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

– 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

• Noncompete• Nonsolicitation of customers• Nondealing with customers• Nonpoaching of employees

Enforceability• Construction– Proper meaning of the covenant – is the complained-

of 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

• Duration of restriction• Geographic scope• Employee’s role and responsibilities• Is a noncompete necessary?

Drafting Considerations• 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– 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

Middle East• Saudi Arabia – 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– 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