Author: Mr. Vo Quoc An | ALB & Partners Law Firm
Source: The Saigon Times – https://thesaigontimes.vn/thoa-thuan-khong-canh-tranh-tinh-phap-ly-va-thuc-tien-xet-xu/
At the present time, the legal aspects related to non-compete agreements restraining employees from working for the employer’s competitors have not been specifically regulated, leading to various conflicting opinions in cases of disputes. This article aims to clarify some important legal aspects of non-compete agreements through practical dispute resolution in court and arbitration.
Employers share a common concern of not wanting employees to work for their competitors, particularly as employees may carry with them technological secrets and business secrets. Therefore, in many cases, the employer often negotiates to enter into a “non-compete agreement” with the employee, which is an agreement prohibiting the employee from working for the employer’ competitors after the termination of the labor contract.
A non-compete agreement is understood as the employee’s commitment to the employer, either as an independent written document or as a clause within a labor contract, not to directly or indirectly engage in work for the employer’s competitors for a specified period after the termination of the labor contract. In case of a breach, employees may be subject to penalties for the violation or liquidated damages. Conversely, employees may receive a sum of money or “benefit from the commitment by enjoying a high position and a high salary during the course of employment” (1).
In the legal context, there is currently no unified perspective on the legal nature of non-compete agreements. The need to protect technological secrets and business secrets of employees is reasonable. The law does not impose any prohibition or restriction on non-compete agreements, and may even contain permissive provisions that are not demonstrated very clearly.
The 2019 Labor Code allows employers to enter into written agreements with employees regarding the protection of business secrets and protection of technological secrets (Article 21.2). The 2005 Intellectual Property Law, as amended and supplemented in 2009, 2019, and 2022, stipulates that the State recognizes and protects intellectual property rights, while also allowing businesses to take measures to protect their intellectual property rights (Article 8.1 and Article 198).
However, it must also be acknowledged that, to some extent, non-compete agreements limit the rights of employees to “work, choose a profession, employment, and place of work” as recognized, respected, and protected by the 2013 Constitution (Article 35.1), the 2019 Labor Code (Article 5.1.a), and the 2013 Employment Law (Article 4.1 and Article 9.6).
Based on this, it can be analyzed that non-compete agreements may be invalid if they fail to meet two conditions: “completely voluntary” (on the part of the employees) and “not in violation of the law or social ethics” as stipulated in Article 117.1 of the 2015 Civil Code (2).
However, in adjudicatory practice, both the court and arbitrators have consistently found that non-compete agreements do not violate the voluntary nature of the employees or violate the law or social ethics. Dispute resolution bodies consider such agreements to be civil transactions and, therefore, legally valid if they meet all the conditions for validity and do not fall under any of the cases of invalidity as stipulated by law.
Defining the extent of competitors
The scope of competitors is a matter that often gives rise to disputes. The employee frequently asserts that the business they are working for is not a competitor of the former employer, while the employer holds a contrary view. Presently, the law does not provide specific criteria for determining whether two businesses are considered competitors of each other or not.
Referencing the adjudicatory practice, both the courts and arbitrators determine competitors based on their business lines. Accordingly, a business is deemed a competitor of the employer if they are working in the same business lines, and vice versa.
Employee’s Liabilities in Case of Violation
Article 21.2 of the 2019 Labor Code permits employers and employees to agree on the content, duration of protection for business secrets, protection of technological secrets, and damages in case of a breach. In adjudicatory practice, courts and arbitrators tend to request employees to compensate for employers when employees fail to comply with or fully execute non-compete agreements.
In fact, there has been an instance where, upon violation of the non-compete agreement by the employee, the employer initiates legal action, requesting the court or arbitrators to prohibit the employee from continuing to work for the the employer’s competitor. Current legal texts do not provide a clear resolution for such request by employers. The 2019 Labor Code and related guidelines neither explicitly permit nor prohibit employers from making such requests to prevent employees from working for a competitor.
However, the practical handling of such requests by courts is not consistent. In one case, the court accepted the employer’s request to compel the employee to cease working for a competitor, reasoning that the employee must adhere to the provisions of the non-compete agreement – a civil transaction that the employee entered into voluntarily (3).
Another case saw the court rejecting the request to terminate the labor contract between the employee and the competitors, arguing that it contradicted the provisions of Article 35.1 of the 2013 Constitution, Article 5.1.a and Article 10.1 of the 2012 Labor Code (effective at the time of dispute resolution), and Article 4.1 and Article 9.6 of the 2013 Employment Law.
In another instance, a request to terminate the labor contract between the employee and the employer’s competitor was not accepted by the arbitrator, based on the arbitrator’s assessment that “terminating the labor contract is a matter of labor law, beyond the jurisdiction of the arbitral panel to resolve disputes related to non-compete agreements” (5).
Given the ambiguity of current legal texts and the lack of consistency in court and arbitration practice, employers should not overly rely on pursuing legal actions to require employees to refrain from working for the employer’s competitors. Instead, they may consider seeking compensation from employees for breaches, as the liability for damages is clearly defined by law and uniformly applied in practice.
Non-compete agreements are contractual agreements between employers and employees. In labor relationships, employers are generally considered to have a higher legal standing, which can potentially limit the voluntary nature of employees when entering into such agreements. As the fundamental content of non-compete agreements typically restricts employees from working for employer’s competitors for a specified period after the termination of the labor contract, such requirements may be disadvantageous for employees.
In this regard, it is suggested that a non-compete agreement (designed by the employer) would be fairer and more reasonable when: the employee is provided by the employer with an amount of money corresponding to the period in which the employee is not allowed to work for the employer’s competitors after the termination of the labor contract. There are specific limitations on the duration, geographical scope, types of work not permitted, and measures to ensure that employee’s employment opportunities are not completely eliminated. This approach aligns with the opinion of an arbitration panel when addressing disputes related to a non-compete agreement (7).
- Nguyen Ngoc Bich, non-compete provision in DNA Contract, Saigon Economic Times, dated 12 July 2018.
- Lac Duy, NDA Dispute: Who Voluntarily Wears the “Pearl Necklace”? Saigon Economic Times, dated 19 July 2018.
- Court Judgment No. 09/2010/LĐ-ST dated 10 December 2010 of People’s Court of Đuc Hoa District, Long An Province.
- Court Judgment No. 420/2019/LĐ-PT dated 15 May 2019 of People’s Court of Ho Chi Minh City.
- Arbitral Award No. 1161/VIAC-HCM dated 20 November 2017 of Vietnam International Arbitration Center (VIAC).
- Lê Thi Thuy Huong and Nguyen Ho Bich Hang (2015), Obligation to protect business secrets in labor relationship, Vietnamese Journal of Legal Sciences, Vol 06.
- Arbitral Award No. 1173/VIAC-HCM dated 21 November 2017 of VIAC.