INTRODUCTION
Law is dynamic and this is more explicitly shown in the continued acknowledgement of restrictive clauses. Restrictive covenants are becoming more recognized in different parts of the world than it was about six centuries ago.
This paper seeks to analyze non-compete clauses, the rationale behind its acceptance while using several jurisdiction as a basis.
ANALYSIS
Non- compete clauses originated from England. It is a clause used in master-apprenticeship relationship to ensure that an apprentice serves his master after the latter's investment on him. The clause forbids a departing apprentice from setting up a rival business either on his own or in conjunction with others
Clauses in restraint of trade are generally unenforceable under common law and frowned upon as they were said to be contrary to public opinion and prevents healthy competition.
The evolution of non-compete clause in common law can be traced to Dyer's case, An old 1414 case. In this case, a London practitioner entered into a non-compete agreement with his apprentice to forgo the latter's debt if he did not engage in his trade in the same city for a period of six months after the cessation of his apprenticeship. In that case, the court was quite intolerant about the contract and refused to uphold it and even threatened to jail the master if he had personally appeared in court. DYER'S CASE was to set the pace and the general perception to non- compete clauses. There was a sharp deviation in Mitchel v. Reynolds when the court began to reconsider the non-accommodation of restrictive covenants. In this case, Lord Macclesfield introduced certain considerations that should guide the courts in determining whether a covenant in restraint of trade should be allowed or not. These considerations formed the bedrock for what would later become the English law position on covenants in restraint of trade. His Lordship distinguished between voluntary, involuntary general and particular restrictive covenants.
In his analysis, Lord Macclesfield posited that involuntary restrictive covenant remains void while voluntary covenants should be allowed provided they are not general but particular. Particularity was viewed in terms of the specific interest of the employer/former business owner to be protected, the reasonableness, scope, time and place of the covenant. This position has greatly guided the courts in England since then.
Safe to say that due to the rapid increase in technological innovation, technological knowhow and in the interest of capitalism , the position and ratio decidendi in Mitchel V. Reynolds is more readily followed than the case of DYER and this is rightly so. Though, another important factor that guides previous decisions is that a court should not interfere in the agreement of parties. A contract as long as it was validly contracted, should not be interfered with by the court. Though a lot of jurists has contradicted this argument on the basis that the bargaining powers is not fairly tilted among parties. They insist that the employer has a higher bargaining power than the employee and can therefore, enforce his choice on the employee.
This power dynamics might have been what Lord Macclesfield was trying to even out in his prescribed test above where he mentioned the voluntary or involuntary test.
This was also the main ingredient that made the court dissent from the judgment in DYER . For while there was a trace of involuntariness in the latter case due to the master-servant relationship, in Mitchel V. Reynolds however, this was not so. Both parties had a certain independence to make their own terms in the contract.
Another ingredient that the court looks at is reasonableness of the restraint. It has been established that a non-compete clause can not thrive in perpetuity. It must be for a certain no. of years . Not just that, a restraint should be particular rather than general. It has more chances of being enforced if it is streamlined to a particular industry or company or "direct competition" than when it is left open(general) like in the case of Infinity Tyres limited v. Mr San Jay Kumar & 3 ORS. (UNREPORTED SUIT NO. NICN/LA/170/2014) Mr. San Jay Kumar signed an employment contract with Infinity limited in Nigeria. He then moved down to Nigeria. After working for a while he was accused of financial misappropriation which he accepted liability for and his employment contract was subsequently terminated. Not long after, it was discovered that he had taken up employment with another company which was described as a close competitor the NICN in reading the judgment stated that it could have upheld the contract if the wordings of the contract had specified what company or industry the restraint applied to Instead the contract sought to prevented Mr. San Jay from taking up employment in Nigeria. This restraint was not upheld by the NICN.
The India's contract Act established in 1872 however does not recognize restraint clauses . In it's S27, "Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind is to that extent void". According to India's early jurist , the law is philosophically unjustifiable. Though recently there has been more than a handful of arguments in favor of dismissing/abolishing S.27. The law commission of India in its 13th report (1959) paragraph 55 noted that the said s.27 " was enacted at a time when trade was yet undeveloped and the object underlying the section was to protect the trade from restraints...but today, trade in India does not lag far behind that of England or the United States and there is no reason why a more liberal attitude should not be adopted...we recommend that Section 27 be suitably amended to permit reasonable restrictions". There are three arguments put forward by defenders of the non compete clause (i) that non compete clauses encourage innovation since it actually prevents companies from easily getting access to that of other companies. (ii) That companies would be disinclined to invest in workers if workers can take their trade secrets etc to competitors and (iii) Parties should be free to contract as they want.
In cases like Niranjan Shankar Golikari v. The Century Spinning and Mfg co. 1967 10 SC and Percept D'Mark Pvt ltd V. Zaheer Khan and ors (2006) 4 SCC 227 the apex court in both cases refused to uphold a non compete clause that prevented a worker in the first case and a cricketer in the second case from joining their rivals/competitors for a higher salary.
It is also surprising that non compete clause as against non-solicitation clause "does not amount to a restraint of trade, business or profession and would not be hit by section 27"as in the case of Wipro Limited v. Beckman Coulter International SA. It is hard to understand the rationale for this except that s.27 is becoming obsolete. Considering that non compete clause has been described as philosophically unjustifiable. One would wonder the reason for this deviation.
It is obvious that the 'early jurists and makers of the law" S.27 must have intended the same poison for non-compete and non-solicitation because, simply put, they are both in restraint of trade. This only goes to show that S.27 has outlived its purpose and is overdue for a change
Absolute bars against non compete were considered a terrible idea in the 18thcentury. They still are.
When one thinks of an appropriate measure of reasonability, one important aspect is time and in a restrictive covenant, one would assume that a restraint bordering on month or few years is only reasonable. For most jurisdictions in the EU especially, it is 12-24 months. However, the court has shown 1that a 10year restriction can be enforceable in the right circumstance. KNC Techs., LLC v. Tutton , 2021 NCBC LEXIS 38 (N.C Super . CT. Apr. 8, 2021)
Eric Tutton entered into a Non-compete agreement during his employment with KNC Technologies, LLC. Around his resignation from KNC in 2013, Tutton allegedly violated the Non- Compete Agreement and misappropriated KNC's confidential information leading KNC to sue Tutton. KNC and Tutton entered into a negotiated Settlement Agreement that prohibited Tutton from "soliciting contacting and or making sales" for 10 years to "(KNC) customers and nine specifically named KNC suppliers . The trial court approved and entered a consent order reflecting the terms of the settlement Agreement thus ending the lawsuit. Roughly a year after entry of the settlement agreement and consent order, Tutton allegedly formed a competing company and later violated the restrictive covenants in the settlement agreement. KNC and Tutton KNC sued Tutton again, this time in the North Carolina Business Court ("Tutton II"), and Tutton challenged the Settlement Agreement as being unreasonable and unenforceable under the well-developed North Carolina case law on restrictive covenants between employers and employees. Indeed, North Carolina courts usually view five years as the outer limit of enforceable restrictive covenants between employer and employee, and even that period is enforceable only in "extreme conditions." Hartman v. W.H. Odell & Assocs., 117 N.C. App. 307, 315, 450 S.E.2d 912, 918 (1994).
The Business Court rejected Tutton's challenge and denied his early motion to dismiss KNC's claim for breach of the Settlement Agreement. See KNC Techs., LLC v. Tutton, 2019 NCBC LEXIS 72 (N.C. Super. Ct. Oct. 9, 2019). Even though KNC and Tutton did have an employment relationship at one point, the Court declined to analyze the Settlement Agreement as a restrictive covenant between employer and employee. The Court noted there are other contexts in which restrictive covenants are routinely upheld (such as with the sale of a business, or between franchisors and franchisees), and the facts alleged "did not fit squarely under the analysis applied to restrictive covenants between employer and employee or buyer and seller, but instead call for a more situation-specific approach." Id. a
The court in North Carolina upheld this agreement.
Generally, in the U.S contracts with non compete clauses are upheld if they can pass the test for "reasonability" just like in English law.
A notable case in the US was the movement of Dr. Kai-Fu Lee from Microsoft to Google. Dr. Lee was a top executive in Microsoft and an expert in search and speech recognition system. He was said to have been responsible for the Microsoft internet search program and has all the trade secret of Microsoft programs. Few years later having signed a non-compete agreement; he moved to Google, a keen competitor of Microsoft and the latter sought to challenge his employment at Google. The matter was eventually settled out of court2
In the US, all states except for the state of California acknowledges restrictive covenants. By default, non-compete agreements are void. These clauses were outlawed by the Civil Code of California. As the
Court held in Edwards v. Arthur Andersen LLP(2008) 44 C4th 937, the State of California in 1872 adopted a 'settled public policy in favor of open competition, and rejected the common law "rule of reasonableness" , when the Legislature enacted the Civil Code'.
The only statutory exceptions allowed are non-competition agreements in the sale or dissolution of corporations, partnerships, and limited liability companies.
Therefore, in the US, only the State of California has a settled legislative policy in favor of open competition and of course, labor mobility3. The US and English law holds similar views on this. The court will weigh each case based on its own merit.
POSITION OF NIGERIA ON RESTRICTIVE COVENANTS AND ITS ENFORCEABILITY:
APROFIM ENGINEERING LTD. V. BIGOURET & ANOR.
(2015) 52 N.L.L.R PT (173) 1 CA.
The Appellant, a Limited Liability Company, was the
Plaintiff at the Lower Court, where it sued the
Defendants/Respondents amongst other reliefs for
An Order of injunction restraining the 1st Defendant from entering into an employment, or offering his
services to any company or organization doing similar business as that of the plaintiff both whilst the 1st
Defendant remains in the Plaintiffs employment and also within six months after the termination of the
employment Agreement between the Plaintiff and the 1st Defendant.
The Lower Court dismissed the case of the Plaintiff and the Court of Appeal in affirming the decision of the trial
judge held thus:
"Any contractual Agreement or Employment Agreement which does not conform with
Section 17(3) (a) (e) of the 1999 Constitution is void because of its non-conformity. In the
instant case, Article 12 of the Plaintiff's Employment Agreement which states that "the
Employee agrees that he will not enter into an employment or offer his service to any similar
company or organizations in Nigeria whatever the circumstances may be, this within six
months after the termination of the agreement" goes counter to the provisions of our Section
17 (3) (a) and (e) of the 1999 Constitution and it is void to the extent of the inconsistency or
non-conformity.
I think that was quite pretentious, as a close study of the said provision shows that Article 12
never outlawed the 1st Respondent entering into an employment or offering his services to
any similar company or organization, while still working for the Appellant but barred him
from doing so "within six months after the termination of this Agreement"
It appears to me that, the Appellant, in the effort to exploit him tried to colonise and
completely expropriate the 1st Respondent, and make him useless to himself, if he stayed back
in Nigeria, even when out of service to the Appellant. The Appellant had hurriedly
incorporated that clause, without vetting it, to see that it had effect, only after the Appellant
would have dumped the 1st Respondent, not while still in service to it! That is what the last
sentence in Article 12 connotes "...this within six months after the termination of this
agreement.
Of course, the learned trial Chief judge had held Article 12 a nullity, for being an affront to
Section 17 (3) (a) and (e) of the 1999 Constitution."
"I hold that the learned trial Chief Judge was right, as it is against the spirit of the Constitution,
basic law, to castrate an able bodied man and render him unemployed and useless to himself
and family, for a period of six months (or any period at all) after being sent out of job, just to
please and satisfy the mischievous desire of a selfish, greedy monopolist, who detest
competition, and loath fairness.
I think section 12 of the Appellant's Agreement is akin to a sentence of death, a wicked
contrivance that completely negates employee's mobility in labor, and bars his right to work
and earn a living...."
By the foregoing, we can see the close semblance between this submission with the one in DYER'S case.
For clarity sake, here are the provisions of S17(a) and (e) of the 1999 Constitution (as amended) :
"The State shall direct its policy towards ensuring that –
(a) All citizens, without discrimination on any group whatsoever, have the opportunity
for securing adequate means of livelihood as well as adequate opportunity to secure suitable
employment;
(e) There is equal pay for equal work without discrimination on account of sex, or any
other ground whatsoever;".
For further clarity, the court of appeal in making it's submission likened restrictive clauses as a contravention to the s.17 of the constitution.
Is this rightly so? I humbly and respectfully submit that while My Lord may have been right in a portion of his submission, he erred in his submitting that restrictive clauses is an affront to s.17. With due respect to the court, the decision of the court is largely based on instinct, assumptions and sentiments rather than the law, facts and evidence before the court.
A restrictive clause cannot be said to approve pay discrimination or discrimination against work.
A reasonable restrictive clause can never be said to be discriminatory. It is left to the court to decide if clause is reasonable or not. One must read a provision with extra care lest one falls into the common habit of generalization without properly distinguishing.
I believe that bringing in the" justicaebility" of chapter II of the CFRN as the writer of the article4 in question did is irrelevant and is a different matter . this analysis is more concerned with the rightness of the decision rather than the enforceability of it.
However the supreme court in Koumoulis v. Leventis Motors ltd [1973] NSCC 557.. rightly reached a decision which approves non-compete clauses especially where such clauses are reasonable. The court of Appeal in APROFIM ENGINEERING unfortunately, was obstinate in ignoring this decision. This was done without even properly distinguishing the case.
There are a lot more other cases where the court has sided with the employer. See Overland Airways Limited v Captain Raymond Jam5 Vee Gee (Nigeria) Limited v Contact (Overseas) Limited,6and Studio Press Plc v Kadoor & Anor, 7
On the general, it is safe to say that restrictive covenants are also enforceable in Nigeria notwithstanding the distracting decision in Aprofim engineering which isn't a popular judgement as there are hardly reported cases where it was used as a precedent.
CONCLUSION
The standard is reasonability. Reasonability based on geographical scope, based on time, voluntariness. All this should be taken into consideration by the courts. Also, restrictive covenants should never be abused. As long as the employee is not privy to any sensitive information, there is no need for a restrictive covenant.
Perhaps the biggest argument in favor of restrictive covenant is that a contract should be sacrosanct and free from the prying eyes of the law. Parties should be allowed to have a consensus ad idem and choose binding terms that are favorable to it. This argument has a always been countered by jurists that are of the opinion that there is nothing like meeting of the minds in such a contract as one party has greater bargaining power.
Followed closely is the school of thought that sees the need to protect intellectual property, innovation and is against unfair competition etc.
Nevertheless, a court should be able to judge every case based on its own merit while constantly holding itself up to the light which is international best practices.
The courts should never be unaware of emerging new "trends" in the ever dynamic legal practice.
Footnotes
2. http://www.crn.com/news/applications-os/175008003/microsoft-google-settle-kai-fu-lee-case.htm
3. See: D'sa v. Playhut, Inc. (2000) 85 Cal.App.4th 927, 933; Metro Traffic Control, Inc. v. Shadow Traffic Network (1994) 22
Cal.App.4th 853, 859; Morlife, Inc. v. Perry (1997) 56 Cal.App.4th 1514, 1520. (these cases are available online at
http://law.justia.com/).
4. Dr. Abubakar Yekini, Tanimola Anjorin
5.. Unreported suit no: NICN/LA/597/2012.
6. [1992] 9 NWLR (Pt. 266) 503
7. NICN/LA/144/2015
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