GOKADA v. ORIDE: WHAT THEIR TURF WAR TEACH US ABOUT NON-COMPETE CLAUSES

‘Joel, they don’t know what is going to hit them’ said Mr. Ayo (pseudonym). He continued: ‘When ORide is done with them, Gokada will delve into another kind of business’. It was late June when Mr. Ayo made these statements while we were having a conversation on ‘this new ORide guys’. I was sure he was not mincing words because a very close relative of his worked as an executive at Paycom Nigeria Limited (popularly known as ORide or OPay). Mr. Ayo informed me that this person had let him in on ORide’s strategy.

In an article, Is ORide behind Gokada’s shutdown of operations? Leading financial resource company Nairametrics observed that about four of ORide’s current senior management staff are ex-Gokada Rides Limited (‘Gokada’) employee. Nairametrics found that ORide did not only poach Gokada’s staff but, ‘…There are reports that riders of Gokada left the bike-hailing pioneer for ORide after the latter offered them better payment package.’ This better payment package involved offering new riders between N35,000 and N36,000 to join ORide. The incentive is reported to have triggered a migration of riders from Gokada to ORide, aiding the company to meet demand during its promotional run in June and July 2019.

ORide’s actions appears to identify a loophole in Gokada’s employment contracts (especially its management staff) – the absence of Non-compete clauses. The episode considered entirely may also raise issues around confidentiality and non-circumvention, but this article will focus on Non-compete clauses.

What is a Non-Compete Clause?

According to Investopedia, non-compete clauses are provisions in an employment agreement which proscribe an employee from entering competition of any kind with an employer after the employment period is over. The clause can also prohibit the employee from revealing proprietary information or secrets to any other parties during or after the employment term (Confidentiality clause). The clause specifies a duration of time during which the employee is barred from working with a competitor after he or she ends employment with the employer. Non-compete clauses are a specie of Restrictive Covenants which are used across various of business transactions.

Non-compete clauses can also be included in contracts with contractors, and consultants.

Essentially, non-compete clauses help a business to retain its business secrets and give the business an edge over competitors. For first movers or companies that are pioneers like Gokada, non-compete clauses are very important and increase the likelihood of their continued dominance and monopoly.

Unfortunately, this first mover advantage may also have been Gokada’s flaw as they may have omitted or felt there was no need to include the non-compete clauses.

The troubles of Gokada and Max.ng (even Jumia Food is not left out according to Nairametrics) in dealing with the aggressive actions of OPay is instructive for lawyers advising startups/businesses (especially pioneers). The advice is simple: bind their employees, especially mid-level and senior level employees who may have unfettered access to business secrets and information using non-compete clauses.

Non-Compete Clauses and Investors/Shareholders

Another point to note is that startups/businesses may at times may have investors who have the financial muscle to replicate and execute the organisation’s business. To deal with this, Shareholders/investors can also be bound by non-compete clauses in the Shareholders’ Agreement. Kelly Santini, a Canadian Law firm observes that ‘Most shareholders of a business will have detailed knowledge of the company’s intellectual property and trade secrets, business plans as well as relationships with key stakeholders and access to customer lists.’ They advice that Non-compete clauses in shareholders’ agreements protect and benefit all the shareholders by preventing any of them from using insider information to start a rival business or contribute to a direct competitor. They also advise that ‘…A majority shareholder looking to grow the business by bringing in new partners should use a non-compete clause to protect the value they have built in the business and its long-term prospects. Likewise, anyone buying out a majority shareholder will want to ensure the former owner cannot set up a competing shop upon their exit.’

Implication of Breaching a Non-Compete Clause

Finally, what should be the consequence of breaching a non-compete clause? Generally, in cases of breach of contract, a claim can be made for damages in a court. More importantly though, a lawyer, Oluwafemi Ojosu suggests that the penalty for the breach of a non-compete clause should be prohibitive. He advises that in providing for penalties resulting from breach, the respective agreement should provide that the breaching employee or shareholder pay a Compensation ( to be determined by an independent expert within the relevant industry) to the wronged business which will include all of the wronged business’ investments and reasonably projected profit for the duration the non-compete clause was supposed to subsist as a full and final settlement of all liabilities arising as a result of the breach.

Meanwhile, while inserting Non-compete clauses in agreements, businesses must be careful not too insert clauses that may be considered punitive and overly prohibitive by the court. The court frowns at restrictive covenants that stretch over a very long period and which impose overly punitive penalties for breach.

Final Words

Meanwhile, I like Gokada’s strategy of stepping back to put their acts together and come back stronger (which we expect). If the other part of what Mr. Ayo told me is true (which is that Paycom/ORide’s main aim is the adoption of their wallet for everyday financial transactions – a more broad-based end rather than Gokada’s bike-hailing-focused business model, then I believe Gokada can ride out the current wave with perseverance and their planned improvements. I wish them well.

Joel Joshua is the Managing Partner of the law firm - Primus Law Partnership. He regularly advises businesses on various issues ranging from corporate structuring/restructuring, compliance, employment to fundraising and etc. He recently advised a Nigerian FinTech in its fundraiser and is currently advising a Logistics startup in its N12 million pre-seed fundraising round.