#CostaRica 🇨🇷 #BDS_Article: U.S. Ruling on the Validity of Non-Compete Agreements Could Affect Their Enforcement in Costa Rica

Since 2003, the legality of post-employment non-compete agreements has been under scrutiny in Costa Rica. The implementation of these agreements has been primarily driven by multinational companies concerned with talent retention and the protection of intellectual property against direct competitors.

These companies began implementing such agreements in Costa Rica based on two rulings by the Labor Chamber of the Supreme Court of Justice. These rulings, interpreting the constitutional right to work and freedom of employment, established that these agreements are valid in Costa Rica, provided that at least three conditions are met:

1. Restriction Period: The restriction period must not exceed two years after termination of the employment contract.
2. Compensation: During the restriction period, the former employee must receive compensation of at least 50% of the salary he/she was paid during the employment relationship.
3. Justification and Geographic Limitation: There must be a reasonable justification for the restriction, which must be geographically limited to a reasonable scope.

Following these precedents, many local and multinational companies have adopted these agreements to protect various organizational interests, with minimal legal complications in the country.

However, a recent ruling by the U.S. Federal Trade Commission (FTC) could reignite the debate over the validity of these agreements. The U.S. authority has determined that non-competes represent a limitation on free competition, noting that one in five Americans has been forced to sign such agreements. Moreover, the FTC argues that these negotiations typically have a clear imbalance in favor of the employer, posing a threat to the well-being of the worker and their family.

This administrative position has been challenged in court, with some states supporting the FTC’s stance, while others question the agency’s authority to regulate this issue.

Why is this discussion important for your company? If the approach claiming that these types of agreements are null and void gains traction in the United States—the country of origin for most non-compete agreements used in Costa Rica—a legal challenge against them could have a similar impact in our country. This could potentially lead to the obligation to pay damages to the affected parties.

Recommendation: If your company uses non-competes, it is crucial to review the reasonableness of these agreements and their negotiated scope. Doing so could result in significant savings for your company in the medium term.

Alejandro Trejos

Partner, BDS Asesores