Held
The confidentiality clause may be valid and enforceable only if there is a substantial factual basis that the information covered is indeed a trade secret or confidential, and the party seeking protection can show a compelling reason for confidentiality as required by Air Philippines Corporation v. Pennswell. The non-compete clause as written—being perpetual and global in scope—is invalid and unenforceable under Philippine law because it lacks reasonable limitations as to time, trade, and place, and is therefore contrary to public policy.
Explanation
Article 1306 of the Civil Code allows parties to agree on contract terms as long as they do not violate law, morals, good customs, public order, or public policy. Article 1183 further clarifies that impossible or unlawful conditions annul the obligation dependent on them, but the valid parts remain effective. The 1987 Constitution prohibits combinations in restraint of trade or unfair competition, reflecting public policy against unreasonable restrictions on employment and business.
Confidentiality clauses protecting trade secrets are valid because trade secrets are recognized proprietary rights that give employers a competitive advantage and deserve protection from disclosure. The Supreme Court in Air Philippines Corporation v. Pennswell affirmed that trade secrets must be kept confidential to preserve their economic value.
Non-compete clauses, however, must be reasonable in scope, duration, and territorial coverage to be enforceable. The Court in Tiu v. Platinum Plans Phil upheld a non-involvement clause limited to one year and specific trade, finding it reasonable and not contrary to public welfare. Conversely, a non-compete clause that prohibits employment in any competing business "in perpetuity" and "in any country where the company operates" is overly broad, unreasonable, and contrary to public policy because it unreasonably restrains the employee's right to work and livelihood.
Application to the facts
The confidentiality clause in Mahusay’s contract is valid and enforceable only to the extent that it covers information that is actually a trade secret or confidential information as defined in Air Philippines Corporation v. Pennswell. Not all information labeled confidential by the employer is automatically protected; there must be a substantial factual basis that the information is indeed a trade secret or confidential, such as being generally unknown to the public and giving the employer a competitive advantage.
However, the non-compete clause barring Mahusay from engaging in any competing business "in perpetuity" and "in any country where the company operates" is excessively broad in time and territorial scope. This restriction is not limited to a reasonable period after employment ends, nor is it confined to a reasonable geographic area. Such a clause effectively prevents Mahusay from earning a livelihood in his field indefinitely and globally, which is contrary to public policy as stated in the Civil Code and the Constitution. The Supreme Court’s ruling in Tiu shows that reasonable limitations on time, trade, and place are necessary for enforceability, which Mahusay’s clause lacks.
- a constitutional provision is among the sources and controls over any conflicting statute
"The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy."
"Impossible conditions, those contrary to good customs or public policy and those prohibited by law shall annul the obligation which depends upon them. If the obligation is divisible, that part thereof which is not affected by the impossible or unlawful condition shall be valid. The condition not to do an impossible thing shall be considered as not having been agreed upon."
"The State shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed."
Laws retrieved
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- Article 1306, Obligations and Contracts and Related Laws
- Article 1183, Obligations and Contracts and Related Laws
- Section 3, The 1987 Constitution of the Republic of the Philippines
- Section 19, The 1987 Constitution of the Republic of the Philippines
- Section 14, The 1987 Constitution of the Republic of the Philippines
"A trade secret may consist of any formula, pattern, device, or compilation of information that: (1) is used in one's business; and (2) gives the employer an opportunity to obtain an advantage over competitors who do not possess the information... Trade secrets should receive greater protection from discovery, because they derive economic value from being generally unknown and not readily ascertainable by the public."
"We noted therein that the restriction did not prohibit the agent from engaging in any other business, or from being connected with any other company, for as long as the business or company did not compete with the principal's business. Further, the prohibition applied only for one year after the termination of the agent's contract and was therefore a reasonable restriction designed to prevent acts prejudicial to the employer... a non-involvement clause is not necessarily void for being in restraint of trade as long as there are reasonable limitations as to time, trade, and place."
Cases retrieved
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