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    New Noncompete Rule Means African Startups Headquartered in US May Face More Challenges Retaining Employees 

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    A recent ruling by the US Federal Trade Commission (FTC) has stirred discussions regarding the impact it may have on the mobility of tech workers. The ruling invalidates most noncompete agreements, a common practice employed by tech companies to retain talent. While this decision on noncompete agreements aims to promote worker freedom and spur entrepreneurship and innovation, it could pose challenges for startups, especially African startups headquartered in and operated from the United States.

    The FTC’s final rule, issued on Tuesday, marks a significant departure from the traditional practice of binding workers with noncompete agreements. These agreements, which restrict employees from joining competitors or starting their own ventures for a certain period after leaving their current job, have long been criticized for limiting career advancement and wage growth. The FTC estimates that the rule change could lead to the creation of 8,500 new businesses annually, along with an average pay increase of $524 for workers, lower healthcare costs, and a potential surge of 29,000 patents each year for the next decade.

    The prevalence of noncompete agreements, particularly in the tech sector, has drawn scrutiny due to its perceived negative impact on workers’ mobility and innovation. Research conducted by the Universities of Maryland and Michigan indicates that a significant portion of tech workers, including engineers and computer science professionals, are subject to such agreements. The new FTC rule is expected to grant tech workers greater flexibility in choosing their employment opportunities and potentially result in higher wages.

    Despite arguments from proponents of noncompete agreements regarding their role in safeguarding trade secrets and encouraging investment in employees, critics contend that these agreements stifle innovation and entrepreneurship. Recent studies have shown that banning noncompetes does not necessarily lead to an increase in trade secret litigation, challenging the notion that such agreements are indispensable for protecting intellectual property.

    However, the implementation of the new FTC rule is not without challenges. While it exempts existing noncompetes for senior executives, it prohibits companies from imposing new agreements on high-level employees. The rule, scheduled to take effect in four months, is expected to face legal challenges, with some arguing that it exceeds the FTC’s authority. Organizations like the US Chamber of Commerce have announced plans to challenge the rule in court.

    Strategies for US-Based African Startups to Navigate Regulatory Challenges Arising from the New Noncompete Rules

    The debate surrounding noncompete agreements extends beyond US borders, particularly for African startups headquartered in the United States. A 2020 report by  African Venture Capital and Private Equity Association says that foreign-registered companies significantly shape the continent’s early stage startups funding landscape. The report notes specifically that about one fifth (21%) of the total number of VC deals between 2014 and 2019 went to startup companies headquartered outside of Africa. Of these companies, the majority (53%) are based in the United States.

    From a legal standpoint, unless a company establishes an overseas subsidiary and conducts hiring through that legal entity, it risks falling under the purview of the new regulations.

    For Nigeria-registered subsidiaries, legal precedent has established that non-compete agreements hold no legal weight. This stance has been reaffirmed through various litigations, such as the 2015 case involving iROKOtv.com. The company sued a former senior manager for breach of contract, alleging violation of non-compete and confidentiality clauses outlined in an employee non-disclosure agreement signed in December 2011. The court ruled in favor of the defendant, setting a precedent against enforcing such agreements.

    According to Nigerian law, any contractual agreement that obstructs an individual’s right to work and consequently hinders tax revenue generation for the nation is deemed contrary to public policy. This principle was upheld in cases such as Dr. Shirish Tanksale v Rubee Medical Centre Ltd. and Nnadozie v Mbabwu.

    However, it’s important to note that under the Companies and Allied Matters Act (CAMA) 2020, directors of a Nigerian company are bound by fiduciary duties, including fidelity. Section 306 (4) (5) of CAMA 2020 prohibits directors from exploiting corporate information for personal gain or disclosing it improperly. Even after resigning from the company, directors remain accountable and can be restrained from misusing confidential information obtained during their tenure.

    This statutory framework represents a form of perpetual restraint on directors, emphasizing the importance of upholding corporate integrity and preventing misuse of privileged information.

    Charles Rapulu Udoh is a Lagos-based lawyer, who has several years of experience working in Africa’s burgeoning tech startup industry. He has closed multi-million dollar deals bordering on venture capital, private equity, intellectual property (trademark, patent or design, etc.), mergers and acquisitions, in countries such as in the Delaware, New York, UK, Singapore, British Virgin Islands, South Africa, Nigeria etc. He’s also a corporate governance and cross-border data privacy and tax expert. As an award-winning writer and researcher, he is passionate about telling the African startup story, and is one of the continent’s pioneers in this regard.

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