman, Senior Counsel, Evonik Corporation
Zaitun Poonja, Partner, Morgan, Lewis & Bockius LLP
Joshua Scribner, Assistant General Counsel, MetLife, Inc.
October 29, 2014
Case Study – BlueSky
• Global software company
– HQ in New York
– Operations in London, Paris, Singapore, Shanghai, Tokyo,
Mumbai, Dubai, Santiago, and Mexico City
• Clients are large multinational companies
• Individual sales professionals (who are employees) have close
relationships with these clients’ key executives
• BlueSky’s sales professionals use innovative, aggressive, and
successfully proven pricing models to win business
A Global Noncompete?
• BlueSky has recently lost several key employees
who have taken up employment with its various
competitors
• BlueSky would like all senior employees around
the globe to have identical noncompetes with a
two-year duration and worldwide reach
• BlueSky is also considering putting noncompetes
in some or all of its incentive compensation plans
Issues
• Is it possible or desirable to have a global
noncompete?
• How are noncompetes viewed generally in the
United States, Europe, and Asia?
• All senior executives?
• Is two years too long?
• Does an employee need to be paid?
• Garden leave?
• What other restrictive covenants are permissible?
Global Perspective – Common
Threads
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Legitimate business interests
Duration
Geographic scope
Is payment required for the duration of restriction?
Variations by jurisdiction
Sale of business vs. employment
Laws developed on similar themes – generally, but the devil is in the
domestic details
Types of Restrictions
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Noncompete
Nonsolicitation of customers
Nondealing with customers
Nonpoaching of employees
• Construction
Enforceability
– Proper meaning of the covenant – is the complainedof activity covered?
• Legitimate Interest
• Reasonableness
– No wider than is reasonably necessary
• Discretion
– Court has the discretion to grant an injunction to
enforce the covenant
– Look at all the circumstances
Construction
• Careful drafting
• Precise definitions of:
– Competitive business
– Customer of customer or clients
– Prospective customers or clients
Legitimate Business Interests
• Trade secrets and confidential information
• Customer connection
• Stability of the workforce
Reasonableness
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Duration of restriction
Geographic scope
Employee’s role and responsibilities
Is a noncompete necessary?
Drafting Considerations
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Employment contract
Specific noncompete agreement
Consideration
Consider tying good /bad behavior to deferred compensation/equity plans
– Forfeiture of payments received
– Loss of vesting rights
– “Employee choice” doctrine
• Global restrictions
• Choice of law
• Arbitration?
United States
• Matter of state, not federal, law
• Covenants are void in some states such as California
• Most states recognize as valid and will enforce a
covenant not to compete, solicit, or deal, provided that
the covenant is:
– supported by adequate consideration
– necessary to protect a legitimate business interest
– reasonable in time, subject matter, and geography
• No requirement to pay employee while subject to
covenant
Europe
• Most European jurisdictions apply a four-stage
test
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Limited in geographic scope
Limited in duration
Legitimate business interest
Ongoing compensation during the noncompete period
• But the amount of compensation in the last
factor varies among countries and is not
necessary at all in the UK or Switzerland
Asia
• Post-termination restrictions are typically enforceable
• Subject to reasonableness restrictions similar to Europe’s
• Compensation during noncompete period is typically not
required
• Reasonable duration varies
– Singapore – 1 year
– Hong Kong – 3 months
• India – post-termination restrictions are usually invalid
• China – compensation during noncompete period may be
required in some provinces
Latin America
• Wide differences in approach from country to
country
• Enforceable in Argentina, Peru, and Venezuela if
they are restricted in time and the employee
receives reasonable consideration for temporarily
waiving his or constitutional right to work
• Brazil: position is unclear! Although
noncompetition and nonsolicitation covenants
are becoming more common in Brazil, Brazilian
labor law still does not regulate them expressly
• Unenforceable in Mexico, Chile, and Colombia
• Saudi Arabia
Middle East
– Noncompetes are enforceable up to two years in
duration
– No need for payment of compensation
• UAE
– Injunctive relief is unobtainable from UAE courts, so
noncompetes are of little use
– Ministry of Labour administrative processes
– In DIFC and other free zones, noncompetes can be
enforced
Noncompetes in Executive
Compensation Plans
• Global compensation plan
– Cash, share options, restricted stock, restricted stock units
– Plan subject to New York law
• Deferred compensation
– Only paid if certain conditions met
• Prior to vesting, awards can be forfeited
– If employment terminated
– If employee is bad leaver
• Bad leaver if acts in breach of noncompete
Questions
• Is a clawback or deemed forfeiture upon breach of
noncompetes permissible?
• Statutory protection?
• A penalty?
• Impact of New York law on non-U.S. employees?
UK
• Clawbacks and deemed forfeitures are permissible in the UK
• Common law considerations
• Unlikely to be a penalty
– Applies to accrued but not contingent rights
– Market practice is relevant
– Commercial justification
• UK courts would consider New York law but would apply UK
principles as a matter of public policy
United States
• Equity awards as consideration
– Can extend to employees without employment
agreement
– Employee choice – compete or retain benefits
• Effect on awards
– Shorten exercise period
– Forfeit unpaid amounts
– Claw back cash paid/stock issued/profit from sale of
shares
United States
• Clawback issues
– Enforceability
• Wage laws
• Collection
– Tax consequences to employee
• Offset if in year of income recognition
• What if in subsequent years?
Global Team Move
• Team of sales professionals focusing on financial services
– Close links to major customers
– Planning to leave to join big rival – DeepOcean
– Senior employees resign on same day in London, New York, Mexico City,
Dubai, and Singapore
• Investigation
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Emails show that employees were planning move for months
Team’s midlevel and junior employees have been approached
Customers spoken to and assurances as to business received
Business plans prepared using BlueSky pricing models
Questions
• How should BlueSky react?
• Legal proceedings? Claims?
• Whom should BlueSky sue?
– The senior brokers?
– DeepOcean?
• Where should BlueSky sue?
– London, New York, Singapore, Dubai, Mexico City?
– Everywhere?
• What prophylactic measures could BlueSky have taken?
Strategic Decisions
• Need to make strategic decisions quickly
– Sue all senior brokers?
– Sue DeepOcean for inducing breaches?
– Sue in New York and London if senior employees are in both
jurisdictions?
– Beware of antisuit injunctions