Where the gears shift

In recent years there has been a significant shift in how different jurisdictions view and regulate non-compete clauses. This shift is reshaping the legal landscape and has far-reaching implications for employers, employees, and the business environment.

The UK Government, recognising that there was no provision in their employment statutory framework for non-compete clauses in employment contracts, launched a consultation in December 2020 on measures to reform post-termination non-compete clauses in contracts of employment to maximise opportunities for individuals to start new businesses, find new work and apply their skills to drive economic growth. The purpose of the consultation was to seek views on the following proposals:

making non-compete clauses enforceable only when the employer provides compensation during the term of the clause;

placing a statutory limit on the length of non-compete clauses; or

determining that post-termination non-compete clauses are unenforceable.

Following the consultation, the UK Government ruled out a complete ban of non-competes and made a significant commitment to introduce a statutory limit of three months for non-compete clauses and to bring forward legislation to implement this limit. This commitment signals a significant change in the regulation of non-compete clauses in the UK and underscores the Government’s focus on promoting fair competition and individual opportunities.

In the US, on the other hand, an independent agency of the US Government whose mission is the enforcement of civil antitrust law and the promotion of consumer protection, the Federal Trade Commission (FTC), issued a final rule in April banning non-compete clauses in employment contracts, which commences in September. The FTC made the rule after analysing empirical research on how non-competes affect competition and reviewing public comments it received following a notice of proposed rulemaking issued in January 2023 for the purpose of addressing conduct that harms fair competition. According to the FTC, the current case-by-case and state-by-state approaches to non-compete agreements were inadequate in addressing how these agreements often negatively impact competitive conditions in labour, product and service markets. The rule thus provides that it is an unfair method of competition and a violation of section 5 of the FTC Act for employers to enter into non-compete agreements with employees.

Existing non-compete agreements are not enforceable after the rule takes effect, except for non-compete agreements with senior executives. However, no new non-compete agreements may be entered into after the rule takes effect, including with senior executives. Employers are further required to provide employees with existing non-competes with a notice that the non-competes are no longer enforceable. The FTC projects that the complete ban of non-compete agreements in employment agreements will boost the annual growth of new business formation by 2,7%, leading to the creation of over 8,500 additional new businesses each year. This marks a significant step in the shift of jurisprudence in one of the world’s economic superpowers. Following this new rule, the US joins countries like Colombia, Malaysia, Mexico and India, where non-competes are restricted.

Regional perspective: East Africa

Save for Kenya, East African countries have no specific legislation regulating the use of non-compete clauses or restrictive covenants in general. Most of the courts in the region use the reasonableness test: meaning the restrictions placed on an employee’s ability to work must be reasonable in terms of geographical scope and duration.

In Kenya, contracts containing non-compete clauses are governed by the Contracts in Restraint of Trade Act CAP 24 (Act). The Act gives the High Court discretion to interpret and enforce restrictive clauses in contracts upon considering the nature of the profession, trade, occupation or business concerned, the period and geographical area within which the restrictive provisions are expressed to apply, and whether or not the provisions are reasonable either in the interests of the parties or in the interest of the public. The Act also provides that non-compete clauses in contracts shall not be enforceable where the employer terminates the employment relationship in contravention of the terms of the employment contract. The court in Mwaura v Taxify Kenya Limited (Employment and Labour Relations Cause 173 of 2019) [2023] KEELRC 1849 (KLR) held that the non-compete clause in the employment contract between the parties which restricted the claimant from engaging in activities that were deemed to be in competition with the respondent’s business for was for a period of 12 months was unenforceable as:

“...it sought to keep the claimant away from opportunities in the industry where the respondent operates for the mere reason that he had been in the respondent’s employment. The clause is not limited to protecting specific interests of the respondent such as its trade secrets. Enforcing such open-ended restrictive agreement would work injustice against the claimant.”

Conclusion

The prohibition of non-compete clauses in the US and the restrictions on their use in the UK could reshape the perception of non-compete agreements as benchmarks for good practice and economic growth stimulators in the region. From a competition standpoint, these changes enable new market entrants to gain from the expertise of seasoned employees, fostering a dynamic flow of talent and knowledge within the market. This increased job mobility enhances healthy competition across industries. However, there is a counterargument that employees might exploit trade secrets for personal gain, leading to higher turnover rates due to competitive offers, potentially reducing productivity for some organisations.

Given the evolving landscape of non-compete clauses, organisations must meticulously craft these agreements to ensure they are fair reasonable, and protect legitimate interests without incurring excessive enforcement costs. When formulating non-compete clauses, employers should consider factors such as the employee’s position, industry specifics, uniqueness of the employee’s skills, geographical scope, duration and the employer’s exposure to risk. Additionally, employers should have alternative protective measures, such as confidentiality and intellectual property clauses, to safeguard against the misuse of trade secrets if the non-compete clause is deemed unenforceable.