Non-compete clauses in licensing agreements

Most licensing agreements – particularly those involving the sharing of trade secrets, know-how, confidential information and other IP rights – contain post-termination non-compete clauses to prevent injury to the licensor. The prohibition period usually ranges from two to five years from termination of the agreement.

In the Philippines, agreements for licensing of all forms of IP right, except for computer software developed for mass markets, are classified as technology transfer arrangements which must comply with the IP Code. Such agreements must not contain the prohibited clauses listed in Section 87 of the code and must contain the mandatory provisions set out in Section 88; otherwise, the agreement shall be considered to be unenforceable. Examples of prohibited clauses under Section 87 are those:

• where the licensor reserves the right to fix the sale or resale prices of the licensed products;
• which establish a full or partial purchase option in favour of the licensor;
• which oblige the licensee to transfer to the licensor for free inventions or improvements that may be obtained through use of the licensed technology; and
• which prohibit the licensee from adapting the imported technology to local conditions.

The objective of the compliance requirement is to prevent an abuse of IP rights which may have an adverse effect on competition and trade. A licensor wishing to record a licence agreement on its trademark registration or application, or considering a possible registration to avail of tax treaty relief, may submit its licence agreement for preliminary review by the Documentation Information and Technology Transfer Bureau (DITB) of the IP Office of the Philippines (IPOPHL). 

In regard to a number of licence agreements reviewed by the DITB, the latter has held that provisions preventing the licensee from engaging in a similar or competing business for two years or more after the licence has expired violate the IP Code. While Section 87 does not expressly prohibit non-compete clauses, the IPOPHL based its objection on Section 87.15, which refers to “other clauses with equivalent effects”. However, this objection was overcome by amending the licence agreement to reduce the prohibition against the licensee to engage in a competing business to one year, citing an earlier IPOPHL decision.

Therefore, rights holders wishing to enter the Philippine market by licensing their IP rights should have their licensing agreements reviewed by an IP practitioner and/or request preliminary review by the DITB. Those crafting non-compete clauses should bear in mind that a licensee can be prevented from engaging in a competing business for only one year. Such prohibition applies only against the licensee as an entity, not against its officers or employees.