What is a “non-compete” clause?
In the traditional non-compete clause, a prospective employee, as part of her commitment to her new employer, agrees that upon termination of employment, she will not undertake any new employment that might be seen to compete with the new employer. The idea is that the new employer should feel secure in exposing the new employee to new technology, company secrets, and competitive advantages that it has developed and to do so without fear that the employee will take these secrets to a new employer after termination. The ban is usually only in force for a particular length of time following the termination of employment.
On 5 July 2024, the Non-Compete Clause Rule (the “Final Rule”) was published in the Federal Register, an official US publication of new laws, and it prescribed a nationwide ban on non-compete clauses. This new rule was drafted by the Federal Trade Commission (“FTC”) and came into effect on 4 September 2024.
- Summary of the Final Rule’s contents
Under the Final Rule, non-compete agreements (“NCAs”) are banned with very few exceptions. The scope of the ban is broad. It prohibits NCAs for all types of workers, regardless of their title or status as an employee, independent contractor, extern, intern, volunteer, apprentice, or even a contractor who provides a service to a person or an entity. NCAs entered into before the Final Rule’s effective date will no longer be enforced.
The only exception to the ban is existing NCAs for senior executives, who are defined as persons in a policy making position and who received a total annual compensation of at least $151,164 in the preceding year. However, this group accounts for fewer than 0.75% of the current USA workforce[1], and after the existing NCAs expire, no NCAs can be imposed on such senior executives again.
The Final Rule does not limit or affect enforcement of State laws that restrict NCAs where State laws do not conflict with the final rule, but the Final Rule does preempt State laws that conflict with the final rule. Thus, for States that only set out standards for NCAs but do not ban them completely, the Final Rule would take precedence as it imposes a total ban.
- The FTC reasoning on banning NCAs
The rationale behind the NCAs ban, according to the FTC, is that NCAs undermine fair competition. The rationale to ban NCAs is similar to the rationale for antitrust rules that apply to corporations, in the sense that NCAs restrain both the labor market and fair trade. Particularly, the FTC states in the Federal Register, that NCAs are exploitative and coercive, and they “threatened a worker’s ability to practice a trade and earn a living and can possibly destroy employee’ finances and career”[2]. In other words, the FTC reasons that NCAs effectively block employees from taking advantage of better job opportunities.
However, the same reasoning cannot be applied to senior executives, as this group has power within the workplace to make policy and is exposed to many company secrets, and executives have more bargaining power when applying for jobs when compared to that of an average worker[3]. Accordingly, many argued that the NCAs ban should not be extended to senior executives. To justify the NCAs ban for senior executives, the FTC claims that NCAs for senior executives are also restrictive and exclusionary. NCAs bar senior executives to contribute to the market within their expertise to their full potential. That is, despite the level, job mobility and the ability of competing employers to recruit and access talent are both impeded because of NCAs. Thus, the trade market quality is also reduced.
- Alternatives to NCAs ban and FTC’s reasoning
When the Final Rule was first proposed, several alternatives were suggested. Firstly, it was suggested that the law could set out restrictions on the scope of the NCAs such as duration, compensation for the term when the employee is restricted, etc. The FTC rejected this idea; It reasoned that employers would apply the maximum term allowed without an attempt to justify such term. Furthermore, the “reasonableness” of such restrictions is not clear. It is a fluid measure and there was concern that it could create confusion in the enforcement of NCAs[4].
Secondly, there was the option to leave this matter to each State to decide, that is, to follow the existing practice. The FTC rejected this option reasoning that employers may avoid State regulation by choosing States that have few restrictions. Leaving this matter to State Law could result in States failing to enact necessary rules, leaving workers unprotected. Therefore, to address all issues arising from NCAs, the FTC decided to ban them nationwide.
- Vietnamese perspective on NCAs ban
Vietnam does not have specific regulations on NCAs. Article 21.2 of the Vietnamese Labor Code 2019 and Article 84.3 of the Vietnamese Law on Intellectual Properties 2005 (amended in 2009, 2019 and 2022) laid out some general regulations that allow employers and employees to enter into an agreement to protect trade secrets and technological know-how[5]. These regulations do not mean that an employer can impose an NCA on employees because to protect trade secrets and technological know-how, they could simply use Non-Disclosure Agreements. It does not help that the law does not specify the type of such agreement.
For years, there has been a debate over the validity of NCAs. The voices that support an NCA ban have been more dominant. The argument is that NCAs hinder employees’ freedom to work, and the right to work is guaranteed by the Constitution[6]. These voices also contend that NCAs are, in a sense, coercive and are a basis to void a contract otherwise valid under Vietnam’s Civil Code 2015[7]. According to this reasoning they should be banned completely in the first place.
There is also support for NCAs. Supporters argue that employees do not always have weaker bargaining power, especially in the case of executives, who have far more connections and expertise and are on an equal footing with employers. Thus, employers need NCAs–regulated under Article 21.2 of the Vietnamese Labor Code 2019–as a mean to protect their trade secrets and technological know-how. There are further arguments on the nature of NCAs. Scholars argue that it depends on when they were signed. NCAs can be classified as civil contracts, where both parties are free to reach an agreement separate from the labor contract, and thus, such a civil agreement is not coercive[8].
To conclude, while NCAs are widely used as part of an employment relationship. Vietnamese law does not provide a solid legal framework for them. However, as Vietnamese labor law usually favor employees, and given the recent NCAs ban in the USA, it is possible that the Government will consider establishing rules and criteria to restrict the use of NCAs to better govern the employment relationship.
By Tran Ngoc Thanh Nguyen
[1] https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes (last entry on 20/8/2024)
[2] Part I. B of the Federal Register on the Final Rule [https://www.federalregister.gov/documents/2024/05/07/2024-09171/non-compete-clause-rule]
[3] Part I. B of the Federal Register on the Final Rule [https://www.federalregister.gov/documents/2024/05/07/2024-09171/non-compete-clause-rule]
[4] Part IX.B.3 of the Federal Register on the Final Rule [https://www.federalregister.gov/documents/2024/05/07/2024-09171/non-compete-clause-rule]
[5] Article 21.2 of the Vietnamese Labor Code 2019: “If the employees’ job is directly related to the business secret, technological know-how as prescribed by law, the employer has the rights to sign a written agreement with the employee on the content and duration of the protection of the business secret, technology know-how, and on the benefit and the compensation obligation in case of violation by the employee.”
Article 84.3 of the Vietnamese Law on Intellectual Properties 2005 (amended in 2009, 2019 and 2022): “A trade secret is protected if it meets the following conditions: […] 3. It is kept secret by the owner using necessary measures to prevent it from being disclosed and easily accessible.”
[6] Article 35.1 of the Vietnamese Constitution 2013: “Citizens have the right to work, to choose their profession, employment and workplace.”
[7] Article 127 of Vietnamese Civil Code 2015: “Any party entering into a civil transaction as a result of deception, threat or coercion has the right to request a court to declare such transaction void.”
[8] Luu Tien Dung (2024), Án lệ Việt Nam – Phân tích và luận giải (Vietnamese Case Law – Analysis and Interpretation, (2), Judicial Publishing House, Ha Noi, 545.
