INTRODUCTION
Non-compete agreements, also known as "covenants not to compete" or "contracts in restraint of trade," have always attracted legal scrutiny in many jurisdictions, including Nigeria. This scrutiny has been intensified in Nigeria following the enactment of the Federal Competition and Consumer Protection Act, 2018 (the "FCCPA"), which seeks to promote fairness and competition across Nigerian markets, including the labour market, ensuring that business practices do not unduly disrupt market dynamics.
Traditionally, agreements restricting an individual's ability to freely engage in business or trade have been viewed with suspicion and are often considered anti-competitive.1 In some cases, these restrictions could suppress innovation, limit consumer choices, or create monopolistic market conditions. However, there are situations where carefully structured limitations are necessary to maintain fairness and healthy competition.
As Nigeria's economic landscape evolves, it is essential to understand how competition law and restraint-of-trade principles intersect, particularly in the context of non-compete agreements. These agreements need to strike a balance between preserving the freedom to contract and safeguarding competition. This balance is even more critical as Nigeria aligns its legal framework with international standards while creating an environment conducive to sustainable economic growth.
This article will provide an overview of the legal framework governing non-compete agreements in Nigeria, discussing their current application and potential impact on competitive practices. By examining relevant case law and offering practical recommendations, we hope to guide legal practitioners, businesses, and policymakers through the landscape of non-compete clauses in Nigeria.
UNDERSTANDING NON-COMPETE AGREEMENTS IN THE NIGERIAN CONTEXT
A non-compete agreement is a contract in which the employee agrees not to join a competitor, engage in a business similar to that of the employer, disclose or use the employer's trade secrets and proprietary information, after leaving the service of the employer.2 Restrictions on competitive practices during employment may seem redundant, as employees are already bound by the duty of good faith and fidelity,3 non-compete agreements provide added protection beyond the term of employment. The primary purpose of a non-compete agreement is to protect the employer's legitimate business interests, which contribute to maintaining the employer's competitive advantage in the market.4 Without these agreements, employers face the risk of unauthorized disclosure or misuse of proprietary information, trade secrets, or business strategies, which could undermine their competitive position in the market.5
In Nigeria, non-compete agreements are generally considered void and unenforceable based on public policy considerations,6 unless they meet the criteria of "reasonableness".7 The reasonableness of such agreements is assessed by factors including, the nature of the employer's business, the scope, duration, and geographical coverage, ensuring alignment with the legitimate interests of the parties involved and broader public welfare.8 The cases of Viramsun Nigeria Ltd v. Nitesh Kumar & Anor9 ("Viramsun's case") and The Lacasera v. Mr. Phrahlad Kottappurath Gangahharan,10 ("The Lacasera's case"), decided by the National Industrial Court of Nigeria (NICN), have established important precedents on the enforceability of non-compete agreements in Nigeria in the last decade.
In Viramsun, the NICN struck down a one-year nationwide non-compete clause, ruling it overly broad and unsupported by evidence of the employer's nationwide operations. The court held that non-compete clauses aimed solely at preventing competition, rather than protecting legitimate business interests, are void—especially where no trade secrets or confidential information were involved.
Similarly, in Lacasera, the NICN invalidated a five-year non-compete clause that sought to bar a former COO from working in a related field indefinitely. The court found the restriction excessive, particularly since the employee's new role at NBC was distinct from his former position. Without a justifiable business interest, the restraint was deemed unreasonable and unenforceable.
These decisions established that a non-compete agreement will be considered reasonable and enforceable under the following circumstances:
- The Reasonableness Test: Scope, Duration, and Geography: Reasonability depends on the specific facts of each case, considering factors such as the nature of the employer's business, the economic activities restrained, the duration, and the geographical reach.11 Both cases established that overly broad restraints, which exceed what is necessary to protect the employer's legitimate business interests, are void.
The rise of digital economies and globalization has introduced new dynamics to the nature of employer's business, scope and geographical relevance of non-compete agreements, particularly where the employer has an international presence. Courts must now balance the employer's international business interests with the employee's right to seek new opportunities in a globalized and interconnected economies. Non compete clauses must therefore be carefully tailored to reflect the realities of modern global commerce, ensuring they do not impose unreasonable restrictions on employees' future career prospects.
- Legitimate Business Interests Must Be Proven: As a trade-protection mechanism, non compete agreements are enforceable where they are employed to protect the legitimate business interests of the employer. These legitimate interests include trade secrets, confidential information that provides a competitive edge, business relationships, specialized training provided to employees, and any valid and justifiable reason for protecting the employer's business.
- Protection Against Competition Cannot Be the Sole Purpose: The NICN has clarified that non-compete clauses cannot be used solely to shield employers from competition or prevent employees from utilizing the personal skills and knowledge gained during employment. Both cases established that such clauses are unenforceable unless supported by a valid business justification.
In some cases, some employers enter into trade-protection agreements aimed at shielding their businesses from competition, including restrictions on hiring former employees for a specific period of their leaving their former employer.12 These practices limit employee mobility and their ability to explore other job opportunities in the labour market.13 Typically, employees affected by such agreements are barred from claiming rights due to the doctrine of privity of contract.14 However, the "neighbour principle" established in Donoghue v. Stevenson,15 and "public policy" considerations now permit third parties who suffer harm from such agreements to enforce them. These exceptions highlight that restrictive clauses are grounded in legitimate business protection, and not to stifle innovation or fair competition.16
- Proportionality Between Role and Restriction: The proportionality between the employee's role or status and the restrictions imposed by a non-compete agreement is crucial. Such restraints should be applied only to employees who have access to trade secrets or proprietary information critical to the employer's business, and not indiscriminately to all employees. In The Lacasera, the court highlighted the significant difference between the ex-employee's role as Chief Operating Officer and his new position as Product Development Director at NBC. This difference rendered the restriction disproportionate and unjustifiable.
- Balancing Public Policy with Contractual Freedom: Both cases reinforce the principle that while contractual freedom is acknowledged, public policy considerations ultimately take precedence. Overly broad agreements, which extend beyond what is necessary to protect legitimate business interest, limit labour mobility or restrict individual's ability to earn a livelihood, violate public policy. Public policy concerns are central to determining whether a non-compete agreement strikes a fair balance between safeguarding the employer's interest and ensuring fair competition and employment rights. This balance is crucial to ensure that such restrictions do not unfairly hinder an individual's right to pursue career opportunities.
- Navigating the Two-Year Rule: Compliance with the FCCPA: Section 68(e) of the FCCPA provides that a contract of service may include restrictive covenants, provided they do not exceed two years. Therefore, the NICN is unlikely to enforce any restraint exceeding the two-year limit as provided under the FCCPA, ensuring that non-compete agreements are reasonable and do not unduly inhibit an employee's ability to engage in their occupation after leaving employment.17 In 7th Heaven Bistro Limited v. Mr. Amit Desphande,18 the NICN deemed a restrictive covenant that barred the employee from accepting employment with any other employer in Nigeria for three years after termination or resignation as inhuman, stifling, and an unfair labour practice. The court found the prolonged restriction on the employee's ability to secure new employment unreasonable and unjustifiable.
- Application of the Severance Doctrine in Enforcing Restrictive Covenants: The doctrine of severance permits courts to severe an offending clause from a contract while enforcing the remaining provisions.19 In the context of non-compete agreements, this principle is applied when a portion of the restraint is unreasonable or illegal, but severable from the rest of the agreement, and if doing so does not fundamentally alter the nature of the agreement.20
The NICN applied this principle in Infinity Tyres Limited v. Mr. Sanjay Kumar & 3 Ors.21 In this case, the non-compete clause restricted the former employee from joining "any other company in Nigeria for one year" after leaving employment. The NICN found the clause excessively broad, as it applied to "[all] any organization in Nigeria", regardless of whether they operated in the same business as the employer. While the one-year time frame and geographic limitations were held reasonable, the blanket restriction was deemed unreasonable and unenforceable.
PUBLIC POLICY CONSIDERATIONS: THE BROADER IMPACT OF NON-COMPETE AGREEMENTS ON COMPETITION
Non-compete agreements have effects that go beyond the relationship between employers and employees, significantly influencing broader market competition and public policy. When non-compete clauses are excessively restrictive, they can hinder economic vitality by limiting the mobility of labor, stifling innovation, and reducing the availability of skilled talent. This, in turn, can lead to monopolistic behavior and suppress competitive practices, which affect both consumer choice and market efficiency. Such restrictive practices can distort the natural flow of supply and demand for labor, both locally and globally, creating an imbalance in the workforce market.
Public policy considerations play a crucial role in determining the enforceability of non compete agreements. Landmark cases like Viramsun and The Lacasera highlight how courts balance the interests of employers with the rights of individuals to work and earn a living. Courts must ensure that non-compete clauses do not unduly restrict a person's ability to earn a livelihood while also protecting the employer's legitimate business interests.
From a public policy perspective, non-compete agreements should serve a justified and purposeful function—one that supports overall economic health and fairness, rather than simply shielding employers from competition.
CONCLUSION
To ensure compliance with competition law and foster fair competition, businesses must navigate non-compete agreements within Nigeria's evolving regulatory framework. It is essential for companies to draft these clauses with precision, ensuring that they meet the criteria of reasonableness regarding scope, duration, and geographical limitations, as outlined by Nigerian courts. Non-compete agreements should be tailored to specific roles, focusing on the actual protection of legitimate business interests—such as trade secrets and proprietary knowledge. By doing so, employers can safeguard their competitive advantages while avoiding conflicts with public policy, employee rights, and competition law.
Footnotes
1 Koumoulis v. Leventis Motors Ltd (1973) LPELR-1710 (SC).
2 Bimbo Atilola, Labour & Employment Law in Nigeria: A Practitioner's Guide, Volume 1 (Lagos: Hybrid Consult, 2022) at p. 197.
3 Sam Erugo, Introduction to Nigerian Labour Law: Contract of Employment and Labour Practice, (2019 at pp. 127 – 128).
4 Legitimate business interests refer to valid and justifiable reasons or concerns that an employer seeks to protect in order to safeguard its operations. These interests typically include trade secrets, proprietary information, and confidential business data, essential for maintaining the employer's competitive edge in the market.
5 Although in Robb v. Green (1985) 2 QB 315, the court held that a former employee has a continuing duty not to disclose its former employer's trade secret to unauthorized third parties even after cessation of employment relationship.
6 Nordenfelt v. Maxim Nordenfelt Co. (1874) AC 535.
7 CFAO v. Luba (1918) 3 NLR 67.
8 Koumoulis v. Leventis Motors Ltd (Supra).
9 (Unreported, Suit No. NICN/LA/459/2013. Judgement delivered on November 5, 2015, coram Her Ladyship, Hon. Justice Oyewunmi Oyebiola).
10 (Unreported, Suit No. NICN/LA/533/2013. Judgment delivered by Hon. Justice J.D. Peters on March 17, 2016).
11 (Unreported, Suit No. NICN/LA/170/2014 – Infinity Tyres Limited v. Mr. Sanjay Kumar & 3 Ors. Judgment delivered on October 7, 2018, per. Hon. Justice Kanyip.
12 In Kores Manufacturing Co. Ltd v. Kolok Manufacturing Co. Ltd (1958) 1 All E.R. 65 such agreement was declared unenforceable.
13 Eastham v. Newcastle United Football Club Ltd (1963) 3 All E.R. 139.
14 Ben Chukwumah v. Shell Petroleum Development Co. (1993) NWLR (Pt. 289) 512 at 543.
15 (1932) All E.R. Rep. 368.
16 In Patrick Abusomwan v. Mercantile Bank of Nigeria Ltd (1987) 3 NWLR (Pt. 60) 196, the Supreme Court of Nigeria endorsed the doctrine of the "neighbour principle", holding that that the obligations arising from a contract extend not only to the contracting parties but also to persons who are likely to be injured by the actions or omissions of any of the contracting parties. The court noted that such persons affected are considered "neighbours" in the sense that they are persons whom the Defendant ought reasonably to have contemplated as being affected by their conducts.
17 See Infinity Tyres Limited v. Mr. Sanjay Kumar & 3 Ors (Supra), where the NICN held the restrictive covenant for one-year post-employment to be reasonable.
18 (Unreported, Suit No. NICN/LA/396/2015. Judgement delivered on September 27, 2018, per Peters J.)
19 Sam Erugo, Introduction to Nigerian Labour Law: Contract of Employment and Labour Practice, (2019 at p. 135).
20 The duty of the court is to strictly interpret, and not to rewrite, the terms of the contract on its clear terms – see Vincent Standard Steel Industries Ltd & Anor v. Lead Bank Ltd & Ors (2009) LPELR-8214(CA)
21 Supra.
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