QUESTION
What can I do if my business is losing customers because my business partner secretly established a new company and diverted our existing customers to his own ‘new’ business?

When Your Business Partner Becomes Your Biggest Competitor
Many Indonesian entrepreneurs spend years building a business from the ground up. They develop products, establish supplier networks, invest heavily in marketing, recruit employees, and gradually earn the trust of customers.

However, in many cases, the greatest threat does not come from external competitors, but from business partners, directors, shareholders, commissioners, or internal parties who possess comprehensive knowledge of the company’s confidential business information.

In business law practice, it is not uncommon to encounter situations where a business partner:
– secretly establishes a new company;
– copies the company’s business model;
– uses the company’s confidential information;
– recruits key employees;
– diverts existing customers;
– utilizes the company’s customer database;
– uses suppliers originally obtained through the existing company.

As a result, a previously successful business may suffer a significant decline in revenue, lose valuable customers, and incur substantial financial losses because a new competitor emerges by exploiting the trade secrets of the business. These critical business assets are, in principle, protected by law through trade secret regulations.

One of the most effective legal mechanisms to prevent such situations is the inclusion of a Non-Competition Clause in business agreements.

Unfortunately, many business contracts in Indonesia do not adequately regulate this issue. Consequently, when disputes arise, companies often face difficulties proving violations and recovering damages.

What Is a Non-Competition Clause?
A Non-Competition Clause is a contractual provision that restricts one party from engaging in business activities that directly compete with the other party’s business within a specified period, geographic area, and scope of activities.

Its primary purpose is to protect critical business information regarding production methods, operational processes, sales strategies, and other proprietary information essential to the continuity of the business, including:
– trade secrets;
– customer databases;
– marketing strategies;
– supplier networks;
– company technology;
– confidential business information;
– business strategies.

In simple terms, this clause is intended to prevent individuals who have access to important confidential information or trade secrets from using such information for their own business advantage.

Why Is a Non-Competition Clause So Important?
Many entrepreneurs assume: “My partner is someone I can trust”

However, in practice, major business disputes often originate from the individuals who were once the most trusted, whether business partners or key employees.

When someone gains access to confidential business information or trade secrets, such as:
– pricing and marketing strategies;
– profit margins;
– supplier and distribution networks;
– product formulas;
– production methods;
– customer lists.
that person may possess the ability to establish a competing business at a significantly lower cost than ordinary competitors.

As a result, customers may switch to the competing business, the company’s reputation may be affected, and the company may lose market share, ultimately leading to declining revenue.

To mitigate these risks, a Non-Competition Clause serves as an essential legal risk management tool.

Non-Competition Clauses Can Protect Trade Secrets
One of the primary purposes of a Non-Competition Clause is the protection of trade secrets. Under Indonesia’s Trade Secret Law, information may qualify as a trade secret when it:
1. Is not publicly known;
2. Has economic value because it is useful in business activities; and
3. Is maintained as confidential.

Such information is only protected if the business owner has taken reasonable measures to maintain its confidentiality.

The question is: What constitutes reasonable measures?

The Trade Secret Law does not specifically define these measures. However, in practice, commonly adopted safeguards include:
– internal company policies;
– non-disclosure agreements (NDAs);
– non-competition clauses in shareholder agreements;
– employment agreements; and
– other business cooperation agreements.

Regulation of Non-Competition Clauses in Business Contracts
In Indonesia, Non-Competition Clauses (NCCs) are not specifically regulated by a single statute that expressly prescribes their form and limitations.

As there is no standard statutory format, the quality of drafting becomes critically important in determining whether the clause can be enforced when disputes arise.

In principle, such clauses are generally permissible under the doctrine of freedom of contract, provided that they do not violate applicable laws, public order, morality, or principles of fair competition.

In practice, many contracts merely state:
“The parties are prohibited from conducting the same business.”

Clauses of this nature are often overly broad and difficult to enforce because they fail to specify:
– what business activities are prohibited;
– the duration of the restriction;
– the applicable geographic scope;
– the parties bound by the restriction; and
– the applicable penalties.
The more specific the clause, the greater the likelihood that it will be enforceable.

ESSENTIAL COMPONENTS OF A NON-COMPETITION CLAUSE

1. Definition of Prohibited Activities
This is arguably the most important component. The contract should clearly define the scope and limitations of prohibited activities, including:
– the relevant industry sector;
– prohibited products and/or services; and
– business activities considered competitive.

For example:
“The restricted party shall not, directly or indirectly, engage in the manufacturing and sale of copper cables, industrial metal components, or similar products that compete with the Company’s business activities.”

If drafted too broadly, the opposing party may argue that their new business operates in a different market segment.

2. Bound Parties
The agreement should clearly identify who is subject to the restriction. Including:
– founders;
– shareholders;
– directors;
– commisioners;
– consultants;
– spesific employees;
– affiliated parties acting directly or indirectly.

A common issue arises where a director is prohibited from establishing a competing company in his own name but instead uses a nominee arrangement through a spouse, child, relative, employee, or another party.

Therefore, the clause should expressly cover activities conducted directly or indirectly through affiliated parties.

3. Restriction Period
A clear time limitation is essential. Without a defined duration, the clause may be considered disproportionate or unreasonable. For example:
– during the period of service;
– for a specified number of years after resignation;
– after termination of cooperation; or
– after a transfer of ownership.
International practice generally regards restrictions lasting between one and three years as more reasonable than indefinite prohibitions.

4. Geographic Scope
The applicable geographic area should be clearly defined. Examples include:
– a spesific province (West Java);
– nation-wide within Indonesia;
– multilateral area: ASEAN-wide; or
– specific regions where the company operates.
If the business operates nationally, a nationwide restriction may be reasonable and proportionate.

5. Customer Non-Solicitation Clause
In practice, this provision is often more important than the Non-Competition Clause itself. The greatest loss typically occurs not because a new competitor emerges, but because existing customers are taken away. The clause may prohibit the restricted party from:
– contacting the company’s customers to conduct transactions through a new business; or
– offering products or services to existing customers.

Example:
“During the term of this Agreement and for two years following its termination/end of the contract, the restricted party shall not contact or solicit any customer who has previously conducted business with the Company.”

6. Employee Non-Poaching Clause
Many customer diversion cases occur because key employees possessing trade secrets move to a competing business. The clause may prohibit:
– recruiting key employees;
– offering employment to company personnel; or
– using former employees to approach customers.

7. Confidentiality Clause (Non-Disclosure Agreement / NDA)
A Non-Competition Clause should almost always be accompanied by a confidentiality provision. This clause requires the parties to maintain the confidentiality of information relating to the company.

8. Prohibition on Using Confidential Information
It is insufficient merely to label information as confidential. The contract should expressly prohibit the restricted party from: using, reproducing, disclosing, and exploiting such information for personal benefit or the benefit of third parties.

9. Damages Clause
The contract should clearly regulate compensation for breach to provide certainty regarding potential losses. Under Section 1243, 1246 of the Indonesian Civil Code, compensation from the damages may include:
– losses (schaden);
– expenses incurred (kosten); and
– interest (interessen).
In significant commercial transactions, the parties may also agree on liquidated damages.

Example:
“Any breach of this clause shall obligate the violating party to pay compensation in the amount of IDR 5,000,000,000 without prejudice to the Company’s right to claim additional damages.”
Such provisions should nevertheless remain reasonable and proportionate.

10. Right to Seek Injunctive Relief
Many businesses focus solely on monetary compensation. However, the primary objective is often to stop the ongoing harm caused by a competing business established through the misuse of trade secrets and breach of the NCC. Accordingly, the contract may grant the company the right to seek:
– cease and desist the offending activities;
– return of confidential information; and/or
– deletion of improperly used confidential information.

WHAT IF A TRADE SECRET VIOLATION OCCURS WITHOUT A NON-COMPETITION CLAUSE?

I. Civil Claim Based on an Unlawful Act (Tort)
If no NCC exists, legal proceedings often become more complex. One available remedy is a claim based on an Unlawful Act (Perbuatan Melawan Hukum / PMH) under Section 1365 of the Indonesian Civil Code. Four elements must generally be established:

1. An Act
Intentional or negligent use of the company’s trade secrets for personal benefit or for affiliated third parties.
2. Unlawfulness
Intentional disclosure of trade secrets or breach of an agreement or obligation (written or unwritten) relating to trade secrets as contemplated by Section 13 of the Trade Secret Law.
3. Loss
The conduct causes actual business losses, such as reduced revenue, loss of customers, operational disruptions, and reputational harm.
4. Causation
The company’s losses must result from the trade secret violation.

II. Reporting the Matter to the Business Competition Supervisory Commission (KPPU)
Section 23 Act No. 5 of 1999 provides legal protection for business and trade secrets. Where a party obtains and uses trade secret information without authorization in a manner that creates unfair competition, that party may be subject to sanctions imposed by the Business Competition Supervisory Commission (KPPU).

One example is KPPU Decision No. 04/KPPU-L/2025, in which sanctions were imposed for violating Article 23 of Law No. 5 of 1999, including an administrative fine of IDR 13,210,000,000 (thirteen billion two hundred ten million rupiah).

This mechanism may provide an alternative avenue for businesses harmed by competitors through the misuse of trade secrets.

CONCLUSION
A properly drafted Non-Competition Clause (NCC) is one of the most effective legal tools for protecting valuable trade secrets and business interests. For businesses involving partners, investors, directors, active shareholders, or strategic employees, a well-structured Non-Competition Clause can provide significant protection against:
– customer diversion;
– misuse of trade secrets; and
– substantial business losses that may amount to billions of rupiah.

Without a Non-Competition Clause, legal protection remains available, but enforcement becomes more complex and may require alternative legal actions, such as:
– filing a civil claim based on an unlawful act; or
– submitting a complaint to the Business Competition Supervisory Commission (KPPU).