PUERTO RICO Law and Practice Contributed by: Miguel E Otero-Sobrino and Alexis R González-Pagani, Ferraiuoli LLC
• permanent disability or permanent incapacity through ill health of the executive’s spouse or child; • retirement (at normal retirement age); • redundancy; • unjustifiable dismissal by the company; and • on some occasions, dismissal by the company where the executive has failed to meet certain per - formance expectations. A typical vesting clause will usually last for four years and have a one-year cliff. 8.4 Restrictions on Manager Shareholders One of the most used restrictive covenants agreed to by managing members is a non-compete agree - ment. In Puerto Rico, the courts often disfavour non-compete clauses, as Article II, Section 16 of the Constitution of Puerto Rico recognises the right of every worker to choose his or her occupation and freely resign. To protect this liberty of choice, Puerto Rico courts have carefully interpreted non-compete clauses and imposed rigorous requirements for their validity. When these are not met, the contract will most likely be deemed invalid and unenforceable. Valid non-compete clauses require the employer to have a legitimate interest in the contract – ie, the busi - ness would be substantially affected if the employer does not receive protection under a non-compete agreement. The scale of this interest is measured con - sidering the position of the manager within the com - pany. The existence of the manager’s interest will be directly related to and reliant on the manager’s posi - tion in the company, and on whether they compete with the company in the future. The extent of the prohibition must correspond to the interests of the company with respect to restriction terms or affected customers. The purpose of the ban should be limited to activities like those conducted by the employer and does not have to be limited to specific functions. The term of the non-compete agreement should also not exceed 12 months, on the understanding that any additional time is excessive and unnecessary to adequately protect the employer. In terms of the reach of the prohibition, the con - tract must specify the geographic boundaries and/
or affected customers. The geographical area to which the restriction applies should be limited to the area strictly necessary to prevent real competi - tion between the employer and employee. When the non-compete clause concerns customers, it should refer only to those who were personally attended to by the employee for a reasonable period before leav - ing, or in a period immediately preceding the exit of the manager. These elements are evaluated in light of the nature of the industry involved and the possible related public interest. Additionally, the company must offer something to the manager in return for signing the non-compete agree - ment, such as a promotion, additional benefits at work or the enjoyment of any similar substantial changes in employment conditions, including a manager keeping a position after a change in ownership of the company when another consideration also applies. As with any contract, non-compete agreements must have the essential elements for validity: consent, object and cause. However, it is a strict requirement that the managers freely and voluntarily sign the non- compete agreement. Undue pressure or coercion by the company would render the non-compete agree - ment invalid and unenforceable. In summary, the elements of a valid non-compete agreement in Puerto Rico are as follows: • the company must have a legitimate interest in the agreement; • the scope of the prohibition in the non-compete agreement must fit the company’s interest but not exceed 12 months; • the company will offer a consideration in exchange for the employee signing the non-compete agree - ment, other than mere job tenure; • non-compete agreements must be valid contracts; and • non-compete agreements must be in writing. Despite these requirements, after the Federal Trade Commission (FTC) of the USA adopted its final rule as of 4 September 2024, in which it banned non- compete agreements across the United States (the Final Rule), the validity of some of these non-compete
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