1. STANDARD OIL CORPORATION V. UNITED STATES (P.

72)
FACTS:

Defendant Standard Stations, Inc., a wholly owned subsidiary of defendant Standard Oil Company
of California (Socal) (now named Chevron Corporation), managed gasoline filling stations that
Socal owned and leased to independent businessmen. It also supplied gasoline to locally owned
and operated filling stations that used the Standard Stations brand name.

The Standard Stations case involved the distribution of petroleum products and automobile
accessories.

Under contracts entered into by an oil company with independent dealers in petroleum products
and automobile accessories, the dealer agreed to purchase exclusively from the company all of his
requirements of one or more of the products marketed by the company.

In 1947, the contracts affected a gross business of $58,000,000, comprising 6.7% of the total in a
seven-state area in which the company sold its products.

The US Justice Department's Antitrust Division brought suit under section 1 of the Sherman
Act1 and section 3 of the Clayton Act 2 to enjoin Standard from entering into or enforcing these
exclusive contracts.
Issue: Whether or not tie-in arrangements are patently illegal. YES.
Held: The contracts were violative of 3 of the Clayton Act and the company was properly enjoined
from enforcing or entering into them.

1 "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of

trade or commerce among the several States, or with foreign nations, is hereby declared to be
illegal. . . ."
2 It shall be unlawful for any person engaged in commerce, in the course of such commerce, to
lease or make a sale or contract for sale of goods, wares, merchandise, machinery, supplies, or
other commodities, whether patented or unpatented, for use, consumption, or resale within the
United States or any Territory thereof or the District of Columbia or any insular possession or
other place under the jurisdiction of the United States, or fix a price charged therefor, or discount
from, or rebate upon, such price, on the condition, agreement, or understanding that the
lessee or purchaser thereof shall not use or deal in the goods, wares, merchandise,
machinery, supplies, or other commodities of a competitor or competitors of the lessor or
seller, where the effect of such lease, sale, or contract for sale or such condition, agreement,
or understanding may be to substantially lessen competition or tend to create a monopoly
in any line of commerce.

The requirement of 3 of the Clayton Act of a showing that the effect of the contracts "may be to
substantially lessen competition" is here satisfied by proof that competition has been
foreclosed in a substantial share of the line of commerce affected.
In view of the widespread adoption of such contracts by the company's competitors and the
availability of alternative ways of obtaining an assured market, evidence that competitive
activity has not actually declined is inconclusive.
The fact that nearly all the products sold by the company to California dealers are produced in that
State does not exempt the company's requirements contracts with California dealers as not
substantially affecting interstate commerce, since the effect of those contracts is to prevent
the California dealers from dealing with out-of-State as well as local suppliers, and thus
to lessen competition in both interstate and intrastate commerce.
FROM BOOK:
o The justification most often advanced in their defense -- the protection of the goodwill of
the manufacturer of the tying device -- fails in the usual situation because specification
of the TYPE AND QUALITY OF THE PRODUCT to be used in connection with the
tying device is protection enough.
o If the manufacturer's brand of the tied product is, in fact, superior to that of competitors,
the buyer will presumably choose it anyway.
o EXCEPTION: The only situation, indeed, in which the protection of good will may
necessitate the use of tying clauses is where specifications for a substitute
would be so detailed that they could not practicably be supplied.
o In the usual case, only the prospect of reducing competition would persuade a seller to
adopt such a contract, and only his control of the supply of the tying device, whether
conferred by patent monopoly or otherwise obtained, could induce a buyer to enter one.
o The existence of market control of the tying device therefore affords a strong foundation
for the presumption that it has been or probably will be used to limit competition in the
tied product also.

2. CONTINENTAL TV V. GTE SYLVANIA (P. 74)

FACTS:

In an attempt to improve its market position by attracting more aggressive and competent
retailers, GTE Sylvania, manufacturer of television sets, limited the number of retail
franchises granted for any given area and required each franchisee to sell respondent's
products only from the location or locations at which it was franchised.

Petitioner Continental, one of respondent's franchised retailers, claimed that respondent had
violated 1 of the Sherman Act by entering into and enforcing franchise agreements that
prohibited the sale of respondent's products other than from specified locations.

Relying on United States v. Arnold, Schwinn & Co., the District Court instructed the jury that it was
the agreement was per se a violation of 1 if respondent entered into a contract, combination, or
conspiracy with one or more of its retailers, pursuant to which it attempted to restrict the locations
from which the retailers resold the merchandise they had purchased from respondent.

The jury found that the location restriction violated 1, and treble damages were assessed against
respondent.

Concluding that Schwinn was distinguishable, the Court of Appeals reversed, holding that
respondent's location restriction had less potential for competitive harm than the restrictions
invalidated inSchwinn, and thus should be judged under the "rule of reason."
Issue: Whether the tie in provisions/vertical restrictions 3 are illegal per se. No. Applying the rule of
reason test, there must first be a determination:
1. If in fact, the allowance of such arrangements will stifle competition.
2. The reason behind the tie-in clause does it serve any useful purpose that would benefit the
public?

3 Restrictions of manufacturers/suppliers relating to the resale of their products. In this case,

what was involved was geographical restrictions (limited to the territory of the franchisee).

Unless a (NDEE) negative demonstrable economic effect is caused by a vertical restraint

provision, the rule of reason standard must be applied.
Held:

FROM BOOK:
o

Vertical restrictions promote interbrand competition by allowing the manufacturer to

achieve certain efficiencies in the distribution of his products. These "redeeming
virtues" are implicit in every decision sustaining vertical restrictions under the rule of
reason.

Economists have identified a number of ways in which manufacturers can use such
restrictions to compete more effectively against other manufacturers.

For example, new manufacturers and manufacturers entering new markets can use
the restrictions in order to induce competent and aggressive retailers to
make the kind of investment of capital and labor that is often required in the
distribution of products unknown to the consumer.

Established manufacturers can use them to induce retailers to engage in

promotional activities or to provide service and repair facilities necessary
to the efficient marketing of their products.

Service and repair are vital for many products, such as automobiles and
major household appliances. The availability and quality of such services
affect a manufacturer's goodwill and the competitiveness of his product.

Because of market imperfections such as the so-called "free rider" effect, these
services might not be provided by retailers in a purely competitive situation,
despite the fact that each retailer's benefit would be greater if all provided the
services than if none did.

The statement of the per se rule in Schwinn is broad enough to cover the location restriction used
by respondent. And the retail customer restriction in Schwinn is functionally indistinguishable from
the location restriction here, the restrictions in both cases limiting the retailer's freedom to dispose
of the purchased products and reducing, but not eliminating, intrabrand competition.

The justification and standard for the creation of per se rules was stated in Northern Pac. R. Co. v.
United States:
o "There are certain agreements or practices which, because of their pernicious effect on
competition and lack of any redeeming virtue, are conclusively presumed to be
unreasonable, and therefore illegal without elaborate inquiry as to the precise harm
they have caused or the business excuse for their use."
Under this standard, there is no justification for the distinction drawn in Schwinn between restrictions
imposed in sale and nonsale transactions. Similarly, the facts of this case do not present a
situation justifying a per se rule. Accordingly, the per se rule stated in Schwinn is
overruled, and the location restriction used by respondent should be judged under the traditional
rule of reason standard.

3. CARLOSS GSELL V. PEDRO KOCH (P. 78)

Facts:

Carlos Gsell and Pedro Koch entered into a contract with the following stipulation:

First. Pedro Koch binds himself to render his services as an employee of the commercial
firm of Carlos Gsell, established in this city, and to devote all his practical and technical
knowledge exclusively to the business of the said Gsell. He binds himself, furthermore, not
to do business, for account of himself, for another person, or for his own account, and to
keep the most absolute reserve with regard to the business commended to him;

Second. The term or duration of this contract shall be two and one-half years, counting
from the first of the present month of January, 1902, to which the effect of this document
shall be retroactive; and the said Pedro Koch shall receive as salary and for board and
lodging the sum of two hundred pesos, Mexican currency, per month;

IMPT: Third. The said Pedro Koch binds himself to pay in cash to Mr. Gsell the sum of ten
thousand pesos if, after leaving the firm of C. Gsell, and against the latter's will, he
shall engage directly or indirectly in carrying on any business in which the two
and one-half years fixed for the duration of the present contract in these
Islands, either as an employee or member of a firm or company, or on his own
account; and he furthermore binds himself to pay in cash to Mr. Gsell an equal sum of ten
thousand pesos for each violation of any secret of the business entrusted to him;

Gsell was engaged in the manufacture of umbrellas, matches and hats in the City of Manila.
Koch was employed as an apprentice in a hat factory in Switzerland under the agreement that
after he should have acquired some experience, he should come to Manila at the expense of Gsell,
to work in Gsells hat factory.
After leaving Gsells employ, Koch engaged in the manufacture of straw hats in the city of Manila,
against Gsells will.
Gsell now claims to enforce the liquidated damages stipulation in the contract.
The trial court ruled against Gsell, basing its decision on article 1583 of the Civil Code, which
declares the hire of services for life to be null and voids, concluding that, by virtue of the said
stipulation, the services of the defendant, in so far as they concern the conduct of any business or
undertaking in which the defendant might engage, were pledged for life to the plaintiff, for in the
said clause, it appears that the services are not confined to any specific business or undertakingthe manufacture of straw hats to which the complaint refers being included therein, nor shall be
obliged to render his business or undertaking in which the latter might engage.

Issue: Whether the non-compete/exclusivity clause in the employment contract is valid. Yes.
Held:

The third clause referred to contains no contract whatever for the hire of services of any kind for
any period of time, either long or short, and still less during the whole of defendant's life; far from
this, it refers distinctly to the cessation of the services stipulated, not indeed for life, but for only
two years and a half, in the first and second clauses of the contract; so that the agreement therein
contained rests on the necessary supposition of the defendant's having left the service of the
plaintiff.

It does not prohibit the defendant from conducting any industry or business, even the kind of
businesses in which the plaintiff is engaged. The defendant has not bound himself to abstain from
such kinds of businesses or industries as are mentioned in the order appealed from. At least, no
obligation whatever of that kind appears to have been assumed in the contract. On the contrary,
the latter allows the presumption that the said defendant may engage in the same industries or
businesses in which the plaintiff is engaged, and the sole obligation that he has contracted with
regard to this feature is that he shall pay to the latter P10,000 in case he should engage in them.

The obligation to pay a certain sum in case one engages in a certain business is valid.

FROM BOOK: Within the liberty to make contracts, sanctioned by our laws, everyone is free to
execute the contracts he may consider suitable, provided they are not contrary to law,

morality, and good customs, and, in our opinion, there is nothing in the obligation referred to
that is opposed to any of three conceptions.
o Apparently, the obligation essentially rests on a just desire on the part of the plaintiff
to protect himself by means of an indemnity paid in advance against the effects
of the competition which the defendant might make, after he had duly qualified the
defendant to enable him to do, so, by defraying the expenses of his industrial
apprenticeship and initiating him into a knowledge of his own procedure and formulas, the
acquisition of which, as he states, has cost him more than P20,000, and this is to be
accepted as true under the demurrer to the written complaint.
ACCORDING TO SIR: The Court in Gsell opined that the restriction to engage in the same line of
business for a period of two and a half years after the termination of employment is valid as it was
indicated by the desire of the employer to prevent the employee from using the know-how
imparted to the employee to compete against the employer.

4. FERAZZINI V. GSELL (P. 79 AND P. 91)

Facts:

Gsell is engaged in the manufacture of umbrellas, matches, and hats.

Ferazzini was employed by Gsell as foreman in the umbrella factory.

Ferazzini was eventually discharged for alleged absence, unfaithfulness, and disobedience to
orders. Ferazzini sued Gsell for illegal dismissal as Gsell allegedly did not give the required sixmonth advanced notice, which Gsell admitted.

Gsell filed a counterclaim for breach by Ferazzini of his contract, one of the stipulations of which is
as follows:
o That during the term of this contract, and for the period of five years after the
termination of the employment of the said party of the second part, whether this contract
continue in force for the period of one, two, three or more years, or be sooner terminated,
the said party of the second party shall not engage or interest himself in ANY
business enterprises similar to or in competition with those conducted,
maintained or operated by the said party of the first day in the Philippines, and shall
not assist, aid or encourage any such enterprise by the furnishing of information, advice or
suggestions of any kind, and shall not enter into the employ of ANY enterprises in
the Philippine Islands, whatever, save and except after obtaining special written
permission therefor from the said party of the first part. It is further stipulated and agreed
that the said party of the second part is hereby obligated and bound to pay unto the party
of the first part the sum of ten thousand pesos, Philippine currency (P10,000) as liquidated
damages for each and every breach of the present clause of this contract, whether such
breach occurred during the employment of the said party of the second part or at any time
during the period of five years from and after the termination of said employment, and
without regard to the cause of the termination of said employment.

Gsell alleged that Ferazzini has engaged in business in the Philippine Islands since leaving the
service of Gsell and without Gsells request or consent, in violation of his contract with Gsell.
o Ferazzini entered the employ of Mr. Whalen in the Philippine Islands as a foreman on some
construction work for a cement factory within a few days after his discharge and without
the consent of Gsell.
Issue: Whether or not the restriction in the employment contract is valid. INVALID for being against
public policy.
Held:

As compared to Gsell v. Koch, where the contract was held to be reasonably necessary for the
protection of the employer and was not oppressive, the contract in this case goes far beyond that
which formed the basis of the action in Koch.
o IMPT: Here the plaintiff Ferrazzini was prohibited from engaging in any business or
occupation whatever in the Philippine Islands for a period of five years after the
termination of this contract of employment without special written permission from the
defendant. This plaintiff became engaged, as we have said, as a foreman in a
cement factory, while the defendant in the other case became engaged in identically the
same business which his employer was carrying on, that is, the manufacture of straw hats.
Consequently, the reasons which support the validity of the contract in the one case are
not applicable to the other.

FROM BOOK: The contract under consideration, tested by the law, rules and principles above set
forth, is clearly one in undue or unreasonable restraint of trade and therefore against
public policy. It is limited as to time and space but not as to trade. It is not necessary for
the protection of the defendant, as this is provided for in another part of the clause. It would force
the plaintiff to leave the Philippine Islands in order to obtain a livelihood in case the defendant
declined to give him the written permission to work elsewhere in this country.
ACCORDING TO SIR: The post-term restriction upheld in Gsell does not provide unbridled freedom to
employers to prevent their employees from engaging in any line of business. In Ferazzini, the Court
held that the restriction must be confined to engaging in the same line of business and not just
any kind of business.

5. OLENDORFF V. ABRAHAMSON (P. 80)

Facts:

Defendant Ira Abrahamson (Abrahamson) appeals judgment of CFI of Manila by which he was
enjoined for 5 years from engaging, in the Philippines, in any business similar or competitive to
that of plaintiff, William Ollendorff (Ollendorff).

Ollendorff was engaged in the business of manufacturing ladies embroidered underwear for export.
He imports the material of the underwear and adopts decorative designs which are embroidered
upon it by needle workers from patterns selected and supplied by him. Most of his workers work at
home; they return the embroidered materials to Ollendorffs factory where it is made into finished
garments and prepared for export

On September 10, 1915, Abrahamson was employed by Ollendorff

o The contract stipulated, among others, that:

The said party of the second part (Abrahamson) hereby further binds and
obligates himself, his heirs, successors and assigns, that he will not enter
into or engage himself directly or indirectly, nor permit any other person
under his control to enter in or engage in a SIMILAR OR COMPETITIVE
BUSINESS to that of the said party of the first part anywhere within the
Philippine Islands for a period of five years from this date.

Abrahamson learned the trades business and method and got connections too.

In April of 1916, Abrahamson left the company for the US because of sickness.

Some months after his departure, he returns to the Philippines as manager of Philippine Underwear
Company.
o The corporation has no factory in the country but sends material and embroidery designs
from NY to its local representatives here who employ local needle workers to embroider the
designs
o The only difference between the two is the method of doing the finishing work.
o Abrahamson is admitted that both firms turn out the same class of goods and that they are
exported to the same market. Abrahamson likewise employed some of Ollendorffs
workers.

Thus, Ollednorff filed a suit for injunction based on the contract. The lower court granted this.
Issue: Whether the provision in the employment contract prohibiting Abrahamson from engaging in or
being employed in a similar or competitive business constitutes an unreasonable restraint of trade.
NO.
Held:

The two businesses are competitive: The business in which defendant is engaged is not only very
similar to that of plaintiff, but that it is conducted in open competition with that business within the
meaning of the contract in question. Defendant himself expressly admitted, on cross-examination,
that the firm by which he is now employed puts out the same class of foods as that which plaintiff
is engaged in producing. When two concerns operate in the same field, produce the same
class of goods and dispose them in the same market, their businesses are of necessity
competitive. Defendant having engaged in the Philippine Islands in a business directly
competitive with that of plaintiff, within five years from the date of his contract of employment by
plaintiff, under the terms of which he expressly agreed that he would refrain form doing that very
thing, his conduct constitutes a breach of that agreement.

Provision does not constitute an unreasonable restraint of trade:

o FROM BOOK:

We are of the opinion that the contract was not void as constituting an
unreasonable restraint of trade. We have been cited to no statutory expression of
the legislative will to which such an agreement is directly obnoxious. The rule in
this jurisdiction is that the obligations created by contracts have the force of law
between the contracting parties and must be enforce in accordance with their
tenor. (Civil Code, art 1091.) The only limitation upon the freedom of contractual
agreement is that the pacts established shall not be contrary to "law, morals or
public order." (Civil Code, Art. 1255.)

Public policy has been defined as being that principle under which freedom of
contract or private dealing is restricted for the good of the community. It is upon

this theory that contracts between private individuals which result in an

unreasonable restraint of trade have frequently being recognized by article 1255 of
our Civil Code, the court of these Islands are vested with like authority.

Originally the English courts adopted the view that any agreement which imposed
restrictions upon a man's right to exercise his trade or calling was void as against
public policy. In recent years there has been a tendency on the part of the
courts of England and America to discard these fixed rules and to decide
each case according to its peculiar circumstances, and make the validity
of the restraint depend upon its reasonableness. If the restraint is no
greater than is reasonably necessary for the protection of the party in
whose favor it is imposed it is upheld, but if it goes beyond this is declared
void. This is the principle followed in such cases by the Supreme Court of the
United States.

We adopt the modern rule that the validity of restraints upon trade or
employment is to be determined by the INTRINSIC REASONABLENESS OF
RESTRICTION in each case, rather than by any fixed rule, and that such
restrictions may be upheld when not contrary to afford a fair and
reasonable protection to the party in whose favor it is imposed.

Examining the contract here in question from this stand point, it does not seem
so with respect to an employee whose duties are such as of necessity to
give him an insight into the general scope and details of his employers
business. A business enterprise may and often does depend for its success upon
the owner's relations with other dealers, his skill in establishing favorable
connections, his methods of buying and selling a multitude of details,
none vital if considered alone, but which in the aggregate constitute the
sum total of the advantages which the result of the experience or
individual aptitude and ability of the man or men by whom the business
has been built up. Failure or success may depend upon the possession of
these intangible but all important assets, and it is natural that their
possessor should seek to keep them from falling into the hands of his
competitors.

It is with this object in view that such restrictions as that now under consideration
are written into contracts of employment. Their purpose is the protection of
the employer, and if they do not go beyond what is reasonably necessary
to effectuate this purpose they should be upheld. We are of the opinion, and
so hold, that in the light of the established facts the restraint imposed upon
defendant by his contract is not unreasonable. As was well said in the case of
Underwood vs. Barker (68 Law J. Ch., 201). "If there is one thing more than another
which is essential to the trade and commerce of this country, it is the inviolability
of contract deliberately entered into and to allow a person of mature age, and not
imposed upon, to enter into a contract, to obtain the benefit of it, and then to
repudiate it and the obligation which he has undertaken, is prima facie, at all
events, contrary to the interest of any and every country . . . . The public policy
which allows a person to obtain employment on certain terms understood by and
agreed to by him, and to repudiate his contract, conflicts with, and must, to avail
the defendant, for some sufficient reason, prevail over, the manifest public policy,
which, as a rule holds him to his bond.
ACCORDING TO SIR: In Ollendorff, the Court recognized a persons right to protect his business
know-how, i.e. his relations with other dealers, his skill in establishing favorable connections, his
methods of buying and selling the sum total of the advantages which is the result of the experience
or individual aptitude and ability of the man or men by whom the business has been built up. A
provision in the employment contract restricting an employee from engaging in a competing business
after his employment is terminated is valid and reasonable.

6. MARTINI V. GLAISERMAN (P. 83)

Facts:

Martini and Glaiserman entered into a contract of employment. The contract did not specify the
character of the services to be rendered by Glaiserman. The employment was for a period of three
years.

The second clause of the contract reads as follows:

o When the three years are over, the second party agreed that in case he should not find it
convenient to renew the connection with the first party for another term, he shall not
engage in any business either for himself or others similar to the business
carried on by his present employer, or in which his employer may be engaged at
that time, for 1 (one) year at least, or without first having secured the consent
of the first party in writing, and in case of breach of this condition by him, he agrees to
pay to the first party the sum of 400 (four hundred pounds sterling) as liquidated
damages, to be recovered from him by the first party in any court having jurisdiction, and
he thus waives any defense in law or in equity to any suit to recover said amount as
liquidated damages, and likewise to any suit or proceeding to restrain himself, or to both
such proceedings.

Glaiserman left plaintiffs employ and shortly after entered the employ of Dyogi & Co.

It appears from the evidence that plaintiff is engaged in a great many branches of business,
one of which is the purchase and exportation of abaca [hemp.] When defendant entered
the employ of plaintiff he had no previous experience whatever in the abaca business. While he
was working for plaintiff, defendant was employed in the hemp department of plaintiff's business.
It also appears that plaintiff was fully aware at the time defendant was employed by him that he
had no previous experience in the hemp business. Upon leaving the service of plaintiff and
entering the service of Dyogi & Co., the defendant was employed by the latter in connection with
the purchase by it of abaca for exportation.
Issue: Whether the restriction in the employment contract is valid. No. it is overly broad.
Held:

The evidence further discloses that the plaintiff corporation is engaged in the great many branches
of commercial activity, the purchase and exportation of abaca being only one of its many
enterprises. By the terms of the second clause of the contract of employment the prohibition
laid upon defendant is not limited to any particular branch of plaintiff's business it is
not even limited to the particular branch or branches of that business in which he might
be employed.

For a year after the cessation of his employment by defendant, he is forbidden to "engage in any
business either for himself or others similar to the business carried on by his present employer, or
in which his employer may be engaged at that time."

Can it be said that such a limitation upon the future activities of the employee was reasonably
necessary to the protection of the employer? We think not. Under its express terms plaintiff, after
treating defendant in such a way that his self-respect would compel him to resign under the sixth
clause of the contract, is nevertheless empowered to prevent defendant, for a year, from engaging
in any business similar to that of plaintiff, although defendant's experience in plaintiff's employ
may have been limited to only one well-defined branch of its multifarious commercial activities.
The scope of this prohibition is clearly shown by the testimony of plaintiff's witness
Buck, who states that the plaintiff corporation is engaged in the business of "importing
a great many different lines . . . and the export of Philippine products in general."
Plaintiff argues that as it is only seeking to enjoin defendant from engaging in the hemp business,
which was the particular branch of plaintiff's business in connection with which he rendered his
services, the generality of the prohibition is not to be regarded as an obstacle to its enforcement. But
the contract is to be construed as it stands, not as it might have been written. The question
is not whether a contract requiring defendant to refrain for a given time from engaging in the
particular line of work in which he was employed by plaintiff would have been valid, but whether this
particular contract, under which he is forbidden to engage in any business in which plaintiff was
engaged during the term of his employment, can be upheld.

7. DEL CASTILLO V. RICHMOND (P. 84)

Note: According to Sir, this case provided additional criteria in the evaluation of non-compete clauses.
While previous rulings on the matter recognized the validity of non-compete clauses for so long as they
are reasonably necessary for the protection of the party in whose favor it was constituted, the Court in
Castillo provided a concrete criteria for determining reasonableness in that such clauses must be
limited as to time and place to be considered valid.
Facts:

The case was instituted to declare the contract of services entered into by Alfonso del Castillo and
Richmond as null and void.

Richmond entered the employ of del Castillo as a pharmacist in Botica Americana situated in
Legaspi, Albay.

The contract contained the following stipulation:

o That in consideration of the fact that the said Alfonso del Castillo has just graduated as a
pharmacist and up to the present time has not been employed in the capacity of a
pharmacist and in consideration of this employment and the monthly salary mentioned in
this contract, the said Alfonso del Castillo also agrees not to open, nor own nor have
any interest directly or indirectly in any other drugstore either in his own name
or in the name of another; nor have any connection with or be employed by any
other drugstore situated within a radius of four miles from the district of
Legaspi, municipality and Province of Albay, while the said Shannon Richmond or his
heirs may own or have open a drugstore, or have an interest in any other one within the
limits of the districts of Legaspi, Albay, and Daraga of the municipality of Albay, Province of
Albay.

Del Castillo alleges that the provisions and conditions contained in the third paragraph of said
contract constitute an illegal and unreasonable restriction upon his liberty to contract, are contrary
to public policy, and are unnecessary in order to constitute a just and reasonable protection to the
defendant; and asked that the same be declared null and void and of no effect.

The defendant interposed a general and special defense. In his special defense he alleges "that
during the time the plaintiff was in the defendant's employ he obtained knowledge of his trade and
professional secrets and came to know and became acquainted and established friendly relations
with his customers so that to now annul the contract and permit plaintiff to establish a competing
drugstore in the town of Legaspi, as plaintiff has announced his intention to do, would be
extremely prejudicial to defendant's interest." The defendant further, in an amended answer,
alleges "that this action not having been brought within four years from the time the contract
referred to in the complaint was executed, the same has prescribed."

It will be noted that the restrictions placed upon the plaintiff are strictly limited (a) [PLACE] to a
limited district or districts, and (b) [TIME] during the time while the defendant or his heirs may
own or have open a drugstore, or have an interest in any other one within said limited district.
Issue: Whether or not the stipulation constitutes an unreasonable restraint in trade. No. Considering
the nature of the business in which the defendant is engaged, in relation with the
limitation placed upon the plaintiff both as to time and place, we are of the opinion, and so
decide, that such limitation is legal and reasonable and not contrary to public policy.
Held:

If the restraint was limited to "a certain time" and within "a certain place," such contracts
were valid and not "against the benefit of the state." The rule is now well established that a
contract in restraint of trade is valid providing there is a limitation upon either time or place.

A contract, however, which restrains a man from entering into a business or trade without either a
limitation as to time or place, will be held invalid.

The general tendency, we believe, of modern authority, is to make the test whether the
restraint is reasonably necessary for the protection of the contracting parties. If the
contract is reasonably necessary to protect the interest of the parties, it will be upheld.

In that case we held that a contract by which an employee agrees to refrain for a given length of
time, after the expiration of the term of his employment, from engaging in a business, competitive
with that of his employer, is not void as being in restraint of trade if the restraint imposed is not
greater than that which is necessary to afford a reasonable protection. In all cases like the present,
the question is whether, under the particular circumstances of the case and the nature of the

particular contract involved in it, the contract is, or is not, unreasonable. Of course in
establishing whether the contract is a reasonable or unreasonable one, the nature of
the business must also be considered. What would be a reasonable restriction as to time and
place upon the manufacture of railway locomotive engines might be a very unreasonable
restriction when imposed upon the employment of a day laborer
8. VILLA REY TRANSIT V. FERRER (P. 86)
Facts:
Jose Villarama was an operator of a bus transportation pursuant to two certificates of public
convenience granted him by the Public Service Commission (PSC). Later, he sold the certificates to the
Pangasinan Transportation Company, Inc. (Pantranco) with the condition that the seller (Villarama)
"shall not for a period of 10 years, apply for any TPU service identical or competing with the buyer."
Barely three months thereafter, a corporation called Villa Rey Transit, Inc. (the Corporation) was
organized with a capital stock of P500,000.00 divided into 5,000 shares of the par value of P100.00
each; P200,000.00 was the subscribed stock; Natividad Villarama (wife of Jose Villarama) was one of
the incorporators, and she subscribed for P1,000.00; the balance of P199,000.00 was subscribed by
the brother and sister-in-law of Jose Villarama; of the subscribed capital stock, P105,000.00 was paid to
the treasurer of the corporation, Natividad.
In less than a month after its registration with the SEC, the Corporation bought five certificates of
public convenience and 49 buses from one Valentin Fernando. Later, the Sheriff of Manila levied on 2
of the 5 certificates, in favor of Eusebio Ferrer, judgment creditor, against Fernando, judgment debtor.
A public sale was conducted. Ferrer was the highest bidder. Ferrer sold the two certificates to
Pantranco.
The Corporation filed a complaint against Ferrer, Pantranco and the PSC for the annulment of the
sheriff's sale. Pantranco, on its part, filed a third-party complaint against Villarama, alleging that
Villarama and/or the Corporation was disqualified from operating the two certificates in question by
virtue of the previous agreement. The trial court declared null and void the sheriff's sale
of two certificates of public convenience in favor of Ferrer and the subsequent sale thereof by the
latter to Pantranco and declaring Villa Rey Transit, Inc., to be the lawful owner of the said certificates of
public convenience.
Pantranco disputes the correctness of the decision insofar as it holds that Villa Rey Transit, Inc.
(Corporation) is a distinct and separate entity from Villarama. Ferrer, for his part, challenges the
decision insofar as it holds that the sheriff's sale is null and void.
Issue: Whether the stipulation between Villarama and Pantranco binds Villa Rey Transit, Inc.?
Held: Yes, the restrictive clause in the contract entered into by the Villarama and Pantranco is also
enforceable and binding against the said Corporation.
Ratio:
From book (until numerous): Analyzing the characteristics of the questioned stipulation, We find
that although it is in the nature of an agreement suppressing competition, it is, however, merely
ancillary or incidental to the main agreement which is that of sale. The suppression or restraint is only
partial or limited: first, in scope, it refers only to application for TPU by the seller in competition with
the lines sold to the buyer; second, in duration, it is only for ten (10) years; and third, with respect to
situs or territory, the restraint is only along the lines covered by the certificates sold. In view of these
limitations, coupled with the consideration of P350,000.00 for just two certificates of public
convenience, and considering, furthermore, that the disputed stipulation is only incidental to a main
agreement, the same is reasonable and it is not harmful nor obnoxious to public service. 38 It does not
appear that the ultimate result of the clause or stipulation would be to leave solely to Pantranco the
right to operate along the lines in question, thereby establishing monopoly or predominance
approximating thereto. We believe the main purpose of the restraint was to protect for a limited time
the business of the buyer.
Indeed, the evils of monopoly are farfetched here. There can be no danger of price controls or
deterioration of the service because of the close supervision of the Public Service Commission. 39 This

Court had stated long ago,40 that "when one devotes his property to a use in which the public has an
interest, he virtually grants to the public an interest in that use and submits it to such public use under
reasonable rules and regulations to be fixed by the Public Utility Commission."
Regarding that aspect of the clause that it is merely ancillary or incidental to a lawful agreement, the
underlying reason sustaining its validity is well explained in 36 Am. Jur. 537-539, to wit:
... Numerous authorities hold that a covenant which is incidental to the sale and transfer of a
trade or business, and which purports to bind the seller not to engage in the same business in
competition with the purchaser, is lawful and enforceable. While such covenants are designed
to prevent competition on the part of the seller, it is ordinarily neither their purpose nor effect
to stifle competition generally in the locality, nor to prevent it at all in a way or to an extent
injurious to the public. The business in the hands of the purchaser is carried on just as it was in
the hands of the seller; the former merely takes the place of the latter; the commodities of the
trade are as open to the public as they were before; the same competition exists as existed
before; there is the same employment furnished to others after as before; the profits of the
business go as they did before to swell the sum of public wealth; the public has the same
opportunities of purchasing, if it is a mercantile business; and production is not lessened if it is
a manufacturing plant.
The reliance by the lower court on tile case of Red Line Transportation Co. v. Bachrach 41 and finding
that the stipulation is illegal and void seems misplaced. In the said Red Line case, the agreement
therein sought to be enforced was virtually a division of territory between two operators, each
company imposing upon itself an obligation not to operate in any territory covered by the routes of the
other. Restraints of this type, among common carriers have always been covered by the general rule
invalidating agreements in restraint of trade. 42
Neither are the other cases relied upon by the plaintiff-appellee applicable to the instant case.
In Pampanga Bus Co., Inc. v. Enriquez,43 the undertaking of the applicant therein not to apply for the
lifting of restrictions imposed on his certificates of public convenience was not an ancillary or incidental
agreement. The restraint was the principal objective. On the other hand, in Red Line Transportation
Co., Inc. v. Gonzaga,44 the restraint there in question not to ask for extension of the line, or trips, or
increase of equipment was not an agreement between the parties but a condition imposed in the
certificate of public convenience itself.
Sir: From the foregoing decision, a further amplification is provided by the Court to the jurisprudence
pertaining to the appreciation of non-compete clauses. Insofar as they are merely ancillary or
incidental to a lawful agreement, they shall be considered valid as they are not intended to stifle
competition.

9. AVON COSMETICS V. LUNA (P. 89)

Short facts: Luna, an Avon Supervisor, entered into a Supervisors Agreement allowing her to
purchase at wholesale Avon products. The Agreement included an exclusivity clause which
prohibited her from selling other products of other companies. It also provided for a termination
clause which would allow either Avon or Luna to terminate said agreement with or without cause upon
notice to the other party. Luna became part of the sales force of Avon. She eventually engaged in
selling vitamins and other food supplements of Sandre Philippines. A law firm opined that her
Agreement with Avon was contrary to public policy because it was an unreasonable restraint of trade.
She circulated a letter to her colleagues about the legal opinion. Avon found out about her activities,
hence she was terminated for violation of the exclusivity clause. The RTC and CA ruled in favor of Luna.
The SC reversed the decision.
(1) The exclusivity clause does not restraint trade and does not limit the Sandre Philippines selling
opportunities. It merely limits the undue use of Avons resources (in this case, the skills of its
manpower). (2) The Agreement, being a contract of adhesion, does not necessarily mean that it was
void because there is no evidence showing that Luna was forced to sign the said Agreement. This
shows that she adhered to the contents of the same. (3) The termination was valid because Avon
complied with the requirement that notice be given before the contract is terminated.

Facts:
Luna began working for Beautifont, Inc. in 1972 as a Supervisor and eventually working for successor
Company Avon Cosmetics when the latter took over the former corporations management since 1978.
Aside from being a supervisor, she also acted as a make-up artist of Avons Theatrical Promotions
Group and received per diems for each performance.
Avon and Luna entered into a Supervisors Agreement which included an exclusivity clause stating
that: Supervisor shall sell or offer to sell, display or promote only and exclusively products sold by the
Company (Sec. 5). They also mutually agreed that the Agreement does not make Luna an agent or
employee of the Company, hence she cannot bind Avon in any contracts with other parties.Also, the
Supervisor shall be treated as an independent retailer/dealer and shall have the sole discretion to
determine where and how the products purchased shall be sold. She cannot sell the same to stores,
supermarkets or to any entity or person who sells things at a fixed place of business. Thus, Luna
became part of the independent sales force of Avon.
In 1988, Luna was invited by a former Avon employee who was then currently a Sales Manager of
Sandr Philippines, Inc., a domestic corporation engaged in direct selling of vitamins and other food
supplements, to sell said products. Luna accepted the invitation as she then became a Group Franchise
Director of Sandr Philippines, Inc. concurrently with being a Group Supervisor of petitioner Avon. Luna
began selling and/or promoting Sandr products to other Avon employees and friends.
Upon her request, a law firm rendered a legal opinion that the Supervisors Agreement was "contrary
to law and public policy." She wrote a letter to her colleagues and attached mimeographed copies of
the opinion. The letter contained the ff (not verbatim):

Section 5 of the Agreement, which restricts the selling of products to only Avons products, is
NOT valid because it is contrary to public policy, being an unreasonable restraint of trade.

Therefore, I can conclude that I dont violate Section 5 if I sell any product which is not in
direct competition with the companys products, and there is no valid reason for the company
to terminate my dealership contract if I sell a non-competitive product. xxx I hope we will all
stay together selling Avon products for a long time and at the same time increase our earning
opportunity by engaging in other businesses without being afraid to do so.
Avon, through its President and General Manager, Jose Mari Franco, notified Luna of the termination of
her Supervisors Agreement. They based her termination on her violation of Sec. 5 of the
Agreement (no to selling of other products) and for promoting other products to Avon employees.

Included in said letter is the recognition of the circulated letters she gave to other members of the
Avon sales force.
Luna filed a complaint for damages before the Makati RTC. RTC ruled in her favor, awarding her
100,000 moral damages, 20,000 attorneys fees and costs. The CA affirmed this decision.
Issue: Whether the exclusivity clause is valid?
Held: Yes, the exclusivity clause does not restraint trade and does not limit the Sandre Philippines
selling opportunities. It merely limits the undue use of Avons resources (in this case, the skills of its
manpower).
Ratio:

In business parlance, the "exclusivity clause" is defined as agreements which prohibit the
obligor from engaging in "business" in competition with the obligee.

This exclusivity clause is more often the subject of critical scrutiny when it is perceived to
collide with the Constitutional proscription against "reasonable restraint of trade or
occupation."
o Consti: The State shall regulate or prohibit monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition shall be allowed.
(Sec. 9, Art. 12)

First off, restraint of trade or occupation embraces acts, contracts, agreements or

combinations which restrict competition or obstruct due course of trade.

The test to determine of the Agreement violates the Constitutional provision is

whether under the particular circumstances of the case and the nature of the
particular contract involved, such contract is, or is not, against public interest.

Restrictions upon trade may be upheld when not contrary to public welfare and not greater
than is necessary to afford a fair and reasonable protection to the party in whose favor it is
imposed.

Thus, contracts requiring exclusivity are not per se void.

o Each contract must be viewed vis--vis all the circumstances surrounding such
agreement in deciding whether a restrictive practice should be prohibited as imposing
an unreasonable restraint on competition.
When is restraint in trade unreasonable?

A restraint in trade is unreasonable when it is contrary to public policy or public

welfare (held in Ferrazzini v. Gsell)
o There are two principle grounds on which the doctrine is founded that a contract in
restraint of trade is void as against public policy.

(1) the injury to the public by being deprived of the restricted partys
industry; and

(2) the injury to the party himself by being precluded from pursuing
his occupation, and thus being prevented from supporting himself and
his family.

Public policy (based on Manresa and Scaevolas definitions) is that principle of the law which
holds that no subject or citizen can lawfully do that which has a tendency to be injurious to the
public or against the public good.
o For Courts to declare a contract void against public policy, the contract:

Has a tendency to injure the public,

is against the public good, or

contravenes some established interests of society, or

is inconsistent with sound policy and good morals, or

tends clearly to undermine the security of individual rights, whether

of personal liability or of private property.

From another perspective, the main objection to exclusive dealing is its tendency to
foreclose existing competitors or new entrants from competition in the covered
portion of the relevant market during the term of the agreement.
o The foreclosure effect depends on the market share involved.
o The relevant market for this purpose includes the full range of selling opportunities
reasonably open to rivals, namely, all the product and geographic sales they may
readily compete for, using easily convertible plants and marketing organizations.
In this case, there is nothing invalid or contrary to public policy either in the
objectives sought to be attained by paragraph 5 in prohibiting respondent Luna,
and all other Avon supervisors, from selling products other than those
manufactured by petitioner Avon.
o Board of Trade of Chicago v. US: "the question to be determined is whether the
restraint imposed is such as merely regulates and perhaps thereby promotes
competition, or whether it is such as may suppress or even destroy
competition."
The exclusivity clause is neither directed to eliminate the competition like Sandr
Phils., Inc. nor foreclose new entrants to the market.
o In its Memorandum, it admits that the reason for such exclusion is to safeguard the
network that it has cultivated through the years.
o Admittedly, both companies employ the direct selling method in order to peddle their
products.
o By direct selling, petitioner Avon and Sandre, the manufacturer, forego the use of a
middleman in selling their products, thus, controlling the price by which they are to be
sold.
o The limitation does not affect the public at all.
It was not by chance that Sandr Philippines, Inc. made respondent Luna one of its
Group Franchise Directors, seeing as she knows the ins-and-outs of the trade
because of Avon.
o This is tantamount to unjust enrichment.
o Worse, the goodwill established by petitioner Avon among its loyal customers will be
taken advantaged of by Sandre Philippines, Inc.
o Customer may be misled into thinking that the Sandr products are in fact Avon
products.
o It cannot be said that the purpose of the subject exclusivity clause is to foreclose the
competition, that is, the entrance of Sandr products in to the market.
o Sandr Philippines, Inc. is still very much free to distribute its products in the market
but it must do so at its own expense.
o The exclusivity clause does not in any way limit its selling opportunities, just
the undue use of the resources of petitioner Avon.

Sir: In the end, the Avon Cosmetics case reiterated previous rulings to the effect that if the restriction
is reasonably necessary for the protection of the legitimate interest of the party in whose favor it was
constituted, it would be allowed.

10. RIVERA V. SOLIDBANK CORPORATION (P. 96)

Facts:
Petitioner had been working for Solidbank Corporation since July 1, 1977. He was initially employed as
an Audit Clerk, then as Credit Investigator, Senior Clerk, Assistant Accountant, and Assistant Manager.
Prior to his retirement, he became the Manager of the Credit Investigation and Appraisal Division of the
Consumer's Banking Group. Deciding to devote his time and attention to his poultry business in Cavite,
Rivera applied for retirement under the SRP. Solidbank approved the application and Rivera was
entitled to receive the net amount of P963,619.28.
Solidbank required Rivera to sign an undated Release, Waiver and Quitclaim, which was notarized on
March 1, 1995.Rivera acknowledged receipt of the net proceeds of his separation and retirement
benefits and promised that "[he] would not, at any time, in any manner whatsoever, directly or
indirectly engage in any unlawful activity prejudicial to the interest of Solidbank, its parent, affiliate or
subsidiary companies, their stockholders, officers, directors, agents or employees, and their
successors-in-interest and will not disclose any information concerning the business of Solidbank, its
manner or operation, its plans, processes, or data of any kind."
Aside from acknowledging that he had no cause of action against Solidbank or its affiliate companies,
Rivera agreed that the bank may bring any action to seek an award for damages resulting from his
breach of the Release, Waiver and Quitclaim, and that such award would include the return of
whatever sums paid to him by virtue of his retirement under the SRP.Rivera was likewise required to
sign an undated Undertaking as a supplement to the Release, Waiver and Quitclaim in favor of
Solidbank in which he declared that he received in full his entitlement under the law (salaries, benefits,
bonuses and other emoluments), including his separation pay in accordance with the SRP. In this
Undertaking, he promised that "[he] will not seek employment with a competitor bank or financial
institution within one (1) year from February 28, 1995, and that any breach of the Undertaking or the
provisions of the Release, Waiver and Quitclaim would entitle Solidbank to a cause of action against
him before the appropriate courts of law.11 Unlike the Release, Waiver and Quitclaim, the Undertaking
was not notarized.
On May 1, 1995, the Equitable Banking Corporation (Equitable) employed Rivera as Manager of its
Credit Investigation and Appraisal Division of its Consumers' Banking Group. Upon discovering this,
Solidbank First Vice-President for Human Resources Division (HRD) Celia J.L. Villarosa wrote a letter
dated May 18, 1995, informing Rivera that he had violated the Undertaking. She likewise demanded
the return of all the monetary benefits he received in consideration of the SRP within five (5) days from
receipt; otherwise, appropriate legal action would be taken against him.
RTC issued an order of summary judgment in favour of Solidbank, ordering the Rivera to pay the
amount of 963,619 pesos. The TC ruled that there was no genuine issue as to a matter of fact in the
case since Rivera voluntarily executed the Release, Waiver and Quitclaim and the Undertaking. RTC
also ruled that the prohibition is not unreasonable.
Issue: Whether the employment ban incorporated in the Undertaking which petitioner executed upon
his retirement is unreasonable, oppressive, hence, contrary to public policy?
Held: [Sir: Court did not squarely rule on the validity of the employment ban. Ruling of the court was
that the lower court erred in granting summary judgment because it was of the opinion that the
validity or invalidity of the restriction can only be determined after the parties have presented
evidence on the reasonableness of the restriction. The court, however, recognized the right of a party
to protect his business by means of non-compete clauses.]
Ratio: Respondent, as employer, is burdened to establish that a restrictive covenant barring an
employee from accepting a competitive employment after retirement or resignation is not an
unreasonable or oppressive, or in undue or unreasonable restraint of trade, thus, unenforceable for
being repugnant to public policy. As the Court stated in Ferrazzini v. Gsell, cases involving contracts in
restraint of trade are to be judged according to their circumstances, to wit:
There are two principal grounds on which the doctrine is founded that a contract in restraint of trade is
void as against public policy. One is, the injury to the public by being deprived of the restricted party's

industry; and the other is, the injury to the party himself by being precluded from pursuing his
occupation, and thus being prevented from supporting himself and his family.
In cases where an employee assails a contract containing a provision prohibiting him or her from
accepting competitive employment as against public policy, the employer has to adduce evidence to
prove that the restriction is reasonable and not greater than necessary to protect the employer's
legitimate business interests. The restraint may not be unduly harsh or oppressive in curtailing the
employee's legitimate efforts to earn a livelihood and must be reasonable in light of sound public
policy.
From book: Courts should carefully scrutinize all contracts limiting a mans natural right to follow any
trade or profession anywhere he pleases and in any lawful manner. But it is just as important to protect
the enjoyment of an establishment in trade or profession, which its employer has built up by his own
honest application to every day duty and the faithful performance of the tasks which every day
imposes upon the ordinary man. What one creates by his own labor is his. Public policy does not intend
that another than the producer shall reap the fruits of labor; rather, it gives to him who labors the right
by every legitimate means to protect the fruits of his labor and secure the enjoyment of them to
himself.56 Freedom to contract must not be unreasonably abridged. Neither must the right to protect by
reasonable restrictions that which a man by industry, skill and good judgment has built up, be denied.
The court has to consider whether its enforcement will be injurious to the public or cause undue
hardships to the employee, and whether the restraint imposed is greater than necessary to protect the
employer. Thus, the court must have before it evidence relating to the legitimate interests of the
employer which might be protected in terms of time, space and the types of activity proscribed
Thus, in determining whether the contract is reasonable or not, the trial court should consider the
following factors: (a) whether the covenant protects a legitimate business interest of the employer; (b)
whether the covenant creates an undue burden on the employee; (c) whether the covenant is injurious
to the public welfare; (d) whether the time and territorial limitations contained in the covenant are
reasonable; and (e) whether the restraint is reasonable from the standpoint of public policy.
Sir: The case of Rivera remains consistent in recognizing the validity of exclusivity or noncompete
clauses insofar as they are reasonable and utilized for protection of the legitimate business interest of
a party.

11. DAISY TIU V. PLATINUM (P. 99)

Facts:
The petitioner was employed as Division Marketing Director of the respondent, a pre-need company. In
1995, she stopped working and became the Vice President for Sales of Professional Pension Plans, Inc.,
another pre-need company. She was sued for damages for violating her contract with respondent
which prohibited her in a business of the same nature within two (2) years separation, whether
voluntary or involuntary. The RTC and the CA held her liable. Before the SC, the petitioner contended
that the non-involvement clause is offensive to public policy since the restraint imposed is much
greater than what is necessary to afford respondent a fair and reasonable protection. She added that
since the products sold in the pre-need industry are more or less the same, the transfer to a rival
company is acceptable. She likewise argued that a strict application of the non-involvement clause
would deprive her of the right to engage in the only work she knows.
Respondent countered that the validity of a non-involvement clause has been sustained by the
Supreme Court in a long line of cases. It contended that the inclusion of the two-year non-involvement
clause in the contract of employment was reasonable and needed since her job gave her access to the
companys confidential marketing strategies. It added that the non-involvement clause merely
enjoined her from engaging in pre-need business akin to respondents within two years from her
separation from respondent. She had not been prohibited from marketing other service plans. In
brushing aside respondents contention, the SC
Issue: Whether the non-involvement clause is against public welfare?
Held: No, the non-involvement clause is not contrary to public welfare and not greater than is
necessary to afford a fair and reasonable protection to respondent.
Ratio: As early as 1916, the validity of a non-involvement clause has already been discussed. In
Ferazzini v. Gsell, 34 Phil. 697 (1916), it was held that such clause was unreasonable restraint of trade
and therefore against public policy. In Ferrazzini, the employee was prohibited from engaging in any
business or occupation in the Philippines for a period of five years after the termination of his
employment contract and must first get the written permission of his employer if her were to do so.
The Court ruled that while the stipulation was indeed limited as to time and space, it was not limited as
to trade. Such prohibition, in effect, forced an employee to leave the Philippines to work should his
employer refuse to give a written permission.
In G. Martini, Ltd. v. Glaiserman, 39 Phil. 120 (1918), a similar stipulation was declared as void for
being unreasonable restraint of trade. There, the employee was prohibited from engaging in any
business similar to that of his employer for a period of one year. Since the employee was employed
only in connection with the purchase and export of abaca, among the many business of the employer,
the restraint was considered too broad since it effectively prevented the employee from working in any
other business similar to his employer even if his employment was limited only to one of its
multifarious business activities.
However, in Del Castillo v. Richmond, 45 Phil. 679 (1974), a similar stipulation was upheld as legal,
reasonable, and not contrary to public policy. In the said case, the employee was restricted from
opening, owning or having any connection with any other drugstore within a radius of four miles from
the employers place of business during the time the employer was operating his drugstore. A contract
in restraint of trade is valid provided there is a limitation upon either time or place and the restraint
upon one party is not greater than the protection the other party requires.
Finally, in Consulta v. Court of Appeals, G.R. No. 145443, March 18, 2005, 453 SCRA 732, a noninvolvement clause was held in accordance with Article 1306 of the Civil Code. While the complainant
in that case was an independent agent and not an employee, she was prohibited for one year from
engaging directly or indirectly in activities of other companies that compete with the business of her
principal. The restriction did not prohibit the agent from engaging in any other business, or from being
connected with any other company, for as long as the business or company did not compete with the
principals business. Further, the prohibition applied only for one year after the termination of the
agents contract and was therefore a reasonable restriction designed to prevent acts prejudicial to the
employer.

Conformably with the aforementioned pronouncements, a non-involvement clause is not necessarily

void for being in restraint of trade as long as there are reasonable limitations as to time, trade, and
place.
In this case, the non-involvement clause has a time limit: two years from the time petitioners
employment with respondent ends. It is also limited as to trade, since it only prohibits petitioner from
engaging in any pre-need business akin to respondents.
In this case what makes the non-involvement clause valid is that, she had been privy to confidential
and highly sensitive marketing strategies of respondents business. To allow her to engage in a rival
business soon after she leaves would make respondents trade secrets vulnerable especially in a highly
competitive marketing environment. In sum, the non-involvement clause is not contrary to public
welfare and not greater than is necessary to afford a fair and reasonable protection to respondent.
(Ollendorff v. Abrahamsom, 38 Phil. 585 (1918)).
In any event, Article 1306 of the Civil Code provides that parties to a contract may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy.
Article 1159 of the same Code also provides that obligations arising from contracts have the force of
law between the contracting parties and should be complied with in good faith. Courts cannot stipulate
for the parties nor amend their agreement where the same does not contravene law, morals, good
customs, public order or public policy, for to do so would be to alter the real intent of the parties, and
would run contrary to the function of the courts to give force and effect thereto. (Phil. Communications
Satellite Corp. v. Telecom, Inc., G.R. Nos. 147324 and 147334, May 25, 2004, 429 SCRA 153).
Sir: The court remained consistent with previous rulings to the effect that noncompete or exclusivity
clauses are not per se illegal. A clause of this nature should be tested first nu their effect on public
welfare. If none is found, we should look to its purpose. If the clause is designed to protect the
legitimate business interest of its beneficiary, and reasonable in the sense that restriction imposed is
limited as to business/trade, time and place, such clauses shall be deemed valid, legal and binding.

12. CONSULTA V. COURT OF APPEALS (P. 102)

Facts: Pamana Philippines, Inc. (Pamana) is engaged in health care business. Raquel P. Consulta
(Consulta) was a Managing Associate of Pamana. The appointment letter stated, among others, that:
By your acceptance of this appointment, it is understood that you must represent the Company on an
exclusive basis, and must not engage directly or indirectly in activities, nor become affiliated in official
or unofficial capacity with companies or organizations which compete or have the same business as
Pamana. It is further understood that his [sic] self-inhibition shall be effective for a period of one year
from date of official termination with the Company arising from any cause whatsoever.
Sometime in 1987, Consulta negotiated with the Federation of Filipino Civilian Employees Association
(FFCEA) working at the United States Subic Naval Base for a Health Care Plan for the FFCEA members.
On 4 March 1988, Pamana and the U.S. Naval Supply Depot signed the FFCEA account. Consulta,
claiming that Pamana did not pay her commission for the FFCEA account, filed a complaint for unpaid
wages or commission against Pamana, its President Razul Z. Requesto (Requesto), and its Executive
Vice-President Aleta Tolentino (Tolentino).
Issue: Whether the exclusivity clause is valid?
Held: Yes
Ratio: Consultas appointment had an exclusivity provision. The appointment provided that Consulta
must represent Pamana on an exclusive basis. She must not engage directly or indirectly in activities of
other companies that compete with the business of Pamana. However, the fact that the appointment
required Consulta to solicit business exclusively for Pamana did not mean that Pamana exercised
control over the means and methods of Consultas work as the term control is understood in labor
jurisprudence.[20] Neither did it make Consulta an employee of Pamana. Pamana did not prohibit
Consulta from engaging in any other business, or from being connected with any other company, for
as long as the business or company did not compete with Pamanas business.
The prohibition applied for one year after the termination of the contract with Pamana. In one of their
meetings, one of the Managing Associates reported that he was transferring his sales force and
account from another company to Pamana. [21] The exclusivity provision was a reasonable
restriction designed to prevent similar acts prejudicial to Pamanas business interest. Article
1306 of the Civil Code provides that [t]he contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy.

13. IN RE: FRANCHISE AGREEMENT FOR OPERATION OF A MCDONALDS RESTAURANT (P. 105)
Facts: This is an appeal from the resolutions of the Director of the Documentation, Information and
Technology Transfer Bureau (hereinafter, Director) denying the request for exemption from the
requirements of Republic Act No. 829 of certain provisions in the two Franchising Agreements executed
by and between McGeorge Food Industries and Golden Arches Development.
Appellants filed with Documentation, Information and Technology Transfer Bureau (DITTB) two
applications requesting that the franchise agreements for the operation of two Mcdonalds restaurants
located in Tagaytay be exempted from the requirements of the IP Code.
Paragraph 12(b) of the LAs, one of the controversial provisions of the LA, provides:
12. RESTRICTIONS Licensee agrees and covenants as follows: x x x (b) Licensee shall not, for a
period of eighteen (18) months after termination of this License, for any reason, directly or indirectly,
engage in or acquire any financial or beneficial interest (including any interest in corporations,
partnerships or trusts, unincorporated associations and joint ventures), in or become a landlord for any
restaurant business, which is similar to the Restaurant operated by the Licensee.
Appellants claim that it is not anti-competitive but reasonable, valid and effective citing the case of
Ollendorf vs. Abrahamson7, which upheld the validity of stipulation in restraint of trade provided that
there is a limitation upon either time or place. The said ruling stated that the test is whether the
restraint is reasonably necessary for the protection of the contracting parties. To bolster such claim,
the Appellants adduced additional evidence that Paragraph 12 (b) of the LAs was designed to protect
legitimate business interests not only of the Appellants but also of the franchisees. They also submit as
evidence the affidavits of their franchisees attesting that said stipulation in the LAs was necessary to:
a) protect the common interests of the franchisees and franchisors in order to preserve the value and
uniqueness of the McDonalds System; and, b) prevent the duplication of the McDonalds System that
will result in the dilution or diminution of the value and uniqueness of the McDonalds System.
According to the Appellants, the limited period of the prohibition is likewise reasonable as this period
will be sufficient to protect legitimate competitive interests but is also short enough that the former
franchisee cannot dissociate himself from the Mcdo System and enable him to begin his own business
without undue economic hardship.
Director however refused to grant exemption stating that: The mere fact that the licensor restricts the
licensee from engaging in a business similar to licensors business for a period of 18 months after
termination of the license is anti-competitive. Although the restriction is limited in time and area, the IP
Code gives no distinction. Their contention that the Supreme Court Ruling still persists despite the
promulgation of the IP Code after the Ruling does not hold water. Although it forms part of the legal
system and is binding and effective on the particular case decided, the prevailing law, which in this
instant case is the IP Code, will have to be followed.
Issue: Whether the Franchise Agreements conform to the provisions of the IP code?
Held: No
Ratio:
This Office finds no cogent reason to disturb the assailed ruling of the Director concerning Paragraph
12(b) of the LAs. Section 87, particularly 87.9, of the IP Code is explicit in saying that provisions which
restrict the use of technology supplied after the termination of the technology transfer arrangement
except in cases of early termination of the technology transfer arrangement due to reasons
attributable to the licensee and other clauses with equivalent effects shall be deemed prima facie to
have adverse effect on competition and trade.
In the case at hand, to allow the restrictive provision of Paragraph 12(b) of the Licensing Agreement
would go against the rationale and spirit of the provisions of the IP Code on Voluntary Licensing and
Technology Transfer Arrangement. The objectives of transferring and disseminating technology
development and preventing practices that may have adverse effects on competition and trade will be
rendered nugatory if Paragraph 12(b) will be allowed. While it is true that the prohibited clauses of
Section 87 state that provision like that of Paragraph 12(b) of the LA is only prima facie to have an
adverse effect on competition and trade, the Appellants failed to overcome this presumption. The

burden of overcoming the presumption of adverse effect on competition and trade rests with the
Appellants. Failing to do so, the legal presumption stays.
This Office has observed that in the instant case, the Franchise Agreements amply protect
the Appellants even without the subject restrictive provision. They are entitled to the payment
of royalties, on top of the Franchise Fee, during the term of the Agreement. One is not unduly deprived
of his property rights where the law not only grants him a protective period of two years to enjoy his
exclusive rights thereto but subsequently recognizes just compensation in the form of royalties. In
addition, the other restrictive provisions contained in Paragraph 12 of the LAs secure the intellectual
property rights (know how and trade secrets) and the proprietary rights of the licensor.
The deletion of Paragraph 12(b) of the LAs will, therefore not prejudice the interests of the licensor. The
Appellants are well-protected by the other provisions of the Franchise Agreement such as Section 4 of
the LAs which states, in part: Without the prior written consent of the Licensor, Licensee shall not
disclose the contents of the business manuals to any person, except employees of Licensee for
purposes related solely to the operation of the Restaurant, nor shall Licensee reprint or reproduce the
manuals in whole or in part for any purpose except in connection with instruction of employees in the
operation of Licensees Restaurant
This Office has also noted that Paragraphs 19, 20 and 21 of the LAs also provide the Appellants the
security and the remedies in cases of breach of the terms and conditions of the LAs including the
violations on the confidentiality of the McDonalds System.
Notwithstanding the foregoing, Paragraph 12(b) may be retained provided that the period
is limited to one (1) year from the termination of the LA and the place is limited to South
Tagaytay and Tagaytay City. This qualification is consistent with Paragraphs 1 and 8 of the FLAs,
which grants, personally and only to the licensee the rights thereunder to operate a McDonalds
Restaurant at Provincial Road of Barangay Kaybagal, South Tagaytay and at Tagaytay Junction, Emilio
Aguinaldo Highway, Tagaytay City. Appellants claim that in American jurisprudence, post-termination
non-compete covenants extending to three (3) years are considered reasonable is irrelevant
considering that business conditions in that country differ from those that prevail here and in view of
the need to protect local licensees from unfair even potentially predatory practices of licensors.

14. IN RE: SHOP FRANCHISE AGREEMENT (HAAGEN DAZS) (P. 109)

Facts: This is an appeal by QT from the decision of the DITTB declaring that Section 10A of a shop
franchise agreement violates Section 87.9 of RA 8294.
Section 10A provides that: Covenant Against Competition. A. Ownership or Operation of Other Food
Service Businesses. In consideration of Franchisor's providing operations and management training to
Franchisee and disclosing to Franchisee its operating procedures and other Trade Secrets, Franchisee
especially covenants and agrees that, during the Term of the Franchise and for two years after its
expiration or termination, Franchisee shall not engage, directly or indirectly (either as sole
proprietor, principal, agent, partner, consultant, independent contractor or employee, or through an
Affiliate or other Person Controlled by it or by any of its respective officers, shareholders or
employees), in any food service business, which is in competition with the activities and services
performed by Franchisor, within the area in which a Franchisor owned or subfranchised Franchisor
Shop, without its consent. Franchisor's consent will be conditioned upon its receipt of absolute
assurances that the Trade Secrets and the Manual will not be used in any manner."
The Appellants now contend that the clauses under Section 87 of the IP Code are not absolutely
prohibited. According to them, parties to a technology transfer arrangement adversely affected by any
of the provisions of the said arrangement may overcome the presumption that these provisions shall
have an adverse effect on competition and trade, citing the 1968 case of Villa Rey Transit vs. Ferrer
decided by the Supreme Court which upheld the validity of stipulations in restraint of trade provided
that there is a limitation upon either time or place. They also sought consideration based on the
alleged uniqueness of the Franchise, claiming that in the industry, it is acknowledged that limitations
on business freedom are essential in franchising. The Appellants also invoked the State policies in the
IP Code which liberalized the registration on the transfer of technology and recognize that an effective
intellectual and industrial property system is vital to the development of domestic and creative
activity, facilitates transfer of technology, attracts foreign investments, and ensures market access for
our products.
DITTB parried the above arguments of the Villa Rey case, to wit: "2. On the argument that the restraint
is limited in time and space, it will be dangerous to apply this tenet in technology transfer
arrangements. The limitation will be subject to discretion of the parties and of the approving authority
and thus application of the law will be subject to various interpretations. To create a scenario, what if
we set a precedent on this and a case comes up where a fast moving technology becomes the subject
of a TTA? If we allow a ten-year period as in the case of Villa Rey Transit, then the technology will
already be obsolete by the time the licensee is allowed to apply the knowledge he has gained out of
the arrangement."
The DITIB likewise debunked the Appellants' claim, that the Franchise is unique, saying that: "A
franchise agreement is no different from other types of technology transfer arrangements. In fact, in
this kind of transaction, it is basically the licensee who has to shoulder most of the expenses involved
in putting up the business since retailing is still limited to Filipinos. This is the reason why at the end or
termination of a franchise agreement, it is usually the local companies who are left with most of the
problems because after building up the business and spending for a location which should conform
with the look and style of a franchise, he cannot use the same format and look as it will violate the
intellectual property rights of the franchisor."
Issue: Whether Section 10A violates the provisions of the IP code?
Held: Yes, This Office finds the content of Section 10 (A) of the subject Agreement restrictive and
anathema to the intent and spirit of the IP Code and the country's policy on technology transfer
Ratio:
In the instant case, to allow the restrictive provision of Paragraph 10 (A) of the Agreement would go
against the rationale and spirit of the provisions of the IP Code on Voluntary Licensing and Technology
Transfer Arrangement. The objectives of transferring and disseminating technology development and
preventing practices that have adverse effects on competition and trade will be rendered nugatory if
Section 1 O (A) of the Agreement will be allowed.

Precisely, the provision of law, that is, Section 87.9 of the IP Code, prohibiting the restriction of the use
of the technology supplied after the expiration of the technology transfer arrangement, was included in
the Act to encourage the transfer and dissemination of technology and prevent or control
practices and conditions that may, in particular cases, constitute an abuse of intellectual
property rights which have adverse effects on competition and trade. The prohibited clauses
under Section 87 are designed to adhere to the policy of regulating the transfer and promoting the
dissemination of technology sources. The restrictive provision of Section 10(A) contradicts such public
policy of encouraging the transfer and promotion of technological advancement.
A scrutiny of the cases cited by the Appellants shows that they are not in parallel with this case.
Firstly, unlike in the instant case, there is no technology transfer involved in the cases
cited by the Appellants. The subjects of those cases were not even about intellectual property. The
Villa Rey Transit case is about public utility. It must be stressed that the meat of the controversy at
hand is about intellectual property, particularly, technology transfer and its conformity, or not, with the
State's policies and requirements set forth under the Constitution and of the IP Code. The crucial role
of intellectual property and technology transfers in national development carries with the immediate
exploitation of the technology acquired. Precisely, it is dangerous to apply a restraint limited by
time and space in technology transfer arrangements. Aside from the application of the law
being vulnerable to various interpretations, the exponential advancement in technology also sets rapid
obsolescence on the state of science and technology. By the time the restriction expires, the
technology acquired or transferred could already be obsolete or rendered inutile.
Secondly, unlike in the cases cited by the Appellants, there is an explicit provision of law,
Section 87.9 of the IP Code, creating a presumption of restraint of trade and anticompetition. The IP Code put the burden of overcoming such presumption on the parties to the
technology transfer arrangement.
Thirdly, the conditions upon which the contracts were made in the cited cases are different
from that of in this instance. In the instant case, the restriction is imposed upon the Franchisee,
who, in effect, already bought the technology from the Franchisor, sufficiently compensating the latter.
This is on top of the expenses the Franchisee has to incur in the construction, renovation and
maintenance of the business operations. It would appear thus, that the contract is onerous for the
Franchisee for the Franchisee would be precluded from making use of the technology transferred.
Although the prohibition is not perpetual, the fact that the Franchisee would not be able to make use
of, and infuse to the local economy and conditions the technology it has already bought from the
Franchisor is precisely the situation the prohibition wants to avoid. In the Villa Rey Transit case, such
precarious situation did not matter. The ten (10)-year restrictive clause in the contract was against the
seller and intended for the protection of the buyer. The ten (10)-year prohibition clause referred to the
operation of lines covered by the certificate of public convenience sold to the buyer and does not refer
to a transfer of technology.
To establish whether the contract is a reasonable or unreasonable one, the nature of the business must
also be considered. In the present case, the other provisions of the Agreement even without
the subject restrictive provision amply protect the business of the Franchisor. The Franchisor
is entitled to the payment of royalties and assistance fees on top of the Franchise Fee during the term
of the Agreement. One is not unduly deprived of his property rights where the law not only grants him
a protective period of two years to enjoy his exclusive rights thereto but subsequently recognizes just
compensation in the form of royalties.24 Moreover, the Agreement is for an initial term of five (5) years
from and after the effective date. The Appellants are therefore adequately protected and
compensated in the Agreement even in the absence of Section 10(A).
Succinctly, Section 10 (A) of the Agreement is both a non-compete clause and a restrictive clause,
which violate the IP Code. Under this provision, the Franchisee is barred and shall not, for two (2) years
after its expiration, engage directly or indirectly to any food service business, which is in competition
with the activities and services performed by the Franchisor as well as to [and] use the technology
supplied by the Franchisor to the Franchisee. To allow Section 10 (A) would certainly defeat the
rationale of the provisions of the IP Code, which provide a presumption that provisions similar to
Section 10 (A) shall have an adverse effect on competition and trade.

Notwithstanding the foregoing, Section 1 O(A) may be retained provided that the period is limited to
one (1) year from the termination of the Agreement.
With respect to the claim of the Appellants that the subject Franchise Agreement is unique, this Office
agrees with the DITTB that a franchise is no different from the other types of technology transfer
arrangement. This Office may read repetitious but then, again, it must be stressed that a franchise or
licensing agreement, or any part thereof, must yield to the higher claim of public interest.