Chapter Five

MANAGEMENT PREROGATIVES
TOPICS PER SYLLABUS
G. Post-Employment Ban

G.
POST-EMPLOYMENT BAN
1. RIGHT TO IMPOSE POST-EMPLOYMENT PROHIBITIONS.
The employer, in the exercise of its prerogative, may insist on an agreement with the employee for certain
prohibitions to take effect after the termination of their employer-employee relationship.
The following stipulations in an employment contract are illustrative of the prohibitions normally agreed
upon by the employer and the employee:
1) Non-Compete or Non-Involvement Clause;
2) Forfeiture-for-Competition Clause or Compensation-for-Competition Clause;
3) Garden-Leave Clause;
4) Confidentiality and Non-Disclosure Clause;
5) Non-Solicitation Clause;
6) Non-Recruitment or Anti-Piracy Clause;
7) Inventions Assignment Clause (Intellectual Property Clause) .
I.
NON-COMPETE OR NON-INVOLVEMENT CLAUSE
1. FREEDOM TO CONTRACT.
The employer and the employee are free to stipulate in an employment contract prohibiting the
employee within a certain period from and after the termination of his employment, from:
(1) starting a similar business, profession or trade; or
(2) working in an entity that is engaged in a similar business that might compete with the employer.
The non-compete clause is agreed upon to prevent the possibility that upon an employees termination or
resignation, he might start a business or work for a competitor with the full competitive advantage of knowing and
exploiting confidential and sensitive information, trade secrets, marketing plans, customer/client lists, business
practices, upcoming products, etc. , which he acquired and gained from his employment with the former
employer. Contracts which prohibit an employee from engaging in business in competition with the employer are
not necessarily void for being in restraint of trade.
2. PHILIPPINE JURISPRUDENCE ON THE NON-COMPETE CLAUSE.
The nature and extent to which a non-compete clause is legally allowed usually varies from one
jurisdiction to another. In the Philippines, several cases dating back to as early as 1910 have dealt with issues on
the validity of non-compete or non-involvement stipulations, also known as Covenant Not to Compete (CNC)
in an employment contract. In order to appreciate the principles affecting this clause in our jurisdiction, the
following cases of significance may be cited and are worth looking into:
1. Carlos Gsell v. Pedro Koch;1
2. Anselmo Ferrazzini v. Carlos Gsell;2
3. William Ollendorf v. Ira Abrahamson (En Banc) ;3
4. G. Martini (Ltd. ) v. J. M. Glaiserman (En Banc) ;4
 5. Alfonso del Castillo v. Shannon Richmond;5
6. Raquel P. Consulta v. CA, Pamana Philippines, Inc. ;6
7. Yusen Air and Sea Service Philippines, Inc. v. Villamor;7
8. Daisy B. Tiu v. Platinum Plans Philippines, Inc. 8
Two (2) cases dealing with the issue of jurisdiction over breach of the non-compete clause have also been
decided by the Supreme Court, namely:
1. Dai-Chi Electronics Manufacturing Corporation v. Hon. Villarama; 9 and
2. Portillo v. Rudolf Lietz, Inc. 10
3. ILLUSTRATIVE CASE.
The most significant case that would broadly describe the historical development as well as illustrate the
legal complications and implications of a non-compete clause is the 2007 case of Daisy B. Tiu v. Platinum Plans
Philippines, Inc. ,11 where the non-compete clause (called Non-Involvement Provision in this case) in the
employment contract stipulates as follows:
8. NON-INVOLVEMENT PROVISION The EMPLOYEE further undertakes that during his/her
engagement with EMPLOYER and in case of separation from the Company, whether voluntary or for
cause, he/she shall not, for the next TWO (2) years thereafter, engage in or be involved with any
corporation, association or entity, whether directly or indirectly, engaged in the same business or
belonging to the same pre-need industry as the EMPLOYER. Any breach of the foregoing provision
shall render the EMPLOYEE liable to the EMPLOYER in the amount of One Hundred Thousand Pesos
(P100,000.00) for and as liquidated damages.
Starting on January 1, 1993, petitioner worked for respondent as Senior Assistant Vice-President and
Territorial Operations Head in charge of its Hongkong and Asean operations under a 5-year contract of
employment containing the afore-quoted clause. On September 16, 1995, petitioner stopped reporting for work.
In November 1995, she became the Vice-President for Sales of Professional Pension Plans, Inc. , a corporation
engaged also in the pre-need industry. Consequently, respondent sued petitioner for damages before the RTC of
Pasig City. Respondent alleged, among others, that petitioners employment with Professional Pension Plans, Inc.
violated the above-quoted non-involvement clause in her contract of employment. Respondent thus prayed for
P100,000 as compensatory damages; P200,000 as moral damages; P100,000 as exemplary damages; and 25% of
the total amount due plus P1,000 per counsels court appearance, as attorneys fees.
Petitioner countered that the non-involvement clause was unenforceable for being against public order or
public policy: First, the restraint imposed was much greater than what was necessary to afford respondent a fair
and reasonable protection. Petitioner contended that the transfer to a rival company was an accepted practice in
the pre-need industry. Since the products sold by the companies were more or less the same, there was nothing
peculiar or unique to protect. Second, respondent did not invest in petitioners training or improvement. At the
time petitioner was recruited, she already possessed the knowledge and expertise required in the pre-need
industry and respondent benefited tremendously from it. Third, a strict application of the non-involvement clause
would amount to a deprivation of petitioners right to engage in the only work she knew.
In upholding the validity of the non-involvement clause, the trial court ruled that a contract in restraint of
trade is valid provided that there is a limitation upon either time or place. In the case of the pre-need industry, the
trial court found the two-year restriction to be valid and reasonable.
On appeal, the Court of Appeals affirmed the trial courts ruling. It reasoned that petitioner entered into the
contract on her own will and volition. Thus, she bound herself to fulfill not only what was expressly stipulated in
the contract, but also all its consequences that were not against good faith, usage, and law. The appellate court also
ruled that the stipulation prohibiting non-employment for two years was valid and enforceable considering the
nature of respondents business.
In affirming the validity of the Non-Involvement Clause, the Supreme Court ratiocinated as follows:
Petitioner avers that the non-involvement clause is offensive to public policy since the restraint
imposed is much greater than what is necessary to afford respondent a fair and reasonable protection.
She adds that since the products sold in the pre-need industry are more or less the same, the transfer to a
rival company is acceptable. Petitioner also points out that respondent did not invest in her training or
improvement. At the time she joined respondent, she already had the knowledge and expertise required in
the pre-need industry. Finally, petitioner argues that a strict application of the non-involvement clause
would deprive her of the right to engage in the only work she knows.
Respondent counters that the validity of a non-involvement clause has been sustained by the
Supreme Court in a long line of cases. It contends that the inclusion of the two-year non-involvement
clause in petitioners contract of employment was reasonable and needed since her job gave her access
to the companys confidential marketing strategies. Respondent adds that the non-involvement clause
merely enjoined her from engaging in pre-need business akin to respondents within two years from
petitioners separation from respondent. She had not been prohibited from marketing other service plans.
As early as 1916, we already had the occasion to discuss the validity of a non-involvement clause. In
Ferrazzini v. Gsell,12 we said that such clause was unreasonable restraint of trade and therefore against
public policy. In Ferrazzini, the employee was prohibited from engaging in any business or occupation in
the Philippines for a period of five years after the termination of his employment contract and must first get
the written permission of his employer if he were to do so. The Court ruled that while the stipulation was
indeed limited as to time and space, it was not limited as to trade. Such prohibition, in effect, forces an
employee to leave the Philippines to work should his employer refuse to give a written permission.
In G. Martini, Ltd. v. Glaiserman,13 we also declared a similar stipulation as void for being an
unreasonable restraint of trade. There, the employee was prohibited from engaging in any business
similar to that of his employer for a period of one year. Since the employee was employed only in
connection with the purchase and export of abaca, among the many businesses of the employer, the
Court considered the restraint too broad since it effectively prevented the employee from working in any
other business similar to his employer even if his employment was limited only to one of its multifarious
business activities.
However, in Del Castillo v. Richmond,14 we upheld a similar stipulation as legal, reasonable, and
not contrary to public policy. In the said case, the employee was restricted from opening, owning or having
any connection with any other drugstore within a radius of four miles from the employers place of
business during the time the employer was operating his drugstore. We said that a contract in restraint of
trade is valid provided there is a limitation upon either time or place and the restraint upon one party is
not greater than the protection the other party requires.
Finally, in Consulta v. Court of Appeals,15 we considered a non-involvement clause in accordance
with Article 1306 of the Civil Code. While the complainant in that case was an independent agent and not
an employee, she was prohibited for one year from engaging directly or indirectly in activities of other
companies that compete with the business of her principal. We noted therein that the restriction did not
prohibit the agent from engaging in any other business, or from being connected with any other company,
for as long as the business or company did not compete with the principals business. Further, the
prohibition applied only for one year after the termination of the agents contract and was therefore a
reasonable restriction designed to prevent acts prejudicial to the employer.
Conformably then with the aforementioned pronouncements, a non-involvement clause is not
necessarily void for being in restraint of trade as long as there are reasonable limitations as to
time, trade, and place.
In this case, the non-involvement clause has a time limit: two years from the time petitioners
employment with respondent ends. It is also limited as to trade, since it only prohibits petitioner
from engaging in any pre-need business akin to respondents.
More significantly, since petitioner was the Senior Assistant Vice-President and Territorial
Operations Head in charge of respondents Hongkong and Asean operations, she had been privy to
confidential and highly sensitive marketing strategies of respondents business. To allow her to engage in
a rival business soon after she leaves would make respondents trade secrets vulnerable especially in a
highly competitive marketing environment. In sum, we find the non-involvement clause not contrary to
public welfare and not greater than is necessary to afford a fair and reasonable protection to
respondent.
In any event, Article 1306 of the Civil Code provides that parties to a contract may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary
to law, morals, good customs, public order, or public policy.
Article 1159 of the same Code also provides that obligations arising from contracts have the force of
law between the contracting parties and should be complied with in good faith. Courts cannot stipulate for
the parties nor amend their agreement where the same does not contravene law, morals, good customs,
public order or public policy, for to do so would be to alter the real intent of the parties, and would run
contrary to the function of the courts to give force and effect thereto. Not being contrary to public policy,
the non-involvement clause, which petitioner and respondent freely agreed upon, has the force of law
between them, and thus, should be complied with in good faith.
 Thus, as held by the trial court and the Court of Appeals, petitioner is bound to pay respondent
P100,000 as liquidated damages. While we have equitably reduced liquidated damages in certain cases,
we cannot do so in this case, since it appears that even from the start, petitioner had not shown the least
intention to fulfill the non-involvement clause in good faith. 16

I.
OTHER POST-EMPLOYMENT PROHIBITIONS
1. FORFEITURE-FOR-COMPETITION CLAUSE.
Forfeiture-for-Competition Clause is a stipulation in an employment contract wherein an employee
forfeits certain benefits like stock option or incentive bonus or deferred compensation to which an employee
would have
been entitled because of his act of engaging in competitive employment or activities after termination of his
employment.
2. COMPENSATION-FOR-COMPETITION CLAUSE.
Compensation-for-Competition Clause is a provision in an employment contract which requires the
payment by the employee of some amount of money to his former employer in order to engage in competitive
employment or activities after termination of his employment. This is also known as a "clawback" provision.
These two kinds of clauses may be combined for greater protection of the employers interests.
3. GARDEN-LEAVE CLAUSE.
A Garden-Leave Clause is a variant of the non-compete agreement. Under this provision, an employee
who has left his work either by reason of termination or resignation is bound to stay at home or in his garden
during the garden-leave period at which time, he continues to receive all his salaries and benefits but is prohibited
from commencing employment with new employers until this period has elapsed. He thus remains subject to all the
strictures of his former employer as if he is still under employment with the latter. The term garden leave is based
on the old-fashioned and attractive idea that the employee will be paid his salaries and benefits while he tends to his
garden at home.
4. CONFIDENTIALITY AND NON-DISCLOSURE CLAUSE.
The confidentiality and non-disclosure clause reflects the commitment of the employee that he shall not,
either during the period of his employment with the employer or at any time thereafter, use or disclose to any
person, firm or corporation any information concerning the business or affairs of his employment, for his own
benefit or to the detriment of the employer. This clause may also cover Former Employer Information and Third
Party Information.
5. NON-SOLICITATION CLAUSE.
To protect the legitimate business interests of the employer, including its business relationships, the
employee under this clause, may, directly or indirectly, be prohibited from soliciting or approaching, or accept any
business from any person or entity who shall, at any time within a fixed period preceding the termination of his
employment, have been (a) a client, talent, producer, designer, programmer, distributor, merchandiser, or advertiser
of the Company, (b) a party or prospective party to an agreement with the employer, or (c) a representative or agent
of any client, talent, producer, designer, programmer, distributor, merchandiser, or advertiser of the employer for the
purpose of offering to that person or entity goods or services which are of the same type as or similar to any goods
or services supplied by the employer at termination.
6. NON-RECRUITMENT OR ANTI-PIRACY CLAUSE.
This clause prohibits the recruitment by the employee of personnel or employees of the employer for a
certain period after his termination of employment, either on his own account or in conjunction with or on behalf of
any other person.
7. INVENTIONS ASSIGNMENT CLAUSE (INTELLECTUAL PROPERTY CLAUSE) .
 In industries engaged in research and development and related activities, this clause requires the employee,
within a certain period, to disclose in confidence to the employer and its subsidiaries and to assign all inventions,
improvements, designs, original works of authorship, formulas, processes, compositions of matter, computer
software programs, databases, mask works and trade secrets, whether or not patentable, copyrightable or protectible
as trade secrets (collectively, the Inventions) , which the employee may solely or jointly conceive or develop or
reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of his
employment with the employer.

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Endnotes:

1 G.R. No. 4907, March 22, 1910.

2 G.R. No. 10712, Aug. 10, 1916.

3 G.R. No. 13228, Sept. 13, 1918.

4 G.R. No. L-13699, Nov. 12, 1918.

5 G.R. No. 21127, Feb. 9, 1924.

6 G.R. No. 145443, March 18, 2005.

7 G.R. No. 154060, Aug. 16, 2005.

8 G.R. No. 163512, Feb. 28, 2007.

9 G.R. No. 112940, Nov. 21, 1994.

10 G.R. No. 196539, Oct. 10, 2012.

11 G.R. No. 163512, Feb. 28, 2007.

12 Anselmo Ferrazzini v. Carlos Gsell, G.R. No. 10712, Aug. 10, 1916.

13 G. Martini (Ltd. ) v. J. M. Glaiserman, G.R. No. L-13699, Nov. 12, 1918 (En Banc) .

14 Alfonso del Castillo v. Shannon Richmond, G.R. No. 21127, Feb. 9, 1924.

15 Raquel P. Consulta v. CA, Pamana Philippines, Inc. , G.R. No. 145443, March 18, 2005.

16 Emphasis and underscoring supplied.