Earlier this year, Jackson Lewis opened a new office in San Juan, Puerto Rico serving clients throughout the Commonwealth. We thought we would take the opportunity to discuss the enforceability of non-competes under Puerto Rico law. As in many other jurisdictions, the validity and enforceability of non-competition agreements in Puerto Rico depends on the reasonableness of the restrictions imposed. Employers must also strictly follow the requirements set forth by the Puerto Rico Supreme Court in Arthur Young & Co. v. Vega, 136 D.P.R. 157 (1994), to wit:
- The employer must have a legitimate interest to protect and the non-competition agreement must be drafted so as to not impose any limitations beyond those needed to protect the interest. The existence of the employer’s interest needs to be directly related to and will depend on whether the employee’s position in the company enables him/her to effectively compete with his/her employer in the future.
- The restrictions on the employee must be circumscribed to activities similar to those the employee is engaged in. Thus, a non-compete that restricts a former employee from working in other capacities will be declared invalid.
- The time span of the restrictions may not exceed a term of twelve (12) months after the employee’s termination date. Any additional term is deemed excessive and illegal per se.
- The geographic area covered by the restriction must be strictly limited to that necessary to prevent actual competition between employer and employee.
- When referring to clients, the non-compete clause should refer only to (i) those personally serviced by the employee during a reasonable period before his/her last date of employment; and (ii) which at the time, or for a period immediately before said date, were still the employer’s clients. The Puerto Rico Supreme Court has further suggested that restrictions applicable to potential clients would be considered to be excessively broad and, therefore, invalid. See PACIV, Inc. v. Pérez Rivera, 159 D.P.R. 523 (2003).
- The employer must provide valid and sufficient consideration in exchange for the employee signing a non-competition agreement. As to newly hired employees, the offer of employment is deemed adequate consideration, provided the employee executes the non-competition agreement as of his/her hire date. As to current employees, additional consideration must be provided in order to secure a valid non-compete. Additional consideration could consist of a promotion, additional employment benefits, or the enjoyment of substantial changes of a similar nature in the employment conditions. Mere job tenure, however, will not be deemed as sufficient and adequate consideration for the non-competition agreement.
- The non-competetion agreement must be in writing.
It should further be noted that the Puerto Rico Supreme Court has expressly rejected the “blue pencil approach,” as well as the partial enforcement method, which allow the parties to modify non-competition agreements to adjust them to reasonable standards and further permit courts to enforce non-competition agreements as modified by the parties. Thus, failure to comply with any of the above-mentioned requirements will cause the entire non-competition agreement to be void and unenforceable. For this reason, we strongly recommend that employers conducting business in Puerto Rico secure legal advice in connection with the preparation and execution of non-competition agreements and other restrictive covenants for employees working in Puerto Rico.