PART 1: Concept and Origin  

Non-compete agreement in labor relationships has been extensively applied for a long period in many nations. In Vietnam, enterprises frequently use non-compete agreement in labor relationships as a practical instrument to safeguard information and business secrets as well as to prevent employees from directly or indirectly competing with themselves. Through a series of articles on non-compete agreement in labor relationships, the author would like to provide an overview of non-compete agreement in labor relationships and some lessons learned for those who apply this type of agreement. 

1. The concept of non-compete agreement in labor relationships 

While working with the employer, the employee can access confidential information of the employer such as production secrets, business secrets, technology secrets, … or even relationships with partners and customers of the employer. The employer commonly agrees with the employee on a commitment not to work for a competitor of the employer or not directly compete with the employer for a specific period after the termination of the labor relationship in order to protect the interests of the employer. Such agreements are known as non-compete agreements (NCAs) in labor relationships. 

Many researchers have proposed the concept of NCA in labor relationships from the perspective of legal science. NCA can be understood as a commitment not to compete with the employer after the termination of the labor relationship between an employee and his/her current or future employer.⁽¹⁾ Alternatively, NCA is regarded as an employment contract in which the employee agrees not to join a competitive company for a period after quitting or being fired.⁽²⁾ According to another view, NCA is considered a contract between an employer and an employee that prohibits the employee from doing his/her business independently or entering into an employment relationship with another employer that performs or is capable of performing competitive activities with the employer during the implementation of the labor relationship or after its termination, which protects the employer’s crucial, confidential, and financially valuable information.⁽³⁾

In Vietnam, the concept of NCA in labor relationships has not been officially defined in legal documents. However, in some countries around the world, especially the United States, it has been regulated in some statutes. 

As stated by Massachusetts General Laws, NCA is an agreement between an employer and an employee, or otherwise arising out of an existing or anticipated employment relationship, under which the employee or expected employee agrees that he or she will not engage in certain specified activities competitive with his or her employer after the employment relationship has ended.⁽⁴⁾ In Washington, on the other hand, “noncompetition covenant” includes every written or oral covenant, agreement, or contract by which an employee or independent contractor is prohibited or restrained from engaging in a lawful profession, trade, or business of any kind.⁽⁵⁾

In conclusion, although there are a variety of perspectives on the introduction of NCA concepts in labor relationships, they all indicate that NCA in labor relationships is a type of agreement to protect the interests of the employer, under which the employee shall not become a competitor of the employer or work for a competitor of the employer after the termination of the employment relationship. 

2. The origin of non-compete agreement in labor relationships 

Some studies claimed that NCA had its beginnings in England in the 15th century.⁽⁶⁾ Accordingly, the NCA resulted from Dye’s noncompete violation in 1414. The respondent – Dyer, was an apprentice dyer with his nameless employer, as the plaintiff in the case. Dyer was to agree with his employer that he would not conduct his own business in the same town as his employer for a period of six months following the end of his apprenticeship. The employer sued Dyer because Dyer broke the agreement of the parties soon after. At the time of considering this case, Europe in general and England were affected by the plague, which led to a severe labor shortage. As a result, the Ordinance of Laborers 1349 was issued and stipulated that everyone under the age of 60 must work.⁽⁷⁾ Due to this regulation, the judge was not sympathetic to the plaintiff’s request in this first NCA case and even threatened to put him in jail for daring to forbid someone from working.⁽⁸⁾ NCA, therefore, are not recognized or enforced at this time. 

By 1711, the first signal of acceptance of NCA appeared in the case of Mitchel v. Reynolds. According to the content of the lawsuit, Mitchel is the tenant of a bakery owned by baker Reynolds. Reynolds and Mitchel agreed that for a period of five years, Reynolds would not run a bakery in the same neighborhood as Mitchel to ensure the supply and demand for his goods. After Reynolds had violated the parties’ agreement by having a bakery in the same area as Mitchel, Mitchel sued Reynolds for breaking their restraint of trade agreement. In response to Mitchel’s petition, Reynolds argued that the parties’ restrictive trade agreement was invalid because it restricted him from doing his business as a baker. When reviewing the case, Judge Lord Macclesfield agreed that all restrictive trade agreements were invalid because they could make the agreement participants difficult due to their inability to earn a living and cause harm to society by loss of services to the agreement participants and result in a monopoly. However, there are exceptions to the restrictive trade agreement. Specifically, in this case, the Court found that the agreement of Mitchel and Reynolds is enforceable due to its “reasonableness” for the parties to enter into a restrictive trade agreement because it directly affects the rental of the bakery. If this agreement is not put into effect, Reynolds will have difficulty renting because Mitchel will not rent the bakery when cannot rest assured knowing that Reynolds will compete with him. Reynolds, in addition, received a financial benefit from the rental of the bakery. In this case, the restrictive trade arrangement was expressly confined and did not cause any loss to the public; therefore, Judge Lord Macclesfield ruled Mitchel’s favor.⁽⁹⁾

It can be seen that NCA in the case of Mitchel was established in the commercial business sector, but the acceptance of its enforcement is considered related to NCA, relevant to employment and influence the development of NCA in labor relationships of some countries, notably the United Kingdom and the United States. 

PART 2: Some views on legal validity in Viet Nam

Despite having been widely applied in Vietnam, a non-compete agreement in labor relationships has raised numerous controversies regarding its legal validity. The objectors to the legal validity of the non-compete agreement argue that the agreement infringes on employees’ right to freely work, rendering it legally unenforceable. Proponents of a legally valid non-compete agreement, in contrast, claim that this agreement is a voluntary agreement between employees when working for an employer that should be legally valid. Conflicting opinions on whether to admit or deny the legal validity of the non-compete agreement appear not only among researchers and legal experts but also in Vietnamese legal practice, which creates concern and apprehension for the parties to enter into this type of agreement. 

1. The non-compete agreement has no legal validity since it infringes on employees’ right to freely work

The legal validity of a non-compete agreement (NCA) is not acknowledged in some nations such as Malaysia, Russia, India or some states such as California, North Dakota and Oklahoma of the United States of America, due to its restrictions and intrusions on the employees’ freedom to choose their occupations and workplaces.⁽¹⁰⁾ 

Similar to Vietnam, many views believe that the NCA is invalid because it violates the employee’s right to freely work as stipulated in the Constitution and other labor-related legal documents. Because, as stated in Clause 1, Article 35 of Constitution 2013, the rights of working, choosing an occupation, job and workplace are constitutional rights. The rights to work, freedom to choose a job, and a place to work are emphasized that the rights of employees in Clause 1, Article 5 of Labor Code 2019 and ensuring the right to work and freely choose jobs and workplaces are considered as one of the principles on employment as prescribed in Clause 1, Article 4 of Law on Employment 2013. Based on these provisions, it can be seen that the employee has the right to work freely and no one has the authority to restrict that freedom. As a result, the NCA containing content forbidding employees from working for employers is invalid. 

In procedural practice, a number of court judgments have expressed this view. For example, the judgment No. 420/2019/LD-PT dated May 15, 2019 of the People’s Court of Ho Chi Minh City on the dispute regarding the termination of a labor contract with a competitor has clearly shown the court’s opinion on the non-recognition of the NCA’s validity. Or most recently, the case that T.T Technology Joint Stock Company sued Mr. N. D., a technician, seeking more than VND 250 million in compensation because Mr. D had violated the confidentiality and non-compete agreement previously signed. According to the agreement, Mr. D. is prohibited from working or collaborating for any person, unit, or company relating to any task or project at the N.S. Refinery and Petrochemical Plant for a period of 12 months from the date of his resignation. However, on June 15, 2021, after leaving his job for 3 months, Mr. D signed a labor contract with N.S Refining and Petrochemical Co., Ltd in the same position, violating his NCA. 

Although the first-instance court agreed with T.T Company’s lawsuit claim, ordering Mr. D to pay more than VND 251 million in compensation to the company, this decision was overturned by the appellate court. Accordingly, at the appellate hearing in early 2023, the People’s Court of Thanh Hoa province rejected T.T Company’s request because the non-compete clause was inconsistent with the Constitution’s provisions on the right to choose an occupation, job and workplace of citizens; contrary to the provisions of the Labor Code on the right to freely choose a job, working for any employer and in any place that is not prohibited by law, so it has no legal validity.⁽¹¹⁾

Additionally, those who do not acknowledge the legal validity of NCA also claim that the employees have the right to freely enter into labor contracts but the fact that they agree to sign the NCA or sign a labor contract with a non-compete clause is “voluntarily but not entirely”. Employees can only be forced to sign NCAs at the request of employers when establishing labor relations if they do not want to forfeit their career chances because they are always the weaker party in labor relations. The majority of employees are “reluctant” to sign to be recruited, yet there are relatively few cases where they dare to voice their concerns.⁽¹²⁾

2. The non-compete agreement has legal validity because it is a voluntary agreement between the employee and the employer

In some countries that recognize the legal validity of NCA such as the UK, France, China, Japan and some US states such as Washington, Oregon, Massachusetts, the NCA is regarded as the basis for the employer to bind the employee does not engage in acts of direct or indirect competition with the employer in order to ensure the legitimate rights and interests of them. The employee can still work for another employer who is not a competitor of the previous employer; therefore, NCA does not infringe on the principles of the employee’s freedom to find work. Furthermore, this contract is only for employees in vital positions who have had extensive training and high levels of qualification, are fully aware of their rights and obligations, and are willing to sign the NCA. At this time, employees are deemed to have actively restricted or restricted the rights they currently have.⁽¹³⁾

In Vietnam, Judgment No. 09/2010/LD-ST dated December 10, 2010 “Regarding Labor Contract Dispute” of the People’s Court of Duc Hoa District, Long An Province or Decision No. 755/2018 /QD-PQTT on the request to cancel the arbitral award of the People’s Court of Ho Chi Minh City has clearly expressed this point of view when requiring employees to comply with NCAs that signed with employers. 

It can be seen that the dispute settlement bodies in Vietnam have exact arguments to protect the interests of employers and employees, but there is still no consensus on the legal validity of NCA. Therefore, entering into NCA from the perspective of employers and employees has some potential risks, creating concern for the contracting parties of this type of agreement. The next articles in this series will give notes for NCA contracting parties. 

PART 3: The conditions for effectiveness under american regulations and recommendations for participants of this agreement 

In some nations in the world, such as the United States, France, and China, a non-compete agreement takes effect only if it satisfies certain conditions. In the United States, these conditions are set to ensure non-compete agreements’ reasonableness. In Vietnam, the recognition of the legal validity of non-compete agreements is still unclear, so the current regulations do not stipulate any conditions for a non-compete agreement to be considered valid. Notwithstanding, the participants of this agreement can carefully consider the agreement’s provisions before signing to make them reasonable to ensure its legality, which can both protect the rights of the employer and not infringe on the rights of the employee. By considering the regulations of reasonableness of non-compete agreements in the United States, the author would like to have some recommendations for the participants of this agreement.  

1. The reasonableness of the non-compete agreement in the United States 

In the United States, the legal validity of the non-compete agreement (NCA) is acknowledged in most states, except California, North Dakota, and Oklahoma.⁽¹⁴⁾ Simultaneously, NCA is only effective if it is reasonable.⁽¹⁵⁾ With the special legal system of the United States, each state has its own regulations on the conditions for NCA to be considered reasonable. 

Pursuant to Section 653.295 of Oregon Revised Statutes, NCA in Oregon is only effective when it fully meets these conditions: (i) To protect the employer’s interest when the employee is able to approach confidential competitive business information or commercial secrets; (ii) To be proposed at least two weeks before the employee starting to work for the employer, except promotion cases; (iii) The employee’s salary meets the minimum salary and bonus threshold; (iv) The term of NCA must not exceed 18 months.⁽¹⁶⁾ 

In Washington, Revised Code of Washington (Section 49.62.020 – 49.62.050) stipulates the various situations when NCA is invalid and unenforceable, such as (i) The employer sets forth the agreement after the employee accepts the recruitment offer or commence working for employers; (ii) Annual income of the employee is lower than USD 100,000; (iii) The employee’s labor contract is terminated due to dismissal; (iv) The term of the agreement is over 18 months; (v) The scope of applying NCA extends beyond Washington.⁽¹⁷⁾    

In Massachusetts, aside from the effective conditions of NCA in Chapter 149 – Section 24L of Massachusetts General Laws, including applying in necessary cases only, complying with provisions of format, term of advanced notification, the limitation of application time and space, this state has more specific provisions than other states: (i) NCA is not effective for several disadvantaged groups such as employees being paid overtime salary under The Fair Labor Standards Act, undergraduate and graduate students participating in an internship or short-term employment, employees aging under 18 years of age, and employees retired for no reason or dismissed, and (ii) There is a compensation amount for the employee in the period of implementing NCA.⁽¹⁸⁾ 

In conclusion, the reasonableness of NCA in the United States will be determined under the omnipresent conditions, such as (i) NCA is only applied in necessary situations to protect the benefits of employers; (ii) Participants of NCA must be appropriate (NCA will be ineffective if the participants are students, low-income people, laid-off employees, etc); (iii) There is limited period; (iv) There is limited geographical coverage (Applicable only in a certain area where employees are able to compete with employers such as within a state); (v) There is a compensation amount for employees in the period of implementing of NCA.  

If NCA has bitterly excessive scope leading to infringe on the employees’ rights, the Court will apply different doctrines to determine the ability to implement provisions in NCA, including deciding that the entire NCA is ineffective if one or numerous provisions of NCA are considered as unreasonable (red pencil); or deleting unreasonable provisions of NCA and reasonable ones will be still in effect (blue pencil); or reforming NCA to make it reasonable (equitable reform).⁽¹⁹⁾ 

2. Recommendations for participants of the non-compete agreement 

As mentioned in the previous part, the recognition of the legal value of NCA in Vietnam has not been explicit, and there are still different opinions. After all, considering the legal validity of NCA relies on whether NCA does or does not violate the rights of the employee. Therefore, participants of this agreement need to consider the application of NCA as well as its provision in a reasonable way, expressing the voluntary agreement between the employee and the employer. Accordingly, the consideration might be based on the reference of the United States to make reasonable content for NCA:  

1. NCA ought to be used in necessary situations and for certain positions to protect the interest of the employer; 
2. The period of NCA needs to be appropriate, it might be from 12 to 24 months;  
3. There is a limitation in certain areas where NCA can be applied, depending on factors such as the nature of work, technological application, and business market, etc; 
4. There are compensation amounts for the employee in the period of implementing NCA. The employer can pay the compensation for the employee in different ways, such as support fees for the employee in the period of implementing NCA; paying a higher salary than the common level and stating clearly that the higher salary is for the employee performing NCA after employment termination, etc. 

In conclusion, executing NCA in labor relationships is essential to protect the employer’s interests as well as harmonize with the employee’s benefits. Hence, through the series of articles about NCA, the author expects that participants of this agreement will have NCA being advantageous for both parties to avoid disputes in the future. 

⁽¹⁾ Harlan M. Blake (1960), Employee Agreements Not to Compete, Harvard Law Review, Vol. 73, No. 4.

⁽²⁾ Matt Marx, Lee Fleming (2012), Non-compete Agreements: Barriers to Entry… and Exit?, Innovation Policy and the Economy, Vol.12, Iss. 1, p.41.

⁽³⁾ Tran Thi Thuy Lam, Nguyen Viet Hung (2022), Agreement to restrict competition in the labor relationships: Current situation and some legal aspects, Journal of Legal Studies, No. 1/2022, p.49.

⁽⁴⁾ Chapter 149, Section 24L(a), Massachusetts General Laws.

⁽⁵⁾ Section 49.62.010.(4), Revised Code of Washington.

⁽⁶⁾ Matt Marx, Lee Fleming (2012), op. cit, p.41.

⁽⁷⁾ Matt Marx, Lee Fleming (2012), op. cit, p.41.

⁽⁸⁾ William L. Letwin (1954), The English Common Law concerning Monopolies, University of Chicago Law Review, Vol. 21, Iss. 3, Article 3, p.373.

⁽⁹⁾ Mitchel v. Reynolds, 1 P. Wms. 181, 24 E.R. 347 (Q.B. 1711).

⁽¹⁰⁾ Do Van Dai, Le Ngoc Anh, Non-compete agreement after termination of labor contract – Experience of foreign countries for Vietnam, Journal of Legal Science December 2019. 

⁽¹¹⁾ Mai Chi, Disputes over confidentiality agreements, Nguoi Lao Dong Newspaper, 2023.

⁽¹²⁾ Lac Duy, Nguyen Huu Phuoc, Confused about the commitment not to work for a competitor, Saigon Economic Magazine, 2019.

⁽¹³⁾ Le Thien, NDA Disputes: Join the game, why not accept the rules of the game?, Saigon Economic, Magazine, 2018.

⁽¹⁴⁾ Kristopher DH, Scott RL, Out with the Old, in with the New: The Biden Administration’s Plan for Non-Competes, Texas CEO Magazine, 2021, https://texasceomagazine.com/out-with-the-old-in-with-the-new-the-biden-administrations-plan-for-non-competes/ .

⁽¹⁵⁾ Griffin Toronjo Pivateau, An Argument for Restricting the Blue Pencil Doctrine, Belmont Law Review, Vol. 7, Issue 1, 2020, tr.6. 

⁽¹⁶⁾ https://oregon.public.law/statutes/ors_653.295

⁽¹⁷⁾ https://app.leg.wa.gov/RCW/default.aspx?cite=49.62

⁽¹⁸⁾ https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXXI/Chapter149/Section24L

⁽¹⁹⁾ Office of Economic Policy, Non-compete Contracts: Economic Effects and Policy Implications, 2016, tr.14, https://home.treasury.gov/system/files/226/Non_Compete_Contracts_Econimic_Effects_and_Policy_Implications_MAR2016.pdf 

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