An important tool for protecting a business and strategic information can be a non-compete clause.
Widely used in Brazilian work relationships, it also applies to partners and service approaches, but some care is essential to have a valid clause, without running the risk that, in the future, it could be annulled by the Brazilian judiciary.
We highlight four points of attention that need to be analyzed to protect the business.
1. Objective: it is necessary to understand that the objective of the clause is to prevent, after the end of the relationship, a partner or service provider from acting for the competition or developing competing businesses, sharing or using information that could harm the current business. For this reason, it is important that you are careful that the current contract no longer contains permissions that are necessary for future enforcement of the non-compete.
2. Company’s Option: the clause must make it clear that the company may have the option of executing the non-compete, not being a mandatory limitation. Especially to avoid an unnecessary cost, as will be explained in item 4, when it does not make sense to execute the non-compete, as in the case of non-essential minority partners, or service providers that have become irrelevant to the business.
3. Term, Territorial and Activity Limitations: the clause must have clear and objective limits, establishing a term, territory and area of activity. An excessively generic and subjective clause may have the opposite effect. Instead of a super limitation, there is a risk of having the clause declared invalid by the Brazilian judiciary.
4. Financial Compensation: without a doubt this is the most discussed and sensitive point in a non-compete clause in Brazil. It is necessary to understand that the clause limits professional activity and, therefore, for its execution to be possible, it is essential that there is financial compensation. This is the most current understanding of the Brazilian courts. The discussion is still about the appropriate percentage of remuneration, which may vary depending on the specific case.
There is no doubt about the loss that a partner or service provider can generate for a company if it decides to become a competitor. This makes the non-compete clause one of the essential items of a Shareholders Agreement or Service Provision Agreement. But as seen here, the wording of the clause involves important reflections that will be essential for its future validity.
