Non-Compete Covenants
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Contributors
ARGENTINA BRAZIL Florencia Funes de Rioja José Carlos Wahle Funes de Rioja Veirano Advogados Av. Eduardo Madero 942 Av. Brigadeiro Faria Lima C1106ACW Buenos Aires 3477 - 16th floor Argentina São Paulo T +54 11 4348 4100 Brazil F +54 11 4348 4115 T +55 11 23135810 E [email protected] F +55 11 23135990 www.funes.com.ar E [email protected] www.veirano.com.br AUSTRIA Birgit Vogt-Majarek CHILE Sophie Mantler Enrique Munita Kunz Schima Wallentin Munita Olavarría & Sáez Porzellangasse 4 Apoguindo 3.721 piso 21 1090 Vienna Las Condes Austria Chile T +43 1 313 74 0 T +56 2 2 3078050 F +43 1 313 74 80 D +56 2 2 3078051 E [email protected] E [email protected] [email protected] www.moslegal.cl www.ksw.at CHINA BELGIUM Zheng Xie Ann Witters Min Wu Claeys & Engels Bo Zhou 280 Boulevard du Souverain Fangda Partners 1160 Brussels 32/F, Plaza 66 Tower 1 Belgium 1266 Nan Jing West Road T +32 3 285 97 80 Shanghai 200040 F +32 3 285 97 90 China E [email protected] T +86 21 2208 1139 www.claeysengels.be F +86 21 5298 5577 E [email protected] [email protected] [email protected] www.fangdalaw.com
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CZECH REPUBLIC FRANCE Nataša Randlová Guillaume Bordier Tomáš Neuvirt Capstan Randl Partners 83 rue La Boétie Tetris Office Building 75008 PARIS Budejovicka 1550/15a France 140 00 Prague 4 T +33 1 44 95 95 80 Czech Republic F +33 1 44 95 52 36 T +420 222 755 311 E [email protected] F +420 270 007 311 www.capstan.fr E [email protected] [email protected] GERMANY www.randls.com Christoph Crisolli Kliemt & Vollstädt DENMARK Thurn-und-Taxis-Platz 6 Morten Langer 60313 Frankfurt Sara Baldus Germany Norrbom Vinding T +49 69 710410 130 Amerikakaj Dampfaergevej 26 F +49 69 710410 200 2100 Copenhagen E [email protected] Denmark www.kliemt.de T +45 35 25 39 40 F +45 35 25 39 50 GREECE E [email protected] Korina Paschaliori [email protected] Kremalis Law Firm www.norrbomvinding.com 35 Kyrillou Loukareos 114 75 Athens FINLAND Greece Seppo Havia T +30 210 64 31 387 Dittmar & Indrenius F +30 210 64 60 313 Pohjoisesplanadi 25 A E [email protected] 00100 Helsinki www.kremalis.gr Finland T +358 9 681 700 HUNGARY F +358 9 652 406 Marianna Csabai E [email protected] Zsanett Németh www.dittmar.fi CLV Partners Tartsay Vilmos u.3. 1126 Budapest Hungary T +36 1 488 7008 F +36 1 488 7009 E [email protected] [email protected] www.clvpartners.com
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INDIA LITHUANIA Rohit Kochhar Žilvinas Kvietkus Vijay Ravi COBALT Lithuania Kochhar & Co. Lvovo 25 11th Floor, Tower - A 09320 Vilnius DLF Towers Jasola Lithuania Jasola District Centre T +370 5250 0800 110 025 New Delhi E [email protected] India www.cobalt.legal T +91 11 41115222 F +91 11 40563813 LUXEMBOURG E [email protected] Christophe Domingos [email protected] Castegnaro www.kochhar.com 67 rue Ermesinde 1469 Luxembourg IRELAND T +352 26 86 82 1 Jennifer O’Neill F +352 26 86 82 82 LK Shields Solicitors E [email protected] 40 Upper Mount Street www.castegnaro.lu Dublin 2 Ireland MEXICO T +353 1 661 0866 Jorge De Presno Arizpe F +353 1 661 0883 Alvaro Gonzalez-Schiaffino E [email protected] Basham, Ringe y Correa S.C. www.lkshields.ie Paseo de los Tamarindos No. 400-A, 9th Floor ITALY Bosques de las Lomas Aldo Bottini 05120 Mexico D.F. Ranieri Romani Mexico Toffoletto De Luca Tamajo e Soci T +52 55 5261 0400 Via Rovello, 12 F +52 55 5261 0496 20121 Milan E [email protected] Italy [email protected] T +39 02 721 44 1 www.basham.com.mx F +39 02 721 44 500 E [email protected] NETHERLANDS www.toffolettodeluca.it Myra Dickhoff Bronsgeest Deur Advocaten De Lairessestraat 137-143 1075 HJ Amsterdam The Netherlands T +31 20 305 33 33 F +31 20 305 33 30 E [email protected] www.bd-advocaten.nl
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NEW ZEALAND POLAND Peter Kiely Tomasz Rogala Kiely Thompson Caisley Raczkowski Paruch Level 10, PwC Tower ul. Bonifraterska 17 188 Quay Street 00-203 Warsaw Auckland 1010 Poland New Zealand T +48 22 380 42 64 T +64 9 366 5110 F +48 22 380 42 51 F +64 9 303 0338 E [email protected] E [email protected] www.raczkowski.eu www.ktc.co.nz PORTUGAL NORWAY Inês Reis Amund Fougner pbbr Claude A. Lenth Av.Liberdade, 110 - 6º Hjort 1250-146 Lisbon Akersgaten 51 Portugal PO Box 471 Sentrum T +351 21 326 47 47 0105 Oslo F +351 21 326 47 57 Norway E [email protected] T +47 22 47 18 00 www.pbbr.pt F +47 22 47 18 18 E [email protected] ROMANIA [email protected] Luminita Dima www.hjort.no Nestor Nestor Diculescu Kingston Petersen Bucharest Business Park, PERU 1A Bucuresti-Ploiesti National Road, José Antonio Valdez Entrance A,4th Floor, 1st District, Estudio Olaechea Bucharest 013681, Romania Bernando Monteagudo 201 T +40 21 201 1200 San Isidro, Lima 27 F +40 21 201 1210 Peru E [email protected] T +51 (1) 219 0400 www.nndkp.ro F +51 (1) 219 0420 E [email protected] RUSSIA www.esola.com.pe Irina Anyukhina ALRUD Building 2, 6th Floor 17 Skakovaya Street 125040 Moscow Russia T +7 495 234 96 92 F +7 495 956 37 18 E [email protected] www.alrud.com
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SLOVAKIA SWITZERLAND Dušan Nitschneider Thomas Pietruszak Nitschneider & Partners Roberta Papa Cintorínska 3/A Blesi & Papa 811 08 Bratislava Usteristrasse 10, am Löwenplatz Slovakia 8021 Zürich T +421 2 2092 1213 Switzerland E [email protected] T +41 44 225 60 25 www.nitschneider.com F +41 44 225 60 26 E [email protected] SPAIN [email protected] Iñigo Sagardoy de Simón www.blesi-papa.ch Gisella Rocío Alvarado Caycho Sagardoy Abogados TURKEY C/Tutor 27 Batuhan Sahmay 28008 Madrid Itri Street 32 Spain Balmumcu 34349, Istanbul T +34 915 429 040 Turkey F +34 915 422 657 T +90 212 270 70 50 E [email protected] F +90 212 270 68 65 [email protected] E [email protected] www.sagardoy.com www.bener.av.tr
SWEDEN UKRAINE Ulrika Runelöv Oksana Voynarovska Elmzell Advokatbyrå AB Oleksandr Melnyk Gamla Brogatan 32 Vasil Kisil & Partners 111 20 Stockholm 17/52A Bohdana Khmelnytskoho Street Sweden Kiev 01030 T +46 8 21 16 04 Ukraine F +46 8 21 00 03 T +38 044 581 7777 E [email protected] F +38 044 581 7770 www.elmzell.se E [email protected] [email protected] www.vkp.ua
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UNITED ARAB EMIRATES UNITED STATES Natalie Jones Mark A Saloman Al Tamimi & Co Christopher P Butler The MAZE Tower Matthew J Gilley 15th Floor J Gregory Grisham Sheikh Zayed Road Joanna S Rich PO Box 9275 FordHarrison Dubai 300 Connell Drive UAE Suite 4100 T +971 4 331 7161 Berkeley Heights F +971 4 331 3089 New Jersey 07922 E [email protected] USA www.tamimi.com T +1 973 646 7305 F +1 973 646 7308 UNITED KINGDOM E [email protected] Michael Anderson www.fordharrison.com Lewis Silkin LLP 5 Chancery Lane, Clifford’s Inn EDITOR London EC4A 1BL Deborah Ishihara United Kingdom Ishihara & Co Ltd T +44 20 7074 8000 writing – editing – proofreading F +44 20 7864 1200 London E [email protected] England www.lewissilkin.com T + 44 (0)7788 793928 E [email protected]
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Contents
About Ius Laboris ...... 3 Contributors ...... 5 Contents ...... 11 Introduction ...... 13 Argentina ...... 15 Austria ...... 23 Belgium ...... 31 Brazil ...... 41 Chile ...... 49 China ...... 57 Czech Republic ...... 63 Denmark ...... 71 Finland ...... 83 France ...... 93 Germany ...... 103 Greece ...... 113 Hungary ...... 121 India ...... 131 Ireland ...... 141 Italy ...... 151 Lithuania ...... 159 Luxembourg ...... 167 Mexico ...... 175 Netherlands ...... 181 New Zealand ...... 191 Norway ...... 199
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Peru ...... 209 Poland ...... 217 Portugal ...... 225 Romania ...... 233 Russia ...... 241 Slovakia ...... 247 Spain ...... 255 Sweden ...... 263 Switzerland ...... 273 Turkey ...... 281 Ukraine ...... 289 United Arab Emirates ...... 295 United Kingdom...... 303 United States ...... 313
12 Introduction
On behalf of Ius Laboris, the Alliance of leading Human Resources law practitioners, we are delighted to introduce the second edition of our guide on the essential principles of post- employment competition restrictions.
Non-compete covenants are amongst the most sophisticated contractual instruments in employment law today. This is even truer in a global work environment, where employees choose their workplace in an increasingly international context and employers have an interest in discouraging former employees from engaging in competition or soliciting customers in such a way that avoids infringing their fundamental right to professional freedom.
This second edition is updated with the most recent legal changes and outlines each country’s rules on non-compete covenants, the formal requirements, the principles regarding compensation, scope and permissible duration, along with guidance on local enforceability. Its purpose is to provide employers with a comprehensive overview of each national system in its global context and to facilitate the protection of legitimate interests without imposing overly- broad restrictions.
The authors are aware that although the law consists of standards that may be relatively easy to formulate, they may be difficult to apply with certainty in any given case. Nevertheless, adhering to each country’s standards will enable employers to reduce the number of invalid covenants – and potentially the number of disputes.
All authors are lawyers from across Ius Laboris and have extensive practical experience in advising international clients on labour and employment law. We would like to express our appreciation to all firms for their contributions and knowledge-sharing.
Christoph Crisolli Kliemt & Vollstädt, Frankfurt, Germany
Eric Deur Bronsgeest Deur, Amsterdam, The Netherlands
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Argentina
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1. Introduction 17
2. Conditions 17 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 18 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 19 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of a new employer
5. Special situations 20 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
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1. INTRODUCTION Non-compete agreements are not specifically regulated in Argentina. However, they are becoming quite common in Argentinian employment practice, especially for directors and senior employees.
The constitutional right to work and do business should not be affected by a non-compete agreement. Therefore, any restriction on accessing a specific job or activity will be analysed by the employment court to check if it is reasonable and justified in the individual circumstances.
2. CONDITIONS
2.1 General Employees are bound by a duty of loyalty during the employment relationship. Both parties are expected to behave in good faith during the employment relationship and after termination.
By law, employees must observe the duty of fidelity required for the job. Therefore, employees must keep work-related information confidential. They must also refrain from doing any business on their own, or for a third party, that might affect the employer’s interests.
During working hours, employees must pay full attention to the job and any breach of this obligation may be treated as serious misconduct. Problems may arise if employees are engaged in activities outside working hours that could be considered to be against the employer’s interests. It is advisable for employers to have a clear policy stating which types of activities may be considered in competition with the employer’s business interests. In order to obtain additional protection, employers usually include an express clause in the employment contract restricting the activities of employees both during and outside working hours.
After the employment contract has ended, the employer’s interests can be protected by including post-termination restrictions on an employee’s activities in the employment contract.
Non-compete clauses will be enforceable if related to trade secrets or confidential information but they cannot include information that amounts to the skill and knowledge of the employee. Restrictions must be reasonable and not abusive. The constitutional right to work and perform any lawful activity should not be affected. Therefore, non-compete clauses are enforceable only as far as they apply to a specific industry, business group or set of people, within a limited period of time and financial compensation must be included.
2.2 Age A non-compete clause can only be executed between an employer and an employee of at least 18 years of age. For employees between 16 and 17 years of age, their parents’ written permission is required.
2.3 Written form In order be valid and enforceable in court, restrictive covenants should be agreed in writing in a specific document, though there is no legal obligation to create them in writing. Non-compete clauses should be discussed and agreed either when the contract of employment is being signed, when the employee is offered a new position or at the time of termination. A written agreement is useful, as the employer may need to prove in court that the restrictions imposed
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are reasonable in terms of the interests they protect, the period of time covered, the activities included and the geographical scope, along with the financial compensation offered.
2.4 Renewal A non-compete agreement may be signed at the beginning of the employment relationship, but it is also advisable to sign a non-compete agreement when the employee is promoted to a new position or when the employee is about to leave the employer. At that point, the employer should check whether the previous terms are still applicable. This can be done by means of a letter confirming the extension or renewal of the contract and signed by both the employer and the employee.
2.5 Liability for compensation on dismissal As the employee must not suffer any substantial moral or material loss, a non-compete clause must provide for reasonable economic compensation which is proportionate to the loss the employee may suffer. The compensation should be paid on a monthly basis instead of by a lump sum. It is generally considered that 50% of the employee’s salary is reasonable.
3. REQUIREMENTS
3.1 General As the law sets general principles but no specific regulations about non-compete clauses, they must be reasonable in order to be valid and enforceable.
The first requirement is a need to protect legitimate interests of the employer. This means that the non-competition duty will be different for an employee devoted exclusively to the sale of goods than for a professional in a biotechnology, software or product development company, for example.
The clause should offer reasonable financial compensation that allows the employee to maintain a living standard similar to the one he or she had while working for the employer. It must be proportionate to the loss that could be suffered by the employee. It should be paid monthly, rather than in a lump sum. It is generally considered that 50% of the employee’s salary is reasonable.
3.2 Geographical, functional and temporal limitations Non-compete clauses should be limited in time. The limitation must allow the employee to get a new job in a reasonable period of time, according to market conditions. The longer the restriction, the more difficult it will be to justify before an employment court. The employee may claim that the constitutional right to work and do business is affected by a long time period and if the court agrees, the clause will be deemed invalid. The time limit should also be justified by type of activity involved, the market conditions and the business of the employer.
The employee has a constitutional right to work that must not be prohibited absolutely. Any restriction on this must be justified by the circumstances. Therefore, the limitations should be related to a particular business or activity, rather than trying to cover any possible activity that the employee could exercise.
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In terms of geographical scope, it is not considered reasonable to restrict an employee's activities in geographic locations where the employer does not do business.
Finally, only employees who hold position that can justify restriction, such as engineers, scientists or economists should be restricted. Administrative employees with little experience, for example, should not.
3.3 Job changes During the employment relationship, the employee may develop his or her professional career and be promoted. If the employer wishes to increase the protection, it should rewrite the non- compete clause. If the employee started his or her career at a junior level, there may have been no non-compete clause in the original contract.
4. ENFORCEABILITY
4.1 General As the constitutional right to work and do business should not be affected by a restrictive covenant, the scope of a non-compete agreement must be reasonable and justifiable to valid and enforceable.
4.2 Balance of interests Employment courts will consider two factors in particular to decide whether a restrictive covenant clause is enforceable: a) the compensation and b) the period of time covered. If a non- compete agreement provides reasonable compensation and only restricts activities for a limited period of time, the employee will not be able to argue successfully that the constitutional right to work or do business has been affected.
The court may also consider other factors. For example, the potential damage that the employer could suffer may depend on the amount of confidential information the employee has acquired during the employment relationship.
The employee’s personal circumstances may also be considered. For example, in one case before the courts, a non-compete clause was for a term of ten years and the employee received the substantial amount of USD 900,000. The employee claimed his rights were violated, but the non- compete agreement was limited to one activity. The court found it enforceable because it was voluntarily signed, covered only a limited part of the employee’s expertise and was substantially compensated.
4.3 Remedies
Employee The employee may file a petition to have a non-compete clause declared invalid or inapplicable, arguing that his or her constitutional right to work has been affected. The success of the employee’s claim will depend on the circumstances of the case, but the court will analyse whether the employer’s interest in keeping the non-compete clause in force is legitimate and should be protected.
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An employee may begin proceedings either during the employment relationship (which is very unusual) or after termination.
Employer If the employee does not comply with the obligations agreed in the non-compete clause, the employer may apply for an injunction to stop activities that could cause damage. The employer will have to prove that to delay would cause harm, and that it has a legitimate interest in obtaining an injunction. However, in practice, the courts are rarely satisfied of the need to grant an injunction in relation to non-compete obligations.
4.4 Penalty clauses If the employee breaches a non-compete agreement, the employer may legitimately suspend any payments or ask for a penalty to be paid, if there is a penalty clause in the agreement.
4.5 Damages An employment court may award damages if the employer can prove in court that damage has resulted from breach of a non-compete agreement.
4.6 Liability of a new employer Generally, a new employer cannot be liable for damages simply because it has hired an employee restricted by a non-compete clause. Usually, the new employee will not disclose this kind of information to the new employer. However, there is no case law that specifically deals with this matter.
5. SPECIAL SITUATIONS
5.1 No clause If the employee has not signed an agreement restricting the performance of activities for a competitor after termination, the employee will have complete freedom of action. Nevertheless, trade secrets and confidential information must be preserved unless there is a legal requirement to disclose them.
5.2 Transfers of undertakings If the contract of employment has been transferred to a new employer, the main aspects of the employment relationship will remain unchanged and any restrictive covenants agreed with the previous employer will remain the same.
5.3 Cross-border competition If the employee performs his or her duties in several countries, it may be reasonable to extend the geographic restriction to those countries where the employee has been working or visiting clients. Nevertheless, each country has its own legal system and a cross-border clause is unlikely to be enforceable in another country.
5.4 Non-solicitation clauses Non-solicitation clauses are usually included in an employment contract or in a post-employment agreement, restricting the employee from directly or indirectly hiring any employee or consultant
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from the company they have worked for. The restriction may prevent the employee from making contact with the company’s customers.
Non-solicitation covenants should be limited in time and space and must be justified by the employee’s knowledge of the company, its business and clients. There must also be reasonable economic compensation, to allow the former employee to maintain his or her lifestyle. The restrictions should not affect the individual’s constitutional right to work or do business.
5.5 Insolvency In a case of insolvency or bankruptcy of the former employer, the employment relationship will end. As a result, a non-compete clause will not be enforceable.
5.6 Enforceability of foreign non-compete clauses In Argentina, the employment labour relationship is regulated by both employment law and the Constitution. Non-compete agreements are only valid if they include financial compensation and a reasonable time limit. If a non-compete obligation does not comply with these requirements, it will be invalid. These principles apply both to domestic and foreign non-compete clauses.
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Austria
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1. Introduction 25
2. Conditions 25 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 26 3.1 General 3.2 Geographical and functional and temporal limitations 3.3 Job changes
4. Enforceability 27 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 29 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
24 Non- Compete Covenants - Austria
1. INTRODUCTION After termination of the employment relationship the employer might have an interest in the employee not working for a competing business. This is contrary to the employee's interest in pursuing his or her future career and using his or her knowledge and abilities in the employment market as well as possible.
A non-compete clause can only be agreed if the employee earns a certain salary and provided the restriction does not go beyond one year and does not transcend the type of business in question. Whether a non-compete clause is enforceable depends on the way in which the employment is terminated.
2. CONDITIONS
2.1 General There are different provisions for white collar and blue collar workers. These are contained in the Act for White-Collar Workers (Angestelltengesetz) and the Employment Law Harmonisation Act (Arbeitsvertragsrechts-Anpassungsgesetz, for blue collar workers). The basic rule is that a duty not to compete can extend beyond termination of employment only if this has been explicitly agreed upon in the employment contract. However, the law places several restrictions on post-contract non-compete clauses, including that:
• The employee's gross salary for the last month of the employment relationship must exceed 20 times the daily ceiling amount set out in law, excluding special payments. For 2016 this amount is EUR 3,240. This only applies to non-compete clauses concluded on or after 29 December 2015. If the parties agreed a non-compete clause between 17 March 2006 (for white-collar workers) or 18 March 2006 (for blue-collar workers) and 28 December 2015, the employee needed to receive more than 17 times the amount set out in law for the last month of employment for the non-compete clause to be enforceable (i.e. EUR 2.754). • The clause may only apply to the employer's type of business and must not run for more than one year. • The clause must not place restrictions on the employee that unfairly impede the employee’s job opportunities in comparison to the business interests of the employer.
2.2 Age In addition to the above, an agreement to a non-compete clause is only valid if employee was not a minor when the agreement was entered into.
2.3 Written form Under Austrian law neither employment contracts generally nor non-compete clauses in particular need to be in writing, but for the purpose of evidence, written form is highly recommended and very common.
2.4 Renewal If an employment contract which was concluded for a fixed period of time and which originally contained a non-compete clause is renewed and extended, the non-compete clause will not be affected and will remain valid. If on the other hand, the text of an employment contract is
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revised, then the new provisions are relevant. A non-compete duty only exists if this has been explicitly agreed upon in the provisions of the revised employment contract.
2.5 Liability for compensation on dismissal The employer is restricted from enforcing a non-compete clause if the employer has (i) caused the grounds for immediate or ordinary termination by the employee, or (ii) has terminated employment without just cause. In the latter case, the employer may still invoke the non- compete clause if it is willing to continue full payment of salary or wages to the former employee for the period of the non-compete clause.
Frequently, non-compete clauses are secured by penalty clauses. Penalty clauses are subject to review and reduction by the courts. The existence of a penalty clause prevents the employer from enforcing the non-compete clause by any means other than the penalty (such as cease and desist orders or additional damages).
A contractual penalty agreed from 29 December 2015 between the employee and employer for breach of a non-compete clause is limited to six months’ salary (without special payments).
3. REQUIREMENTS
3.1 General The employer may only invoke a non-compete clause in certain types of termination. The employer cannot enforce a non-compete clause if the employer has: • given the employee grounds for immediate or ordinary termination • terminated the employment without cause.
In the latter case, the employer may still invoke the non-compete clause if he or she is willing to continue full payment of salary to the former employee for the period of the non-compete clause.
To force the employee to adhere to non-compete restrictions in a case of employment termination by the employer without just cause (i.e. in that event that the employer cannot invoke a non-compete clause), the employer must pay the last received salary for the duration of the limitation. This kind of compensation is known as a ‘waiting allowance’ and it need only be awarded in this specific case. If the employee makes a new employment contract beyond the restrictions of the non-compete clause, this does not enable a deduction of the salary earned.
In addition, voluntary compensation which is lower than the last received salary can be agreed upon, but this should be considered carefully by the employer because, in order for it to be sufficient, there must be a shift in the balance of interests in the employer’s favour.
A non-compete clause remains valid in the case of mutual termination of employment, unless otherwise agreed.
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3.2 Geographical and functional and temporal limitations Non-compete clauses which prevent any kind of gainful employment are invalid. The more specific the wording of the clause, the more likely the court will be to consider the employer’s interest in enforcing the clause as reasonable. This is especially true as concerns the geographical scope of the clause and the scope of the type of work. The more specific the non- compete clause, the higher the chances that the clause will not be annulled in any court procedure.
A non-compete clause is only valid if the limitation applies to the employer's type of business or ‘business branch’. In view of the interests of the employee and his or her fundamental rights, what is covered by the ‘business branch’ is very specific and must not extend further than necessary. That is why the Austrian Supreme Court would not uphold a non-compete clause by a refrigerator producer preventing its former employee from marketing dishwashers. The validity of the obligations depends on the circumstances of each case. The inclusion of an entire area of business – in particular if it does not involve a high degree of specialisation and where this is not relevant to the employee’s job - would be likely to be invalid.
Limitations may also relate to clients of the former employer.
3.3 Job changes Where the employee's job changes, this can have an effect on the enforceability of a non- compete clause if prohibited activities are clearly defined in the non-compete clause but these are no longer applicable because of the change. Therefore, when an employee changes jobs it is advisable to re-examine the non-compete clause to check whether any prohibited activities are still relevant and if necessary, amend it, possibly by appending a side-letter to the employment contract.
4. ENFORCEABILITY
4.1 General In considering the validity of a non-compete clause, the court will take all relevant circumstances into account. This ‘interest assessment’ will balance the limitations placed on the employee's employment as a result of the protection of the employer's business from competing activities by the employee.
4.2 Balance of interests A non-compete clause will be invalid if:
• the employee's occupation does not involve any competition • the employee has had to let his or her knowledge and professional experience go to waste or was forced to give up his or her specialism and change to a branch of trade which pays less well – purely in order to stay within the terms of a non-compete clause.
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4.3 Remedies
Employee In theory, the employee could take action in court against the employer by requesting a declaration that the non-compete clause is too broad or is invalid. In practice an employee who leaves employment usually takes a new job and, if so, it will be up to the former employer to decide whether to enforce a claim. Only then will the employee need to argue that the non- compete clause is invalid.
Employer If the employee infringes a validly concluded non-compete clause, the employer may demand adherence to the agreement (i.e. ask the court for an injunction to prevent the employee doing the job). To obtain an injunction, it is often necessary to secure an interim injunction first. The employer must attest to the existence of potential harm. This might arise, for example, from the threatened loss of clients. In addition, if there is culpable violation of the clause the employer may claim compensation, but to obtain this the employer will need to prove actual accrued damage.
4.4 Penalty clauses If a penalty clause was agreed upon for the infringement of provisions of the non-compete clause, the employer may only claim that penalty. The penalty clause, however, is subject to the court's right to modify the penalty. Nevertheless, by paying the penalty fee, the employee may manage to satisfy the employer.
Note that the Labour and Social Court in Vienna rated a penalty fee of six months’ gross salary as too high in an average scenario with some aspects in favour of the employee. Since 29 December 2015 a contractual penalty in connection with non-compete-clauses has been limited to six months’ salary (without special payments).
4.5 Damages The employer is restricted from enforcing a non-compete clause if the employer has (i) caused the grounds for immediate or ordinary termination by the employee, or (ii) has terminated the employment without just cause. In the latter case, the employer may still invoke the non- compete clause if it is willing to continue full payment of salary to the former employee for the period of the non-compete clause.
4.6 Liability of new employer There is no liability on a new employer, even if it knew of the existence of a non-compete clause with the old employer. A new employer would generally not be required to pay any compensation to the old employer provided that the new employer did not actively support the breach of law by the employee (e.g. by knowingly headhunting the employee or paying the penalty on the employee’s behalf). If it did actively support the breach, the old employer could claim compensation or an injunction based on unfair competition.
28 Non- Compete Covenants - Austria
5. SPECIAL SITUATIONS
5.1 No clause A duty not to compete extends beyond termination of employment only if this has been explicitly agreed upon beforehand. If no non-compete clause applies the employee is free to enter into employment with any direct competitor or start his or her own competing business. In addition, the employee will be permitted to compete in the same market with the same customers as those of the ex-employer, with the exception that certain legal limitations are placed on professionals such as public accountants and tax consultants.
5.2 Transfers of undertakings In the case of the transfer of a business, if there is a continuous employment relationship, a non-compete clause will pass to the purchaser.
However, if an employee who is subject to a non-compete relationship has already resigned, the situation is different. If the business passes to the purchaser by ‘universal succession’ (e.g. in the case of a merger), the non-compete clause will pass to the purchaser, but if the business passes by ‘singular succession’ (i.e. the purchase of specific assets only), the clause will only pass to the purchaser if it is specifically assigned.
5.3 Cross-border competition The view now held is that it would be too narrow if an employee's obligations were always regarded as unenforceable abroad. There can be circumstances in which a non-compete clause beyond national borders will be valid. If, for example, the old employer distributes mountaineering products via a German contractor in the alpine areas of Germany, and an Austrian subsidiary of the German competing enterprise (where the employee is now employed) sells these products in Austria, according to the Austrian Supreme Court, these employers would be caught in a competition relationship.
5.4 Non-solicitation clauses A non-solicitation clause is an agreement according to which the employee may not have business relations with the employer's clients after termination of the employment relationship. Case law and doctrine deem non-solicitation clauses to be non-compete clauses.
Note that there are certain limitations governing professionals such as public accountants and tax consultants.
5.5 Insolvency If an organisation becomes insolvent, the administrators in most cases will terminate a percentage of the employees. At the same time, they will try to find a way to sell valuable assets or reorganise and restart. Even though the administrators may have an interest in ensuring the employees adhere to non-compete clauses, the employees are not bound to these if they are terminated by the administrators.
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5.6 Enforceability of foreign non-compete clauses The question of enforceability of a foreign non-compete clause will only come up if it concerns an employment contract that is subject to foreign law. Such cases are unlikely to be within the jurisdiction of Austria and so the question of enforceability of foreign non-compete clauses in Austria would probably not come up at all. Since the ‘Convention on the law applicable to contractual obligations’ favours party autonomy, a foreign non-compete clause could be applied by means of choice of law.
However, it should be noted that limitations on valid choices of law are prescribed by law and so different laws may be imposed and administered without the parties’ having a choice in the matter. If Austrian law were imposed on parties in this way, the mandatory provisions under Austrian law for non-compete clauses would need to be applied – despite any contrary express choice of law made by the parties.
30
Belgium
31 Ius Laboris
1. Introduction 33
2. Conditions 33 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 34 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 37 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 4.5 Damages 4.6 4.6 Liability of new employer
5. Special situations 38 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
32 Non- Compete Covenants - Belgium
1. INTRODUCTION In Belgium, an employee is never allowed to compete with his or her employer in the course of employment, but when the contract is terminated, the employee regains freedom entirely. Consequently, the employee may engage in a competing business or enter into the service of a competitor.
This freedom is however limited by a double legal restriction: • the employee may not abuse knowledge gained of trade secrets, commercial secrets, or any confidential or personal information and • the employee may not compete in a dishonest way, e.g. by systematically contacting all the former employer’s customers, or by blackening the former employer’s name or reputation.
Besides these legal restrictions, which apply automatically, the employee can waive the freedom to compete by subscribing to a non-compete clause.
A non-compete clause is any clause limiting the employee’s freedom to compete with the former employer. A distinction is made between a non-compete clause signed before and one signed after termination of the employment.
If the employee is in the service of the employer at the point of signing the non-compete clause, he or she is deemed not to be completely free from the possibility of coercion. Therefore, the validity of a clause is subject to a number of legal conditions, protecting the employee’s interests. If the non-compete clause does not meet the legal conditions, it is void. The employee may, however, ‘cover the nullity’, i.e. agree to respect the clause, even though it is not in line with applicable legislation.
Once the employment contract is terminated, the employee is deemed to have regained his or her freedom. The employee is no longer subordinate to the employer and therefore needs no specific legal protection. The legal provisions protecting employees’ interests are therefore not applicable to non-compete clauses signed after termination of the employment contract.
2. CONDITIONS
2.1 General Under Belgian labour law, a distinction should be made between: • general non-compete clauses • special non-compete clauses • non-compete clauses for sales representatives.
The law sets out the following formal conditions in order for a non-compete clause to be valid.
2.2 Age There are no restrictions regarding age.
2.3 Written form Because the non-compete clause limits the employee’s freedom of employment, he or she must be made fully aware of the clause and its contents. Therefore, in order for a non-compete
33 Ius Laboris
clause to be valid, it must be agreed in writing. It is recommended that the non-compete clause be included as a clause of the employment agreement and signed by both parties.
2.4 Renewal In cases of extension and/or renewal of an employment contract or an important change to the job of the employee within the company, it is advisable to make sure that the non-compete clause from the previous contract remains applicable.
2.5 Liability for compensation on dismissal General non-compete clauses A general non-compete clause will not take effect if employment is terminated by the employer: • during the first six months of the employment contract or • without serious cause (i.e. with notice or indemnity).
In other words, a non-compete clause will only be effective if the employee is dismissed for serious cause, after the first six months of employment.
If the employment contract is terminated by the employee with notice or with a payment in lieu of notice, the non-compete clause will normally take effect.
Special non-compete clauses Contrary to an ordinary non-compete clause, a special non-compete clause may also apply if the employment contract is terminated by the employer without serious cause after the first six months of employment. It may also apply if the contract is terminated during the first six months of the employment contract.
If the employment contract is terminated by the employee with notice or with a payment in lieu of notice, the non-compete clause will normally take effect.
Non-compete clauses for sales representatives A non-compete clause for a sales representative does not take effect if the employment is terminated by the employer:
• during the first six months of the employment contract or • without serious cause (i.e. with notice or indemnity). If the employment contract is terminated by the employee with a notice period or with a payment in lieu of notice, the non-compete clause will normally take effect.
3. REQUIREMENTS
3.1 General A non-compete clause must be fully in line with the applicable legislation. Any lack of compliance with the legislation will render the clause void. The employee may, however, agree to respect a clause which is not in line with applicable legislation.
34 Non- Compete Covenants - Belgium
General non-compete clauses In order to be enforceable, a general non-compete clause must meet the following requirements: • The clause must be in writing. • The employee's annual salary must exceed EUR 60,654 (2010 amount). • The non-compete must be restricted to similar activities. This means that the prohibition aims at activities which are similar to those which were performed during the employment relationship and that these activities must be performed for a competing company (this is referred to as a condition of ‘double similarity’). A non-compete clause can only protect knowledge of an industrial or commercial nature. • The prohibition must be geographically limited to places where the employee could in fact compete with the employer and this may not extend outside Belgium. • The prohibition applies for maximum of up to 12 months after termination of the employment. • The clause provides for the payment of a specific non-compete indemnity, equal to at least 50% of the employee's salary during the non-compete period, unless the employer notifies the employee within 15 days after termination of the contract that he or she waives the clause's application.
If these conditions are not observed, the non-compete clause will be void. The employee may, however, override this and agree to respect a clause which is not in line with the above.
Special non-compete clauses A special non-compete clause is less restrictive, but it may only be used for certain categories of companies and for white collar employees (except sales representatives) with specific functions.
The employers concerned must comply with one of the following conditions: • they must have an international scope of activities or significant economic, technical or financial interests in the international markets or • they must have an internal research and development division.
With those employers, a special non-compete clause may only be used for employees whose duties allow them, directly or indirectly, to obtain knowledge of practices specific to the organisation, whose use outside the organisation could be harmful to it.
If these conditions are met, it is possible to deviate from a general non-compete clause on the following points: • limitation to within Belgian territory (the fields of operation of the organisation and the name of the countries to which the clause applies and in which the employee concerned is operating should be mentioned specifically) • the maximum period of 12 months (a clause applicable for two or three years can be reasonable).
Further, a special non-compete clause will only be valid if: • the clause is in writing • the employee's annual salary exceeds EUR 66,441 (2016 amount);
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• the prohibition is restricted to similar activities for a competing company (see above on ‘double similarity’) • the prohibition provides for the payment of a specific non-compete indemnity, equal to at least 50% of the employee's salary during the non-compete period (e.g. if a non-compete obligation has been imposed on an employee for two years, the minimum amount of the indemnity to be paid by the employer will not be lower than one year's remuneration), unless the employer notifies the employee within 15 days of termination of the contract that he waives the clause's application.
Non-compete clauses for sales representatives Specific rules regarding non-compete clauses apply to sales representatives. These clauses are less restrictive than the general and special non-compete clauses and are only available for sales representatives. Such a clause will only be valid if: • it is in writing • the employee’s annual salary exceeds EUR 33,221 (2016 amount); • the prohibition is restricted to similar activities (see above on ‘double similarity’) • the prohibition is territorially limited to places where the sales representative works, which may extend outside Belgium • the prohibition applies for up to 12 months after termination of the employment contract.
If these conditions are not observed, the non-compete clause will not be enforced by the courts.
The non-compete clause must not be dependent on payment of a one-off lump-sum or any other sum to be enforceable.
3.2 Geographical, functional and temporal limitations A general non-compete clause must be geographically limited to places where the employee could in fact compete with the employer and this may not extend outside Belgium.
A competition prohibition for sales representatives must be territorially limited to places where the sales representative works and this may extend outside Belgium. A special non-compete clause must cover the geographical scope of its application and this must be limited to the territory in which the employee operates. It may extend outside Belgium.
All non-compete clauses are restricted to activities which are similar to those of competitors.
3.3 Job changes Under a non-compete clause, an employee is prohibited from carrying out similar activities to those performed at the end of his or her employment contract, for a competitor. A non- compete clause will only prohibit the employee from performing functions which are similar to his or her last functions and therefore cannot prohibit the employee from performing a different function for a competitor.
36 Non- Compete Covenants - Belgium
4. ENFORCEABILITY
4.1 General In practice, it is often difficult to enforce a non-compete clause, as the employer often fails to prove that the employee is in fact performing similar activities for a competitor.
4.2 Balance of interests In considering the validity of a non-compete clause, the court will examine whether the legal conditions and requirements are met. If one of the legal conditions or requirements is not respected, the clause will be void and unenforceable. The employee may, however, decide to accept the clause as it exists.
4.3 Remedies In some non-compete cases interlocutory proceedings are initiated, because the parties have an interest in obtaining a judgment quickly. The employer wishes to prevent harm to the organisation as soon as possible and the employee will wish to take up employment with the new employer. In interlocutory proceedings, only provisional judgments can be issued and these are applicable up to the decision in the action on the merits.
If the employee wishes to have a non-compete clause annulled or the employer wishes to obtain indemnification, full court proceedings should be commenced.
Employee The employee may ask the labour court to declare a non-compete clause void. There will be grounds for such a claim if the clause does not comply with all legal conditions and requirements.
If the non-compete clause is deemed to be valid, the employee will be entitled to payment of a non-compete indemnity (except in the case of sales representatives).
Employer If the employee does not comply with the obligations of a non-compete clause, the employer may claim reimbursement of any non-compete indemnity that was paid, and, in addition an amount equivalent to this indemnity. The courts may, however, grant a higher indemnification at the request of the employer provided that the existence and extent of harm caused is proven.
For cases of violation of non-compete clauses involving sales representatives, the employee must pay to the employer a lump-sum indemnity equivalent to three months’ remuneration, unless the employer claims and proves greater harm was caused.
4.4 Penalty clauses An employee who breaches the terms of a non-compete clause will be obliged to compensate the employer for any proven damage he or she has caused. The penalty is fixed by law at double the compensation the employee receives for not competing. If the employer can prove higher actual harm, it may claim a higher indemnification.
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A sales representative who breaks a contractual obligation not to compete, must pay damages equal to three months’ remuneration. The employer may, however, claim a higher amount if higher actual harm can be proved.
4.5 4.5 Damages The only compensation a court would grant if an employee violates a valid non-compete clause, is the compensation mentioned in section 4.4 above.
4.6 4.6 Liability of new employer Not only the employee but also the new employer can act wrongfully against the employer. In general a new employer is not liable for damages by the mere fact that it has hired an employee who was known to be restricted by a non-compete clause. Special circumstances can however implicate the new employer. For example, if the new employer knew the employee was bound by a non-compete clause and actively hired the employee in order to approach its competitor’s customers by making use of the trade secrets that the employee gained in his or her former position. The burden of proof of these circumstances lies with the ex-employer.
5. SPECIAL SITUATIONS
5.1 No clause If no non-compete clause applies, the employee is free to enter into service with a direct competitor or start his or her own competing business. In addition, the employee is free to target the market and customers of the ex-employer.
The employee will only be liable for damages if he or she acts wrongfully against the former employer. The burden of proof for this wrongful act lies with the ex-employer and will be assessed very strictly.
5.2 Transfers of undertakings Pursuant to collective bargaining agreement no 32bis, all rights and obligations of both the employer and employee will transfer to the transferee by operation of law. This includes the rights and obligations pursuant to any non-compete clause.
5.3 Cross-border competition General non-compete clauses and non-compete clauses for sales representatives only apply within Belgian territory. Only the special non-compete clause may validly provide cross-border non-competition arrangements.
5.4 Non-solicitation clauses ‘Non-solicitation’ is not a legal term and so general contract law applies. What is usually meant by a non-solicitation clause, however, is a clause in which the employee is prohibited from contacting and/or working for clients of the organisation after termination of the employment for a certain period. Such a clause will mostly be of importance if the employee has a lot of external client contact that is important to the organisation. Compliance with a non-solicitation clause can be linked to a penalty clause.
38 Non- Compete Covenants - Belgium
If the non-solicitation clause aims at limiting the employee’s right to compete, the employee may claim that it is a non-compete clause. A court could then declare the clause void, as the legal conditions and requirements would not have been respected. There is, however, no case law on this at the time of writing.
5.5 Insolvency If an organisation goes into liquidation, the administrator will in most cases terminate all employees. At the same time, the administrator will try to find a way to outsource valuable activities or start afresh. The administrator may therefore have an interest in holding the employees to their obligations pursuant to any non-compete clauses that exist.
5.6 Enforceability of foreign non-compete clauses Foreign non-compete clauses will be enforceable in Belgium on condition that foreign law applies and the clauses are valid under the laws of the jurisdiction in question.
39
Brazil
41 Ius Laboris
1. Introduction 43
2. Conditions 43 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 44 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 45 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 46 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
42 Non- Compete Covenants - Brazil
1. INTRODUCTION Non-compete covenants are generally permitted in Brazil as additional protection for professional confidentiality and proprietary information. These covenants have two very distinct forms: • An obligation not to compete during the employment agreement, which derives from law. The employee must not compete against his or her employer without prior written consent. Violation of this duty is very serious and will be just cause for termination. • A post-employment covenant, which is not covered by law. It is permitted in justified circumstances but is otherwise considered a violation of the constitutional right to freedom of profession. Court precedents, while non-binding, lay down the conditions for non- compete covenants to be valid.
2. CONDITIONS
2.1 General During the employment agreement, the employee has a legal duty not to compete against the employer, without any compensation or conditions. The rule applies by default, but the employer should detail what it considers as competition and prohibited conduct, including indirect forms of competition and conflicts of interest. The following conditions apply to a post- employment non-compete covenant: • Justifiable business need and reasonableness: A non-compete covenant is valid only if the employee holds a position that permits access to valuable proprietary business information. While the organisation will be able to retain documents and other media after the employee leaves, it is impossible to control intangible information gained by the employee from his or her professional experience. A temporary ban on competing business activities is therefore a justifiable measure to ensure the protection of valuable intangible property. Accordingly, a non-compete covenant is not valid for the average worker performing administrative tasks or other routine forms of business. • Consent: The employee’s consent is essential. The employer will have a natural advantage during the course of the employment agreement and consent may be reviewed by the courts in litigation. Therefore, ideally, the organisation should obtain consent when the job is accepted or upon termination of employment. • Compensation: As for any restrictive covenant, non-compete clauses require appropriate compensation. The employee’s salary is the obvious benchmark but any indemnity should be proportionate to the restriction imposed. The more restrictive the covenant the higher the compensation should be. • No absolute prohibition: A non-compete covenant must not represent an absolute prohibition on work. It must not prevent the employee from exercising his or her profession or force him or her to change profession, regardless of the compensation. • Term: A non-compete covenant cannot be in force for an indefinite period of time after the termination of employment. One year is generally accepted, but more than two years may be considered invalid.
2.2 Age Age is irrelevant to non-compete issues.
43 Ius Laboris
2.3 Written form For any restrictive covenant, written form is essential. However, any implied waiver of the need for a restrictive covenant to be in written form by the organisation will be accepted as valid because it benefits the employee.
2.4 Renewal Renewal may be accepted in justified circumstances, provided that the essential conditions are observed, including compensation and reasonable term.
2.5 Liability for compensation on dismissal The organisation need not compensate the employee on dismissal for a non-compete duty during the employment agreement. It may compensate the employee for a post-employment covenant but the employer should not make such a payment in advance.
3. REQUIREMENTS
3.1 General A duty not to compete during employment is provided for by law. The organisation may confirm and supplement this duty. However, any post-employment duty depends on whether there is a private agreement, which must observe several general principles and limitations, namely: freedom of profession, protection of the employee as the weaker party in the employment relationship, equity and fairness.
Circumstances in which an employee can avoid a non-compete agreement will depend on the practical circumstances, but usually the employee may: • argue invalid consent as a result of moral or economic constraint • decline or return compensation, and sometimes by paying a financial penalty or • argue the covenant is so restrictive that the employee would either have to start a new profession or stop working altogether.
3.2 Geographical, functional and temporal limitations The legal non-compete duty during employment is very broad and has no limit on location, function or duration. Further, the employee must not engage in any business or activity that would affect his or her productivity or availability during work hours without the employer’s prior permission in writing.
A post-employment, non-compete covenant has the same geographical limitations as the employer’s business. For example, if Asia is not a competing market, the courts will not consider the prohibition applicable to that jurisdiction. The covenant must have a reasonable limit in time and will be considered invalid for an average worker who does not perform critical work or hold confidential information.
3.3 Job changes Generally, the employer should make any promotion contingent on prior acceptance of a new restrictive covenant.
44 Non- Compete Covenants - Brazil
4. ENFORCEABILITY
4.1 General The organisation has discretion to discipline employees who breach their non-compete duty during the employment agreement, including termination of employment. The onus is on the organisation to prove the breach in court if the employee disputes termination in order to be entitled to legal severance pay.
A post-employment, non-compete covenant is subject to the jurisdiction of the labour courts, which are generally protective of employees. The courts behave essentially neutrally but, there are many rules that protect employees from their employer’s superior financial and organisational strength. Therefore, the courts are strict in interpreting non-compete covenants and look for reasonableness as a fundamental condition for the clause to be valid. The more tailored the covenant, the more likely it will be valid. Template covenants applicable to too many employees are generally not enforceable.
4.2 Balance of interests Balancing the parties’ interests is an important way of assessing the validity of post- employment non-compete covenants and determining whether they are reasonable. While the organisation may have a legitimate business interest to protect, the individual’s right to freedom of profession is protected by the Constitution. If the organisation does not demonstrate that the covenant is reasonable and valid in form and content, the courts usually refuse to grant an order against the employee for injunctive relief and may even refuse to enforce the covenant.
4.3 Remedies An indemnity is the usual remedy in cases of breach of a non-compete clause by a former employee. The courts tend to refuse orders preventing someone from working, but it is not impossible to obtain such an order depending on the circumstances. The greater the seniority of the employee the more likely the employer is to get an order. The courts have previously ruled a former president of a telecoms company was legitimately temporarily banned from working for a competitor.
Regardless of any non-compete covenant, all workers must observe the duties of professional secrecy under law. The use, disclosure or receipt of confidential information in breach of the employer’s interests is both a civil tort and a criminal offence. The duty survives termination of the employment agreement. Criminal prosecution may be a remedy, particularly to obtain leverage in negotiating a settlement but note that the legal timeframe within which to bring a claim is short (six months).
4.4 Penalty clauses If an employee breaches the legal non-compete duty during employment, he or she may be subject to disciplinary action and required to indemnify the employer under the rules of civil liability. Note that the courts usually refuse to uphold any additional penalty clauses in such cases.
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In terms of post-employment covenants, the courts will generally uphold financial penalties, but the loss and refund of any compensation already paid may be difficult to obtain if the employee observed the covenant for part of the term. Therefore, it is necessary to structure the compensation scheme to prevent employees from avoiding a covenant close to the end, with minimal penalty.
Brazilian law imposes a cap on any contractual penalty, based on the non-compete indemnification paid to the former employee.
4.5 Damages Indemnification for loss and damage is possible. However, Brazilian law does not provide for punitive or indirect damages. Further, direct damages arising from a breach of a non-compete covenant tend to be hard to establish. Firstly, the victim is expected to mitigate such risks. Secondly the risks are often not material and do not necessarily materialise immediately. Therefore, the employer should stipulate the amount it anticipates should be payable in damages.
4.6 Liability of new employer The law protects trade secrets and therefore addresses the issue of new employers as recipients of confidential information. Individuals are subject to criminal prosecution for disclosure. The new employer will be liable to pay damages for any loss.
5. SPECIAL SITUATIONS
5.1 No clause The employer does not need a non-compete clause during the employment agreement. However, it will have no rights after termination of the employment agreement without an adequate non-compete covenant.
5.2 Transfers of undertakings An organisation that acquires another through the sale of equity or the sale of the business, also acquires the corresponding rights and liabilities. Non-compete duty during employment and any non-compete covenants for post-termination will stand, unless the restrictions become intrinsically redundant (e.g. the acquirer is the main competitor) or are expressly cancelled.
Brazilian start-ups are often the target of acquisitions by corporations interested in clientele, technology or business knowledge. These are usually small organisations with a few shareholders in key management positions. Former shareholders will be required to remain in the business as employees, both to ensure a smooth transition and to prevent these employees from immediately competing against the former organisation. In these situations, depending on the circumstances and the terms of the agreements, it may be possible to obtain a more concrete non-compete covenant based on the terms and conditions of the corporate transaction and therefore avoiding some limitations of labour law.
Depending on the terms of the non-compete covenant and the circumstances in which the employment is terminated, the organisation may waive the non-compete clause, free the employee from any restriction and avoid paying a redundant indemnification.
46 Non- Compete Covenants - Brazil
5.3 Cross-border competition Restrictions on cross-border competition will depend on whether the employer has cross-border competitors and access to valuable cross-border information that may affect its business.
5.4 Non-solicitation clauses Non-solicitation of other employees and clients is controversial. This practice is not prohibited but likely to be in violation of the right to freedom of profession and the rules of free competition. Work and business opportunities are not considered to be confidential or proprietary information and therefore eligible for protection. In rare cases, however, the organisation may have a case under competition law. For example, if the former employee and his or her new employer (i.e. the competitor) aggressively approach the organisation’s staff, the organisation may argue the purpose is to damage the business or to gain access to business information.
5.5 Insolvency A non-compete covenant may remain valid in insolvency depending on the legal proceedings that result. A legal non-compete duty (i.e. a duty not to compete during the term of employment) automatically ends on termination of employment. Post-employment covenants follow the same rule as general agreements. If the legal entity is liquidated and ceases to exist, the covenant automatically ends. However, it remains valid during restructuring proceedings.
5.6 Enforceability of foreign non-compete clauses Foreign non-compete clauses may be enforceable, provided they observe local requirements (e.g. consent, reasonableness and adequate compensation). If a non-essential clause becomes void, this does not invalidate the entire agreement (e.g. where there is a non-tacit waiver of the clause by the organisation).
47
Chile
49 Ius Laboris
1. Introduction 51
2. Conditions 51 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 52 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 53 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Compensation 4.6 Liability of new employer
5. Special situations 54 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
50 Non- Compete Covenants - Chile
1. INTRODUCTION Non-compete clauses are restrictions which prevent an employee from competing with his or her employer during employment and after the employment contract has ended. They are common in Chile and are used by employers to minimise the risk of confidential information falling in the hands of competitors.
Generally, the employment contracts of employees holding managerial or strategic positions, or those who deal with confidential information on behalf of the employer contain non-compete clauses.
If there is an express non-compete clause in the employment contract, its infringement during employment will constitute justifiable cause for termination of the employment agreement.
After the termination of the employment relationship, there are no legal provisions that apply either in labour or civil law. The Constitution of the Republic of Chile may be relevant as it protects certain essential rights, namely the freedom to contract in labour matters and the right to develop any economic activity.
Although non-compete clauses are commonly applied in practice, they are not specifically regulated in Chile and neither doctrine nor case law has provided any useful debate in connection with them.
2. CONDITIONS
2.1 General There is no provision in the Labour Code which specifically refers to or regulates non-compete covenants during the employment contract. However, Article 160 No 2 of the Labour Code can be relied upon to enforce non-compete clauses during the employment relationship. It is contained in the section that regulates termination of the employment contract with cause. This ground of termination provides that the employee can be dismissed without severance pay if he or she is involved in negotiations relating to the business of the employer and prohibited by the employer in the employment contract. Note that, the prohibition provided by Article 160 No 2 of the Labour Code is limited to activities performed by the employee within the employer’s line of business and not to other activities.
Infringement by an employee of a non-compete clause during employment is regarded as a serious breach, allowing the employer to terminate the employment contract. In these circumstances, the employee is not entitled to any compensation.
Only non-compete covenants made during the employment relationship are recognised as valid. The law does not expressly regulate covenants that apply after termination of employment.
There are no labour rules or civil rules expressly regulating non-compete clauses after termination of the employment contract. Non-compete clauses that apply after termination of the employment contract are only valid in limited circumstances. Post-termination restrictions are considered to be a breach of the constitutional rights established in Article 19 Nos 16 and 21 of the Constitution, namely the employee´s right to freely contract in labour matters and the right to engage in an economic activity. In connection with the latter, the Chilean Constitution
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provides that unless the economic activity is contrary to morality, public security or health, the public interest or has been declared unlawful, no activity may be forbidden.
Non-compete clauses that apply after employment has ended, can be enforced only if they are not absolute, that is, they do not impose a perpetual or long-lasting prohibition and they are justified by a lawful interest. The following requirements have been established for these clauses to be valid: • they must be made in writing • there must be financial indemnification or compensation for the employee • their duration must be reasonable and • the conditions must be reasonable and not hinder freedom to work in a lawful occupation.
2.2 Age There are no rules specifying that the employee must have reached a certain age to be able to consent to a non-compete clause.
2.3 Written form A non-compete clause must be agreed in writing for it to be enforceable. It may be included either in the employment agreement or the termination agreement.
2.4 Renewal There is no statutory provision requiring the renewal of a non-compete clause where the employment contract is renewed. However, as the applicability of the clause may be affected by a change in contractual provisions, the parties should review whether or not the clause requires amendment.
2.5 Liability for compensation on dismissal Under Chilean law dismissal does not affect the validity or enforceability of a non-compete clause.
3. REQUIREMENTS
3.1 General Non-compete clauses are not specifically regulated in Chilean law. However, the wording of a non-compete clause should be clear and specify the restricted activities accurately and unambiguously.
3.2 Geographical, functional and temporal limitations Chilean law does not specify the geographical scope or duration of non-compete clauses, but restrictions should be reasonable. The geographical scope and duration of the clause may be subject to assessment by the Chilean courts.
3.3 Job changes Chilean law does not regulate non-compete clauses. However, an employee´s contract may require amendment if the employee changes jobs within the organisation. For example, if an employee is promoted to a managerial or strategic position. In such a scenario, it may be
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necessary either to incorporate a non-compete clause or, if the existing contract had one, to amend the clause so that it reflects the new job that the employee will do.
4. ENFORCEABILITY
4.1 General The ‘Dirección del Trabajo’, which has the authority to interpret labour regulations, rejected non-compete clauses having effect after termination of the employment contract by Ruling 4.392/187 of 6 August 1992 and Ruling 5.620/300 of 22 September 1997. These decisions are based on the following: • Article 19 No 16 of the Constitution states that every person has the right to work and to decide where and what kind of occupation to engage in. Restricting a person’s right to work should only be possible if the work is contrary to moral codes, public security or health, or if this is in the public interest, or required by law. • Article 160 No 2 of the Labour Code establishes that the employer is only authorised to prevent its employees from engaging in activities that are within the scope of its business while the employee is employed in its business provided that the prohibition is in writing in the individual’s employment agreement. • These rulings refer to non-compete clauses that did not comply with the accepted conditions. Ruling 5.620/300 refers to the Dirección del Trabajo’s declaration in relation to a non-compete clause preventing an employee from working in a similar job to that of the employee´s previous employer for a period of three years after termination of the employment agreement. As no geographic scope was determined, it was considered an absolute prohibition. • Ruling 4.392/187 refers to a clause preventing the selling of the same or similar products to those sold by the employer, to the employer’s customers, as well as retaining services from the company’s personnel (either for the employee or third parties) for a period of 12 months, with no geographic limitation or pecuniary compensation.
4.2 Balance of interests When considering the validity of a non-compete clause, the court must take all relevant circumstances into account. In general, the following factors are relevant: • the employee´s position • the financial damage caused by the employee´s knowledge of specific trade secrets of the organisation and/or his or her contact with customer or other important relations of the employer • the terms of the clause as set out in the employment contract or termination agreement (including what it says about indemnities, compensation, duration and geographical scope) • the essential rights established in the Constitution, specifically the freedom to contract in labour matters (Article 19 No 16) and the right to develop any economic activity (Article 19 No 21).
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4.3 Remedies Employer If the employee does not comply with the obligations set out in a non-compete clause during the employment relationship, the employer may terminate the employment contract and the employee will not be entitled to any severance payment by virtue of Article 160 No 2 of the Labour Code. If the employee breaches the non-compete clause after termination of the employment relationship, the employer may initiate a judicial procedure in order to obtain financial compensation.
Employee The employee, during and after the labour relationship, may file a claim in order to annul or limit the scope a non-compete clause. This is, however, unusual.
4.4 Penalty clauses The parties may agree that if an employee breaches a non–compete clause, he or she will be obliged to pay a contractual penalty to the employer. By law, the amount of any such contractual penalty must be reasonable and fair.
4.5 Compensation The employer may claim compensation for any potential loss that exceeds the amount of the agreed penalty. However, the burden of proof for damages in excess of an agreed penalty lies with the employer. The amount will be subject to the court’s assessment.
4.6 Liability of new employer In general, new employers are not liable for damages by the mere fact of hiring an employee who is bound by a non-compete agreement. However, there are circumstances which could render the new employer liable. For example, if the new employer knew the employee was bound by a non-compete clause and hired him or her in order to actively approach its competitor by using information and trade secrets that the employee has gained in his or her former position.
5. SPECIAL SITUATIONS
5.1 No clause If there is no non-compete clause, the employee is free to enter into service with a direct competitor or to start his or her own competing business. In addition, the employee may work in the same market and with customers of the former employer.
The employee will only be liable for damages if he or she acts wrongfully against the former employer, notably in situations of unfair competition. The burden of proof of a wrongful act rests with the former employer.
5.2 Transfers of undertakings In the event of the transfer of an undertaking or part of one, the employment relationship will automatically be transferred to the acquiring party, including all rights and obligations, as of the date of the transfer.
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5.3 Cross-border competition Chilean law does not regulate the geographical area within which a non-compete clause applies. However, any non-compete clause should be limited to an area that is reasonable. Whether or not an employer can enforce a non-compete with international application, will depend on the circumstances, including the market where the employer conducts its business. In the event of a dispute, the matter may be referred to the courts.
5.4 Non-solicitation clauses In Chile, it is possible to restrict an employee from contacting and/or soliciting clients after termination of the employment in order, directly or indirectly, to try to persuade clients to terminate their relationship with the former employer.
5.5 Insolvency Insolvency has no impact upon the validity and enforceability of a non-compete clause.
5.6 Enforceability of foreign non-compete clauses Employment contracts and termination agreements, including any foreign non-compete clause, must comply with Chilean law and are likely to be difficult to enforce.
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China
57 Ius Laboris
1. Introduction 59
2. Conditions 59 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 60 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 60 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 61 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
58 Non- Compete Covenants - China
1. INTRODUCTION Employees have certain obligations that can restrict their activities both during and after employment. During employment, there is an implied duty of loyalty to the employer, especially for directors, supervisors and senior managers and so there is normally no need to make an express agreement, though it is not prohibited. Post-employment non-compete obligations must, by contrast, be expressly agreed by both parties. These may restrict the employee from performing competing activities or setting up a competing business after termination of the employment contract.
2. CONDITIONS
2.1 General During employment most employers rely on the implied duty of loyalty owed by employees and do not impose express non-compete clauses. Post-employment non-compete obligations are regulated by Chinese law and provide, for example, that the duration should be no more than two years from termination. An employer can only impose post-employment non-compete obligations on an employee if the employee is a senior executive, a senior technician, or subject to a confidentiality obligation.
2.2 Age Age has no relevance to whether a non-compete clause can be agreed. Young people, for example, can be held to a non-compete agreement, though in practice this is unusual.
2.3 Written form A non-compete obligation must be agreed in writing, either in an employment contract or in a separate agreement. From a legal perspective, there is no difference between these two forms. However, if an employer adopts a separate non-compete agreement, it is usually advisable to sign the agreement at the beginning of the employment, whilst the employer has the bargaining power to persuade the employee to accept its terms.
2.4 Renewal Renewal and/or extension of a non-compete obligation requires the employee’s consent. However, the total duration of a non-compete period (including renewal) must be no more than two years from termination of the employment.
2.5 Liability for compensation on dismissal Chinese law is silent on whether an agreed non-compete obligation continues to be effective in cases of unfair termination by the employer.
However, as a post-employment non-compete obligation takes effect after the termination of employment and is therefore relatively independent of the employment relationship, it will generally remain valid even if the employer is held liable for unfair dismissal.
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3. REQUIREMENTS
3.1 General The employer must pay the employee monthly compensation for the duration of a non- compete clause to ensure the employee’s compliance with the obligation. The compensation usually ranges from 20% to 50% (though some areas have a specific higher local standard such as one third) of the employee’s average monthly salary for the 12 months prior to termination of the employment, subject to the agreement of both parties.
3.2 Geographical, functional and temporal limitations There is no clear guidance on the geographical coverage of non-compete obligations. This is usually subject to agreement between the employer and employee.
However, if the agreed geographical coverage includes areas where the employer has no business operations, this is likely to be challenged on the grounds that it is unfair and unreasonable.
With regard to functional limitations, Chinese law provides that, generally, an employee subject to a non-compete obligation must not work for any other employer or set up a competing business after termination of the employment. However, in practice, the employer should try to specify the activities of the employee that are prohibited after termination.
3.3 Job changes There is no specific law on how job changes during employment might affect a non-compete obligation. Practically, this is subject to mutual agreement on the scope of the non-compete obligation, for example, whether the employee’s restricted activities after employment should include those related to his or her previous positions.
4. ENFORCEABILITY
4.1 General As long as a non-compete clause complies with the legal requirements, it is enforceable. The law requires, for example, that the maximum non-compete period must be no more than two years from termination and the employer must pay the employee monthly compensation during the non-compete period to ensure enforceability of the non-compete obligations.
4.2 Balance of interests The balance of interests between the employer and employee is considered by the labour arbitration commission or court on a case by case basis. This will be especially relevant when assessing the reasonableness of the agreed damages for breach of contract.
4.3 Remedies If an employee breaches a non-compete obligation, the employer may first bring a claim against the employee before a labour arbitration commission, as all labour disputes must go through labour arbitration in the first instance. If the employer is not satisfied with the arbitrated award, it can bring a case to court for litigation and appeal. During legal
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proceedings, the onus is on the employer to prove that the employee has breached the non- compete obligation.
Injunctions are not possible in China, but the labour arbitration commission or court may make an award or judgment that orders the employee to cease the relevant act. However, even where the employer obtains a favourable judgment, it may be difficult or impossible, for the employer to enforce this if the employee refuses to cooperate. Therefore, the most important and effective remedy for the employer is normally the penalty set out in the non-compete agreement.
If an employer breaches an obligation under the non-compete agreement (e.g. fails to pay compensation) the employee may file a complaint before the labour arbitration commission. If the employee is not satisfied with the award, he or she can bring a case to court.
4.4 Penalty clauses A penalty clause can be included in a non-compete agreement to further protect the employer’s interests. There is no specific legal requirement as to the amount of the penalty, which must be agreed by both parties. In practice, the labour arbitration commission or court may exercise discretion and reduce the agreed penalty if it considers it too high, taking into account various factors such as the employee’s ability to pay.
A higher level penalty is always advisable as it has a greater deterrent effect on the employee and will not necessarily be lowered by the labour arbitration commission or court. Payment of the penalty does not relieve him or her of the obligation to comply with the non-compete obligations.
4.5 Damages If either the employer or the employee has suffered loss as a result of the other party’s actions under a non-compete agreement, they may bring a claim for damages against the breaching party before the labour arbitration commission or court.
4.6 Liability of new employer As a non-compete obligation is a contract between the employer and employee, there is no legal basis upon which to hold a new employer liable, even if the new employer was aware that the employee was subject to the non-compete obligation.
5. SPECIAL SITUATIONS
5.1 No clause A non-compete obligation must be expressly agreed in writing between the parties. Therefore, if there is no non-compete clause, the employee is free to enter into an employment contract with a direct competitor or start his or her own competing business.
5.2 Transfers of undertakings There is no law on transfers of undertakings in China. This means that if a business is sold the employment relationship does not transfer automatically. If an employment transfer is
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necessary (e.g. in some asset deals), the employees would be terminated and then offered new contracts. The seller would decide whether the non-compete obligations should be retained.
5.3 Cross-border competition Chinese law does not prevent cross-border competition from being included in a non-compete obligation. However, if the employer has no business operations abroad, it is likely to be unenforceable.
5.4 Non-solicitation clauses Non-solicitation obligations are not explicitly provided for by Chinese law (unlike non-compete obligations). Therefore, enforcing such clauses may be challenged in practice.
In these circumstances, the employer should incorporate any non-solicitation obligations into the non-compete obligation, so that they may be regarded as part of the non-compete obligation.
5.5 Insolvency If the employer is insolvent and the court has accepted a bankruptcy application, the employee is entitled to declare his or her creditor’s right to compensation for non-compete clauses within a designated period set by the court.
5.6 Enforceability of foreign non-compete clauses If a foreign employer has obtained a judgment in relation to a non-compete clause in its own jurisdiction which requires recognition and enforcement by a court in China, the employer may apply directly to the intermediate court for recognition and enforcement, or to the foreign court to request recognition and enforcement under the provisions of an international treaty concluded with or acceded to by China or under the principle of reciprocity.
After examining the application for recognition and enforcement of the foreign judgment, the court may issue a ruling recognising the legal force of the judgment and will issue an order for enforcement. However, if the judgment violates the basic principles of Chinese law or sovereignty, security or the public interest, the court will not grant recognition and enforcement.
62
Czech Republic
63 Ius Laboris
1. Introduction 65
2. Conditions 65 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 66 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 67 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 68 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
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1. INTRODUCTION The fundamental rights to free choice of occupation, to engage in a commercial and economic activity and to acquire the means to live by work are guaranteed to all individuals by the Charter of Fundamental Rights and Basic Freedoms, which forms an integral part of the constitutional system of the Czech Republic. The fundamental rights and basic freedoms are ‘inherent, inalienable, non-prescriptable, and not subject to repeal’. Limitation of fundamental rights and basic freedoms may be determined only by law and under the conditions specified by the Charter.
However, one such restriction is determined by the Labour Code and relates to non-compete obligations and non-compete clauses. Employers and employees must comply with this limitation but any agreement to further extend it will be deemed invalid.
The Labour Code regulates two types of non-compete obligations. One applies during the employment relationship and the other may apply after termination of employment relationship.
The Labour Code expressly prohibits the performance of any additional gainful activity that is identical to the business activities of the employer during employment. This automatically applies to all employees. It is not necessary to agree it in the employment contract. The Labour Code does not define the term gainful activity but the business activities of the employer are those activities registered in the Commercial or Trade Licence register. According to case law and legal doctrine gainful activity means activity performed for the purpose of profit, regardless of whether profit is actually made. However, the mere ownership of property including shares in a company performing an identical activity is not considered performance of a gainful activity. An employer may exempt an employee from this obligation by providing written approval. The exemption could include, for example, only certain activities or activities only within certain territory. The prohibition against gainful activity does not apply to the performance of scientific, educational, publishing, literary or artistic activities.
2. CONDITIONS
2.1 General After termination of employment relationship, an employer may limit an employee’s performance of further activities only if a non-compete clause has been agreed. Such an agreement must comply with the conditions and limitation determined by the Labour Code.
The employer cannot automatically conclude a non-compete clause with all its employees. The Labour Code enables employers to agree non-compete clauses only where there it can be justly required based on the nature of information, skills, know-how and technological methods acquired by the employee as a result of the employment and where their use could damage the employer’s activities.
2.2 Age A non-compete clause may be signed with any employee regardless of age. A person may become an employee on the day he or she reaches 15 years of age, provided he or she has completed compulsory education.
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2.3 Written form The Labour Code provides that non-compete clauses must be made in writing. Non-compliance with this condition will cause the clause to be invalid, unless the parties subsequently make a written agreement. Generally a non-compete clause is included in the employment agreement, but it can be agreed as a separate document.
2.4 Renewal A non-compete clause will only relate to the employment relationship that exists when it is concluded and it will take an effect when that relationship terminates. A non-compete clause will not be automatically renewed if an employment relationship is renewed between the same employer and employee. It must therefore be concluded again if the parties want it to apply to the renewed relationship.
If changes are made to the employment contract during the employment relationship, any termination or change to the non-compete clause will depend on the parties’ agreement.
2.5 Liability for compensation on dismissal Employers are obliged to compensate employees for their compliance with a non-compete clause, regardless of the way in which the employment terminates. Therefore a non-compete clause will take effect after termination of employment even if the employee is dismissed. If the dismissal is declared void by the court and the employment is reinstated, the non-compete clause will also be reinstated and will be valid after eventual termination of the (reinstated) employment.
3. REQUIREMENTS
3.1 General The basic requirement for a non-compete clause to be valid is a commitment from the employer to provide the employee with financial compensation in the amount of at least one half of employees’ average earnings for each month of the operation of the non-competition agreement. The Labour Code contains mandatory provisions for calculating average earnings. Generally speaking, provided an employee does not receive bonuses in addition to salary, the monthly average earning is the same as the monthly salary. If the employee receives bonuses, the monthly average earnings will be increased by the amount of bonus (pro-rated) for the relevant period. A non-compete clause which does not contain such commitment would be considered invalid. The financial consideration is payable monthly in arrears unless the parties have agreed on a different payment schedule.
The employer and employee may agree on a contractual penalty that the employee must pay if he or she breaches the obligation not to compete. The amount of the penalty must be adequate, given the nature and importance of the information, skills, know-how and technological methods acquired by an employee during the employment relationship and also any other conditions of the non-compete clause, such as its length and the amount of financial consideration the employer is required to pay for the employee’s compliance. Upon payment of the contractual penalty, the employee’s obligation not to compete expires.
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Parties may agree on withdrawal from a non-compete clause. However, pursuant to recent case law of the Supreme Court of the Czech Republic, for this to be done, the option to withdraw must have been expressly included in the written non-compete clause and the clause must list reasons based on which this may happen. The reasons must not represent any abuse of the employee´s rights. The Labour Code also provides that the employer may only withdraw during the employment relationship and the withdrawal must be delivered to the employee both in writing and in person.
The Labour Code provides that an employee may terminate a non-compete clause by notice if the employer fails to pay the agreed financial consideration for more than 15 days after the deadline for payment. The notice of termination must be delivered to the employer in writing. The non-compete clause will terminate on the first day of the calendar month following delivery of written notice of termination.
3.2 Geographical, functional and temporal limitations The Labour Code does not include any geographical limitations for non-compete clauses and therefore they are usually agreed without limitation.
Non-compete clauses may only restrict performance of a gainful activity that is identical to or competes with the employer’s activities. The business activities of the employer are defined as those activities registered in the Commercial or Trade Licence register. The restriction does not relate to the type of activities performed by the employee but to those performed by the employer. For example, if an employee works as IT specialist for a bank, he or she must not perform any gainful activity for another bank. However the employee could work as IT specialist for a hotel operator. Many companies have very broad business activities registered in the Commercial and Trade Licence register and the restriction applies to all of them, unless the non-compete clause expressly states that it is limited to some of activities of the employer.
Non-compete clauses may be concluded for a maximum period of one year after employment termination.
3.3 Job changes A change to the job of the employee during the employment does not automatically serve to terminate a non-compete clause unless this has been agreed in writing.
4. ENFORCEABILITY
4.1 General Provided the employer and employee comply with the mandatory provisions of the Labour Code governing non-compete clauses, it will be valid and enforceable.
4.2 Balance of interests The Labour Codes regulates the conditions and requirements for non-compete clauses (i.e. a limitation as to which employees can be subject to them, a time limitation and obligatory minimum financial consideration). This ensures that the interests of both parties are balanced.
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4.3 Remedies If the employer does not fulfil its obligation to provide the employee with the agreed financial consideration, the employee may either claim this before a court or terminate the non-compete clause by the notice of termination and start to perform forbidden activities.
If the employee does not fulfil his or her obligation not to compete, the employer may only request the court to order compliance. Therefore, the parties often agree on a penalty for breach in advance.
4.4 Penalty clauses The employer and employee may agree on a contractual penalty which the employee would be obliged to pay in the case of breach of a non-compete clause.
The amount of the penalty must be adequate given the length of the non-compete clause and the amount of agreed remuneration for compliance with it. Generally, an admissible contractual penalty would amount to the sum of all monthly financial payments paid during the validity of the non-compete clause. An inadequate contractual penalty may cause either this provision or the whole of the non-compete clause to be invalid. However due to lack of case law, it is not certain. Upon payment of the contractual penalty, the employee’s obligation not to compete expires.
4.5 Damages Generally, employers do not claim damages incurred for breach of non-compete obligations, as it is very difficult to prove the harm caused directly by the breach. For that reason, virtually all non-compete clauses will contain a contractual penalty, both to deter the employee from breaching his or her obligations and also to cover damages. However, it is still possible to claim damages, provided that option is specifically agreed in the non-compete clause.
4.6 Liability of new employer The obligation not to compete applies only to employees and it is the employee who is liable for any breach. Therefore, the new employer will not be liable if the employee breaches a non- compete clause with a former employer, with the exception of certain special situations, for example, if the new employer knowingly misuses business secrets which were unlawfully disclosed to the new employer by the employee.
5. SPECIAL SITUATIONS
5.1 No clause If there is no non-compete clause the employee is entitled to perform any activities after termination of employment relationship. However, even after termination of the employment relationship, the employee must preserve business secrets and avoid to activities that may be considered unfair competition. Moreover, the employee is obliged to keep confidential personal data he or she learnt in connection with the employment relationship. These obligations derive directly from law.
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5.2 Transfers of undertakings In the case of the transfer of an undertaking, non-compete clauses will remain valid and will transfer to the relationship of the employee with the transferee, together with other rights and obligations arising from an employment relationship.
5.3 Cross-border competition The Czech Labour law does not specify geographical limitations for non-compete clauses and normally no geographical limitations are set out in non-compete clauses. Some larger companies, particularly ones operating outside the Czech market, may wish to specify geographical limitations on employees’ activities and explicitly extend the non-competition obligation beyond the Czech market. However, there is no case law to indicate whether such a limitation is valid.
5.4 Non-solicitation clauses Even though non-solicitation clauses are quite often included in employment contracts, they are not regulated by law. There is no case law to indicate whether such clauses are valid and enforceable. Moreover, the parties may not validly agree on a contractual penalty for breach of a non-solicitation clause.
5.5 Insolvency If there are insolvency proceeding relating to the employer or the employer is declared insolvent, this does not affect the validity of non-compete clauses. The employer (or insolvency administrator) will be still obliged to pay the agreed financial consideration for compliance with the clause. If the employer does not continue to pay the financial consideration, the employee may terminate the non-compete clause by notice of termination or claim payment before the court.
5.6 Enforceability of foreign non-compete clauses If the employer and employee agree that the employment relationship as a whole is governed by foreign law, the foreign-law non-compete clause will be enforceable, provided that it is not contrary to public order requirements.
69
Denmark
71 Ius Laboris
1. Introduction 73
2. Conditions 73 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 76 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 78 4.1 General 4.2 Balancing of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 80 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
72 Non- Compete Covenants - Denmark
1. INTRODUCTION Danish law only provides limited protection for employers against competition from former employees. If an employer wishes to prevent a specific employee from taking up employment with a competitor or setting up in business on their own after termination of the employment contract, a ‘non-compete clause’ will need to be agreed with the employee. If, however, the employer ‘merely’ wishes to prevent the employee from being employed by or having business dealings with its customers or other business connections, a ‘non-solicitation of customers’ clause or a ‘non-dealing’ clause can be agreed instead. Which type of clause the employer chooses is not unimportant since that choice will affect the employee’s chances of persuading the courts to rule the clause invalid in the event of a dispute which ends up in court.
While obviously in restraint of trade (i.e. job mobility), the above covenants may be necessary for many employers in order to protect their legitimate business interests. Legislators have tried to safeguard these interests by accepting such covenants while, at the same time, establishing a number of conditions that must be complied with in order for the covenants to be valid and enforceable.
With effect from 1 January 2016, a new regime on restrictive covenants was implemented in Denmark, imposing very strict legal requirements with regards, for example, to the duration of the restriction and compensation. Note that these provisions only apply to non-compete and non-solicitation clauses entered into after 1 January 2016. Clauses already existing on 31 December 2015 are still governed by the former regime for salaried employees. Further, special rules apply if a salaried employee’s non-compete clause dates back to before 15 June 1999.
2. CONDITIONS
2.1 General Section 5 of the Danish Act on Post Termination Restrictions provides that if an employee has accepted a non-compete clause – an obligation not to carry on a trade or other business of a specified nature and/or not to accept employment in any such trade or business – this will be valid only if the employee holds a position of very special trust or has concluded an agreement with the employer on the right to use an invention made by the employee.
In addition, the covenant will be valid only if the employee receives compensation for the period in which it is in force (the restricted period) and only if a written contract has been made specifying that the employee holds a ‘position of very special trust’, more specific grounds for the need for the restriction, the entitlement to compensation, the duration of the restriction, and also that the non-compete clause enters into force when the employee has been employed for a consecutive period of no less than six months.
When determining what constitutes a ‘position of very special trust’, the Danish courts will, as a starting point, look at whether the employee’s job means that a job change to a competitor could expose the employer to considerable competition, for example, if the employee has access to confidential information about the employer’s business or know-how.
The compensation which the employee is entitled to receive must – as a minimum – amount to 40% of the employee’s pay on the effective date of termination if the duration of the restriction is six months or less and 60% if the duration of the restriction is between six and 12
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months. Compensation for the first two months must be paid as a lump sum on the effective date of termination, and then on a monthly basis for the remainder of the restricted period. In this context, ‘pay’ includes all salary components, e.g. the taxable value of any company car, mobile phone and other benefits in kind as well as performance-based remuneration such as bonus.
The entitlement to compensation will be lost if the employer has summarily dismissed the employee for cause. In addition, if the employee obtains suitable alternative employment after the effective date of termination, the employer will be entitled to reduce the compensation payable to the employee to 40% of the required amount, meaning 16% for a clause of up to six months’ duration and 24% for a clause of up to 12 months.
The entitlement to reduce the compensation does not apply to the lump sum payment for the first two months. In this context, ‘suitable alternative employment’ means employment within the professional field in which the employee has trained or worked. As a result of the entitlement to reduce the compensation payable, the employee must actively seek new employment. Otherwise, the employee will lose the entitlement to receive compensation. Case law shows that, for an employee, setting up a business during the restricted period may be incompatible with the duty to mitigate from a general point of view, but based on a specific assessment, setting up a business might meet the requirement to mitigate, for example, because of the income obtained by the employee from the business.
A non-compete clause may have a maximum duration of 12 months and the duration must be stated in the written agreement. The duration of the restriction cannot be extended in any way.
A non-compete clause will be invalid in any case if the employee has been employed for six months or less.
The employer may terminate a non-compete clause by giving one month’s notice to expire on the last day of a month. If the effective date of termination (of the employment) falls within six months after notice of termination (of the non-compete clause) was given, the employee will still be entitled to the lump sum payment of two months’ compensation.
The provisions on non-compete and non-solicitation clauses in the Danish Act on Post- Termination Restrictions may be varied by collective agreement entered into by the most representative organisations in the Danish labour market.
CEOs The Danish Act on Post-Termination Restrictions does not apply to CEOs (except for section 11(1)-(2)), unless otherwise specified in the service agreement. Whether a non-compete clause is binding on a CEO must be determined on the basis of Danish contract law, in particular section 36 of the Danish Contracts Act, which also applies to employees, and section 11 of the Danish Act on Post-Termination Restrictions. The employer should make sure – for evidential reasons – that a non-compete clause that has been agreed is also set out in the service agreement.
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2.2 Age As a general rule, employees under the age of 18 cannot sign a non-compete clause with their employer.
2.3 Written form A non-compete clause agreed between an employee and an employer will be valid and enforceable only if a written contract has been made and only if the following provisions are included in the written agreement: • that the employee holds a position of very special trust • more specific grounds for the need for the restriction • the entitlement to compensation • the duration of the restriction (not exceeding 12 months) and • that the restriction will come into effect when the employee has been employed for a consecutive period of six months.
A non-compete clause will normally be set out in the employment agreement or a separate amendment. A more general restriction set out in a staff handbook or a collective bargaining agreement, for example, would not satisfy the requirements of the provision. If the original employment agreement contains no non-compete clause and the current employer wishes to introduce one into the existing employment relationship, this will constitute a material change to the terms and conditions of employment and the employee will therefore be entitled to the same notice as the contractual notice of termination of the employment. If the employee does not wish to accept the non-compete clause, he or she will be entitled to consider him or herself dismissed. This principle makes it advisable to decide at the recruitment stage whether the employee should be subject to a non-compete clause.
2.4 Renewal If an employee’s contract is renewed or changed, it is recommended that the existing non- compete clause should either be restated expressly in the renewed employment contract or in an annex to the employment contract in order to ensure that the non-compete clause continues in full force and effect. Due to the fact that in Denmark, non-compete clauses are subject to (currently) three different regimes, it is important not to change the wording of the clause at all if the employer wishes to keep the non-compete clause under the same regime as when the clause was originally drafted. An amended non-compete clause will in all likelihood become subject to the new regime, which is incompatible with the usual wording of non- compete clauses under the former regime. Further, amendments in a non-compete clause might constitute a material change to the terms and conditions of employment.
2.5 Liability for compensation on dismissal Under section 11(1) of the Danish Act on Post-Termination Restrictions, a non-compete clause will become invalid if the employee is dismissed without having given reasonable cause or resigns and the employer’s failure to meet its obligations provides a valid cause for leaving. In such cases, the employee will be entitled to receive the lump-sum compensation for first two months of the restricted period on the effective date of termination.
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If the employee is given notice of termination, it is for the employer to prove that the employee has given reasonable cause for the dismissal. If the employee resigns, the starting point will be that the non-compete clause is operative. To reach another result, the employee must prove that the employer’s breach of contract justifies resignation.
3. REQUIREMENTS
3.1 General When drafting a restrictive covenant, it is important to specify the restricted activities as accurately and unambiguously as at all possible. If the wording is unclear, almost every principle of interpretation will weigh in favour of the employee because the employer will be seen as the ‘stronger’ party and will often also be the one who drafted the wording.
Case law on how to construe the wording of restrictive covenants is extensive. Most construction issues arise because the wording was unclear from the outset, but some of the issues also arise because the employer’s circumstances have changed in the period since the restrictive covenant was drawn up. It is therefore necessary to balance the importance of specifying the restricted activities with the need to use language that leaves room for changes in the future.
In particular, the issue of how to understand ‘non-compete’ has given rise to extensive case law in Denmark. One of the things that employers must be particularly clear about when drafting a non-compete clause is the restricted activities, e.g. whether to prevent the employee from taking up employment with a competitor as well as setting up in business on his or her own after termination of employment. Even though wording preventing the employee from being ‘financially interested’ in any other businesses would normally include taking up employment with a competitor, it is a good idea to be as specific as possible in order to avoid any doubt, for example, by adding examples of what such financial interest might include. If the employer is a company that belongs to a group of companies, the employer should also consider preventing the employee from engaging in activities in competition with one or more of the group companies. If the wording is not construed so as to cover the group as a whole, the employer must be prepared to accept that the clause only covers the employer company.
Many non-compete clauses do not limit the geographical scope in their wording. If an employer decides to define the geographical scope, it should use wording which allows for future changes in the relevant market/territory and the employee’s job or responsibilities.
If an employer formulates a restrictive covenant so generally as to go beyond what is necessary to safeguard the employer’s legitimate interests, the covenant may be ruled invalid by the Danish courts. In relation to non-compete clauses, the courts may do so on the basis of section 11(2) of the Danish Act on Post-Termination Restrictions and (in theory) also section 36 of the Danish Contracts Act. In relation to the non-solicitation of customers clauses, the courts may rule them invalid on the basis of section 36 of the Danish Contracts Act.
3.2 Geographical, functional and temporal limitations Under section 11(2) of the Danish Act on Post-Termination Restrictions, a non-compete clause will not be binding on the employee if the provisions concerning duration, territory and other
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terms go beyond what is necessary to avoid competition or unreasonably restrict the employee’s job opportunities.
With regard to geographical scope, this will – whether or not expressly specified in the non- compete clause – be subject to the Danish court’s assessment on a case-by-case basis as to necessity and reasonableness. However, this assessment will also involve a balancing of the parties’ interests in each case. If the employer can prove that the non-compete clause does not go beyond what is necessary to avoid competition, the geographical scope of the non-compete clause may in general also be extended to areas outside the geographical area of the employee's primary employment.
Other terms include the employee’s position in the organisational hierarchy – meaning that the position of the employee in the corporate hierarchy may affect the assessment of whether the non-compete clause goes beyond what is necessary to avoid competition. The employee’s age, social circumstances, educational background, etc. may affect the assessment of whether the non-compete clause unreasonably restricts the employee’s job opportunities.
With the new Danish Act on Post-Termination Restrictions that came into effect on 1 January 2016, the duration of non-compete clauses is restricted to a maximum of 12 months. Under the previous regime, there was no statutory maximum so if the employee claimed the restriction to be unreasonably long, it would be up to the courts to decide whether that was the case. The courts were generally reluctant to overrule non-compete clauses with a restricted period of 12 months or less and, therefore, it is unlikely that non-compete clauses under the new regime will be overruled or modified with regard to the duration of the restriction.
Known as the ‘catch-all section’, section 36 of the Danish Contract Act provides that a contract may be modified or overruled in whole or in part if it would be unreasonable or at variance with the principles of good faith to enforce it. The Danish courts generally apply this provision very restrictively and a non-compete or non-solicitation clause would be overruled or modified only in extraordinary circumstances.
If a non-compete clause is overruled on the basis of section 36 of the Danish Contract Act or (presumably also) under section 11(2) of the Danish Act on Post-Termination Restrictions, the entitlement to compensation will most likely be lost, according to Danish case law.
3.3 Job changes If the employee resigns, the employee will be entitled – provided that the employer wishes to enforce the clause – to compensation of at least 40% or 60% (depending on the duration of the restriction) of the employee’s pay on the effective date of termination during the restricted period. If the employee obtains suitable alternative employment, the employer will be entitled to reduce the compensation payable to the employee to 40% of the compensation payable (i.e. 16% or 24%). However, the compensation for the first two months must in any event be paid as a lump sum on the effective date of termination and the entitlement to reduce the compensation does not apply to this lump sum payment. In this context, ‘suitable alternative employment’ means employment within the professional field in which the employee has trained or worked. The entitlement to compensation will be lost, however, if the employee is summarily dismissed for cause.
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If the employer wants to transfer the employee to another job within the same organisation, this may constitute a material change to the terms and conditions of employment and the employee will therefore be entitled to the same notice as the contractual notice of termination. However, the employment contract between the employee and the employer may not necessarily change and thus the non-compete clause will, as a starting point, continue in full force and effect. The same will apply if the job change does not constitute a material change to the terms and conditions.
With the new Danish Act on Post-Termination Restrictions, it is now a requirement to include a specification of the grounds for imposing a non-compete clause. For the non-compete clause to be valid and enforceable, the employer must ensure that the grounds stated are in line with the facts. This means that even though employers are not required to amend the grounds when the employee changes job or responsibilities, it is strongly recommended to do so or at least review the clause when the employee’s job function changes.
4. ENFORCEABILITY
4.1 General In general, it appears to be easier to enforce a non-compete clause in Denmark than in some other countries. The general rule is that non-compete clauses are valid and if an employer suspects that an employee has engaged in any of the restricted activities, the employer may apply for an interim injunction for a ‘speedy’ ruling.
4.2 Balancing of interests With regard to balancing the interests of the employee and employer, the Danish courts may take into consideration whether or not the employer has formulated the restrictive covenant so generally as to go beyond what is necessary to safeguard the employer’s legitimate interests. If so, the court may rule a non-compete clause invalid on the basis of section 11(2) of the Danish Act on Post-Termination Restrictions and (in theory) also section 36 of the Danish Contracts Act, in which case the clause will no longer be enforceable.
4.3 Remedies
Employee A non-compete clause constitutes a substantial restriction of the employee’s job opportunities on termination of employment and, therefore, employees are entitled to compensation. If the employer fails to pay the lump sum constituting the compensation for the first two months and/or the compensation subsequently payable for each month of the remainder of the restriction, this will constitute a material breach of contract and the non-compete clause will be unenforceable. However, if payments are simply delayed or the amount slightly wrong, this will not constitute a material breach.
The former employee may also choose to dispute the validity of a non-compete clause and take the former employer to court.
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Employer The employer’s primary need will often be to prevent the employee from engaging or persisting in any of the restricted activities. In most cases, the employer will therefore apply for an interim injunction because the employer will have an interest in obtaining a ‘speedy’ ruling. This would not be possible if the employer were required to assert its rights before the ordinary courts, for one thing because loss is difficult for the employer to prove. Yet loss must be proven in order for damages to be awarded.
An interim injunction may be available if the employer can prove or show on a balance of probabilities (i) that the employee has engaged in – or is planning to engage in – activities which are contrary to the employer’s rights, (ii) that the employee’s behaviour calls for immediate reaction and (iii) that the purpose would be lost if the employer were required to assert its rights before the ordinary courts.
An interim injunction is a provisional measure and a full trial must be initiated within two weeks after the injunction has been granted. If the interim injunction turns out to be unjustified, the employer will be liable for the employee’s loss in that connection and perhaps be liable to pay compensation for injury to the employee’s reputation.
4.4 Penalty clauses As a result of the difficulties involved in calculating losses and in order to ensure compliance, an agreed penalty clause will often be included in the restrictive covenant.
If the (former) employee disputes the size of the agreed penalty in court, the Danish courts will assess whether the amount of the penalty is reasonable. In that assessment the following factors will often be given weight: • the employer’s substantiated loss • the employer’s need for the agreed penalty clause • proportionality between the agreed penalty and the breach • the severity of the breach • the balance of power between the employer and the employee.
A decision to modify or overrule an agreed penalty clause will be made on the basis of the ‘catch-all section’ – section 36 of the Danish Contracts Act.
4.5 Damages An employee who has engaged in competitive activities, including breach of a restrictive covenant, and in so doing has caused the employer a financial loss will be liable for such loss in accordance with the general law of damages in Denmark.
The practical issue here is that it will often be very difficult for the employer to show that a loss has been suffered or to quantify such loss, which is necessary in order to be awarded damages. Quantifying a loss is rarely an easy task since the indicators that employers would typically use, such as turnover, are also affected by factors other than the employee’s breach of a restrictive covenant. And future losses are even harder to quantify. The problems involved in quantifying a loss are one of the reasons for introducing a penalty clause.
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4.6 Liability of new employer Unless otherwise agreed, the general rule is that the new employer will not be liable for the employee’s breach of any post-termination restrictions agreed with his or her former employer. However, it is quite normal for the new employer and the employee to enter into an agreement stipulating that the new employer will assume some responsibility for the situation, including liability for any damages claimed by the former employer or any agreed penalty. The new employer should also be aware that if it initiates negotiations about the employee’s obligations to the former employer, it may become liable to the employee under the general Danish rules on liability for negligent advice. Finally, if the new employer is fully aware of the restrictions agreed, it may become liable to the employee if the new employer does not comply with the restrictions, for example, if the new employer instructs the employee to perform a task involving a customer which is covered by a non-solicitation clause agreed with the former employee.
5. SPECIAL SITUATIONS
5.1 No clause Employees are bound by a duty of loyalty to their employer during employment until the effective date of termination, including a duty not to engage in competitive activities. Unless otherwise agreed between the parties, the employee may therefore not be directly or indirectly employed, engaged, concerned or interested in any business or activities competing in full or in part with the business or activities carried on by the employer.
During the employment as well as after termination, the employee will be bound by sections 1 and 19 of the Danish Marketing Practices Act. Those sections do not prohibit the employee from being employed, engaged, etc. in any business or activities competing with the business or activities carried on by the employer, but they do prohibit the employee from making use of the former employer’s trade secrets and from generally acting contrary to good marketing practice, including the unauthorised use of internal information about products, business methods, customer files, prices, discount policies, etc. The employee may not systematically approach the former employer’s customers, although contact with customers in the course of general marketing initiatives targeting the relevant market as a whole will be allowed.
5.2 Transfers of undertakings Under section 2 of the Danish Act on Employees’ Rights on Transfer of Undertakings, all rights and obligations will transfer to the new employer, including any restrictive covenants agreed by the transferor and its employees. If, as a result of their wording, the restrictive covenants become substantially more extensive in scope as a result of the transfer, the employee may – depending on the circumstances – take the view that this constitutes a material change to the terms and conditions of employment. The employee will then be entitled to consider him/herself dismissed. In relation to non-compete clauses, this would mean that the clause becomes unenforceable. Further, the transferee should consider if the wording of the non- compete clause still covers the employee’s job function and responsibilities after the transfer in order for the non-compete clause to continue in full force and effect after the transfer.
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5.3 Cross-border competition The geographical scope of a non-compete clause does not need to be limited to the territory of Denmark or a region of Denmark. It is possible for the parties to agree on a wider territory, e.g. Europe. Whether a wide geographical scope can be upheld will depend on how the employer’s interests are weighed against the employee’s. Whether the employer will in fact be able to enforce a non-compete clause in other jurisdictions will be subject to the conflict of law principles.
5.4 Non-solicitation clauses Non-solicitation clauses Under section 6 of the Danish Act on Post-Termination Restrictions, an undertaking by an employee not to take employment with or have any business dealings with the employer’s customers or other business connections after the effective date of termination may be valid only if the employee has had business dealings with the customer or business connection in question in the course of the employment during the 12 months preceding the date when notice of termination was given.
It is a more or less well-established principle in Danish case law that ‘business dealings’ means that the employer has bought, sold or delivered goods or services to the customer in question during the 12 months preceding the date when notice of termination was given. However, whether a more informal approach to explore the possibilities of entering into a contract with a potential customer qualifies as having business dealings is yet for the Danish courts to decide.
The condition that a non-solicitation clause is valid only for customers with whom the employee personally has had business dealings should most likely be taken as an attempt to make sure that the employee is aware which customers are covered by the non-solicitation clause. In most cases, it will be quite obvious which customers an employee has had business dealings with personally. However, in situations where this distinction is less obvious – for example, because the visible dealings take place via a person holding a central role, while a number of back-office employees carry out the ‘real’ work – it can be quite difficult to prove that the employee has in fact had business dealings with the customer. Previously, employers were entitled to issue a separate notice to the employee and thereby include customers in the scope of the non-solicitation clause, regardless of whether the employee had had any business dealings with the customer. With the new regime, this possibility no longer exists. It will be for the Danish courts to establish the level of contact is required to qualify as business dealings.
As with non-compete clauses, employees are entitled to compensation equivalent to 40% or 60% of their total pay (depending on the duration of the restriction). Further, the compensation for the first two months must be paid as a lump sum at the effective date of termination.
If covered by a non-compete and a non-solicitation clause at the same time, the employee will be entitled to compensation amounting to 60% of his or her pay at the effective date of termination. Further, if an employee is covered by both types of clauses, the maximum duration of the clauses is six months, even though 60% compensation is required.
The employer may terminate a non-solicitation clause by giving one month’s notice to expire on the last day of a month.
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As with non-compete clauses, if the employee takes up suitable alternative employment after the effective date of termination, the compensation payable will be reduced to 40% of the original compensation, meaning 16% or 24%, respectively, though not for the first two months.
Non-Solicitation of Employees and No-Hire Covenants Under section 3 of the Danish Act on Post-Termination Restrictions, employers are prohibited from entering, for example, into a no-hire agreement or a non-solicitation of employees agreement. This means that agreements between two (or more) employers not to hire each other’s employees (no-hire agreements) and agreements between an employer and an employee (often a senior employee) which prevent the employee from enticing away ex- colleagues after termination (non-solicitation of employees agreements) are invalid and unenforceable under Danish law.
Even so, section 4 of the Danish Act on Post-Termination Restrictions provides that in the situation where negotiations have been initiated for the transfer of an undertaking, the transferor and the transferee will be allowed to agree not to hire each other’s employees, but only for a maximum of six months.
5.5 Insolvency If a company goes bankrupt, the trustee will often preserve the company as a going concern with a view to selling it. In this situation, the trustee will have a legitimate interest in the restrictive covenants being observed by the employees. The subsequent transfer of the company will be covered by the Danish Act on Employees’ Rights on Transfers of Undertakings.
5.6 Enforceability of foreign non-compete clauses Whether a foreign non-compete clause is enforceable in Denmark will be determined on the basis of conflict of law principles.
Even if the parties have agreed to submit to the jurisdiction of another country, the employer may apply for an interim injunction in Denmark unless the parties have expressly agreed otherwise. The Danish High Court has stated that a jurisdiction agreement does not mean with regard to the substance of the case that the employer is prevented from applying to a Danish court for an interim injunction in order to stop an employee’s breach of a non-compete clause.
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1. Introduction 85
2. Conditions 85 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 86 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 87 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 89 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
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1. INTRODUCTION The most common restrictive covenants in Finland are non-compete and non-solicitation covenants. In some jurisdictions, prohibition on soliciting former colleagues is called a ‘non- poaching obligation’. In Finland no distinction is generally made between non-solicitation of customers and non-solicitation of employees but both can be covered with a non-solicitation covenant.
According to Finnish employment law, an employer and an employee can agree on a post- termination non-competition agreement. Such agreements limit the employee's right to conduct activities which compete with the former employer. These prohibitions must be expressly agreed in the employment contract or a separate agreement.
However, employment law sets out certain criteria about the circumstances in which a non- competition agreement can be validly entered into. Accordingly, the parties to an employment contract may agree on non-competition provided that the grounds for such restrictions are based on the activities of the employer or on a particularly significant reason relating to the employment relationship.
2. CONDITIONS
2.1 General According to employment law, a post-termination, non-competition agreement will only be justified if there is a particularly significant reason relating to the employer’s business and operations. Such an agreement is usually considered valid if the employee’s duties relate to product development, research or other similar activities and the employee possesses information and know-how relating to the employer's business which is not in the public domain. Non-competition obligations are generally included in employment contracts for more senior management of the organisation.
A legitimate reason for allowing a non-competition restriction must exist both when concluding the contract and at the time of enforcement. The assessment of the seriousness of the reason is made overall, considering the nature of the business, the need to keep a business or trade secret confidential, special training provided to the employee by the employer and the employee’s status and duties.
A non-competition agreement which has been concluded without a particularly significant reason is considered void.
2.2 Age Age has no significance in concluding or enforcing non-compete covenants. There are, however, certain restrictions on employing people under the age of 15 who have not completed their compulsory education.
2.3 Written form The law does not set any formal requirements for non-competition agreements. However, the employer should put non-competition agreements in writing because a written non-compete clause or agreement is easier to enforce than an oral agreement. For an oral agreement, its
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existence and content are be difficult to prove should the employee contest the enforcement of the clause or agreement.
2.4 Renewal Legitimate grounds for concluding a non-competition restriction must exist both when concluding the contract and at the time of enforcement, therefore, there may be a need to review or renew a non-compete covenant. However, non-compete agreements are not typically put in place for a fixed period and so in practice, the need to review does not arise often.
2.5 Liability for compensation on dismissal The employee is released by law from any non-competition obligations if the employment relationship is terminated on grounds related to the employer rather than the employee. In practice, this relates to redundancy or unlawful dismissals. If the legal grounds for termination are related to the individual employee’s work performance or behaviour, the non-competition covenant is binding post-termination.
3. REQUIREMENTS
3.1 General During the employment relationship, all employees have a legal obligation not to work for another party or engage in an activity that would, taking into account the nature of the work and the employee's position, cause fundamental harm to the employer. This obligation applies to all employees and, therefore, there are no specific requirements.
According to employment law, an employer may require a post-termination, non-competition covenant from an employee if there are particularly significant reasons. In general, these reasons relate to the employee's specific position in the organisation as a result of his or her knowledge of the employer's business and trade secrets.
The employer must not restrict the employee's right to engage in competing activity to a greater extent than can be considered necessary to protect the employer's business interests. Therefore, non-competition clauses and every other term, should be drafted to prevent the term being regarded, wholly or partly, as void in court proceedings. Any uncertainty would most likely be interpreted as against the employer because employees are protected as being in a weaker position. Therefore, an unclear clause would be interpreted in the employee's favour.
3.2 Geographical, functional and temporal limitations The only activities that may be restricted are those that compete with the employer. Therefore, engaging in activity in the same branch of industry could be permitted in a different territory where the employer does not carry out any activities. For example, if the employer sells technology devices solely in Finland, the employee's engagement with another employer selling technology devices in Spain after termination would not be regarded as a competing activity. However, the employee may be bound by a secrecy obligation and would therefore not be permitted to disclose confidential information about the former employer even after termination.
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Particularly significant reasons for executing an agreement for non-competition must be present both when concluding the contract and when using the contract as proof. The assessment of the seriousness of the reason is made on an overall basis, considering the nature of the business, the need to keep a business or trade secret confidential, special training provided to the employee by the employer and the employee's status and duties.
A non-competition obligation must not cover duties that do not need to be subject to competitive restrictions from the employer's perspective. It is prohibited to conclude a non- competition agreement that restricts usual, healthy competition or to prevent the employee from using his or her expertise. Therefore, with reference to freedom of trade, the employee's ability to make a living using his or her expertise and the right to freely choose the place of work will affect the assessment of whether the clause is valid. In general, the less restrictive the non-competition obligation (i.e. in time, geographically and scope) the more likely it will be found reasonable.
The employee's right to engage in competing activities may be restricted for a maximum of six months after employment has ended. However, if the employee receives reasonable compensation, the restricted period may be extended to a maximum of one year. Although not defined by law and determined on a case-by-case basis, ‘fair compensation’ has, in case law, generally amounted to between 50 and 100% of the employee's final monthly salary. If agreed, the compensation may be paid as a lump sum, or on a monthly basis. This restriction, however, does not apply to employees who, in light of duties and status, are deemed to be engaged in the management of the organisation, corporate body or foundation or an independent part of the organisation or who have independent status comparable to managerial duties.
3.3 Job changes In principle, non-compete agreements are made with individuals and the agreements are therefore not directly dependent on the employee's position. As the employee's position within the organisation changes, it may be that the particularly significant reasons that previously applied no longer apply to the new employment relationship.
A court may consider that the non-compete clause or agreement has become either wholly or partially void. The assessment is always based on the facts. Therefore, the employer should ensure that the formal requirements of the non-compete clause or agreement apply to the new position. Ideally, a new non-compete agreement is drawn up with the transfer to the new position.
4. ENFORCEABILITY
4.1 General Enforcement of a non-compete clause or agreement is always considered on a case-by-case analysis and on the basis of the facts. If a non-compete agreement or clause has been concluded in accordance with the relevant requirements it is, in principle, enforceable.
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4.2 Balance of interests Particularly significant reasons for drafting a non-competition agreement must be present both when concluding the agreement and when using it as evidence. The assessment of the seriousness of the reason is made on an overall basis, considering the nature of the business, the need to keep a business or trade secret confidential, special training provided to the employee by the employer and the employee's status and duties.
4.3 Remedies If a former employee breaches a non-compete clause or agreement, the employer may take the matter to a district court and claim damages from the employee for the breach. Breach of a non-compete obligation may result in an order to pay for damages, if proven. Alternatively, a provision on a contractual penalty may be included in the non-compete agreement. As the employer has the burden of proof in showing that the employee has breached the non- compete clause or agreement, employers generally prefer a clause on contractual penalty, as the payment of the penalty does not require proving loss or damage.
Injunctions to prevent a breach or a breach continuing by a former employee, and interim injunctions, are potential remedies. However, injunctions are generally sought only in clear cases, where the validity of the restrictive covenant is clear. In practice, this occurs in situations where the employee’s duties and position indicate the need for a valid restrictive covenant and the employee deliberately breaches the covenant and refuses to pay damages or the agreed contractual penalty. If the validity of the covenant is unclear, injunctions are rarely used.
4.4 Penalty clauses Breaches of a restrictive covenant are usually supported by a contractual penalty that must be paid by the employee for the breach. The contractual penalty is always subject to agreement. The penalty sets out the minimum compensation for the breach. Therefore, if the damage caused to the employer exceeds the amount of the contractual penalty, the employer can claim both the penalty and damages from the employee. As the employer has the burden of proof to demonstrate that the employee has breached a restrictive covenant, employers generally include a clause on contractual penalty in employment contracts, as payment of the penalty does not require proving loss or damage.
For non-compete restrictions, the contractual penalty must not exceed the employee’s pay for the six months preceding termination of employment. This restriction does not apply to employees who are considered to be engaged in the management of the organisation or an independent part or have an independent status comparable to such positions, for example, administrative and commercial directors reporting directly to senior management.
4.5 Damages In the absence of an agreement on contractual penalty, general tort law applies to the breach. Therefore, the employer may claim damages for the loss caused by the breach from the employee. The employer may only request compensation for proven damages suffered as a result the breach. However, proving such damage and the causal link between the damage and the breach may be difficult in practice.
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4.6 Liability of new employer In principle, a new employer cannot be held liable for a former employee's breach of a post- termination, non-compete agreement.
However, under employment law, employees must not work for another party or engage in an activity that would, taking into account the nature of the work and the employee's position, cause manifest harm to the employer as a competing activity contrary to fair employment practices. During employment, employees must not take steps to prepare for competing activities that that are contrary to this rule. An employer that recruits a person it knows must not work for it on the basis of the legal prohibition is liable for any loss caused to the previous employer, jointly with the employee. This applies only to the legal prohibition.
5. SPECIAL SITUATIONS
5.1 No clause If the employer and employee have not specifically agreed a non-compete clause, the employee is free to accept a position with a competing employer or start a business that competes with the former employer's business. The employee may also solicit the former employer's employees or clients.
The employee is only liable for damages, if he or she acts wrongly against the former employer. The Supreme Court has ruled that an employee is liable for damages where there is no non- compete clause if the employee systematically contacts the former employer’s customers while using knowledge and information gained during employment with the previous employer. The burden of proof lies with the previous employer and is assessed very strictly.
5.2 Transfers of undertakings According to employment law, all terms and conditions of employment for transferring employees generally remain the same after the transfer, unless the transferee and employees agree otherwise. Employees are not under an obligation to sign new employment contracts or to accept material changes to the terms and conditions of employment. This includes rights and obligations pursuant to any non-compete clauses.
However, a legitimate reason for a non-compete covenant must exist both when concluding the agreement as well as at the point of enforcement. Therefore, a non-compete agreement that was valid may not be enforceable after the transfer.
5.3 Cross-border competition Non-compete clauses are generally limited in geographical scope. Usually this is the area covered by the employee during the employment relationship. The geographical scope may cover areas outside Finland if the employer is able to compete with employers in the region stipulated in the geographical limitation. As a rule, the less restrictive the non-compete obligation (e.g. its geographical scope) the more likely it will be reasonable.
5.4 Non-solicitation clauses The parties to an employment relationship may agree a non-solicitation clause in relation to the employer’s customers and employees which applies after termination of employment. A non-
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solicitation covenant generally prohibits the employee from soliciting individuals, who have been customers of the employer during the employee’s employment or encourage those individuals to end the customer relationship with the employer. Usually, the non-solicitation obligation only covers customers who the employee has been in contact with during the term of employment. Further, it is common practice for the parties to agree on a prohibition on soliciting employees of the employer.
Non-solicitation covenants are typically concluded with high-level executives and employees responsible for customer relations.
There is no specific law on non-solicitation covenants. Therefore in the context of enforcement, a case-specific assessment of reasonability, based on general contract law, is necessary. Non- solicitation clauses may also be assessed on the legal provisions on post-termination, non- compete agreements. To be considered valid the non-solicitation restriction must be reasonable.
5.5 Insolvency If an employer becomes insolvent and is declared bankrupt, the liquidator may terminate the employment contracts without normal restrictions on termination for insolvency. The termination period is 14 days.
Further, if an employer is subject to debt restructuring, it may, in general, terminate employment contracts regardless of duration, with two months’ notice, where the termination results from: • an arrangement or measure carried out during the restructuring process, is necessary to avoid bankruptcy and causes the work to cease or decrease, or • a procedure under a confirmed restructuring plan that causes the work to cease or decrease, or • an arrangement under a restructuring plan for financial reasons set out in the plan and calls for a reduction in human resources.
The employee must observe a notice period of 14 days for restructuring procedures. However, during lay-off, employees are entitled to terminate the employment contract without period. If the date when the lay-off will end is known by the employee, he or she must not exercise this right for seven days before the end of the lay-off period.
A termination from insolvency is considered to result from actions related to the employer. Therefore, non-compete covenants will not remain valid in a dismissal or resignation on the grounds of debt restructuring or bankruptcy.
5.6 Enforceability of foreign non-compete clauses Enforceability of a foreign non-competition clause or agreement varies depending on the applicable law and jurisdiction. If a Finnish court has jurisdiction over a dispute about a non- compete agreement based on, for example, the fact that the employee is domiciled in Finland, the Finnish court can, in principle, settle the dispute. There is, however, no case law on enforcing foreign non-compete clauses.
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If a foreign employer has obtained a judgment in another jurisdiction, it can seek recognition and execution of the judgment in Finland. The recognition may be automatic and the applicable procedure depends on international agreements or EU law. Once the judgment is recognised, it has in principle, the same effects as a Finnish judgment.
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France
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1. Introduction 95
2. Conditions 95 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 97 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 99 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of the new employer
5. Special situations 101 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
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1. INTRODUCTION A ‘non-compete clause’ (or ‘non-compete obligation’) is a written provision in an employment contract or company agreement preventing an employee, after leaving his or her job, from engaging in any activity which is in competition with that of the employer, and which would put the interests of the former employer in jeopardy. This definition limits the possible scope of non-compete clauses.
A non-compete clause must be distinguished from: • An obligation of loyalty, which is an essential element of an employment contract, and the prevention of the employee from engaging in any activity directly in competition with the organisation throughout the duration of the employment contract. • A non-poaching clause, which prevents the hiring of ex-employees and which may be included in an agreement between two organisations (the service provider company and the client company), notably in the event of an employee being hired-out for one-off assignments. Such a clause contains no obligations regarding the employee but forbids the client company from hiring an employee of the service provider company.
Usually, a non-solicitation clause made between an employer and employee which prevents an employee from poaching clients of his or her ex-employer is considered to be a non-compete clause in France.
A non-compete clause restricts employees from exercising their profession freely, as they are prevented from looking for certain jobs. Such a clause is therefore only lawful if it does not circumvent the right to work. In reality, it also prevents an employee from starting his or her own business in the same field of activity as the previous employer.
In French law, there is no legal or regulatory text defining the conditions of validity and application of non-compete clauses and they are simply either included in individual employment contracts or in company agreements. Consequently, the legal status of non-compete clauses is defined by case law, which operates to ensure effective control over their use.
A non-compete clause in an employment contract involves only the parties to the contract. Therefore, it may in no way affect a third party’s right to work, whether the spouse of the employee or another family member.
2. CONDITIONS
2.1 General Normally, in order for a non-compete clause to be enforceable it must be contained in the contract of employment. However, some company agreements explicitly impose an obligation not to compete on the employee, without formalising it in the employment contract. An obligation contained in a company agreement in this way will be binding on the employee only on certain conditions. The non-compete clause must have existed in the company agreement at the time of recruitment of the employee; the employee must have been informed of this obligation at the time of recruitment; and the provisions of the company agreement must comply with certain conditions, as described below, for it to be valid. Best practice for employers is to insert the non-compete clause in the individual employment contract.
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Moreover, an employee hired without a non-compete clause contained in his or her employment contract is not obliged to accept the addition of a new clause in the employment contract after recruitment.
A non-compete clause included in the employment contract must be drafted in accordance with the provisions contained in the company agreement. In some cases, the company agreement may even forbid the addition of a non-compete clause in the employment contract for certain employees. If any contradictions exist between a non-compete clause in the employment contract and the provisions of the company agreement regarding non-compete, the employer must apply the provisions that are most favourable to the employee.
Non-compete clauses are usually seen in indefinite term employment contracts, but may also be found in other contracts such as fixed-term employment contracts or, in more exceptional cases, apprenticeship contracts. Usually non-compete clauses are drafted into the initial employment contract, but it is also possible for it to be done at a later date, even once the employment contract is in force, provided the employer has the full consent of the employee. Should the employer fail to ask for approval, the employee will have the right to go before a judge to request acknowledgement of the modification, i.e. acknowledgement that the employer has breached the employee’s contract.
Case law even admits the possibility of entering into a non-compete obligation when the employee leaves the employer, notably in the event of a settlement. However, a clause providing that, at the end of the contract of employment, the employer has the right to unilaterally impose a non-compete clause on the employee is void. The employer will have to obtain the express, prior consent of the employee.
In the absence of statutory provisions, case law confirms the validity of non-compete clauses which are made in a certain way. To be lawful, a non-compete clause must: • be essential to protect the legitimate interests of the employer • be limited in time • be limited geographically • be limited with regard to the nature and the specifics of the employee’s activity • be limited to the company’s activities and not extended to the group’s activities • take into account the actual activity of the company • include an obligation on the employer to pay the employee any necessary financial compensation.
Failure to respect one of these conditions could result in the non-compete clause being annulled, as well as harm to the employee, regardless of whether the employer waives or enforces the non-compete clause at the end of the contract of employment.
Note that to be valid, a non-compete clause must, first and foremost, be essential to protect the employer’s interests. Consequently, a non-compete obligation may only be imposed on employees whose technical or sales know- how could seriously harm the employer should it be divulged to a competitor. So, for example, in the case of a contract for window cleaners, a non-compete clause was found to be invalid.
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2.2 Age The validity of a non-compete clause is not subject to any age requirement, except that a minor needs the consent of his or her parents.
2.3 Written form As it impinges upon the right to work, a non-compete clause may not be presumed to exist. It must therefore be drafted in writing, so allowing its terms to be considered. For the same reason, a non-compete clause must be carefully worded and will be strictly interpreted by the courts.
2.4 Renewal A non-compete clause will be for a fixed term after the termination of the contract. If the contract is renewed or reviewed, it can affect the applicability of the clause. If the parties decide to review a non-compete clause and to adjust it to a new contractual environment, they need to agree this and document their agreement in writing.
2.5 Liability for compensation on dismissal If a non-compete clause does not allow for the possibility of waiver, it will have to be applied and compensation paid. The payment of compensation is guaranteed under French law, irrespective of who ended the contract.
3. REQUIREMENTS
3.1 General A non-compete clause may apply at the end of a fixed-term contract, on retirement or pre- retirement, resignation, dismissal for personal or economic reasons and dismissal with no concrete reason, and breach during a trial period provided there is a written clause which does not exclude this. .
A non-compete clause will start on the date that the employee stops working for the employer. Thus, if no notice is given, it applies as soon as the employee leaves the organisation.
If the employment contract or company agreement to which the employer refers to does not provide for waiver, the employer can only waive the non-compete clause if agreed by the employee. The clause and the waiver should be carefully worded.
If the terms of the waiver have already been taken into account by contractual provisions, the employer must respect these. If they are not respected, the employer must pay non-compete indemnities, for at least the time period during which the employee abided by the terms of the non-compete clause. An employer that waives the clause must be very explicit and unambiguous, but must also react very quickly after the end of contract (usually within eight to 15 days of notice of termination of the contract being given).
Only an employee is authorised to request the annulment of a non-compete clause. The employer has no such right. The employee may claim damages for the time that he or she respected the terms of an unlawful non-compete clause. It is for a judge to assess the existence and the extent of harm caused to the employee. However, if the employee engaged in
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unethical or unprofessional activities after the termination of the contract, in as much as he poached clients from the company (‘détournement de clientèle’), the employer may sue him or sue his new employer.
Any employee subject to a non-compete obligation must benefit from financial compensation, which must be fair and reasonable. If this is not the case, the employee may claim the clause is void. The absence of financial compensation renders the agreement unlawful and unenforceable against the employee.
If an employee respects a non-compete obligation, financial compensation is automatically payable, regardless of whether the contract is terminated by either the employer or the employee and irrespective of the reasons for the termination. The amount of the non-compete indemnity may not vary according to the reason for the termination.
Moreover, if the employee has kept to the terms of a non-compete clause which is unlawful because of the absence of financial compensation (or because it fails to meet any other condition of validity), the employee may, in addition to seeking the annulment of the clause, bring a case before the court for damages against the employer. Damages may be awarded even if the employer waived the clause at the end of the employment contract. The only situations in which the employer may be exempted from paying financial compensation are where: • the employee violates the non-compete clause • the employee dies.
Finally, it is important to emphasise that the amount of the non-compete indemnity is left in the hands of the two parties. Any modifications are also their responsibility. It is common practice to provide compensation equivalent to at least 25-30% of gross monthly salary per month of restriction, but the collective bargaining agreement that applies to the organisation (if any) may provide for a higher minimum amount.
In the event of non-payment of a non-compete indemnity by the employer, the employee will be freed from the prohibitions against competition, and the employer will have no right to forbid the employee from working with a competitor. The employee may, in addition, bring a case before the court for damages against the employer.
3.2 Geographical, functional and temporal limitations In a non-compete clause, any ‘prohibited territory’ must be very clearly defined, otherwise the clause may be deemed void. Generally, the clause should be limited to the geographical area in which the employee is likely to be in competition with the former employer because of having a new job. It should not be a way of preventing the employee from having a professional life.
With this in mind, case law has tended to reduce the geographical scope of non-compete clauses to within France and to the specific ‘departments’ where the employee is required to work during the period of the employment contract.
The clause contained in the employment contract may not apply to a broader geographical area than that set out in the company agreement. If it does, the clause risks being partially annulled. Conversely, if there are no geographical limitations contained in the company
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agreement, the employer can define the area in accordance with the restrictions described both above and later in this section.
A non-compete clause must be limited to a very specific business sector (i.e. that of the employer - and not unrelated sectors of the group to which it belongs) so as to allow the employee the possibility of finding a job using his or her past professional experience. In setting this condition, the employer should take into consideration the employee’s training and professional background. The validity of the clause will be evaluated according to the actual activities of the organisation, and not by how it is defined, or by the activities of the group as a whole, if the organisation belongs to a group.
According to case law, the professional qualifications of the employee such as know-how, trade secrets and knowledge relating to technical and sales techniques should be taken into account. This condition is ancillary to the condition relating to the legitimate interests of the organisation. However, note that this condition has arisen from case law and is not defined very precisely at the time of writing.
In concrete terms, the judge must study the competitive risk posed by the employee on a case by case basis, taking into account the jobs and functions carried out in the organisation, as well as its hierarchy, where relevant.
A non-compete clause must indicate the period during which the employee is forbidden to communicate with the competition. If the company agreement does not set a time limit the employer must set one in the employment agreement. The employer may freely define the time limit, but in so doing, must consider all the elements of the clause as a whole, including for example, geographical scope, the nature of the activity and all matters specifically relating to the employee’s job. If a judge considers the time limit to be excessive, it will be annulled or reduced. Two years is the maximum term most often used in company agreements and upheld by judges.
3.3 Job changes If there is an important change in the functions of the employee (or any change, in the case of a non-complete clause with a narrowly defined scope), the validity of the non-compete clause could be challenged, as non-compete clauses are designed to match the nature of the functions carried out by the employee.
However, if the change involves only a salary increase, with no new tasks assigned, this should not be the case. Should the employer realise that its interests are no longer sufficiently protected by a non-compete clause, it should try to negotiate an amended one with the employee.
4. ENFORCEABILITY
4.1 General If either of the parties to a non-compete clause refuses to comply with any obligations under the clause, the other party may choose between: • asking a judge to enforce the contractual obligations: for example, the employer can sue the employee in an emergency procedure (‘référé’) to get an injunction to prevent the
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employee from competing with the employer, or the employee can ask for payment of the compensation in court • ceasing to comply with its obligations.
4.2 Balance of interests In assessing the validity of a non-compete clause, a judge will test the balance of interests between the employee’s freedom to work and protection of the employer’s interests. The judge may reduce the scope (geographical, duration or functional scope) of a non-compete clause if it is too restrictive of the employee’s freedom to work.
4.3 Remedies Employee In the event of non-payment of a non-compete indemnity by the employer, the employee will be freed from the prohibition against competition, and the employer will have no right to forbid the employee from working with a competitor.
Nevertheless, the employee may be entitled to ask a judge for financial compensation for the time that the employee has respected the non-compete obligation. The employee may also ask the judge for damages in compensation for the employer’s failure to respect its legal obligations.
Employer Breach of a non-compete clause might involve the carrying out of unethical practices with competitors, such as the solicitation of clients. If the employer is able to find evidence of a breach of this kind, the employee will lose the right to compensation, even if the breach was temporary. Further, the employee may be required to reimburse any indemnity paid from the date of the breach. However, the employer must prove that the employee did not abide by the non-compete clause (Supreme Court, 25 March 2009, no 07-41.894).
The employee may also be obliged to pay damages to the former employer, and may even be forbidden by a judge to continue any competing activity. The employer may also sue the new employer who hired the employee despite the existence of the non-compete clause and ask for damages.
4.4 Penalty clauses The employer may protect him/herself against breach of a non-compete clause by means of a penalty clause guaranteeing a fixed amount of compensation without the need to prove harm was caused by the employee. This is usually advisable for employers, but it should be borne in mind that a judge could reduce the amount of the penalty clause in the event of litigation with the employee.
4.5 Damages Breach of a non-compete clause by an employee may have different consequences. The employer could request in court that the employee comply with it or could withhold compensation. In addition, the employer may claim damages on grounds of breach of
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contractual duties. The amount of damages will be based on the extent of the harm caused by the employee to the employer.
4.6 Liability of the new employer Liability in tort (in an action for unfair competition) on behalf of the new employer can be set in motion if an employer hires an employee whilst knowing that the employee is subject to a non- compete clause, even if no real breach by the employee or any actual corruption of clients has taken place. The burden is on the former employer to prove that the new employer hired the employee knowing of the non-compete obligation. The employer may be ordered damages by a Commercial Court.
5. SPECIAL SITUATIONS
5.1 No clause If employees are not bound by non-compete clauses they are free to work with whom and wherever they please. Employees may choose to work in a competing company or to run their own businesses performing the same activities after the employment contracts come to an end. The employer will have no right to oppose this.
Nevertheless, in the absence of a non-compete clause, the former employee will still be expected to act respectfully and not purposely harm the former organisation in any way during the course of employment. Harm, in this sense, would include, for example, disrupting the organisation, or creating sales problems or confusion in clients’ minds.
If the former employee fails to act respectfully, the employer may file a claim of unfair competition in tort against either the former employee, or even a new employer, where relevant.
5.2 Transfers of undertakings If the organisation is transferred to a new employer, any non-compete clause which binds the employee to the initial employer will be taken over by the new employer, who must pay out any applicable compensation. In the same way, in the event of a breach of a non-compete clause by the employee, the new employer may ask the judge for compensation from the employee. Note that depending on the scope of the non-compete clause, its enforceability could be affected after a transfer of undertaking.
5.3 Cross-border competition A non-compete clause can cover the area of a city, a region or France in its entirety. The permissible geographical scope of the clause depends to a large extent on the circumstances, especially the specialisation of the employer. The more specialised the area of activity, the wider in scope the non-compete clause can be (even global for very specialised industries). Generally however, a worldwide clause will not be justifiable under French criteria and will need to be restricted to a more clearly specified and relevant area, bearing in mind the reasonable interests of the company and the job performed by the employee.
5.4 Non-solicitation clauses In France, non-solicitation clauses are divided in two categories:
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• Non-poaching of employees: such clauses are permissible and do not require compensation as such, provided they only target active and extensive solicitation.
The Labour Code also considers that an employer that has hired an employee who breached his previous employment contract without cause may have to pay damages to the previous employer, along with the employee. The previous employer must prove that the new employer knew that the employee was bound by a previous contract or that the new employer played an active role in the breach of the contract and that the previous employment contract was not close to expiry (such as the end of a fixed term contract or the end of a notice period).
For temporary agencies, the Labour Code prohibits such clauses as an organisation which uses a temporary employee is permitted to recruit him or her at the end of the temporary arrangement. • Non-poaching of clients: such clauses are contained in standard non-compete clauses and therefore require compensation.
5.5 Insolvency Generally, non-compete clauses are unaffected by the insolvency of the employer. Where a company has become insolvent or has been put into receivership by a commercial tribunal, a specific body (the ‘AGS’) may guarantee payment of compensation for non-compete clauses in the case of contract termination following the insolvency. Either the administrator or the employee may decide to keep a non-compete clause (with its compensation) or to waive it.
5.6 Enforceability of foreign non-compete clauses The Rome Convention on contractual obligations of 1980 and EU Regulation 593/2008 of 2008 allow the employer and the employee to choose the applicable law of the contract and the chosen law may be enforceable in France, provided that it does not deprive the employee of the protection of public order laws applicable in France. For example, any non-compete clause which contains no financial compensation will be unenforceable.
Indeed, mandatory provisions of French law apply to the subject matter and form part of French public order (‘ordre public’) which cannot be overruled. A comparison must be made between the law chosen by the parties and the law that would apply based on objective criteria (i.e. if the employee performed his work in France), regardless of the choice of law.
The more favourable provisions apply as a result and the agreement becomes a combination of both the chosen law and the law which would apply if no choice of law had been made. Note that in France, in another context, compensation for a non-compete clause was considered to be mandatory (Supreme Court, 4 June 2008, no 04-40.609).
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Germany
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1. Introduction 105
2. Conditions 105 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 106 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 108 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 110 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
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1. INTRODUCTION During the term of the employment contract the employee is generally not permitted to enter into competition with his employer. The legal situation changes if the contract is terminated. Then, the employee is no longer restricted in his activities and there is no general post- contractual duty to refrain from competing.
In this situation, the employer may protect its interests by means of a non-compete covenant in the employment contract. However, as the freedom to engage in a profession is a constitutionally guaranteed right of the employee, restrictive covenants must be carefully drafted to meet the requirements of the German Commercial Code and German court precedents. Above all, the employee must be duly compensated for signing a covenant not to compete.
2. CONDITIONS
2.1 General The requirements which must be met in order to ensure the validity of a covenant not to compete, or a ‘non-compete clause’, are primarily determined by Sections 74 to 75d of the German Commercial Code.
2.2 Age There are no special provisions requiring a certain minimum age when entering into a covenant not to compete. However, as a non-compete covenant is a contractual obligation the general rules for contracts apply. Thus, the parties to the covenant must be of age – a minor would need the consent of his or her parents.
2.3 Written form A non-compete clause must be agreed upon in writing. A post-termination covenant does not necessarily have to be included in the employment contract itself but may be set out in a separate document. In addition, the employee must be given a copy of the document containing the non-compete clause, duly signed by the employer.
Violation of the requirement of written form renders the non-compete clause invalid. If the employer omits to hand the signed document to the employee the covenant is not invalid but the employer cannot enforce the non-compete clause. For the employee the clause is ‘non- binding’, i.e. he or she may choose whether to abide by it or compete.
2.4 Renewal There is no statutory provision which requires the renewal of a non-compete clause in the case of a renewal of the employment contract. However, as the applicability of the clause can be affected by a change in the contractual provisions, the parties should review whether or not it is necessary to adjust the clause. Should they deem it appropriate to modify the clause, this must be done in writing as outlined above.
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2.5 Liability for compensation on dismissal Section 75 of the German Commercial Code outlines the following different situations in which a non-compete clause is retrospectively invalidated following termination of the employment relationship: • If the employee dissolves the employment relationship because of a serious breach of contract by the employer, the non-compete clause will be invalid if the employee declares in writing within one month after giving notice of termination that he does not consider himself bound by the agreement. • Likewise (i.e. following a declaration by the employee not to be bound by the agreement), a non-compete clause will become invalid if the employment relationship is terminated by the employer. This does not apply if there are significant grounds for the termination relating to the person of the employee or the employer declares that it will pay the employee the full contractual remuneration last earned by him or her for the period of non-competition. The offer must be made at the time the notice of termination is given.
In any other case of unilateral termination of the employment relationship the non-compete clause remains in force unless the parties explicitly agree upon its expiry.
3. REQUIREMENTS
3.1 General The main requirements for the validity and enforceability of a non-compete covenant are also set out in Sections 74 to 75d of the German Commercial Code. Those have in part been backed up by case law.
Wording As is the rule with all contractual provisions, a non-compete clause should be carefully worded. This is especially important as the clause is subject to interpretation if its meaning remains unclear. Generally, courts tend to interpret the scope of the clause in a restrictive way with the effect of an ‘employee-friendly’ result.
Compensation As a non-compete clause is a clear restriction of the employee’s right to freely choose his or her employment, a clause will be void if it does not provide for compensation. According to Section 74 para 2 of the German Commercial Code, a covenant not to compete is only binding if the consideration for it is at least 50% of the previous year’s total remuneration (including all monetary and non-monetary benefits) for each year during which the clause is in effect.
However, it will only be invalid if it does not foresee any compensation at all. If the compensation is too low or otherwise insufficient, the covenant is not void but only ‘non-binding’.
The German Federal Labour Court recently ruled that a non-compete clause which was included in a standard form employment agreement – and was, therefore, tested against the German legal rules for standard form contracts – could be considered valid if the affected employee wanted it to be valid so that he could earn the minimum statutory compensation.
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However, this court ruling only protects employees – employers who issue covenants not to compete with no compensation will not benefit from this court ruling.
Deduction of earnings If the employee enters into a new employment relationship he or she will be paid for work in addition to the compensation provided for in the non-compete clause. However, the law aims to prevent this double payment to the employee and therefore, Section 74c of the Commercial Code stipulates that any earnings during the period of compensation must be deducted from the compensation due, if the compensation plus these earnings would exceed the most recent contractual remuneration by more than ten percent. If the employee was forced to change his or her residence to find work, the ten percent figure is increased to 25 percent.
Waiver Employers may at any time during the course of the employment relationship waive enforcement of a non-compete clause. However, the employer must give the employee 12 months advance written notice of the waiver. If, for example, the employer gives notice 12 months prior to the termination of the employment relationship, the employer will not be required to provide the employee with any additional compensation related to the non- compete clause (and the employee, will of course, be able to compete).
If, on the other hand, the employer waits to give written notice until a month before the employment contract is terminated, then the employer will be required to compensate the employee for the 11 months after the employment relationship terminates (i.e. 12 months from the date the employer notified the employee of its intent to waive the non-compete clause). If the employee was terminated for operational reasons (as opposed to serious misconduct), the employee has the right to notify the employer within a month of the termination that he or she will not be observing the non-compete restriction. The only way the employer can avoid such a scenario is to promise to pay the employee 100% of their most recent total remuneration during the entire non-compete period. The situation is similar if the employee resigns without notice, where the employee will have the right to notify the employer within a month of resigning that he or she will not be complying with the non-compete restriction.
3.2 Geographical, functional and temporal limitations The freedom of the employee to engage in a profession is especially restricted by geographical and functional limitations as set out in a non-compete clause. Thus, the scope and geographical area to which the clause extends should be kept as narrow as possible whilst still being adequate to protect the legitimate business interests of the employer in the particular circumstances.
The safest way to comply with this requirement is to limit the scope of the clause to precisely the type of professional activities the employee has performed or seriously and actively planned to perform during the last one or two years of his employment with the employer.
The geographical restriction must take into account the type of business and the specialisation of the activities performed within it. As a rule, geographical area should be limited to the country or region the employee was in charge of and the place where he or she actually performed his or her work during employment.
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The maximum term for a covenant not to compete is two years after the date of termination of the employment (i.e. not after the start of a ‘garden-leave’ period). However, a shorter term must be agreed if it is sufficient to protect the legitimate interests of the employer or if the maximum of two years would be an unreasonable impediment to the employee’s professional career and ability to earn a living.
3.3 Job changes Job changes – which are especially likely to happen for employees in senior positions – may have an effect on the enforceability of a non-compete clause. Whether this is the case is above all dependent on the type of clause used in the contract. The non-compete may either refer to certain activities (i.e. forbidding the employee to perform the activities stated in the clause with a new employer) or to certain companies (i.e. restricting the employee from working for all employers of a certain branch). ‘Activity-linked’ non-compete clauses are generally static, which means that they are no longer enforceable if the employee changes job. In contrast, ‘company- linked’ clauses are dynamic: they always cover the whole scope of goods produced or services performed by a company and thus are more or less independent of job changes.
While in theory the differentiation between the two types of clauses is quite clear, it is often hard to make in practice. Careful wording is of great importance. Should the employer realise that his interests are no longer sufficiently protected by a non-compete clause it should try to negotiate an amended one with the employee. If the employee refuses to agree – which he or she has the right to do – the wisest thing for the employer to do is waive the non-compete clause in order to at least save the compensation payable to the employee.
4. ENFORCEABILITY
4.1 General Quite apart from cases where a non-compete clause is invalid from the outset, there are certain situations where a clause will be ‘non-binding’ by law. For the employer, a non-binding clause can be worse than an invalid one, as in such a case the employee has the right to choose whether he or she wants to abide by it (and request the agreed compensation – even though this may be too low) or enter into competition (and not claim the compensation).
A non-compete covenant is considered to be ‘non-binding’: • If the compensation is too low. The employee may then choose whether he or she wants to abide by it and take the compensation or compete and not claim the compensation. • If and insofar as a non-compete covenant does not serve to protect a legitimate business interest of the employer. A legitimate interest can be assumed if the employer uses the non- compete covenant to protect itself from disadvantages that may arise from prospective competitive activities by the employee. Therefore, it would, for example, not be a legitimate interest if the employer used the clause exclusively for the purpose of binding the employee to the business. • If the scope, term and geographical area are not limited to the extent necessary to protect the legitimate business interests of the company. • If the scope, term and geographical area unreasonably impede the employee’s professional career and ability to earn a living in light of the promised compensation.
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It is controversial whether courts can reduce a non-compete covenant that is too extensive. Most likely, the courts will refuse to do so if the clause is considered to be a ‘general term and condition’ within a standard contract, i.e. a contract that is meant to be used in the same or much the same way for a number of employees. The consequences of this would be that the covenant would be ‘non-binding’.
4.2 Balance of interests Sections 74 et seq. of the German Commercial Code contain a detailed system of requirements for the validity of non-compete clauses which aim to ensure a balance of interests between the parties. Above all, Section 74a requires a ‘justified interest’ of the employer in order for the non-compete clause to be binding. Therefore, an additional weighing of interests beyond these legal provisions is not necessary.
If the individual subject to the clause is, however, not an employee but a managing director, Sections 74 et seq. of the Commercial Code do not apply. The validity of the clause is then not tested against these provisions but against the rules for general terms and conditions (Sections 305 et seq. of the German Civil Code). The weighing of interests then must be conducted within the test of the validity of the non-compete clause as a general term and condition.
4.3 Remedies Employee If the employer does not comply with its obligation to pay compensation even though the employee duly fulfils his or her part of the non-compete clause, the employee may make a claim for payment of compensation before a court. If there is a dispute between the parties as to whether or not a clause is binding, the employee may ask the court to make a ruling on this.
Employer If the employee does not comply with the obligations of the non-compete clause the employer may file for an injunction. The employer is also entitled to request that the employee cease his or her competitive activities, e.g. by closing down his or her new business.
The employer may further claim damages that arise from non-adherence to a post-termination covenant. Another way for the employer to enforce compliance with a non-compete clause would be to retain the employee’s compensation. However, the employer may not claim any benefit which the employee may have earned from the competing activities.
4.4 Penalty clauses Section 75c of the German Commercial Code explicitly provides the option to set a penalty which the employee must pay if he or she does not comply with the obligations agreed in the non-compete clause. If the penalty clause has been validly concluded, the employer may enforce its rights in accordance with Section 340 of the German Civil Code. This means that the employer must choose either to request the employee to comply with the non-compete clause or to accept the non-compliance and demand the contractual penalty.
If the employer opts for compliance with the non-compete clause, it may choose again as soon as the next instance of non-compliance arises. It is up to the parties to decide when a new breach of the non-compliance clause has occurred. However, recently, the Federal Labour
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Court overturned the standard wording of clauses used in cases where the employee repeatedly and permanently breaches obligations arising from the non-compete clause. For a long time it has been permissible to claim a penalty for each month of the breach because the breach was deemed to reoccur at the beginning of each month. This is now not permitted: from now on each single breach within a period of repeated violations must be separately defined to trigger payment of a new penalty. The penalty clause is void if the non-compete clause itself is void or if, in reality, it is not designed to prevent competition but solely to impede acceptable solicitation.
4.5 Damages Breach of a non-compete clause by an employee may have different consequences. The employer may, for example, file for injunctive relief or withhold compensation. In addition, the employer may claim damages on grounds of breach of contractual duties (Section 280 para 1 of the German Civil Code). The compensation which must then be paid by the employee comprises all harm which the employer has suffered as a result of the breach of the covenant not to compete. However, the employer may not absorb the benefits that the employee earned by working for a competitor of the former employer.
4.6 Liability of new employer Generally, a new employer is not liable to the old employer based on the fact that it has hired an employee whom it knew to be restricted by a non-compete clause.
5. SPECIAL SITUATIONS
5.1 No clause During the term of the employment contract it is a secondary duty of the employee not to engage in competition with his or her employer. By contrast, the employee is free to enter into competition after the employment relationship has been terminated. As indicated, this flows from his constitutionally guaranteed freedom to engage in a profession. Thus, the employer can only prevent the employee from competing by way of a valid post-contractual covenant not to compete. If there is no such clause, there is no duty for the employee to refrain from competition.
5.2 Transfers of undertakings Section 613a of the German Civil Code provides that if a business is transferred by means of a lawful transaction the new owner will take on the rights and obligations arising from the employment relationships in existence at the time of the transfer. In relation to non-compete clauses this means that, generally, the transferee must abide by the conditions of the non- compete clause. In contrast, the clause will only be binding vis-à-vis the employee if the transferee has a reasonable interest in restricting the employee from competing.
Should the employee object to the transfer of the employment relationship the non-compete clause will continue to exist between the employee and the former employer, but the question will be whether the former employer still has a reasonable interest in non-competition. If not, the clause will not be binding on the employee.
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5.3 Cross-border competition A non-compete clause can comprise the area of a city, a Federal State or Germany in its entirety. The permissible geographical scope of the clause is to a great extent dependent upon the circumstances, especially the specialisation of the employing organisation. In technical sectors of industry, for example, an international, if not global, non-compete clause may be justifiable.
A competition prohibition can also be worded ‘dynamically’, e.g. by stating that it comprises ‘all countries in which the employee works in the two years preceding the termination of the employment relationship’. In any event, whether the employer has a reasonable interest in the geographical scope of the clause agreed upon must be checked. Most clauses that purport to apply ‘worldwide’ are not covered by the justified interests of the employer. However, this is no risk for the employer, as the clause is only non-binding with respect to the part that is not covered by its reasonable interests.
5.4 Non-solicitation clauses Whereas a non-compete clause prevents an employee from taking advantage of business- related information, a non-solicitation clause is designed to prevent the employee from taking active steps to acquire customers or clients from his former employer. If the clause does not only forbid the deliberate poaching of customers or clients of the former employer but generally prevents the former employee from establishing business relations of any kind with those customers or clients, the clause must be made in accordance with the requirements of Sections 74 et seq. of the Commercial Code. Clauses which merely prohibit active – i.e. targeted poaching of clients – do not have to be tested against the rules of Sections 74 et seq. of the Commercial Code provided the former employee is a member of the so-called liberal professions (e.g. lawyers and tax advisers). Employees in these professions are, by virtue of their professional standards, forbidden from engaging in active poaching for a certain period of time after termination of the employment relationship, so that any non-solicitation clause would merely be repeating this. If, however, the employee does not belong to one of these professions, any ‘non-poaching-clause’ would also be required to be in accordance with the requirements of the Commercial Code.
Clauses which forbid the former employee from hiring ex-colleagues are permissible and enforceable if and insofar as they prohibit active and extensive solicitation: the mere hiring of an ex-colleague, where this is not accompanied by any other activity is not a case of active ‘poaching’ and therefore acceptable.
5.5 Insolvency Generally, a non-compete covenant is unaffected by the insolvency of the organisation. Pursuant to Section 113 of the Insolvency Code, both the employee and the administrator can terminate the employment relationship. Where the employee terminates, the non-compete clause will remain valid. The administrator, however, may choose between compliance with the obligation to pay compensation and waiver of the covenant not to compete. Should the administrator waive compliance, the employee is free to compete. The employee may then claim damages for compensation not received.
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5.6 Enforceability of foreign non-compete clauses Non-compete covenants under foreign law are valid and enforceable in Germany pursuant to the applicable provisions of conflict law. Until 17 December 2009 the relevant provision to this effect had been Article 27 I 1 of the Introductory Act to the German Civil Code (‘EGBGB’). This has now been replaced by Article 3 I of the Rome I Convention of 17 June 2008.
However, restrictions apply. Mandatory provisions of German law that apply to the subject matter and form part of German public order (‘ordre public’) cannot be overruled (Article 6 of the EGBGB). In this context, a non-compete covenant under US law that prohibits worldwide competition for three years without any compensation would be invalid because it breaches German public order principles. In addition, with respect to mandatory provisions for the protection of employees, a comparison must be made between the law chosen by the parties and the law that would apply based on objective criteria mentioned (i.e. German law, if the employee performed his work in Germany), regardless of the choice of law. As a result, the more favourable provision applies, and while the choice of law does not become invalid, the parties' agreement becomes a mixture of both the chosen law and the law which would apply if no choice of law had been made. Experience shows that German labour law provisions are generally more favourable than many others, so that even where a choice of law has been made, many German provisions will still apply.
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Greece
113 Ius Laboris
1. Introduction 115
2. Conditions 115 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 116 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforcement 117 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 118 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
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1. INTRODUCTION A non-compete clause (i.e. covenant in restraint of competition) is an obligation on employees to refrain from carrying on activities in competition with their employer.
Non-compete clauses are put in employment contracts by employers for many reasons. The main one is to ensure that, should the employee leave the employment, the employer’s trade secrets, confidential customer information, confidential business know-how and other confidential matters with which the employee had contact remain protected and cannot be used by the employee in a way which is detrimental to the employer. Some employers also insert non-compete clauses in employment agreements to deter employees from leaving to go and work for the employer’s competitors.
2. CONDITIONS
2.1 General Under Greek law, a non-compete obligation is permissible as long as it is not contrary to Article 179, Section a, of the Civil Code, i.e. it does not excessively constrain the person’s freedom. The parties may freely agree on a prohibition of competition for the time the employment agreement is in force and they may limit it, add specifications or expand it as long as the constraint can be justified in light of the object of the agreement, its duration, the financial activities that the employee is permitted to exercise and the degree to which the interests of the party benefitting from the limitation should be legitimately protected.
The obligation to abstain from competitive actions may be supported by the principle of good faith (Article 288 of the Civil Code) or by the rules contained in Articles 173 and 200 of the Civil Code, even if those obligations have not been explicitly agreed upon. Breach of the principle of proportionality set out in Article 179 of the Civil Code will mean that a non- compete clause is unjustifiable and abusive and therefore void. However, the invalidity of such a clause will not affect the remaining clauses of the employment agreement, which stay intact.
2.2 Age There are no specific provisions under Greek legislation in relation to the age an employee must be to enter into an agreement containing a non-compete clause. However, generally speaking a contract of employment with a minor (i.e. a person under 18), which includes restrictive covenants, is not enforceable unless it is for the benefit of the employee.
2.3 Written form A non-compete clause must be agreed in writing. If this condition is not met, the non-compete clause will be invalid and unenforceable. The aim of this formal condition is to protect both parties – although it favours the employee – against any disputes about mutual rights that could arise in future if the clause was made by oral agreement.
2.4 Renewal In cases of extension and/or renewal of an employment contract or an important change to the job of the employee within the organisation, it is advisable to make sure that the non-compete clause contained in the previous contract remains applicable.
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2.5 Liability for compensation on dismissal A non-compete clause remains valid notwithstanding the reasons for termination of the contract and their fairness or otherwise. Therefore, under Greek law a non-compete clause should remain in force whether the employee resigns, is dismissed, or the employment relationship ends by mutual agreement.
3. REQUIREMENTS
3.1 General The contractual commitment of the employee to abstain from competitive actions after the employment has ended is valid and binding on the employee, if it does not breach the principle of freedom to practice one’s occupation. This depends on the circumstances of the case, such as the duration of the obligations, the geographical scope of the clause and the type of activity prohibited.
By contrast, a contractual term is not valid, if it does not protect a professional interest of the employer, if it results in an inordinate restriction of the occupational freedom of the employee and if the employer has not agreed to pay reasonable compensation. Thus, a necessary precondition for the validity of a contractual commitment of this kind is the agreement of an amount to be paid by the employer in return. Without such an agreement the clause would violate the occupational freedom of the employee.
The amount of compensation will depend on the duration and geographical scope of the restraint, as well as the actions and activities that are subject to it. However, under Greek Law there are no provisions concerning the geographical scope of non-compete covenants, other than certain regulations relating to specific professionals, such as athletes, professional soccer players and trade commissioners. It is up to the courts to decide, whether a covenant which limits an employee geographically is contrary to the occupational freedom of the employee. As far as the amount and means of payment of compensation are concerned, there is nothing specified in law.
3.2 Geographical, functional and temporal limitations In order to ensure the validity of a non-compete clause, certain conditions must be met, as follows:
• The limitation must not exceed one year. • The geographical area may (by case law) extend to the 'spread of the town' but must not go beyond this. If an employer operates within a particular area of the market the courts may refuse to enforce a non-compete clause that extends beyond this. • The activities to be prohibited must be balanced against the employer's occupational interests. Courts recognise that employers have a legitimate interest in protecting the time, investment, and other resources they have invested in employees, but that interest must be balanced against an employee's job mobility in a free market system. The courts will generally scrutinise non-compete agreements carefully to make sure that they are geared to protect the reasonable business interests of an employer without unduly limiting an employee's other job opportunities. Therefore, these arrangements must usually be tailored
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narrowly to restrict truly competitive activities without preventing an employee from working in the same industry or profession in a way that is not competitive.
3.3 Job changes An employee’s contract may require amendment in the event that he moves from one position to another within the same organisation, for example, where an employee is promoted to a more senior role. In such a scenario, the employee may be provided with a new contract of employment, in which case the new restrictive covenant may need to be amended or made more extensive to reflect the fact that the employee now occupies a more senior role.
4. ENFORCEMENT
4.1 General If there is any dispute between the employer and the employee about the validity and scope of a non-compete clause, enforcement will be handled by the tribunals. Greek case law tries to strike a balance between freedom to contract, on the one hand, and the freedom to work, on the other. The legitimate interests of the employer not to suffer harm as a result of its former employee’s competing activities must be weighed against the necessity for the employee to find new work using his or her qualifications, expertise and skills. However, the judge may reduce the scope of a covenant in terms of duration, territory covered or in other respects, even where the existing prohibitions were vital for the protection of the legitimate interests of the employer if they served to prevent the employee from getting a job using his or her training and experience. As there is no issue of general public interest, only the employee is authorised to bring a claim that a non-compete clause is invalid.
4.2 Balance of interests The balance of interests test that courts generally apply depends on the circumstances of the case, such as the duration of the obligations, the geographical scope and the type of activity prohibited. Specifically, the contractual term will not be valid if it does not reflect a professional interest of the employer; if it results in an inordinate restriction of the occupational freedom of the employee; and if it no reasonable provision has been made for the payment of compensation by the employer in exchange. Thus, a necessary precondition for the validity of such a contractual commitment is the agreement of an amount to be paid by the employer in return. Without this, the term would violate the occupational freedom of the employee. The amount of compensation will depend on the term of the agreement and its geographical scope, as well as on the actions and activities that are subject to it. However, under Greek Law there are no provisions about the geographical scope of non-compete covenants, apart from some regulations concerning specific professions, such as athletes, professional soccer players and trade commissioners. It is up to the courts to decide whether such covenants over-restrict the occupational freedom of the employee. As far as the amount and means of payment of compensation are concerned, there are no specifications in law.
4.3 Remedies Employee After termination of the employment contract, the employee may file for a petition to claim the agreed compensation included in the non-compete clause.
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Employer If the employee breaches an obligation to abstain from competitive activity after the agreement has terminated, the employer may, according to Article 374 of the Civil Code, refuse to make any outstanding payments. Moreover, the employer may request compensation for failure to perform the agreement and, if a penalty clause has been agreed, may demand payment under that clause (Article 406 of the Civil Code). The employer may file an interim measures petition requesting the court to order the employee not to compete.
4.4 Penalty clauses In order to safeguard adherence to a non-compete clause, a penalty clause can be included in the employment contract. Just as the court may rule the scope of a non-compete clause excessive, it may also hold that a penalty is excessive and decrease it to a more reasonable amount. If the clause stipulates a contractual penalty, the employee may relieve him- or herself of liability by paying the penalty.
4.5 Damages In cases of breach of a non-compete clause by the employee, he or she will be liable to compensate any loss incurred by the employer as a result of the breach. The court will evaluate the scope of the non-compete clause, taking into consideration the limitations to its scope. If the non-compete clause is found to be valid and applicable, the court will rule on the employee’s liability to compensate for the employer’s loss.
4.6 Liability of new employer Generally, a new employer is not liable for damages merely because it employed an individual previously engaged by a competitor.
5. SPECIAL SITUATIONS
5.1 No clause If the employment contract does not include a non-compete clause, the employee is in principle free to enter into an employment contract with a direct competitor or start his or her own competing business. It goes without saying that the employee will continue to be bound to his or her duty of fidelity (which includes a confidentiality duty) even after termination of the employment relationship to the extent required to protect the employer’s legitimate interests.
According to the general duty of fidelity, the employee must not inform third parties of any facts that should not be disclosed (e.g. trade or/and business secrets). To defend its interests, the former employer may claim compensation for harm caused by the disclosure of trade secrets. In addition to compensation for harm, the employer may seek an injunction to prevent the employee from disclosing any further secrets.
5.2 Transfers of undertakings All rights and obligations of the transferor in relation the employment contract or employment relationship are automatically transferred to the transferee upon transfer. The transferee will then take on all rights and obligations of the transferor toward every employee.
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5.3 Cross-border competition A non-compete clause should be reasonably limited geographically. A clause with international scope can be considered as an inordinate restriction of the occupational freedom of the employee. Whether or not the employer will be able to enforce this will depend on the circumstances, in particular the markets in which the employer is active and its interest in enforcing the non-compete clause. Ultimately, the courts would determine whether the non- compete clause represents an unreasonable impairment of the employee’s economic interests.
5.4 Non-solicitation clauses The employment contract may provide a non-solicitation clause pursuant to which the employee is prohibited from contacting or working for clients of the employer for a certain period after termination of the employment.
A non-solicitation clause usually affects the employee’s economic freedom to the same extent as a non-compete clause.
5.5 Insolvency In the case of insolvency, employment contracts automatically terminate upon publication of the relevant court decision regarding special liquidation, without any need for prior notice. However, the employer is obliged to indemnify the employees and consequently, insolvency has no impact upon the validity and enforceability of a non-compete clause.
5.6 Enforceability of foreign non-compete clauses The law that applies to a contract is determined in accordance with the Rome Convention. A contract will normally be governed by the law stated within it. However, under Article 6, regardless of the chosen governing law, an employee may still rely on the protection of the ‘mandatory rules’ of the law of the country in which he habitually carries out his work or the country in which the business is situated. Such ‘mandatory rules’ apply regardless of choice, for example, this could include statutory laws protecting health and safety or those affording minimum employment protection rights.
For employees habitually working in Greece, restrictive covenants can be expected to be enforced according to Greek law and disputes about them heard in Greek courts. Where an employee works regularly in various countries, this may present some additional problems. The judge will investigate which law applies on a case by case basis in accordance with the relevant principles.
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Hungary
121 Ius Laboris
1. Introduction 123
2. Conditions 123 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 125 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 126 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 128 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
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1. INTRODUCTION As a general rule, Hungarian labour law allows the employer and employee to agree on restrictive covenants for the period after termination of employment. Restrictive covenants can contain varying degrees of restriction. Besides preventing an employee from working for a competitor, restrictive covenants may prohibit solicitation of clients or employees of the employer.
In Hungary, restrictive covenants are mainly agreed with executive employees or those in key positions, where the employer is willing to pay compensation to keep the employee out of work in order to protect the employer’s legitimate business interests.
The law sets out the general conditions that must be satisfied for clauses to be enforceable. Even if the conditions are met, however, the courts will review the clauses, and the facts of each case are very important in determining whether a clause is valid. At the time of writing, there is no substantial case law in Hungary on the validity and interpretation of restrictive covenants.
2. CONDITIONS
2.1 General Hungarian labour law differentiates between non-compete restrictions during the term of employment and post-termination.
During employment the employee must refrain from any conduct that would affect the economic interests of the employer, unless this conduct is authorised by the employer.
Non-executive employees are not prohibited by law from entering into further employment, however, these employees must inform the employer. The employer may prohibit further employment if it affects its economic interests.
For executives the law is more stringent. According to Hungarian labour law an executive: • must not start another employment relationship • must not acquire interests in a business association engaged in the same or similar activities or that is in a regular business relationship with the employer (i.e. except in the acquisition of stocks in a public limited company) • must not conclude any contract within the scope of the employer's activities in his or her own name or interest and • must disclose if a close relative becomes a member, or establishes a relationship of personal involvement, as an executive of an organisation engaged in the same or a similar business activity as the employer, or which has regular business contact with it.
Shareholders of the employer may release executive employee from some or all of these restrictions.
Hungarian law does not permit implied restrictive covenants. Restrictive covenants after termination of employment must be explicitly agreed by the parties either within the employment contract or in a separate agreement.
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Usually, restrictive covenants are agreed at the start of employment. However, an agreement can be made later, prior to termination of employment (e.g. within the mutual termination agreement).
Several requirements (e.g. limitation in time, scope or geographical location and appropriate compensation) must be met for a restrictive covenant to be legally valid and enforceable under Hungarian law.
2.2 Age There is no statutory age limit for an employee to sign a non-compete agreement. However, by definition an ‘employee’ must be someone who is at least 16 years old, with some exceptions. There is no case law on this issue. However, considering the purpose of a restrictive covenant, non-compete clauses for underage employees (i.e. under 18 years) and for young adults who have just recently entered the workforce would likely be deemed as unreasonable and unenforceable by courts.
Further, a restrictive covenant might be unreasonable for an employee who is close to pensionable age. However, each case should be considered individually.
2.3 Written form An agreement to a non-compete clause could be valid if made orally. However, employers should define the detail of the non-compete obligation in writing either as part of the employment contract or in a separate agreement.
2.4 Renewal Non-compete clauses are typically entered into at the start of employment. Circumstances may arise which require the clause to be amended, for example, in terms of limitation in time or geographical area. In these cases the restrictive covenant may be amended provided that both parties agree and compensation is paid for any additional restriction. However, the non- compete clause must not be renewed beyond the legal time limit.
2.5 Liability for compensation on dismissal As a general rule, termination of employment, either by the employer or by the employee, has no effect on previously agreed restrictive covenants, which continue to be effective post- termination.
However, if an employee terminates the employment with immediate effect, he or she may revoke the non-compete agreement. In this case neither the employee nor the employer need pay compensation and the non-compete clause becomes unenforceable.
If the parties terminate the employment contract by mutual agreement, they must agree on whether the non-compete clause will survive the termination. If the mutual termination agreement is silent on the non-compete clause, it must be deemed as remaining valid and enforceable. The employer must pay compensation for the duration of the non-compete obligation.
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Further, the parties may agree that the employer may waive the restrictive covenant at any time prior to termination of employment. In this case the employee is not entitled to compensation and may freely start an employment relationship even with a competitor of the employer.
3. REQUIREMENTS
3.1 General According to Hungarian labour law, the employer and employee may agree, for a maximum of two years after termination of employment, that the employee will not engage in any conduct which would jeopardise or affect the employer’s legitimate business interests.
Hungarian labour law does not detail what the scope of a restrictive covenant may be. A restrictive covenant may be a non-compete obligation, non-solicitation of clients and employees or a combination.
Hungarian courts have held that a restrictive covenant must afford no more than adequate protection to the employer. It must only restrict activities as far as necessary for business interests to be protected. Therefore, clear, precise drafting of any clause is crucial in order to prevent a court from declaring it void.
In the non-compete agreement the parties should clearly state the activities that are prohibited and the geographical area. The restriction must not be unreasonable or too broad as this could lead to the courts declaring the restrictive covenant unenforceable.
According Hungarian labour law, the employer must pay appropriate compensation in exchange for the non-compete obligation. The amount of compensation must not be less than a third of the employee’s gross base salary, payable for each month of the non-compete obligation. The stricter the non-compete obligation, the greater the compensation must be. The industry norm is around 50% of the gross base salary.
In determining the amount of appropriate compensation, the extent to which the non-compete agreement prevents the employee from getting a new job must be considered. The employee’s qualifications and experience should also be taken into account.
Compensation may be paid prior to the start of the non-compete period in monthly instalments with the salary. In this case, compensation must be regarded as employment income and must be taxed in the same way as salary. However, the employer should not pay the compensation in advance as it may wish to waive the non-compete obligation before termination of employment and the employee would have to repay any compensation received.
Further, the employer should not pay compensation in a lump sum upon termination of employment, but in monthly instalments during the period of the restrictive covenant. If compensation is paid post-termination, it must be regarded as other income (i.e. not employment income) and must be taxed accordingly.
The employer must withhold and pay all taxes and social security contributions in relation to the compensation.
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3.2 Geographical, functional and temporal limitations Hungarian labour law requires only a temporal limitation of the non-compete obligation. However, when determining whether a restrictive covenant is valid and enforceable, the Hungarian courts also consider whether the restriction was reasonable not just in time, but also from a geographical and functional perspective.
An employer may wish to restrict the geographical area in which an employee is able to work. Generally, the broader the area, the less likely a clause is to be found to be reasonable and enforced by the courts. However, the context is always important.
The restrictive covenant should expressly stipulate the kind of work or activities that are forbidden for the employee.
For a restrictive covenant to be valid, the employee must have contact with the client, supplier or employees over which restriction is to be exercised. An employer can more easily justify a restrictive clause against an employee upon whom suppliers and clients were reliant. It is a question of degree. More onerous restrictions may be reasonable for a senior-level employee with a significant amount of in-depth, recent contact with the client or supplier, than would be reasonable for a more junior employee.
The employer should provide the employee with a list of competitors for which the employee must not work and a list of clients whom the employee must not solicit during the term of the restrictive covenant.
A restrictive covenant must be reasonable in terms of time. The longer the period of time a clause covers, the more difficult to justify. For non-executive employees the legal time limit (i.e. two years post termination) must not be extended by the parties. For executive employees, the parties may deviate from the legal provisions and agree on a restrictive covenant longer than two years. However, if there is a legal dispute the employer must prove that the longer non- compete period was reasonable to adequately protect its business interests.
3.3 Job changes Job changes do not automatically affect the terms of a previously agreed restrictive covenant. If the employee is promoted and the employer wishes to increase the restrictions, the restrictive covenant must be rewritten, which requires the mutual agreement of the parties. In practice, the employer should make the promotion conditional upon signing a new contract.
4. ENFORCEABILITY
4.1 General If the parties have agreed on a restrictive covenant for a period within the legal time limit and the employee receives the minimum amount of compensation stipulated by law, the restrictive covenant is usually enforceable, unless the employee challenges it in court. He or she may do this by arguing that the scope of the restrictive covenant is too broad, ambiguous, or the compensation not appropriate considering the restrictions imposed.
The general rule is that businesses should not be protected from competition unless necessary to protect legitimate business interests. There is no legal definition of what constitutes
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legitimate business interests of an employer. The courts usually accept trade connections (i.e. a client or supplier base), goodwill, stability of the workforce and trade secrets or confidential information as business interests worthy of protection.
4.2 Balance of interests Enforceability of a restrictive covenant depends on the reasonableness of the clause. The restriction cannot be so wide that it limits the livelihood of the employee in an unfair or excessive way. However, the legitimate business interests of the employer must be taken into consideration. Each case is different and it is possible for identically drafted clauses to be void in one situation, yet enforceable in another.
The point at which the contract is entered into is used when assessing the reasonableness of a clause. Reasonableness is determined based on the geographical, functional and temporal limitations. The court considers which party is more likely to be damaged if the restrictive covenant is upheld. This approach tends to favour employers that argue if the employee is not restrained the potential loss to the employer is difficult to measure and the employee will not be in a financial position to compensate the employer for the financial loss. However, the employer must pay the employee appropriate compensation.
4.3 Remedies The employee may challenge the restrictive covenant in court if the scope of restriction is unreasonable or the compensation inappropriate. Depending on the employee’s request, the court may: • Strike down the entire clause, if it is unreasonable, too broad and cannot be interpreted in a way that reflects the true contractual will of the parties. The court must not rewrite a restrictive covenant as this would go against the contractual freedom of the parties. • Provide interpretation, if some elements of the clause are ambiguous and not formulated clearly, provided that the clause would otherwise be valid. • Increase the amount of compensation, if it is not appropriate to the scope of restriction. • Award damages.
If the employee breaches the restrictive covenant, the employer may: • seek an injunction from the court to prevent the employee from committing further breaches • request repayment of compensation already paid to the employee • claim liquidated damages • claim damages.
Injunctions may be granted on an interim or final basis. However, because of the urgent nature of the situation, interim injunctions will often be of greater use. To obtain an interim injunction the following criteria must be fulfilled: • There must be a serious issue to be tried. • The balance of convenience must favour granting the order. Relevant factors include whether damages alone would be a sufficient remedy, whether the employer will compensate the employee, the likelihood the final hearing would conclude that an interim
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injunction should not have been granted and whether more harm than good will be done by granting the injunction.
Injunctions are rare in practice, as the employer usually learns of a breach afterwards, when it has already been committed by the employee.
4.4 Penalty clauses It is common for the parties to agree that if the employee breaches the restrictive covenant, he or she must pay liquidated damages to the employer. Liquidated damages release the employer from the burden of proving actual damages, the employer need only establish that a breach has occurred, triggering the employee’s obligation to pay the liquidated amount.
Liquidated damages are a fixed amount, usually based on the employee’s base salary and equal to or exceeding the compensation paid to the employee for the non-compete obligation. The employee may ask the court to decrease the amount of liquidated damages, if the amount is excessive.
4.5 Damages In addition to claiming back the compensation already paid to the employee, the employer may bring a claim against the employee for damages. However, the burden of proof is on the employer. It employer must present evidence of the damage (i.e. including the actual amount of the damage) and causation (i.e. the link between the damage and the breach committed by the employee). The amount paid by the employee as liquidated damages will be set-off against any damages awarded by the court.
Besides requesting the restrictive covenant be declared void, the employee may also claim damages if the restrictive covenant was unreasonable and limited the livelihood of the employee in an unfair or over-excessive way. In this case, the employee must provide evidence of the actual damage incurred.
4.6 Liability of new employer If the employee starts employment in breach of a non-compete clause, the new employer must not be held liable for the breach, even if it had knowledge of the breach. However, if the new employer actively encourages the breach or uses the employee to obtain business secrets from the former employer, the new employer could be held liable under Hungarian competition law.
5. SPECIAL SITUATIONS
5.1 No clause Under Hungarian law, restrictive covenants must be expressly agreed. If there is no such clause, the employee may act completely freely after the termination of employment provided that he or she does not misuse confidential information obtained during prior employment.
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5.2 Transfers of undertakings If an employee’s contract is transferred, the restrictive covenants agreed with the former employer remain enforceable in the same way as any other contractual provision (i.e. subject to requirements of reasonableness).
5.3 Cross-border competition In principle, the parties may agree that the restrictive covenant applies not only to Hungary but outside as well. However, such a broad restraint may be difficult to justify. The geographical scope of the activity of the employer must be taken into consideration. If the employer’s activity outside of Hungary is marginal, a restrictive covenant applied to cross-border activities may not be reasonable and may be declared unenforceable by the courts.
5.4 Non-solicitation clauses It is common for restrictive covenants to include not only non-compete, but also non- solicitation clauses.
There is no automatic (i.e. legal) ban on approaching other employees to encourage termination of employment relationships with the employer. Only actively encouraging employees or other individuals working under civil law contracts to under-perform or improperly perform duties for the employer is deemed to be an act of unfair competition and is forbidden under Hungarian law. Therefore, if the employer wishes to prevent a former employee from contacting or encouraging other employees to take up employment with another organisation, the restrictive covenant must include a non-solicitation clause. Usually compensation paid for the non-compete clause also covers the non-solicitation clause.
5.5 Insolvency When an employer becomes insolvent and winds up trading completely, no clause will remain enforceable. The organisation’s legal identity will cease to exist. Therefore, there is no body to bring a claim against a former employee breaching the restrictive covenant.
However, if the company is not liquidated, but an administrator or receiver appointed temporarily due to insolvency, the clause still binds a former employee. The employer retains its legal identity and could bring a claim against the former employee for breach.
5.6 Enforceability of foreign non-compete clauses To enforce a foreign non-compete clause in Hungary, a declaration is required from the foreign court with jurisdiction over legal disputes over the non-compete clause. The foreign court must issue a decree that the non-compete clause is valid and enforceable under the applicable foreign law.
According to EU law the Hungarian courts will enforce the decrees of courts of other EU member states without further action required. The Hungarian courts must not review the substance of a foreign declaration and only the formalities of the application will be reviewed.
However, according to EU law, a declaration will not be recognised if: • such recognition is manifestly contrary to public policy in the EU country in which recognition is sought
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• the defendant was not served with the document that instituted the proceedings in sufficient time and in such a way as to enable the defendant to arrange a defence • it is irreconcilable with a judgment given in a dispute between the same parties in the EU country where recognition is sought • it is irreconcilable with an earlier judgment given in another (EU or non-EU) country involving the same cause of action and the same parties.
Therefore, in some situations Hungarian courts may refuse to enforce foreign non-compete clauses, but this is decided in the circumstances of each case.
If the foreign court is located outside of the EU, the Hungarian courts will only enforce the declaration if there is a bilateral agreement in place between Hungary and the country where the foreign court is located.
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India
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1. Introduction 133
2. Conditions 133 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 135 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 137 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 139 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
132 Non- Compete Covenants - India
1. INTRODUCTION A non-compete clause in the context of an employment contract refers to a clause restricting an employee from professionally associating or performing activities in competition with his or her employer for an agreed period of time. A non-compete clause may seek to restrict an employee during the subsistence of an employment contract and/or also beyond its termination.
India, for a long time followed the principle of ‘restraint of trade’ as was understood under English common law, which provides that a person is entitled to exercise any lawful trade as and where he or she wishes. The common law has always been intolerant towards any interference with lawful trade, even at the risk of curbing freedom of contract, as this was regarded to be against public policy. Later, it became the rule that a restraint, partial or general, may be acceptable if it was reasonable and if it could be shown to be reasonably necessary for the purpose of freedom of trade.
Currently in India, agreements in ‘restraint of trade’ are governed by Section 27 of the Indian Contract Act 1872. Generally speaking, the validity and enforceability of a non-compete clause usually depends on whether or not the clause amounts to a restraint of trade. A contract in restraint of trade is one by which a person’s future liberty to carry on his or her trade, business or profession in such manner and with such persons as he chooses is restricted. A contract of this kind is prima facie void, but may become binding if it falls within the statutory exceptions provided in the Indian Contract Act. The exceptions primarily relate to commercial contracts. As far as non-compete clauses in an employment contract are concerned, their enforceability depends on how long the employee is being restricted for and whether during the term of employment or after termination.
2. CONDITIONS
2.1 General In India, the concept of a ‘non-compete’ clause, with respect to employment matters has not been dealt with specifically in any statute. However, the Constitution of India and the Indian Contract Act are relevant.
Article 19(1)(g) of the Constitution of India provides that all citizens of India have the right to practice any profession, or to carry on any occupation, trade or business. The Constitution, however, also allows the legislature to provide for ‘reasonable restrictions’ with regard to this freedom.
Section 27 of the Indian Contract Act restricts an individual’s freedom to contract where such a contract amounts to a ‘restraint of trade’. The provision is as follows: ‘Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.’ However, there are certain exceptions: someone who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, provided that the restrictions appear to the court to be reasonable, based on the nature of the business.
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The courts in India have distinguished between cases where a non-compete clause is to operate during the period of the contract and where it is to operate after the employment contract has terminated.
Restrictive covenants operating during the contract of employment are generally not regarded as restraint of trade and therefore do not fall under Section 27 of the Indian Contract Act. Thus, when a contract only ties the employee during the period of the contract and the restrictions are incidental to the agreement and within normal bounds, although the employee may be restricted from all dealings with third parties, there is no restraint of trade.
If, however, a clause in an employment contract restricts an employee in any way from seeking employment or practicing any lawful profession after termination, it is regarded as a restraint of trade and is prima facie void.
Indian courts have repeatedly struck down non-compete clauses in employment contracts which restrict the ability of an employee to seek employment in competition with the employer after termination of the employment contract. Not only have the Indian courts struck down non-compete clauses which completely restrain an employee after termination of employment they have also struck down any arguments as to reasonableness and the principle of partial restraint with respect to post-employment non-compete clauses.
Therefore, all restrictions which operate after the term of the contract are void except in cases of the sale of goodwill, where protection may be given to the buyer.
Note that although post-employment restrictive covenants are considered to be prima facie void, one void clause in an agreement does not automatically render the entire agreement void and unenforceable. The remaining valid clauses may continue to be enforced.
Therefore, even though such restrictive covenants do not operate after termination and have been held to be void by the courts, it is still common practice to include them in an employment agreement to serve as a deterrent.
2.2 Age As per the provisions of the Indian Contract Act, parties should have attained the age of majority (i.e. 18 years) to enter into a valid contract. Any contract entered into with a minor would be deemed void.
A restrictive covenant in an employment contract which operates after termination of the contract is void and cannot be enforced, whether or not the employee was 18 years or above. However, where an employee is 18 years of age or above, a restrictive covenant in the employment contract would be enforceable against him or her during the existence of the employment contract.
2.3 Written form Apart from a few State-specific labour and employment statutes, the law does not require an employment contract to be in writing. Generally in India, employment contracts bar employees from undertaking any other gainful activity during employment, except with the prior permission of the employer. However, although a restrictive covenant that limits an employee’s
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freedom of employment after termination is void, such a clause is often included in the employment contract for its deterrent value. In such cases it is advisable to ensure the employee is fully aware of the restriction by recording it in writing.
2.4 Renewal In cases where an employee’s employment contract has been extended or renewed, or pursuant to a promotion or change in designation, the nature of duties warrants more stringent non-compete obligations, it is advisable to ensure that the employee is made fully aware of the non-compete provisions. These should be recorded in writing and signed by both parties. Further, non-compete covenants should be drafted in such a way that after termination of the employment contract, they are separable and do not affect the validity of the other terms of the contract.
2.5 Liability for compensation on dismissal A non-compete clause in an employment agreement prohibiting an individual from seeking employment after the termination of the agreement is void. Hence, wrongful dismissal of an employee by an employer would not have any effect on the enforceability of a negative covenant that operates after dismissal.
3. REQUIREMENTS
3.1 General Since restrictive covenants that operate after termination of an employment contract are prima facie void, the laws of India do not provide any formal requirements in this regard. A non- compete clause, in whatever form, which restricts the ability of an employee in any way to take up any employment or profession after termination of employment contract would be void.
However, it is a common practice to include non-compete clauses in employment contracts, which operate both during and after termination of the employment contract, for their deterrent value. Thus, care must be taken that the non-compete clause is not regarded as onerous for the employee.
While an employer is not entitled to protect itself against competition per se on the part of an employee after the employment has ended, it is entitled to protect its proprietary interest, namely its trade secrets, confidential information, intellectual property, etc. Consequently, over the years the Indian courts have held restrctive covenants relating ‘non-disclosure of privileged information’ to be valid.
Where a non-compete agreement provides that an employee must not disclose or make use of confidential information of the employer during or after the employment except during consultation with representatives of the organisation, this does not amount to restraint of trade. The effect of it is not to restrain the employee from working within the meaning of section 27 of the Indian Contract Act but only to protect the proprietary information of the employer. An employee may be liable to pay damages and/or face criminal prosecution for breach.
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However, an employee cannot be restrained from seeking employment with a competitor on the pretext that he is privy to certain trade secrets. This situation was dealt with in the case of American Express Bank Ltd. v Ms. Priya Puri (2006) III LLJ 540 Del. The Delhi High Court held that the right of an employee to seek and search for better employment cannot be curbed by an injunction on the grounds that the employee is privy to confidential data of the employer.
The courts in India recognise that anyone in employment for a period of time would become aware of certain facts and information without making any special effort. These cannot be considered as ‘trade secrets or confidential information’. In addition, with regard to a particular skill or expertise that the employee may have acquired during the course of employment, the courts have recognised that this involves a long process in the career of an individual, and no employer can have any proprietary right or interest over it.
Therefore, depending on the facts, an employee may be restrained from disclosing confidential and proprietary information of an employer during and after the term of employment, the consequence of which may be a restraint on the ability of an employee to take up employment or practice a profession in competition with the employer after termination of the contract.
A restraint on an employee prohibiting him or her from working for any other person during the subsistence of employment is valid under Indian law. The courts in India have repeatedly held that an employment contract in which an employee agrees to serve the employer exclusively for the term of the agreement is binding and enforceable.
3.2 Geographical, functional and temporal limitations Where a restrictive covenant in an employment contract restricts an employee from taking up certain employment after termination of the employment contract, the geographical and functional limitations set out in the covenant are irrelevant because the employer is only entitled to protect its proprietary interest, namely trade secrets, confidential information, intellectual property, etc. and cannot restrict an employee from working with anyone after termination of the contract. By contrast, during the existence of an employment contract, an employee can be restricted from working for any other person in any part of the world without any functional limitations.
Restrictive covenants should be carefully drafted because of the inequality in bargaining power between the parties, which inclines the courts towards non-enforcement. In this regard, the courts have observed that generally no bargaining actually occurs at the time when the agreement is made, as employees are presented with a standard form of contract, to accept or reject, and they usually give little thought to the restriction because they want the job .
In Jet Airways Ltd. v Mr. Jan Peter Ravi Karnik 2000(4) BomCR487, Jet Airways sought to enforce a non-compete clause that prevented one of its pilots from quitting and going to work for a competitor for a period of seven years from when he originally commenced his employment. In concluding that the covenant did not protect a proprietary interest, the Bombay High Court held that an injunction can only be granted to protect the proprietary interest of the plaintiffs. This was not the case here and the court felt that to grant an injunction would be against public policy.
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The Supreme Court of India has also observed that such a situation would create conditions of ‘bonded labour’. The freedom to change employment is a vital and important right of an employee which cannot be restricted or curtailed on the grounds that the employee is privy to confidential information.
3.3 Job changes Where an employee’s role warrants a non-compete clause, this should be recorded in writing and signed by both parties.
However, the stance of Indian courts with regard to non-compete clauses which seek to operate after termination of the employment contract is that they are prima facie void.
4. ENFORCEABILITY
4.1 General Indian courts generally do not look favourably upon restrictive covenants that operate after termination of an employment contract and have repeatedly refused to enforce them. However, depending on the facts of the case, an employer may succeed in obtaining an injunction restraining an employee from disclosing confidential information, plus damages.
By contrast, a restrictive covenant preventing an employee from working for any other employer during the term of employment has been held as valid and not contrary to Section 27 of the Indian Contract Act 1872.
4.2 Balance of interests An employer cannot restrict an employee from seeking employment with competitors after termination of the employment contract, under any circumstances. An employer would only be able to protect its proprietary interests, namely trade secrets, confidential information, intellectual property, etc. In such cases, the courts may enforce restrictive covenants which prevent employees from disclosing confidential information to competitors and soliciting clients of the employer.
4.3 Remedies The remedy for enforcement of a restrictive covenant is to seek an injunction from the courts. Generally speaking, an injunction is usually granted in cases where the harm arising from the breach cannot be reasonably quantified in terms of financial compensation or where this would not be adequate.
In India, Section 42 of the Specific Relief Act 1963 governs the power of the courts to grant injunctions in cases of restrictive covenants. It provides that the court has the power to grant an injunction to perform a restrictive agreement, as long as the plaintiff has not failed to perform the contract so far as it is binding on it.
The Supreme Court of India has, however, observed that the court is not bound to grant an injunction in every case and an injunction to enforce a restrictive covenant would be refused if it would indirectly compel the employee either to idleness or to serve only one employer. However, where it can be proved that the employee may breach a covenant restricting him or
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her from disclosing confidential information (not general in nature) and trade secrets, the court may issue an injunction to enforce it.
An interlocutory injunction may be granted to mitigate the risk of injustice to the employer whilst a breach of the restrictive covenant can be resolved. The employer's need will be weighed against the need of the employee to be protected against harm, where he or she is prevented from exercising legal rights. The court weighs one need against another and determines where the 'balance of convenience' lies.
The grant of an interlocutory injunction is at the discretion of the court. In exercising this discretion the court applies the following tests: • whether the plaintiff has a prima facie case • whether the balance of convenience lies in favour of the plaintiff • whether the plaintiff would suffer any irreparable injury if the claim for an interlocutory injunction is refused.
Employee An employee can be restricted from seeking employment with any competitor only during the employment contract and not after termination. However, after termination of the employment contract an employee may be restricted from disclosing confidential and proprietary information of the employer to competitors. Where an employee breaches such provisions, he or she may be liable to pay damages to the employer.
Employer Where an employee breaches a restrictive covenant regarding confidentiality or solicitation, an employer may bring an action for an injunction and damages. The court can only award compensation for harm which arises naturally in the normal course of events, and harm which the parties knew at the time of making the contract was likely to result from breach. Damages cannot be awarded for any remote or indirect loss or circumstances. Hence, the employer would have to prove any loss is a direct consequence of breach by the employee which the parties knew at the time of making the contract, was likely to arise.
4.4 Penalty clauses A restrictive covenant which operates after termination of an employment contract is void and therefore a penalty clause for breach is unenforceable. However, a penalty clause may be incorporated in the employment contract to act as a deterrent.
A penalty clause which relates to breach of a confidentiality or non-solicitation clause may be enforceable. However, the courts can only award damages for loss which is a direct consequence of a breach and which the parties knew was likely to arise in the event of a breach, at the time of making the contract. If the parties to the employment contract had agreed on liquidated damages, the non-breaching party will only be entitled to reasonable damages, not exceeding the agreed amount.
4.5 Damages The question of damages with regard to breach of a post-employment restrictive covenant does not arise, as post-employment restraints are void and cannot be enforced. However,
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damages could be claimed by an employer from the employee in the case of disclosure of confidential information, trade secrets and intellectual property.
4.6 Liability of new employer Generally, there is no liability on a new employer where an employee has breached the provisions of his or her previous employment contract except where it can be proved the employer colluded with the employee to breach confidentiality obligations.
5. SPECIAL SITUATIONS
5.1 No clause From a legal perspective, the repercussions of failing to provide a non-compete clause to operate after termination of the employment contract are inconsequential. However, it is common practice in India to include a non-compete clause in the employment contract requiring the employee to serve the employer exclusively during the term of the contract.
Further, clauses, it is essential that non-solicitation and confidentiality clauses are recorded in writing and signed by both parties.
5.2 Transfers of undertakings Generally, in cases of transfers of undertakings, where the employees are transferred to a new employer, the new employer can enforce the employment contract which was entered into between the employee and the previous employer. However, a non-compete clause which operates after termination of an employment contract remains unenforceable.
5.3 Cross-border competition According to Indian law, a non-compete clause is unenforceable if it seeks to operate after termination of the employment contract, irrespective of any geographical limitations and/or the reasonableness of the clause. Hence, whether the geographical limitation in the non-compete clause restricts an employee from seeking employment within India or cross-border, is irrelevant so far as it relates to a non-compete clause that operates after termination. Even non-compete clauses agreed by an employee in a foreign jurisdiction where they are enforceable, are not given effect in India if they are to take effect after termination of employment, as they are regarded as being against public policy.
5.4 Non-solicitation clauses The validity of ‘non-solicitation’ clauses is still a matter of debate as no cogent law has yet been laid down in this regard. However, it is quite common for an employee to be required to sign a non-solicitation agreement at the time of employment, in which the employee agrees that on resignation or termination of the employment contract he or she will not, for a specified period, interfere with the employer’s clients, customers, suppliers and/or employees. Nevertheless, the enforceability of such a clause is uncertain.
In VFS Global Services Private Limited v Mr. Suprit Roy, the High Court of Delhi refused to grant an injunction against the employee with regard to a non-solicitation clause, which restricted the employee from soliciting customers and employees of the previous employer, holding it to
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be in restraint of trade. However, in Desiccant Rotors International Private Limited v Bappaditya Sarkar and Anr, the High Court of Delhi issued an injunction against the employee restraining him from approaching the employer’s suppliers and customers soliciting business in direct competition with the business of the employer.
5.5 Insolvency Insolvency of the employer would not in any way effect the enforceability of non-compete clauses which operate after termination of the employment contract, as they are void. A non- compete clause which operates during the term of employment would remain enforceable as long as the employment contract exists, even if the employer is insolvent.
5.6 Enforceability of foreign non-compete clauses Foreign non-compete clauses, even though valid and enforceable in the jurisdiction where they were entered into, are not enforceable in India, as they are regarded as contrary to public policy.
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Ireland
141 Ius Laboris
1. Introduction 143
2. Conditions 143 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 144 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 145 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 148 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of a foreign non-compete clause
142 Non- Compete Covenants - Ireland
1. INTRODUCTION Restrictive covenants are terms or conditions in a contract of employment which seek to protect an employer’s business interests during and after the termination of an employee’s employment. These clauses seek to restrict employees from competing with their employers or soliciting their employers’ customers and/or suppliers after they leave employment or protect the employer’s proprietary interests in trade secrets, confidential information or customer/supplier information.
2. CONDITIONS
2.1 General Restrictive covenants in Ireland are governed by common law and generally, will only be upheld where it can be shown that the employer has a legitimate interest to protect and that the restrictive covenants are reasonable in terms of subject matter, duration and geographical extent.
2.2 Age There are no specific provisions under Irish legislation in relation to the age an employee must be to enter into an agreement containing a non-compete clause. However, generally speaking a contract of employment with a minor (i.e. a person under the age of 18), which includes restrictive covenants, is not enforceable unless it is for the benefit of the employee.
2.3 Written form Restrictive covenants should be set out in the contract of employment in clear and unambiguous terms and the contract of employment should be signed by the employer and the employee. This will serve to demonstrate that the employee is aware of the existence of the restrictive covenants and agrees to be bound by them. Sometimes restrictive covenants are set out in a separate addendum, side letter or employee handbook and are expressed to form part of the employee’s terms and conditions of employment. Whilst this is not ideal, if it is clear that the employee has accepted the terms, then the restrictions should be enforceable. For example, restrictive covenants included in severance agreements on the termination of an employment relationship are generally enforced by the courts provided they are reasonable.
It should be borne in mind that the absence of a written agreement is not necessarily fatal to the protection of an employer’s interests – the common law implies a duty of fidelity and obligations of loyalty in all contracts of employment for as long as the employment relationship exists and may give protection to an employer in the area of trade secrets/confidential information for a period after the relationship has ended.
2.4 Renewal An employee’s contract of employment may require amendment in the event it is extended or renewed. In Murgitroyd and Company v Purdy (unreported, Clarke J, 1 June 2005) Clarke J held that all of the terms and conditions within the fixed term employment contract, to include the restrictive covenant, continued and remained binding on the employee notwithstanding that there was no formal renewal of the employment contract.
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However, it is preferable to be clear on the position in relation to restrictive covenants which an employer intends would continue to apply to an employee after any extension or renewal of an employment contract.
2.5 Liability for compensation on dismissal An employer who repudiates a contract of employment or is involved in a fundamental breach of one will not normally be able to rely on restrictive covenants which effectively crystallise as a result of the employer’s breach.
The UK case of Cantor Fitzgerald International v Callaghan [1999] IRLR 234, which would be of persuasive authority in Ireland, illustrates this point. In this case the defendants’ contracts of employment contained restrictive covenants aimed at preventing them from working for competitors for a specific period. Loans were made by the company to the staff with an assurance that there would be no tax liability during the period of the loan. As a result of an error by the company the Revenue was misinformed about the nature of the loans and raised a tax charge on the loans. The employees handed in a joint written notice of termination intending to go to work for a competitor. In defending a claim by the company to enforce the restrictive covenants in their contracts, the employees argued that the company could not rely on the restrictions as the company was in repudiatory breach of contract in refusing to pay them the money to meet their tax liabilities on the loans which they had been assured would be tax-free. The Court of Appeal held that the employer was in fundamental breach in refusing to pay the employees sums due and that consequently the entire foundation of the contract of employment was undermined and the restrictive covenants were unenforceable.
3. REQUIREMENTS
3.1 General As mentioned previously, the wording of restrictive covenants must be clear and unambiguous. Where any ambiguity arises, the Courts may elect to interpret the restrictive covenant(s) against the party seeking to rely on it, i.e. the employer.
3.2 Geographical, functional and temporal limitations The restriction must be reasonable in terms of subject matter, duration and geographical extent.
The subject matter of the restriction must relate to the conduct or activity that the employee engaged in while working with the employer. It is unlikely to be upheld if it is drafted in any broader terms.
As regards whether the restriction is reasonable in terms of duration, what the courts will consider as reasonable will vary from case to case depending on the specific facts of each case. The courts usually endeavour to strike a balance between protecting the employer’s business interests and the employee’s right to earn a living. A clause which places a restriction on a departing employee for longer than is necessary for the employer to protect its business interests is unlikely to be upheld. What is actually too long will depend on the facts of each case but it is questionable whether a restriction on trade placed on an employee for longer
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than six months after he ceases to be employed is likely to be upheld unless specific factors relating to the industry or the role made the restriction reasonable in the circumstances.
As regards whether the restriction is reasonable in terms of geography, a restriction is too wide to be enforced if its area is greater than is required to protect the employer’s business interests. In determining what is reasonable in this regard, each case will turn on its own particular facts. For example, in Commercial Plastics Ltd v Vincent [1965] 1 QB 623 it was held that where an employer had a worldwide restrictive covenant, but only operated in the UK, the covenant was geographically too wide and was unenforceable. In contrast, in Murgitroyd and Company v Purdy (referred to previously) it was held that the fact that a clause referred to all of Ireland did not of itself make it unreasonable as, in that case, there were only ten patent lawyers operating in Ireland and they all operated from Dublin. Accordingly, the geographical restriction based on the jurisdiction of the Irish State was not unreasonable having regard to the manner in which the business operated in Ireland. Clearly, therefore, the question of whether the geographical extent is unreasonable will depend on all the facts of the particular case.
3.3 Job changes An employee’s contract may require amendment in the event that he moves from one position to another within the same organisation, for example, where an employee is promoted to a more senior role. In such a scenario, the employee may be provided with a new contract of employment in which event the restrictive covenant clause(s) may need to be amended or made more extensive to reflect the fact that the employee now occupies a more senior role.
The updated restrictive covenant(s) should be drafted clearly and unambiguously and the new contract of employment should be signed by the employer and the employee as usual. If there is no change required to the restrictive covenants then their continued applicability to the employee should be made clear in writing.
In Swift Technological Group Holdings Ltd v Mulcahy [2009] EWHC 1485 (QB) it was held that an agreement which imposed restrictions on an individual who occupied a managerial role during the period of his employment or directorship was clearly intended to apply to managers with an executive role. It was held that the restrictive covenants did not continue to apply to that individual when he took up a new position with the company as a non-executive director.
4. ENFORCEABILITY
4.1 General In determining the reasonableness of a restrictive covenant, the Courts will give consideration to various factors, and they have some discretion to interpret or amend clauses so that they may become enforceable. Employment contracts therefore frequently provide firstly that if any particular provision of a contract is considered to be void that the unenforceable part is to be severed from the other covenants, and secondly the Court is called upon to substitute what it considers to be reasonable in place of the unenforceable part of the clause. The Courts have always had an understandable reluctance to re-write a contract but have tended to allow severance where appropriate. Case law has illustrated however that severance could be effected where:
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• the unenforceable provision is capable of being removed without the necessity of adding to or modifying the wording of what remains • the remaining terms continue to be supported by adequate consideration • the removal of the unenforceable provision does not so change the character of the contract that it becomes ‘not the sort of contract that the parties entered into at all’ • the severance is consistent with the public policy underlying the avoidance of the offending term.
Similarly the Courts have no difficulty in ignoring provisions contained in employment contracts which provide that by signing the document the employee accepts that the restrictions contained in them are reasonable.
4.2 Balance of interests Restrictive covenants will only be upheld where it can be shown that the employer has a legitimate interest to protect. The types of interests which the courts have determined warrant protection are those matters which are so much a part of the employer’s business as to be almost deemed to be the property of the employer, for example, customer lists, specialist knowledge of a product or production process and the goodwill built up by an employer in its business. When drafting restrictive covenants, the employer must isolate and define the interest to be protected and the restrictive covenant clause(s) must go no further than is necessary to protect that interest.
The courts will also consider the employee’s position, including the seniority of the employee, the nature of the work involved, the ability of the employee to find other work, the facts giving rise to the termination and any other relevant circumstances.
4.3 Remedies
Employee An employee who does not adhere to a restrictive covenant in a binding agreement may well be sued by his employer for breach of contract. In addition to such action the employer may apply for an injunction to prohibit a threatened breach or further breaches of the restrictive covenant. The Court will then interpret whether the clause is reasonable and should be upheld. If the clause is considered unenforceable the employee will be free to compete with the employer.
Employer An employer who discovers that his former employee may be about to breach a restrictive covenant may opt to write to the employee and the new employer (if appropriate) directing their attention to the restrictive covenant and calling upon both parties to confirm that they will not breach or induce the employee to breach the covenant, failing which legal proceedings will be instituted.
Where an employer claims damages for breach of a restrictive covenant in an employment contract, the employer will need to show loss or damage resulting from the breach. This will normally be loss of profits on contracts diverted by the former employee. It is generally difficult
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to establish with any degree of certainty that such contracts would have been placed with the employer had it not been for the employee’s breach. Consequently, the assessment of damages in this area is often quite difficult.
It is not uncommon for employers to seek injunctions against former employees to enforce restrictive covenants or to protect confidential information, in which case the employer would need to move quickly as any material delay may defeat an application for an injunction. Applications for mandatory injunctions in employment situations must satisfy the following conditions: • there must be a strong case to answer • damages must not be an adequate remedy and • the ‘balance of convenience’ must lie in favour of granting the injunction.
The applicant will also be required to give an undertaking as to damages. This undertaking is given to the court and means that if the party who obtains the injunction ultimately loses at trial and the trial judge finds that the injunction should not have been granted, then the plaintiff will be liable to compensate the defendant(s) in respect of any loss suffered as a result of the injunction.
In many cases where injunctions are granted, they are granted on an interlocutory basis which means that they are granted pending the full trial of the action. Generally, the Irish courts will only order the specific performance of restrictive covenants seeking to prevent the disclosure of confidential information.
4.4 Penalty clauses Penalty clauses would not be enforced by Irish Courts. However, liquidated damages clauses may be enforced in certain circumstances. Liquidated damages are a fixed or determined sum agreed by the parties to a contract to be payable in the event of default by one of the parties. If the liquidated damages clause does not represent a genuine pre-estimate of the loss that would be caused by the relevant breach at the time the contract was made, it will be deemed to be a penalty clause and will not be upheld by the Irish Courts. The Courts are more inclined to view negatively any imbalance of bargaining power between the parties and accordingly, it is very important that an employer is in a position to stand over any amounts specified as damages in the contract of employment. Employers should exercise caution in this area as it may prove to be very difficult for them to furnish a realistic pre-estimate of the loss, in which case the clause may be deemed to be a penalty clause and will not be enforced by the Irish courts.
4.5 Damages There are no statutory provisions in Irish law providing for the payment of damages by an employer to an employee in consideration of the fact that the former employee is subject to a restrictive covenant.
4.6 Liability of new employer Generally, a new employer is not liable for damages merely because it employed an individual previously engaged by a competitor. However, clearly the situation may well differ where the
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new employer deliberately approached the individual in full knowledge of the fact that he was restricted by a non-compete clause and induced him to breach the clause by joining its service for the benefit of its business and to the detriment of the former employer’s business. In such circumstances the new employer may be joined to proceedings by the former employer against the employee for procurement of the breach of contract.
5. SPECIAL SITUATIONS
5.1 No clause As mentioned previously, the absence of a written contract of employment is not necessarily fatal to the protection of the employer’s interests. The common law provides some protection.
For example, while the employee is still employed by the employer, the common law will imply a duty of fidelity and loyalty in all contracts of employment. However, if the protection required is the prohibition of competition beyond the termination of the employment contract, a specific written covenant must be inserted into the contract of employment.
Another area where the common law provides protection to an employer without an express term in a contract of employment is in the area of trade secrets/confidential information. If an employee breaches his former employer’s proprietary rights in trade secrets/confidential information in the course of competing with his former employer, the former employer may prohibit the unlawful use of such trade secrets/confidential information thereby preventing the damage that might be done by such competition. In this regard, it should be borne in mind that the information which the employer seeks to protect must have the necessary elements of secrecy or confidentiality attaching to it in order to warrant protection under common law.
5.2 Transfers of undertakings The European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003 are clear that the rights of a transferor arising from a contract of employment transfer to the transferee. Therefore it is to be expected that if restrictive covenants are otherwise effective in law, the benefit of those restrictive covenants and contractual obligations must pass to the transferee. The UK case of Morris Angel & Son Ltd v Hollande [1993] IRLR 169 is relevant in this regard. In this case the Court of Appeal held that restrictive covenants do transfer but only in certain circumstances and subject to certain qualifications. Accordingly, parties ought to proceed with caution in this area.
5.3 Cross-border competition A restriction is too wide to be enforced if its area is greater than is required to protect the employer’s business interests. Again, it is difficult to predict what the Courts will consider reasonable in this regard – each case will turn on its own particular facts. That said, in circumstances where an employer operates its business on a European level and defines ‘territory’ for the purposes of the non-compete clause as being those countries within Europe where it has a commercial presence, then a court may uphold such a restriction if given all the facts it considers that the geographical scope is reasonably necessary to protect the employer’s interest.
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5.4 Non-solicitation clauses Irish law would not prohibit the inclusion of a non-solicitation clause in a contract of employment. Such clauses do not prohibit an employee joining the service of a competitor of his former employer but do prohibit such an employee from attempting to contact customers/suppliers or key employees of his former employer for the purpose of engaging in business with them. As with other restrictive covenants, generally, a non-solicitation clause will only be upheld where it can be shown that the employer has a legitimate interest to protect and that the restriction is reasonable.
5.5 Insolvency If a Company is wound up by the Court (official liquidation), the winding up order is deemed to be notice to the employees that they are dismissed. The contract of the employees is brought to an end at this stage.
A restrictive covenant within a contract of employment will therefore not continue to be enforceable in such circumstances.
In general, if an examiner or receiver is appointed, the contract of employment is not automatically terminated. As the contract remains in existence, a restrictive covenant within the contract will still bind an employee and as the employer will still retain its legal identity it could still sue the employee. A former employee considering breaching a clause may find him or herself more likely to be subject to legal action, as the breach may damage the rescue of a failing business to a much greater extent than one that was not struggling.
5.6 Enforceability of a foreign non-compete clause Governing law A governing law clause may be used to determine the substantive law that will apply to disputes arising from the contract.
Under the Rome I Regulation, regardless of the chosen governing law, an employee may still rely on the protection of the ‘mandatory rules’ of the law of the country in which or from which he or she habitually carries out work in the performance of the contract. Failing that, the employee may be protected in the place where the business through which the employee was engaged is situated or if the contract is more closely connected with another country, the law of that other country.
Jurisdiction Under the Recast Brussels I Regulation, which took effect on 10 January 2015, an employee may sue his employer in the courts of the member state where the employer is domiciled or in the place where the employee habitually carried out his or her work or, where the habitual place of work is not situated in any one country, the place where the business that engaged the employee is situated.
An employer may only bring proceedings against an employee who is domiciled in an EU Member State, in the courts of the Member State where the employee is domiciled. Generally parties to an agreement are free to agree exclusive jurisdiction of the courts of any State and to exclude the jurisdiction of the State which would otherwise have jurisdiction. However this is
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subject to the special employment provisions under the Recast Brussels I Regulation, which generally limits the usefulness of exclusive jurisdiction clauses in employment contracts.
150
Italy
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1. Introduction 153
2. Conditions 153 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 154 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 155 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 157 5.1 No clause 5.2 Transfers of undertakings 5.3 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
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1. INTRODUCTION Restrictive covenants, including non-compete clauses, are enforceable in Italy. A non-compete covenant is enforceable after the termination of the contract, in order to prevent the former employee from entering into service with potential competitors. However, in this case, the restriction of the employee’s rights is admissible only under the specific conditions provided for by Article 2125 of the Italian Civil Code.
2. CONDITIONS
2.1 General Pursuant to Article 2125 of the Italian Civil Code, a non-compete clause which is operative after the termination of the employment contract must be connected to the employment relationship. Employer and employee can enter into a non-compete agreement either at the beginning or during the employment relationship (also during a probationary period) or after its termination.
Article 2125 of the Civil Code applies only to employees, and not, for example, to directors (i.e. members of a board of directors), who are not employees, but a necessary body through which the company carries out its business. For directors, a different provision applies (Article 2596 of the Civil Code).
Article 2125 of the Civil Code sets out the following formal conditions in order for the non- compete clause to be valid.
2.2 Age Non-compete agreements are contracts and therefore general rules of validity of contracts apply. In particular, the employee can validly enter into a non-compete covenant only if at least 18 years old.
2.3 Written form The non-compete agreement must be in written form to be valid. Further, it should be inserted either into the employment contract itself, or into a separate addendum.
The parties can modify the terms and conditions of a non-compete agreement or mutually terminate it at any time, but the consent of both parties is required.
2.4 Renewal There is no statutory provision which requires the renewal of a non-compete clause in the case of amendments to or renewal of the employment contract. However, as the applicability of the clause can be affected by a change in contractual provisions, the parties should assess whether or not it is necessary to amend the clause.
2.5 Liability for compensation on dismissal A non-compete clause remains valid notwithstanding the reasons for termination of the contract and their fairness or otherwise. Therefore, under Italian law a non-compete clause should remain in force in the case of resignation by the employee, dismissal of the employee, or mutual termination by both parties.
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3. REQUIREMENTS
3.1 General Pursuant to Article 2125 of the Italian Civil Code, a written non-compete clause is only valid insofar as it complies with certain statutory limits. It must specify: • the activity forbidden to the employee • its duration • the geographic scope of the obligation • compensation.
As far as the last of these – compensation – is concerned, the payment of special compensation is a requirement for the enforceability of non-compete restrictions. The amount of the compensation is not provided for by law, but must be ‘congruous’ in relation to the activity, the territory and the duration of the covenant, with the consequence of otherwise rendering the entire non-compete covenant void.
On this matter, case law provides that compensation cannot be considered ‘congruous’ if it is manifestly unfair and disproportionate to the sacrifice requested from the employee and to his or her reduced earning power, as considered separately from the benefit that could be derived by the employer from the restriction.
Although employers are not supposed to provide former employees with the same level of compensation that they would have received had they remained employed during the non- compete period, the amount must not be merely symbolic, unfair or disproportionate to the sacrifice being made by the employee. Courts in Italy have generally required employers to provide employees with 20-35% of their last annual gross remuneration for each year of a non-compete period.
The payment of compensation can be either during the employment contract or after the termination of the employment contract. In the first case, the compensation forms part of the normal remuneration and is subject to the payment of social security contributions and the ordinary tax regime. In the second case – where compensation is paid after termination of the employment contract by a single payment or by several instalments during the non-compete period – it is still subject to social security contributions, but is subject to a slightly more favourable tax rate.
If the non-compete covenant does not require the employer to compensate an employee for the non-compete period, the clause will be deemed void and unenforceable.
In contrast, post-employment restrictions regarding the non-solicitation of employees and/or customers, if included in employment agreements, are valid after termination of the employment contract even if they provide the employee with no additional compensation.
3.2 Geographical, functional and temporal limitations The geographic scope of a non-compete clause must be evaluated in relation to the amount of agreed compensation and the extent of the forbidden activities. The more specific the forbidden activity, the wider the geographic scope of the covenant can be. In a recent case it
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was held that a non-compete covenant throughout the whole of the EU was valid. However, it must not prevent the employee from having a source of income (e.g. a non-compete covenant that purported to extend world-wide).
The parties are free to agree on the types of restricted activities. Case law has held that this restriction can refer to all the employer’s activities and not only to tasks and duties previously performed by the employee. In any event, the forbidden activities must not prevent the employee from having a source of income. If they do, the non-compete covenant could be considered void.
The duration of a non-compete agreement cannot be longer than five years for executives (i.e. ’dirigenti’) or longer than three years for other categories of employees. If a non-compete clause provides for a longer period, it will be automatically reduced to the statutory maximum period.
3.3 Job changes In general a non-compete clause affects all of the employer’s activities and not only the tasks and duties performed by the employee (see section 3.2 above). Therefore, if the employee’s job changes, the non-compete clause remains valid and will not automatically be renewed.
4. ENFORCEABILITY
4.1 General Provided that a non-compete clause complies with all of the conditions of validity set out in Article 2125 of the Italian Civil Code, in particular, that compensation is ‘congruous’, a non- compete covenant should be easy to enforce. Generally, the higher the compensation provided by the non-compete clause, the easier it will be to enforce it.
However, it must be underlined that, even if there is no non-compete clause, or it is deemed void, other remedies could be applied, for example, for breach of confidentiality obligations, as the disclosure of trade secrets by a former employee is a criminal offence. The Criminal Code states that anyone who knows a secret for reasons related to his position, office or profession, and discloses it, without just cause, or uses it for his own profit or for the profit of a third party, may be punished with imprisonment of up to one year or with a fine of up to EUR 500, if the disclosure has caused harm (Article 622 of the Criminal Code). In addition, Article 623 of the Criminal Code states that anyone who knows, for reasons related to his position, office or profession, facts which should be kept confidential regarding discoveries or scientific inventions and discloses them for his own profit or for the profit of a third party, may be punished with imprisonment of up to two years.
4.2 Balance of interests The court does not apply a balance of interests test in assessing a non-compete clause.
4.3 Remedies For the period after termination of the employment contract, the employer and employee have the following remedies:
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Employee The employee may request an injunction in order to have the non-compete agreement declared void. This can be ruled by the courts for failure of the mandatory specific requirements of length, scope, object and compensation. Very often a non-compete covenant will be deemed invalid because of inappropriate compensation. If a clause is declared void, the employee will need to pay back the amount received in compensation for the restriction of the activity.
Employer In the case of breach of a post-employment non-compete agreement, the employer can request an injunction to prevent, with immediate effect, the employee from working for a competitor for the duration of the non-compete agreement.
The employer may also file an ordinary action in order to obtain compensation for harm caused or the payment of an agreed penalty for breach of a non-compete covenant by the employee.
Italian courts also have jurisdiction over claims relating to a non-compete restriction agreed in Italy but breached in another country, as long as the country in which the non-compete covenant was breached is included in the territory specified in the covenant.
4.4 Penalty clauses It is also possible to insert a specific clause in the non-compete agreement providing that, in the case of complete or partial failure to comply with the covenant, the employee must repay money received from the employer and will be liable to pay a penalty. Please note that according to the Italian Civil Code ‘the penalty is due regardless of proof of damage’ (Article 1382 of the Civil Code), which means that if a clause providing for a penalty is inserted into a non-compete agreement, the employer is automatically entitled to ask for the amount referred to in the clause (plus further damages where expressly provided for by the clause). In any event, the Court has the power to reduce the amount of the agreed penalty. However, if no penalty clause has been agreed by the parties, the employer may take the matter to court, but it will be required to prove the harm suffered.
4.5 Damages The parties may provide that the employer is entitled to the amount specified in a penalty clause, without prejudice to any further compensation payable if damages are awarded which exceed the amount of the penalty. For that to happen the employer must prove both the harm suffered and a causal relationship between the behaviour of the employee and the harm itself.
4.6 Liability of new employer In general a new employer is not liable for damages by the mere fact that it has hired an employee who was known to be restricted by a non-compete clause, as non-compete restrictions can be directly enforced only between the employer and the employee.
However, a new employer could be sued for concurrent liability or, in certain circumstances, for unfair competition, by Article 2598(3) of the Italian Civil Code. In particular, the line between free trade and unfair competition is crossed when the behaviour is conducted in a way which is contrary to the principal of correctness in trade and is aimed at harming another’s business (‘animus nocendi’).
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5. SPECIAL SITUATIONS
5.1 No clause If a non-compete clause has not been agreed by the parties, the employee is free to enter into service with a direct competitor or set up a competing business.
The employee will only be liable for damages, if he or she acts wrongfully against his former employer, for example, by enticing clients or poaching employees.
Note, however, that enticement and poaching are not themselves prohibited by law, due to the principle of freedom of trade contained in Article 41 of the Italian Constitution, according to which an employer is free to organise its structure internally and employees or clients are free to choose their employer or supplier. Therefore, the mere fact in itself of hiring employees from a competitor or poaching clients cannot be considered unfair competition.
Case law identifies some elements as signalling unfair competition in the case of poaching of employees and enticement of clients, and these can be summarised as follows:
• the number of employees/clients ‘poached’ in relation to the size of the company • professional qualifications and seniority of the employees poached or value of clients • potential damage to the competitor in terms of turnover, reputation or lost revenue • breach of a non-compete covenant between the poached employees and former employer • the timing of the enticement or poaching • any disclosure of confidential information, strategy, know-how, etc.
5.2 Transfers of undertakings Pursuant to Article 2112 of the Civil Code, if a transfer of undertaking is carried out, employees are automatically transferred on the terms and conditions of employment that they previously held with the former employer, and both transferor and transferee are jointly liable for the employee’s entitlements at the time of the transfer.
Therefore, in the case of a transfer of undertaking all rights and obligations of both employer and employee will transfer to the transferee. This includes the rights and obligations pursuant to a non-compete clause.
5.3 5.3 Cross-border competition A non-compete clause must contain a geographical limitation. In most cases this limitation will be the territory of Italy or specific regions (for instance, Northern Italy). However, it is also possible for parties to agree upon a far more extended region, e.g. the EU, or certain foreign countries.
If the non-compete agreement concerns more than one country, the extension of the forbidden activities should be evaluated very carefully in order to avoid the non-compete restriction being deemed too wide and the covenant being declared void.
5.4 Non-solicitation clauses In Italy it is possible to enter into a non-solicitation clause that provides that the employee is prohibited from contacting and/or soliciting clients after termination of the employment so that
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he or she can try to persuade clients, directly or indirectly, to terminate the relationship with the employer and to enter into a contract with another party.
A non-solicitation clause will be of importance if the employee has a lot of external client contacts which are important to the organisation. Compliance with a non-solicitation clause can be linked to a penalty clause.
Non-solicitation clauses differ from non-compete covenants in that they are not provided for by any specific legal provisions and no compensation is due to make them enforceable.
In any event, a non-solicitation clause runs the risk of being deemed to be a non-compliant non-compete clause by the Court.
5.5 Insolvency Insolvency has no impact upon the validity and enforceability of a non-compete clause.
5.6 Enforceability of foreign non-compete clauses Whether the Italian Court has jurisdiction over the foreign non-compete clause must be evaluated on a case by case basis in accordance with the general principles of public order applicable in Italy.
In particular, mandatory provisions of Italian law that apply to the subject matter and form part of public order cannot be overruled, according to Article 16 of Law no 218/1995 (International Law Reform). For example, a non-compete covenant of indefinite duration with no compensation could be considered as in violation of the general principles of public order. However, at the time of writing, there is no known case law on this matter.
158
Lithuania
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1. Introduction 161
2. Conditions 161 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 162 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 162 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 164 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
160 Non- Compete Covenants - Lithuania
1. INTRODUCTION In the employment agreement a clause can be included with regard to the activities of the employee after termination of the employment agreement: a non-compete clause. By means of a non-compete clause, the employer is able to prevent an employee from performing activities for a competitor or establishing his or her own business after termination of the employment contract. A non-compete clause will necessarily limit the employee’s freedom of employment.
Generally, non-compete clauses do not fall within the scope of Lithuanian labour legislation. They qualify as civil contracts and are therefore regulated by general principles contained in the Civil Code. However, the Civil Code only provides the basic principles of prohibition of competition by commercial agents (Article 2.164) and does not provide any rules about the conclusion, validity or enforcement of non-compete clauses. In practice, non-compete clauses are executed in accordance with the basic guidelines set out in recent case law.
2. CONDITIONS
2.1 General Lithuanian labour law does not set out any conditions for non-compete clauses. However, recent case law provides certain conditions that must be followed.
2.2 Age There are no rules covering age.
2.3 Written form A non-compete clause must be executed in written form, which is either incorporated in the employment contract or signed as a separate document.
2.4 Renewal In cases of renewal of an employment contract or any important change in the position of the employee within the organisation, it is also advisable to make sure that the non-compete clause in the initial employment contract remains applicable.
2.5 Liability for compensation on dismissal Compensation for compliance with a non-compete obligation is the principle condition of validity of any such clause. According to the practice of the Lithuanian courts, a non-compete clause should establish fair and proper compensation for the restrictions placed on employees’ rights, i.e. the right to freedom of employment. However, the Lithuanian courts have not laid down any minimum amount of compensation. Article 2.164 of the Civil Code provides that the compensation payable to a commercial agent is a matter of agreement between the parties and may amount to the annual payment to the agent. If a non-compete obligation is set to run for the maximum of two years, the minimum amount of compensation for compliance with it should be at least 50% of the employee’s monthly salary. In practice, this percentage is the most often used.
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3. REQUIREMENTS
3.1 General According to the practice of the Lithuanian courts, the purpose of a non-compete clause is to protect a business entity from unfair competition by its employees. Therefore, a non-compete clause must be connected to the employment contract and should be binding upon the employer and the employee during the employment relationship and after its termination.
Because the non-compete clause limits the employee’s freedom of employment, he or she must be made fully aware of the clause and its contents. Therefore, in order for a non-compete clause to be valid, it must be agreed in writing in an individual employment contract, or in a separate addendum to the employment agreement.
Further, according to court practice, an organisation may exercise its right to release the employee from compliance with a non-compete obligation. If it does, no compensation is payable and the employee may compete with the former employer.
Case law provides certain requirements for validity of a non-compete clause and these are set out in the sections that follow.
3.2 Geographical, functional and temporal limitations A non-compete clause should provide the geographical scope of the obligation. According to the recent case law, the exact territory within which the employee is prohibited to compete with the former employer should be indicated.
With regard to functional limitations, the employer should, as far as possible, specify the activities of the employee that are forbidden after termination of an employment contract. A limitation which completely deprives an employee of the right to work after termination may not be included in a non-compete clause.
Even though case law is silent on the maximum duration of a non-compete obligation, it can be established by analogy with Article 2.164 of the Civil Code. According to this Article, non- compete agreements with commercial agents may be concluded for a period not exceeding two years. In practice, non-compete clauses tend to be valid for one to two years.
3.3 Job changes A change in the position of an employee does not influence the validity of a non-compete clause, unless otherwise agreed between the employer and the employee.
4. ENFORCEABILITY
4.1 General According to the practice of the Lithuanian courts, non-compete clauses are recognised as enforceable if they aim to protect a legitimate business interest of the employer, do not limit the former employee’s rights excessively and meet certain conditions.
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4.2 Balance of interests Case law provides that a non-compete clause should maintain the balance between the parties’ interests. This means that the employer’s interests in protecting its business from unfair competition will be weighed against the interests of the employee in exercising his or her right to work. A non-compete clause may not automatically be concluded with any employee at all, but case law does not elucidate the criteria for the selection of employees who could be obliged not to compete with the employer in this way.
4.3 Remedies A non-compete clause may be deemed void by the courts in accordance with the general principles on invalidity of contracts, provided in the Civil Code.
Employee The employee may lodge an action either during the employment or after it has ended. The employee may ask the court for payment of compensation for observing the clause if the employer fails to pay it. Further, the employee may ask the court to annul or moderate the scope of a non-compete clause in an action on the merits.
Employer If the employee does not comply with a non-compete obligation, the employer may apply to the court for specific performance.
4.4 Penalty clauses In order to safeguard adherence to a non-compete clause, a penalty clause can be included in the employment contract. The penalty will consist of an amount corresponding, for example, to one month’s gross salary for every infringement, as well as an amount for every day the infringement continues. If the parties have agreed upon a penalty clause, it can be claimed in court without the employer having to prove actual harm or financial loss. The reason for the claim will simply be for breach of the non-compete clause.
The employer should include a reasonable penalty for breach of the non-compete clause, that is, one which is high enough to deter the employee from breaching the clause (or the new employer from paying the penalty) and low enough to prevent reduction of the penalty in court. The court has the power to reduce the penalty and this cannot be excluded by contract.
4.5 Damages If the parties have not agreed upon a penalty clause, the employer may also claim damages from the employee for breach of the non-compete clause. When claiming damages however, the burden of proof for the actual loss lies with the employer.
It is possible to claim both the penalty and damages in excess of the penalty from the employee.
4.6 Liability of new employer Not only the employee, but also the new employer can act wrongfully against the former employer. In general, a new employer will not be liable for damages by the mere fact that it
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has hired an employee who was known to be restricted by a non-compete clause. Special circumstances can however imply liability for the new employer, for example where the new employer knew the employee was bound by a non-compete clause and has hired the employee in order actively to approach the customers of the competitor by making use of trade secrets that the employee gained in his former position. Actions of this kind may amount to unfair competition. The burden of proof of these circumstances lies with the ex-employer.
5. SPECIAL SITUATIONS
5.1 No clause If no non-compete clause applies, the employee is free to enter into service with a direct competitor or start a competing business of his or her own. In addition, the employee may aim at the same market and customers as the ex-employer.
The employee will only be liable for damages, if he or she acts wrongfully against the former employer either as a self-employed person or as a representative (e.g. employee) of a business. The court may deem the actions of the former employee or his or her new employer as unfair competition if, for instance, the employee systematically contacts the customers of the ex- employer whilst making use of the knowledge and information that the employee had gained during his employment with the ex-employer. The burden of proof of this wrongful act lies with the ex-employer.
5.2 Transfers of undertakings In cases of transfers of undertakings, all rights and obligations of both employer and employee will transfer to the transferee, unless otherwise provided in the relevant agreement. This includes any rights and obligations pursuant to a non-compete clause.
5.3 Cross-border competition A non-compete clause should contain a geographical limitation. In most cases the limitation will be within the territory of Lithuania. However, it is also possible for parties to agree upon a far more extended region, e.g. the EU.
Further international law problems might arise if the employee moves abroad and starts working from there for a competitor within the scope of a Lithuanian non-compete clause. The employer might then face the situation where it needs to start legal proceedings locally either to enforce a Lithuanian judgment or to ask the local court to rule on a Lithuanian non-compete clause. How successful this might be will very much depend on local rules in combination with international law.
5.4 Non-solicitation clauses Non-solicitation covenants prevent an employee from approaching the former employer’s customers and soliciting former colleagues to work with him or her. There are no criteria set for non-solicitation clauses either in Lithuanian labour law or in recent case law. Note that in practice non-solicitation clauses are usually incorporated into non-compete clauses.
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5.5 Insolvency There are no rules regulating the enforcement of a non-compete clause where an employer has become insolvent.
5.6 Enforceability of foreign non-compete clauses If a foreign employer has already obtained a judgment in its own jurisdiction it may try to enforce this judgment in Lithuania, based on international agreements and/or EU law. Depending on the circumstances of the case, before enforcing the judgment the foreign employer might need to ask for recognition of the judgment by the competent Lithuanian courts.
Should the foreign employer ask for an injunction in Lithuania, assuming that the Lithuanian court is competent, it will, in principle, be required to follow the chosen foreign law and rule accordingly, both with regard to the validity of the clause and its scope.
165
Luxembourg
167 Ius Laboris
1. Introduction 169
2. Conditions 169 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 170 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 171 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 172 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
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1. INTRODUCTION A non-compete clause must be agreed in writing and included in the employment contract. By means of a non-compete clause, the employee declares that, following the end of the employment, he or she will not engage in any independent activities which correspond to those of the former employer, in order not to compromise the employer’s interests.
Note that in Luxembourg until recently it was thought that it was not possible to prevent an employee from working in competition with the former employer if this was done through a new employer, as the only purpose of the Luxembourg Labour Code was to prevent former employees from running their own businesses and it does not stop employees from working for competitors under new employment contracts. However, in 2014, the Court of Appeal found a clause preventing a former employee from working as an ‘employee’ for a competitor to be valid, as long as it does not limit the employee’s freedom to work in an abusive manner. The prohibition must then be limited, in time and space, must be financially compensated and must allow the employee to work for or apply for positions with non-competitor companies. However, at the time of writing, this is the only judgment of this kind and therefore cannot be regarded as settled law.
The legal provisions concerning non-compete clauses contained in employment contracts are laid down in Article L. 125-8 of the Luxembourg Labour Code.
2. CONDITIONS
2.1 General Article L. 125-8 of the Luxembourg Labour Code sets out a number of formal conditions in order for a non-compete clause to be valid.
The annual gross salary of the employee must be at least EUR 52,843.88 on the day when the employee leaves the company (Luxembourg salaries are indexed and this amount corresponds to the index applicable in 2016, i.e. EUR 775.17).
A non-compete clause applied to an employee who earns less than this amount is deemed ‘unwritten’.
2.2 Age An employee who signs an employment contract or an addendum with a non-compete clause must be at least 18 years old. If the employee is less than 18 years old, the clause is deemed ‘unwritten’.
2.3 Written form A non-compete clause must be in writing. If not, the clause is void. It must be included in the employment contract or in an addendum to the employment contract.
2.4 Renewal A non-compete clause will be for a fixed term after termination of the contract. In the case of an extension and/or renewal of a fixed-term employment contract or of a significant change to
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the job of the employee within the organisation, it is advisable to make sure that the non- compete clause from the previous contract remains applicable.
2.5 Liability for compensation on dismissal Whether a non-compete clause is valid after dismissal does not depend on whether financial compensation is paid by the employer, as financial compensation is not compulsory. A non- compete clause will not apply and cannot be enforced if the employer has unfairly terminated the employment contract with immediate effect for gross misconduct. The same applies if the employer terminated the employment contract without having respected the relevant notice period.
3. REQUIREMENTS
3.1 General Note that according to the Labour Code, a non-compete clause only applies to an employee running his or her own business in competition with the former employer’s business after having left the employer and does not apply to an employee working for a competitor under a new employment contract.
3.2 Geographical, functional and temporal limitations A non-compete clause must be limited geographically to the localities where the employee can genuinely compete with the employer, based on the nature of the company and its range of activities. It cannot be extended outside Luxembourg.
A non-compete clause must also be restricted to a specific professional sector as well as to professional activities which are similar to those performed by the employer.
It must be limited to a 12-month period, which begins to run on the day when the employment contract comes to an end.
If a court decides that these requirements have not been observed, the non-compete clause will not apply. Alternatively, the court may reduce the scope of the clause to make it permissible in law.
The law does not require the payment of financial compensation to be an element of a non- compete agreement, but the employer may provide for this in the employment contract.
If a non-compete clause does provide for payment of financial compensation, the employer can unilaterally waive the clause only if this is provided for in the employment contract or in an addendum. Otherwise, the employee’s consent is required.
3.3 Job changes Job changes have no impact on a non-compete clause, as the activities to be taken into account are those of the employer, not the employee. A non-compete clause is justified by the need to protect the former employer’s interests and does not depend on the employee’s job.
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Luxembourg law does not prevent employers from making a promotion conditional upon the employee signing a non-compete agreement, but the normal requirements for non-compete clauses must be respected. No distinction is made between different types of promotion.
4. ENFORCEABILITY
4.1 General If the employee does not comply with a non-compete clause, the employer may choose between: • enforcing the employee’s contractual obligation using an emergency procedure (a ‘référé’), in order to get an injunction to stop the activity; or • taking legal action to obtain damages.
4.2 Balance of interests The court’s duty is restricted to analysing whether the content of a non-compete clause is in line with the validity conditions provided for by the Labour Code. Therefore, the court does not weigh the interests of the employer in keeping the non-compete clause against the interests of the employee having the clause annulled or its scope reduced.
4.3 Remedies Employee The employee may file for a petition to annul the non-compete clause or moderate its scope. Whether or not such a request will be granted will depend on whether the content of the non- compete clause is in line with the validity conditions provided for by law. An employee may begin proceedings either during the employment or after it has ended.
Employer If the employee does not comply with the obligations contained in a non-compete clause, the employer may claim an injunction against the employee in an emergency procedure (‘référé’) to stop his or her business. The court may be requested to impose penalty payments for as long as the employee does not comply with the non-compete obligations. Further, breach of a non- compete clause can lead to an award of damages to the former employer, but the former employer must prove its loss and the causal link.
4.4 Penalty clauses According to case law, it is not possible to stipulate that an employee is subject to a penalty payment if he or she breaches non-compete restrictions.
4.5 Damages If a non-compete clause is valid and the employee breaches the clause, the employee may be found contractually liable and may be required to pay damages to the former employer based on the extent of its loss.
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4.6 Liability of new employer There can be no liability for a new employer under Luxembourg law, as a non-compete clause merely asserts that, following the end of the employment, the employee will not engage in any independent activities similar to those of the former employer, which compromise the employer’s interests. Nevertheless, an employee’s own company could be found liable for breach of the clause.
5. SPECIAL SITUATIONS
5.1 No clause If no non-compete clause applies, the employee is free to engage in any independent activity, even if it is similar to the activities of the former employer. However, the employee must observe the general principle of good faith even after the end of the employment contract.
Note that the former employee can be liable for unfair competition. Luxembourg law provides for two kinds of action in relation to unfair competition: • An injunction (‘action en cessation’) - this allows any economic entity, whether a natural or legal person, to claim an injunction against a person to refrain from unfair competition, without the need to prove any harm resulting from those acts. However, with an injunction, there is no financial compensation. • Action in tort - the burden of proof of any unfair act lies with the former employer and is assessed very strictly. The former employer must prove that the former employee used unfair methods, for example, contacting the former employer’s customers using its customer database. The employer will also have to prove that it suffered harm as a result of the former employee’s unfair conduct, and that the damage is directly linked to the former employee’s unfair acts.
5.2 Transfers of undertakings In the case of transfers of undertakings, all rights and obligations resulting from the employment contract transfer to the transferee, including non-compete clauses.
5.3 Cross-border competition A non-compete clause cannot be extended outside Luxembourg. The law does not allow the parties to widen the geographical scope of non-compete restrictions to other countries.
5.4 Non-solicitation clauses A non-solicitation clause prohibits an employee from actively soliciting the former employer’s customers or employees or encouraging them to work with the employee or a new employer - even by fair means.
Non-solicitation clauses are not expressly regulated by the Luxembourg Labour Code and the courts have not yet ruled on the conditions for their validity. However, as a starting point, these clauses should comply with general principles such as freedom to work and freedom of commerce and industry. A non-solicitation clause should therefore not prevent an employee from working and this implies that it should be limited in time and in space.
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5.5 Insolvency If a company becomes insolvent, this would have no legal impact on a non-compete clause. It will remain enforceable in the normal way.
5.6 Enforceability of foreign non-compete clauses Foreign non-compete clauses will in principle be enforceable in Luxembourg on condition that they are valid under the laws of the jurisdiction in question and comply with Luxembourg law on public order.
173
Mexico
175 Ius Laboris
1. Introduction 177
2. Conditions 177 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 178 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 178 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 179 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
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1. INTRODUCTION Labour relationships in Mexico are highly regulated and Mexican employees may have greater rights than those in other countries. Mexican labour law resulted from an armed revolution that concluded with the adoption of the Constitution in 1917. The Constitution expressly recognises and protects a series of basic inalienable rights of employees. This was the first constitutional recognition of labour rights in world history.
In 1931 the first Federal labour law was enacted to regulate labour relations. This was later superseded by the 1970 Federal labour law which improved working conditions for employees. The 1970 law is the Federal labour law in place in Mexico today.
The enforceability of non-compete clauses is problematic, but provided the arrangements are properly documented, they may be enforceable.
2. CONDITIONS
2.1 General In Mexico, the principles from which all restrictive covenant law derives are found in the Mexican Constitution. In general terms, the Constitution prohibits any agreement by which a person waives the right to conduct his or her profession or business either temporarily or permanently and grants every individual the right to engage in any lawful activity. It further provides that employees’ rights and protections cannot be waived and therefore that any agreement claiming to do so is void.
The Supreme Court of Justice has ruled that non-compete agreements may be enforceable provided that they are limited in time and space and compensation is paid in exchange.
2.2 Age Age has no relevance to the issue of enforcement of non-compete arrangements, but the minimum working age in Mexico is 15 years old.
2.3 Written form Even though non-compete provisions are commonly included in employment agreements in Mexico, these provisions are a moral rather than a legal obligation. They are often used as a deterrent for employees to not compete, but enforceability can be difficult. For post-termination non-compete provisions to be enforceable, the arrangements must be documented in a civil rather than a labour agreement at the end of the employment relationship.
2.4 Renewal It is not common to renew non-compete arrangements in Mexico, as one of the requirements is that these agreements must made be for a specified period of time.
2.5 Liability for compensation on dismissal An employer in Mexico may dismiss an employee without liability only if there is a justified ground for the dismissal. If the employee is dismissed without just cause, any non-compete clause will survive termination of the contract and the employee will be entitled to a significant severance package.
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An employer may not prevent a former employee from entering into a new employment relationship with another individual or legal entity. However, even after termination of a labour relationship, employees must keep confidential information and/or trade secrets obtained whilst employed by the former employer. Failure to comply with confidentiality provisions could result in criminal liability.
3. REQUIREMENTS
3.1 General The Mexican Constitution expressly prohibits the enforcement of any contract under which a person renounces his or her right to practice a given profession or work at an industrial or commercial pursuit. However, some organisations create financial incentives for former employees to observe post-employment restrictions.
3.2 Geographical, functional and temporal limitations The Mexican Supreme Court of Justice has ruled that non-compete agreements may be enforceable provided they are limited in time and geographical location and compensation is paid in exchange. However, there is no legal guidance about this, nor any case law precedents. Therefore, it is a matter of agreement between the parties.
3.3 Job changes Non-compete arrangements do not vary when an employee changes job and therefore the employer should confirm the obligations in writing. This can be done by having both the employer and the employee sign a letter containing the revised non-compete clause.
4. ENFORCEABILITY
4.1 General Some employers include post-termination covenants in employment agreements and pay a lump sum in exchange for the employee’s agreement to the restrictive covenant. This must be paid ahead of time, and may not be deferred until termination or the post-employment restrictive period.
4.2 Balance of interests A balance of interest exists whenever an employee’s activities are restricted in time and geographical scope in exchange for payment. How reasonable a particular clause may be is a matter for the courts, but as yet there is no case law or guidance on this subject.
4.3 Remedies Some employers pay employees a lump sum when they start a job to secure voluntary compliance with a non-compete arrangement. If a departing employee competes or declares his or her intention to compete, the employer may bring a claim against the former employee for return of the compensation paid for the restrictive covenant. Essentially, the employer may ask the court to declare the covenant invalid, as that would require the former employee to repay the employer. Many employees do not wish to risk an order to repay compensation previously received so will comply with the post-termination covenant. However, it should be
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noted that there may be difficulties in getting the court to declare a covenant invalid, although this has been done successfully in the past. There is certainly no guarantee that the courts will accept the arguments and declare the ‘illegal’ covenant void.
The alternative is to write-off the non-compete clause altogether and to seek remedies associated with trade secrets and confidential information.
4.4 Penalty clauses Non-compete arrangements may include penalty clauses, but these only usually act as a moral obligation and can be used as a deterrent to the employee not to compete. However, if a departing employee competes or declares his or her intent to compete, the employer may bring a claim against the former employee for repayment of the compensation paid for the restrictive covenant and to enforce the penalty clause.
4.5 Damages Damages for breach of non-compete clauses cannot be claimed.
However, confidentiality and non-disclosure covenants that are designed to protect an organisation’s confidential business information are enforceable. Further, trade secrets are protected under Mexican property law.
4.6 Liability of new employer A new employer incurs in no liability in the mere fact of hiring a person who has previously worked for a competitor. However, liability may arise if it is clear that the new employer has taken advantage of a breach of a non-compete, confidentiality or non-disclosure clause agreed with the former employer by the new employee.
5. SPECIAL SITUATIONS
5.1 No clause No clause means no agreement and therefore no legal obligation on the former employee to observe any restrictions.
5.2 Transfers of undertakings Whenever a business is acquired (i.e. including its assets), an automatic transfer of the employees occurs. The transferee becomes the substitute employer for the transferred employees.
Mexican labour law provides that the new employer must honour all the conditions of employment, including any special arrangements such as non-compete clauses.
If the new employer does not honour the terms and conditions of the employment, a constructive dismissal is triggered and an employee is entitled to legal severance.
5.3 Cross-border competition There is no reason in principle why a covenant cannot prevent cross-border competition but enforcement is complicated.
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5.4 Non-solicitation clauses Employers may include a clause prohibiting future contact with customers, clients and former colleagues. However, this is enforceable only to restrict the use of corporate information to prevent unfair competition.
5.5 Insolvency When an employer becomes insolvent and winds up trading completely, no clause remains enforceable. The legal identity ceases to exist. Therefore, there is no body able to bring a claim against a former employee for breach of a non-compete clause.
5.6 Enforceability of foreign non-compete clauses Enforceability of non-compete arrangements is difficult in Mexico and therefore foreign non- compete clauses would likely be dismissed by the local courts on the basis that the Mexican Constitution provides that the State cannot cannot allow the waiver of the freedom of individuals to work. The Constitution provides that no person can lawfully agree to waive his or her right to practice a given profession or industrial or commercial pursuit.
It is important to draft non-compete, non-disclosure and confidentiality agreements carefully to try to ensure they can be enforced.
180
Netherlands
181 Ius Laboris
1. Introduction 183
2. Conditions 183 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 184 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 186 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 188 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
182 Non- Compete Covenants - Netherlands
1. INTRODUCTION A clause can be included in the employment agreement with regard to the activities of the employee after termination of the agreement: a ‘non-compete clause’. By means of a non- compete clause, the employer is able to prevent an employee from performing activities for a competitor or establishing his or her own business after termination of the employment contract.
The non-compete clause will limit the employee’s freedom of employment. Therefore the legislator has laid down strict conditions with which a non-compete clause must comply in order to be enforceable. Even if the non-compete clause complies with these conditions, the court will always take the interests of both the employer and employee into consideration, in order to decide on the reasonableness of a non-compete clause.
2. CONDITIONS
2.1 General By Article 7:653 of the Dutch Civil Code, a non-compete clause must be connected to the employment agreement. A non-compete clause in a sale-purchase agreement is not governed by Article 7:653. In addition, the clause should apply to relations between the former employer and the employee. For example, the rules of Article 7:653 will not apply to relations between a company and a separate management company because the management company is not an employee within the meaning of the law. Finally, the clause must relate to the employment of the employee. A mere financial interest in a competitive company does not fall within the scope of the Article.
Note that there are specific restrictions in relation to fixed term contracts. In principle, since 1 January 2015, non-compete clauses are not valid in fixed term contracts unless the employer has ‘substantial business interests’ in imposing the restrictions. If so, the employer should evidence these in writing at the time of making the non-compete clause and the reasons must still be relevant at the time the restrictions are invoked. If sufficient reasons are not provided, the non-compete clause will be void.
It is not yet entirely clear what the court will regard as sufficient ‘substantial business interests’. This could refer to the protection of business secrets, or the prevention of a former employee taking clients with him. The employer should, in any case, document what substantial business interest applies to each individual employee, taking into account the nature of the business and the position of the employee.
2.2 Age A non-compete clause can only be concluded between an employer and an employee of at least 18 years of age. If a non-compete clause is agreed with an under-age employee, the clause will be void. Moreover, the clause will not become valid by operation of law once the employee has become of age. In that situation, the parties must agree upon a new non- compete clause.
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2.3 Written form Because a non-compete clause limits the employee’s freedom of employment, the employee must be made fully aware of the clause and its contents. Therefore, in order for a non-compete clause to be valid, it must be agreed in writing in an individual employment contract, or in a separate addendum to one.
A general non-compete clause in, for example, a personnel handbook or collective labour agreement is not considered legally valid. However, the Supreme Court of the Netherlands ruled that a non-compete clause is also valid where the clause is inserted in a personnel handbook and the employee has signed either the employment agreement or the accompanying letter that refers to the handbook. In such a case, a copy of the handbook must be provided to the employee.
In order to circumvent any discussion about the validity of a non-compete clause with the employee, it is recommended that the non-compete clause be inserted in the employment agreement and that the agreement be signed by both parties.
2.4 Renewal In cases of extension and/or renewal of an employment contract or any important change in the position of the employee within the company, it is also advisable to make sure that the non-compete clause in the previous contract remains applicable. This can be done in a letter confirming extension/renewal of the contract and it should be signed by both the employer and the employee.
The above is based on the condition that a non-compete clause should be agreed in writing in the individual employment contract or in a separate addendum. Reconfirming in a side letter avoids any miscommunication and/or discussion on the subject at a later stage.
2.5 Liability for compensation on dismissal There is no liability for compensation, but the employee is released from his obligations under the non-compete clause if the termination of the employment contract is the result of serious culpable acts or omissions on the part of the employer. The following examples would qualify as such: • objectionable behaviour of the employer • discriminatory behaviour • creating a false dismissal ground • grossly negligent behaviour resulting in a disrupted employment relationship.
In the case of a settlement agreement, the non-compete clause will in principle remain valid, unless the parties have agreed otherwise.
3. REQUIREMENTS
3.1 General The wording of a non-compete clause must be very clear and correct. Case law shows that the wording of the clause will determine its scope. Any lack of clarity in the wording will be explained, based on the principle that the employee is the vulnerable party. This means that
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unless the expectations that both parties could reasonably be expected to have had from each other in relation to the non-compete clause can be shown in a decisive way, the clause will be interpreted in the employee’s favour.
3.2 Geographical, functional and temporal limitations The more specifically the clause is formulated, the more likely the court will be to consider the employer’s interests in enforcing the clause as reasonable. This is especially true as concerns the geographical scope of the clause and the scope of the employment. The more specific the non- compete clause, the higher the chances that the clause will not be annulled in any possible court procedure.
For example, an employee who works in an Italian restaurant in Amsterdam could be restricted from working in or starting his or her own Italian restaurant in Amsterdam after termination of the employment. To prevent the employee from working as an Italian cook all over the Netherlands, would most likely be considered unreasonable.
In addition, with regard to functional limitations, the employer should try as far as possible to specify the activities of the employee that are forbidden after termination.
There are no limitations as to the duration of a non-compete clause. In general, parties agree upon non-compete clauses with a duration of anywhere between six months and two years. The duration will be taken into account by the Court when assessing the reasonableness of the non-compete clause. What will be considered a reasonable term, will depend on the duration of the employment contract and other circumstances of the case. The court may limit the term of a non-compete clause upon the request of the employee.
3.3 Job changes Case law shows that certain employees who, during their employment, have undergone a change in position (without having agreed on a new non-compete clause), have successfully claimed the old non-compete clause to be void when leaving the company. The Supreme Court has however specified the criteria for this in the ‘AVM judgments’. Pursuant to these judgments, in situations where the burden of a non-compete clause on an employee has increased during the employment, a non-compete clause agreed at the start of the employment might no longer apply. This might be arguable if the employee has a new position in the organisation, but the burden of proof is on the employee to show that because of the change of job, his or her position in the labour market is being influenced negatively by the non-compete clause and that his or her interests would be unreasonably affected if he or she were bound to the non-compete clause as it was agreed at the start of the employment.
The court therefore must first consider whether there has been an ‘important change’ in the employee’s job and second, whether the change influences the position of the employee on the labour market in a negative way because of the non-compete clause. Elements that will be considered by the court with regard to an important change in position are the differences between the previous and current jobs; changes in the content of the work and its responsibilities, authority gained; changes in the remuneration package; improved social status; increased social responsibility and any change to the position from a labour law perspective.
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A general promotion from, for example, junior to senior manager or consultant would be seen as a logical and foreseen move on the employee’s career path and will hence not automatically be considered as an ‘important change’ in position. A promotion from sales manager into, for example, a board of directors will most likely be seen as an increase in the position that would make the current non-compete clause void.
As the answer to whether or not a non-compete clause has become partially void always depends on the factual circumstances, the outcome of any court procedure will always remain uncertain. It is therefore recommended that in confirming a promotion to an employee the agreed non-compete clause should be reaffirmed in writing. This can be done by having both the employer and the employee sign a promotion letter containing a non-compete clause.
4. ENFORCEABILITY
4.1 General Provided that a non-compete clause in a permanent contract complies with various formal requirements, it will, in principle, be enforceable. However, the court will always take all relevant circumstances into account and will decide, based on a weighing of the interests of both parties, whether or not there are grounds for its suspension, moderation or annulment.
4.2 Balance of interests The court will take all relevant circumstances into account when considering the validity of a non-compete clause. The interests of the employee in accepting the new position and being able to earn a living will be weighed against the interests of the employer in protecting its business. In general, the following interests will be taken into account: • the fear of economic loss arising because the employee is aware of specific trade secrets of the organisation and/or had contact with customers or other important relations of the employer • length of service • who it was who took the initiative (or who was forced to take the initiative) to terminate the employment • investment made in the employee by the employer e.g. to enable him or her to take courses and to study • the point in time that the non-compete clause was agreed upon (at the start or during the course of the employment) • the career prospects of the employee with his current and future employer • the risk for the employee of losing his or her new job by being held to the non-compete clause as well as the employee’s opportunities on the labour market • in some cases also the personal or family circumstances of the employee.
4.3 Remedies In most non-compete cases interlocutory proceedings are initiated, because the parties have an interest in a speedy judgment. The employer will wish to prevent harm as soon as possible and the employee will want to ensure he or she is allowed to enter into service with the new employer. In interlocutory proceedings only provisional judgments can be issued and therefore
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these judgments only apply up to the time a decision is made in an action on the merits. However, very often parties limit themselves to obtaining a provisional judgment, meaning that in practice this effectively becomes the final judgment.
Employee The employee may file for a petition to suspend a non-compete clause in interlocutory proceedings, as well as to annul or moderate the scope of a non- compete clause in an action on the merits. Whether or not such a request will be granted depends on how the interests of the employer in keeping the non-compete clause in force are weighed against the interests of the employee in having the clause annulled. An interlocutory claim can be combined with a claim based on Article 7:653 para 5 of the Dutch Civil Code (see section 4.5 below).
An employee may begin proceedings either during the employment or after it has ended.
Employer If the employee does not comply with the obligations contained in the non-compete clause, the employer may claim specific performance of the non-compete obligations. The court can be requested to impose incremental penalty payments (not to be confused with the contractual penalties mentioned in section 4.4 below) for as long as the employee does not comply with the non-compete obligations. The employer may ask, for example, for an injunction forbidding the employee to enter into service with the competitor, by means of preliminary proceedings.
4.4 Penalty clauses In order to safeguard adherence to a non-compete clause, a penalty clause can be included in the employment contract. The penalty consists of a penalty amount, for example, corresponding with one month’s gross salary for every infringement, as well as an amount for every day the infringement continues. If the parties have agreed upon a penalty clause, this penalty can be claimed in court, without the employer having to prove actual harm or financial loss. Infringement of the non-compete clause is sufficient reason to claim the agreed penalty.
The employer should include a reasonable penalty for the infringement of the non-compete clause, which is high enough to prevent the employee from breaching its terms (or the new employer from paying the penalty) and low enough to prevent mitigation being successful in court. The court has the power to reduce the penalty and this possibility cannot be excluded by contract.
If the parties have not agreed upon a penalty clause, the employer can also claim damages from the employee for breach of the non-compete clause. When claiming damages however, the burden of proof for actual loss lies with the employer. In order to prevent having to prove the loss in court, most employers in The Netherlands prefer to insert a penalty clause in the employment contract.
4.5 Damages Article 7:653 para 5 of the Civil Code provides the court with the option to award damages to the employee for the period that the non-compete clause remains in force. This is in order to balance the interests of the employer in preventing the employee from entering into service with a competitor against any unreasonable financial loss that the employee may suffer.
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This Article allows for the employee to be compensated fairly but is not intended to provide the employee with damages for wrongful acts. The criteria for granting compensation are that the employee’s means to support him- or herself are sufficiently impeded. It is not necessary that the employee should be forbidden to work at all and compensation will already be considered reasonable if the employee is forced to accept a less well-paid position because of the non- compete clause.
4.6 Liability of new employer Not only the employee but also the new employer may act wrongfully against the employer. In general a new employer is not liable for damages by the mere fact that it has hired an employee who was known to be restricted by a non-compete clause. Special circumstances can however imply liability for the new employer, for example, where the new employer knew the employee was bound by a non-compete clause and hired the employee with the express intention of approaching the customers of the competitor by making use of the trade secrets that the employee gained in his former position. The burden of proof for this lies with the ex- employer.
5. SPECIAL SITUATIONS
5.1 No clause If no non-compete clause has been agreed, the employee is free to enter into service with a direct competitor or start his or her own competing business. In addition, the employee may target the same market and customers as the ex-employer.
The employee will only be liable for damages, if he or she acts wrongfully against the former employer. The Supreme Court has ruled that the employee is liable for damages where there is no applicable non-compete clause in circumstances whereby the employee systematically contacts the customers of the ex-employer, while making use of knowledge and information that the employee gained during his or her employment with the ex-employer. The burden of proof of this wrongful act lies with the ex-employer and is assessed very strictly.
5.2 Transfers of undertakings By Article 7:663 of the Dutch Civil Code, all rights and obligations of both employer and employee will transfer to the transferee by operation of law. This includes all rights and obligations pursuant to a non-compete clause.
It is also possible that, as a result of the transfer, the position of the employee on the labour market is negatively affected by the non-compete clause. Based on this argument, the court could decide that the non-compete clause is no longer valid.
Note also that the Supreme Court has ruled that the transferee cannot claim rights pursuant to a non-compete clause with regard to ex-employees who left the organisation before the transfer took place. The Supreme Court has based this ruling on Article 3 of Directive 77/187/EEC and case law of the European Court of Justice.
The lower court in The Netherlands has decided that the transfer of an undertaking into another legal form or the division of the organisation will not in all circumstances qualify as
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transfers of undertakings pursuant to Article 7:662 of the Dutch Civil Code. This led to the conclusion that the non-compete clauses of employees who entered into service with the new legal form, were no longer valid and parties should have agreed upon new non-compete clauses. This verdict has not yet been confirmed by the Supreme Court, but for safety’s sake, it is nonetheless advisable to reconfirm the validity of a non-compete clause in this situation.
5.3 Cross-border competition A non-compete clause should contain a geographical limitation. In most cases the limitation would cover, for example, the region of Amsterdam or The Netherlands. However, it is also possible that parties could agree upon a far more extensive region, for example Europe.
Whether or not the employer will be able to enforce the non-compete clause abroad will – under Dutch law – depend on a balance of the interests of the employer in enforcing the non- compete clause and the interests of the employee. For example, where there are only, say, two competitor companies in Europe that make the same product and that serve the same market, the interests of the employer in preventing the employee from working for one of those competitors is clear. The employee, however, could state that his or her expertise is so specific that it will be impossible to find employment outside that market and therefore the geographical scope is unreasonable. Whether or not the court will decide in favour of the employer, will depend on the how the interests of both parties are balanced by the court.
Further international law problems might arise if the employee moves abroad and starts working from there for a competitor within the meaning of a Dutch non-compete clause. Then the employer might face the situation where it needs to start legal proceedings locally either to execute a Dutch judgment which has already been given or to ask the local court to rule on a Dutch non-compete clause. How successful this might be will very much depend on local rules in combination with international law.
5.4 Non-solicitation clauses A non-solicitation, or ‘business relations’ clause (in Dutch ‘relatiebeding’) is a clause in which the employee is prohibited from contacting and/or working for clients of the organisation after termination of the employment for a certain period. Such a clause will normally be of importance where the employee has a many external client contacts which are important to the employer. The mere existence of a business relations clause does not prevent the employee from entering into an employment agreement with a competitor. Compliance with a business relations clause can be linked to a penalty clause.
In order to prevent litigation on a non-compete clause, parties often agree to change the non- compete clause into a business relations clause. In this way, the employee is still able to enter into service with a competitor, but will not be allowed to contact customers specified by parties. In most cases the new employer will be a party to the negotiations as well, as its interests are also at stake.
The employer cannot be forced by the employee to change the non-compete clause into a business relations clause. If the parties cannot reach agreement, the court will provide a final judgment.
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5.5 Insolvency If a company becomes insolvent, the trustee will, in most cases, terminate all employees. As an alternative, the trustee may try to find a way to sell off valuable activities and/or restart the organisation. The trustee may therefore have an interest in holding the employees to the obligations set out in a non-compete clause.
In principle, the employees are bound by non-compete clauses after dismissal by the trustee. Whether or not this will be considered reasonable, given that the employee will be unemployed in most cases on short notice, will depend on the circumstances and the interests of both parties.
5.6 Enforceability of foreign non-compete clauses If a foreign employer has already obtained a judgment in its own jurisdiction it can try to execute this judgment – based on international agreements and/or EU law – in the Netherlands. Depending on the circumstances of the case, the foreign employer might have to ask prior permission for this from the competent Dutch courts. Whether or not such permission will be granted may depend on whether the foreign decision would comply with Dutch law notions of public order.
Should the foreign employer ask for an injunction in the Netherlands, assuming that the Dutch court is competent, it will, in principle, be required to follow the chosen foreign law and rule accordingly, both with regard to the validity of the clause and its scope. Unfortunately, not much case law is available on this and it is therefore uncertain to what extent the courts would take into account what the outcome might be according to local law.
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New Zealand
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1. Introduction 193
2. Conditions 193 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 194 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 195 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 196 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
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1. INTRODUCTION In New Zealand, non-compete provisions are generally referred to as restraints of trade. Restraints of trade are provisions in employment agreements that can restrict the activities of employees after termination of employment in three ways. A restraint can prevent a former employee from: • working for a competitor of his or her former employer or • soliciting work from customers and/or clients of the former employer for the employee’s new employer or • soliciting his or her former colleagues to leave the former employer and join the employee at his or her new employer.
A restraint of trade will be presumed void and unenforceable unless the restraint can be justified as necessary to protect a legitimate proprietary interest of the former employer and is in the public interest. The restraint cannot be any broader than necessary to protect the proprietary interest.
If an employer wishes to rely on and enforce a restraint it will need to justify the reasonableness of the restraint. The law does not permit a restraint which purports to prevent an employee from merely competing with the former employer or using the skills, experience and general knowledge that the employee has gained through his or her employment.
2. CONDITIONS
2.1 General An effective restraint of trade will generally need to be expressly incorporated into an employment agreement. There is a presumption against implying a restraint of trade in an employment agreement without clear evidence of agreement because the starting point is that such clauses are void and unenforceable.
Consideration (e.g. payment) for the restraint is required. If a restraint of trade is included in an employment agreement from the outset of the relationship then consideration for the restraint is found in the mutual exchange of promises between the parties. However, where the terms of the employment agreement are varied by the introduction of a restraint of trade clause, it will be necessary to identify distinct consideration for this variation.
2.2 Age Age has no direct relevance to the issue of enforcement of restraint of trade provisions. There is no general restriction on the age at which someone may sign an employment agreement, but it is unlikely that a restraint of trade would be included in an employment agreement where the person is in a junior position. If a restraint were included, it may not be enforceable.
2.3 Written form Since restraint of trade provisions must be specific and tailored to the particular employee, these provisions should usually be in written form.
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2.4 Renewal A restraint of trade provision should specify the period for which it applies and therefore will not be renewed.
2.5 Liability for compensation on dismissal If the employment agreement is repudiated by the employer by failing to perform a key contractual obligation and the employee then terminates the employment agreement, the courts tend to find that the employer cannot subsequently rely on a restraint of trade clause.
The position is more difficult where the employer has breached a legal duty, for example, has unfairly dismissed the employee. It is not clear whether the court would find a restraint of trade to be void and unenforceable in those cases.
3. REQUIREMENTS
3.1 General A restraint of trade provision must protect a legitimate and identifiable proprietary interest. It cannot simply be used to prevent competition or to prevent an employee from using the skills, experience and general knowledge he or she has gained through employment. A legitimate proprietary interest may include trade secrets, confidential information or trade connections.
3.2 Geographical, functional and temporal limitations Restraint of trade provisions will generally limit the activities of an employee after termination of employment in a geographical area for a specified period of time.
The geographical area will usually be defined as a radius from a known geographical location, although some provisions can refer to a particular city or even country. What is considered a reasonable area will depend on the circumstances of each case. For example, a New Zealand- wide restriction has been found to be both reasonable and unreasonable in different cases.
Whether the period of time specified in a restraint of trade is reasonable will need to be determined on a case-by-case basis. However, restraint periods of two, three or six months have been upheld as reasonable. The court will also likely take a period of garden leave into consideration when deciding whether a period of restraint is reasonable. For example, where an employee has been on a period of garden leave for six months, a restraint of trade period of six months may not be reasonable if the period of garden leave has sufficiently protected the employer’s proprietary interests.
In general, the broader the restraint of trade is in terms of geographical area and time period, the less likely that the courts will find it is reasonable and therefore enforceable. The restraint of trade provision, in terms of length, scope and purpose, should reflect the specific employment relationship in question. Generic restraint of trade provisions should be avoided.
3.3 Job changes If an employee does not have a restraint of trade provision in his or her employment agreement but his or her position and title changes, if the employer wishes to include a restraint of trade it
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must agree to a variation to the employee’s employment agreement with consideration (e.g. payment) given to the employee.
4. ENFORCEABILITY
4.1 General The courts in New Zealand will presume a restraint of trade void and unenforceable unless justified by the employer as necessary to protect its proprietary interests.
For a court to enforce a restraint of trade provision it must be satisfied that the restraint is reasonable. In considering whether a restraint is reasonable the court will consider whether: • the employer has a proprietary interest that is capable of protection • it is reasonable that the specified activities be restrained • the period of the restraint is reasonable and • the geographical limit of the restraint is reasonable.
The courts have the power to modify an unenforceable restraint so that the modified restraint would have been reasonable at the time it was agreed, and to enforce the modified restraint. The courts will not, however, substantially redraft an unreasonable restraint of trade clause.
An additional difficulty is that employment law requires that before modifying an employment agreement, the parties must attempt to resolve the problem themselves. Employers should not therefore rely on the courts as a safety net to modify an overly broad restraint to make it retrospectively lawful and enforceable.
4.2 Balance of interests A dispute about a restraint of trade provision will often need to be heard on an urgent basis. Where this is the case, the party seeking to rely on the restraint of trade can apply to the court for an interim injunction. The court will consider whether the party seeking to enforce the restraint has an arguable case, where the ‘balance of convenience’ lies and the interests of justice. (Note that the balance of convenience means the balance between the hardship to the applicant if the injunction is not granted, and the hardship to the respondent if the relief is granted).
4.3 Remedies The most common type of remedy an employer will seek if it believes an employee has acted in breach of a restraint of trade is an injunction from the court preventing the employee from continuing with the activity. The employer may also be entitled to damages where it has suffered loss.
If an employee is covered by a restraint that he or she believes to be unreasonable and therefore unenforceable, the employee can apply to the court for an order deleting or modifying the restraint.
4.4 Penalty clauses There are no penalty clauses in the context of restraint of trade provisions. If the restraint of trade provision is unreasonable it is deemed void and unenforceable.
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4.5 Damages Although an injunction is the most common remedy for breach of a restraint of trade, damages may also be awarded by the court. In deciding on the amount of damages, the court is guided by the principle that damages should be no more than is necessary to compensate the aggrieved party for the injury caused by the other party’s unlawful activity. The party seeking damages must establish on the balance of probabilities that the loss has been suffered, that it was related to what the other party did and the extent of the loss.
4.6 Liability of new employer Where the employee breaches a restraint of trade and the new employer is aware of this, it may be found to be party to the breach if it induced the employee to breach the restraint of trade.
5. SPECIAL SITUATIONS
5.1 No clause If there is no non-compete clause in the employment agreement, the employee is free to compete with his or her previous employer after termination of employment. However, an employee remains bound by common law or contractual duties of confidentiality which means that the employee must not disclose confidential information obtained during the employment.
5.2 Transfers of undertakings If an employee is transferred to another organisation as part of a transfer of the business, the terms of the employment agreement with the former employer will terminate and new terms (i.e. including a new restraint) must be agreed.
‘Vulnerable employees’, as defined in employment law, may choose to transfer to a new employer where the former employer is selling, transferring or contracting out the business. The employment will be on the same terms and conditions with the new employer, and the employment is treated as continuous. This includes any terms and conditions relating to non- compete, non-solicitation, restraint of trade and confidentiality.
However, once an employee has transferred, the new employer may try to negotiate new terms and conditions.
5.3 Cross-border competition Any type of restraint must be reasonable to be enforced by the courts. This includes in relation to the geographic area covered by the restraint of trade. It is rare for a restraint to be enforced where the geographic restriction extends beyond New Zealand, but it will depend on the seniority of the employee and the type of business.
5.4 Non-solicitation clauses In New Zealand the same rules apply as to non-compete clauses. A non-solicitation clause must be reasonable in what it restrains (i.e. particularly in geographic area and duration of restraint) to be enforceable.
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5.5 Insolvency There is no reason in law why post-employment restraints cannot be enforced by an insolvent employer.
5.6 Enforceability of foreign non-compete clauses Typically, the enforceability of foreign non-compete clauses depends on what the law of the contract should be and whether there is a governing law clause in the employment agreement.
For example, if the employee is employed under an Australian employment agreement but works in the organisation’s offices in New Zealand, the Employment Relations Authority or the Employment Court will weigh up the competing factors to determine which system of law should govern the contract.
The courts will examine the real nature of the employment relationship in addition to the terms of the employment agreements. The courts will also consider factors such as where the employee performs his or her duties and whether they are paid in New Zealand currency.
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Norway
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1. Introduction 201
2. Conditions 201 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 204 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 204 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 206 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 .4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
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1. INTRODUCTION By using a non-compete clause, an employer can prevent an employee from performing activities for a competitor or establishing a competing business after termination of employment. During employment, any potentially competitive activities by the employee will normally be regarded as a serious breach of the duty of loyalty in the employment relationship. It is therefore generally not necessary to include a non-compete clause in the employment agreement for the duration of employment.
Non-compete clauses are entered into between an employee and an employer for a period after the termination of the employment agreement. However, non-compete clauses can also occur in similar circumstances, for example, as part of a share purchase agreement with an entrepreneur or for the transfer of a business. Clauses preventing an employee from having contact or soliciting the former employer’s customers (i.e. non-solicitation clauses) are also possible.
From 1 January 2016 new law entered into force on agreements restricting competition in employment and regulating non-compete and non-solicitation clauses. The new law limits the rights of organisations to make agreements to recruit employees (i.e. non-poaching clauses). The new law applies to all new non-compete, non-solicitation and non-poaching clauses. Under transitional rules, the provisions apply to existing clauses from 1 January 2017.
2. CONDITIONS
2.1 General Non-compete clauses are regulated by law. By law, an agreed non-compete clause does not automatically apply, but must be invoked. It can only be invoked to the extent necessary to ensure the employer’s need for protection against competition. The maximum length of a non- compete clause is one year after termination of the employment relationship. The employer must compensate the employee if the clause is invoked. Further, the employer must provide a written statement about whether, and to what extent, the non-compete clause will be invoked in order for it to apply.
The law cannot be departed from by agreement, to the detriment of the employee. A non- compete clause that imposes further restrictions on an employee than those allowed by law must therefore not be used by the employer.
According to law, a non-compete clause is an agreement between an employer and employee which limits the employee’s employment with another employer or his or her ability to establish, manage or participate in another business after termination of the employment relationship. Therefore, a non-compete clause must be agreed upon by both parties. This can be a prohibition on taking employment or a provision stating that the employee must compensate the employer if he or she begins working for another employer. The scope of this provision is wide, as it is not necessary for the new employment to be in a competing business. Establishing, managing and participating in another business is covered.
The main condition for a non-compete clause to be lawful is that the employer must have a particular need for protection against competition. The employer’s position is evaluated on a case-to-case basis. The condition is generally satisfied where an employee acquires knowledge
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of trade secrets and know-how developed in the business. Factors including the employee's position and length of service are relevant in the assessment.
If the employer has a particular need for protection, the non-compete clause can be invoked, but only to the extent necessary to ensure that protection. The courts have the power to wholly or partially set a non-compete clause aside if found that it extends beyond the need for protection against competition. The purpose of the provision is to balance the conflicting interests of the employer, employee and the public interest. The purpose of the law is to limit the use of non-compete clauses and safeguard employers with a legitimate need for protection.
An important innovation in the law is the employer’s obligation to provide a written statement about whether and to what extent, the agreed non-compete clause will be invoked. The statement must include a description of the employer’s particular need for protection against competition. The purpose of this requirement is to force the employer to reconsider whether older non-compete clauses are necessary and to ensure clarity for the employee. The employee can request a written statement at any time, without reason and the statement must be provided within four weeks. The same rule applies if the employee gives notice of resignation. The deadline is four weeks from the date of the notice.
For dismissal with notice by the employer, a written statement must be provided at the same time as the notice. For a summary dismissal, the employer has one week after the decision to provide a statement. The written statement is binding on the employer for three months. For a dismissal with notice given before the three-month period, the statement is binding throughout the notice period, even if longer than three months.
A non-compete clause will lapse if it does not comply with the law on written statements.
A non-compete clause may only be enforced if the employee is dismissed for justifiable reasons relating to the employee, or if he or she gives notice. Non-compete clauses will lapse if the employer terminates employment because of a reorganisation, redundancy (i.e. circumstances related to the employer) or if a dismissal is not justifiable. If the lawfulness of the dismissal is disputed, the employee must decide whether to risk violating the non-compete clause by taking up employment with another employer while awaiting the decision of the court.
Further, a non-compete clause will lapse if the employee has reasonable grounds to resign because of the employer’s failure to fulfil its obligations under the employment contract, for example, a failure to pay the salary. The object of this provision is to prevent an employee being compelled to remain in an employment relationship because of a non-compete clause where the employer fails to fulfil its obligations.
According to law, an employer may cancel a non-compete clause in writing at any time during the employment relationship. This may be reasonable if the employer considers the compensation too high compared to invoking the non-compete clause. However, this must not be done in any period when the employer is bound by a written statement. After termination of the employment relationship the parties may enter into a written agreement for the non- compete clause to lapse.
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Contract law continues to apply to non-compete clauses that do not fall within the scope of employment law. For example, non-compete clauses outside employment relationships.
Under employment law, it may be legally agreed between an employer and a chief executive that the law on non-compete and non-solicitation clauses does not apply to the person in question. The condition is that he or she has waived the relevant rights in exchange for a termination payment by agreement. The agreement must be in writing and entered into during employment, normally as part of the employment agreement. The law does not impose any requirements on the amount of the payment.
If a valid agreement is made, the parties may, for example, agree on non-compete and non- solicitation clauses lasting longer than one year. However, non-compete and non-solicitation clauses are still governed by contract law, meaning that the courts may set the clause aside wholly or partly, if found unreasonable.
2.2 Age Minors will normally not be in a position where a non-compete clause will be valid.
2.3 Written form According to law, it is a mandatory requirement that a non-compete clause is in writing.
2.4 Renewal There is new law on non-compete clauses in Norway and in accordance with the transitional rules, certain provisions only apply to pre-existing non-compete clauses from 1 January 2017. Employers who have already signed non-compete clauses with employees had until the end of 2016 to renegotiate and adapt existing clauses to the new rules. The employer cannot impose further restrictions on the employee without consent.
2.5 Liability for compensation on dismissal If a non-compete clause is invoked, the employer must compensate the employee. The compensation must be 100% of the remuneration and may be up to eight times the basic national insurance amount (i.e. at the time of writing, approximately NOK 740,000). Further, the compensation must be at least 70% of the employee's remuneration if it is over eight times the basic amount. The parties may agree that the maximum compensation should be limited to 12 times the basic amount (i.e. at the time of writing, approximately NOK 1,110,000).
The compensation is calculated based on remuneration paid for the 12 months prior to notice of termination or summary dismissal. Remuneration includes all payments for work, including regular wages, overtime, bonuses and/or commission and holiday pay. Expenditure allowances and payments in kind, for example, do not count as remuneration.
The employer may deduct up to half the compensation if the employee earns or receives remuneration or other employment income from other employers for the period the non- compete clause applies. During this period, the employee has a duty of disclosure. If the employee fails to comply with this duty, the employer may withhold the compensation until the information has been provided.
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3. REQUIREMENTS
3.1 General The wording of a non-compete clause should be clear. Case law shows that any lack of clarity in the wording of a non-compete clause must be interpreted in terms of the intentions and expectations that both parties could reasonably have had when the clause was agreed. If this does not provide the necessary clarity, the clause will generally be interpreted in favour of the employee.
3.2 Geographical, functional and temporal limitations The more specific the non-compete clause, the more likely that it will not be declared void in court. A clause may more easily be invalidated if it involves large business sectors and/or broad geographical scope.
The maximum length of a non-compete clause under law is one year, but the reasonableness of the length of a non-compete clause should always be considered on a case-by-case basis.
3.3 Job changes A non-compete and/or non-solicitation clause can be changed or amended by mutual agreement between the parties during the employment relationship, including where an internal promotion is given.
An internal change to a job involving less responsibility and knowledge about internal affairs could also result in the employer no longer needing the protection of a non-compete clause, in which case, it would no longer be invoked.
4. ENFORCEABILITY
4.1 General The former employer can bring an action against the employee and/or the competitor or new employer before the courts for an interim injunction to stop the breach of a non-compete clause. Based on case law, former employers often succeed if they can prove a breach of contract and the need for an injunction.
4.2 Balance of interests When considering the validity of a non-compete clause, the court must consider all relevant circumstances. A balance of interest between the employer and the employee is no longer required. This is due to the employee’s absolute right to compensation and ability to request a written statement at any time.
The issue to be assessed is whether the employer has a particular need for protection, and whether the clause is wider than necessary. In general, the following aspects are often relevant: • the reason for termination of the employment relationship • the employee’s position • the length of service before termination • the employee’s actual knowledge of specific trade secrets and/or know how
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• whether the new business is a competitor • the potential financial loss • duration of the non-compete clause • geographical scope of the non-compete clause • business sector • whether the information will remain current • whether the information is well-known • whether the information is time-consuming to obtain.
4.3 Remedies Interim injunctions are often requested by the employer in conflicts over non-compete clauses that prevent harm and competition. In interim proceedings, only provisional measures can be ordered and these rulings apply until the court has settled the dispute.
The employee may also bring interim injunction proceedings against the former employer, file a petition to suspend the non-compete clause and apply for an order to void or moderate the non-compete clause. This is, however, unusual. Generally, the employer files for an interim injunction.
If the employee does not comply with the obligations set out in a non-compete clause, the former employer may start interim injunction proceedings against the employee to prevent him or her from entering into service with a competitor. The former employer may make a similar claim against the competitor or new employer to prevent it from engaging the employee in a competing business. Whether an interim injunction will be granted by the court will depend on whether the former employer can substantiate the claim as being in breach of the non- compete clause and prove the need for an injunction on the basis that the employer is at risk of substantial harm or disadvantage if preliminary measures are not taken by the court.
If the employee does not comply with the obligations of the non-compete clause, the employer may issue a claim for non-compliance with the non-compete obligations and claim for damages (i.e. both for actual and potential harm). Such an order may be issued at the same time as a request for an interim injunction or at a later stage.
4.4 Penalty clauses In order to ensure compliance with a non-compete clause, a penalty clause can be included in the employment contract stipulating a particular figure. If the parties have agreed upon a penalty clause, this can be produced in court without the employer having to prove actual harm or financial loss. Infringement of the non-compete clause is sufficient reason to claim the agreed penalty. However, a penalty clause does not generally exclude an additional claim of damages, depending on the agreement. A penalty clause may also be found invalid by the court, either wholly or partially, if it would be considered unreasonable under law.
4.5 Damages The former employer can claim damages for harm caused by breach of a non-compete clause where this can be evidenced based on the general rules for claims of damages. The type of
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compensation will vary from business to business and whether the claim is brought against the former employee or the competitor or new employer.
4.6 Liability of new employer The new employer may be found to have acted wrongfully against the former employer if it hires an employee in breach of a non-compete clause. The new employer may be considered to have acted contrary to good business practice under law, if it has appointed an employee who is bound by a non-compete clause or has instructed that employee to work in breach of a non- compete clause. In these situations, interim injunctions may be granted against the new employer.
5. SPECIAL SITUATIONS
5.1 No clause If there is no non-compete clause, the employee is free to enter into service with a direct competitor or start his or her own competing business after termination of employment. Further, the employee may target the same market and customers as the former employer.
However, a claim for damages may be made against an employee based on the general rules for claims of damages or a breach of the unwritten duty of loyalty in the employment relationship. The employee must have acted negligently and, as a result, caused loss to the former employer, for example, by the disclosure or use of business secrets or by starting up or preparing to compete before the expiry of the notice period. The burden of proof that a wrongful act took place lies with the former employer. Interim orders may also be granted against the new employer.
5.2 Transfers of undertakings All rights and obligations of both employer and employee transfer to the transferee under law. This includes any rights and obligations pursuant to a non-compete clause.
5.3 Cross-border competition The geographical scope of a non-compete clause does not need to be limited to the territory of or a region of Norway. It is possible for the parties to agree on a wider territory, for example, Europe. Whether the employer will be able to enforce a restrictive covenant in other jurisdictions will depend on an assessment of whether the clause is necessary.
5.4 .4 Non-solicitation clauses Non-solicitation clauses were not directly regulated by law prior to 2016. General contract law applied. Since 1 January 2016, non-solicitation clauses are regulated by new law.
A non-solicitation clause is defined in law as ‘an agreement between an employer and an employee restricting an employee's right to make contact with the employer's customers after termination of the employment relationship’. Accordingly, a non-solicitation clause must be agreed by both parties. The limitation can be a prohibition on contact or a provision stating that the employee must compensate the employer if he or she makes contact with a previous
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customer. The employer cannot prohibit the employee from having contact with former customers who initiate contact with the employee.
The term ‘customer’ is not defined in law. The wording suggests that only recipients of the employer’s products or services are included and that suppliers, collaborating partners and former or potential customers fall outside the scope. There are, however, good reasons for considering business connections, such as suppliers, as customers, especially as the new provisions limit the use of non-compete and non-solicitation clauses because of the rights of employee to work and society’s interest in freedom in the labour market.
A non-solicitation clause may be agreed upon for a maximum of one year after termination of employment. Only customers an employee had contact with or responsibility for in the year prior to the date of the written statement may be included. There is no condition that the employer has a particular need for protection.
It is important to determine the extent of the requirement of affiliation. There must be an individual assessment for every customer. According to law, customers the employer has engaged in deliberations or negotiations with will typically fulfil the requirement. The requirement will be fulfilled if the employee has been responsible for the customer.
Unlike a non-compete clause, an employee is not entitled to compensation if the employer invokes a non-solicitation clause, but the parties are free to agree upon compensation.
There is a requirement for an employer to provide a written statement when applying a non- compete clause and this also applies to non-solicitation clauses. The statement must specify the customers covered by the clause.
The same rules that apply to non-compete clauses regarding cancellation, written form, lapse when the employment relationship is terminated by the employer, transitional rules and exceptions for chief executives apply to non-solicitation clauses.
Further, non-poaching clauses are partially regulated in the new law. A non-poaching clause is defined as ‘an agreement between the employer and other organisations which hinders or restricts an employee’s ability to take up employment in another business’. Accordingly, only clauses agreed upon between the employer and an organisation are included. Freedom of contract applies to a non-poaching clause agreed upon by an employer and employee.
The main rule is that non-poaching clauses are prohibited. There are, however, exceptions for non-poaching clauses agreed during negotiations on the transfer of an organisation. Such clauses may be invoked during the negotiations and up to six months afterward, if negotiations prove unsuccessful. A non-poaching clause may also be agreed upon from the date on which the transfer takes place and up to six months, provided that the employer has informed all affected employees in writing.
5.5 Insolvency If an organisation becomes insolvent, the administrator will, in most cases, need to dismiss all employees. At the same time, the administrator will try to find a way to sell valuable assets or restart. The administrator may, therefore, have an interest in ensuring employees keep to any obligations they may have under a non-compete clause. However, a non-compete and non-
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solicitation clause will automatically be void if the dismissal is caused by insolvency (i.e. circumstances relating to the employer).
5.6 Enforceability of foreign non-compete clauses Whether a foreign non-compete clause can be enforced in Norway will be determined on the basis of private international law rules. Even if an employment agreement is subject to another country’s jurisdiction, the normal practice would be for the trial to take place in Norway.
208
Peru
209 Ius Laboris
1. Introduction 211
2. Conditions 211 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 212 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 213 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 214 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
210 Non- Compete Covenants - Peru
1. INTRODUCTION It is common for employers to include provisions in labour contracts to prevent employees from competing with the employer once the labour contract ends.
The most common clauses fall into the following categories: • Non-compete: Prevents competition against the employer or former employer. • Non-dealing: Prevents accepting business from current or former clients. • Non-solicitation: Prevents contact with current or former clients, but does not prevent the employee from accepting business if the client is not approached. • Non-poaching: Prevents contact with former colleagues to join the former employee in a new business.
These categories are not regulated in labour law. The Peruvian Constitution recognises and guarantees the right to work by providing the following principles: • Work is a duty and a right of citizens. It is the basis of social welfare and the means of individual fulfillment. • Work protects mothers, minors and disabled persons. The Peruvian government promotes social and economic progress. No working relationship can limit the exercise of the constitutional rights or violate the dignity of workers. • Fair payment for working must be ensured and this means that every employee must be paid for work performed. • The average working day is eight hours and the working week is 48 hours. • Freedom from discrimination, interpretation of the rules in favour of workers and a prohibition against waiving up labour rights. • Protection against unfair dismissal. • Provision of collective rights for workers such as collective bargaining and the right to strike. • The ability for the workers to benefit from gains made by the organisation.
Generally, the employer will pay an amount to the employee to comply with a non-compete clause. The courts will invalidate clauses that do not have this condition.
2. CONDITIONS
2.1 General Any restrictive covenant must be written into the contract. If a contract does not expressly do this, the employee is not bound after his or her employment ends. The employee owes the employer duties of loyalty, good faith and confidentiality and a duty to use labour time to the benefit of the employer. The employee should not pursue any other activities during this time.
During the labour relationship the employee must not disclose confidential information and this applies to trade secrets after termination. However, this does not prevent the employee from pursuing other activities that are not related to the employer’s business outside of the employer’s time unless otherwise agreed by both parties.
2.2 Age Age has no relevance regarding the issue of enforcement of covenants.
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2.3 Written form Non-compete clauses must be written into the contract. The clauses must define the amount that will be paid at the end of labour relationship and the period for which the clause will be valid.
2.4 Renewal Non-compete clauses are entered into for a fixed period of time and take effect when the labour relationship ends. But there is no reason, why covenants cannot be renewed and rewritten from time to time provided both parties agree and there is appropriate compensation.
2.5 Liability for compensation on dismissal If a contract is terminated, any restrictive covenants may be enforceable against the former employee, but this will depend on whether the employee received fair payment in exchange for compliance with the agreed clauses. Any agreed clauses must state that payments to be made to the employee are enforceable.
3. REQUIREMENTS
3.1 General The Constitution protects the right to work and since non-compete clauses are not regulated or prohibited, the employer and employee may agree the wording of a restrictive covenant provided both parties benefit from it.
Note that a non-compete clause must not go against the Constitution. This means that the clause should protect the interests of the employer whilst paying the employee when the labour relationship ends.
3.2 Geographical, functional and temporal limitations If an employer wants to prevent the employee from working in a specific geographic area, this must be specified in the clause. If the employer tries to restrict the geographical area in which an employee can work, it should use the same clause to restrict the type of work that can be performed.
The restrictive covenant must be made in writing in order to be valid and the employer must have a contract with the employees covering the restraint to be exercised. If the employer wants to prevent a relationship between the employee and any other organisation or potential client, it is not be necessary for the employer to have a written agreement with those organisations. It is sufficient for it to have an agreement with the employee.
A restrictive covenant must be justified in terms of time. The longer the period a clause covers the more it will cost the employer. As this matter is not regulated, the parties may agree the conditions.
3.3 Job changes Usually, restrictive covenants are used for high-level employees, but this does not prevent the employer establishing a restrictive clause with a junior employee. If the employee is promoted
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and he or she previously had a non-compete clause, the employer should note this in the promotion notice to avoid conflict about the validity of the restrictive covenant.
4. ENFORCEABILITY
4.1 General Non-compete clauses can be enforced if the employer has paid the agreed amount to the employee, but otherwise the clause is not enforceable. Case law supports this view.
If a former employee breaches the contract, the affected employer is entitled to bring a claim against the employee before the labour courts.
4.2 Balance of interests Even if there is a valid clause, it may be disproportionate. The court will review all the information when considering the validity of a clause. The interests of the employee will be weighed against the employer’s interest in protecting its business. The following interests will be taken into account: • the danger of loss of profit because the employee knows specific trade secrets of the employer; • length of service by the employee; • who terminates the labour relationship; • training that the employer has paid for, for the employee; • the future of the employee in his or her career.
4.3 Remedies If an employee has not been paid for the covenant and he or she is taken to court to enforce the clause, the employee can respond by claiming the employer is avoiding payment.
If an employer suffers loss as a result of breach of the clause by a former employee, the employer may claim the agreed financial compensation or request a different amount.
Since this matter is not regulated, the employer could request an injunction to prevent the former employee from continuing to breach the contract. For example, the employer could apply for an injunction if a former employee tries to steal a major client and there is a continuing risk of this. Injunctions may be granted before or during the court process. Note that if the first instance judge does not rule in favour of the employer, any injunction already obtained will no longer be valid.
4.4 Penalty clauses There is no concept of a penalty clause in relation to non-compete clauses. If the effect of a clause is to restrict the employee beyond what is reasonably necessary to protect the employer, the clause is not valid.
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4.5 Damages The agreed payment between the parties should cover breach of contract and therefore additional damages would be unusual However, this does not mean that a court may not award damages.
4.6 Liability of new employer If a new employer encourages the employee to breach the contract, the new employer may have equal responsibility with the employee.
5. SPECIAL SITUATIONS
5.1 No clause If there are no express restrictions, the employee may do whatever he or she wishes after termination of the employment as long he or she does not misuse confidential information.
5.2 Transfers of undertakings If an employee is transferred (i.e. where one business takes over another), two situations are possible:
• The labour relationship between the former employer and the employee is no longer valid and the new employer offers a new contract with different conditions. • The transfer agreement provides that the conditions of the contract will remain the same and the new employer simply replaces the former employer.
5.3 Cross-border competition There is no reason why a restrictive covenant could prevent cross border competition but enforcement may be more complicated, as proof of conduct would be more difficult be harder for the employer to obtain in practice.
5.4 Non-solicitation clauses There is no specific regulation of non-compete clauses, and so there is no reason why they could not protect against the non-solicitation of clients or prospective clients, or the misuse of confidential information. Breaches of such provisions may not to be too hard to prove, in which case the courts may uphold them.
5.5 Insolvency When an employer becomes insolvent, a non-compete clause will no longer be valid, as the employer will cease to exist. This means that there is no entity that could bring a claim against a former employee for breach. This is the case even if an administrator is named for an organisation under liquidation and the administrator wishes to pursue a former employee. The local courts will not consider the claim because the employer no longer exists.
5.6 Enforceability of foreign non-compete clauses Usually the law of an employment contract is the labour law of the country where it is signed. According to Peruvian law, if services are rendered in Peru the applicable law is Peruvian law.
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In addition, where the parties agree clauses in which there are cross-border issues, if the employee is domiciled in Peru, it should be possible to make a claim for breach of contract.
215
Poland
217 Ius Laboris
1. Introduction 219
2. Conditions 219 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 220 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 221 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 222 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
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1. INTRODUCTION A non-compete agreement prevents employees from conducting competitive activities on their own and from performing work or services for other entities that are in competition with the employer. A non-compete obligation may cover: 1) the period of employment and 2) the period following termination of employment.
This means that concluding only an employment agreement does not prevent an employee from conducting a competitive activity as long as the activity does not violate the employer’s interests or damage the employer. In order to fully prohibit an employee from performing a competing activity during employment, the employer should conclude a non-compete agreement with him or her for the period of their employment.
It is recommended that non-competition during employment or for the period following termination of employment is specified in an agreement which is separate from the employment agreement.
2. CONDITIONS
2.1 General A non-compete agreement may only be concluded during the employment relationship.
A non-compete agreement for the period of employment may be concluded with any employee.
By contrast, a non-compete agreement for a period following termination of the employment may be concluded only with an employee who has access to particularly important information, the disclosure of which may harm the employer.
2.2 Age There are no restrictions which would prevent the conclusion of a non-compete agreement with an employee who is under 18 years of age.
2.3 Written form Non-compete agreements must be made in writing and will be invalid if not.
2.4 Renewal The renewal of an employment agreement may require the conclusion of a new non-compete agreement. In general, the renewal of a non-compete clause will not be required if there is no time-gap between both employment agreements and when the relevant circumstances (e.g. the scope of activity of the organisation) changed.
2.5 Liability for compensation on dismissal A non-compete agreement will be valid even if the employer is liable for unlawful dismissal.
Further, the employer has the right to dismiss any employee who refuses to enter into a non- compete agreement.
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3. REQUIREMENTS
3.1 General A non-compete agreement should specify a number of issues, as described in sections 3.2 and 3.3. Some of these are legal requirements and others are recommended for practical reasons.
Note that compensation is not required in a non-compete agreement for the period of employment. By contrast, compensation is required in a non-compete agreement for the period after termination of the employment. The compensation must not be less than 25% of the remuneration (including bonuses, etc.) that the employee received during the period prior to termination of his or her employment, provided that period corresponds to the duration of the non-compete clause. This means that if a non-compete clause lasts for one year beyond termination of employment then the compensation should be 25% of the employee’s earnings from the last year of employment. It is recommended that the compensation be paid in monthly instalments.
3.2 Geographical, functional and temporal limitations Territorial scope should be indicated with reference to the place in which an employer carries out its business activity. It could be described as one or more cities, a region or a whole country. It can also include other countries. The territorial limits of a non-compete clause should be reasonable, i.e. they should reflect the area within which the employer actually conducts its business. If they are not, the court may declare that the prohibition does not apply to a particular territory.
There is no legal definition of competitive activities and the agreement should therefore define these. The activities defined as competitive must be truly competitive to the employer, i.e. they must be actual or planned activities.
A non-compete agreement for the duration of the employment is binding until termination of the employment.
A non-compete agreement following termination of employment is binding for an agreed period following termination. There are no statutory restrictions on the length of non-compete agreement after termination of employment. However, the employee’s non-compete obligation expires when the ‘reasons for the non-competition expire’. In such cases, however, the employer’s obligation to pay compensation remains. Thus although the employee will be considered free once the ‘reasons for the non-competition expire’ the employer will be obliged to continue to pay compensation until the end of the period originally agreed. Hence there is a certain risk attached to making agreements for too long, though this is low because according to recent jurisprudence, the ‘expiration’ of the reasons for the non-compete is assessed by the employer at its discretion and is not subject to control by the court.
3.3 Job changes Changes in position do not influence non-compete agreements.
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4. ENFORCEABILITY
4.1 General The enforcement of non-compete clauses by means of specific performance is difficult. Enforcement of damages is possible as long as the employer can prove harm and a causal nexus between the employee’s breach and the harm. Contractual penalties are the best means of enforcement because the employer need only prove breach for the penalty to be awarded. This option is, however, only available for post-employment non-compete clauses.
4.2 Balance of interests When investigating the validity of a non-compete agreement, the court will examine whether the formal requirements were met (e.g. written form) as well as the general requirements for contracts (e.g. the intention of the parties to conclude an agreement).
4.3 Remedies The employee’s liability for breach of a non-compete clause during employment is capped at a level of three months’ salary if the breach is involuntary. If employee willfully breaches a non- compete obligation, the employer may claim full reparation of damage. Breach of a non- compete agreement may also constitute a justified reason for termination of employment or, depending on the circumstances, immediate, i.e. ‘disciplinary’ termination of employment without notice.
In the case of a breach of a non-compete obligation after termination of employment, the employer is not obliged to pay the agreed compensation to the employee and can claim damages in full. The employer can also enforce a contractual penalty, if this is provided for in the agreement.
4.4 Penalty clauses A contractual penalty is not permitted in a non-compete agreement during the period of employment. By contrast, a penalty is permitted in non-compete agreements for the period following termination of employment. The court may reduce the amount if the penalty is excessive.
4.5 Damages An employee bears financial liability towards its employer for harm which the employer suffered through non-compliance or imperfect compliance with a non-compete agreement. The burden of proof is on the employer. The employer must prove: (1) the illegality of the act; (2) harm suffered; (3) culpability; (4) a causal nexus between the act and the harm, which can be very difficult. A non-compete agreement may contain a right for the employer to ‘waive’ it before the agreed end date. A right of that kind must be expressed as a ‘rescission’ or ‘termination by notice’ (or both).
According to Supreme Court case law, the employer’s right to ‘rescind’ a non-compete agreement can be exercised until the end of the non-compete obligation. There are no particular conditions to be met to exercise this right and it is therefore at the employer’s discretion.
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The right to terminate a non-compete agreement ‘upon notice’ can also be exercised up to the end of the non-compete obligation only in the circumstances specified in the agreement. However, these circumstances may be described very generally.
4.6 Liability of new employer A new competitive employer is not liable for hiring an employee who is bound by a non- compete agreement with a former employer. However, the employer is prohibited from soliciting an employee to terminate or breach an agreement with the former employer for gain. (This is irrespective of whether this employee has a non-competition agreement with his or her employer.)
5. SPECIAL SITUATIONS
5.1 No clause By Article 100 of the Labour Code, employees have a statutory obligation to act respectfully in relation to the interests of the employer. To a certain limit this also prevents an employee from conducting competing activities.
5.2 Transfers of undertakings Pursuant to Article 23(1) Section 1 of the Labour Code, all rights and obligations of both the employer and the employee are transferred to a transferee by operation of law. Therefore, a non-compete agreement for the period of employment will be binding on both the employee and the transferee. Note however that, according to a recent Supreme Court ruling, a non- compete agreement for the period after termination of employment is not a part of employment relationship subject to Article 23(1) regulation. Hence, this is not transferred to the new employer in the case of a transfer of the undertaking.
5.3 Cross-border competition A non-compete agreement should determine the territorial limitation of any non-compete obligation. The territorial scope cannot include areas within which the employer does not conduct its business activities.
5.4 Non-solicitation clauses Some aspects of non-solicitation are covered by the Law on Counteracting Unfair Competition of 16 April 1993. Under this Law an employee is prohibited from soliciting for gain any persons (including other employees or clients) to terminate or breach an agreement with the employer/ex-employer. This prohibition is without time limitation.
For three years after termination of the employment, the employee is also forbidden from disseminating trade secrets of the organisation that were learned of during the employment. Trade secrets include: technical, technological and organisational information and other information of economic value which is not in the public domain, where the employer has taken all necessary steps to keep it confidential. The non-compete agreement may contain further non-solicitation, or other similar obligations.
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5.5 Insolvency Insolvency does not affect non-compete obligations. A non-compete agreement following termination of employment may be withdrawn from by the employer with immediate effect if the employer had been declared ‘bankrupt’ by the court. If, however, the undertaking is sold, the transferee becomes fully liable for the transferor’s liabilities under the non-competition agreement, unless the official receiver withdrew from the agreement before the transfer.
5.6 Enforceability of foreign non-compete clauses If a Polish court is required to rule on a foreign non-compete agreement, the first step it will take is to ascertain whether the courts of any other country in fact have exclusive jurisdiction. This will require an examination of both Polish and international law, including any bilateral agreements between Poland and the respective country.
If the Polish court has jurisdiction over the case, it will apply the foreign law governing the non- compete obligation. Any doubts with respect to how it should be applied may be explained upon the court’s request by the Ministry of Justice or an expert appointed by the court. Where the court is unable to determine the meaning of an aspect of the foreign law, Polish law will be applied as an auxiliary.
Polish courts may not apply foreign law if the application of it would be contrary to fundamental principles of the Polish legal system.
223
Portugal
225 Ius Laboris
1. Introduction 227
2. Conditions 227 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 228 3.1 General 3.2 Geographical functional and temporal limitations 3.3 Job changes
4. Enforceability 229 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 231 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
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1. INTRODUCTION The Portuguese Constitution sets out the general principle of freedom to work. This forbids unreasonable limitations on employees’ rights in what concerns access to employment, both during and after termination of the employment contract.
In a modern economy, competition by former employees is a reality, and all knowledge, skills and expertise acquired by the employee during the execution of the employment contract add to the market value of the employee and may be lawfully used by him or her on the labour market.
Following the above constitutional principle, the Portuguese Labour Code (the ‘Code’) stipulates that any clause in an employment agreement or any provision of a collective bargaining agreement which directly or indirectly limits an employee’s freedom to work after termination of the employment is void.
However, as an exception to this, bearing in mind the legitimate interests of the employer, it is possible to agree a non-compete clause, provided that the general conditions for non-compete clauses are met.
2. CONDITIONS
2.1 General It is lawful to agree that the employee, after termination of the employment contract, will be prevented from performing certain activities. These activities may be related to new employment with a competitor of the former employer or the establishment of the employee’s own business, if that adversely impacts on the business of the former employer. Formal conditions have also to be met in order for the non-compete clause to be valid and enforceable.
According to the Portuguese Labour Code (the ‘Code’), a non-compete clause is only valid if the activity the employee is prevented from performing may cause, or has the potential to cause, harm to the employer. The Code uses the expression ‘activities that may cause harm to the employer’, which leads to the conclusion that both direct and indirect harm may be covered. Taking the above into consideration, non-compete clauses may consist of: • prohibition of a certain activity • prohibition of contacting competitors of the employer • prohibition of contacting clients or service providers of the employer.
2.2 Age Portuguese law does not contain restrictions of any kind to non-compete clauses on the basis of age. It is therefore lawful to set restrictions to the employee’s activity irrespective of his or her age.
2.3 Written form In order for a non-compete clause to be valid and enforceable it must be agreed in writing, either in the employment agreement or in a termination agreement.
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2.4 Renewal In cases where important changes to the job of the employee within the organisation occur, it is advisable to consider whether any adjustment should be made.
2.5 Liability for compensation on dismissal Non-compete clauses remain in force irrespective of the causes of termination of employment.
3. REQUIREMENTS
3.1 General As in any other agreement, the wording of a non-compete clause should be very clear and particular attention should be paid to setting out the activity or activities that the employee is prevented from performing. On the one hand, a wide open clause may benefit the employer, since it may argue that a specific activity is included in the ‘general concept’ agreed with the employee and, therefore, that he or she is not entitled to perform a new job. However, the risk is that the court may consider a very broad clause as unreasonable and disproportionate. On the other hand, a ‘closed clause’, where the parties are exhaustive and list out the activities specifically, may benefit the employee if it is too limited. It should be noted that Portuguese courts still tend to interpret non-compete clauses, as well as other clauses connected to employment relations, in favour of the employee.
It is recommended that the employer revise the non-compete clause from time to time, to assess whether or not it still protects its interests.
During the non-compete period the employer must pay the employee compensation, which may be less than they would have been if the employer has paid a significant amount towards training the employee. There is no mandatory rate for the compensation but it must be agreed in writing and be reasonable and proportionate.
Courts tend to consider void any non-compete clauses that set compensation that does not truly reflect the employee’s interests during the period of limited access to the labour market, with the consequent income loss that entails.
3.2 Geographical functional and temporal limitations For the employer, any competition is a risk, either from a geographical or functional point of view. The requirements of the law concerning the existence of actual or potential harm to the employer as a result of the employee’s activities, are directly connected to how far the clause extends geographically and functionally.
For the agreement to be valid it must refer to an objective competitive activity but the Portuguese Labour Code (the ‘Code’), does not contain any provisions regarding geographical and functional limitations. Normally, the parties agree on both geographical and functional limitations, i.e. the employee is prevented from performing X activity as an employee for any other company located in Y.
Any limitations on the freedom to work must be reasonable (it may be unreasonable to forbid an employee of a small bookshop in an area of Lisbon to work for a bookshop in Oporto, but this may not be the case if it is a highly specialised bookshop).
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According to the Code, a non-compete clause is valid for a maximum of two years after termination of the employment agreement, but this may be increased up to a maximum of three years in cases where the employee performs tasks involving a special relationship of trust or if he or she deals with privileged information regarding competition issues.
3.3 Job changes Where employees have changed their jobs in the course of their employment, an existing non- compete clause may no longer be enforceable, since it may not reflect the new goals of the employer. However, it is for the employee to prove that with the change of job, he or she is being held back by the clause and that by holding the employee to it, his or her interests are unreasonably affected.
Therefore the court must consider whether there is a relevant change in position and whether the change influences the position of the employee on the labour market.
4. ENFORCEABILITY
4.1 General The enforceability of a non-compete clause is dependent on its reasonableness, though the courts may have some discretion to interpret or amend clauses so they may be enforceable. Whilst a court may not rewrite an unreasonable or overly-broad non-compete clause, it does have some discretion in the way in which it interprets a clause. The court may also strike out any offending unreasonable elements to make it reasonable.
4.2 Balance of interests In considering the validity of a non-compete clause, the court will take all relevant circumstances into account. The interests of the employee in accepting the new position will be weighed against the interests of the employer.
4.3 Remedies Issues regarding non-compete clauses (notably enforceability, extension, reduction, validity, etc.) may be discussed and resolved through mediation by specialised organisations or brought before the Labour Courts. Although mediation is faster and cheaper than court procedures, in Portugal it is still not standard practice to use mediation services.
Employee The employee may file a petition to reduce the period of operability of a clause, mitigate its scope, increase the amount of compensation, or declare the clause void. The employee may initiate a judicial procedure either during employment or after termination.
Employer If the employee does not comply with the obligations of a non-compete clause, the employer may demand compliance or claim compensation for breach.
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4.4 Penalty clauses Penalty clauses agreed to ensure compliance with a non-compete clause are valid only upon termination of the employment contract. The employer will argue breach of the non-compete clause and must provide the grounds for the claim and adduce evidence to prove it.
If the parties have not agreed a penalty clause, the employer may still claim damages for breach of a non-compete clause. When claiming damages however, the burden of proof for actual loss rests with the employer. It is possible to claim both a penalty and damages from the employee, but only where both options have been explicitly agreed upon.
4.5 Damages The court may decide that compensation can be reduced fairly where the employer has spent a large amount on the employee’s training. The employer must award compensation during the non-compete period. The compensation may be fairly reduced in cases where the employer has spent large amounts on the employee’s training.
The parties may agree that compensation will be paid upon termination of the employment agreement or during the non-compete period. The courts generally prefer compensation to be paid over the non-compete period, rather than as a lump sum.
The Portuguese Labour Code does not provide any guidelines regarding the amount of compensation, meaning that the parties are free to agree on any amount, but it may vary according to the following circumstances: • the risk of harm, given that the employee is aware of specific trade secrets of the organisation and/or has contacted customers or other important contacts of the employer • actual or potential harm to the employer, bearing in mind the nature of the prohibited activity • length of service, in cases where the non-compete clause is inserted in the employment termination agreement • the time when the non-compete clause was agreed (i.e. at the beginning or during the course of the employment) • the risk for the employee of losing his or her new job by being held to the non-compete clause, as well as his or her opportunities on the labour market.
In cases of unfair dismissal or termination of the employment contract by the employee based on fair cause (i.e. on an unlawful act by the employer), compensation agreed may be increased judicially up to the amount of the employee’s base remuneration at the time of termination. Failure to pay this compensation prevents the employer from invoking the non-compete agreement. In such a case, the employee will be free to perform any activity, including a competing one. Conversely, payments received by the employee for professional activities rendered after termination will be deducted from the compensation awarded by the courts.
4.6 Liability of new employer In general, a new employer is not liable for damages by the mere fact that it has hired an employee who is bound by a non-compete agreement. However, in special circumstances the new employer could be liable, for example, if the new employer knew the employee was
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bound by a non-compete clause and hired him or her in order to actively approach customers of its competitor by using information that the employee has gained in his or her former position. The burden of proof of these circumstances rests with the former employer.
5. SPECIAL SITUATIONS
5.1 No clause If there is no non-compete clause that applies, the employee is free to enter into service with a direct competitor or start his or her own competing business. In addition, the employee may work in the same market and with the same customers as the former employer.
The employee will only be liable for damages, if he or she acts wrongfully against the former employer, notably in situations of unlawful competition. The burden of proof of this wrongful act rests with the former employer.
Although many non-compete clauses foresee the possibility of the employer opting out within a certain (usually short) period after termination, the Portuguese courts have tended to rule that unilateral opting out is not valid, as the employee’s free choice of new work would have already been limited by that point.
5.2 Transfers of undertakings According to the Portuguese Labour Code, all rights and obligations of both employer and employee will be automatically transferred to the transferee upon transfer. This includes the rights and obligations pursuant to a non-compete clause.
5.3 Cross-border competition It is common practice for non-compete agreements to stipulate a geographical limitation. Where the parties agree that the employee is prevented from performing activities outside Portugal, two questions may arise: • Is it reasonable to extend the limitation beyond Portugal, given that the countries in which the limitation will apply are stated? • Is the agreement enforceable?
As concerns the first question, the answer will depend on actual or potential harm to the former employer. In fact, if the former employer operates in certain specific countries, it could well be reasonable to stipulate them in a non-compete clause, particularly if competitors operate in the same geographical areas.
On the second question, the clause will be enforceable in Portugal if the parties have agreed that it is subject to Portuguese law (which may facilitate a claim against the former employee for breach of the agreement).
5.4 Non-solicitation clauses A relationship clause is also considered to be a form of non-compete clause and it is, in principle, therefore treated in the same way as a non-compete clause, but should be assessed on a case-by-case basis.
231 Ius Laboris
5.5 Insolvency Although Portuguese law does not contain any specific legal provisions regarding this matter, in cases where an insolvency procedure has led to an organisation’s closure, it is not reasonable to continue to enforce a non-compete clause on employees – whose employment contracts will soon end or have already ended. In fact, it would not seem to be a legitimate interest of the former employer to prevent its ex-employees from working for a competitor once the organisation has stopped conducting business.
5.6 Enforceability of foreign non-compete clauses Should a foreign non-compete clause be submitted for assessment to a Portuguese court, it will be found to be enforceable provided that it complies with the requirements set forth in Portuguese law.
232
Romania
233 Ius Laboris
1. Introduction 235
2. Conditions 235 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 236 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 237 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 238 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
234 Non- Compete Covenants - Romania
1. INTRODUCTION Romanian employment law expressly allows for non-compete clauses within employment agreements to prevent an employee from performing competing activities for a limited period of time after the termination of the employment agreement. During employment, the employee's non-compete obligation is considered as part of the fidelity obligation.
A non-compete clause post termination represents a limitation on the former employee's right to work for which he or she receives a non-compete indemnity from the employer. To protect both the employer and employee's interests, the law sets out specific enforceability requirements for the non-compete obligation. Even if the non-compete clause complies with these requirements, when requested to decide on the validity of a non-compete clause, the courts will analyse the interests of both the employer and employee and, depending on the circumstances, may declare the non-compete clause void or may limit its effect.
2. CONDITIONS
2.1 General Under Romanian labour law, a non-compete clause can be included in an employment agreement, from the date it is signed or during performance of the agreement. This clause means the employee agrees to refrain from performing, after the termination of the employment contract, any activity competing with the activities performed for the employer, for a certain period of time, on his or her own account or for a third party. In return, during this period, the employer pays the former employee a monthly ‘non-compete indemnity’.
2.2 Age There are no restrictions on age in relation to a non-compete clause in the employment contract, as long as the general employment age restrictions provided by law are observed (i.e. individuals aged 15 may only perform work with approval from parents or legal representatives, but those aged 16 or 17 can perform work without any approval).
2.3 Written form Romanian labour law expressly provides that, to be valid, the employment contract must be in writing. As a result, for a non-compete clause to be valid and enforceable, it must be in writing in the employment contract or an addendum.
2.4 Renewal Once included in the employment contract, the non-compete clause becomes enforceable once the employment contract has terminated. There is no need for the clause to be renewed during the employment. However, any amendment of a non-compete clause included in the employment contract must be made by way of an addendum. Note that general, an addendum must be concluded within 20 days of the amendment taking effect, but amendments to a non- compete clause will become effective only after termination of the employment contract.
235 Ius Laboris
2.5 Liability for compensation on dismissal When the employment contract is terminated in accordance with law, generally the non- compete clause is enforceable post-employment, subject to specific exceptions provided by the law.
A non-compete clause will not normally operate post-employment if the employment contract is terminated by virtue of law. However, in the following cases, a non-compete clause will be enforceable: • upon retirement • following reinstatement of a former employee in his or her job, where the employment agreement had been terminated without observing the legal requirements • if the employee is imprisoned • if the authorisations or certificates necessary for performing the employee's profession are revoked by the relevant authority • upon the expiry of a fixed term employment contract.
A non-compete clause does not apply when the employment contract is terminated by the employer for reasons not related to the employee (e.g. redundancy).
3. REQUIREMENTS
3.1 General If the employee or the labour authority requests it, a non-compete clause can be reduced in scope by a court. Therefore, the terms and conditions of the clause must be clear and precise, granting adequate protection to the employer and made in accordance with the legal requirements.
3.2 Geographical, functional and temporal limitations Romanian labour law sets out strict rules regarding the content of non-compete clauses. For a non-compete clause to be enforceable, it must contain express and detailed references to: • The activities that must not be performed by the former employee. • The amount of the monthly non-compete indemnity, in accordance with the legal provisions in force, in exchange for the non-compete. The employee is entitled to receive a monthly non-compete indemnity amounting at least 50% of the average gross income received by the employee in the six months prior to the termination of his or her employment. • The duration of the non-compete obligation. The non-compete clause can be in force for a maximum of two years from the date of termination of employment. • The third parties with whom the employee may not perform activities. • The geographical area in which the employee may not compete with the employer.
The non-compete clause cannot make it impossible for the employee to carry out his or her profession or specialisation. At the employee’s or labour authority's request, a court may limit the scope of a non-compete clause included in the employment agreement. For example, some
236 Non- Compete Covenants - Romania
courts have ruled that a non-compete clause stating that the prohibited area is Europe is void because such a broad clause would make it impossible for the employee to do his or her job.
However, note that relevant case law on this topic in Romania is both scarce and inconsistent.
3.3 Job changes If the employee's job and corresponding activities change and a non-compete clause is included in the employment agreement, the employer should amend it so as to better protect its interests.
4. ENFORCEABILITY
4.1 General Provided a non-compete clause complies with the legal requirements, it will be, in principle, enforceable. However, on the employee’s or labour authority's request, a non-compete clause can be amended by a court.
4.2 Balance of interests If a court of law is asked to review the validity of a non-compete clause, the interests of both the employer and the employee must be considered.
The courts have ruled several times that the reasoning behind a non-compete clause is to protect the employer and it is in the employer's interest to include a non-compete clause in the employment contract. Meanwhile, the employee is not prejudiced as he or she receives a non- compete indemnity to compensate for the limitation on the right to work.
4.3 Remedies Under Romanian law, the employee or the labour authority may claim in court that a non- compete clause is void or its scope should be limited.
Under Romanian law, if the employee does not comply with the non-compete clause, the employer may bring a claim in the court for performance of the non-compete obligations, the restitution of the non-compete indemnity already paid to the employee and damages corresponding to the prejudice caused by the breach.
4.4 Penalty clauses To safeguard the employer's interests, a penalty clause for the payment of a specific amount if the employee does not comply could be included in the employment agreement. Very rarely in practice, are penalty clauses are imposed upon employers.
Romanian labour law does not contain specific provisions relating to penalty clauses. The general law on such clauses is in Romanian civil law which defines a penalty clause as a clause where the parties agree that the debtor must fulfill another obligation if the main obligation in the agreement is not fulfilled. The clause is aimed, therefore, at setting out in advance the exact financial equivalent of the damage that may be incurred.
Whether such a clause is enforceable in the courts by the employer is, at the time of writing, uncertain, as relevant case law varies in this respect. However, the principle that is generally
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accepted and applied by the courts is that penalty clauses in the employer’s favour cannot be enforced and are void. The reasoning for this is based on two main arguments supported by Romanian labour law: • the conditions upon which the employee can be held liable for damages caused to the employer are regulated by a strict legal framework and • employees cannot waive fundamental rights guaranteed by law and any agreement purporting to waive or limit such rights is void.
However, penalty clauses imposed on employees still exist, particularly as they can act as a deterrent to employees. In addition, several court rulings have upheld these clauses on the basis that there is no express legal provision prohibiting them and that labour law must act in harmony with civil law to the extent that civil law is not incompatible with the nature of employment relationships.
4.5 Damages The law expressly provides for the employer's right to request damages for the harm by the breach of the non-compete clause by the employee.
Although not expressly provided by law, in addition to a request for a non-compete clause be declared void or limited in scope, the employee can also request damages.
4.6 Liability of new employer Given the personal nature of the employment relationship and the fact that the new employer is a third-party to the non-compete agreement between the former employer and the employee, the new employer cannot be held liable for an employee's breach of a non-compete clause.
5. SPECIAL SITUATIONS
5.1 No clause If the employment agreement does not include a non-compete clause, the employee has the freedom to conclude an employment agreement with a competitor or to start his or her own competing business.
5.2 Transfers of undertakings Pursuant to labour law and the law on transfers of undertakings, employment contracts of transferred employees are automatically transferred to the transferee.
Therefore, all rights and obligations arising from employment contracts, including non-compete clauses, remain valid after such a transfer. When the employment relationship with the new employer (i.e. the transferee) is terminated, the non-compete clause agreed with the old employer (i.e. the transferor) becomes enforceable.
238 Non- Compete Covenants - Romania
5.3 Cross-border competition A non-compete clause must include a geographical restricted area, which can extend outside Romania. However, to be enforceable, the restriction must not result in the absolute inability of the employee to carry out his or her profession or specialisation.
5.4 Non-solicitation clauses Although not expressly regulated by Romanian law, clauses preventing solicitation of clients, prospective clients or employees can be included in an employment agreement, separately from the non-compete clause, without resulting in the same obligations as the non-compete clause
5.5 Insolvency Generally, when an employer becomes insolvent, the employment relationship with employees is terminated on the basis of redundancy, which is an exception to the enforceability of a non- compete clause.
5.6 Enforceability of foreign non-compete clauses The law applicable to a contract is determined by the provisions of the Rome Convention. Therefore, contracts are governed by the law chosen by the parties. However, the choice of law must not deprive the employee of the protection afforded by provisions that cannot be avoided by agreement under law that, in the absence of choice, would have applied. Therefore, regardless of the chosen governing law, the employee will still benefit from the protection afforded by the law of the country in which he or she habitually carries out work in performance of the contract or the country where the place of business is situated.
By EU law, an employer may bring proceedings only in the courts of the Member State in which the employee is domiciled.
239
Russia
241 Ius Laboris
1. Introduction 243
2. Conditions 243 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation for dismissal
3. Requirements 244 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 244 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 245 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
242 Non- Compete Covenants - Russia
1. INTRODUCTION Provisions of employment contracts which impose non-compete obligations on an employee are unenforceable in Russian law in most cases.
One of the main labour law principles of the Labour Code of Russia is that each employee is entitled to freedom of labour. This includes the right to work, the right of the employee to dispose of his or her own labour capacity and the right to choose his or her profession or type of activity.
Following these principles, Russian law does not allow for an employee to be restricted from working for another employer (a competitor of the company) during the employment or for some time after its termination. If a non-compete clause is included in an employment contract, it cannot be legally applied and will not be enforceable in the Russian courts.
In practice, many employers (especially companies with foreign management) often include non-compete provisions in their employment contracts and other labour related documents as a ‘moral’ obligation on the employee.
2. CONDITIONS
2.1 General Despite the general unenforceability of non-compete clauses in Russia, there are a few cases when similar obligations can be imposed. The head of a company must obtain the consent of the authorised body of the company or of the owner of the company’s property, or the person (body) authorised by the owner, in order to take up additional employment with another employer.
This limitation is aimed at protecting the company’s interests in relation to competition. However, it would be quite difficult to hold the employee to account (i.e. terminate his employment) for failure to obtain consent for secondary employment and due to a lack of case law it is quite difficult to assess the level of protection that would be granted to the employer for breach of this obligation.
As they are unable to conclude non-compete agreements, employers may use indirect means of protecting their interests, at least partially, for example, via confidentiality agreements with employees in order to ensure they do not use commercial secrets of the company to violate its interests, either whilst employed or afterwards.
The law on the protection of commercial secrets (including production secrets) of the company is quite specific. By law, ‘information comprising commercial secrets’ includes, but is not limited to, information of any character (production, technical, economic, organisational, etc.), including information on the results of intellectual activity in scientific and technical areas, as well as information on the methods of performance of professional activities of an actual or a potential commercial value, where it is unknown to third parties, and third parties have no free access to it on lawful grounds, and with respect to which the owner of the information has introduced a regime of commercial secrecy.
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The obligation not to disclose information comprising commercial secrets of the company, its clients, its affairs, finances or business other than information generally known or easily accessible by the public, applies until the exclusive right of the company to the information ceases.
2.2 Age Not applicable.
2.3 Written form Not applicable.
2.4 Renewal Not applicable.
2.5 Liability for compensation for dismissal Not applicable.
3. REQUIREMENTS
3.1 General Not applicable.
3.2 Geographical, functional and temporal limitations Not applicable.
3.3 Job changes Not applicable.
4. ENFORCEABILITY
4.1 General Non-compete clauses are generally not enforceable in Russia.
4.2 Balance of interests Not applicable.
4.3 Remedies Not applicable.
4.4 Penalty clauses Not applicable.
4.5 Damages Not applicable.
244 Non- Compete Covenants - Russia
4.6 Liability of new employer Not applicable.
5. SPECIAL SITUATIONS
5.1 No clause Not applicable.
5.2 Transfers of undertakings Not applicable.
5.3 Cross-border competition Not applicable.
5.4 Non-solicitation clauses The term ‘non-solicitation clause’ does not exist in Russian law and is thus not applicable.
5.5 Insolvency There are no specific provisions relating to non-compete provisions in cases of insolvency.
5.6 Enforceability of foreign non-compete clauses If the employer is a foreign entity – which is quite rare – it is possible to enter into a non- compete agreement under foreign law if that law recognises non-compete agreements. The agreement must be regulated by the laws of the chosen state and disputes will not be resolved by a Russian court.
Note however, that a decision of a foreign court may not be recognised in Russia, on the basis that non-compete obligations are not part of the mandatory norms of Russian law. In any event, recognition will most likely be impossible if Russia does not have an international agreement on mutual recognition and enforcement of court judgments with the country concerned. In such cases it will only be possible to recover damages for breaches of non- compete obligations from an employee located outside Russia or from assets located outside Russia.
245
Slovakia
247 Ius Laboris
1. Introduction 249
2. Conditions 249 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 250 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 251 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 252 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
248 Non- Compete Covenants - Slovakia
1. INTRODUCTION Non-compete clauses are governed by Act No. 311/2001 Coll., Labour Code as amended (the ‘Labour Code’). This distinguishes between competing activity during the employment, and after termination. A non-compete clause may only be agreed with an employee in an employment relationship with the employer, in other words, under an employment agreement. A non-compete clause may not be agreed to cover work performed outside of the employment (e.g. project work agreements, temporary student work agreements, or ‘work activity agreements’ - i.e. for a maximum of ten hours a week for no more than 12 months). In such cases, the employer cannot prohibit the employee from performing a similar activity, which competes with the employer´s activity, for another employer.
2. CONDITIONS
2.1 General Non-compete clauses which are effective during the term of employment do not need to be agreed individually in the employment agreement because the obligation not to compete is automatically covered by the Labour Code. The employee may perform another competing activity only with the employer´s prior written consent. If the employer does not respond within 15 days of delivery of the employee´s request, consent will be deemed to be granted. There is an exception to the need for consent for the performance of scientific, educational, publishing, training, lecturing, literary and artistic activities.
Non-compete clauses that are effective after termination may be agreed in the employment agreement between the employer and employee. They may agree that after termination of employment the employee must not pursue any gainful activity which is competitive in character with the employer´s business activities, for certain period, but no longer than one year. The prohibition will apply to all employees at the employer and to all activities the employee might perform for other entities carrying out the same activities as the employer. The employer´s scope of business activities listed in the Slovak Commercial Register, which is publicly available.
The employer is entitled to agree with the employee to restrict his or her gainful activity after termination of employment only if the employee is in a position to acquire information or knowledge during the employment that could cause substantial harm to the employer. In practice, this will cover higher level jobs, such as managers, executives and directors.
Note that it is not possible to make an agreement to restrict an employee´s activities after the employee has already left the employment. Conversely, the employer can only withdraw from a non-compete agreement only while the employment is still continuing and if it does, the non- compete obligation will end on the first day of the calendar month following the month in which the withdrawal was delivered to other party.
In the case of a non-compete clause, for up to one year after termination of the employment, the employer must provide the employee with appropriate financial compensation for restricting his or her activities, of at least 50% of the employee´s average monthly earnings for each month of the commitment. Equally, the employer may agree with the employee on appropriate financial compensation for breach of the non-compete obligation. The financial
249 Ius Laboris
compensation must not exceed the total of the employer´s financial compensation, proportionately decreased if the employee has partially fulfilled his or her obligations. After paying this amount, the employee´s obligation ceases.
The Work Inspectorates can impose a fine of up to EUR 100,000 on the employer in the case of breach any of their obligations under the Labour Code and other relevant legislation.
2.2 Age There are no special age requirements regarding non-compete clauses under the Slovak Labour Code.
2.3 Written form To be effective, a non-compete clause that applies after termination must be agreed as part of the employment agreement and therefore must be in writing.
2.4 Renewal A non-compete obligation covering the time the employee is employed is contained in the Labour Code and so there is no need to draft or renew a non-complete clause for this situation. A non-compete clause which is effective after termination may only be agreed during the employment and therefore, again, the question of renewal does not arise.
2.5 Liability for compensation on dismissal The employer may agree appropriate financial compensation with the employee in the employment contract for breach of the employee´s non-compete obligation. The compensation must not exceed the total of the employer´s financial compensation to the employee, decreased pro-rata if the employee has partially fulfilled his or her obligations and after paying this, the employee´s obligation ceases.
If the court declares a dismissal to have been unfair, the employer may reinstate the employee or pay compensation. This does not directly affect the non-compete clause and if it was agreed in the employment agreement during the employment, the employee will continue to be obliged to observe it
3. REQUIREMENTS
3.1 General It is not necessary to agree a non-compete clause for the period of the employment, as a non- compete obligation is contained in the Labour Code and applies automatically.
A non-compete clause intended to be effective after termination may only be agreed during the employment and recorded in the employment agreement between the employer and employee.
3.2 Geographical, functional and temporal limitations Non-compete clauses that are effective after termination may be agreed in the employment agreement for a period no longer than one year.
250 Non- Compete Covenants - Slovakia
Non-compete clause may be established only in cases where ‘the employee is able during the employment to acquire information or knowledge that is not normally available and the use of which could cause substantial harm to the employer’. However, there is no legal guidance or case law as to the reasonableness or otherwise of any particular restrictions.
3.3 Job changes Not applicable.
4. ENFORCEABILITY
4.1 General A non-compete clause that covers a period after termination of employment can be enforced in court proceedings if its terms were agreed in the employment agreement. This applies only for non-compete clauses valid for up to one year after termination. If no non-compete clause has been agreed, the employer is not protected.
Note that if the employee breaches a non-compete obligation during the employment, this is covered by the Labour Code and treated as a breach of work discipline. The consequences may be the dismissal of the employee.
4.2 Balance of interests If the employee breaches a non-compete obligation during employment, this will be covered by the Labour Code and may be treated as a breach of work discipline. An employer may dismiss the employee for breach of work discipline. The employer may also apply for damages in court for loss caused by employee.
The employer may enforce a non-compete obligation in court if the terms were mutually agreed in the employment agreement. This applies only for up to one year after termination. For example, if the employer and the employee mutually agreed on financial compensation for breach of obligations covered by the non-compete clause and the employee does not pay on time, the employer may enforce this in court.
If case the restriction agreed in the employment agreement is more extensive than required to protect the employer, the court may limit or cancel the obligation.
4.3 Remedies The employer may seek damages for loss caused by the employee. If the employer and employee agree on appropriate financial compensation for breach of the non-compete clause and the employee breaches the obligation without paying, the employer may claim compensation in court.
4.4 Penalty clauses The employer and employee may agree on appropriate financial compensation to be paid by the employee for breach of a non-compete clause, but for this to be valid, it must be contained in the employment agreement. The amount of the compensation must not exceed the total financial compensation payable by the employer to the employee for the restriction. The
251 Ius Laboris
compensation will be reduced proportionately if the employee partially fulfils his or her obligations. After payment, the employee´s obligations cease.
Note that an agreement for the employee to pay financial compensation for breach of non- compete obligations during employment would be invalid. In such a case, the employee could only be disciplined.
4.5 Damages The court may consider damages if the employer or employee makes a claim for them.
An employee is liable for any damage caused by him or her to the employer for culpable breach of obligations in performing tasks or in direct connection with the performance of tasks. The onus is on the employer to prove the employee´s liability.
4.6 Liability of new employer There are no consequences for any new employer in relation to a non-compete clause with a former employee. The only liability is on the employee.
5. SPECIAL SITUATIONS
5.1 No clause An employee may only pursue a gainful activity which competes with the employer´s business with the employer´s written consent. If the employer does not respond within 15 days of the employee´s request, consent will be deemed granted.
However, note that the employer´s consent is not required for the pursuit of scientific, educational, publishing, training, lecturing, literary or artistic activities.
5.2 Transfers of undertakings In the case of a transfer of the employer´s business, the rights and obligations arising from the employment relationships transfer to the new employer. This includes any non-compete clauses agreed with the employees.
5.3 Cross-border competition There is no Slovak case law which relates to cross-border competition. Therefore it is not possible to say whether any enforcement action would be successful.
5.4 Non-solicitation clauses An employee must keep in confidence any matters that the employee has learnt about whilst working for the employer which should not be disclosed to third parties in the interests of the employer. This includes the non-solicitation of employees, customers and business opportunities.
5.5 Insolvency The employee may terminate a non-compete clause if the employer has not paid the agreed financial compensation within 15 days following its maturity. The employee’s obligations
252 Non- Compete Covenants - Slovakia
towards the employer cease when the employee delivers a termination notice of the non- compete clause to the employer.
If the employer becomes insolvent and is unable to settle employees´ claims, these will be settled by means of a guaranteed insurance benefit, provided for by law.
The employer, preliminary administrator or administrator must inform the employee representatives or employees directly in writing about the employer´s insolvency within ten days of the date the insolvency occurred. The employee must provide them with any information they request about claims to do with the employment.
5.6 Enforceability of foreign non-compete clauses There is no Slovak case law which relates to the enforceability of foreign non-compete clauses and so it is not possible to predict the outcome of an enforcement action in Slovakia.
253
Spain
255 Ius Laboris
1. Introduction 257
2. Conditions 257 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 259 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 260 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 261 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
256 Non- Compete Covenants - Spain
1. INTRODUCTION Article 38 of the Spanish Constitution recognises the freedom to conduct business and incorporates the concept of a liberal economy into the Spanish legal system. This system consists of private companies which compete with each other to succeed.
In order to prevent market disruption as well as abusive or unfair competition, and following instructions given by the European Union, the Spanish legislator has enacted several laws in order to protect competition and to discourage unfair competition.
The concept of an unfair (disloyal) act appears in Article 5 of the Unfair Competition Law and this is defined as ‘any behaviour which goes objectively against good faith’. Extrapolating unfair competition regulation to the labour field, Article 13 of the Unfair Competition Law describes as unfair ‘the spreading and exploitation of industrial secrets or any other company secrets which the worker has accessed legitimately, without the owner’s consent’.
Further, the Workers’ Statute establishes that it is the duty of every worker to not to compete with the activity of the company in the way described in that Statute.
2. CONDITIONS
2.1 General The Workers’ Statute does not ban workers from working in more than one setting and so, as a general rule, every worker has the right either to work for more than one organisation or to work for himself in addition to the service he gives to the organisation that hires him. In Spanish law this is called ‘multiple jobs’ or ‘multiple activities’.
Multiple jobs (‘moonlighting’) is defined in the social security rules as providing services for more than one organisation at the same time – and the same social security system is used for both/all jobs.
‘Multiple activity’ on the other hand, consists of providing services in more than one company at the same time but having different social security regimes. The most common example of this is where the worker, in addition to his job in a company is also self-employed.
As mentioned, labour law does not ban any of these activities expressly and so both are permitted. However, they are subject to certain legal limitations in order to prevent them from being used in an abusive, unfair or disloyal way.
Unfair competition In an employment relationship the employee is required to act in good faith. The duty of good faith consists of not competing with the employer and is the second limit to the freedom to ‘moonlight’. The employee cannot work for another employer that competes directly in the market with its real employer because even though the employee must show loyalty to his or her employer, it may be very difficult for the other employer not to take advantage of any sensitive data or exclusive knowledge obtained by the worker from the real employer.
Thus, the concept of unfair competition has been defined by the Supreme Court as economic or professional activities performed by workers in order to satisfy their private interests, which
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are in economic competition with the employer because of their influence in the same market area with the same potential customers.
In order to determine whether unfair competition exists, the courts will look at whether the jobs are actually in competition and whether they are impacting on the same industrial or commercial sector. The test requires that goods and/or services offered by the employer coincide with those of competitors in terms of subject matter, geographical scope and time. If all three aspects are found to match, it will be considered that the competitor’s activity influences the same market as the employer’s and the collaboration will be deemed unfair.
No damage to the original employer or benefit to subsequent ones need be proved for unfair competition to exist, as the courts have established that potential damage is sufficient, as long as some simple preparatory acts aimed at competing with the employer are found to have been made.
Unfair competition requires the following three elements: • the carrying out of an economic activity by the employee that a) satisfies his or her interests; and b) is within the scope of the employer’s commercial interests and in competition with them • the use by the employee of experience and skills acquired from the employer • potential damage to the interests of the employer.
However, there is no unfair competition when the employer knows and consents or if the employee does not conceal it.
Non-compete after termination Labour law does allow for a non-compete agreement to prohibit a former employee from working in a different organisation once the contract has expired with the first employer. However, this can only be done by agreement, as the idea that an employer can prevent an employee from working for another organisation after termination is contrary to the principles of freedom of business and a liberal economy.
2.2 Age There are no age restrictions on non-compete clauses.
2.3 Written form There is full freedom as to how a non-compete agreement may be concluded by the parties to it, but if it is not made in writing, this could cause evidential difficulties. An agreement of this kind may be made at any time, even during a probationary period.
2.4 Renewal Article 21.2 of the Workers´ Statute establishes that a non-compete agreement applicable after termination of the employment contract must not last for more than two years for ‘technical’ employees and six months for others. Hence, any renewals may only be made to the extent that they remain with these time limits.
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2.5 Liability for compensation on dismissal Non-compete agreements after termination The employee’s dismissal will not affect the validity of the non-compete agreement.
Exclusive dedication agreements to be in forced during the employment relation If the employee does not comply with an exclusive dedication agreement - previously entered into by the parties and submitted to the payment of a financial compensation - this will give rise to a right to dismiss the employee for having an unlawful source of income contrary to good faith. Courts often quantify damages in terms of the amount set out by parties as compensation in their agreement.
3. REQUIREMENTS
3.1 General Article 21.1 of the Workers’ Statute regulates ‘exclusive dedication agreements’, by which the employee is banned from having more than one job. This prevents the employee from working either for any other company or for himself.
As in any agreement which limits the freedom of one of the parties, the company is obliged to provide the employee with financial compensation. This means that although the parties are given the freedom to set the amount and the method of payment of compensation, the agreement must contain compensation and this must be expressly stated. It cannot be included in salary, for example. If no compensation is agreed the agreement will be void. Note also that such an agreement is not absolutely binding, as the employee may terminate it with 30 days’ advance notice, so recovering his or her freedom to work for other companies, but losing the right to the agreed compensation.
The purpose behind this kind of agreement is normally not to curb unfair competition, but to ensure the commitment of employees to the organisation. Therefore the compensation is intended to make up for the employee’s having abstained from other activities at the same time. Reasonably enough, if the employee does not comply with the agreement, this will give rise to a right to damages for the company, including the right to dismiss the employee for having an unlawful source of income, in breach of his or her ‘good faith’ obligations.
On the other hand, the effectiveness of any non-compete agreement is dependent on the legal requirement that the employer must provide adequate financial compensation to the employee, given that the agreement restricts the employee’s the right to work and limits his or her ability to find a new job within his or her specialisation. If the financial compensation is inadequate, the agreement will be invalid. Further, compensation must be determined at the time the agreement is signed and cannot be fixed at a later time. What is ‘adequate’ will depend on the circumstances, but the following criteria are used: • the shorter the duration of the non-compete agreement, the less compensation is required • if the non-compete agreement is signed at the time when the employment contract terminates, the amount of compensation should be increased (and must always be adequate) • the smaller the field of competition, the lower the compensation should be.
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As for the method of payment, it may be a lump sum or paid by monthly instalments during the employment relationship or at the termination of the contract. The compensation will not be subject to social security, but will be taxable, and is therefore compatible with unemployment benefit.
According to Article 1303 of the Civil Code, if a non-compete agreement is declared void the employee must return any compensation paid and the employer must release the employee from his or her obligation not to compete.
3.2 Geographical, functional and temporal limitations ‘Industrial interests’ involve in the broadest sense possible, the manufacturing process of any kind of product, while ‘business interests’ include, in as general a sense as possible, sale and distribution and any related activities. However, in a non-compete agreement the interests protected should be limited to a particular geographical area, as the courts have held that any absolute prohibition of employment activities will be invalid. Further, it is necessary that the job position and functions performed by the employee for the new employer should be similar to those performed for the former employer.
The maximum duration of a non-compete agreement is two years for ‘technical’ employees and six months for others. For high ranking managers and commercial agents, the maximum length is two years. A technical worker is defined as a qualified employee who has knowledge of business techniques related to production, organisational or commercial matters and someone who is in touch with business strategy personnel.
If the duration of a non-compete agreement is longer than the period mentioned above, the Supreme Court has indicated that it will be shortened and the amount of compensation will be reduced accordingly.
3.3 Job changes If the job or functions performed by the employee for a new employer are different from those performed for the former employer, no breach of the non-compete agreement could be claimed to have occurred. The same applies if the job performed for the old employer changes.
4. ENFORCEABILITY
4.1 General The Workers´ Statute does not include any regulations relating to remedies that an employee or employer can use to enforce a non-compete agreement.
By contrast, Article 21.3 of the Workers´ Statute establishes that exclusive dedication agreements may be terminated by the employee upon 30 days´ advance notice. By terminating in this way the employee will recover his or her freedom to work for other organisations but will lose the right to the agreed compensation.
4.2 Balance of interests In case of disputes, the Courts will establish whether or not the terms and conditions of a non- compete agreement are appropriate (i.e. not excessive). The judge has wide discretion and will
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consider whether the industrial or business interests of the former employer are real and whether the financial compensation is adequate.
4.3 Remedies Employee If the employer fails to pay the agreed compensation the employee may terminate the non- compete agreement and/or require the employer to pay what was agreed. Conversely, it is lawful for the employer to fail to pay compensation if industrial or commercial interests have been lost for reasons beyond the employer’s control, such as the incapacity of the worker.
Employer If there is a breach of a non-compete agreement, the employer is entitled to request a refund of any compensation paid to the employee and to request damages. Of course, allegations must be proved in court if damages are to be awarded. The employee may also be required to carry out his or her non-compete obligations. Although the courts tend not to make rulings requiring compliance with a non-compete obligation, some courts have done it.
4.4 Penalty clauses The Supreme Court has ruled that penalty clauses incorporated in non-compete agreements are valid. Hence, the parties may determine the compensation that the employee will have to pay to the former employer if there is a breach of the obligation not to compete. If the compensation is not proportionate or appropriate, the courts may consider the clause to be partially invalid.
4.5 Damages If the employee does not comply with an exclusive dedication agreement, this will give rise to a right to damages for the employer, including the right to dismiss the employee for having an unlawful source of income in breach of his or her obligation to act in good faith. Further, if there is a breach of a non-compete agreement, the employer may be entitled to ask the former employee for damages. In both cases the allegations for which damages are requested must be proved in court.
4.6 Liability of new employer A non-compete agreement which applies after termination of the employment contract binds only the parties to it. Hence, new employers will not be liable for any obligation arising from breach of that agreement.
5. SPECIAL SITUATIONS
5.1 No clause Despite the fact that there is full freedom as to how exclusive dedication agreements and non- compete agreements are concluded by the parties, if they are not made in writing this could cause evidential difficulties later on. If any dispute arises from the agreement, the parties will be required to prove its terms and conditions before the court.
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5.2 Transfers of undertakings According to Article 44 of the Workers´ Statute, all rights and obligations of both employer and employee will be transferred to the transferee by operation of law. This includes any rights and obligations in relation to non-compete agreements or exclusive dedication agreements.
5.3 Cross-border competition The Workers´ Statute does not regulate cross-border competition but the parties may draft a non-compete agreement in accordance with the general rules, including the criteria followed by the Supreme Court. These state that in a non-compete agreement, the interests protected should be limited to a particular geographical area and any absolute prohibition of employment activities will be invalid. However, if there is a dispute, the courts will analyse each case on its merits and decide whether or not the restrictions are excessive.
5.4 Non-solicitation clauses The parties enjoy full freedom to agree the terms of non-solicitation agreements. However, in any dispute, the courts will take each case on its merits and decide whether or not the clause is excessive.
5.5 Insolvency Insolvency proceedings (which are different from cases of winding-up) allow the continuation of the employer’s activities. Thus, in the case of exclusive dedication agreements employees will continue be obliged to refrain from working for any other employer. In addition, the validity of any non-compete agreement will be unaffected if the employer is involved in insolvency proceedings. However, if the employer fails to pay the agreed compensation because of its insolvency, the employee may terminate the agreement and recover his or her freedom to work.
5.6 Enforceability of foreign non-compete clauses According to the provisions of Article 10.6 of the Civil Code, the parties are free to choose which legal system applies to non-compete agreements made between them and in the absence of any such choice any agreements will be governed by the law of the country in which the employee performs work pursuant to the employment contract.
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Sweden
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1. Introduction 265
2. Conditions 265 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 266 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 267 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 269 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
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1. INTRODUCTION During employment, the employee has a far-reaching duty to exhibit loyalty towards the employer. The employee may not act in any way which is detrimental to the employer, for example, the employee may not compete with the employer. However, when the employment relationship terminates, the duty to be loyal, including the obligation not to compete, expires. If the employer wishes to protect itself after termination of employment, this can be attained through a non-compete prohibition in the individual employment agreement.
Although non-compete clauses are valid, they can be moderated or set aside entirely by the courts if they go beyond what is deemed reasonable. In addition, limits were imposed on the use of non-compete clauses under a 1969 collective agreement covering white-collar workers in the manufacturing industry. In 2015, the Confederation of Swedish Enterprise and the Federation of Salaried Employees in Industry and Services negotiated a new collective bargaining agreement on non-compete clauses which replaces the agreement from 1969. This applies to non-compete clauses entered into by employers from 1 December 2015.
2. CONDITIONS
2.1 General There is nothing in Swedish law prohibiting the use of non-compete clauses in employment relationships per se but the law does say that a person is not bound by a pledge not to pursue an activity of a certain kind, or not to seek employment with another employer, if the pledge is more far-reaching than is reasonable. A non-compete clause may be tested by the courts and adjusted to the advantage of the employee if found unreasonable. This usually happens in relation to the amounts of any penalties for breach.
Case law in this area has usually been based on the 1969 collective agreement covering white- collar workers in the manufacturing industry. This CBA became a source of great importance to the application of the law on non-compete clauses for employees over the years, but it has now been replaced by a new non-compete agreement.
The aim of both the former CBA and the new non-compete agreement are to limit and regularise the use of competition and secrecy clauses. Employers bound by the new CBA (the majority of the employers in industry) are legally prohibited from agreeing non-compete clauses that are less favourable to the employee than those set out in the CBA. Hence, deviations from the CBA can only occur in other, smaller parts of the Swedish labour market.
2.2 Age A minor can enter into an employment relationship, including a non-compete clause, if his or her guardian consents to it. Consent is not required from the age of 16 if the minor enters into a new employment relationship of a similar nature.
2.3 Written form There are no formal legal requirements for the validity of a non-compete clause. However, the employee must be fully aware of the clause and its contents and it is recommended that it should be in writing. Further, the EU Directive on an employer´s obligation to inform employees of the conditions applicable to his or her contract or employment relationship (91/533/EEC),
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which was incorporated into Swedish law by Article 6c of the Employment Protection Act, requires the employer to inform the employee in writing of all important employment conditions, which would include non-compete clauses.
2.4 Renewal In cases of extension and/or renewal of the employment agreement or an important change to the job of the employee within the organisation, it is advisable to make sure that the non- compete clause from the previous agreement remains applicable.
2.5 Liability for compensation on dismissal The non-compete prohibition cannot be invoked by the employer where:
• The employer terminates the employment agreement and the termination is not the result of a breach of contract by the employee. This means that the non-compete prohibition cannot be invoked when the employment is terminated for redundancy. • The employee terminates the employment agreement because of a breach of contract by the employer.
3. REQUIREMENTS
3.1 General Case law has established a restrictive use of non-compete clauses. A non-compete clause may not be too hard on the employee, i.e. it must be reasonable and hold the balance between the employer’s need for protection of its business and the employee’s opportunities to earn a living. Case law shows that the courts will regard any non-compete clause that is not within the scope of the former 1969 collective agreement covering white-collar workers in the manufacturing industry, now replaced by the new non-compete agreement (the ‘CBA’) unfavourably. Hence, the central elements of the CBA are listed below.
Scope • non-compete clauses should only be used by employers which are dependent on independent products and method development and which, by means of such development work, acquire manufacturing secrets or comparable knowledge, the disclosure of which might entail significant detriment. • non-compete clauses should only apply to employees who, during their employment, receive knowledge of manufacturing secrets or comparable knowledge which they have the opportunity to use through training or experience.
A note in the minutes to the CBA adds that sales and administrative personnel may also be bound by non-compete clauses, but only on condition that the objective requirements of the CBA are met.
Prohibitions A non-compete clause can prohibit the employee from:
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• taking up employment with any other organisation which is directly or indirectly in competition with the former employer within a specific area, and the new employer could consider using trade secrets known to the employee through his or her former employment or • becoming engaged as a partner in such a company or assisting them in any other way, such as by giving them advice etc. or • running or carrying out any type of business which is in competition with the former employer on his or her own behalf or on behalf of someone else.
The employer must compensate the employee for the inconvenience caused by the non- compete clause. According to the CBA the compensation must correspond to the difference between the employee’s new salary and the employee’s salary at the time of termination of the employment. However, the employer may choose to cap the compensation at 60% of the employee’s salary at the time of termination of the employment. It must not be paid out for longer than the duration of the non-compete restriction and the employee must keep the employer informed of the level of income he or she is receiving from other work.
Compensation for a non-compete clause could also be included in the employee´s salary or in the form of severance pay.
The employer is however at any time entitled to waive the non-compete restriction and if this is done the employer´s obligation to pay compensation will immediately cease.
3.2 Geographical, functional and temporal limitations Although not clearly specified in law, the more specifically a non-compete clause is formulated the more likely the court will be to find the clause reasonable. This is especially true in relation to geographical scope and the scope of the work. The more specific the non-compete clause is, the higher the chances that the clause will not be moderated or set aside in any possible court procedure.
The duration of the non-compete clause should not be longer than the estimated life of the know-how of the employer subject to protection. Generally, taking into account the employee´s interest in working freely, the duration should not exceed 18 months or, if the estimated life of the know-how is short, 9 months.
3.3 Job changes Where an employee´s job changes, this could have an effect on the enforceability of a non- compete clause, for example, if prohibited activities are defined in the non-compete clause but these are no longer applicable because of the changes. It is therefore recommended that in confirming any job changes to an employee the agreed non-competition clause should be reaffirmed or amended if necessary, in writing.
4. ENFORCEABILITY
4.1 General In considering the validity of a non-compete clause, the court will take all relevant circumstances into account. The legislator has, however, stated in preparatory works to legislation that the law should be compared to and interpreted in accordance with the former
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1969 collective agreement covering white-collar workers in the manufacturing industry and the new non-compete agreement, although it noted that the different conditions in different areas of the labour market should be taken into account.
4.2 Balance of interests The Labour Court has declared that a non-compete clause which is outside the scope of the (former) collective agreement of 1969, for example in the consulting business or IT, cannot be regarded as unreasonable and invalid per se, but should, nevertheless, be interpreted very restrictively. All cases that have been heard in the Labour Court so far have concerned disputes about non-compete clauses where the collective agreement has not directly applied (as disputes about CBAs are generally resolved by arbitration in special proceedings).
Further, the Labour Court has declared that a non-compete clause whose sole purpose is to retain an employee with specialist knowledge or competence, is not lawful. The Labour Court has also taken the following factors into account when weighing the parties’ interests: the position of the employee; whether the prohibition is especially harsh on the employee or more marginal for the employee´s chances of finding new employment or carrying out his or her own business; whether the employer´s interests in protecting its business are justified; whether the clause really acts to protect the employer from ordinary market competition; whether the employee is compensated for the existence of the clause – which, quite apart from the compensation envisaged under the CBA, may involve generous employment conditions or high severance pay.
4.3 Remedies Interlocutory proceedings may be initiated in relation to a non-compete clause, as both parties have an interest in obtaining a speedy judgment. The employer will wish to prevent loss or damage as soon as possible and the employee will wish to ensure that he or she can enter into the service of a new employer. Only provisional judgments may be made in interlocutory proceedings and these will apply until a decision is made on the merits of the case.
Employee An employee may bring an action to suspend a non-compete clause in interlocutory proceedings and may bring a full action on the merits to moderate or set the clause aside. Whether or not the employee’s claim will be granted will be a matter of balancing the interests of the employer in retaining the non-compete clause against the interests of the employee in having it set aside. The employee may start proceedings either during employment or after it has ended.
Employer If the employee does not comply with a non-compete obligation, the employer may claim specific performance of the non-compete obligations and the court may issue a prohibition, enforceable by a fine, to prevent the employee from avoiding complying with the non-compete prohibition.
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4.4 Penalty clauses In order to safeguard adherence to a non-compete clause, a penalty clause may be included in the employment contract. A contractual penalty should have a reasonable correlation with the employee’s salary. According to the CBA, a penalty equal to six months’ salary for every infringement should give sufficient protection. If the parties have agreed upon a penalty clause, this can be claimed in court without the employer having to prove actual harm or financial loss. Breach of the non-compete clause is reason enough to claim the agreed penalty.
If the parties have not agreed upon a penalty clause the employer may claim damages from the employee for breach of the non-compete clause. When claiming damages however, the burden of proof for the actual loss lies with the employer. In order to prevent having to prove loss in this way, most employers in Sweden insert a penalty clause in the employment contract.
It is possible to claim both the penalty and damages from the employee if the actual loss exceeds the penalty.
4.5 Damages An employee who has engaged in competitive actions, including breaching a non-competition clause, and in so doing has caused the employer financial loss, will be liable for any such loss in accordance with the law of torts in Sweden.
The big practical problem here is that it will often be very difficult for the employer to show either that a loss has been suffered at all or its size, yet this is necessary for a claim of damages to succeed. Calculating loss is rarely easy since the indicators that employers would typically use, such as turnover, are also affected by factors other than the employee´s breach of a non- compete clause. The problems involved in calculating loss are one of the reasons for introducing penalty clauses.
4.6 Liability of new employer Not only the employee, but also the new employer may act wrongfully towards the employer. In general, a new employer is not liable for damages by the mere fact that it has hired an employee who was known to be restricted by a non-compete clause. However, special circumstances may result in liability on the new employer, for example, if the new employer knew that the employee was bound by a non-compete clause and hired him or her in order actively to approach customers of the competitor by making use of trade secrets that the employee had gained in his former position. The burden of proof of these circumstances lies with the ex-employer.
5. SPECIAL SITUATIONS
5.1 No clause If no non-compete clause applies after termination of the employment, the employee is free to enter into service with a direct competitor or start his or her own competing business. In addition, the employee may target the same market and customers as the ex-employer. The general rule is that employees are free to make use of knowledge they have acquired, including knowledge of the trade and business secrets of a former employer. However, a duty of confidentiality continues to apply where there are particular reasons, such as in a situation
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where an individual has entered into an employment relationship with the deliberate intention of gaining knowledge of trade secrets in order to be able to make use of them either on his or her own account or in the employment of a competing employer.
5.2 Transfers of undertakings All rights and obligations of both employer and employee transfer to the transferee by operation of law. This includes any rights and obligations in relation to non-compete clauses.
5.3 Cross-border competition A non-compete clause should contain a limitation of geographical scope. In most cases this limitation will be Sweden or the Nordic countries. However, it is possible that the parties might agree upon a far more extensive region, for example, Europe.
By Swedish law, whether or not the employer will be able to enforce a non-compete clause abroad will depend upon the balance between the interests of the employer in enforcing the non-compete clause and the interests of the employee. For example, where there are only two competing companies in Europe making the same product and serving the same market, the interests of the employer in preventing the employee from working for one of those competitors is clear. The employee, however, could argue that he or she is trained so specifically, that it would be unreasonable to expect him or her to be able to find employment outside that market.
5.4 Non-solicitation clauses A non-solicitation clause is a clause which prohibits an employee from taking the employer´s customers or previous customers to a competitor and/or enticing or soliciting individuals who are employed by or are working as consultants of the employer. The duration of non- solicitation prohibitions varies between six months and two years and they do not need to involve compensation for the employee in order to be valid. Adherence to non-solicitation clauses can be safeguarded by a penalty clause in the employment contract.
5.5 Insolvency If an organisation becomes insolvent the administrator will, in most cases, terminate all employees. At the same time, the administrator will try to find a way to sell the valuable activities of the business or make a restart. The administrator may therefore have an interest in requiring employees to fulfil their obligations pursuant to their non-compete clauses.
In principle, employees are bound to non-compete clauses after dismissal by the administrator. Whether or not this will be considered reasonable will depend on the circumstances and the interests of both parties.
5.6 Enforceability of foreign non-compete clauses The rules regarding international private law will be used to determine which country´s law applies to a dispute about a foreign non-compete clause and a Swedish court will be required to rule on that basis. The rules on such matters are laid down in the Rome I Regulation, the law applicable to contractual obligations, and this has been incorporated into Swedish law. The basic principles of the Regulation, and hence the Swedish Act, are that the contracting parties
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are free to choose which legal system applies and that, in the absence of any such choice, the contract is governed by the law of the country with which it is most closely connected. For contracts of employment however, there are special rules which provide that notwithstanding any choice of law made by the parties, the employee is still protected by mandatory rules in the law which would have applied in the absence of any choice having been made (meaning, generally, the law of the country in which the employee habitually carries out the work in performance of the contract).
In sum, if Swedish law regarding non-compete clauses is more favourable to the employee than the law chosen by the parties, Swedish law will apply.
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Switzerland
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1. Introduction 275
2. Conditions 275 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 276 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 277 4.1 General 4.2 Balance of interests 4.3 Damages 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 278 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
274 Non- Compete Covenants - Switzerland
1. INTRODUCTION During the employment relationship, the employee must loyally protect the employer's legitimate interests. This general duty of loyalty includes an obligation not to compete with the employer.
The general duty of loyalty and the obligation not to compete with the employer ends on termination of the employment relationship. The employee is then free to work for a competitor or to establish a competing business.
The employer and employee may, however, agree that the employee must not compete after termination of the employment relationship. As this obligation restricts the economic prospects of the employee, Swiss employment law protects the employee against post-contractual non- compete clauses. Such clauses are only permitted in specific circumstances. The scope must not be excessive, taking into account the legitimate interests of the employer and employee. Finally, the clauses may lapse depending on the circumstances leading to termination of the employment relationship. When examining non-compete clauses, the court has broad discretion and must consider the circumstances of each case.
2. CONDITIONS
2.1 General A non-compete clause can only be validly agreed upon if: • the employment relationship gives the employee insight into the employer’s customer base or manufacturing or business secrets and • the employee could significantly harm the employer by using that information.
According to case law, the employee has insight into the customer base if personal contact with customers allows him or her to understand the customers’ preferences and needs so that the employee can easily offer the same goods or services.
Manufacturing secrets cover technical information. Business secrets refer to commercial aspects of the organisation (e.g. price structure and suppliers). The term ‘secrets’ encompasses all facts the employer wishes to keep confidential and that are not publicly known. An employee has access to such secrets if he or she has the opportunity to gain knowledge, regardless of whether the opportunity is taken.
2.2 Age A non-compete clause may only be entered into with an employee who has legal capacity to act, that is, the employee has reached the age of maturity (i.e. is at least 18 years old) and is capable of making rational decisions. If a non-compete clause is agreed upon by an employee without legal capacity to act, it is void.
Further, non-compete clauses included in an apprenticeship contract are void.
2.3 Written form A non-compete clause must be agreed in writing to be valid. The employee’s signature is required as a minimum. Employers should include a clause in the written employment contract
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which is signed by both parties or in a separate, written and signed addendum to the employment contract.
It is not clear whether the written form requirement is met if the non-compete clause is in a staff regulation or handbook that is not signed but referred to as part of the employment contract. This would also expose the non-compete clause to the risk of being challenged on other grounds.
2.4 Renewal A non-compete clause can be renewed or modified in writing at any time during the employment relationship. If a new employment contract is signed, it should specify whether it fully or partially replaces the existing employment contract and whether an existing non- compete clause should remain in place under the new contract. The employer should also insert the non-compete clause in a new contract.
2.5 Liability for compensation on dismissal Swiss law does not require the employer to pay consideration for a non-compete clause to be enforceable. However, the court must have regard to any payments made by the employer when determining whether a non-compete clause is excessive and should be restricted. Payment may therefore make the non-compete clause enforceable.
3. REQUIREMENTS
3.1 General According to Swiss employment law, a post-contractual prohibition on competition must be reasonably limited in terms of geographical scope, duration and subject matter to prevent an excessive limit on the employee’s economic prospects. This requires a case-by-case analysis of the interests of the employer in applying the prohibition and the opposing interests of the employee. In balancing these interests, the court must also have regard to any payment made by the employer.
Finally, a non-compete-clause is unenforceable in the following circumstances: • if the employer no longer has a substantial interest to protect • if the employment relationship is terminated by the employer without a justified reason attributable to the employee, or • if the employment relationship is terminated by the employee for a justified reason attributable to the employer.
3.2 Geographical, functional and temporal limitations A non-compete clause must be reasonably limited geographically. Geographical limits are determined by two factors: • the area in which the employer does business, and • the area in which the employee’s specialist knowledge is effective.
Accordingly, the geographical scope of the non-compete clause may be broader, for example, for a global manager than for a local manager.
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The court has discretion to restrict the geographical scope of a non-compete clause, or to set the scope if the non-compete clause does not define it.
The same principles apply to the limitation of subject matter. If the non-compete clause covers the employer’s business without focusing on the activities performed by the employee, it is likely that a court would consider this as excessive and restrict the clause.
The restrictive period must be limited to the extent necessary to protect the employer’s legitimate interests. For example, the employee’s access to customers is usually deemed to be potentially damaging for a shorter period than his or her access to manufacturing secrets. Therefore, if the non-compete clause protects the customer base, the courts usually consider a restriction of six to 12 months reasonable, whereas with manufacturing secrets, a longer restriction (up to three years) could be considered reasonable.
3.3 Job changes An employee’s contract may require amendment if he or she moves to another position within the same organisation. In these circumstances, the parties should review the non-compete clause and adapt it accordingly.
4. ENFORCEABILITY
4.1 General A non-compete clause may be a useful tool to protect the employer against competition from the employee after the end of the employment relationship. It may act as a deterrent and prevent damaging conduct by the employee and may also be enforceable.
4.2 Balance of interests According to Swiss law a non-compete clause must be reasonably restricted with regard to place, time and scope so that it does not excessively compromise the employee's economic prospects. When examining the validity of a non-compete clause, the court must take all relevant circumstances into account and balance the employer’s and employee’s interests.
It is not a legal requirement for the validity of a non-compete clause that the employer pays for the restriction. However, payment by the employer may increase the likelihood that a court will enforce the non-compete clause.
A non-compete clause may provide that part of the basic salary paid during the employment relationship includes payment for the non-compete obligation. However, it must be clear how much of the payment relates to the non-compete clause. Further, it may be disadvantageous for the employer to compensate the employee for a non-compete clause during employment while it is unclear whether it will be effective. This depends on the circumstances leading to the termination of the employment contract.
4.3 Damages If an employee breaches a non-compete obligation, he or she is liable for damage and loss the employer suffers as a result of the competing activity. In practice, however, a claim for
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damages will play only a minor role, as it is normally very difficult for an employer to prove the harm suffered was caused by the competing activity.
4.4 Penalty clauses A non-compete clause may provide that the employee must pay liquidated damages to the employer if he or she breaches a non-compete obligation. If this is the case, the employer need only prove the employee’s breach of the non-compete obligation and any harm done. This contrasts with general claims for damages, where the employer would also need to prove the harm was caused by the competing activity. Therefore, employers should insist on liquidated damages as a remedy under Swiss law.
The amount of liquidated damages is normally agreed as six to 12 months’ salary. If a Swiss court considers the agreed damages excessive in the circumstances, it may reduce them.
4.5 Damages An employer may seek an injunction prohibiting an employee from breaching a non-compete clause. An injunction is only available if: • the non-compete clause expressly provides for it, and • it is justified by the employer’s legitimate interests (e.g. if the employer is able to demonstrate that it will suffer irreparable harm if the non-compete clause is not enforced) and the employee’s behaviour is particularly reprehensible.
In practice, injunctions are rarely granted as preventing an employee from working for his or her new employer could be very harmful.
4.6 Liability of new employer In general, a new employer is not liable for damages simply because it has hired an employee who is bound by a non-compete obligation. However, in specific circumstances the new employer could be held liable. This may be the case, for example, if the new employer encouraged the employee to breach the non-compete clause. The burden of proof of this rests with the former employer. In practice, this is difficult to prove.
5. SPECIAL SITUATIONS
5.1 No clause If no non-compete clause has been agreed, the employee is, in principle, free to enter into an employment contract with a direct competitor or start a competing business after termination of employment. However, the employee continues to be bound by confidentiality obligations to the extent required to protect the employer’s legitimate interests. In particular, the employee must not disclose manufacturing or business secrets (e.g. customer lists) to third parties or to a new employer. An employee who breaches his or her confidentiality obligation is liable for harm caused to the employer and commits a criminal offence. Further, the employer may apply for an injunction to prevent the employee from disclosing more secrets.
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5.2 Transfers of undertakings If a business or part of a business is transferred, all employment relationships transfer to the acquiring party at the date of the transfer. This includes all rights and obligations. The same rules apply to a merger or division.
If the employee declines to transfer, his or her employment contract terminates at the end of the statutory notice period. Whether he or she remains bound by a non-compete clause in this situation is unclear. The legal view is that the non-compete clause should continue to apply if the transfer would not have been detrimental to the employee. If the employee does not decline to transfer, the non-compete clause transfers to the acquiring party, which will then be protected. However, the wording of the non-compete clause may not fit with the business of the acquiring party. Therefore, the acquiring party may need to agree a revised non-compete clause.
5.3 Cross-border competition The geographical scope of a non-compete clause must not be broader than the geographic area in which the employer does business and has a legitimate interest in enforcing the non- compete clause. If justified in the circumstances, a non-compete clause may have international scope and prevent the employee from competing with the employer outside Switzerland.
5.4 Non-solicitation clauses Non-solicitation clauses qualify as non-compete clauses and are governed by the same rules.
An exception applies to the non-solicitation of employees or suppliers. The Swiss Federal Supreme Court has ruled that any post-contractual restrictions can only relate to markets in which the employer offers goods or services and not to markets in which the employer procures its resources. Therefore, a non-solicitation clause prohibiting the employee from soliciting other employees or suppliers after termination of the employment relationship is not enforceable. During the employment relationship, the employee’s duty of loyalty prevents him or her from such activities.
5.5 Insolvency Generally, the insolvency of an employer does not affect employment agreements, including non-compete clauses. However, a non-compete clause lapses by law if it can be proved that the employer no longer has a significant interest in the protection. This would occur if the employer terminates the employment contract without a justified reason attributable to the employee or if the employee terminates the employment contract for a justified reason attributable to the employer. Insolvency usually leads to a lapse of the non-compete clauses as a result of these rules.
5.6 Enforceability of foreign non-compete clauses If a Swiss court is asked to enforce a non-compete clause governed by foreign law, the Swiss court will determine the applicable law. Depending on the circumstances, Swiss or foreign law may apply. The court will then enforce or decline to enforce the non-compete clause.
From a Swiss legal perspective, legal disputes between employers and employees arising from non-compete clauses are employment disputes. The jurisdiction for these disputes is
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determined in accordance with the (revised) Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters (the ‘Convention’) if both the employer and employee are domiciled in a state that has ratified the Convention. Pursuant to the Convention, an employer with head offices in a member state wishing to enforce a non-compete clause has jurisdiction in Switzerland if either the employee is domiciled in Switzerland or conducts competing activities in Switzerland that it believes should be prohibited by an injunction.
If the Convention does not apply, the relevant court will be determined pursuant to Swiss federal law. According to this, the Swiss courts of the employee’s domicile or where the employee usually performs work are the relevant courts. A claim by an employee may also be brought before the courts where the employee is domiciled or has his or her usual residence in Switzerland.
A non-compete clause is considered part of the employment contract and, therefore, governed by the law of the employment contract. Under Swiss federal law, the employment contract is governed by the laws of the state in which the employee usually performs work. If the employee usually works in more than one state, the laws of the state in which the employer has an office, head office or ordinary residence apply. The parties may choose the laws of the state of the employee’s ordinary residence, or the employer’s branch, head office or ordinary residence.
280
Turkey
281 Ius Laboris
1. Introduction 283
2. Conditions 283 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 284 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 285 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Compensation 4.6 Liability of new employer
5. Special situations 286 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
282 Non- Compete Covenants - Turkey
1. INTRODUCTION Employment legislation does not contain any provisions expressly regulating non-compete clauses. This being said, Labour Law number 4857 lists loyalty as one of the obligations of employees towards their employer. Therefore, as the issue of competition is closely tied to principles of loyalty, trust and commitment, there are often provisions in employment agreements that limit the activities of the employee during the course of employment.
Though limitations on activities are recognised for the term of the employment, the Labour Law does not stipulate any limitation on activities following termination of the employment agreement. However, the subject is regulated in the Turkish Code of Obligations, under the title ‘ban on competition’. According to this, it is possible to prevent an employee from performing certain activities for a competitor or establishing his or her own business after termination of the employment agreement, subject to certain limitations (e.g. territory, time and scope). Note, however that the employer is not obliged to pay any sort of compensation to the employee as a result of application of the non-compete principle.
A non-compete clause limits the employee’s right to freedom of employment and restricts prospective areas of income. Therefore, both the legislature and the Court of Appeal have laid down strict conditions with which a non-compete clause must comply in order to be enforceable. Even in cases where the non-compete clause complies with all the conditions, the court will consider the interests of both the employer and employee before declaring the employee bound by the non-compete clause. It is important to note that the courts have a tendency to protect employees, who are perceived to be in a weaker position, and to amend non-compete clauses accordingly.
2. CONDITIONS
2.1 General Non-compete restrictions may be imposed by means of a separate agreement or a non- compete clause within the original employment agreement. Such a clause would be drafted so as to become effective following termination, setting out the rules of non-competition after the date of termination.
For a non-compete clause to be valid, the employee to whom it applies should have access to clients, trade secrets and important information in relation to the employer. This information should be sufficient to pose a threat of serious damage to the employer. However, a non- compete clause which restricts an employee’s ability to earn a living, and/or is inconsistent with the principle of equity, will be invalid.
A non-compete clause will cease to be valid as soon as the employer’s interest in restricting the employee’s activities no longer exists. In cases where an employer terminates the employment agreement in a manner and for reasons not considered to be in compliance with labour law or where the employee has justifiable grounds for terminating the employment agreement, a non- compete clause will be considered void.
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2.2 Age A non-compete clause may only be concluded between an employer and an employee who is of age (i.e. 18 years old). If a non-compete clause is agreed with an underage employee, the clause will be deemed void.
2.3 Written form In order for a non-compete clause to be valid, it must be in writing. It may either be contained in the original employment agreement or in a separate agreement between the parties concluded following the commencement of employment.
2.4 Renewal There is no Court of Appeal decision prohibiting renewal of non-compete clauses, which suggests that, as per the principles of freedom of contract, the parties may decide to renew the clause or the relevant agreement for a set term provided that the total period of the non- compete clause (including the renewal) does not exceed two years. In addition, the employee will not be obliged to renew and therefore may not consent to a renewal.
2.5 Liability for compensation on dismissal It is not necessary to offer compensation for a non-compete clause to be valid however, making a payment will increase the chances that a court would deem the non-compete clause reasonable.
3. REQUIREMENTS
3.1 General The courts perceive employees to be in a weaker position than employers and have a tendency to protect employees. Therefore most non-compete clauses reviewed by the courts are deemed to be excessive. To determine whether a non-compete clause is excessive, the courts will consider the items listed in Article 445 of the Turkish code of Obligations. Following that evaluation the court may decide to shorten the term of the non-compete clause, limit its geographical area or scope, or deem it void.
3.2 Geographical, functional and temporal limitations For a non-compete clause to be valid, it must have a reasonable territorial limitation. Unfortunately there is no explicit guidance on what constitutes excessive territorial scope and the courts assess this on a case by case basis. While most Court decisions lean towards the view that citing an entire country (e.g. Turkey), as the territory where a non-compete clause applies is excessive, even very small territorial limitations may be deemed excessive if considered by the court to be excessively inconvenient for the employee. An example would be the pharmaceutical sector, where 100% of the activities are in the Marmara Region and a territorial limitation in relation to that region might hinder the employee’s right to work and therefore be deemed excessive.
A non-compete clause should not prohibit broad categories of work. Thus, an employee may not be completely banned from seeking employment for a certain period of time, even in a very
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narrow territory and the restrictions set out in the non-compete clause should relate to work performed under the former employer’s control.
The total term of a non-compete clause may not exceed two years (except in extraordinary circumstances). This being said, a non-compete clause will become invalid as soon as the employer’s interest in restricting the employee’s activities ceases to exist, regardless of whether the time limitation in the clause has expired.
3.3 Job changes A non-compete clause would normally be worded in a way which avoids specifying any particular job title, so that if the employee’s job changes with the same employer, it would include the new position. If the employee changes positions in a way that involves a new job category (e.g. if an engineer becomes a marketing professional), it may be possible to draft the clause to apply to ‘current and past positions’ with the same employer. However, the courts are likely to reduce the scope of any clause which is too restrictive.
4. ENFORCEABILITY
4.1 General In considering the validity of a non-compete clause, the court will take all relevant circumstances into account. The most important issue is that the elements (limitations, penalty, etc.) of the non-compete clause are not excessive. While the burden of proof is on the employer to establish that the non-compete clause is appropriate, if the employee is claiming the clause is excessive, he or she must prove this in order to relieve him- or herself of the clause.
4.2 Balance of interests Whether a non-compete clause is appropriate and not excessive will be determined either in ordinary proceedings or in an action for a declaratory judgment. In either case, the judge will consider the interests of both parties and yet will have broad discretion to consider all circumstances.
4.3 Remedies If the employee breaches the clause in a way that threatens the interests of the employer, the employer may request an order from the court obliging the employee to stop breaching the clause provided that employer has reserved this right in the non-compete clause. However, an injunction of this kind is only granted in exceptional cases and only where the non-compete clause contains an explicit right to request an injunction.
4.4 Penalty clauses In order to safeguard adherence to a non-compete clause, a penalty clause can be included in the employment contract. Just as the court may rule the scope of a non-compete clause excessive, it may also hold a penalty to be excessive and limit it to a more reasonable amount. If the clause stipulates a contractual penalty, the employee may relieve him/herself of liability by paying the penalty (except if otherwise stated in the non-compete clause). Even then, if the
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amount of harm incurred by the employer exceeds the amount of the contractual penalty, the employee will be liable for the difference.
4.5 Compensation In cases of breach of a non-compete clause by the employee, he or she will be liable to compensate any loss incurred by the employer as a result of the breach. In evaluating whether a breach occurred, the court will only proceed with the case if all the conditions are satisfied. If they are, the court will then evaluate the scope of the non-compete clause, taking into consideration the various limitations. If the non-compete clause is found to be valid and applicable, the court will rule on the employee’s liability to compensate for the employer’s loss.
4.6 Liability of new employer The undertakings set out in the non-compete clause apply only to the employee, meaning that any subsequent employer will not be liable for breaches of a non-compete clause that applies to the employee. This being said, since trade secrets of a company are protected by law, the new employer may be sued for the unauthorised use of protected trade secrets.
5. SPECIAL SITUATIONS
5.1 No clause Since the wording of Article 444 of the Turkish Code of Obligations provides that the parties ‘may stipulate’ the conditions of a non-compete clause, unless the parties agree on such a clause, the employee will be free to enter into a service contract with any business in direct or indirect competition with the employer and/or start his or her own competing business, even targeting the same market and customers as the ex-employer. In doing so, the only obligation of the former employee is to act in compliance with the principles of good faith. In the absence of a non-compete clause, the burden will be on the employer to prove the basis of the loss incurred by the employer as a result of a breach of good faith.
5.2 Transfers of undertakings The transfer of an undertaking includes the transfer of all employment agreements (including the rights and obligations arising from such employment agreements) from the former employer to the new employer. This means that the employee is bound by the non-compete clause, even where the clause was signed and/or the employment agreement was terminated, prior to the transfer of the undertaking.
5.3 Cross-border competition The law does not address cross-border competition but the parties may draft a cross-border non-compete clause in accordance with the general rules. If there is a dispute, the court will exercise its discretion and may rule that the restriction of activities abroad is excessive.
5.4 Non-solicitation clauses A non-solicitation clause is a clause permitting an employee to enter into a service contract with a competitor after termination of the employment agreement, but banning the employee from contracting with customers specified by the parties. Non-solicitation clauses are mainly important where the employee has many important external client contacts and they can be
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used either instead of or in conjunction with non-compete clauses. A penalty may also be imposed for non-compliance with a non-solicitation clause.
5.5 Insolvency According to Turkish law, all assets (both tangible and intangible) of an organisation pass to the insolvent party’s estate in cases of insolvency. While the organisation’s commercial activities will cease following a declaration of insolvency; the knowledge and information that is protected by a non-compete clause may be recorded as an asset. Accordingly, former employees of the insolvent company will be bound by a non-compete clause signed prior to the insolvency.
5.6 Enforceability of foreign non-compete clauses Whether a foreign non-compete clause is enforceable in Turkey will be a matter of the application of the rules of recognition and enforcement. If the Turkish court rules that a clause is suitable for recognition and enforcement (i.e. it is in accordance with the rules set out in the relevant law – such as compliance with the concept of Turkish public order, not being a matter that is subject to the exclusive jurisdiction of the Turkish courts, etc.) it will apply in Turkey.
287
Ukraine
289 Ius Laboris
1. Introduction 291
2. Conditions 291 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 292 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 293 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 294 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
290 Non- Compete Covenants - Ukraine
1. INTRODUCTION Ukrainian employment law does not recognise or regulate non-compete covenants between the employer and the employee. Therefore, in practice, non-compete clauses set out in employment agreements are unenforceable in Ukraine.
The main reason for unenforceability is that, according to labour law and the Constitution the right to work and choice of job and occupation are guaranteed to every individual. Both these fundamental laws protect against discrimination and limitation on employment, except where expressly stipulated by law. Therefore, a person must not be limited in his or her right to choose the place of work or occupation by an employment agreement, because this violates the fundamental freedom to work.
An employer may prohibit an employee from being employed by another organisation to prevent competition during employment. Some categories of employees are prohibited from taking up two jobs by law. For others the restriction may be specified in the employment agreement. The restriction is valid during the employment agreement only. Upon termination of employment, any such restriction is void and the employee is free to choose a new employer and occupation.
Given that these express employment regulations favour the employee, the enforcement of a non-compete clause or other types of restrictive covenant (e.g. non-solicitation clauses) is not common practice in Ukraine. However, international organisations present in Ukraine do include non-compete covenants in employment agreements with employees in Ukraine, to comply with internal policies and to provide a deterrent. However, a non-compete covenant will not survive the termination of the employment agreement and is, therefore, void after termination of employment. In practice, non-compete covenants are sometimes included in a termination agreement, but they are not legally binding and act merely as a deterrent.
Note that non-compete clauses in employment agreements have recently become admissible as evidence in court of the bad faith conduct of an employee. Therefore, the court may consider the provisions of a non-compete clause while hearing the case.
As explained above, a non-compete covenant must not form a part of an employment agreement, but note that a restriction on the employment can be agreed in a separate civil agreement, which is not governed by employment law, but by civil law.
2. CONDITIONS
2.1 General There is no legal regulation of non-compete covenants. Therefore, the conditions of these are not pre-determined and may be agreed at the discretion of the parties, provided that they do not breach the law.
2.2 Age It is prohibited to employ a person under 16 years old (i.e. in exceptional cases, people aged 15 may be employed with the consent of a parent). Therefore, any restrictive covenant related to employment may be applied only to a person aged 16 (i.e. in exceptional cases 15).
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2.3 Written form According to civil law any agreement between an individual and a legal entity must be made in writing. A non-compete covenant is treated as a civil agreement and must therefore be executed in writing.
As non-compete clauses are not expressly regulated by law, the parties also need to be clear that they understand the rights and obligations they are agreeing to and to that end, it is preferable for the agreement to be made in writing..
2.4 Renewal A non-compete covenant that is not an agreement under employment law, but under civil law, is not legally connected to the employment. It will therefore not survive any changes to the employment, for example, the extension or renewal of the employment agreement, or a change to the job or working conditions. However, the covenant may be changed or extended by the agreement of the parties by executing an annex to the employment agreement.
2.5 Liability for compensation on dismissal Restrictive covenants made in a civil agreement are not formally connected to the employment agreement and constitute a separate obligation made between the contracting parties. However, a civil non-compete agreement may still contain covenants that are technically associated with the employment relationship between the parties. For example, the parties may agree that the enforcement date for the non-compete agreement is the date of termination of the employment. Thus, termination of employment may be made a condition of validity of the non-compete agreement.
3. REQUIREMENTS
3.1 General If a non-compete covenant is executed in the form of a civil agreement, rather than in the employment contract, it must comply with the general requirements for civil contracts, as follows: • the contents of the agreement must not breach civil law, state and public interests or moral standards • the parties to the contract must have full civil capacity • the agreement must be concluded on the basis of the free will of the parties • the agreement must be executed in writing • the agreement must aim to create legal consequences for the parties.
3.2 Geographical, functional and temporal limitations There is no concept of geographical or temporal limitation of the effect of a restrictive covenant in Ukraine. The parties are free to agree any limitations, provided the agreement does not breach the laws of Ukraine or its moral standards.
3.3 Job changes Job changes do not affect non-compete obligations under a civil non-compete agreement, as the obligations are related to the person, not to his or her position or employment status.
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However, specific covenants relating to job changes (e.g. a promotion that involves access to confidential information) may be stipulated in a civil non-compete agreement.
4. ENFORCEABILITY
4.1 General A non-compete covenant in an employment agreement is not enforceable under Ukrainian law. Ukrainian courts do not consider a non-compete covenant as a valid restrictive measure.
However, a non-compete covenant executed as a separate civil agreement may be enforceable in court. The courts would consider a civil non-compete agreement strictly according to civil law. The courts would not balance the interests of the contracting parties. However, note that there is no case law on this issue.
4.2 Balance of interests In Ukraine there is no legal requirement to balance the interests of the contracting parties to a civil agreement. The principle of freedom of contract allows the parties to agree on any clause that does not breach the law, state or public interests or moral standards. Therefore, a civil non-compete agreement may be unbalanced.
4.3 Remedies Disputes that arise from civil relationships are subject to consideration by the civil courts of Ukraine. A claim for enforcement of a non-compete civil agreement should be filed with the local civil court. There are three stages to court proceedings in Ukraine: the local civil court, the Court of Appeal and the Court of Cassation.
If a remedy awarded by a court is not complied with, the enforcement procedure can be invoked. Enforcement is carried out by the State Enforcement Service of Ukraine. The Service will be authorised to seize assets of the debtor to fulfill the obligation to the creditor.
4.4 Penalty clauses A penalty clause may be included in a civil non-compete agreement if the parties agree. A pre- action recovery procedure may be set out in the agreement. If the agreement is not followed, the affected party may bring a claim.
4.5 Damages There is no concept of damages with regard to non-compete covenants in Ukraine. However, the parties may agree on damages resulting from a breach of a civil non-compete agreement. Only actual harm may be considered by the court for compensation. The burden of proof is on the claimant.
4.6 Liability of new employer The provisions of a civil non-compete agreement may only bind the parties to the agreement. Third parties, including new employers, incur no liability under Ukrainian law.
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5. SPECIAL SITUATIONS
5.1 No clause It is usual in Ukraine to have no express restrictive covenant in the employment agreement. If there is a covenant, it will terminate with the employment. After termination, the employee is not bound by restrictions set out in the employment agreement (with the exception of confidentiality provisions, which may remain valid after termination of employment).
5.2 Transfers of undertakings Non-compete covenants must not form part of the employment relationship and so there is no concept of transferring non-compete covenants when a business transfers to a new owner.
If there is a civil agreement not to compete (i.e. an agreement that is separate from the employment agreement), this will be binding only on the contracting parties. However, it could be transferred by amendment with their mutual consent.
5.3 Cross-border competition Non-compete covenants are not recognised as an element of employment in Ukraine. Therefore, there is no cross-border recognition.
5.4 Non-solicitation clauses A non-solicitation clause is rarer than a non-compete clause in Ukraine. Non-solicitation clauses are not subject to regulation and therefore may be agreed for internal compliance purposes or to confirm the principle of good faith between the employer and employee after termination. However, these clauses are unenforceable in Ukraine.
5.5 Insolvency If a company becomes insolvent, it may go through financial rehabilitation or it may be liquidated. Upon liquidation, the company’s activities, rights and obligations cease. Therefore, any civil non-compete agreement will terminates. If the company recovers and continues its activity, the obligations under the non-compete civil agreement will remain valid.
5.6 Enforceability of foreign non-compete clauses According to international private law, the decisions of foreign courts in civil cases may be recognised and enforced in Ukraine. The local Ukrainian court must recognise a foreign non- compete clause in Ukraine unless:
• the decision of the foreign court has not been enforced in the foreign state • the debtor was prevented from participating in foreign court proceedings because of inadequate notice of proceedings • the claim falls outside the jurisdiction of the Ukrainian court • the same claim between the same parties has already been considered by the Ukrainian local court • recognition of the foreign ruling may threaten the interests of Ukraine (e.g. because it violates public order). After recognition of a foreign court ruling, the ruling may be enforced.
294
United Arab Emirates
295 Ius Laboris
1. Introduction 297
2. Conditions 297 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 298 3.1 General 3.2 Geographical limitations 3.3 Job changes
4. Enforceability 299 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 301 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
296 Non- Compete Covenants - United Arab Emirates
1. INTRODUCTION Clauses can be included in contracts of employment as a way of controlling an employee’s actions both during and after employment. They can prohibit various activities, for example: • Non-compete: Preventing an employee from entering into competition against the employer. • Non-dealing: Preventing an employee from accepting business from current or former clients. • Non-solicitation: Preventing an employee from contacting current or former clients, not preventing the employee from accepting business if the client is not approached. • Non-poaching: Preventing the employee from soliciting former colleagues to join him or her in a new enterprise.
Of the restrictions set out above, only non-compete clauses are specifically provided for under local law. As a result, non-compete clauses must fulfil a number of legal conditions to be enforceable.
The key issue in respect of all post-termination restrictions in the UAE is the ability to legally compel employees to comply through the courts, given the limitations around enforcement.
Note that we have not included any discussion of the rules applicable to the Dubai International Financial Centre or the Abu Dhabi Global Market in the text.
2. CONDITIONS
2.1 General Due to immigration restrictions, an employee must not carry out work for any entity other than the employer set out on the visa and work permit whilst employed. Despite this, it is common for employers to specifically set out restrictions which apply during employment in employment contracts.
Employees are unable to lawfully work for other entities whilst employed. Therefore, it is common for employers to use garden leave to protect against competition by preventing employees from taking up employment with competitors during notice. Sending an employee on garden leave has the advantage that the employment relationship will continue during the period of notice. The employee will therefore be kept out of circulation, will not be able to make use of any contacts or connections he or she has with fellow employees, customers and suppliers and will not have access to any confidential information.
The disadvantage of garden leave is that the employee must be paid during the notice period.
Pursuant to UAE labour and civil law, where an employee performs a role which allows access to confidential information, the employer may put an agreement in place or include a provision in the employment contract to prevent the employee, after termination, from working for a competing business. However, a non-compete provision must be reasonable, and should only restrict conduct to the extent necessary to protect the employer’s legitimate business and legal interests. It must therefore be limited in: • time or duration
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• place or geographical scope and • nature or business restricted.
2.2 Age A non-compete clause can only be agreed between an employer and an employee of at least 21 years of age.
2.3 Written form In order for a non-compete clause to be valid, it must be agreed in writing in an individual employment contract or in a separate addendum. A general non-compete clause in, for example, a staff handbook is not enforceable.
2.4 Renewal Non-compete clauses are not typically entered into for a fixed period of time. Rather they correspond with the duration of the employment contract.
2.5 Liability for compensation on dismissal If a contract is terminated according to the contractual provisions (i.e. adequate notice is given and the correct procedure used) any reasonable restraint clauses may continue to be effective post-employment. However, practically, in the event of a claim for breach of post-termination restrictions by an employee in circumstances where the employee has terminated employment, the local courts are unlikely to be sympathetic to the employer, particularly where it does not have a valid reason for terminating employment.
If an employee terminates employment, serves notice and leaves, any restrictive covenants are generally enforceable (i.e. subject to meeting the conditions which would otherwise apply). If, however, the employee resigns as a result of a gross breach of contract by the employer, the employer is unable to rely on the restrictive covenants. An example may be where the employer unilaterally reduces the employee’s pay or benefits.
3. REQUIREMENTS
3.1 General A restrictive covenant must afford no more than adequate protection to the employer. It must only restrict activities as far as necessary for the employer’s business interests to be protected. Therefore, clear, precise drafting of any clause is crucial in order to prevent a court from declaring it void.
When assessing whether a restraint clause is valid, the courts have regard to several factors. Whether a clause can be relied upon depends on the circumstances of each case. Each case is different and it is perfectly possible for identically drafted clauses to be void in one situation, yet enforceable in another.
3.2 Geographical limitations It is necessary for non-compete clauses in the UAE to be geographically limited. A geographic scope limited to the Emirate within which the employee has been working, for example, Dubai,
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is generally acceptable, unless there are specific reasons unique to the particular employee which means that a wider restriction is necessary. Generally, the wider the geographical scope and duration, the less likely a clause is to be found to be reasonable and enforced by the courts. However, the context is always important.
In limiting the geographical scope of a non-compete clause, it is necessary to sufficiently limit both the duration and the type of work which the employee is prohibited from carrying out. Failure to limit all three factors would effectively make the clause unenforceable.
A non-compete provision with a duration of up to six months is generally considered to be reasonable. It is difficult for an employer to successfully demonstrate that a longer period is necessary.
For a restrictive covenant to be valid, the employer must have had contact with the client, supplier or employees over which restraint is to be exercised. An employer can more easily justify a more restrictive clause against an employee whom suppliers and clients were reliant upon. It is a question of degree and more onerous restrictions may be reasonable for a senior level employee with a large amount of in-depth, recent contact with the client or supplier, than would be reasonable for a more junior employee.
Local courts are likely to be less arbitrary in terms of enforcing other restrictions (e.g. non- poaching or non-dealing) even where they are more broadly drafted, given that only non- compete clauses must be limited according to UAE labour and civil law. Where the parties agree to other restrictions, the content is ultimately a matter of contract between the parties. However, practically, the courts are unlikely to uphold contractual provisions that are clearly unreasonable or excessive.
3.3 Job changes It is not uncommon for employees to join at a junior level under very simple employment terms and for such terms not to be amended as the employee works his or her way up through the organisation. For restraining activity after termination this is problematic because covenants are not automatically inferred from an employee’s promotion. Contracts should be rewritten and mutually agreed when an employer wishes to increase its protection. In practice, the employer’s should make the promotion conditional upon signing a new contract.
4. ENFORCEABILITY
4.1 General The enforceability of a restraint clause is dependent upon reasonableness, though the courts may have some discretion to interpret or amend clauses so they may be enforceable.
If an employer considers that there has been a breach of a restrictive covenant in this jurisdiction, its civil remedies are limited. The Dubai civil courts do not grant interim relief (e.g. injunctions) for the enforcement of post-termination restrictions. In practice, it is not possible to prevent an employee from acting in breach of a post-termination restriction.
In the event of the breach of a post-termination restriction, an employer’s recourse is to bring a claim for damages. A court will initially consider whether the relevant restrictions are
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reasonable. Further, an employer must provide evidence to show that it has suffered financial loss as a direct result of the employee’s breach of the post-termination restrictions, which is often difficult, if not impossible, to prove. A claim for damages is an expensive and often lengthy process in the UAE courts.
The employer may rely on a liquidated damages clause in the contract of employment, which sets out an estimate of the likely loss suffered in the event of a breach of a restriction. The benefit of such a clause is that, in the event of a dispute, the burden of proof shifts to the employee to demonstrate that the amount claimed has not actually been suffered by the employer. The court would, however, need to be satisfied that the amount claimed is reasonable.
4.2 Balance of interests The balance of interests between the parties is not ordinarily a consideration in a dispute regarding post-termination restrictions.
4.3 Remedies If an employer considers there has been a breach of a restrictive covenant, its civil remedies are limited. The Dubai Civil Courts do not grant interim relief (such as injunctions) for the enforcement of post-termination restrictions. In practice, it is not therefore possible to prevent an employee from acting in breach of a post-termination restriction (particularly a non-compete provision).
4.4 Penalty clauses In light of difficulties in enforcing post-termination restrictions in the UAE, one option is to rely on a liquidated damages clause in the contract of employment, which sets out a pre-estimate of the likely loss that would be suffered by the employer in the event of breach of a restriction. The benefit of this is that in the event of a dispute, the burden shifts to the employee to prove that the amount claimed has not actually been suffered by the employer, rather than it being for the employer to prove it has suffered the loss. The court would however need to be satisfied that the amount claimed is reasonable. If the employer suffers a greater loss than the amount set out in the liquidated damages clause, it is possible to claim this, but the employer would be required to prove the additional loss suffered.
4.5 Damages Where there is a breach of a post-termination restriction, an employer’s recourse is to commence a claim for damages. In order to bring such a claim, a court will initially consider whether the restrictions are reasonable. Further, an employer must provide evidence to show that it has suffered financial loss as a direct result of the employee’s breach of the post- termination restriction. This is often difficult, if not impossible, to prove. A claim for damages is an expensive and often lengthy process in the UAE courts.
4.6 Liability of new employer A new employer is generally not liable for any breach by the employee. However, where there is evidence that the new employer deliberately and knowingly enticed the employee to aid its business in soliciting customers or disclosing trade secrets of the previous employer, a
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separate action for damages could be brought against the new employer based on ‘unfair competition’. However, the circumstances in which such an action would be successful are very limited.
5. SPECIAL SITUATIONS
5.1 No clause If there are no express restraints, the employee is free to act as he or she wishes after termination of employment provided he or she does not misuse confidential information.
5.2 Transfers of undertakings There are no transfer regulations in the UAE for employment transfer from one entity to another. On any transfer, the employment with the first employer is treated as having been terminated and the employee must enter into a new employment contract with the second employer. Any restrictions agreed between the employee and employer no longer apply after transfer. Instead, the new employer must introduce any restrictions which the employee will be required to observe.
5.3 Cross-border competition There is no reason in principle why a covenant cannot prevent cross-border competition (i.e. where reasonable in the circumstances to do so) but enforcement is more complicated.
5.4 Non-solicitation clauses There is no reason why an appropriately drafted non-solicitation of clients, prospective clients, or employee provision cannot be enforced and, as the least restrictive of typical post- termination restraints, this is the form of restriction most likely to be approved by a court.
5.5 Insolvency When an employer becomes insolvent and winds up trading completely, no clause remains enforceable. The business’s legal identity ceases to exist. Therefore, there is no body to bring a claim against the former employee breaching any restraint clause.
5.6 Enforceability of foreign non-compete clauses As a matter of public policy, the laws of the UAE are applied to any claim brought before the UAE courts involving an employment relationship conducted in the UAE. This applies even where the governing law clause in the contract expressly specifies a different law.
The UAE courts accept jurisdiction of any claim involving an employee working in the UAE.
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1. Introduction 305
2. Conditions 305 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 308 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 309 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 311 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
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1. INTRODUCTION Clauses can be included into contracts of employment as a way of controlling an employee’s actions both during and after his or her employment. Clauses preventing activity after termination are generally referred to as restrictive covenants. They can contain varying degrees of restriction, for example:
Non-compete preventing an employee from entering into competition against the employer Non-dealing preventing an employee from accepting business from current or former clients Non-solicitation preventing an employee from contacting current or former clients, though not preventing the employee from accepting business if the client is not induced and Non-poaching preventing the employee from soliciting former colleagues to join him in his new enterprise.
Over time, a body of law has developed in this area and clear conditions have emerged which must be satisfied for any such clauses to be capable of being enforced. Even if met, however, the courts will scrutinise such clauses and the individual facts of each case will be very important in determining the validity of a clause. The general rule is that businesses should not be protected from competition unless it is necessary to protect legitimate interests such as the stability and integrity of its workforce, client or supplier base, or to protect confidential information.
2. CONDITIONS
2.1 General There can be no implied restrictive covenant. If a contract does not expressly contain one, the employee will not be subject to any restrictions during or after his employment, other than that an employee owes his employer duties of loyalty, good faith, confidentiality and may owe fiduciary duties in limited circumstances. The implied duty of confidentiality applies to ‘trade secrets’ even after termination. In addition, the employee is under a duty to use the employer’s time for the employer’s work and should not pursue any other activities during this time. This would not however stop the employee from pursuing other activities outside of the employer’s time.
Restrictions during employment If the employee’s contract does contain a clause applicable during his employment (such as one that states an employee must devote the whole of his time and attention to his employment), this will usually be upheld by the court as the employee’s ability to earn a living is not affected – he already has a job.
Accordingly, one way for an employer to protect itself from competition by employees looking to join a competitor is by taking advantage of an express ‘garden leave’ provision in the employee’s contract. This will typically say that during any period of notice (whether served by the employer or employee) the employer may require the employee not to work but the parties will remain bound by all the other terms of the contract which, as just noted, during
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employment, can be wide-ranging and in particular ban the employee from competing with his employer. The employee will therefore be kept out of circulation, will not be able to make use of any contacts or connections he has with fellow employees, customers and suppliers, and his access to any confidential information will be removed.
Sending an employee on garden leave has the advantage that the employment relationship will still be continuing during the period of notice. The employee also remains under an implied duty of good faith and fidelity to his employer.
The downside of garden leave is, obviously, that the employee will still have to be paid during the notice period.
After employment The position is different when the employment relationship has ended. The starting point is that restrictive covenants are on the face of it, void. However, they may be upheld if the employer can show them to be reasonable. Reasonableness is determined in two stages: firstly whether there is a legitimate business interest to protect, and then secondly whether the clause extends no more than is reasonably necessary to protect that interest.
Restrictions linked to remuneration Employers may also seek to limit employee competition by making commission, bonuses or other deferred remuneration payable subject to the employee complying with restrictive covenants. This is a developing area and the courts will first need to consider whether such a provision does have the effect of restraining the employee. If it does, then the court will consider the legitimate business interest and reasonableness in the usual way.
Legitimate business interest The main legitimate business interests which an employer may be entitled to protect are: • trade connections • goodwill • stability of the workforce and • trade secrets and confidential information.
‘Trade connections’ includes an employer’s clients, suppliers, employees, and may also potentially cover an employer’s previous and future clients, such as a client the employer has been working to try to secure the business of and that the affected employee was heavily involved with.
Reasonableness Having established that there is a legitimate business interest to protect, the next condition is that any clause which seeks to protect these interests must extend no more than is reasonably necessary. The point in time at which the contract is entered into is used when assessing the reasonableness of a clause and reasonableness is determined based on consideration of the geographical, functional and temporal limitations.
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2.2 Age Age has no relevance to the issue of enforcement of covenants.
2.3 Written form Theoretically, an agreement to enter into a restrictive covenant could be made validly orally but in practice this rarely happens, not least because the level of specificity required in the wording of such agreements to be enforceable would be most unlikely to be achieved in a simple conversation. It is critical in relation to restrictive covenants that employees signify their agreement to them, ideally by signing the contract in which they are contained. Agreement will not be inferred from the employee, simply because the employee provides services to the employer. Where the restrictions are contained in a separate document, for example a handbook, it is important that those terms are effectively incorporated within the employee’s terms and conditions of employment. In addition, it is necessary to bring the existence of covenants to the attention of the employee, and to give valuable consideration for them. Consideration is given if the employee accepts covenants at the same time as a job offer, promotion or bonus. However if covenants are imposed partway through employment and there is no benefit offered, then a nominal payment will typically be required. A deed is often used when entering the new arrangements, incorporating a payment of GBP 100 or more.
2.4 Renewal Restrictive covenants are not typically entered into for a fixed period of time. Rather they are co-terminous with the employment contract. Accordingly, this issue does not arise often in practice. However, there is no reason, in theory, why covenants should not be renewed and rewritten from time to time provided both parties are in agreement and consideration is given for any additional restraint.
2.5 Liability for compensation on dismissal If a contract is terminated according to the contractual provisions, i.e. adequate notice is given and the correct procedure used, then any reasonable restraint clauses may continue to be effective post-employment. However, if an employer terminates the employee’s contract in breach of the contractual provisions, the restrictive covenant will be unenforceable and the employer will not be able to rely on them. The most common example where the benefit of restrictions is lost is where the employer has not given the employee his or her contractual notice of termination.
Another example may occur when an employer dismisses an employee and makes a payment in lieu of notice. If the contract is silent as to this and does not expressly permit a payment in lieu of notice, the employer will have committed a technical breach of contract and any restrictive covenants will not be enforceable.
If an employee terminates his employment, serves his notice and leaves, then any restrictive covenants may be enforceable (subject to the usual tests). If however the employee resigns in the face of a fundamental breach of contract by the employer, then the employer will be unable to rely on the restrictive covenants. An example may be where the employer reduces the employee’s pay where there are no contractual provisions permitting it to do so.
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3. REQUIREMENTS
3.1 General A restrictive covenant must afford no more than adequate protection to the employer. In other words, it must only restrict activities as far as is necessary for the business’s interests to be protected. Therefore clear, precise, drafting of any clause is crucial in order to prevent a court from striking it down as unenforceable.
The first issue that a court will consider is whether the type of restraint is necessary to protect the legitimate business interest that the employer is looking to protect. For example, if an employer seeks to protect its clients, it may not be necessary to have a pure non-compete restriction. It would likely be enough for the employee simply to be restrained from working with the clients of his former employer with whom he had material contact over a defined period. Accordingly, a non-compete clause would protect the employer's client base, but it would be more than was reasonably necessary to do so because a less restrictive non-dealing clause would achieve the same protection.
There are, however, times when a non-compete clause will be the only way to achieve the desired effect. For example, an employer who works in a business where the customers would have loyalty to it but cannot be easily identified by name (e.g. a shop keeper or hairdresser) may be able to show that only a geographical non-compete restriction would be sufficient. Likewise, whilst an undertaking not to misuse confidential information is the standard and least restrictive way for an employer to protect its confidential information, a court will enforce a blanket non-compete clause if the reality is that no matter how hard the employee tried, it would be inevitable that if the departing employee worked for a competitor they would use confidential information gleaned from the former employer. This will typically only arise with senior employees.
When assessing whether a restrictive covenant is valid, having determined that the correct type of restraint has been used, the court will then have regard to the factors listed below. The factors are not to be considered independently, but rather as a whole. Each case is different and it is perfectly possible for identically drafted clauses to be void in one situation, yet enforceable in another.
3.2 Geographical, functional and temporal limitations An employer may wish to restrict the geographic area in which an employee is able to work. Generally, the wider these areas are, the less likely a clause is to be found to be reasonable and hence, enforced by the courts. However, the context is always important.
For example, a clause restricting an accountant from working within a 3km radius of the employer’s offices in a small rural village would be more likely to be reasonable than if their offices were in the City of London, as many more potential opportunities would be denied by such a restraint in London.
An employer may also choose to limit the restrictive covenant to the type of work that can be done for a new employer. For example, a clause might restrict the carrying out of work for a competing business which is the same type of work that the employee carried out previously.
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For a restrictive covenant to be valid, the employee usually needs to have had contact with the client/supplier/employees over which restraint is to be exercised. An employer will be more easily able to justify a more restrictive clause against an employee whom suppliers and clients were reliant on. It is a question of degree, and more onerous restrictions may be reasonable for a senior level employee with a large amount of in-depth, very recent contact with the client/supplier, than would be reasonable for a more junior employee with less contact.
A restrictive covenant must be reasonable in terms of time. The longer the period of time a clause covers, the more difficult it will be to justify. For example, a three-year clause is much more likely to be unreasonable than a three-month one. Such long clauses may well be inappropriate as knowledge of the market will become out-of-date as time passes, and a clause will only be enforced if it extends no more than is reasonably necessary.
Consideration should be given when drafting as to the lifespan of client connections that require protection. For example, if clients come to a business on an annual basis for assistance with filing accounts, a twelve-month clause may be reasonable. Anything more may be seen as arbitrary. Anything less would likely give insufficient protection.
3.3 Job changes It is not uncommon for employees to join at a junior level under very simple employment terms and for such terms never to be rewritten as the employee works his or her way up through the organisation. From the point of view of restraining activity after termination this would be an unfortunate chain of events because nothing about covenants is automatically inferred from an employee’s promotion. Contracts should be rewritten and mutually agreed at each point that an employer wishes to change restrictive covenants. In practice, the employer’s best point of leverage is to make the promotion conditional upon the signing of a new contract.
4. ENFORCEABILITY
4.1 General The enforceability of a restraint clause is dependent upon the reasonableness of the clause, though the courts may have some limited discretion to interpret or amend clauses so they may be enforceable. Before looking at whether the clause is a reasonable one and whether there are legitimate business interests that warrant protection, one must consider the way the contract was terminated.
The court may strike out offending unreasonable elements to render a covenant enforceable. This is called severance, or ‘blue-pencilling’. The conditions necessary for blue-pencilling are: • the unenforceable provision is capable of being removed without the need to add or modify the wording • the remaining terms continue to be something for which the employer has given value and • the removal of part of the provision does not change the character of the contract in such a way that it ceases to be the kind of contract that the parties entered into.
Though the courts will not readily ‘blue pencil’ clauses, it is advisable to bear in mind this possibility.
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4.2 Balance of interests Most disputes about restrictive covenants are considered at an interim stage by the court before a final determination. In practice, in many cases that interim hearing resolves the dispute one way or another as the parties may settle the dispute – although that is by no means universally the case.
At this interim stage, the court usually considers who is more likely to be damaged by the court making an incorrect decision as part of its reasoning process. This tends to favour the employer who will argue that if the employees are not restrained then the loss they suffer will be difficult to measure and the employee will not be in a financial position to recompense the employer for the financial loss it suffers through a restraint order not being fully made. However, as a quid pro quo, the employer will be required to undertake to compensate employees for financial loss they will suffer if they are restrained as an emergency measure, only for the court to conclude that having heard all the evidence and considered the matter in full, the order should not be made. This is called a ‘cross undertaking in damages’.
4.3 Remedies Employee An employee may seek a declaration that a restrictive covenant is unenforceable and not binding. Alternatively, if an employee has been improperly restrained as a result of an application for emergency relief by the employer, the employee has a right to damages to put him into the position that he would have been in financially if he had not been improperly restrained.
Employer An employer suffering loss owing to a breach of a restraint clause by a former employee may be able to bring a claim for financial compensation against him or her. However, the employer may additionally (or alternatively) seek an injunction to prevent the former employee from breaking a restrictive covenant. An employer can only do this if damages alone would not be sufficient. This may be applicable if a former employee is about to poach a major client in breach of a restrictive covenant and the employee does not have the means to compensate the employer for this, or if the loss would be too hard to assess.
Injunctions can be granted on an interim or final basis, but, because of the urgency, interim injunctions will often be of greater use. In order to obtain an interim injunction the following criteria must be fulfilled: • There must be a serious issue to be tried. • The balance of convenience must favour granting the order. The factors relevant to this are: whether damages alone would be a sufficient remedy; whether the employer seeking the injunction will undertake to compensate (and have the financial means to compensate) the employee, should the final hearing conclude that an interim injunction should not have been granted; and whether more harm than good will be done by granting the injunction.
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4.4 Penalty clauses There is no concept of a penalty clause in this context. If the effect of a clause is to restrain the employee beyond that which is reasonably necessary to protect the legitimate interest of the employer, it will be void and unenforceable.
4.5 Damages In practice, in most cases, an injunction is the primary remedy. However, a court may award damages as an alternative to an injunction.
Generally damages are calculated to compensate the employer for losses suffered as a result of the employee’s breach of a restrictive covenant. Where losses are difficult (or even impossible) to calculate alternative measures can be used (depending on the circumstances) including gain- based damages or an account of profits based on the profits the employee has made as a result of the breach.
4.6 Liability of new employer The new employer may also be held liable if it has knowingly encouraged the employee to breach his contract or otherwise acted unlawfully.
5. SPECIAL SITUATIONS
5.1 No clause If there are no express restrictive covenants, then they will not be implied into the contract.
5.2 Transfers of undertakings If an employee’s contract is transferred by reason of a transfer under the Transfer of Undertakings (Protection of Employment) Regulations (‘TUPE’) (for example where one business takes over another), then when the employee’s employment with the new employer terminates, any restrictive covenants created by the old employer business will be enforceable in the same way as any other contractual provision (subject to requirements of reasonableness).
5.3 Cross-border competition There is no reason in principle why a covenant cannot prevent cross border competition but enforcement is likely to be more complicated – see below.
5.4 Non-solicitation clauses There is no reason why an appropriately drafted non-solicitation of clients (which could include former and prospective clients), employees or trade contacts provision would not be enforced. Indeed, as the least restrictive example of common post-termination restraints, it is the form of restriction most likely to find favour with an English court.
5.5 Insolvency When an employer becomes insolvent and winds up trading completely, its post termination restrictions will not be enforceable. The business’s legal identity will cease to exist. Therefore there is no one to bring a claim against a former employee breaching any restraint clause.
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If an administrator or receiver is appointed, the clause will still bind a former employee as the employer will still retain its legal identity and could sue the former employee. Indeed, a former employee considering breaching a clause may find him or herself more likely to be subject to legal action, as unfair competition may damage the rescue of a failing business to a greater extent than one that was not struggling.
5.6 Enforceability of foreign non-compete clauses Governing law A contract will normally be governed by the law stated within it. However, under Article 6 of the Rome Convention, regardless of the chosen governing law, an employee may still rely on the protection of the ‘mandatory rules’ of the law of the country in which he habitually carries out his work or the country in which the business is situated. Such ‘mandatory rules’ apply regardless of choice, for example statutory laws protecting health and safety or affording minimum employment protection rights.
Under Article 16 of the Rome Convention, the application of the laws of a particular country can be refused if, by applying them, it would be ‘manifestly incompatible with the public policy of the forum’. As UK law on restraint of trade is rooted in public policy considerations, the clauses would have to satisfy UK law in order to be enforceable. Employees may find protection from an otherwise enforceable restrictive covenant by relying upon Article 16. It essentially provides a safety net for employees working in the UK for a foreign employer, allowing them to be protected by UK laws. The effect is therefore the same as if the principles were deemed to be mandatory rules. A UK court will not enforce a covenant which does more than is necessary to protect an employer’s legitimate business interests because to do otherwise runs counter to public policy.
Jurisdiction Under EU law (Regulation 44/2001/EC) disputes over employment contracts are to be heard in the place where the employee is domiciled.
For employees habitually working in the UK, restrictive covenants can be expected to be enforced according to UK law and disputes about them heard in the UK courts. Where an employee works regularly in various countries, it may present some additional problems. In the event of any dispute, evidence would have to be heard by the UK court to decide where an employee was domiciled.
When agreeing clauses in which there are cross-border issues, regardless of what law may be stated to apply in the contract and where any disputes are stated to be heard, the employer should consider if the employee is domiciled in the UK. The clauses will need to be drafted having regard to UK principles of enforcement. You may also wish to consider whether the other relevant jurisdictions require payment during the restricted period.
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1. Introduction 315
2. Conditions 315 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal
3. Requirements 317 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes
4. Enforceability 319 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer
5. Special situations 321 5.1 No clause 5.2 Transfers of undertakings 5.3 Cross-border competition 5.4 Non-solicitation clauses 5.5 Insolvency 5.6 Enforceability of foreign non-compete clauses
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1. INTRODUCTION A wide variety of employers require employees at all levels to execute agreements containing restrictive covenants such as non-compete, non-solicitation, and confidentiality provisions. Non- compete agreements generally prohibit the employee from competing with the employer in a defined geographic territory during and for some time after the termination of employment. Non-solicitation provisions are designed primarily to protect the employer’s investment of time and money in developing customer relationships. Generally, non-solicitation agreements only require a territorial restriction if the forbidden clients include clients with whom the employee had no relationship prior to leaving the company. A non-solicitation of customers agreement may not preclude the employee from accepting unsolicited business from the employer’s clients. Though not every state distinguishes between non-competition and non-solicitation of customers provisions, in those states that do make such a distinction, courts may be more likely to enforce non-solicitation agreements.
In the US, there is no overarching federal law governing restrictive covenants applicable in every state. Fewer than half of the states in the US have enacted a statute applicable to non-compete clauses. Further complicating matters, the statutes in place differ from state to state, and many have unique, specific nuances. Oregon’s statute, for example, has particular notice requirements that must be followed at the inception of the employment relationship. North Carolina’s administrative code has particular restrictions applicable only to locksmiths. South Dakota’s statute details specific post-employment limitations on competition that should be included in an employment contract. Additionally, some states prohibit or limit the use of non- compete agreements with regard to certain types of professions, usually medical professionals, lawyers and individuals working in broadcasting.
The enforceability of a non-compete agreement is highly fact-specific and subject to the requirements of the relevant state law. While states use different criteria to evaluate these agreements, most will enforce them if they are reasonable in geographic scope and duration and protect a legitimate business interest. Only Oklahoma, North Dakota, and California prohibit the use of non-competes, except in very narrow circumstances.
2. CONDITIONS
2.1 General Restrictive covenants must comply with each state’s requirements for an enforceable contract, as well as specific requirements for restrictive covenants. Because state laws vary as to requirements for the enforceability of restrictive covenants, employers should carefully examine the law of the state in which the employer and employee are located to determine the applicable law.
Generally, a contract must be supported by sufficient consideration to be enforceable. This means that the employer must provide the employee with something of value (or suffer a detriment) in return for the employee's promise not to compete with the employer.
Offer of employment as consideration In the US, most employment is ‘at- will’, which means that the employee can be discharged by the employer or can resign voluntarily at any time with or without cause or notice, so long as
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the discharge is not for an unlawful reason. Most states find that an offer of at-will employment is sufficient consideration for a non-compete agreement. However, some states require the employment to continue for a specific period of time for the non-competition agreement to be enforceable. In Illinois, for example, courts have required the employment to continue for at least two years, though other states, such as Missouri, have no specific duration requirement.
In some states, an offer of at-will employment is insufficient consideration for an enforceable non-competition agreement. In Texas, the consideration must be something that ‘gives rise’ to the public policy justification for enforcing non-competition agreements (i.e., to protect an employer’s legitimate business interests). Thus, the consideration provided must relate to the employer’s legitimate business interests. For example, a promise to provide an employee with confidential information or highly specialised training, both of which are designed to further the specific business interests of an employer that are protected by the non-compete, may be sufficient consideration for a non-competition agreement. Texas courts have also recognized consideration in the form of implied promises of confidential information based on the nature of the job.
Continued employment as consideration Whether continued employment is sufficient consideration when a current employee is required to sign a non-compete depends on the laws of each specific state.
For example, the Kentucky Supreme Court in Charles T. Creech, Inc. v. Brown, 433 S.W.3d 345 (Ky. 2014), held that a three-year non-competition agreement entered into by an employee mid-employment was unenforceable for lack of consideration where the employee had to sign the agreement to ensure his continued employment but the employment relationship did not change – the employee remained an at-will employee and was not promoted, had no increase in wages, and received no specialized training. Similarly, the Pennsylvania Supreme Court in Socko v. Mid-Atlantic Systems of CPA, Inc., 126 A.3d 1266 (Pa. 2015), recently affirmed an appellate ruling that an employment agreement containing a restrictive covenant not to compete may be challenged for a lack of consideration even though the agreement, by its express terms, indicated that the parties ‘intended to be legally bound’ pursuant to the Uniform Written Obligations Act, 33 P.S. § 6 (which states that contracts are generally enforceable, whether or not consideration exists, if the contract contains the recital that the parties ‘intend to be legally bound’).
In South Carolina and Connecticut, courts generally require separate consideration, in addition to continued employment, when a non-compete is entered into after employment has begun. In Marsh USA v. Cook, 354 S.W.3d 764 (Texas 2011), the Texas Supreme Court held that the grant of stock options is sufficient consideration for the enforcement of a non-compete entered into after employment has begun, where such stock supported the employer’s reasonable interest in goodwill.
2.2 Age Generally, there are no special requirements concerning the age of a contracting party in order to sign an enforceable non-compete agreement. As long as the employee signing the contract
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has reached the age of majority in his or her state, he or she is old enough to enter into a non- compete agreement.
2.3 Written form Generally, non-compete agreements must be in writing to be enforceable. There are rare instances where an oral non-compete agreement or other restrictive covenant (such as a non- solicitation agreement) may be enforceable. For example, in TES Franchising, LLC v. Dombach, 2010 WL 3946274 (E.D. Pa. Oct. 7, 2010), the U.S. District Court for the Eastern District of Pennsylvania considered an oral non-competition covenant in the independent contractor context and confirmed that such agreements are exceedingly difficult to enforce, but not per se unenforceable. There, plaintiff asserted, but defendant denied, the existence of an oral non- compete agreement. The court refused to enforce the alleged verbal non-compete, explaining that its terms were unknown and plaintiff could not have established that the terms were reasonably limited in duration and geographic context for the non-compete to be enforceable.
2.4 Renewal Like other contracts, a non-compete agreement can be renewed. However, if the terms of the agreement (such as geographic or temporal scope) have changed, additional consideration most likely will be required for the renewed non-compete agreement to be enforceable.
2.5 Liability for compensation on dismissal Generally, employees are considered to be employed ‘at will’, meaning they can quit or be discharged at any time, without or without cause or notice, for any reason, as long as the reason is not unlawful (i.e., due to discrimination, retaliation, etc.). An employer who discharges an at-will employee generally is not liable for compensation upon dismissal. If the employee is employed under a contract that is for a specific period of time and is discharged before that time has expired, the employer may be liable for breach of the employment contract. With regard to non-compete agreements, many jurisdictions will enforce fair competition restraints whether the employee quit or was fired. However, some states, such as Pennsylvania, Montana and New York, will not normally enforce restrictive covenants against an employee who has been discharged through no fault of the employee (i.e., without cause).
3. REQUIREMENTS
3.1 General For a non-compete agreement to be enforceable, the restrictions must be reasonable in the length of time and geographic area. Competition from a former employee usually poses its greatest danger in the months immediately following termination. Though the reasonableness of a restraint is usually determined on a case-by-case basis, any non-compete agreement that restricts employment for a period of longer than two years is much more likely to be declared invalid, unless the restraint is obtained in the sale of a business. The restraint must also protect a legitimate business concern in order to be enforceable.
In addition to the requirement that a non-compete agreement be reasonable in time and geographic area, many states impose other requirements for a non-compete to be enforceable. These requirements vary from state to state, but usually require that the restricted activities be
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narrowly tailored. Courts may also look to whether the agreement will essentially prevent the employee from working in his or her chosen field, whether the restriction will cause the employee undue hardship, and whether the employer has previously enforced non-competes against other employees.
California law regarding non-competes is one of the most restrictive in the nation. In California, employee non-compete agreements restricting post-employment conduct are generally void and unenforceable. There are certain narrow exceptions to this law, including when the non- compete arises in the context of the merger or sale of a business.
Because of the strong public policy behind the California law, courts generally will not honour attempts to circumvent the law by including a choice-of-law provision selecting the law of another state to govern the terms of any dispute over the agreement. If the employment is to be carried out in California, courts will apply California law. In one case, a California Court of Appeal held that California law may be applied to determine the enforceability of a covenant not to compete in an employment agreement between an employee who did not reside in California when the agreement was signed and an employer whose business was based outside of California, when a California-based employer sought to recruit or hire the non-resident for employment in California. However, the enforcement of non-competes involving out of state employees may depend on the specific facts of the case.
Non-solicitation of customers provisions are also considered restraints of trade and generally will be strictly scrutinized by California courts. Such provisions generally are enforced only if they are necessary to protect the employer’s trade secrets. For example, a California court has invalidated a non-solicitation of customers provision where the customers’ contact information was not obtained by using the former employer’s trade secrets.
A non-solicitation of employees provision may be enforced in California when the sale of a business is involved, if the agreement is limited to individuals who were employed by the business when it was sold.
California employers can still use other means to protect trade secrets and other confidential information, for example, by using confidentiality and non-disclosure agreements. If an employee has taken a former employer’s trade secrets and used them to compete against the former employer, a court may order injunctive relief, damages for lost profits, damages based on unjust enrichment, and, possibly, liquidated and/or punitive damages.
Note that the rule that post-employment non-compete agreements are generally void and unenforceable only affects restraints of trade imposed after termination. During the term of employment, an employee owes a common-law duty of loyalty to the employer, which would preclude the employee from competing with his or her current employer either by soliciting the employer’s customers, using the employer’s trade secrets, or otherwise.
3.2 Geographical, functional and temporal limitations Restrictive covenants must be reasonable in geographic and temporal scope to be enforceable. The type of business involved may affect the determination of the reasonableness of the restrictions. For example, a 30-mile geographic restriction against a neurosurgeon might be found to be too broad, if, perhaps, there is a relative lack of neurosurgeons within the area. In
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this example, a court might refuse to enforce the non-compete, if the court were to conclude that the restriction would be injurious to the public interest. However, in contrast, a geographic restriction that covers the entire United States and Canada might be found to be reasonable if the employer competes for business worldwide, and the restrictive provision bars competition only in certain aspects of the employer's business.
Employers who want to enforce non-compete agreements against employees who telecommute should specify which state’s laws will govern if a dispute arises over the non- compete. Sometimes, however, such agreements may not be sufficient.
3.3 Job changes Generally, a non-compete likely will be enforceable against an employee who changes positions within a company, although this can vary based on the specific state law in question. If an employee is demoted, a court might find the demotion to be a breach of the non- compete agreement, thereby rendering it unenforceable. For example, in one case, a New York court refused to enforce a non-compete following an employee’s voluntary resignation where the employer had demoted the employee prior to his resignation. The court held that the employee’s demotion was a material breach of the employment agreement, rendering the non- compete covenant unenforceable. However, the court permitted the employer to enforce its employee non-solicitation covenant, since the former employer could demonstrate a legitimate business interest in prohibiting the former employee from soliciting his former co-workers. This decision demonstrates that courts may find employee non-solicitation agreements to be enforceable, even if a non-compete agreement is determined to be unenforceable.
4. ENFORCEABILITY
4.1 General Some state laws permit courts to modify non-compete agreements if only part of the agreement is found to be unreasonable (called ‘blue-pencilling’). Blue-pencilling allows a court to delete or modify an unreasonable and unenforceable provision of a non-compete agreement and then enforce the agreement based on terms deemed reasonable. Some states, such as New York, Florida, and Georgia, permit blue-pencilling. Other states have taken a stricter approach to enforcement of restrictive covenants, disallowing blue-pencilling entirely and requiring courts to enforce or strike down the covenant based solely on the terms in the agreement. For example, in South Carolina, the restrictions in a non-compete clause cannot be rewritten by a court or limited by the parties’ agreement. Similarly, Maryland law limits blue- pencilling to removing the offending language.
4.2 Balance of interests In balancing the interests of the parties, courts will consider the legitimate business interests that the employer seeks to protect, such as the protection of trade secrets, prevention of an employee’s release of confidential information regarding the employer’s customers, or an employee’s services to the employer that are deemed special or unique. The court will balance this against the employee’s interest in pursuing his or her chosen profession. This is a fact- specific inquiry that will vary from case to case.
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4.3 Remedies Before filing a lawsuit for breach of a non-compete agreement, an employer may send a ‘cease and desist’ letter to the former employee, reminding the employee of his or her obligations under the agreement, stating that the former employer believes the former employee to be in violation of the agreement, and stating the steps the former employer intends to take if the breach of the agreement continues. In some situations, the former employer may send a letter to the new employer stating that the former employee is bound by a non-compete agreement, and that the new employment may interfere with this agreement.
If the cease and desist letter does not result in the former employee and/or new employer taking appropriate action, the former employer will typically file a legal action for injunctive relief, seeking a court order prohibiting the employee from working for a competitor or releasing confidential information.
Although most litigation surrounding non-compete agreements is filed by an employer seeking to enforce the non-compete agreement, in a few cases, the employee may seek a declaration on his or her own accord from the court stating that the non-compete is unenforceable.
4.4 Penalty clauses Some agreements may include a liquidated damages clause, which fixes the amount of monetary damages in advance. But, employers should be aware that in some cases an enforceable liquidated damages clause could weigh against issuance of injunctive relief by a court. An employer may find it difficult to argue that it will be severely harmed in the face of a liquidated damages provision that monetises the injury caused by the departing employee. A reviewing court also may reject permanent injunctive relief in favour of an award of liquidated damages.
4.5 Damages Employers will generally seek injunctive relief prohibiting an employee from violating a non- compete agreement. An employer may also be able to recover monetary damages if it can show losses from an employee’s violation of a non-compete agreement. Employers must be able to show actual, not speculative, losses – such as lost profits – caused by the breach of the non-compete.
4.6 Liability of new employer The new employer could become embroiled in litigation over the enforcement of a non- compete agreement. For example, the former employer may assert a tortious interference claim against the new employer, claiming that the new employer wrongly induced, encouraged, or assisted the employee’s breach of the agreement. Other claims that might be asserted include aiding and abetting a breach of fiduciary duty or loyalty, misappropriation of trade secrets, and/or unfair competition.
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5. SPECIAL SITUATIONS
5.1 No clause In limited circumstances, a former employee may be enjoined from competitive employment even in the absence of a restrictive covenant.
Inevitable disclosure doctrine Some courts will enjoin a former employee’s competitive employment if there is evidence that the ex-employee will ‘inevitably disclose’ the former employer’s trade secrets in the new employment. The inevitable disclosure doctrine was revived by the Seventh Circuit Court of Appeals in PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995), where the court enjoined a former Pepsi executive from taking a position at rival Quaker. The injunction was justified because, at PepsiCo, the executive was privy to confidential and proprietary business strategies, including marketing plans and pricing policies, which would allow him to anticipate PepsiCo’s behaviour and use this information to undercut his former employer.
When determining whether inevitable disclosure is sufficient to enforce a non-compete, courts consider a variety of factors, including: (1) whether the employers are direct competitors that provide the same or similar products or services; (2) the similarity between the employee’s new and old positions; (3) whether the employee could not reasonably be expected to perform his new job responsibilities without using his former employer's trade secrets because his new position is nearly identical to his old one; and (4) whether the trade secrets in dispute are highly valuable to both employers.
Most courts, however, are reluctant to imply a non-compete agreement under the inevitable disclosure doctrine, and its use generally involves the potential disclosure of trade secrets by employees in highly technical industries. Some courts reject the inevitable disclosure doctrine outright, including California, Florida, Maryland, Louisiana, and Virginia.
Unfair Competition Where the former employee and his new employer use the former employer’s confidential information and trade secrets to unfairly compete against the former employer, a court may enjoin the former employee from employment with the new employer. Even California recognizes that former employees may not misappropriate the former employer’s trade secrets to unfairly compete with the former employer.
5.2 Transfers of undertakings The US does not have a set of regulations similar to the UK’s Transfer of Undertakings (Protection of Employment) Regulations (‘TUPE’). Accordingly, whether a non-compete agreement is enforceable against employees when a business is sold depends on the way the deal is structured. If the deal is a stock purchase, and the business continues essentially as before, the non-compete generally is enforceable. If the deal is an asset purchase or a merger, the predecessor employer may cease to exist, and whether a non-compete agreement executed with that employer can be enforced by the new company is a matter of state law. For example, in North Carolina an asset purchaser is considered to be a new employer and must either act to enforce the original non-compete or enter into a new non-compete agreement with the
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employees (Artistic Southern Inc. v. Lund, 2015 WL 8476587 (N.C. Super Ct. 2015)). By comparison, some courts have held that non-compete agreements are assets that pass to a purchaser by operation of law under state corporation statutes and therefore can be enforced (Aon Consulting, Inc. v. Midlands Fin. Benefits, Inc., 748 N. W. 2d 626 (Neb. 2008)). While the current trend in the law favours assignability, in some states non-compete clauses in employment agreements are not assignable to successor employers unless there is either (1) an explicit assignability provision contained in the agreement, or (2) evidence that the employee consented to the assignment. These states construe restrictive covenants narrowly because they impose a restraint on an employee’s right to earn a livelihood. Thus, absent an explicit assignability provision, courts in these states are reluctant to read one into the contract.
5.3 Cross-border competition In the US, employers must consider inter-state enforceability of restrictive covenants, as well as international enforceability. In the absence of a provision stating which state’s or country’s laws apply to the agreement, a court generally will apply the law of the state or country with the closest connection to the employee and/or the underlying employment. Yet a court may refuse to apply an agreement’s choice of law provision if it finds that the selected law offends the public policy of the chosen forum.
This task becomes more difficult when dealing with international enforceability, particularly for expatriate employees who travel the world. Employers should evaluate whether the law selected in any restrictive covenant agreement is enforceable in the jurisdictions where the employer may seek to enforce the non-compete, such as where the employee works or resides.
5.4 Non-solicitation clauses Unlike non-compete clauses, many courts look more favourably upon customer non-solicitation clauses because they allow former employees to immediately work anywhere, even for a direct competitor. Because they protect the employer’s prized business asset—its customer base— while not prohibiting an employee from working in his or her chosen field, there normally is little burden on the employee if he or she is prohibited from contacting customers whom he or she serviced during the prior employment. However, many states will not prohibit a former employee from soliciting prospective customers or clients whom he or she never serviced during the former employment. Courts are more likely to enforce restrictions limited to clients developed and/or serviced by the former employee during the last year or two of employment, and for a time reasonably related to the time it should take for the employer to re-establish relationships with those clients. A five-year non-solicit covering every current and prospective client is more likely to be deemed an overbroad ‘sword’ to punish the former employee rather than a reasonable ‘shield’ to protect the employer’s legitimate business interests and good will.
Like customer non-solicitation clauses, employee non-solicitation clauses do not infringe upon a former employee’s ability to work anywhere in his or her chosen profession. Instead, the clause prohibits a departing employee from hiring away or ‘poaching’ another employee or group of employees to join a competitor. Though designed to protect a legitimate business interest, namely the stability of an employer’s relationships with its own workforce, enforcement often turns on the impact of the clause on the mobility rights of otherwise at-will employees who are mere bystanders to the company’s agreement with the departing employee. Due to the historic
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disfavour of non-compete agreements, some courts do not allow employers to create non- competes with at-will employees by stopping them from resigning to join a competitor of their choosing—even after being solicited by a former employee with post-employment non-solicit obligations.
5.5 Insolvency The federal bankruptcy laws provide a uniform framework for debtors to discharge their debts and resolve disputes with creditors. Chapter 11 of the bankruptcy laws provides a procedure allowing a debtor to continue operating its business while either formulating a plan of reorganisation with its creditors or liquidating and winding up business. Once a Chapter 11 petition is filed, the debtor operates under the protection of the bankruptcy laws. These protections include, among other things, an automatic stay, which prohibits creditors from taking any action against the debtor, its property or the estate. In some situations, a company pursuing a claim for breach of a non-compete against a bankrupt debtor may file a lift-stay motion, seeking to permit the case to proceed. Courts consider a variety of factors in determining whether to grant a lift-stay motion, including whether relief would result in a partial or complete resolution of the issues, lack of any connection with or interference with the bankruptcy case, the impact of the stay on the parties and the balance of harms, among others. A number of courts have granted lift-stay motions to permit the company the right to seek injunctive relief to prevent violations of non-compete agreements. These courts have reasoned that such actions for injunctive relief do not qualify as a claim dischargeable in bankruptcy since no expenditure of money is required to comply. In addition, these courts have recognized that state court judges are in the best position to resolve the legal and factual issues related to the alleged breach of the non-compete agreement and enforce orders for injunctive relief.
Bankruptcy laws also permit the debtor to reject executory contracts and leases. Former employees being sued for breach of a non-compete who file for bankruptcy usually will try to characterize the non-compete as a contract that can be rejected. Some courts have permitted this, while others have held that a former employee’s covenant not to compete against the former employer is not the type of contractual obligation subject to rejection. Additionally, even if portions of an employment contract are subject to rejection, a bankruptcy court may allow for the covenant not to compete to be carved out of a contract and enforced post- rejection. Court decisions vary regarding whether an employee’s obligations under a non- compete can be discharged in bankruptcy. However, a finding that the former employee’s conduct was ‘willful or malicious’ related to a breach of a non-compete agreement will generally render the resulting damages non-dischargeable under the bankruptcy code.
Additionally courts are divided on whether an assignor can enforce a non-compete entered into with a company that has filed bankruptcy, where the agreement does not specifically address assignability and the employee does not consent to the assignment. In one case, the employer with whom an employee had a two-year non-compete agreement covering all of North America was adjudicated bankrupt, and the bankruptcy trustee assigned the non-compete to a solvent, wholly-owned subsidiary of the bankrupt employer. The employee went to work for the subsidiary with the same job title performing essentially the same job as before. He subsequently resigned and went to work for a competitor. The court entered an order
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enjoining him from working for the competitor, in part because of evidence of the significant amount of time, effort and expense the former employer incurred in developing and protecting the trade secrets that the employee might reveal to the competitor. These cases are extremely fact-specific, and the court may have reached a different result with different facts.
5.6 Enforceability of foreign non-compete clauses There is no per se prohibition against the enforceability of non-compete agreements entered into in foreign countries. However, the law of post-employment restrictive covenants is dependent on state law and courts in different states take very different approaches on whether, and under what circumstances, a non-competition clause will be enforced. As a result, many courts will not apply the law of a foreign jurisdiction if it would lead to enforcement of a non-compete that would be invalid under the law of the state in which enforcement is sought.
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Printed: March 2017
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