Recognition of Non-Disclosure Agreements are not always before the Civil Courts

In a previous article, we discussed non-competition agreements, or agreements or clauses in a contract which by their very nature restrict an individual’s ability to compete in a particular industry or field for a certain period of time. They may also restrict one’s ability to work for a competing company or prevent would-be entrepreneurs from forming competing businesses.

In the Philippines, there is no law specifically prohibiting such non-competition agreements, and the Supreme Court has had occasion to lay down the standards in upholding such agreements which are:

1. Whether the covenant protects a legitimate business interest of the employer;
2. Whether the covenant creates an undue burden on the employee;
3.  Whether the covenant is injurious to the public welfare;
4. The time and territorial limitations contained in the covenant are reasonable; and
5. The restraint is reasonable from the standpoint of public policy.

(Rivera vs. Solidbank Corporation, G.R. No. 163269, April 19, 2006)

READ: Limits of confidentiality

The Supreme Court has declared that a non-involvement clause is not necessarily void for being in restraint of trade for as long as there are reasonable limitations as to time, trade, and place.

On the other hand, there are also cases where the Supreme Court had declared non- competition agreements as invalid such as when the prohibition was found to impose a limitation without a definite time limit or scope.

The rule is that when an employer seeks to recover damages for the violation of a non- compete agreement, the action falls under contract law or civil law, which means that the case for damages is to be filed and decided by the regular courts, not the labor courts (i.e. the Department of Labor and Employment and National Labor Relations Commission).

In the case of Dai-Ichi Electronics Manufacturing Corporation v. Limjuco, et al. (GR 112940, November 21, 1994) the company filed a complaint for damages with the Regional Trial Court against its former employee claiming that he had violated his Contract of Employment which provides: “That for a period of two (2) years after termination of service from EMPLOYER, EMPLOYEE shall not in any manner be connected, and/or employed, be a consultant and/or be an informative body directly or indirectly, with any business firm, entity or undertaking engaged in a business similar to or in competition with that of the EMPLOYER.”

In its complaint, the company sought to recover liquidated damages in the amount of One Hundred Thousand Pesos which was provided for in the employee’s contract.

The Regional Trial Court dismissed the complaint of the company ruling that it had no jurisdiction over the subject matter of the controversy because the complaint was for damages arising from employer-employee relations, meaning that it was the labor courts that should entertain the complaint.

The Supreme Court reversed the dismissal of the Regional Trial Court and ordered the Court to continue with the civil case filed by the Company holding that the Company did not ask for any relief under the Labor Code of the Philippines but seeks to recover damages agreed upon in the contract as redress for private respondent’s breach of his contractual obligation.

READ: Caveat on confidentiality agreements

Accordingly, the cause of action is within the realm of Civil Law, and jurisdiction over the controversy belongs to the regular courts. Moreover, the Supreme Court found that the non-competition stipulation in the Contract of Employment refers to the post-employment relations of the parties.

Accordingly, in the Dai-ichi case, the Supreme Court decided that the matter of violation and claim for damages for violation of non-competition agreements are to be litigated before the civil courts, and not the labor courts.

However, in a subsequent case decided by the Supreme Court in 2016, the Court declared that the non-competition clause contained in the employment contract of the employee is admissible and enforceable before the labor courts.

The case involved a Vice-President of the Company and Project Director who were terminated for breaching the non-disclosure and non-competition provisions in their contract of employment. When the company forfeited the commissions they earned, the former employees filed a labor complaint with the labor court for non-payment of commissions and damages against the company.

The Court of Appeals confirmed the termination of employment of the employees by the company, but awarded the employees their claim for unpaid commissions. The Court declared that the company cannot withhold unpaid commissions on the ground of the employees’ breach of the Confidentiality of Documents and Non-Compete Clause in their employment contracts, because such clause referred to acts done after the cessation of the employer-employee relationship, or to the “post-employment” relations of the parties.

Moreover, according to the Court of Appeals, any such breach is a civil law dispute that is best resolved by the regular courts and not by labor courts. In this case, the Confidentiality of Documents and Non-Compete Clause contained in the employment contracts read: “All records and documents of the company and all information pertaining to its business or affairs or that of its affiliated companies are confidential and no unauthorized disclosure or reproduction or the same will be made by you any time during or after your employment.

And in order to ensure strict compliance herewith, you shall not work for whatsoever capacity, either as an employee, agent or consultant with any person whose business is in direct competition with the company while you are employed and for a period of one year from date of resignation or termination from the company…

Finally, if undersigned breaches any terms of this contract, forms of compensation including commissions and incentives will be forfeited.”

The wording of the non-compete and non-disclosure in the contract provided that the obligation of non-competition and non-disclosure was to apply during the period of employment and to continue one year from termination from the company.

Based on the foregoing, the Supreme Court reversed the ruling of the Court of Appeals (that the breach of the non-competition and non-disclosure agreement was a matter to be resolved by the civil courts and not the labor courts) and declared that the agreement was admissible and enforceable before the labor court. Thereafter, the Court proceeded to
determine that there was indeed a violation of the same. It was ruled that the parties intended to apply the clause during the pendency of the employee’s employment and that the company correctly invoked the same before the labor court to resist the employee’s claim for unpaid commissions on account of his breach of the said clause while the employer-employee relationship between them still subsisted.

Applying the penalty provision in the agreement, the Court declared that the company was entitled to forfeit the commissions earned by the Vice-President. (Century Properties, Inc. v. Babiano & Concepcion, GR 220978, July 5, 2016)

Accordingly, recognition and enforcement of non-competition agreements are not always exclusively with the civil courts. Depending on how the provisions are written, non-competition agreements may also be enforced before the labor courts.

The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, an Arbitrator of the Construction Industry Arbitration Commission of the Philippines, and teaches law at the De La Salle University Tañada-Diokno School of Law. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.