Carolina Tavares Rodrigues

Machado, Meyer, Sendacz e Opice Advogados, São Paulo

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Murilo Caldeira Germiniani

Machado, Meyer, Sendacz e Opice Advogados, São Paulo

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In his book Management Challenges for the 21st Century, published in 1999, Peter F Drucker, the father of modern management stated that ′the most valuable asset of a 21st-century institution, whether business or non-business, will be its knowledge workers and their productivity′. Knowledge workers, when compared to ′regular′ ones, are those individuals whose main asset is knowledge, that is, their creative thinking and capacity to generate value to the company. Indeed, it is a fact that information and knowledge have become intangible assets for companies and the protection of such assets represents their capacity for doing business in an extremely competitive market economy, which Drucker describes as a ′knowledge economy′. According to the Annual Study of Intangible Asset Market Value recently released by Ocean Tomo, an investment advisory firm, intangible assets represent 84 per cent of the total asset value of the companies composing the S&P 500 Index.

In this context, considering that access to confidential and proprietary information represents a significant part of the routine of knowledge workers, the proper establishment of post-employment restrictive covenants (such as confidentiality, non-compete, nonsolicitation and non-poaching obligations) is vital for companies to ensure adequate protection of sensitive information and legitimate business interests.

Therefore, when seeking to establish such post-employment restrictive covenants in employment contracts, multinational companies in Brazil should be aware that the enforcement and validity of such restrictive covenants is subject to several limitations.

Confidentiality has statutory protection in Brazil, even after the termination of employment. According to the Brazilian Penal Code, it is a criminal offence to disclose, without cause, a secret known as a result of the rendering of services, if such disclosure will cause damage to others. Moreover, the Brazilian Intellectual Property Law establishes that it is a criminal offence to disclose, exploit or use, without authorisation, confidential knowledge, information or data in the industry, commerce or services known as a result of the rendering of services, even after the termination of the contract, except in relation to those of public knowledge or evident for an expert.

Nonetheless, due to the lack of a proper legal definition of what constitutes ′trade secrets′ and ′confidential information′, it is highly advisable for companies aiming at enforcing such obligations in Brazil to contractually define such concepts, establish additional confidentiality-related obligations (such as the return of the company′s property and files in case of termination) and set forth non-compensatory fines in case of breach. Although the breach of confidentiality obligations may be considered a criminal offence, a criminal prosecution may not be desirable for companies since it may be time-consuming and not cost-effective (not only from a legal perspective, but also from a corporate standpoint).

In relation to post-employment noncompetition obligations, although Brazilian laws prohibit employees from engaging in any unfair competition against their former employer, there is no legal provision preventing their engagement by competitors. As long as employees do not use any confidential or proprietary information belonging to their former employer, the Brazilian Federal Constitution guarantees them a broad right to work. As a consequence, Brazilian labour courts tend to only enforce post-employment noncompetition obligations if: (1) their extent is geographically limited to a certain territory; (2) the competitor companies or the relevant market is defined; (3) the non-compete period does not exceed two years; and (4) an adequate compensation (calculated based on the remuneration of the employee, the extent of the geographic coverage and the definition of competitor) is paid during the non-compete period.

Specifically regarding the compensation, the broader the extent of the geographic coverage and the definition of competitor, the higher the compensation paid to the former employee must be. For example, if the individual is a lawyer licensed to practise law solely in Brazil, and the noncompetition obligation prohibits him/her from working to all law firms in the entire Brazilian territory, ′adequate′ compensation would be around 100 per cent of his/her last remuneration throughout the entire non-compete period (since the possibilities of him/her finding another job would be substantially limited). On the other hand, if the definition of competitor is restricted to, for example, law firms with more than 350 associates, ′adequate′ compensation would be substantially lower, as there are probably no more than four firms with more than 350 associates in Brazil (and, thus, the job opportunities in this case would be higher).

In addition, Brazilian labour courts understand that amounts paid throughout the employment relationship cannot be used to compensate post-employment noncompetition obligations, meaning that the compensation must be paid after the termination. Moreover, such compensation cannot be paid solely after the termination of the restrictive period, as it may be too burdensome for the former employee to spend this entire period without any income. As a consequence, although it is possible to pay such compensation in a lump sum at the start of the non-compete period, it is best for companies to pay it on a monthly basis, since, in this case, if the former employee breaches the obligation during the non-compete period, the company will not have to seek for reimbursement of the entire compensation, but rather cease future payments (and seek for compensation solely in relation to compensation already paid).

It is best to execute the post-employment non-competition obligation at the beginning of the employment relationship, since, in some circumstances, the establishment of such an obligation during employment may be considered as a detrimental amendment to previous employment conditions, which is prohibited by the Brazilian Labour Law. The circumstances in which the establishment of such a restrictive covenant during the employment relationship may be legally accepted would be those related to substantial changes in the employee′s duties, such as the promotion to a management position which affords the employee access to sensitive information. However, even in these cases, the employee′s consent must be obtained, meaning that it cannot be imposed on the employee.

In relation to non-solicitation and nonpoaching obligations, although Brazilian labour courts accept their enforcement without requiring the payment of any compensation, such obligations end up being easily circumvented (and, thus, hardly enforceable) as, due to the constitutional protection of the right to work and free market, employees may lawfully voluntarily apply for jobs with former colleagues, and customers and suppliers may also procure business with them.

Finally, when multinational companies desire to enforce any type of postemployment restrictive covenants before Brazilian labour courts (especially those related to non-competition obligations), they must be aware that, although it would be lawful to make a claim for an injunction requesting the former employee to stop breaching the restrictive covenant, Brazilian labour judges tend not to accept such claims. Even if the non-competition obligation is drafted in accordance with the requirements described above, Brazilian labour judges tend not to interfere with individuals′ right to be employed based on their constitutional right to work, but rather view such a covenant as an obligation to pay a compensation for losses and damages resulting from the breach. Therefore, considering that it is difficult for companies to evidence the occurrence and extent of such losses and damages and, moreover, to associate them with the breach of the restrictive covenant, it is highly advisable for companies to establish a minimum amount to be paid as a non-compensatory fine by the employee in case of breach.

Given this context, companies doing business in Brazil, especially those whose main capital is information and knowledge, have to properly address the implementation of postemployment restrictive covenants and observe all requirements established by case law in order to ensure the adequate protection of sensitive information and business interests.

Latin American Regional Forum - Newsletter of the International Bar Association Legal Practice Division. v. 8, n. 1. Sept. 2015, p. 43-45.