Alexandre de Almeida Cardoso
TozziniFreire Advogados, São Paulo
acardoso@tozzinifreire.com.br

Mariana Fiorotto Pereira
TozziniFreire Advogados, São Paulo
mpereira@tozzinifreire.com.br

Introduction

Non-compete agreements have long been a subject of debate within labour law, particularly as the global economy undergoes rapid changes driven by globalisation and digital transformation.

Globalisation has led to highly competitive markets, both locally and internationally. This requires stronger protection for businesses to safeguard their trade secrets, which explains the proliferation of non-compete agreements in some countries, such as the US and Brazil.

However, the application of non-compete agreements can vary significantly across jurisdictions, influenced by regulatory frameworks, judicial rulings and economic trends, raising questions about their enforceability and legality, in a rapidly evolving digital landscape that transcends traditional boundaries.

Non-compete agreements in Brazil: legal framework and judicial rulings

The Brazilian Labor Code^[1] establishes that employees cannot compete with their employers during the term of their employment. If an employee breaches this obligation, the employer has the right to terminate the employment for cause and seek indemnification for any damages resulting from such misconduct.

Additionally, the Brazilian Industrial Property Law^[2] prevents employees from disclosing or using their employer’s trade secrets without authorisation, both during employment and after its termination, for an indefinite duration. Violating this provision may constitute unfair competition, subjecting the offender to civil and criminal penalties.^[3]

However, such legal provisions are insufficient to prevent the silent breach of trade secrets. For example, an executive in a key position at a company, who is intentionally enticed by a direct competitor, may cause irreversible damage to their former employer, even without disclosing or expressly using that information. It is enough for the executive to incorporate the knowledge gained from their former employer when planning and performing their new duties. In situations like this, a non-compete agreement operates as the only effective measure to protect, in a preventive manner, a potential violation of trade secrets.

While Brazil does not have specific regulations governing the enforceability of non-compete agreements after employment, Brazilian labour courts recognise these agreements as valid and enforceable, contingent upon the fulfillment of certain criteria:

• Access to trade secrets: It is important to provide evidence that the former employee had access to trade secrets, due to the position held and the duties performed for the employer.
• Limitation in time: The restriction period must be reasonable and explicitly limited to a maximum of 24 months.
• Geographic limitation: A reasonable geographic scope must be defined, indicating the areas where the former employee is restricted from providing services.
• Limitation of activities: The obligation outlined in the agreement must be directly related to a defined purpose, ensuring that they do not extend beyond what is necessary to protect the former employer’s legitimate interests.
• Fair financial compensation: The former employee must receive financial compensation for the non-compete obligation, reflecting the duration and extent of the restrictions.

Federal Trade Commission’s decision on non-compete agreements

On 23 April 2024, the Federal Trade Commission (FTC) issued a final rule banning non-compete agreements for employees at all levels, with only very limited exceptions allowed. Although the rule was originally supposed to take effect on 4 September 2024, a district court intervened on 20 August 2024, preventing the FTC from enforcing this rule nationwide. The FTC has since appealed this decision.

According to the FTC,^[4] approximately 18 per cent of US workers – around 30 million individuals – are currently bound by non-compete agreements. The FTC estimates that abolishing these clauses could lead to benefits. For example, the elimination of non-compete agreements is projected to (1) foster greater innovation, potentially leading to an annual increase of 17,000 to 29,000 additional patents; (2) stimulate the formation of new businesses, with an anticipated 2.7 per cent rise in startup creations, resulting in over 8,500 new businesses each year; and (3) boost workers’ earnings, with typical workers expected to earn $524 more annually.

The rule not only aims to eliminate existing non-compete agreements but also seeks to prevent employers from implementing new ones. This move has ignited intense debate among employers and legal experts.

Implications of the FTC’s decision for non-compete agreements in Brazil

While the potential implications of the FTC’s decision extend beyond the US – particularly to countries navigating the complexities of non-compete agreements in a globalised economy – the situation in Brazil presents unique considerations.

In contrast to the US, post-termination non-compete agreements in Brazil are not widely applied. This distinction arises from the well-established framework within the Brazilian Labour Courts, which outlines requirements for its enforceability. These requirements are essential for striking a balance between employer’s rights to protect their trade secrets and employee’s rights.

From a Brazilian perspective, labelling all non-compete agreements as excessive would overlook their role as an effective tool for employers to preventively safeguard their trade secrets. In today’s business, trade secrets – such as formulas, recipes, marketing and price strategies, software algorithms and business plans – constitute the most significant portion of a company’s economic value, whose violation can jeopardise the very continuity of the business.

Implementing preventive measures to protect trade secrets is crucial, as once these assets are compromised, restoring them to their original state is often impossible. Additionally, reparatory measures against the offender are not an effective mechanism to compensate for the losses and damages incurred by the company.

Conclusion

Although the landscape of non-compete agreements is evolving due to globalisation of highly competitive markets, rulings from the Brazilian labour courts have become well-established and continue to play a crucial role in preventing unfair competition, without neglecting the necessary balance between the rights of employers and employees.

Nevertheless, it is important to monitor the ongoing discussion surrounding the applicability of non-compete agreements in the US and other countries and any potential implications on the Brazilian market.

The requirements for the enforceability of non-compete agreements must be regularly reviewed and updated to adapt to the changes brought by digital transformation. Geographical limitations are an example of requirement that may need reevaluation to reflect the new realities faced by businesses, as they may not apply in the context of a flexible workforce, where employees can work from anywhere.

By staying informed of these developments and proactively adapting their strategies, companies will have the necessary tools to navigate the landscape of non-compete agreements, protecting their trade secrets while responding to the complexities of global markets.