Possible Unconstitutionality of Non-Compete and/or No Investment Clauses

June 24, 2006
Possible Unconstitutionality of Non-Compete and/or No Investment Clauses

Contracts and clauses which contain elements of non-compete and/or no investment, which impose a prohibition to compete against or invest in a certain activity or business, likely are not valid under Mexican law based on the Mexican constitutional guaranty to freely exercise one’s profession, employment or business, which is enshrined in Article 5, first and sixth paragraphs of the Political Constitution of the United Mexican States. In the case of individuals, in general terms it is unconstitutional to impede or prohibit such persons from temporarily or permanently engaging in any type of work, commerce or profession.While no Mexican case decisions or federal court jurisprudence exist with respect to the application of non-compete clauses in relation to theguaranty contained in Article 5 of the Constitution, various case decisions and jurisprudence do exist in judicial or administrative cases statingthat such right may be restricted only if it benefits public order and the public interest. In the case of business associations or corporations,the analysis is different since it is clear that the constitutional guaranty mentioned above does not apply to entities or corporations. The aboveopinion is based on the fact that an interpretation of Article 5 of the Constitution implies that the constitutional guaranty was drafted andintended to protect individuals, not collective legal persons, which have a constitutional basis in Article 9, which permits individuals toassociate for legal purposes, not meaning that said persons have the right to protect themselves through the right to freely associate in theirprofession. On the other hand, it is worth noting that the Federal Law of Economic Competition (Ley Federal de Competencia Económica)prohibits any individual or entity from establishing agreements or contracts that restrict, limit or prohibit the distribution, sale, processing andproduction of various products or services, since such could be considered as an agreement or contract in furtherance of a monopolisticactivity. In this sense, it would not necessarily be contrary to Mexican law to enter into a non-compete and/or no investment agreement witha corporation, so long as the provisions of the Federal Competition Law are complied with, and which does not seek to impede or restrict theactivities or professional undertakings of individuals who form a part of a corporation, whether as employees, partners, shareholders, directorsor managers.

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