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In antitrust law, non-compete clauses (‘NC clauses’) are categorized by their context: merger transactions or employment relationships. The former are agreed between a seller and a buyer, preventing the seller from competing with the acquired business for a set period. The latter are established between employers and workers, prohibiting the employee from competing or working for a rival both during and for a specific duration after their employment
NC clauses are not exempt from controversy. In merger transactions, they often restrict competition by limiting the seller’s freedom to compete, potentially affecting consumer welfare (something that would derive from reduced competition). On the other hand, regarding NC clauses in employment relationships, these limit individuals’ freedom to work and engage in entrepreneurship. Similarly, such clauses reduce the worker’s bargaining power with the employer, as the worker’s ability to move to another company in the same industry is limited — a possibility that could otherwise incentivize the employer to improve their working conditions more broadly.
NC clauses in employment are often confused with no-poach agreements, as both involve restrictions on competition in labor markets. However, they differ in the parties involved and the nature of the obligation. While NC clauses are agreed between the employer and the worker, or between a buyer and a seller of a business, no-poach agreements are entered into between competing companies that agree not to hire each other’s employees.
Employment-related NC clauses generate ambivalent effects from an antitrust perspective, presenting both benefits and risks depending on their context and scope. On the one hand, their benefits are tied to the protection of companies’ intangible assets and incentives for innovation. These clauses help safeguard know-how, trade secrets, and confidential information that workers access during the employment relationship. Thus, such clauses would prevent a company’s technological information from falling into the hands of competitors (via hiring their competitor’s employees). In this way, under the protection of NC clauses, companies maintain their incentives to invest not only in technological development but also in advanced training for their workers, with greater assurance that such human capital will not be immediately exploited by rival firms, particularly in terms of sensitive and confidential information accessed in their roles as employees of the original employer.
Likewise, when NC clauses apply to business sellers, their value lies in the fact that the core transaction might lack economic rationale if, after its completion, the seller could use its experience and know-how in the market to compete directly with the buyer by simultaneously re-entering the same market they just exited. This would significantly reduce the transaction’s value and very likely jeopardize the buyer’s interest in proceeding with it (Levin, 2024) and could imply a degree of disloyalty from the seller to the buyer.
However, the excessive, unjustified, or disproportionate use of these clauses can create significant risks for both the labor market and goods and services markets. From the labor market perspective, NC clauses restrict worker mobility, reduce worker’s bargaining power against employers and thereby affect their salary expectations, working conditions, and career advancement — particularly in cases where the worker does not have access to sensitive and confidential information. This phenomenon can lead to the creation of monopsony power, a situation in which employers exert significant control over labor supply, enabling them to keep wages artificially low in the absence of effective competition for talent (see: ForoCompetencia with E. Posner: Labor Markets in the U.S. and Antitrust).
Moreover, as mentioned earlier, the harmful effects of NC clauses are not limited to the labor market but may also have an impact on the market for goods and services. First, insofar as companies face greater barriers in hiring experienced or knowledgeable workers —because they are prevented from switching employers due to NC clauses— productive efficiency would decrease, innovation would slow down (dynamic efficiency), and processes would become more expensive. Second, by making it harder for new players to enter or expand and hire qualified personnel, competition among companies would weaken, facilitating greater market concentration. This can lead to fewer incentives to improve quality, lower prices, or innovate, negatively affecting both consumers and other competitors. Third, competition would be inhibited, as employees subject to NC clauses are prevented from starting their own businesses. Fourth, in the case of merger transactions linked to an NC clause, by preventing the seller from staying in the market, a potential competitor is lost.
In summary, although NC clauses may be legitimate tools for protecting reasonable economic interests, their use must be properly justified, proportional, specific, and time-limited (Pardo, 2024). Otherwise, they may become an illegitimate entry barrier that not only harms workers but also creates competitive distortions that impair the efficient functioning of markets and ultimately harm consumers.
Given the anticompetitive effects mentioned above, several jurisdictions have developed legal and jurisprudential criteria to restrict such agreements. However, these criteria remain controversial and lack uniform application. Nonetheless, the most common are the following:
In the antitrust field, non-compete clauses have recently gained attention due to their impact on labor markets. In particular, in April 2024, the Federal Trade Commission (FTC) adopted a rule prohibiting most U.S. employers from maintaining or enforcing non-compete clauses against employees and independent contractors (see CeCo notes “La visión anglosajona sobre la libre competencia y los mercados laborales” and “Facultades de la FTC para regular pactos de no-competencia”).
According to the FTC, this regulation is justified on the grounds that such clauses constitute an unfair method of competition and thus a violation of Section 5 of the FTC Act (see CeCo note “Enfoque de la FRC sobre competencia desleal”). These clauses negatively affect competition by concentrating markets, raising prices, pushing wages down, and reducing market dynamism.
As such, the regulation seeks to protect workers’ freedom to change jobs, increase innovation, and foster new business formation. In this vein, the FTC’s official statement declares that “the final rule banning non-compete clauses will boost new business formation by 2.7% annually, resulting in the creation of more than 8,500 new businesses each year.”
However, this FTC rule is not currently in force. In August 2024, a federal judge blocked its entry into effect (initially scheduled for September 4, 2024), and the FTC appealed the decision. Nevertheless, the agency’s new Chair, Andrew Ferguson, publicly stated that the Commission should reconsider its defense of the rule (see the legal blog “Trading Secrets”), and eventually abandoned the rule’ defence (see “FTC drops Biden-era noncompete ban but promises continued enforcement”).
Now the regulation of non-compete agreements falls entirely to state and local governments. According to Lawdepot.com, several states already prohibit these clauses, such as California (Cal. Bus. and Prof. Code §§ 16600, 16601, and 16602.5) and Colorado (CRS Section 8-2-113). Other states allow them under certain conditions —for instance, in New York, where they must be reasonable in duration, geographic scope, and breadth, and in Florida (Fla. Stat. Ann. §§ 542.335), where a legitimate business interest must support the agreement.
In the EU, Article 15 of the Charter of Fundamental Rights of the European Union establishes the freedom to choose an occupation and the right to work—rights which, according to Geoffrey Manne, may be violated by non-compete (NC) clauses that are arbitrary or excessive. However, as Manne points out, labor-related NC clauses are not specifically regulated under EU competition law, leaving their regulation to the discretion of each Member State.
Given the regulatory disparities, a 2019 report commissioned by the European Parliament raised concerns about their impact. The lack of EU-wide legislation, it argued, creates legal uncertainty and undermines the region’s competitiveness and economic growth. The report emphasized the need for further research on the effects of labor-related NC clauses in the European economy and suggested initiating a regulatory process to prohibit them in certain circumstances.
With respect to the assessment of NC clauses in the context of merger control, the EU relies on the 2005 Commission Notice on restrictions directly related and necessary to concentrations. According to Levin (2024), the Notice establishes that once a merger is cleared —whether unconditionally or subject to commitments— any restrictions directly related and necessary to the implementation of the merger are automatically covered and need not be assessed separately by the competition authority. The EU framework outlines two main criteria for assessing NC clauses in mergers: (i) whether they are ancillary, and (ii) whether they are proportionate.
Ancillarity is assessed by determining whether the NC clause is directly related to and necessary for the implementation of the merger. As for proportionality, non-compete obligations must be limited in three key areas:(i) Subject-matter scope – the clause must not extend beyond what is strictly necessary to ensure the effectiveness of the main transaction; (ii) Geographic scope – the clause must not cover a wider area than the main agreement affects; (iii) Duration – the clause must not last longer than what is strictly necessary to achieve the purpose of the merger and its effects.
Outside the EU, in the United Kingdom, as noted by lawyers Watt and Cassaidy, there is no statutory provision explicitly addressing the validity of NC clauses. However, courts have long followed consistent case law rejecting such clauses unless they meet strict criteria: (i) the protection of a legitimate business interest, and (ii) the clause must not go beyond what is necessary to safeguard that interest. It is worth noting that on July 3, 2019, after 100 years, the UK Supreme Court ruled in favor of the validity of this type of stipulation.
More recently, in 2023, there were attempts to impose a 3-month cap on non-compete obligations. However, this proposal has not yet been implemented (see the Watt and Cassaidy report for further details).
As for how the Competition and Markets Authority (CMA) assesses NC clauses in merger cases, its “Mergers: Guidance on the CMA’s jurisdiction and procedure” (2024) states that such clauses “are only justified by the legitimate objective of implementing the merger when their duration, their geographical field of application, their subject matter, and the persons subject to them do not exceed what is reasonably necessary to achieve that end.” The CMA guidance thus aligns closely with the principles laid out in the European Commission’s Notice.
In Chile, there is no specific legal provision regulating NC clauses in employment contracts. Consequently, the validity of such clauses is primarily analyzed under labor law, where they are considered to conflict with the right to freedom of work, as expressly protected by Article 19 No. 16 of the Constitution. This explains why the Labor Directorate, through Ordinance No. 5620/300 of 1997, rejected such limitations on workers’ rights.
However, Chilean civil courts have recognized the validity of these clauses (see Supreme Court Rulings Nº 3985-2009 and Nº 5152-2009), provided that they involve workers who had close contact with the employer’s competitive interests; that the restriction only applies to activities falling within the company’s business scope; that there is a maximum duration; and that the clause includes financial compensation in favor of the worker (Sierra, 2014).
In the field of competition law, the debate has mainly focused on the validity and scope of such clauses between competitors, with a growing trend toward recognizing them if certain requirements are met. A significant case occurred in 2010, when the TDLC approved(Resolution Rol AE Nº 02-10) a settlement agreement between the National Economic Prosecutor’s Office (FNE) and SMU. In this agreement, the latter committed to adjusting both the non-compete clauses previously signed in the context of already completed merger transactions and those it might sign in the future. In this case, SMU S.A. had gained a significant position in the national supermarket industry through the acquisition of various supermarket stores. The acquisition contracts included NC clauses under which the sellers committed not to compete in that business or any related activity, for periods ranging from 5 to 30 years and in geographic scopes ranging from the region where the store was located to the entire national territory. Given this, the FNE launched an investigation, and SMU agreed to adjust the contract clauses to comply with competition law, based on restrictive criteria agreed with the FNE and approved through out-of-court settlements with the TDLC.
In the agreement, the FNE stated that NC clauses must meet the following criteria to comply with Decree Law 211: (i) Material scope: they must not extend beyond the business scope strictly necessary to ensure the effectiveness of the merger transaction; (ii) Geographic scope: they must not exceed the geographic scope in which the main agreement produces effects; (iii) Time scope: they must not extend beyond the time needed for the main agreement to produce its effects (thus, SMU accepted that the NC clauses would have a maximum duration of two years). In the TDLC’s opinion, the settlement agreement effectively safeguarded free competition by reasonably limiting the effects of the non-compete clauses, and therefore decided to approve it (for more details on cases where Chilean competition institutions have addressed this issue, see: “El desafío regulatorio de las cláusulas de no competencia laborales para la FTC”).
According to Levin, this reasoning has been applied to other cases as well. The FNE has analyzed these clauses based on the principle that any provision exceeding the limits of material, geographic, and temporal scope may generate anticompetitive effects in the market and, therefore, must be limited accordingly — generally in advance and as a condition for the approval of the transaction. More recently, in merger transaction Rol FNE F377-2023, the FNE determined that restrictions exceeding two years are not considered ancillary to the transaction, and that this period may only be extended to three years if it is proven —with sufficient evidence— that the merger involves the transfer of commercial knowledge or know-how (paragraph 34) (for more on the FNE’s approach, see the article by José Pardo “Rol activo de la Fiscalía Nacional Económica respecto de las cláusulas de no competencia en operaciones de concentración”).
