In Puerto Rico, non-compete agreements restrict employees from working for competitors for a period of time after leaving a company. The enforceability of these agreements varies among U.S. jurisdictions and has recently come under increased scrutiny at the federal level. In January 2023, the Federal Trade Commission (FTC) proposed a rule that would effectively prohibit most non-compete agreements nationwide. However, that rule has been challenged in court. See Ryan, LLC v. Federal Trade Commission, pending before the United States District Court for the Northern District of Texas. Although the FTC’s proposed ban has been temporarily blocked, the litigation remains ongoing. Businesses should continue to monitor developments while complying with applicable state and territorial laws, which continue to vary significantly among jurisdictions.
Non-Compete and Other Restrictive Covenants
In non-compete agreements, an employee agrees not to compete with the employer after the employment relationship ends. These contractual provisions restrict an individual’s ability to seek or accept employment with another company following separation from the current employer. Proper drafting of employment agreements and commercial contracts is essential to increase the likelihood that such provisions will be deemed valid and enforceable.
Generally, non-compete clauses prohibit employees from accepting employment with competing businesses or from establishing competing enterprises for a specified period of time and/or within a defined geographic area. These provisions may be structured as standalone agreements or included in employment contracts, professional services agreements, franchise agreements, business sale transactions, and other commercial arrangements. They may be entered into at the beginning, during, or at the conclusion of the applicable contractual relationship.
Article II sec. 16, of the Constitution of Puerto Rico recognizes the right of every worker to choose his occupation and freely resign. To protect this freedom of choice, courts have narrowly interpreted non-compete clauses and imposed strict requirements for their validity. When these are not met, the contract is deemed invalid and unenforceable.
Content of the Agreement
Valid non-compete clauses require that:
The employer have a legitimate interest in the agreement, that is, of not receiving the protection of a non-compete agreement, the business would be substantially affected. The magnitude of this interest is measured, in light of the position of the employee within the company. That is, the existence of the employer’s interest will be directly related and dependent on the employee given his/her the position in the company, can effectively compete with the employer in the future.
The scope of the prohibition must correspond to the interest of the employer, as to object and place restriction term or affected customers. The purpose of the ban should be limited to activities similar to those conducted by the employer, need not be limited to specific functions used. The term non-compete should not exceed twelve months, understanding that any additional time is excessive and unnecessary to adequately protect the employer.
Regarding the scope of the prohibition, the contract must specify the geographic boundaries or affected customers. As for the geographical area to which the restriction applies, it should be limited to the strictly necessary to prevent real competition between the employer and employee. When the non-competition concerns customers should refer only to those who personally attended the employee for a reasonable period of time before giving up, and in doing so, or in a period immediately preceding the withdrawal, clients were still employer. These elements are evaluated in mind the nature of the industry involved and the possible related public interest.
The employer must offer something in return for signing the non-compete agreement by the employee. This consideration may be, for example, in obtaining a promotion, additional benefits at work or enjoyment of any similar substantial changes in employment conditions. Even serious enough consideration a candidate obtains the desired job in the company. However, there shall be allowed as a cause of non-compete agreement mere continued employment.
Non-compete agreements, as with any contract, must have the essential elements for validity: consent, object and cause. Article 1213 of the Civil Code, 31 LPRA sec. 3391. However, in this type of contract will be especially strict to ensure that the employee freely and voluntarily signed the non-compete agreement. Undue pressure or coercion by the employer will make it invalid and unenforceable.
Non-compete agreements frequently involve issues that extend beyond employment law. Their enforceability often depends on contract drafting, the protection of legitimate business interests, and, in some cases, litigation to enforce or challenge restrictive covenants. Learn more about our Commercial Contracts Practice, Labor & Employment Practice, and Commercial Litigation Practice.
In sum, the elements of a valid non-competition agreement in Puerto Rico are: (1.) The employer must have a legitimate interest in the agreement; (2.) the scope of the prohibition in the non-compete must fit the employer’s interest but not exceed twelve months; (3.) The employer shall offer a consideration in exchange for the employee signing the non-competition covenant other than mere job tenure; (4.) Non-competition agreements must be valid contracts; (5.) Non-competition covenants must be in writing.
For further information, see: Arthur Young, 137 D.P.R. 40, 94 J.T.S. 75.
Robert Alex Fleming is a corporate and trial attorney with over 35 years of experience advising and representing clients in Puerto Rico. He leads Fleming Law Offices, LLC, where his practice is informed by decades of experience in commercial matters, litigation, governance, and dispute resolution. Mr. Fleming is admitted to practice before the courts of Puerto Rico, several federal courts, and the state courts of New York and Texas. He holds an LL.M. in Commercial Law and an MBA from the Kelley School of Business at Indiana University.