Nguyen Huy Hoang, Partner, Bross & Partners

Email: hoang@bross.vn

Doan Thanh Binh, Senior Associate, Bross & Partners

Email: binh.dt@bross.vn

Since the opening up of Vietnam's economy, along with the presence of multinational corporations, non-disclosure and non-compete agreements ("NDCA") have appeared in industrial relations. The NDCA may be agreed upon in a labor contract ("LC"), as part of an LC, or by independent agreement. NDCAs typically consist of NDAs (Non-Disclosure Agreement) and NCAs (Non-Compete Agreements). However, from the legal perspective, the issue of the validity of the NCA remains with mixed opinions even with the publication of Precedent 69/2023/AL on the competence of Commercial Arbitration in the settlement of disputes related to NDCAs ("Precedent 69").

Within the scope of this article, we discuss and share some legal views regarding the validity of NCAs under Vietnamese law.

1. The essence of NCAs

An NCA is an agreement whereby an employee undertakes to an employer that the employee will not to work for the employer's competitors for a certain period of time after termination of the LC. The purpose of establishing the NCA is to protect trade secrets and technological know-how, which are intangible assets of employers stipulated in the Law on Intellectual Property 2005, amended and supplemented in 2009 (the "IP Law") (Article 3.2, IP Law) and must be respected by the parties, including employees. Thus, employers are permitted by law to take necessary measures, possibly including establishing NCAs to protect their trade secrets and technological know-how (Article 84.3, IP Law).

2. Validity of NCAs

2.1 While the legal validity of NDAs has been recognized by Vietnamese law and specified in the Labour Codes (the "Labor Code") (Article 21.2, Labor Code 2019[1], previously Article 23.2, Labor Code 2012[2]) and Circular No. 10/2020/TT-BLDTBXH dated November 12, 2020 of the Ministry of Labor, War Invalids and Social Affairs ("Circular 10/2020/TT-LĐTBXH") (Article 4.1, Circular 10/2020/TT-LĐTBXH[3]), the legal aspects and validity of NCA do not have specific regulations, although in our opinion, the nature, purpose of establishment, and jurisdiction for dispute resolution in Vietnam for NDAs and NCAs are not different. Both NDAs and NCAs are established with the purpose of protecting employers' trade secrets and technological know-how. When the NDA and NCA are violated, the Court has jurisdiction to settle if the violation occurs within the validity period of the LC, conversely, it will be the Court or commercial arbitration (if the parties have an agreement) if the violation occurs after the termination of the LC. Since there is no specific regulation, the issue of the validity of the NCA is still controversial even after Precedent 69 is published. In fact, regarding the same type of NCA disputes, some Courts recognize the NCA's validity[4], while other Courts find that the NCA is invalid because it violates the prohibition of the laws.[5] 

2.2 Precedent 69 only provides the legal solution for similar NCA violations after termination of the LC, accordingly Precedent 69 "defines the non-disclosure and non-compete agreement dispute between two parties as an agreement independent of the employment contract, within the competence of Commercial Arbitration".[6] Although, in Section [6], the ruling part in Decision 755/2018/QD-PQTT dated 12/06/2018 – the source of Precedent 69 ("Decision 755"), the Court observed that "the NDA [in fact, the NCA] is valid. It is perfectly lawful for the arbitral tribunal to recognize the validity of the NDA", Precedent 69 is not the precedent that determines the validity of the NCA. Therefore, the assessment of the validity of the NCA must be based on each specific case and depends on the legal views of the relevant tribunal, especially the Court.

2.3 Our position in participating in the settlement of some disputes related to NCAs is that the NCA has the force of law if it is established "on the basis of freedom, voluntary commitment or agreement"[7] and it is not considered invalid due to violation of the prohibition of the laws, specifically some frequently quoted provisions: Article 35.1 of the 2013 Constitution stipulates that "Citizens have the right to work, choose careers, jobs and workplaces", Article 9.2 of the Labor Code 2012 stipulates that "The State, employers and society have the responsibility to participate in job creation, ensuring that everyone with working ability has the opportunity to have jobs". Article 10.1 of the Labor Code 2019 stipulates that employees "may work for any employer and in any place not prohibited by law". In our opinion, the above provisions are not legal prohibitions because according to Article 123 of the Civil Code 2015 "Prohibitions of the laws are those provisions of laws that do not allow subjects to perform certain acts". The above provisions are regulations related to the employee's right to work and career choice that other entities must respect. However, because it is a right, an employee with full capacity for civil acts can "waive" the exercise of that right by unilateral legal acts or by agreement with another person. This "waiver", if in accordance with the principle of freedom of will[8] and does not "infringing upon the national and national interests, public interests, legitimate rights and interests of others" must be respected by other persons[9], including tribunals.[10] Conversely, the employee has the right to request that the employer pay a "loyalty" compensation when agreeing and establishing the NCA in accordance with the principle of equality[11] and good faith[12] of the Civil Code 2015.

2.4 In addition, Article 9.6 of the Employment Law 2013 prohibits obstructing, causing difficulties or prejudice to the legitimate rights and interests of employees (and employers), however, if the establishment of the NCA of the Employee is voluntary and free, it is unreasonable to assume that the Employer has obstructed, causing difficulties or caused damage to employees. In other words, in our opinion, the Employment Law does not prohibit the agreement and establishment of the NCA, but only prohibits acts of obstruction and damage to the employee such as the employer coercing or deceiving the employee to sign the NCA. Therefore, when an employee waives the exercise of the right to work for some businesses by means of an agreement that he has voluntarily signed with the employer, it cannot be considered that the agreement violates the prohibitions of the laws. This view is used by us to defend the legal validity of the NCA in disputes related to this agreement and is accepted by the tribunals, including Arbitral Tribunals and the Court, who also consider that the NCA is valid and not invalid due to violation of the prohibition of the laws.[13]   

2.5 Despite this, these are just some of the disputes related to the NCA to be resolved. While there are no specific provisions regarding the legal aspect of the NCA as provided for with the NDA, the assessment of the validity of the NCA may depend on the specific case. Since the law does not directly and explicitly provide for the validity of the NCA, the reasonableness of the NCA should also be taken into account when basic principles of civil law and equity are also used as legal grounds for resolving civil disputes in Court[14]. Confidential information and trade secrets are becoming increasingly important for many businesses and the economy as a whole, but the main legal mechanism to protect these assets is still the traditional actual damages regime. Proving violations as well as actual damages is not at all simple, if a violation occurs and businesses have to "wait" until they can prove damages and claim damages, it might be "too late". Therefore, NCAs can be a necessary legal tool to overcome and prevent early risks of damage to businesses, as well as create an “ethical barrier” to limit negative behaviors such unethical business practices and unfair competition such as (i) employees’ disclosing and "selling" trade secrets and confidential information of enterprises to competitors, (ii) competitors bribing or inducing employees to disclose trade secrets, confidential information of enterprises, etc.

2.6 However, one should not overlook the significance and legal validity of Precedent 69 when it is built on the basis of Decision 755 (the source of the precedent), where one of the important contents of Decision 755 is the Court’s observation that "the [NCA] is valid. The arbitral tribunal's recognition of the validity of the [NCA] is fully lawful." With this in mind, we already have an important legal argument to substantiate the legal validity of NCAs.

Disclaimer: This article is for information sharing, reference, and discussion purposes only and please do not take this as legal advice regarding the validity of NCAs or any other legal matters.

BROSS & Partners is a Vietnamese law firm proposed by Legal 500 Asia Pacific, Chamber Asia Pacific, AsiaLaw, IFLR1000, Benchmark Litigation, with experience and capacity to advise and resolve disputes related to Investment, Enterprise and Commerce, Mergers & Acquisitions, Labor & Employment, Real Estate & Construction, Finance – Banking, Securities, Capital Markets, and Intellectual Property.

If you need assistance, please contact: hoang@bross.vn; Mobile: +84 903 556 119; WhatApps: +84 903 556 119; Zalo: +84 903 556 119.