By: Roxana Sandoval
Non-competition or non-compete agreements are pacts entered into by two individuals, determining that one of them will be restricted from engaging in certain economic, professional, or labor activities. These agreements take into consideration the prior contractual relationship between the parties, where one had access to privileged commercial information. The purpose is to establish restrictions or obligations regarding the use of shared information, protecting the economic interests of the information owner.
These agreements are common in two major areas: a) employment or professional service relationships, and b) commercial relationships in the context of acquisitions or certain types of investments.
The main objective of these agreements is to protect trade secrets, know-how, and other valuable commercial information of a company. They prevent former employees, service providers, shareholders, investors, and similar parties from using this privileged information for commercial exploitation in a competing company or for their own benefit.
However, the practical issue with these agreements is that while they protect the commercial information of one party, they may potentially limit constitutionally protected rights of the other party, such as the right to work or the freedom of industry and commerce.
To better explain these possible limitations, let’s use some examples. Suppose Pablo has been employed as a Sales Manager at a real estate development company called Los Patitos for 20 years. After deciding to resign, Pablo seeks other job opportunities in the market. In this case, Los Patitos and Pablo enter into a non-competition agreement due to Pablo’s access to privileged information. The agreement stipulates that Pablo cannot work for a competing company or engage in similar commercial activities as Los Patitos. In practice, this means that Pablo essentially cannot work in his area of expertise, which is selling buildings or real estate projects, as the non-competition agreement prohibits him from working in companies involved in that line of business. However, throughout his professional life, selling real estate projects is the only thing Pablo has done and has experience in.
That is why, in some countries like Spain, Italy, France, and Argentina, there are minimum regulations to be observed within a non-competition agreement, including:
- The duration of the non-competition agreement must be reasonable and should not exceed a maximum period specified by law or court decisions (typically 2 or 3 years).
- There should be a reasonable compensation for the employee as an incentive for complying with the non-competition agreement and as a way to mitigate the potential economic impact on the employee.
- The beneficiary company must have a genuine industrial or commercial interest in the restricted activities, meaning that the restricted activity should solely take place within the scope of the beneficiary company’s commercial activities. This prevents economic harm, such as the diversion of customers to a competing company, either for the benefit of the employee or a third party.
The idea behind these regulations in those countries is to ensure that non-competition agreements are as restricted as possible in their application, with limitations on the employee strictly necessary for the protection of commercial information or know-how.
It is important to note that Guatemala does not have specific regulations governing non-competition agreements, and there are no basic guidelines on the subject. However, considering the protective nature of labor law in Guatemala, favoring the employee, it is advisable to apply similar parameters as indicated in comparative law to ensure that the imposed restrictions are truly acceptable and reasonable, and that they can withstand judicial scrutiny without being considered disproportionate.
Similarly, concerning commercial relationships, we can use the following example to explain a possible limitation on constitutional rights: Karla sells her shares in Los Patitos, a fast-food company, and as part of the share sale, a non-competition agreement is included, stating that Karla cannot become a shareholder or invest in companies in the same industry for a period of 5 years. However, throughout her life, Karla has been involved in investing in and managing companies in this industry. Therefore, this non-competition agreement would mean that Karla cannot engage in business or investments in the industry or economic sector in which she has extensive experience for 5 years.
It is important to note that, regarding commercial relationships like the example mentioned, there are no clearly established criteria as there are for employment relationships. However, considering the right to freedom of industry and competition, it can be concluded that certain parameters implemented for employment relationships should also be considered when entering into such agreements in a purely commercial context. This is to avoid potential nullity based on the argument of limitation of constitutional rights or even a violation of competition law rules or principles. Therefore, it is suggested that the duration of these agreements be reasonable and that the specific areas or commercial activities being restricted are clearly defined, with clearly delimited scopes.