Global HR Hot Topic - June 2012: Non-Competes and Other Restrictive Covenants in a Foreign Jurisdiction

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Imagine, somewhere in the world, some key employee of a US-based multinational an executive, say, or a technical expert or sales star — defects, joins a - competitor and starts openly competing, divulging trade secrets and luring away former colleagues and customers. Laws on the books in many countries ostensibly protect trade secrets and require employee loyalty, but often those laws reach only currently working employees. (E.g., Argentine Labour Contract Law 20, 744, sec. 88; Austrian Employment Act secs. 7 and 36; Bulgarian Labor Code art. 111.) Savvy employers prefer not to have to rely on these employee loyalty or trade secrets statutes to arm them with powerful enough ammunition to stop former employees from sabotaging their business. Rather, to protect themselves, multinationals resort to self-help, binding key employees around the world to restrictive covenants—non competes, confidentiality/trade secrets restrictions and non-solicitation/non poaching/“non-dealing” agreements that prohibit poaching customers and co-workers. But a restrictive covenant that an employee knows to be unenforceable is worthless. And some jurisdictions impose fines (formerly €100,000, in Slovakia, until September 2011) merely for executing an illegal restrictive covenant.

Restrictive covenant enforceability standards vary widely from country to country, as every jurisdiction struggles to balance the competing interests inherent in enforcing these agreements. Different jurisdictions balance the competing interests in very different ways. What are the competing interests here? For an employer, restrictive covenants make good business sense because they help insulate a business from competition, data leaks, corporate espionage and customer/employee poaching. For an employee, restrictive covenants can look like handcuffs restraining the freedom to find and succeed in a new job. Another interest in the mix is restraint on trade—employment-context restrictive covenants can raise antitrust/competition law issues. Society, acting through law and courts in each jurisdiction, balances these interests, recognizing on one hand that yes, employers need to protect their businesses and individuals should follow commitments they contracted to uphold. But on the other hand, society has an interest in freeing up the newly unemployed to use their skills to earn a living and contribute to the economy while staying off the rolls of the unemployed. Society also has an interest in fostering free trade....

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