G. Martini (Ltd.) vs. Glaiserman

A post-employment non-competition covenant is valid only if the restraint imposed is no greater than reasonably necessary to protect the employer's legitimate interests and is not contrary to public welfare; where the prohibition extends to all of the employer's multifarious business activities rather than the particular branch in which the employee was engaged, it is void as an unreasonable restraint of trade and is not severable.

G. Martini (Ltd.), the plaintiff and appellant, was a commercial corporation engaged in numerous branches of business, including the purchase and exportation of abaca (hemp). J. M. Glaiderman, the defendant and appellee, had no prior experience in the abaca trade when he was hired by the plaintiff under a three-year employment contract. The contract contained a non-competition clause and a separate provision governing resignation in the event the employer rendered the employment relationship difficult or disagreeable. The case reached the Supreme Court on appeal from the lower court's decision favoring the defendant.

In September 1915, G. Martini (Ltd.) and J. M. Glaiderman entered into a contract of employment under which Glaiderman agreed to serve the company exclusively for a period of three years, to carry out his employer's instructions to the best of his ability, and to go wherever the employer's interests required. The contract did not specify the character of the services to be rendered. Its second clause provided that, upon the expiration of the three-year term, should Glaiderman not renew the connection, he would not engage in any business—either for himself or for others—similar to the business carried on by the employer, or in which the employer might be engaged at that time, for at least one year, unless he first secured the employer's written consent. In the event of breach, Glaiderman agreed to pay £400 as liquidated damages and waived any defense to a suit for recovery or to an action for injunctive relief.

A sixth clause addressed the contingency of the employer rendering the relationship difficult or disagreeable. Under its terms, Glaiderman would have the right to tender his resignation, which would become effective six months after filing, or earlier if the employer so desired; in such case, the conditions of the second clause would still bind.

Glaiderman entered upon the performance of the contract and continued in the plaintiff's service until July 1, 1917, when he left the company's employ. He testified that his departure was compelled by the insulting treatment he received from the plaintiff's managing director. The evidence, including the managing director's own testimony, confirmed that Glaiderman was justified in refusing to submit to such treatment and in leaving. Shortly thereafter, Glaiderman entered the employ of Dyogi & Co., a firm engaged in the purchase of abaca for exportation.

During his tenure with the plaintiff, Glaiderman had been assigned to the hemp department, but according to the plaintiff's managing director, he never acquired any appreciable proficiency in the abaca business and was not permitted to close any purchase deals without the express approval of another officer or employee. The plaintiff had been fully aware at the time of hiring that Glaiderman had no previous experience in the hemp trade. The plaintiff corporation was engaged in importing many different lines of goods and exporting Philippine products in general, of which the abaca business was only one among numerous enterprises. The lower court ruled in favor of the defendant, declining to enforce the non-competition clause.

• Scope of Enforcement: Plaintiff argued that because it was only seeking to enjoin the defendant from engaging in the hemp business—the particular branch in which he had rendered services—the generality of the contractual prohibition should not be regarded as an obstacle to enforcement.

• Validity of Restraint: Whether the non-competition clause in the employment contract, prohibiting the defendant from engaging in any business similar to any of the employer's multifarious commercial activities for one year after cessation of employment, constitutes a reasonable restraint of trade and is therefore enforceable.
• Severability: Whether the overbroad prohibition is severable from the remainder of the non-compete clause such that a narrower, lawful restraint could still be enforced.

• Validity of Restraint: No. The non-competition clause was void as constituting an unreasonable restraint of trade, the prohibition being far broader than reasonably necessary to protect the employer's interests.
• Severability: No. The objectionable agreement was not severable because the undertaking was a unit affecting many forms of activity, and an unlawful pact that is not itself severable cannot be partially enforced.

• Validity of Restraint: The Court adopted the modern rule, following Ollendorff vs. Abrahamson and Gibbs vs. Consolidated Gas Co. of Baltimore, that the validity of restraints upon trade or employment is determined by the intrinsic reasonableness of the restriction in each case rather than by any fixed rule. A restraint may be upheld when not contrary to public welfare and not greater than necessary to afford fair and reasonable protection to the party in whose favor it is imposed. Applying this standard, the Court found that the prohibition in clause two was not limited to the particular branch of the employer's business in which the defendant had been employed. The plaintiff was engaged in a great many branches of commercial activity, of which abaca was only one, yet the clause forbade the defendant from engaging in any business similar to any business carried on by the employer. This meant that even if the defendant's experience had been confined to a single well-defined branch, he was barred for a year from entering any of the employer's numerous lines of business. Such a limitation was not reasonably necessary to protect the employer's legitimate interests. The Court rejected the plaintiff's argument that the clause should be enforced only as to the hemp business, holding that the contract must be construed as it stands, not as it might have been written. The question was not whether a more limited covenant would have been valid, but whether this particular contract—under which the defendant was forbidden to engage in any business in which the employer was engaged—could be upheld.

• Severability: The Court acknowledged the general principle that an illegal and void pact which is severable from the rest of a contract will not affect the lawful portions. The agreement for the letting and hiring of services was valid and was not affected by the addition of the unlawful non-compete pact. However, the objectionable agreement was not itself severable. The undertaking was a single unit, albeit one affecting many particular forms of activity. Citing Reed vs. Reeves, the Court noted that where a single undertaking combines lawful and unlawful elements inseparably, the whole is unenforceable. Because the non-compete prohibition could not be divided into a valid, narrower restraint and an invalid, broader one, the entire clause was void.

• Reasonableness Test for Restraints of Trade — The validity of a contractual restraint upon trade or employment is determined not by any fixed rule but by the intrinsic reasonableness of the restriction under the particular circumstances of each case. A restraint is upheld when it is not contrary to public welfare and is no greater than reasonably necessary to afford fair and reasonable protection to the party in whose favor it is imposed; if it exceeds what is necessary for such protection, it is declared void. The Court applied this test to hold that a non-compete clause covering all of the employer's diverse business activities—rather than only the branch in which the employee worked—was unreasonably broad and therefore void.

• Non-Severability of an Overbroad Restraint — Where a non-competition undertaking is framed as a single, unitary prohibition that encompasses both lawful and unlawful degrees of restraint, the unlawful portion is not severable and the entire clause fails. The Court applied this principle to strike down the whole of clause two, because the prohibition could not be divided into a valid narrower restraint limited to the hemp business and an invalid broader prohibition covering the employer's other enterprises.

• "Following this opinion, we adopt the modern rule that the validity of restraints upon trade or employment is to be determined by the intrinsic reasonableness of the restriction in each case, rather than by any fixed rule, and that such restrictions may be upheld when not contrary to the public welfare and not greater than is necessary to afford a fair and reasonable protection to the party in whose favor it is imposed." — This passage states the ratio decidendi, articulating the reasonableness standard that governs restraints of trade in Philippine jurisprudence.

• "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." — This passage defines the Court's approach to contractual construction of restraint clauses: the actual language controls, and a court will not rewrite an overbroad covenant to render it enforceable.

• "We are, therefore, of the opinion that the agreement contained in paragraph two of the contract of employment is void as constituting an unreasonable restraint of trade, and that the decision of the lower court should be and is hereby affirmed." — This is the dispositive holding, declaring the non-compete clause void and affirming the lower court.

• Ollendorff vs. Abrahamson, 38 Phil. Rep. 585 — Controlling precedent followed. The Court quoted extensively from this decision to adopt the modern reasonableness test for restraints of trade, discarding older fixed rules that treated restraints as per se void or valid based solely on limitations of time or space.

• Gibbs vs. Consolidated Gas Co. of Baltimore, 130 U.S. 396 — Cited within Ollendorff and adopted by the Court. The U.S. Supreme Court's formulation—that public welfare is first considered, and if it is not involved, the restraint may be sustained if not greater than protection to the other party requires—was endorsed as the principle governing restraints of trade.

• Reed vs. Reeves, 13 Bush (Ky.) 447 — Cited as authority for the proposition that where a single undertaking combines lawful and unlawful elements inseparably (as in a note given partly for a lawful loan and partly for a gaming debt), the whole is unenforceable. The Court used this analogy to hold that the overbroad non-compete clause was not severable.

Torres, Johnson, Street, Malcolm, and Avanceña, JJ., concurred.