Non-Compete Clauses A Publication of Ius Laboris A N
cover 30-07-2010 12:13 Pagina 1 Non-Copmete Clauses An International Guide Ius Laboris 280 Boulevard du Souverain B-1160 Brussels, Belgium T +32 2 761 46 10 F +32 2 761 46 15 E [email protected] A Publication of Ius Laboris Produced by the Individual Employment Rights International Practice Group Printed: July 2010 Non-Compete Clauses An International Guide Nothing stated in this booklet should be treated as an authoritative statement of the law on any particular aspect or in any specific case. Action should not be taken on the basis of this booklet alone. For specific advice on any particular matter you should consult the relevant country representative listed inside. The law is stated as at May 2010. ® Is a registered trademark of Ius Laboris scrl Ius Laboris is an alliance of leading Human Resources law practitioners. We have more than 2,500 lawyers providing local expertise across the globe, with member firms in over 42 countries and coverage in more than 100 jurisdictions. 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Our lawyers understand the issues and challenges associated with managing a workforce, wherever it is located. The Alliance focuses on specific areas of expertise within our six International Practice Groups (IPGs). The IPGs bring together lawyers from across the Alliance with expertise in key areas of Human Resources law; including Individual Employment Rights, Discrimination, Restructuring and Labour Relations, Pensions, Employee Benefits and Tax, and Immigration. Contributors In our experience, local expertise in these areas of law is crucial to developing coherent Human Resources strategies that work within a global framework. Our IPGs meet regularly and are well placed to coordinate regional and worldwide requests, drawing on each individual lawyer’s wealth of experience. Clients can access the work of our IPGs, which complement our extensive portfolio of services. The Individual Employment Rights IPG brings together lawyers from across the Alliance with expertise on the unique issues that arise at different stages in the employer-employee relationship. Members of this practice group advise clients on a range of issues from structuring employment contracts, identifying and implementing alternative working week arrangements, creating and implementing performance management plans, staff training, creating cross-border employment policies, terminations and settlement agreements, labour audits and due diligence inquiries for corporate transactions. For any additional information, please visit our website (www.iuslaboris.com) or feel free to contact us: Ius Laboris 280 Boulevard du Souverain 1160 Brussels Belgium T +32 2 761 46 10 F +32 2 761 46 15 E [email protected] AUSTRALIA Darren Perry George Raptis Freehills MLC Centre 19 Martin Place Sydney NSW 2000 Australia T +61 2 9225 5000 F +61 2 9322 4000 E [email protected] [email protected] www.freehills.com AUSTRIA Natalie Seitz Kunz Schima Wallentin Porzellangasse 4 1090 Vienna Austria T +43 1 313 74 0 F +43 1 313 74 80 E [email protected] www.ksw.at BELGIUM Ann Witters Claeys & Engels 280 Boulevard du Souverain 1160 Brussels Belgium T +32 3 285 97 91 F +32 2 761 47 00 E [email protected] www.claeysengels.be CANADA Jonathan Dye Heenan Blaikie Bay Adelaide Centre PO Box 2900 Toronto, Ontario M5H 2T4 Canada T +1 416 360 6336 F +1 416 360 8425 E [email protected] www.heenan.ca CHILE Cristian Olavarria Philippi, Yrarrazaval, Pulido & Brunner Avenue El Golf 40, piso 20 Las Condes CP 755-0107 Santiago Chile T +56 2 364 3700 F +56 2 364 3796 E [email protected] www.philippi.cl < CZECH REPUBLIC Jaroslav Skubal PRK Partners s.r.o. Jáchymova 2 110 00 Prague 1 Czech Republic T +420 2 21 43 01 11 F +420 2 24 23 54 50 E [email protected] www.prkpartners.com DENMARK Morten Langer Sabrina Sahl Norrbom Vinding Locations & Partner Amerikakaj Dampfaergevej 26 2100 Copenhagen Denmark T +45 35 25 39 40 F +45 35 25 39 50 E [email protected] [email protected] www.norrbomvinding.com FRANCE Anne-Laure Peries Capstan Stratégie Concept – Bât 4 1300, avenue Albert Einstein 34000 Montpellier T +33 4 67 15 90 90 F +33 4 67 15 90 91 E [email protected] Laurent Deschaud Capstan 509, avenue du Prado 13008 Marseille T +33 4 91 29 03 90 F +33 4 91 29 03 99 E [email protected] www.capstan.fr GERMANY Christoph Crisolli Kliemt & Vollstädt Ulmenstrasse 37-39 60325 Frankfurt Germany T +49 69 710 410-0 F +49 69 710 410-200 E [email protected] www.kliemt.de GREECE Alexia Stratou Kremalis Law Firm 35 Kyrillou Loukareos 114 75 Athens Greece T +30 210 64 31 387 F +30 210 64 60 313 E [email protected] www.kremalis.gr INDIA Manishi Pathak Puneet Arora Kochhar & Co 11th Floor, Tower A, DLF Towers Jasola Jasola District Center New Delhi – 110025 India T +91 11 4111 5222 / 4056 3812 F +91 11 4056 3813 E [email protected] [email protected] www.kochhar.com IRELAND Jennifer O’Neill LK Shields Solicitors 39/40 Upper Mount Street Dublin 2 Ireland T +353 1 661 0866 F +353 1 661 0883 E [email protected] www.lkshields.ie ITALY Aldo Bottini Toffoletto e Soci Via Rovello, 12 20121 Milan Italy T +39 02 721 44 1 F +39 02 721 44 500 E [email protected] www.toffoletto.it LITHUANIA Julija Lisovskaja Raidla Lejins & Norcous Lvovo 25 09320 Vilnius Lithuania T +370 5250 0800 F +370 5250 0802 E [email protected] www.rln.lt LUXEMBOURG Alexandra Castegnaro Castegnaro Cabinet d’Avocats 33, Allée Scheffer 2520 Luxembourg T +352 26 86 82 1 F +352 26 86 82 82 E [email protected] www.castegnaro.lu NETHERLANDS Erik Deur Bronsgeest Deur Advocaten De Lairessestraat 137-143 1075 HJ Amsterdam Netherlands T +31 20 305 33 33 F +31 20 305 33 30 E [email protected] www.bd-advocaten.nl RUSSIA Olga Pimanova ALRUD Law Firm 2nd 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 POLAND Grzegorz Ruszczyk Bartlomiej Raczkowski Kancelaria Prawa Pracy ul. Ciasna 6 00-232 Warsaw Poland T +48 22 537 52 84 F +48 22 531 52 81 E [email protected] www.raczkowski.eu SLOVAK REPUBLIC Jaroslav Skubal Peter Varga PRK Partners s.r.o. Gorkeho 3 811 01 Bratislava Slovak Republic T +421 259 241 180 F +421 254 432 733 E [email protected] [email protected] www.prkpartners.com PORTUGAL Bruno Soeiro Barbosa Pedro Pinto, Reis & Associados Av. Fontes Pereira de Melo, No. 21,7 1050-116 Lisbon Portugal T +351 21 350 9400 F +351 21 352 7212 E [email protected] www.ppradv.com < NORWAY Claude Lenth Advokatfirmaet Hjort DA Akersgaten 51 P.O.Box 471 Sentrum 0105 Oslo Norway T +47 22 47 18 00 F +47 22 47 18 18 E [email protected] www.hjort.no SPAIN Íñigo Sagardoy de Simón Gisella Alvarado Caycho Sagardoy Abogados C/Tutor 27 28008 Madrid Spain T +34 91 454 0053 F +34 91 542 26 57 E [email protected] [email protected] www.sagardoy.com SWEDEN Ulrika Runelöv Elmzell Advokatbyrå HB Gamla Brogatan 32 111 20 Stockholm Sweden T +46 8 21 16 04 F +46 8 21 00 03 E [email protected] www.elmzell.se SWITZERLAND Urs Baumgartner Rayan Houdrouge Lenz & Staehelin Bleicherweg 58 8027 Zurich Switzerland T +41 58 450 8000 F +41 58 450 80 01 E [email protected] [email protected] www.lenzstaehelin.com TURKEY Maria Celebi Pelin Tirtil Bener Law Office Yapi Kredi Plaza, C blok, Kat. 4 34330 Levent Istanbul Turkey T +90 212 270 70 50 F +90 212 270 68 65 E [email protected] [email protected] www.bener.av.tr UNITED KINGDOM Richard Miskella Lewis Silkin LLP 5 Chancery Lane Clifford's Inn London EC4A 1BL England T +44 20 7074 8175 F +44 20 7864 1789 E [email protected] www.lewissilkin.com UNITED STATES OF AMERICA Eric A Savage Littler Mendelson PC 1085 Raymond Blvd 8th Floor Newark, NJ 07102 United States of America T +1 973 848 4706 F +1 973 643 5626 E [email protected] www.littler.com Contents INTRODUCTION 13 AUSTRALIA 15 AUSTRIA 33 BELGIUM 43 CANADA 55 CHILE 69 CZECH REPUBLIC 79 DENMARK 93 FRANCE 111 GERMANY 125 GREECE 139 INDIA 149 IRELAND 163 ITALY 175 LITHUANIA 187 LUXEMBOURG 197 NETHERLANDS 209 NORWAY 223 POLAND 235 PORTUGAL 245 RUSSIA 255 SLOVAK REPUBLIC 263 SPAIN 271 SWEDEN 283 SWITZERLAND 295 TURKEY 309 UNITED KINGDOM 319 UNITED STATES OF AMERICA 335 INTRODUCTION Introduction 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’ interests in discouraging former employees from engaging in competition or soliciting customers run the risk of infringing employees’ fundamental rights to professional freedom on a large geographic scale. On behalf of Ius Laboris, an alliance of leading Human Resources law practitioners, we are delighted to introduce a publication, which explains the essential principles of post-employment competition restrictions in a large number of countries, with a focus on relevant domestic standards. This guide outlines each country's rules on non-compete covenants, the formal requirements, and 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 question of whether a post-employment covenant is enforceable in cross-border employment relationships is as essential as whether it adequately compensates the employee for the restrictions placed upon him. 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 the Alliance and have extensive practical experience in advising international clients on labour and employment law. We would like to express our appreciation to all member firms for their contributions and knowledge sharing. Christoph Crisolli Kliemt & Vollstädt, Frankfurt, Germany Erik Deur Bronsgeest Deur Advocaten, Amsterdam, Netherlands 13 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 17 18 19 19 19 3. REQUIREMENTS 19 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 19 22 23 4. ENFORCEABILITY 24 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 24 24 26 26 27 27 5. SPECIAL 27 SITUATIONS 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 27 28 28 29 29 30 Australia Non-Compete Clauses - An International Guide - AUSTRALIA 1. INTRODUCTION Employment agreements will often contain a clause that restricts the activities of an employee after termination of the agreement, commonly known as a ‘restraint of trade’ provision. Common restrictions that employers may seek to impose upon former employees include: • • • time-limits regarding the commencement of employment in a similar field; non-disclosure of certain information and know-how acquired during employment; and geographical limitations on markets in which an employee can work. The purpose of these provisions is to protect the employer’s legitimate business interests, such as trade secrets, confidential information and established customer connections. The common law underpins the Australian approach to ‘restraint of trade’ clauses in employment law. Under the common law, all restraint of trade clauses are prima facie void, as they are considered to be against public policy. Concerns surrounding the public impact of restraint of trade clauses were discussed in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd, in which Lord MacNaughten stated that: ‘The public have an interest in every person’s carrying on his trade freely; so has the individual. All interference with individual liberty of action in trading, and all restraint of trade of themselves, if there is nothing more, are contrary to the public policy, and are therefore void. That is the general rule.’ This United Kingdom decision was approved by the High Court of Australia in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd. The presumption in the Nordenfelt case may be rebutted, however, by establishing that a restraint clause is ‘reasonable’. Successful restraints therefore largely depend upon whether the employer has any legitimate protectable interest and if so, whether the restraints are no more than is reasonable for the protection of those interests. 2. CONDITIONS 2.1 General A restraint of trade clause must satisfy the following preconditions for validity. If it does not satisfy these preconditions, the clause will most likely be determined to be invalid. Such a determination will often occur without 17 Ius Laboris analysis of whether the clause meets with the common law requirements for validity in restraint of trade clauses. While an employment relationship continues to exist between an employer and employee, the employee’s duty of fidelity will support extensive restraints on competing with the employer. Although restrictions during employment are generally not considered contentious by Australian courts, there may be problems in applying the restraint of trade doctrine after termination of employment. Moreover, it may be difficult to determine whether a sufficient employment relationship continues to exist between the employer and employee. Non-Compete Clauses - An International Guide - AUSTRALIA 2.3 Written form The general law will not restrain a former employee from seeking employment with a competitor. Therefore any employer seeking to prevent a former employee from competing with their business must rely on an enforceable clause in their contract of employment with the former employer. Thus, it must be in writing and acknowledged by both parties. Australian common law has established that in order to be enforceable, the terms of a restraint of trade must be clear, certain and not vague. Thus, even if an employer has a valid need to protect its interests, the restraining clause must be drafted with sufficient clarity and certainty. The doctrine also extends to restraints imposed by contractual agreements between employers and third parties or organisations. For example, in the case of Buckley v Tutty, the rules of the New South Wales Rugby Football League controlling the transfer of players (who were contracted to individual clubs) were void as they constituted a restraint of trade. 2.4 Renewal Under Australian law, a renewal of a contract of employment is a variation of or replacement of the original contract of employment. If the contract of employment is replaced entirely on renewal, it will be necessary for new non-compete clauses to be included in the replacement contract. The test for the enforceability of these provisions will be the same as those in the original contract. 2.2 Age Persons over the age of 18 years are generally considered to have the capacity to enter into a binding contract of employment. Where a person over the age of 18 enters into a contract that includes a restraint of trade provision, there is a rebuttable presumption that they are able to consent to such restraints. This presumption may be rebutted by evidence of vitiating factors, such as mental illness or incapacity. Alternatively, if the renewal comprises a replacement of only part of the original contract of employment (for example, as part of a review of remuneration), in the absence of any new non-compete provisions in the renewal contract, the original non-compete provisions will continue to operate in accordance with their terms. Contracts of employment that include restraint of trade provisions may theoretically be enforceable against a minor. It will be necessary, however, to satisfy the court that the employment contract is substantially for the minor’s benefit when construed as a whole, having regard to the circumstances of the case If the court can be satisfied that the contract, including the restraining provision, can be regarded as to the minor’s ‘benefit’, then the contract and the restraint may be enforceable. An early 20th century judgment held that where a minor is found to have the capacity and power to elect whether he will keep or surrender the benefit of the contract, then if he retains the benefit, he is to be taken as ratifying the bargain and to be bound by its obligations, including the restraint of trade. However, the Australian courts may adopt a slightly different approach to such a contract today. 18 2.5 Liability for compensation on dismissal A restraint of trade clause is invalid in situations where the employer is liable for unfair dismissal. Where it is determined that an employee’s termination was harsh, unjust or unreasonable, any clause within their contract of employment purporting to restrain trade will be invalid. 3. REQUIREMENTS 3.1 General The High Court of Australia has held that restraint of trade provisions may be upheld if the party seeking to enforce them shows that circumstances exist which make the restraint reasonably necessary for the protection of the employer’s business and that it is not contrary to public interests. 19 Ius Laboris The common law has also established that it is necessary that clauses purporting to restrict trade be expressed in a clear manner that is not vague about the type and extent of restrictions sought. Reasonableness The determination of reasonableness is at the discretion of the courts and will take into account the individual facts and circumstances of each case. Reasonableness is assessed in terms of the activities which the employee is being required to refrain from, taking into account the geographical reach and duration of the restraint and the activities subjected to the restraint. The case of Tullett Prebon encapsulates the Australian common law position for the enforcement of restraint of trade provisions. The court in that case summarised that in order for a restraint of trade to be held enforceable by the courts, the party seeking to enforce the restraint must show that the covenant is reasonable, in the sense that: • • the covenant is intended to protect some ‘legitimate interest’ of the employer and the extent of the restriction imposed on the employee is commensurate with that interest, being no greater than is strictly necessary to protect it. The question of reasonableness is examined at the time of entry into the contract. Evidence of later relevant events, which were foreseeable at the time of entering the contract is admissible. Prospective future developments, for example, promotion, within the contemplation of the parties as an ordinary incident of employment will be relevant in assessing the reasonableness of the restraint clauses in a contract of employment. Legitimate interest To be valid, a restraint of trade provision must protect a legitimate interest of the employer. The employer cannot seek to prevent the employee from competing with the employer in general. It is a legitimate interest of the employer to prevent a former employee from appropriating aspects of the employer’s goodwill such as confidential information or knowledge of and influence over the employer’s customers. It is firmly established in case law that an employer may only legitimately use a post-employment restraint to protect trade secrets or established customer connections. 20 Non-Compete Clauses - An International Guide - AUSTRALIA Trade secrets and confidential information A trade secret is usually regarded as information an employee must deliberately memorise or copy, rather than know-how or skill that has been learned over a period of time. At the very least, the information must itself have the necessary quality of confidence about it and it must have been communicated in circumstances importing an obligation of confidence or secrecy. In addition, a person who received information in confidence is not allowed to use it as a springboard for activities detrimental to the person who provided the information, even if all features can be ascertained by inspection by any member of the public. In order to justify a restraint covering trade secrets or other confidential information, the employer must be able to show that they are legitimately seeking to protect information that is genuinely confidential, and the scope of the covenant is no wider than is reasonably necessary. There is, however, no need for the employer to isolate the particular information they want the employee to refrain from using; it is enough that some such information exists to provide the necessary ‘legitimate interest’. The restraint can refer to the relationship between the customer and the employer, but not to the ‘ownership’ of customers, as customers are always free to take their business elsewhere. The restraint of trade clause will only be valid if it is reasonably necessary to protect the employer’s legitimate interest. Courts are more likely to uphold restraint of trade provisions relating to the protection of customer connections if the employee is in frequent face to face contact with customers, where the employee alone knows the customers and their requirements, where the contact takes place away from the employer’s premises, or where the employee is relatively skilled and not merely working under the supervision of others. Former employees can also be restrained from using customer lists and other information about customers obtained through employment with the employer. Courts have found that where an ex-employee approaches a former customer, solicitation may be made out, and this may amount to a breach of a non-solicitation clause in the employment contract. Non-compete covenants restrain employees from competing with his or her former employer. Such behaviour would involve engaging in trading activity by illegitimately seeking to use confidential information, tools and client information of their former employer. Generally, non-compete covenants will be invalid unless they are necessary to prevent disclosure of trade secrets or use of a connection built up by the employee with customers, and the 21 Ius Laboris protection of the former business is jeopardised in some way by the actions of the former employee. However, Australian courts held that the fact that an employee has agreed to a non-compete restriction may be in itself evidence that the restriction is reasonable. When courts have upheld non-compete clauses as valid restraints of trade, they have usually limited them to a relatively short period of time. Again, the time period that is held to be ‘reasonable’ will depend upon the facts (see below). Public interest Restraints of trade are presumed on the face of them to be void in most Australian jurisdictions because they are considered contrary to public policy. This is because they are often deemed to interfere with an individual’s liberty to carry on their trade and contract freely. This presumption is rebuttable, and thus the onus is on the party seeking to enforce the restraint of trade provision to show that the provision is not against the public interest. Tullett Prebon summarised the common law approach to rebutting this presumption, stating that ‘a restraint of trade is not contrary to public policy if it is reasonable as between the parties, and not unreasonable in the public interest, so that while affording adequate protection to the party in whose favour it is imposed, it is not injurious to the public’. In New South Wales, however, because of legislative differences, the Restraint of Trades Act 1976 provides that a restraint of trade clause is valid to the extent that it is not against public policy. The court will focus on the reasonableness of the particular provision when evaluating the implication of public policy. In these circumstances, the court may instead ‘read down’ and enforce a ‘reasonable restraint’ falling within the terms of the express restraint, even though the expressed restraint is too broadly formulated and is deemed contrary to public policy. This approach allowing ‘reading down’ of clauses also demonstrates another significant difference between the approach in the State of NSW and the other Australian States and Territories. This is discussed in further detail below. 3.2 Geographical, functional and temporal limitations Consideration of the duration and geographical scope of purported restraining clauses is an important aspect when determining the restraint’s reasonableness. As the time of the restriction lengthens and the space of its operation extends the onus upon the employer increases. Determination of reasonableness will depend upon the facts. For example, a restraint clause preventing an executive from working with competitors for a 12 month period was found to be unfair because it was contrary to public 22 Non-Compete Clauses - An International Guide - AUSTRALIA interest to deprive the community of his services for such a long time. Moreover, it was found to be unfair to protect the former employer from competition for such an extensive period of time and was unreasonably harsh as it would impose a serious financial burden for no good reason. In this case, the New South Wales Industrial Relations Commission held that a six month restraint would be reasonable. However, in another case of a 12 month restraint, in instances where an ex-employee was entitled to payment for the entire 12 month period of restraint, the court upheld the restraint as reasonable. Australian courts will also give consideration to the nature of activities that are purported to be restricted. For example, the Supreme Court of the State of Western Australia held in the case of Sear v Invocare Australia Pty Ltd that a restraint clause was invalid because it effectively prevented a former funeral parlour manager from being involved in the funeral industry in any capacity whatsoever. Such a restriction was found to be unreasonably broad for the protection of legitimate business interests. Determining reasonableness may also involve an interrelated consideration of duration, geography and role. For example, where a vast geographical area is specified, the court may determine it is only reasonable to enforce such a restriction for a limited time period or for specified roles. Similarly, the court may be more likely to enforce a lengthy restraint clause where it only relates to a small geographical area and specified roles. 3.3 Job changes When the job of an employee changes, the question arises as to whether any non-compete provisions in their contract of employment continue to operate. This will depend upon whether the contract of employment contemplates the changes that are made to the job. For example, the contract may provide that the employee is initially appointed to a role and that alternative roles may be allocated to the employee from time to time. In a contract of this kind, the changes to the employee’s job will not change the terms of his or her contract of employment (including the non-compete provisions). However, the analysis will be different where the new job is not contemplated by the original contract of employment. In this case, the original contract of employment may cease to operate and be replaced by an unwritten contract of employment comprised of terms that are orally agreed and terms that are implied by law. These terms will not include a non-compete provision, such that the change in the job may result in the non-compete provisions ceasing to apply. This makes it important to ensure that, either: 23 Ius Laboris • • the existing contract is reviewed on the change of job to ensure that it will still apply to the job or a new contract of employment is entered into which contains appropriate provisions relating to non-competition. 4. ENFORCEABILITY 4.1 General In many cases, non-compete provisions are difficult to enforce in Australian jurisdictions. In order to demonstrate that a prohibition on competition is reasonable, and therefore enforceable, it is generally necessary to show that the former employee has, in his or her possession, confidential or other sensitive information which cannot be protected in an effective way in the absence of a non-compete provision. Provisions which stop short of prohibiting competition, for example, by prohibiting the solicitation of clients or employees, are generally easier to enforce. The key to the enforcement of these provisions is demonstrating that the employee has a sufficiently close connection to the client or employee to make it reasonable to prevent them from soliciting them away from the employer. It will also assist enforcement of these provisions if they are limited to a geographic area which correlates to the area in which the employee has particular influence over customers or employees. Similarly, the operation of the provision in time should be limited to a period which is no more than strictly necessary to ensure that the employee does not obtain an unfair advantage by using the connections they have with customers and employees of their former employer. 4.2 Balance of interests Post-employment restraints are treated more strictly than restraints in other commercial covenants, for example, vendor restraints. This is because vendor restraints are justifiable by reference to purchaser’s acquisition of substantial good will and equal bargaining power of parties. Restraint clauses will only be enforced if they reasonably protect the legitimate interests of the party seeking to enforce the restraint. The onus is on the employer to show special circumstances that warrant protection, and to show that the clause is reasonable and goes no further than protecting the employer’s interests with respect to its trade secrets or customer connections. 24 Non-Compete Clauses - An International Guide - AUSTRALIA The onus of proof in establishing that a restraint of trade is reasonable as between the parties is upon the party seeking to enforce the restraint. The onus of proof in establishing that a restraint of trade is not reasonable in the public interest is upon the party burdened by the restraint of trade. A court may ‘sever’ any clauses, or even parts of a clause, that they determine go unreasonably far in restraining trade. If the court is satisfied that what remains after severance is still consistent with both parties' contractual intentions, they may then decide to enforce what remains of the restraining provision. This process is also known as the ‘blue pencil test’, as it is important that the remaining provisions continue to reflect both parties contractual intentions once the offending provisions have been severed by the use of a ‘blue pencil’. Severance is only possible in particular circumstances, where the terms of the contract are such that they still represent the parties’ intentions after the terms have been severed. In circumstances where terms may be severed for unreasonable restrictions, it may be useful for parties to utilise ‘cascading clauses’ to ensure that their intentions can be discerned by the courts in instances of unreasonableness. Cascading clauses contain a series of overlapping obligations that vary in extent and scope. These clauses have been enforced in Australia where the contracts stipulate that invalid portions can be severed without affecting the validity of the whole clause, and that the clause operates as separate restraints, although the restraints may be cumulative and overlapping. The NSW case of Hitech Contracting Ltd v Lynn for example, contained a cascading provision in relation to the duration and geography of the restraint. In that case, the duration of the restraint cascaded from twelve months, to six months, to three months, while the geographical area restrained cascaded from the entire east coast of Australia to the State of NSW. The court in this case found that it was reasonable to uphold the restraint for a period of three months, in the geographical area of the State of NSW. However, when utilising cascading terms, it is necessary that the parties ensure that the terms are sufficiently certain such that the court can evince clear contractual intentions. Unlike courts in the United Kingdom, courts in most Australian States and Territories will not read down a restraint clause that is otherwise too wide to be enforceable. If a court finds that a restraint of trade provision is not reasonable, then a court will find the whole clause to be invalid and therefore unenforceable. In NSW, however, the courts take a different approach due to the Restraint of Trades Act 1976. Section 4(1) allows a court to ‘read down’ the terms of a 25 Non-Compete Clauses - An International Guide - AUSTRALIA Ius Laboris restraint clause to modify it until it is reasonable. As discussed above, this means that the court may enforce a ‘reasonable restraint’ falling within the contracted restraint, even though the expressed restraint is too widely formulated and contrary to public policy. The court may therefore vary the terms of the restraint, such as restricting the geographical scope of a non-compete clause or reducing the time period for which behaviour is constrained. The courts in NSW can therefore ‘read down’ clauses, in addition to applying the techniques of severance and cascading. In determining whether to enforce a restraint of trade provision, the courts will take into account where the ‘balance of convenience’, or the ‘balance of the risk of injustice’, lies between the parties. The court weighs the injustice to the defendant if a restraint of trade clause is enforced, against the injustice to the plaintiff if relief for breach of a restraint of trade provision is wrongly declined. 4.3 Remedies Remedies are available to the party seeking to enforce the restraint for a breach or threatened breach of the restraint. The main remedies available are interlocutory injunctions, final injunctions and damages for loss as a result of the breach. An interlocutory injunction is the most common relief sought, and where it is granted most cases will not proceed to final hearing. Injunctions are equitable remedies, and so it is at the court’s discretion whether to grant the injunction. In granting an interlocutory injunction the court takes into account whether there is a serious question to be tried, the balance of convenience and the likelihood of success at trial. Since an interlocutory injunction effectively puts an end to the proceedings, the court will look closely at the degree of likelihood of success at trial. Breach of one aspect of a restraint can justify sufficient concern about breach of another aspect to warrant the grant of an injunction. 4.5 Damages Damages are rarely a sufficient remedy for a breach of a restraint of trade as it is difficult to quantify the damage that may be suffered and that which may accrue over time. In order to obtain damages, it is necessary to show that there is a financial loss which the employer has suffered as a direct consequence of the particular breach by the employee. For example, in obtaining compensation for breach of a non-solicitation of customer provision, it will be necessary to point to a particular customer who has been solicited and to prove particular loss arising out of the solicitation of that customer. Due to the difficulties in assessing compensation in this area, the usual remedy for breach of a non-compete is generally an injunction restraining the breach. Commonly, injunctions are obtained on an urgent and interim basis and few matters proceed to final hearing on compensation. 4.6 Liability of new employer Generally speaking, the new employer will not be liable for the acts of an employee who has left his or her former employer in breach of a non-compete provision. That is because the new employer is not a party to the relevant contract which contains the non-compete obligation. It is, however, possible for the new employer to be liable for damages for the tort of interference with contractual relations. This liability will arise where the new employer is aware of the terms of the non-compete and intentionally acts in a way that gives rise to a breach of the provisions by the employee. In this case, damages can be awarded for the loss occasioned to the former employer by the acts of the new employer. 5. SPECIAL 4.4 Penalty clauses Sometimes a non-compete provision provides for the employee to make a payment to the former employer in the event that there is a breach of the provision by the employee. Such a provision will be unenforceable under Australian law unless the amount that the employee is required to pay closely corresponds to the loss which the employer has suffered. A pre-determined fixed sum will rarely satisfy this test. 26 SITUATIONS 5.1 No clause Where there is not a non-compete clause in a contract of employment, an Australian Court will not imply a provision into the contract. This means that the employees will be free to compete against their former employer. However, they will remain subject to their duty not to use or disclose the confidential information of their former employer. 27 Ius Laboris 5.2 Transfers of undertakings Whether a transfer of undertaking has implications for a non-compete provision depends upon the structure of the transfer. Where the undertaking is disposed of by way of a sale of the shares in a company, the terms of the contracts between the company and its employees will not be affected. Accordingly, any non-compete provision in a contract of employment will continue to operate (except in the rare case where the contract expressly provides for the non-compete to cease operating if there is a sale of the organisation). Where the undertaking is transferred by way of a sale of assets, the position is different. In this scenario, the employment of the employee with the transferor will come to an end. Any provisions that survive termination of employment will operate for the benefit of the transferor for a period of time from the transfer. The employee may then enter into a new contract of employment with the transferee. This will be a matter for negotiation and a prudent party acquiring a business will negotiate an appropriate non-compete with employees who join it as a result of the transfer. 5.3 Cross-border competition As discussed in section 3.2 above, a restraint of trade clause should contain a geographical limitation. Generally, this limitation will cover the region of a city, state or territory or in rare circumstances, Australia-wide. Nevertheless, a restraint of trade clause does not have to be geographically limited to Australia alone. It is possible for an employer and employee to agree to a cross-border geographical limitation, for example both Australia and New Zealand. Whether such a restraint of trade clause will be considered enforceable depends upon the balance of the interests of the employer in protecting their legitimate business interests and the interests of the employee to carry on their trade freely. For example, where an oligopoly exists both for the Australian and New Zealand markets of a particular industry, an employer has a strong business interest in preventing the employee from working for a competitor. In return, an employee could argue that such a geographical limitation is unreasonable given that his or her expertise is so highly specialised, rendering employment opportunities outside that market impossible. Ultimately, the courts will balance the employer’s and employee’s competing interests in determining whether a cross-border limitation is enforceable. International law issues may also arise in the determination of cross-border restraint of trade clauses. For instance, where an employee is subject to a cross-border geographical limitation and begins working for an organisation 28 Non-Compete Clauses - An International Guide - AUSTRALIA abroad in breach of the restraint clause, an employer is faced with two options. The employer may either seek an Australian judgment be made in the absence of the employee and begin legal proceedings in the courts of the subject foreign country to enforce this judgment or have the foreign court make a ruling on the Australian non-compete clause under their jurisdiction. The success of the proceedings will be dependant upon the local laws of the country in combination with international law. 5.4 Non-solicitation clauses Covenants for non-solicitation of customers can be framed broadly or narrowly. Broadly, to prevent a former employee soliciting any of the employer’s customers; or narrowly so as to prohibit solicitation of those employer’s customers with whom the employee dealt. There has been recent Australian case law supporting the view that an employer can restrict a former employee from soliciting staff of the former employee. In Cactus Imaging Pty Ltd v Peters, the employment contract of a former employee of Cactus contained a restraint of trade provision preventing the former employee from (amongst other things) soliciting clients and customers of Cactus. The Judge held that the former employee was restricted from soliciting other employees of Cactus, because this represented a legitimate interest of the company. It was acknowledged that solicitation of employees was still an issue in the context of restraints of trade. Whether such a restraint would be enforced would depend on the relationship between the employer and former employee. If the employee exerted some influence over his or her former colleagues then the restraint would be more likely to be enforced. An anti-poaching clause was not upheld in Aussie Home Loans v X Inc Services because the clause was too broad in scope and duration. However, the court noted that a restraint against enticing employees away from their employer will be justified if it is designed to prevent the disclosure of trade secrets, or to protect a trade connection, which could be construed to include confidential information which the ex-employee has about the relations between the former employer and its employees. 5.5 Insolvency Whether a restraint of trade clause is enforceable when an employer becomes insolvent will depend on the ramifications of insolvency upon the organisation’s legal status. Where an organisation ceases to trade and is no longer a legal entity, a restraint of trade clause for that organisation’s former employees will no longer be enforceable. 29 Ius Laboris Should that organisation continue trading in the hands of an administrator, a restraint of trade clause will still bind an employee and the employer organisation will still retain its rights in relation to that clause. 5.6 Enforceability of foreign non-compete clauses Sometimes employees will be subject to non-compete clauses in contracts with foreign organisations or contracts that are governed by foreign law. The test for the enforceability of these provisions in Australian jurisdictions will be the same as set out above. However, in the absence of the employer having significant confidential information or customer connection in the Australian jurisdiction, these provisions may be difficult to enforce. 30 1. INTRODUCTION 35 2. CONDITIONS 35 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 35 35 36 36 36 3. REQUIREMENTS 36 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 36 37 37 4. ENFORCEABILITY 38 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 38 38 38 39 39 39 5. SPECIAL 39 SITUATIONS 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 39 39 40 40 40 41 Austria Non-Compete Clauses - An International Guide - AUSTRIA 1. INTRODUCTION After termination of the employment relationship the employer might have an interest in the employee not working for a competitive 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 specific 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 For white-collar workers Section 36 and following of the Act for White-Collar Workers (Angestelltengesetz – ‘AngG’) and for blue-collar workers Section 2c of the Employment Law Harmonisation Act (‘ArbeitsvertragsrechtsAnpassungsgesetz’), contain corresponding provisions. A duty not to compete can extend beyond termination of employment only if this has been explicitly agreed upon in the employment contract. 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 not exceed 17 times the daily ceiling amount set out in Section 45 of the General Social Insurance Act (‘Allgemeines Sozialversicherungsgesetz’). This salary limitation only applies to non-compete clauses concluded after 17 March 2006 (for white-collar workers) or after 18 March 2006 (for blue-collar workers) the restriction may only apply specifically to the employer's type of business and must not run for more than one year (Section 36 para 1 no 2 AngG) the non-compete 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 (Section 36 para 1 no 3 AngG). 2.2 Age In addition to the above, an agreement to a non-compete clause is only valid insofar as the employee was not a minor when the agreement was entered into (Section 36 para 1 no 1 AngG). 35 Ius Laboris 2.3 Written form Under Austrian law neither employment contracts generally nor non-compete clauses in particular need 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 thereby 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 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. Non-Compete Clauses - An International Guide - AUSTRIA the period of the non-compete clause (“Karenzentschädigung”) (see section 2.5 above). To oblige the employee to adhere to a non-compete clause in a case of employment termination by the employer without just cause (Section 37 para 2, case 2 of the AngG), the employer must consent to 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. In addition, voluntary compensation can be agreed upon which is lower than the last received salary, but this should be considered carefully by the employer because, in order for this to be sufficient, there must be a shift in the balance of interests in the employer’s favour. 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. 3.2 Geographical and functional and temporal limitations 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 are that the clause will not be annulled in any court procedure. Frequently, non-compete clauses are secured by penalty clauses. Any such clause is subject to equitable 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). According to Section 36 para 1 no 2 of the AngG, a non-compete clause is only valid insofar as the limitation applies to the employer's type of business or occupational activity (‘business branch’). In view of the interests of the employee and the employee's position as regards his or her fundamental rights, the term ‘business branch’ must be very specific and must not extend further than necessary. 3. REQUIREMENTS 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 individual 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. 3.1 General The employer may only invoke a non-compete clause in certain types of termination (Section 37 of the Act for White-Collar Workers and Section 2c para 3 and 4 of the Employment Law Harmonisation Act). The employer is restricted from enforcing a non-compete clause if the employer has: • • given the employee grounds for immediate or ordinary termination terminated 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 36 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 37 Ius Laboris 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 competitive activities by the employee. 4.2 Balance of interests The 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 the non-compete clause. Non-Compete Clauses - An International Guide - AUSTRIA 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 (Section 37 para 3 of the Act for White-Collar Workers and Section 2c para 5 of the Employment Law Harmonisation Act). This is, however, subject to the court's right to modify the penalty (Section 38 of the Act for White-Collar Workers and Section 2c para 6 of the Employment Law Harmonisation Act). Nevertheless, by paying the penalty fee, the employee may manage to satisfy the employer. The Labour and Social Court in Vienna rated a penalty fee of six months’ gross salary as too high in an average scenario in which there were some modifying aspects in favour of the employee. 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 or wages (Karenzentschädigung) to the former employee for the period of the non-compete clause. 4.3 Remedies Employee In theory, the employee could take declaratory action at court against the employer, by requesting a declaration that the non-compete clause is too broad or 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 secure injunctive relief, it is often necessary to obtain an interim injunction first. The employer must attest to the existence of potential harm. This might arise, for example, from the threatened loss of clientele. 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. 38 4.6 Liability of new employer If the new employer were to be required to pay a penalty to the old employer on behalf of the employee, this would be regarded as unconscionable by the Austrian Supreme Court. 5. SPECIAL SITUATIONS 5.1 No clause A duty of non-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 service with any direct competitor or start his or her own competing business. In addition, the employee will be permitted to aim at the same market and 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 a transfer of undertaking, if there is a continuous employment relationship, a non-compete clause will pass to the purchaser pursuant to 39 Ius Laboris Section 3 para 1 of the AVRAG. If an employee who is subject to a non-compete relationship (Konkurrenzklauselverhältnis) has already resigned, the situation is different. If the undertaking passes to the purchaser by universal succession, the competition clause relationship will pass to the purchaser as well, but if it is a case of singular succession, the purchaser should include legal concepts such as cession of goods or assignment of contract in the new agreement in order to secure its interests. 5.3 Cross-border competition Contrary to earlier opinions regarding internationalisation, the view now held is that it would be too narrow if an employee's obligations were generally to be regarded as inequitable and unenforceable abroad. There can be circumstances in which a non-compete clause beyond national borders will be valid, based on special economic or regional relationships in a certain geographical area. If, for example, the former employer distributes mountaineering products via a German contractor in the alpine areas of Germany, and an Austrian subsidiary of the German competing enterprise (at which 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. Non-Compete Clauses - An International Guide - AUSTRIA 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 generally 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’ (‘EVUE’) 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 (Art 6 EVUE). 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. 5.4 Non-solicitation clauses A non-solicitation clause is an agreement, according to which the employee may not adopt business relations with the employer's clients after termination of the employment relationship. Case law and doctrine indicate that non-solicitation clauses are subject to Section 36 of the AngG and are therefore deemed to be non-compete clauses. It should be noted that in addition to the above protections, certain limitations are codified in law governing professionals (e.g. public accountants and tax consultants). However, to the extent that these obligations are not otherwise documented, a non-compete clause is not deemed to exist. 5.5 Insolvency If an organisation becomes insolvent, the administrators in most cases will terminate a percentage of the employees. At the same time, the administrators 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 the obligations pursuant to non-compete clauses, the employees are not bound to these where termination is carried out by the administrators, as this is considered to be equivalent to a termination made by the employer. 40 41 1. INTRODUCTION 45 2. CONDITIONS 46 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 46 46 46 46 46 3. REQUIREMENTS 47 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 47 49 50 4. ENFORCEABILITY 50 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 50 50 50 51 51 51 5. SPECIAL 52 SITUATIONS 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 52 52 52 52 53 53 Belgium Non-Compete Clauses - An International Guide - BELGIUM 1. INTRODUCTION In Belgium, an employee is never allowed to compete with his employer in the course of employment, but when the contract is terminated, the employee regains his freedom entirely. Consequently, he 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 the knowledge he 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 his former employer’s customers, or by blackening his former employer’s name or reputation. Besides these legal restrictions, which apply automatically, the employee can waive his 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 his 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 when he signs the non-compete clause, he is deemed not to be completely free from the possibility of coercion. Therefore, the validity of such 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 freedom. He is no longer subordinate to his 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. What follows covers the legal provisions relating to non-compete clauses contained in employment contracts. 45 Ius Laboris 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 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 a trial period 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 trial period. 46 Non-Compete Clauses - An International Guide - BELGIUM 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 trial period. It may also apply if the contract is terminated during the trial period, in which case it will only have effect for as long as the trial period actually lasts. 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 trial period 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 in 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. 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 47 Ius Laboris • • • 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, and 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. Non-Compete Clauses - An International Guide - BELGIUM Further, a special non-compete clause will only be valid if: • • • • the clause is in writing the employee's annual salary exceeds EUR 60,654 (2010 amount); 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 (for example, 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. If the aforementioned 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. Non-compete clauses for sales representatives Specific rules regarding non-compete clauses representatives. 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. 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: 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. • • • • • apply for sales it is in writing the employee’s annual salary exceeds EUR 30,327 (2010 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. 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 the aforementioned conditions are not observed, the non-compete clause will not be enforced by the courts. If these conditions are met, it is possible to deviate from a general non-compete clause on the following points: 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. • 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). 48 49 Ius Laboris 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. Non-Compete Clauses - An International Guide - BELGIUM 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. All non-compete clauses are restricted to activities which are similar to those of competitors. 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). 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. 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. 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. 50 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 (see section 4.5 below). If the employer can prove higher actual harm, it may claim a higher indemnification. 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 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 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 51 Ius Laboris Non-Compete Clauses - An International Guide - BELGIUM 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. 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. 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. 52 53 1. INTRODUCTION 57 2. CONDITIONS 58 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 58 60 60 60 61 3. REQUIREMENTS 61 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 61 62 63 4. ENFORCEABILITY 63 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 64 64 65 65 65 65 5. SPECIAL 65 SITUATIONS 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 65 66 66 66 67 67 Canada Non-Compete Clauses - An International Guide - CANADA 1. INTRODUCTION In jurisdictions other than Québec, the law concerning an employee’s ability to compete with his or her employer or solicit the employer’s customers is governed by the common law. Under that law, non-solicitation and non-compete clauses in an employment contract that restrict an employee’s ability to compete during the course of the employment relationship are usually not problematic. This is because it is almost always an implied term of the employment contract that an employee must not compete or otherwise engage in significant conflicts of interest with his or her employer during the employee’s term of employment. In the province of Québec, Article 2088 of the Civil Code of Québec specifically provides that all employees owe their employer a duty of loyalty, as follows: ‘2088: The employee is bound not only to carry on his work with prudence and diligence, but also to act faithfully and honestly and not to use any confidential information he may obtain in carrying on or in the course of his work’. These obligations continue for a reasonable time after cessation of the contract, and permanently where the information concerns the reputation and private life of another person. After the employment relationship has ended, however, the law is quite different. While executives and other key employees may owe their former employer fiduciary obligations which include the duty to refrain from soliciting the employer’s customers for a reasonable period of time after employment ceases, most employees are not subject to such restrictions. Usually, there is no implied term that prohibits competing with a former employer or soliciting its customers once the employment relationship is over. Moreover, restrictive covenants that restrain an employee’s ability to pursue his or her chosen field of work after termination of the employment relationship are prima facie void and unenforceable as impermissible restraints on trade. Such provisions are permissible only if they are designed to protect an employer’s legitimate proprietary interests, are reasonable with respect to duration, scope and relative fairness between the parties, and do not offend the public interest. In the province of Québec, Article 2088 of the Civil Code of Québec stipulates that the duty of loyalty remains in force for a certain period of time after the termination of employment. This duty of loyalty prohibits employees from competing with their former employer in a disloyal manner, as well as using confidential information to which they were privy during the course of their 57 Ius Laboris employment. The scope of the duty of loyalty will vary from one employee to another on the basis of the position held and the kind of knowledge the employee had of confidential information pertaining to his or her ex-employer. As is the case with the common law provinces, Québec employers can contractually restrict the competitive activity of former employees by restrictive covenants. Similar to the common law provinces, the onus is on the employer to show that the restrictive covenants are necessary to protect its legitimate business interests. Moreover, restrictive covenants must have a geographical limit, a duration and limited activities that go no further than what is necessary to protect the legitimate business interests of the employer. 2. CONDITIONS 2.1 General As discussed above, Canadian courts will only enforce a post-employment non-solicitation or non-compete covenant if the covenant is required to protect the employer’s legitimate proprietary interests, goes no further than what is required to protect those interests, is fair as between the employer and employee, and is not contrary to the public good. Appellate courts have repeatedly affirmed that post-employment non-compete clauses are enforceable only when a non-solicitation covenant would not adequately protect the employer’s proprietary interests. Under Canadian common law, a post-employment restrictive covenant will only be upheld if the employer can prove that the covenant has each of the following six features: • • • • • • the restriction protects a legitimate proprietary interest of the employer the scope of the restriction is reasonable. (For non-compete clauses, this requirement relates to the geographical area that is covered. For non-solicitation clauses, this requirement typically means that the restraint must be limited to customers with whom the former employee dealt with during his or her employment, and only with respect to sales relating to the jurisdiction in which he or she formerly served) the duration of the restriction is reasonable the restriction is fair as between the parties the covenant is clear and unambiguous and the restriction is not contrary to the public interest. In the province of Québec, Article 2089 of the Civil Code of Québec and case law provide for similar features. Each of these requirements is discussed in greater detail below. 58 Non-Compete Clauses - An International Guide - CANADA Protection of a legitimate proprietary interest of the employer Post-termination non-solicitation and non-compete clauses are enforceable only if they protect a legitimate proprietary interest of the employer. Although the categories of what constitutes a legitimate proprietary interest are not closed, traditionally, Canadian common law courts have recognised three types of proprietary interests: (1) trade secrets and confidential information; (2) the employer’s connections with its customers; and (3) the employer’s goodwill. Trade secrets and confidential information are generally protected by a confidentiality agreement, whereas an employer’s trade connections and goodwill are generally protected by a non-solicitation agreement, and in rare cases by a non-compete agreement. However, under no circumstance is an employer able to protect itself for all time against compete by a former employee or prevent a former employee from using his or her general skills, knowledge or expertise after leaving the employer’s employment, even if his or her skills, knowledge and expertise were acquired during the employment relationship. The same principle applies in the province of Québec: the employer must have legitimate business interests to protect in order to make use of a restrictive covenant. The legitimate business interests that have been recognised by the courts in Québec are generally similar to the ones described above. Restriction must be fair to the parties Canadian courts require restrictive covenants in a contract of employment to be fair as between the employer and employee. This requires a court to balance a former employee’s right to engage in his or her chosen field of work and a former employer’s right to protect its legitimate business interests. Again, this concern with fairness has caused Canadian common law courts to hold that non-compete covenants are enforceable only in exceptional cases. If a post-termination non-compete covenant is not necessary to protect an employer’s proprietary interests, then the clause is disproportionately unfair to the employee and the courts will generally refuse to enforce a non-compete covenant when a non-solicitation covenant would adequately protect the employer. Although, in the province of Québec, case law has not recognised the principle that a non-compete covenant will be invalid where a non-solicitation restriction would be sufficient to protect the interests of the employer, it has nevertheless recognised the invalidity of a non-compete restriction where the objective of such a restriction is to prevent the employee form earning a living. 59 Ius Laboris Restriction must not be contrary to the public interest In common law provinces, a post-termination restrictive covenant that satisfies the requirements above can still be declared unenforceable if the covenant is contrary to the public interest. 2.2 Age In each province, there is local legislation establishing the minimum wage that an employee can have. These can vary by industry. Similarly, each province will designate a legal ‘age of majority’ that an individual must be to be presumed able to contract on his or her own behalf. The age of employment and the age of majority may not always be one and the same, with resulting debate as to which might take precedence in determining whether someone was old enough to enter into legally binding contracts. However, there is a dearth of case law on the subject, since very few minor employees are likely to hold a position of a nature that would make it reasonable for the employer to impose, or the courts to enforce, restrictive covenants. 2.3 Written form While in theory a verbally agreed upon restrictive covenant would be possible under Canadian common law, in practice, they are universally made in writing. The reason for this is fairly straightforward. A restrictive covenant that is vaguely or ambiguously worded will usually be unenforceable and void, and that result is obviously far more likely to be the case if the covenant were formed verbally. The Supreme Court of Canada also recently confirmed that, in the normal course, courts ought not amend an unenforceable restrictive covenant to cure the covenant’s defect and render the provision enforceable. Non-Compete Clauses - An International Guide - CANADA 2.5 Liability for compensation on dismissal Each Canadian jurisdiction has established minimum entitlements for employees stemming from termination. These minimum entitlements are set out in local employment or labour standards legislation. They are then augmented in the common law jurisdictions by the requirement that employer provide ‘reasonable notice or pay in lieu thereof’. The same legal obligation is in fact the minimum legislated requirement in the Province of Quebec. In the common law provinces, it is open to the parties to establish termination entitlements by contract, so long as they exceed the applicable statutory minima, and in doing so exclude the operation of the common law reasonable notice requirement. In general, a failure to provide an employee’s legal entitlements upon termination will not, in and of itself, render an otherwise enforceable restrictive covenant void. It may, however, make enforcing that covenant far more difficult. Recall that Canadian courts generally require that restrictive covenants be reasonable in scope and effect. In practice, it will therefore be much harder to convince a judge that an employee should be barred from competing or soliciting clients if the former employer has not given the due amount of notice or paid the required compensation. The employee may well be able to argue that he or she had no choice but to engage in competitive activities to earn a living, since the former employer has not provided the entitlements the employee relied upon to survive while competition was prohibited. 3. REQUIREMENTS 2.4 Renewal Most employment contracts in Canada have indefinite terms. As such, most frequently it is unnecessary to renew them. If the contract is for a fixed term, an otherwise enforceable restrictive covenant will carry over along with the rest of the agreement if it is renewed. If, however, the exiting agreement is renegotiated in any way, it is highly advisable that the covenants are either repeated in the revised agreement, or at the very least are incorporated by reference into the new terms. Otherwise, the employee may argue later that the absence of the covenants reflected an intent that they should no longer apply. 60 3.1 General The onus is on the employer to show that the restriction imposed in the covenant is reasonable and fair. It is far easier for an employer to justify a non-solicitation clause than it is to convince a court that a non-compete clause should be enforced. The law in the common law jurisdictions of Canada has evolved such that a non-compete covenant is only enforceable when a nonsolicitation covenant would not adequately protect the employer’s proprietary interests. In other words, the only time an employer can prevent a former employee from joining a competitor outright, is where no other lesser restriction would suffice. In the vast majority of cases, the common law courts will find that something short of preventing the employee from joining a competitor will be sufficient. For example, precluding the employee only from certain positions or jurisdictions or from contacting certain business relations, is frequently seen as enough protection. 61 Ius Laboris 3.2 Geographical, functional and temporal limitations A post-termination non-compete covenant must be limited geographically by the area that is required to protect the employer’s proprietary interests. The question here is how far the employer’s market and business interests reach. Another relevant consideration is the geographic territory in which the employee worked. The analysis is contextual and what constitutes reasonable geographical scope in one case will not necessarily be considered reasonable in another. For example, a restrictive covenant that purported to prohibit a former employee from soliciting a laundry or dry cleaning business within the province of Manitoba for one year following the former employee’s dismissal was found to be unenforceable because the employer's business activity was concentrated within the city of Winnipeg and did not extend into all areas of the province. The geographical scope of a restrictive covenant in other contexts, however, such as certain web-based industries, may be considerably broader and possibly even extend world-wide as customers in such industries are not necessarily contained within national borders. The broader the restriction, however, the more likely it is subject to challenge, so employers are well advised to draft such clauses carefully. The principles outlined above are also applicable in the province of Québec where the geographical area must be limited to what is reasonable to protect the employer’s business interest. For example, the courts have generally held that the geographical scope of a non-compete covenant applicable to a sales representative should not be broader than the territory in which the representative worked. In terms of functional limitations, the activities being prohibited or restricted must be connected to what the employee actually did for the former employer. For example, it is unlikely that a court would uphold a provision preventing the solicitation of clients against an employee who never had any client contract. The courts may even go so far as to rule that a non-solicit clause should only apply to clients with which the employee actually had contact, not every client that the employer may have had. Best practice to increase the likelihood of enforcement is to limit the restrictions to the functions that the employee actually had, and through which they could obtain a competitive advantage that would not be available to someone else who had never worked for the former employer. Non-Compete Clauses - An International Guide - CANADA customers, can only last as long as reasonably required to protect the employer’s propriety interests in its goodwill and customer relationships. The inquiry here asks how long it will take a new, replacement employee of the employer to establish an effective relationship with the employer’s customers that the departing employee serviced. It could also be evaluated on the basis of the period of time during which the critical confidential information known by the employee would, if disclosed to a competitor, give an edge to that competitor. While the period of time that will be considered reasonable varies in each case, Canadian courts, including those in Québec, often find a restraint of more than two years to be excessive. One year is typically considered to be a sufficient period of time to permit a new employee to establish customer relationships with the former employee’s clients. As with geographic restrictions, the shorter the duration, the more likely the clause will be found to be reasonable. In many industries, client relationships are forged in a matter of days or weeks, and over-reaching in the duration of the contractual limitation will only weaken the enforcement potential. 3.3 Job changes When an employee changes jobs, the terms of employment change. As such, it is advisable to enter into a new contract in connection with the change of position, and to include any restrictive covenants that would be applicable to the new position. Like all Canadian contracts, it is essential to make it clear that signing the new agreement is a condition of appointment to the position, preferably by presenting the new or revised employment contract as part of offering the new job to the employee, and having him or her sign it to accept the position well before actually assuming the role. As noted above, the covenants should also reflect the functions of the position, so that if the job changes, presumably some adjustment of the covenants will also be necessary. 4. ENFORCEABILITY To be enforceable, the first requirement is that the contract containing the restrictive covenants is itself valid. For that to occur there must be an offer, acceptance and consideration of value passing between the parties. Assuming that is present, the covenants themselves must meet all of the criteria outlined above. Again, the primary requirements are: As far as duration is concerned, any restriction on a former employee’s ability to compete with his or her former employer, or solicit the former employer’s 62 63 Non-Compete Clauses - An International Guide - CANADA Ius Laboris • • • • • • the the the the the the restriction protects a legitimate proprietary interest of the employer scope of the restriction is reasonable duration of the restriction is reasonable restriction is fair as between the parties covenant is clear and unambiguous and restriction is not contrary to the public interest. All of these elements must exist if the employer is to have a realistic prospect of enforcement. 4.1 Balance of interests The requirement that the covenants be ‘reasonable’ has been referred to repeatedly above. This reflects the clear balancing of interests by the courts. That balancing, however, is not an even one. As has been seen throughout, the legal presumptions are generally in favour of the employee, in that they are designed to promote freedom of employment, rather than the strict enforcement of contract, given the underlying principle that restraint of trade is inherently undesirable. Further, the Supreme Court of Canada has ruled that pre-trial injunctions, including those enforcing restrictive covenants, are only to be issued when the ‘good’ that would be done in enforcing the contract clearly outweighs the harm to the employee that would occur if he or she were prevented from competing. 4.2 Remedies Employee While in theory an employee is not precluded from going to court to enforce a restrictive covenant (or, for that matter, having it declared unenforceable), the reality is that there is very little reason for that to occur. Normally, employees will simply begin working for another business, and the former employer will then go to court to try to prevent any contractually prohibited activity from occurring. Employees and their new employers could, however, obtain compensation from a former employer that institutes legal proceedings improperly or unsuccessfully, either in the form of reimbursement for legal fees and expenses incurred or, in certain cases, damages if the former employer’s actions have prevented the employee from doing something he or she had a right to do. Employer Breaches of restrictive covenants can be remedied by way of injunction (on an interim and/or permanent basis) and awards of damages caused by the breach. Injunctions are the most typical response, and often the determination of the 64 initial motion will be the end of the action. In deciding whether or not to grant an interim injunction, the court considers: (i) whether there is a serious question to be tried; (ii) the balance of convenience; and (iii) the likelihood of success at trial. In essence, the court must be satisfied that there is sufficient likelihood that the former employer will succeed at trial to warrant changing the status quo, particularly in light of the effect that doing so would have on both parties. 4.3 Penalty clauses Penalty clauses are generally prohibited. The parties may include a clause setting out a reasonable estimate of the damage that would be caused by a breach of the covenant, but an agreement that an punitive amount would be payable in the absence of (or over and above) any actual damages caused is generally not permitted. 4.4 Damages Actual damages incurred by the former employer may be awarded if there has been a breach of an enforceable restrictive covenant. The former employer’s damages must be proven, which generally means establishing that there has been a loss of profit that would not have occurred if the employee had complied with the covenant. In some cases, the courts have seen fit to award the profits gained by the employer and his or her new business, but the general approach is to put the former employer back to the position it would have been in had the breach of covenant not occurred. 4.5 Liability of new employer An employee’s new employer can, and often is, jointly and severally liable for the employee’s breach of a restrictive covenant. Certainly, this is likely to be the case if the new employer knowingly caused or encouraged the breach of the covenant, or ought to have known it was doing so. Even in the absence of direct knowledge or encouragement, the new employer may be found to be vicariously liable for the employee’s actions. 5. SPECIAL SITUATIONS 5.1 No clause At common law, contractual terms may be verbal, but a verbal restrictive covenant is likely to be too inherently vague and difficult to prove to be enforceable. Therefore, it is highly unlikely that a restrictive covenant can be enforced unless it is in writing. 65 Ius Laboris That said, fiduciaries of an employer can have certain obligations that will reduce their ability to compete. For example, a senior corporate officer will generally have a fiduciary duty not to take advantage of the employer’s corporate opportunities, even in the absence of a written term to that effect. 5.2 Transfers of undertakings One instance in which adherence to the general common law rule that non-compete clauses are usually unenforceable is reduced occurs in the context of the sale of a business. Non-compete covenants contained in agreements of purchase and sale are often enforceable when the consideration received by the party agreeing to be bound by the restrictive covenant is part or all of the proceeds of the sale of the business. Some courts have enforced non-compete clauses with periods of protection as long as five to ten years when they were connected with a sale of a business. This was because: (1) there is an assumption that the parties to the transaction are of equal bargaining strength; and (2) the covenant is justified in order to ensure that the purchaser receives all of the assets of the business which it is purchasing, including its goodwill. That said, even in the sale of business context, it is wise to limit the restrictive covenants to those reasonably necessary, particularly where the selling ‘owner’ is a minority stakeholder or is not high in the company hierarchy. Of course, those employees that are not also owners are not likely to be the subject of non-compete provisions as part of the sale, as they are not selling anything and so are not receiving any consideration for their agreement not to compete (even assuming the restriction met all of the other tests for enforcement). Non-Compete Clauses - An International Guide - CANADA some Canadian courts have held that post-termination non-solicitation covenants are enforceable only if they prohibit a former employee from soliciting customers whom he or she dealt with during their employment, and only with respect to jurisdictions serviced with the previous employer, rather than the employer’s customers at large. However, in the province of Québec, some recent case law has concluded that Article 2089 of the Civil Code of Québec would also apply to non-solicitation restrictions, given that solicitation is considered as a form of competition. According to these cases, a territorial limit would be necessary. This reasoning is not, however, widely followed. 5.5 Insolvency If a company is insolvent but the legal entity still exists, then it remains capable of enforcing its legal rights in the absence of a court order suspending them. 5.6 Enforceability of foreign non-compete clauses Canadian courts have the ability to enforce restrictive covenants that are subject to foreign law against employees that are located in Canada. However, they will only take jurisdiction if they are satisfied that it is proper for them to do so, which requires strong evidence that the courts of another country are not better suited to hear the case. In practice, it may be far easier for an employer to obtain a foreign judgment and then ask the Canadian courts to enforce it. Canada has a long tradition of respecting and enforcing foreign judgments in a large number of circumstances. 5.3 Cross-border competition A restrictive covenant subject to Canadian law will normally only be enforced if it has a reasonable geographic limit, as note above. Often, clauses are only enforced if they cover a single municipality or province, as even a clause covering all of Canada is frequently seen as unreasonable where the employee’s work only dealt with a certain region. Therefore, while there is no technical limit to what is ‘reasonable’, in general, this will mean that clauses that purport to extend outside Canada will be unenforceable. 5.4 Non-solicitation clauses Unlike non-compete clauses, non-solicitation covenants in contracts of employment do not necessarily address geographical scope in the same way, since by definition, they are concerned with solicitation of the former employer’s customers wherever they are located. Companies that wish to restrict their former employee’s ability to solicit their customers after termination of the employment relationship should be aware, however, that 66 67 1. INTRODUCTION 71 2. CONDITIONS 72 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 72 73 73 73 73 3. REQUIREMENTS 73 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 73 74 74 4. ENFORCEABILITY 74 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 74 75 75 76 76 76 5. SPECIAL 76 SITUATIONS 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 76 77 77 77 77 77 Chile Non-Compete Clauses - An International Guide - CHILE 1. INTRODUCTION Non-compete clauses, by means of which the employee undertakes not to compete with his or her employer and develop activities within its business for personal gain or for the benefit of another organisation, are a common practice in Chile. Employers aim to reduce the risk posed by certain employees competing directly with them, or the risk of employees’ being tempted by competitors to provide services to them. Non-compete clauses are generally included in the employment contracts of employees holding managerial or strategic positions, or in the contracts of employees who deal with confidential information on behalf of the employer. These clauses exist where, because of the circumstances and knowledge of the employee, there is a risk of serious harm to the employer. Non-compete clauses may be agreed on for the purposes of avoiding competition either during the labour relationship or after termination of the employment contract. If there is an express non-compete clause which is in force during the period of the labour relationship in the employment contract, its infringement during the course of employment will constitute justificable cause for termination of the employment agreement. After termination of the employment relationship there are no legal provisions that apply either in labour or civil law, although the Constitution of the Republic of Chile may be relevant in that this protects certain essential rights, namely the freedom to contract in labour matters (Article 19 No 16) and the right to develop any economic activity (Article 19 No 21). 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. 71 Ius Laboris 2. CONDITIONS Non-Compete Clauses - An International Guide - CHILE health, or unless it is so demanded by public interest, or the law so declares it, no activity may be forbidden. 2.1 General Non-compete clauses during the employment contract There is no provision in the Labour Code specifically referring to or regulating covenants not to compete but it is arguable that non-compete clauses can have effect during the labour relationship by application of Article 160 No 2 of the Labour Code. This provision is located in the section of the Labour Code which regulates termination of the employment contract with cause. It states that the employment contract terminates with no right to any indemnification resulting from negotiations conducted by the employee with the employer, thus implying that such negotiations may be conducted. However, there are no specific guarantees besides those contemplated in the Constitution referred to in section 1. above. It is clear, however, that the Labour Code only recognises the validity of covenants not to compete while the labour relationship is in force as it does not expressly regulate convenants agreed on with respect to termination of the employment contract. The labour prohibition provided by Article 160 No 2 of the Labour Code refers to tasks performed by the employee within the employer’s line of business and not to other activities. Infringement of a non-compete clause agreed on in the employment contract is regarded in labour law as sufficiently serious to result in termination of the employment contract. Thus, if an employee breaches a non-compete clause agreed on by the parties in the employment agreement during the labour relationship, the employer may terminate the employment contract without the employee being entitled to any indemnification by virtue of Article 160 No 2 of the Labour Code. Non-compete clauses after the termination of the employment contract In Chile there are neither labour rules nor civil rules expressly regulating this issue. Non-compete clauses made after termination of the employment contract are only accepted to a limited extent as they are deemed to be in conflict with the constitutional rights established in Article 19 Nos 16 and 21 of the Constitution, namely freedom to contract in labour matters and the right to develop any economic activity. In connection to the latter, the Chilean Constitution provides that unless it is contrary to morality, public security or 72 Non-compete clauses are neither regulated by labour laws nor by civil law. Nevertheless, they are regarded similarly to clauses forbidding the transfer of goods in civil law, where there is a conflict with property rights and some principles such as free movement of goods. Considering the above, non-compete clauses after the employment relationship has ended are accepted provided 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: a) they must be made in writing; b) there must be pecuniary indemnification or compensation for the employee; c) their duration must be reasonable, and d) the conditions must be reasonable and not hinder freedom of occupation or the lawful right to fulfill oneself through a lawful occupation. 2.2 Age There are no restrictions as to age in terms of the capacity to agree a non-compete clause. 2.3 Written form A non-compete clause must be agreed in writing in order 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 it is necessary to adjust the clause. 2.5 Liability for compensation on dismissal In Chilean law the validity of a non-compete clause is unrelated to dismissal. In other words, dismissal does not affect the validity or enforceability of a non-compete clause. 3. REQUIREMENTS 3.1 General As mentioned in section 2.1. non-compete clauses are not specifically regulated in Chilean law. However, the wording of a non-compete clause 73 Ius Laboris should be very clear and it is important to specify the restricted actions as accurately and unambiguously as possible. 3.2 Geographical, functional and temporal limitations Chilean law does not make any specification in relation to geographical scope or duration, but restrictions of this kind should be reasonable. The geographical scope and any temporal limitations of the clause may be subject to assessment by the Chilean courts. 3.3 Job changes As mentioned above in section 2.1, Chilean law does not regulate non-compete clauses. However, an employee´s contract may require amendment in the event that he or she moves from one job to another within the organisation. For example, where an employee is promoted to a managerial or strategic position. In such a scenario, it may be 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 position that employee will occupy. 4. ENFORCEABILITY 4.1 General The Dirección del Trabajo, which has the authority to interpret labour regulations, has rejected non-compete clauses having effect after termination of the employment contract by Ruling 4,392/187 dated 6 August 1992 and Ruling 5,620/300 dated 22 September 1997. Its rulings are based on the following: Non-Compete Clauses - An International Guide - CHILE outside the organisation after termination of the labour relationship. The only kind of clauses that are permitted are those drafted during the labour relationship and evidenced in writing in the employment agreement, which prohibit activities that the employee may develop within the organisation’s business. The above-mentioned rulings refer to non-compete clauses that did not comply with the accepted conditions. Indeed, Ruling 5,620/300 refers to the Dirección del Trabajo’s declaration regarding a non-compete clause by means of which the employee committed him- or herself to refrain from doing similar jobs to the ones established in the employment contract for a period of three years following termination of the employment agreement. As no geographic scope was determined, it acted as an absolute prohibition. In turn, 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 circumtances into account. In general, the following interests are often relevant: • • • the employee´s position the financial damage done 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). Article 19 No 16 of the Constitution states that every person is entitled to freedom to contract and freedom of occupation, such that the employee may freely decide upon the activity he or she wishes to develop and no type of occupation may be forbidden unless it is contrary to moral codes, public security or health, or unless it is so demanded by public interest, or law so declares it. 4.3 Remedies Article 160 No 2 of the Labour Code establishes that the employer is only authorised to prevent its employees from performing tasks within the scope of its business while the labour relation is in force and provided that the prohibition is evidenced in writing in the individual’s employment agreement. In light of the above, we conclude that the parties may not draft clauses obliging the employee to refrain from carrying out any remunerated activity 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 74 • 75 Ius Laboris Non-Compete Clauses - An International Guide - CHILE 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 moderate a non-compete clause. This is, however, rather 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 Chilean court assesment. 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, in some circumstances the new employer could be 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 5.2 Transfers of undertakings According to Article 4 para 2 of the Labour Code, 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. 5.3 Cross-border competition As mentioned in section 3.2 above Chilean law does not regulate the geographical area within which a non-compete clause may be applied. However, any non-compete clause should be reasonably limited geographically. Whether or not the employer will be able to enforce a non-compete clause with international scope, for example, will depend on the circumstances, including the market in which the employer is active and its interest in the non-compete clause. In any dispute the matter may be referred to the courts. 5.4 Non-solicitation clauses In Chile it is possible to prohibit 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 be agreed according Chilean law. Therefore foreign non-compete clauses would be difficult to enforce. SITUATIONS 5.1 No clause If case 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. 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. 76 77 1. INTRODUCTION 81 2. CONDITIONS 81 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 81 83 83 83 83 3. REQUIREMENTS 84 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 84 85 86 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 87 87 87 88 89 89 5. SPECIAL 89 SITUATIONS 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 89 89 90 90 90 90 Czech Republic Non-Compete Clauses - An International Guide - CZECH REPUBLIC 1. INTRODUCTION Employers use non-compete clauses in order to prevent former employees from carrying out gainful competitive activity after the employment relationship has been terminated. Applicable Czech law regulating non-compete clauses is mostly mandatory since non-compete clauses have a material impact on the affected employees. If the mandatory rules are not observed it usually results in the invalidity of the whole of the non-compete clause. The most important feature of a non-compete clause under Czech law is that the employer is obliged to compensate its employee with his or her full average salary during the effective period of non-competition. When taking this feature into account, we may conclude that non-compete clauses are quite favourable for employees. Applicable Czech law is quite short (and sometimes vague) and does not regulate non-compete clauses in much detail. Moreover, there have been only a few court cases relating to non-compete clauses since 2001 when the clause was introduced. 2. CONDITIONS 2.1 General Non-compete clauses are currently regulated by Sections 310 and 311 of the Labour Code (Act No 262/2006 Coll., as amended). They stipulate the following conditions which must be met to establish a valid and binding non-compete clause. Link to trial period Where a trial (probationary) period has been agreed with an employee, a non-compete clause may only be concluded after the termination of the trial period, otherwise the non-compete clause will be void. An employer must thus choose whether a trial period or non-compete clause is more important at the commencement of employment. Obviously, if a trial period is chosen, there is no certainty that the employee in question will sign the non-compete clause after the trial period expires, as the employee may not then be motivated to conclude the non-compete clause. 81 Ius Laboris For this reason employers in similar situations sometimes enter into an employment contract for a definite period of time which also includes a non-compete clause. This ensures that the new employee is covered both by the non-compete clause and the fact that the employment contract would end if the employer were not satisfied with the employee (which is similar to a trial period in that either party may terminate the contract without any reason). We believe that a court might consider this course of action to be contrary to law, but we are not aware of any case law regulating this. Limitation of application of non-compete clauses A non-compete clause may not be agreed generally with all employees. Because of the purpose of a non-compete clause (i.e. protection of an employer against the application of methods and know-how acquired during the performance of the employer’s activity by former employees), an employer may only conclude a non-compete clause with employees for whom such a non-compete undertaking can be justly required in light of the nature of the information, skills, knowledge of work and technological methods acquired during the employment relationship. Moreover, to establish a valid non-compete clause it is necessary that the use of such information, skills or knowledge by an employee during the performance of his or her gainful activity (which corresponds to the subject of the employer’s activity or is of a competitive nature vis-à-vis an employer) could materially impede the employer’s activity. Therefore, non-compete agreements may be concluded only if this can be justly required in respect of the employee’s access to the employer’s know-how. If these conditions are not met the whole non-compete clause would be void. Each concrete case must be considered on an individual basis. However, we regard it as fair and appropriate to conclude a non-compete clause, particularly in cases where an approach to know-how is systematic rather than just incidental. Moreover, it will be necessary to assess the impact of the potential use of know-how on another employer’s activities, particularly whether such use of know-how could result in a material impediment to the employer’s activity. A more in-depth interpretation of the terms ‘justly require’ and ‘material impediment of the employer’s activity’ must be left to the discretion of the competent courts. Unfortunately, there is no available broad case law yet, as non-compete clauses were only introduced in 2001. 82 Non-Compete Clauses - An International Guide - CZECH REPUBLIC 2.2 Age A non-compete clause may be signed with any employee who has reached age 15 years (provided that the employee has completed compulsory school attendance). In other words, there is no limitation on juvenile employees signing this kind of clause. If an under-age employee signed a non-compete clause, it would be void (as the whole employment would then be invalid). 2.3 Written form Based on an explicit provision of the Labour Code, a non-compete clause must be agreed in writing. If this condition is not met, the non-compete clause is invalid (and therefore unenforceable). The aim of this formal condition is to protect both parties – although it favours the employee – against any disputes about mutual rights arising from an oral non-compete clause which might occur in the future. Usually, a non-compete clause is agreed directly in the employment contract, i.e. at the commencement of employment. But employers and employees may also agree on a non-compete clause at some later time – in a separate agreement which may take the form of an amendment (addendum) to the employment contract but also may be named differently, e.g. ‘Agreement not to compete’. 2.4 Renewal There is no statutory regulation relating to the renewal of non-compete clauses. Therefore, the basic principles apply: if the employment is renewed (e.g. where the employment contract was signed for a definite period which expires), it is necessary to agree on the non-compete clause once more. The parties may sign a short agreement that the original employment contract (including the non-compete clause) will be renewed or will continue in force, or they may sign a new employment contract containing a non-compete clause. 2.5 Liability for compensation on dismissal Again, there is no special provision regulating the liability of an employer. A non-compete clause applies in all cases of dismissal (including situations when dismissal takes place during a trial period, upon reaching pension age, etc). The only exception is if the dismissal would be invalid according to a court decision as in such cases the employment would continue and the agreed non-compete clause would not apply. 83 Ius Laboris 3. REQUIREMENTS 3.1 General Unless agreed otherwise in a non-compete clause, the clause applies in all cases of employment termination, such as termination by notice, agreement or the expiry of an agreed definite term, etc. If, for example, employer does not want to exploit the clause if the employee has been dismissed for cause, such as poor performance or breach of employee obligations, it is necessary to agree on that in the non-compete clause (i.e. to limit application of the clause in such cases of dismissal). Nevertheless, even if no such limitation has been agreed, an employer may withdraw from the agreed non-compete clause before the employment terminates. Based on applicable law, an employer may withdraw from the clause and an employee may terminate the application of the clause by notice, provided that statutory conditions are met. Withdrawal by employer The Labour Code stipulates that an employer may withdraw from a non-compete clause before the end of the employment. This vague provision allows for a time limitation within which withdrawal may take place (e.g. during a notice period) but this may not be the basis for the withdrawal. In other words, in order to make sure that the employer can withdraw from the non-compete clause this must be explicitly agreed. It should be emphasised that the withdrawal (a letter of withdrawal), if agreed, must be delivered to the employee before the employment terminates, e.g. before the last day of a notice period. It is therefore very important for employers to consider in good time whether or not they want to apply the non-compete clause. If an employer delivers the withdrawal after the last day of the employment, the withdrawal will be ineffective and the non-compete clause will be binding on both parties (unless they agree on its cancellation). The Labour Code does not offer an indication that employees may also withdraw from a non-compete clause. Nevertheless, the absence of an explicit provision does not prevent parties from agreeing that an employee may withdraw from the non-compete clause. However, we are not aware of any case of this having been agreed. In any event, withdrawal must be in writing and will be void and unenforceable if not. 84 Non-Compete Clauses - An International Guide - CZECH REPUBLIC Notice of employee In contrast to withdrawals, the Labour Code enables employees to terminate non-compete clauses by notice if an employer has not paid the requisite compensation or part of it within 15 days of its becoming due. The non-compete clause will expire on the first calendar day of the month following the day when notice of termination was delivered to the employer. After this, the employee may perform competing activities, and the employer will not be obliged to pay him or her compensation. As with withdrawals, an employee notice must be in writing, otherwise it will be void and without effect. Compensation According to an explicit provision of the Labour Code (Section 310(1)), an employee is entitled to compensation for observing the agreed non-compete clause. The compensation must be equal to at least average earnings. ‘Average earnings’ is a legal term based on the total income paid to an employee during a previous calendar quarter. The actual calculation of average earnings is quite complicated as it is necessary to know all the details of the employee’s remuneration as well as his or her attendance at work within the relevant quarter. Generally speaking, average earnings correspond to a full salary (as the calculation may include any bonuses paid in the past, average earnings may even be higher than basic salary). Any agreement between the employer and employee to decrease the amount of compensation will be void (but we consider that it should not affect the validity of the entire non-compete clause – unfortunately, there is no available case law, so we may not exclude that the court would have a different opinion). Compensation is payable on a monthly basis in a same way as salary, unless the parties agree otherwise. For example, the parties may agree that the compensation will paid as a lump sum at the end of the 12 month period during which the non-compete clause applies. 3.2 Geographical, functional and temporal limitations Neither statute nor case law regulate within what geographical area a non-compete clause may apply. Usually, a non-compete clause does not mention any geographical limitation at all. If that is the case we believe that the clause would limit a former employee’s activities in any location (cities or even countries) where any competitive activity could materially impede the employer’s activity. 85 Ius Laboris With regard to functional limitations, the non-compete clause should specify what activities of the employee are forbidden after termination of the employment agreement, as applicable law only stipulates that the employee in question must not perform any gainful activity which would correspond to the activity of the employer or would compete with the employer’s activity. The non-compete clause thus does not relate to activities of the employee him- or herself but relates solely to the employer’s activity. In other words, a non-compete clause agreed with employees who are not directly involved in the employer’s activity (such as employees working in the HR or IT departments) would limit the employee in question only if he or she were hired by a competitor after the employment terminates. On the other hand, the non-compete clause would not prevent the employee from being hired in the HR or IT department of a non-competitor. Gainful activity forbidden under a non-compete clause may take the following forms: • • • performance of work for another employer in an employment relationship performance of any activity by which the employee participates in the competition with the employer, e.g. in the form of a statutory body, a member of one or otherwise or performance of a business or other activity by the employee on his own behalf (e.g. as a freelancer) if that would compete with the activities of the employer. On the other hand, a gainful activity does not include the mere ownership of property (e.g. shares in a company running a competing business), unless the shareholding relates to the performance of active work. The grounds for this are that gainful activity relates only to active work. As regards temporal limitations, applicable Czech law requires that the maximum duration of a valid and binding non-compete clause is 12 months after the employment has terminated. If a longer period has been agreed, we believe that it would not result in the invalidity of the whole clause but that the statutory maximum period of 12 months would apply. Unfortunately, there is no case law to confirm our assumption. 3.3 Job changes There is no case law regulating in any more detail what happens when an employee who signs a non-compete clause subsequently changes his or her 86 Non-Compete Clauses - An International Guide - CZECH REPUBLIC position. We believe that the change in position would not have any direct implication for the original non-compete clause provided that the employee has access to the employer’s know-how at least in the course of one of those positions. 4. ENFORCEABILITY 4.1 General To agree on a valid and therefore enforceable non-compete clause, all conditions specified above must be met. Even in such a case it may be very difficult to enforce an agreed non-compete clause, for practical reasons. In particular, it may be very difficult to discover that the employee has breached his or her undertaking not to compete. If the employer brings court proceedings against the former employee requesting performance of his or her obligations under the non-compete clause, a contractual penalty or damages, the employee in question will almost certainly attempt to challenge the validity of the non-compete clause. 4.2 Balance of interests Balance of interests is one of the conditions of a valid non-compete clause. Generally, a non-compete clause may be agreed only with an employee who has (or will probably have) access to the employer's know-how. For more details, see section 2.1 above, under Limitation of application of non-compete clauses. 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 non-compete undertakings, the employee may make a claim before a court for the payment of compensation. As an alternative, the employee may terminate the non-compete clause by notice (see section 3.1 above). Based on a recent case, an employee may be entitled to compensation even if the non-compete clause is invalid, if he or she can prove compliance with the non-compete undertaking (i.e. that he or she refused an offer from a competitor during the application of an invalid non-compete clause). 87 Ius Laboris Employer If the employee does not comply with the obligations of the non-compete clause the employer may file for an injunction for the employee to cease his or her competitive activities. The employer may request payment of a contractual penalty if the penalty has been agreed (which is standard) – see section 4.4 below. The employer may further claim damages arising from non-adherence to the non-compete clause. 4.4 Penalty clauses Under the Labour Code, the parties may arrange in a non-compete clause that if an employee breaches the 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 in relation to (i) the nature and significance of the know-how which is accessible to the employee and (ii) how severely any potential misuse of it could impede the employer’s activity. An inordinately high penalty would cause the whole of the non-compete clause to be invalid. It is therefore very important for the employer to be able to justify why the agreed penalty is reasonable. Generally, lawyers in the Czech Republic consider that the amount of the penalty should not exceed the total amount of compensation payable by the employer for the employee’s observance of the non-compete clause (but there is no case law which would confirm this opinion). The moment of breach of a non-compete clause may be crucial for determining whether a penalty is reasonable or not (e.g. there is a material difference if the clause is breached immediately after the employment has been terminated or during the last month of the 12 month period in which the clause applies). Therefore, the parties sometimes agree that the amount of the contractual penalty will be calculated as a function of the employee’s average monthly earnings and in terms of a coefficient, defined as the difference between the agreed duration of the non-compete clause and the number of full calendar months that elapsed between the day of termination of the employee’s employment and the day on which the employee started to violate his or her commitments under the non-compete clause (thus, the sooner he or she breaches the non-compete clause, the higher the penalty). 88 Non-Compete Clauses - An International Guide - CZECH REPUBLIC Upon payment of such a penalty, the employee’s obligations pursuant to the non-compete clause will expire. This is a mandatory rule and parties may not avoid its application. It is possible to claim both a contractual penalty and damages from the employee, provided that this is explicitly agreed upon by the parties. The court has no right to mitigate the agreed penalty. 4.5 Damages For possible damages, see sections 4.1 and 4.3 above. 4.6 Liability of new employer A new employer may not be liable for breach of a non-compete clause agreed between a new hire and his or her former employer. Nevertheless, it is not uncommon that a new employer signs an agreement with its new hire that the employer will compensate the new employee if he or she is obliged to pay, for example, a contractual penalty to the former employer as a result of the new employment. Such an agreement depends entirely on discretion of the new employer, as to whether it is worth the employer’s while signing such an agreeement with the new employee in question. 5. SPECIAL SITUATIONS 5.1 No clause If no non-compete clause has been agreed, the employee may compete with his or her previous employer. This could be as an employee; via the statutory body of a competitor; or through entrepreneurial activities. The only limitations which apply by operation of law are based on a ban on unfair competition (governed generally by the Czech Commercial Code). In particular, ex-employees may not violate trade secrets (i.e. they may not exploit any trade secrets of a former employer gained during their employment). 5.2 Transfers of undertakings In the case of a transfer of undertaking, the rights and obligations arising from a non-compete clause will automatically pass to the transferee. Therefore, the employee will be limited by the non-compete clause agreed with the transferor even in respect of activities which compete with those of the transferee. 89 Ius Laboris 5.3 Cross-border competition As mentioned above, a non-compete clause does not usually contain a geographical limitation. However, if it does, the clause would limit the employee at any place where his or her activity could materially impede the employer’s activity, including cross-border competition. Obviously, for the employer to claim that the activity is competitive, the employer must itself perform business activities in that foreign state. 5.4 Non-solicitation clauses Czech law does not recognise non-solicitation clauses but it is not unusual for clauses of this kind to form part of a non-compete clause. A practical question is whether a non-solicitation clause could be enforced before a court. Unfortunately, there is no case law yet on this point. 5.5 Insolvency There is no specific legislation applicable to non-compete clauses during the insolvency of an employer. Therefore, the administrator would be obliged to continue paying compensation under a non-compete clause (in the same way that there is an obligation to pay other employment law entitlements, such as salary and severance). 5.6 Enforceability of foreign non-compete clauses The enforceability or otherwise of a foreign non-compete clause depends whether it is in line with the foreign law in question. Even though there is no case law, we believe that Czech rules on non-compete clauses are not mandatory rules, so they do not need to be observed if the clause is governed by the foreign law (based on a general principle, employees may not lose protection of local mandatory rules due to a choice of foreign law but we do not believe that this principle will apply to foreign non-compete clauses). 90 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 95 97 97 98 98 3. REQUIREMENTS 98 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 98 99 100 4. ENFORCEABILITY 101 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 101 101 101 102 103 103 5. SPECIAL 103 SITUATIONS 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 103 104 104 104 107 108 Denmark Non-Compete Clauses - An International Guide - DENMARK 1. INTRODUCTION Danish law only protects employers against competitive actions from former employees to a limited extent. 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. If the employer’s needs can be narrowed down to an interest in preventing another employer (typically one of its business partners) from hiring its employees, a ‘no-hire’ clause can be agreed with those business partners instead. Similarly, a ‘non-solicitation of employees’ clause is an agreement between employer and employee (often a senior employee) that prevents the employee from poaching ex-colleagues after termination. Which type of clause the employer chooses is not unimportant since that choice will affect the employee’s chances of persuading the ordinary courts to set aside the clause as invalid in the event of a court case. In addition, the rules governing the various types of restrictive covenants differ, e.g. with respect to compensation. While the above covenants are in restraint of trade (i.e. in restraint of job mobility in the labour market), they may on the other hand be necessary for many employers in order to protect their legitimate business interests. Legislators have tried to safeguard these interests by accepting such covenants but, at the same time, establishing a number of conditions that must be complied with in order for the covenants to be valid and enforceable. 2. CONDITIONS 2.1 General Salaried employees The Danish Salaried Employees Act applies to salaried employees, i.e. non-manual workers. Section 18 of the Danish Salaried Employees Act provides that if a salaried employee has undertaken 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, such a commitment will be valid only if the employee holds a post of special responsibility or has concluded an agreement with the employer on the right to use an invention made by the employee. In addition, 95 Ius Laboris such a commitment will be valid only if the employee receives compensation for the period during which the commitment is in force (the restricted period) and only if a written contract specifying the commitment and the right to compensation has been made. When determining what constitutes a post of ‘special responsibility’, the Danish courts will normally look at whether the employee’s job means that if the employee were to take up employment with a competitor, this could expose the employer to considerable competition. The compensation which the employee is entitled to receive must – as a minimum – amount to 50% of the employee’s pay on the effective date of termination. Compensation for the first three months must be paid as a lump sum on the effective date of termination and subsequently each month during 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 payments such as bonus schemes. 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 is entitled to deduct the income from that employment from the compensation payable to the employee. However, the right to deduct income does not apply to the lump sum payment for the first three 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 right to deduct income from suitable alternative employment from 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 to set up a business during the restricted period will be incompatible with the employee’s duty to mitigate losses. A non-compete clause will be invalid in any case if the employee has been employed for three months or less. If the employee has been employed for more than three but less than six months, the restricted period may not exceed six months from the effective date of termination. 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 96 Non-Compete Clauses - An International Guide - DENMARK non-compete clause) was given, the employee will be entitled to the lump sum payment of three months’ compensation. The provisions of Section 18 of the Danish Salaried Employees Act can be varied by a collective agreement if it sets out the terms and conditions for entering into a non-compete clause. Special rules apply if a salaried employee accepted the non-compete clause before 15 June 1999. Other employees The provisions of Section 18 of the Danish Salaried Employees Act do not apply to manual workers and CEOs, – unless otherwise specified in the employment agreement. Whether a non-compete clause is binding for such employees must be determined on the basis of Sections 36 and 38 of the Danish Contracts Act, which also apply to salaried employees. For every category of employees, however, the employer should – for evidential reasons – make sure that a non-compete clause that has been agreed is also set out in a written contract. 2.2 Age As a general rule, an employee under the age of 18 cannot sign a non-compete clause with an employer. 2.3 Written form A non-compete clause agreed between a salaried employee and the employer will be valid only if a written contract has been made and only if the actual non-compete clause and the entitlement to compensation are expressly stated in the written contract. A non-compete clause will normally be set out in the employment agreement or in a separate amendment. A more general non-compete clause 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. And if the employee does not wish to accept the change, he or she will be entitled to consider him or herself dismissed. This state of the law makes it recommendable to clarify from the beginning of the employment relationship whether the employee is subject to a non-compete clause. 97 Ius Laboris 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 a supplement to the employment contract in order to ensure that the non-compete clause remains applicable. If the current employer wishes to introduce a non-compete clause into the existing employment relationship in connection with renewing the employment contract, 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. If the employee does not wish to accept a non-compete clause, he or she will be entitled to consider him or herself dismissed. 2.5 Liability for compensation on dismissal Under Section 38(2) of the Danish Contracts Act, a non-compete clause will become inoperative 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. If the employee is given notice, 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 termination of employment. 3. REQUIREMENTS 3.1 General When drafting a restrictive covenant, it is important to specify the restricted activities as accurately and unambiguously as 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 selected the language. There is extensive case law on how to construe the wording of restrictive covenants. Most construction issues arise because the wording was unclear from the beginning, but some of the issues also arise because the employer’s circumstances have changed in the period between when the restrictive covenant was drawn up and when it becomes relevant to use and interpret it. It is therefore necessary to balance the importance of specifying the restricted activities by using language that leaves room for changes in the future. 98 Non-Compete Clauses - An International Guide - DENMARK 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 such as ‘financial interest’ would normally include taking up employment with a competitor, it is a good idea to be more specific in order to avoid any doubt. 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 which compete with those carried on by one or more of the group companies. If the wording is not construed as covering the group as a whole, the employer must be prepared for the clause to cover only the ‘employer company’. Many non-compete clauses do not contain a limitation of geographical scope in their wording. If an employer decides to define the geographical scope, it should be aware that the relevant market/territory and the employee’s responsibilities may change during the period of employment. If an employer formulates a restrictive covenant so generally that it goes beyond what is necessary to safeguard the employer’s legitimate interests, the covenant may be set aside by the Danish courts. In relation to non-compete clauses, the courts may do so on the basis of Section 38(1) of the Danish Contracts Act and (in theory) also Section 36 of the Danish Contracts Act (see section 3.2 below). In relation to the non-solicitation of customers clauses, non-solicitation of employees clauses and no-hire clauses, the courts may set them aside on the basis of Section 36 of the Danish Contracts Act. Under Section 38(1) of the Danish Contracts Act, a non-compete clause will not be binding on the employee if the provisions concerning duration, territory and other terms go beyond what is necessary to avoid competition or unreasonably restrict the employee’s access to employment. 3.2 Geographical, functional and temporal limitations Whether or not specified in the non-compete clause, the geographical scope of the clause will be subject to the Danish court’s assessment. This issue must also be addressed in each individual case by balancing the parties’ interests. 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 in which the employee has had his primary employment. 99 Ius Laboris The ‘other terms’ mentioned above 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 access to employment. The question of how long a non-compete clause can be extended in time must be assessed in each individual case and will in each case depend on a balancing of the parties’ interests – the employer’s legitimate interest in avoiding competition and the employee’s access to new employment. As a rough general rule and in the absence of special circumstances, the Danish courts have so far been reluctant to set aside non-compete clauses where the restricted period is one year or less. Known as the ‘catch-all section’, Section 36 of the Danish Contract Act provides that a contract may be modified or set aside 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, non-solicitation or no-hire clause would be set aside or modified only in extraordinary circumstances. If a non-compete clause is set aside on the basis of Section 36 or 38(1) of the Danish Contract Act, case law has established that entitlement to compensation on the basis of Section 18 of the Danish Salaried Employees Act will be lost. There is a presumption that the same would apply to a non-solicitation of customers clause, a non-solicitation of employee clause and a no-hire covenant. 3.3 Job changes If the employee resigns, the employee is entitled to compensation at a minimum of 50% of the employee’s pay on the effective date of termination. If the employee obtains suitable alternative employment, the employer is entitled to deduct income from the new suitable employment from the compensation payable to the employee. However, the compensation for the first three months must be paid as a lump sum on the effective date of termination and the right to deduct income 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 was summarily dismissed for cause. 100 Non-Compete Clauses - An International Guide - DENMARK If the employer wants the employee to do a different job within the 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 remain in force. The same will apply if the job change does not constitute a material change to the terms and conditions. However, the employer may elect to terminate the non-compete clause with the employee. This requires one month’s notice by the employer. If the employee does not wish to accept the new job, he or she will be entitled to consider him- or herself dismissed. 4. ENFORCEABILITY 4.1 General In general, it appears to be somewhat easier to enforce a non-compete clause in Denmark than in many other countries. The main 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 (see section 4.3 below). 4.2 Balance 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 that it goes beyond what is necessary to safeguard the employer’s legitimate interests. If so, the court may set aside a non-compete clause on the basis of Section 38(1) of the Danish Contracts Act and (in theory) also Section 36 of the Danish Contracts Act, in which case the clause will no longer be binding on the employee. 4.3 Remedies Employee A non-compete clause constitutes a substantial restriction on the employee’s job opportunities if the existing employment is terminated and therefore salaried employees are entitled to compensation. If the employer fails to pay the lump sum constituting the compensation for the first three months and/or the compensation subsequently payable for each month of the remainder of the restricted period, this will constitute a material breach of contract and the employee will not be bound by the non-compete clause. However, if payments are simply delayed or the amount slightly wrong, this will not constitute a material breach. 101 Ius Laboris The former employee may also choose to dispute the validity of a non-compete clause and take the former employer to court. Employer The employer’s primary need will often be to prevent the employee from engaging in or continuing with 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 this is necessary in order for damages to be awarded. An interim injunction may be available if the employer can prove or show it is probable (i) that the employee is engaging in – or planning to engage in – activities which are contrary to the employer’s rights and (ii) that the ‘purpose would be lost’ if the employer was required to assert its rights before the ordinary courts. An interim injunction is a provisional measure and a full trial must be held 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. 4.4 Penalty clauses As a result of the difficulties 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, 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 individual 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 set aside an agreed penalty clause will be made on the authority of the ‘catch-all’ – Section 36 of the Danish Contracts Act. 102 Non-Compete Clauses - An International Guide - DENMARK 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 financial loss will be liable for any such loss in accordance with the general law of damages in Denmark. The big practical problem here is that it will often be very difficult for the employer to show that a loss has been suffered, or the size of the loss, as is necessary in order to be awarded damages. Calculating a 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 restrictive covenant. And future losses are even harder to quantify. The problems involved in calculating loss are one of the reasons for introducing a penalty clause. 4.6 Liability of new employer Unless otherwise agreed, the general rule is that the new employer will not be responsible for the employee’s breach of competition 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 should assume some responsibility for the situation, including liability for any damages the former employer may claim or an 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 in accordance with the general Danish rules on liability for negligent advice. Finally, if the new employer is fully aware of the competition restrictions agreed, the new employer may be liable to the employee if the new employer does not respect the restrictions, for example, if the new employer instructs the employee to perform a task in relation to 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. 103 Ius Laboris Both during the employment and 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 and business methods, customer files, prices, discount policies, etc. The employee may not systematically approach the former employer’s customers, although contact with customers will be allowed if it forms part of general marketing initiatives targeting the relevant market as a whole. 5.2 Transfers of undertakings Under Section 2 of the Danish Act on Employees’ Rights on Transfers 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 and he or she will therefore be entitled to consider him or herself dismissed. In relation to non-compete clauses, this would mean that the clause becomes inoperative. 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 the employer will be able to enforce a restrictive covenant in other jurisdictions will depend on how the employer’s interests are weighed against the employee’s (see section 3.2 above). 5.4 Non-solicitation clauses Salaried employees Under Section 18a of the Danish Salaried Employees Act, a commitment by a salaried 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 employer has had business dealings with the customer in question within 18 months preceding the date when notice of termination was given. This commitment will also be valid only in relation to customers etc. with whom the employee has had direct 104 Non-Compete Clauses - An International Guide - DENMARK business dealings in the course of the employment with the employer and in relation to other customers who are covered by the employee’s commitment by virtue of a separate notice in writing before the notice of termination is given. It is more or less established 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 18 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 can be seen as having business dealings with that potential customer 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 in a central role, while a number of employees are carrying out the ‘real’ work – it can be quite difficult to prove that the employee has in fact had business dealings with the customer. In those cases – and others as well – the employer can choose to give separate notice in writing as mentioned above. Section 18a contains provisions on compensation that to a great extent are identical to the compensation provisions of Section 18 regarding non-compete clauses. In relation to non-solicitation clauses, however, Section 18a does not require that the compensation for the first three months should be paid as a lump sum on the effective date of termination. The compensation amount must instead be paid each month during the restricted period. In addition, if the employee receives compensation under Section 18, he or she will not be entitled to compensation under Section 18a as well. This rule against ‘double compensation’ means that many employers may decide to impose both a non-solicitation clause and a non-compete clause on the employee even though the employer’s interests would be adequately safeguarded by only one of them. 105 Ius Laboris Non-Compete Clauses - An International Guide - DENMARK The employer may terminate a non-solicitation clause by giving one month’s notice to expire on the last day of a month. Unlike for termination of non-compete clauses, the employee will not be entitled to have the first three months’ compensation paid as a lump sum when the employer terminates a non-solicitation clause. Non-solicitation of employees and no-hire clauses are valid only if the employer and the employees affected by the clause have signed a written agreement which describes the limitation of the affected employees’ job opportunities as a result of the non-solicitation of employees and no-hire clauses and the affected employees’ entitlement to compensation. As with non-compete clauses, if the employee takes up suitable alternative employment after the effective date of termination, the income from that employment can be deducted from the employee’s compensation. In relation to non-solicitation clauses, however, the employee will not be entitled to a lump sum of three months’ compensation. The employer must pay compensation to the affected employees during the period in which the employees’ job opportunities are limited as a result of the covenant. The affected employees’ job opportunities are normally limited when their employment ends. The compensation must – as a minimum – amount to 50% of their pay on the effective date of termination and the compensation must be paid on the same dates as salary payments under the employment contract. ‘Pay’ in this context should be understood in the same way as in Sections 18 and 18a of the Danish Salaried Employees Act, i.e. as including the taxable value of any company car, mobile phone and other benefits in kind as well as performance-based payments such as bonus schemes. If the employees receive compensation under Sections 18 or 18a of the Danish Salaried Employees Act, they will not be entitled to compensation. Other employees Section 18a only applies to employees who are protected by the Danish Salaried Employees Act. Whether a non-solicitation clause is binding on such employees will be determined on the basis of Section 36 of the Danish Contracts Act. Act on Employers’ Use of Non-Solicitation of Employees and No-Hire Covenants Agreements between two (or more) employers not to hire each others’ employees (no-hire covenants) and agreements between an employer and an employee (often a senior employee) which prevent the employee from poaching ex-colleagues after termination (non-solicitation of employees covenants) are governed by the Danish Act on Employers’ Use of Non-Solicitation of Employees and No-Hire Covenants. The Act, which came into force on 1 July 2008 and was given retrospective effect from 1 July 2009, applies to all employees, whether or not protected by the Danish Salaried Employees Act. The Act is intended to limit the use of non-solicitation of employees and no-hire covenants and to make sure that they are known to those affected by them. Even though non-compete and non-solicitation (of customers) clauses differ a great deal from non-solicitation of employees and no-hire covenants, the substance of the Danish Act on Employers’ Use of Non-Solicitation of Employees and No-Hire Covenants has been lifted from the existing provisions of Sections 18 and 18a of the Danish Salaried Employees Act. It is important to note that the Act only governs the relationship between the employer and those employees whose job opportunities have been limited as a result of the covenants, e.g. the staff of a senior employee who has signed such a covenant. It does not govern the relationship between the direct parties to the covenant. 106 Before the Act introduced a right to compensation for employees who are affected by a no-hire clause, many employers saw this type of covenant as an attractive alternative to a non-solicitation of customers clause. The provisions on the employer’s right to deduct income obtained by former employees from other employment and also the provisions on invalidity due to too short tenure are similar to the provisions of Section 18a of the Danish Salaried Employees Act. The Act allows for some derogations in relation to temporary employment agencies and in the situation where negotiations have been initiated for the transfer of an undertaking. 5.5 Insolvency If a company becomes insolvent, the administrator will often preserve the company as a going concern with a view to selling it. In this situation, the administrator 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. 107 Ius Laboris 5.6 Enforceability of foreign non-compete clauses Whether a foreign non-compete clause can be enforced in Denmark will be determined on the basis of conflict of law rules. Even if the parties have agreed to submit to the jurisdiction of another country, the employer can apply for an interim injunction in Denmark unless the parties have expressly agreed otherwise. The Danish High Court has stated that an agreement to submit to another country’s jurisdiction with regard to the substance of the case does not mean 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. Even if the subsequent full trial that must be held in the ordinary courts is subject to another country’s jurisdiction, the normal practice would be for the trial to take place in Denmark. The Danish courts will in such situations postpone the judgment on the substance of the case. 108 1. INTRODUCTION 113 2. CONDITIONS 114 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 114 115 115 116 116 3. REQUIREMENTS 116 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 116 118 119 4. ENFORCEABILITY 119 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 119 119 120 120 120 121 5. SPECIAL 121 SITUATIONS 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 121 121 121 122 122 123 France Non-Compete Clauses - An International Guide - FRANCE 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 directly 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. 113 Ius Laboris 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 if the non-compete clause existed in the company agreement at the time of recruitment of the employee and only if the employee was informed of this obligation at the time of recruitment. Best practice for employers is to insert the non-compete clause in the individual employment contract. 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 acordance 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 contract 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 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. Non-Compete Clauses - An International Guide - FRANCE Case law even admits the possibility of contractualising a non-compete obligation when the employee leaves the employer, notably in the event of a settlement. In the same way, for a breach of contract within the framework of a settlement agreement (and certified by a record of conciliation proceedings), case law authorises the parties to the contract to apply a new non-compete clause, where the new clause is different from the original one but retains some of its standard conditions. 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 having regard to the nature and the specifics of the employee’s activity 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. 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. 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. 114 115 Ius Laboris 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 The material requirements for the validity and enforceability of a non-compete covenant are set out in French case law, as stated before. A non-compete clause may apply at the end of a fixed-term contract, on retirement or pre-retirement, on resignation, on dismissal for personal or economic reasons and dismissal with no concrete reason, and on breach during a trial period provided there is a written clause in the contract making this clear. 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 customary or 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 financial consequences of the clause must be very explicit and unambiguous, but must also react very quickly after the end of contract (usually within 15 days of notice of termination of the contract being given). 116 Non-Compete Clauses - An International Guide - FRANCE Only an employee is authorised to annul 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. There is no burden of proof upon the employee – it is for a judge to assess the extent of harm caused to the employee. However, if the employee carried out unethical or unprofessional activities after the breach of 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 before a judge. The absence of financial compensation renders the agreement unlawful and the employee is entitled to have this rectified. 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. Moreover, if the employee has kept to the terms of a non-compete clause which is unlawful because of the absence of financial compensation, the employee may, in addition to annulling the clause, bring a case before the court for damages from the employer. 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 indemnity for breach of a non-compete clause is left in the hands of the two parties. Any modifications are also their responsibility. It is common practice to provide compensation equivalent to 25-30% of monthly salary per month of restriction but the collective bargaining agreement that applies to the organisation (if any) may provide for a 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. 117 Ius Laboris 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. In the same way as above, the clause contained in the employment contract may not be more restrictive in defining geographical area than the equivalent in the company agreement. If it is, the clause risks being partially annulled. Conversely, if there are no geographical limitations contained in the company 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 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. 118 Non-Compete Clauses - An International Guide - FRANCE 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. 3.3 Job changes If there is an important change in the functions of the employee, 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 is not 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 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 juge may reduce the scope (geographical, duration or functionnal scope) of a non-compete clause if it is too restrictive of the employee’s freedom to work. 119 Ius Laboris 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- or 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 the harm 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 contractual duties. The amount of damages will be based on the extent of the harm caused by the employee to the employer. 120 Non-Compete Clauses - An International Guide - FRANCE 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 Should the organisation be transferred into the hands of 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 relevant compensation. In the same way, in the event of any breach of a non-compete clause by the employee, the new employer may ask the judge to be compensated by the employee. 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 121 Ius Laboris extent on the circumstances, especially the specialisation of the employer. The more specialised 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-sollicitation clauses are divided in two categories: • 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) (Article L.1237-3 of the labour code). Non-Compete Clauses - An International Guide - FRANCE 5.6 Enforceability of foreign non-compete clauses The Rome Convention on contractual obligations of 1980 allows 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). 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 (Article L.1252-16-7°). • 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 (Supreme Court, 9 July 2008, no 07-41.970). Where a company has become insolvent or has been put into receivership by a commerical tribunal, a specific body (the ‘AGS’) guarantees payment of compensation for non-compete clauses. Either the administrator or the employee may decide to keep a non-compete clause (with its compensation) or to waive it. 122 123 1. INTRODUCTION 127 2. CONDITIONS 127 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 127 127 127 128 128 3. REQUIREMENTS 128 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 128 131 131 4. ENFORCEABILITY 131 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 131 132 133 133 134 134 5. SPECIAL 134 SITUATIONS 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 134 135 135 135 136 136 Germany Non-Compete Clauses - An International Guide - GERMANY 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. These legal conditions are described in the sections that follow. 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. 127 Ius Laboris 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. 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 material 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. The principles stated therein have in part been backed up by case law. 128 Non-Compete Clauses - An International Guide - GERMANY Wording As is the rule with all contractual provisions, a non-compete clause should carefully worded. This is especially important as the clause is subject interpretation if its meaning remains unclear. Generally, courts tend interpret the scope of the clause in a restrictive way with the effect of ‘employee-friendly’ result. be to to an 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’ (see section 4.5 below). 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. 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 receive remuneration for his or her 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. 129 Ius Laboris 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 his or her 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 he or she 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 (see section 4 below). 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. 130 Non-Compete Clauses - An International Guide - GERMANY 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. impeding the employee from working for all employers of a certain branch, no matter which activities he will perform there). ‘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. Here again, 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 to 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). 131 Ius Laboris Non-Compete Clauses - An International Guide - GERMANY A non-compete covenant is considered to be ‘non-binding’: 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 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. 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, again, 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. 132 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 injunctive relief. 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 stipulate a penalty which the employee must pay if he or she does not comply with the obligation as agreed upon 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 Court overturned the standard wording of clauses used in cases where the employee repeatedly and 133 Ius Laboris Non-Compete Clauses - An International Guide - GERMANY 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 as described in 3.1. 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 who 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. 134 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 here again, 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. 5.3 Cross-border competition A non-compete clause can comprise the area of a city, a Federal State or Germany in its entirety. As indicated in section 3.2 above the permissible geographical scope of the clause is to a great extent dependant 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 135 Ius Laboris 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. Non-Compete Clauses - An International Guide - GERMANY 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 the objective criteria mentioned above (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. 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. 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. 136 137 1. INTRODUCTION 141 2. CONDITIONS 141 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 141 141 142 142 142 3. REQUIREMENTS 142 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 142 143 143 4. ENFORCEABILITY 144 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 144 144 144 145 145 145 5. SPECIAL 145 SITUATIONS 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 145 146 146 146 146 146 Greece Non-Compete Clauses - An International Guide - GREECE 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 inserted 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 manner 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. Moreover, 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 141 Ius Laboris (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 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. 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. 142 Non-Compete Clauses - An International Guide - GREECE 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 specificied 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 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. 143 Ius Laboris 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 specific case, such as the duration of the obligations, the geographical scope of the prohibition 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 geographcial 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 Non-Compete Clauses - An International Guide - GREECE 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 set out in section 3 above. 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. 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. 144 145 Ius Laboris Non-Compete Clauses - An International Guide - GREECE 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. 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. 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. 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 lex fori principles. 5.3 Cross-border competition As mentioned above, 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. 146 147 1. INTRODUCTION 151 2. CONDITIONS 151 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 151 153 153 154 154 3. REQUIREMENTS 154 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 154 156 157 4. ENFORCEABILITY 157 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 157 157 158 159 159 160 5. SPECIAL 160 SITUATIONS 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 160 160 160 161 161 161 India Non-Compete Clauses - An International Guide - 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 the common law of England, which provides that a person is entitled to exercise any lawful trade or calling as and where he or she wishes. The common law has always been intolerant towards any interference with lawful trade and calling, even at the risk of curbing one’s 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 good if it was reasonable and if it could be shown to be reasonably necessary for the purpose of freedom of trade. Therefore, in earlier times, non-compete clauses seem to have been given effect based on their reasonableness. 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 such a clause constitutes or amounts to ‘restraint of trade’, which apart from a few exceptions, is barred by Section 27 of the Indian Contract Act. A contract in restraint of trade is one by which a party’s future liberty to carry on his trade, business or profession in such manner and with such persons as he chooses is restricted. A contract of this class is prima facie void, but may become binding if it falls squarely within the statutory exceptions provided in the Indian Contract Act, such that the restriction is deemed justifiable in the circumstances. These 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 in this context. 151 Ius Laboris 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: one who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided that such limits appear to the Court to be reasonable, based on the nature of the business. 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. Negative covenants operative during the period of the contract of employment when the employee is bound to serve his employer exclusively are generally not regarded as restraint of trade and therefore do not fall under Section 27 of the Indian Contract Act. A negative covenant that the employee would not engage himself in a trade or business or would not seek employment with any other employer for whom he would perform similar or substantially similar duties, while the employment subsists, is not regarded as a restraint of trade and is valid and enforceable. Thus, when a contract only ties the employee during the period of the contract, and the restrictions are incidental and normal having regard to the positive growth of the contract, although the employee may be restricted from all dealings with third parties, there is no restraint of trade. Non-Compete Clauses - An International Guide - INDIA employment contract. Not only have the Indian courts struck down non-compete clauses which completely restrain an employee after termination of employment but 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. Thus, where a non-compete covenant only restricts an employee during the term of the employment contract, there is no restraint of trade and the covenant is valid under Indian law. By contrast, where the non-compete covenant restricts the employee after termination of the employment contract, it amounts to a restraint of trade and is void ab initio. Post-employment restrictive covenants are considered to be prima facie void, but it is important to note that 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 negative covenants do not operate after the termination of the contract and have been held void by the courts of India, it is still common practice to include such covenants 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 ab initio. If, however, a clause in an employment contract restricts an employee in any way from seeking employment or practicing any lawful profession after termination , in competition with the employer, it is regarded as a restraint of trade and is prima facie void. A negative covenant in an employment contract which operates after the termination of the contact is void ab initio and cannot be enforced irrespective of the fact that the employee’s age was 18 years or above. Hence, the age of the parties to such contract would be irrelevant. However, where an employee is 18 years of age or above, a negative covenent in the employment contract would be enforceable against him or her during the subsistence of the employment contract. Indian courts have time and again 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 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 152 153 Ius Laboris employment contracts bar employees from undertaking any other gainful activity during the subsistence of employment, except with the prior permission of the employer. It may be noted that although a negative covenant which limits the rights of an employee in his or her freedom of employment after termination of the contract is void, such a clause is often included in an employment contract for its deterrent value. In such cases it is advisable to ensure that the employee is made 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, it may be pertinent to note that non-compete covenants should be drafted in such a manner 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 As stated earlier, a non-compete clause in an empoyment agreement prohibiting an individual from seeking employment after the termination of the agreement is void ab inito. Hence, wrongful dismissal of an employee by an employer would not have any effect on the enforceability of a negative covenant that is operative after dismissal 3. REQUIREMENTS 3.1 General Since negative covenants operative on the 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. Be that as it may, it is a common practice to include non-compete clauses in employment contracts, which are operative both during the term 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. 154 Non-Compete Clauses - An International Guide - INDIA While an employer is not entitled to protect itself against competition per se on the part of an employee after the employment has ceased, it is entitled to protection of its proprietary interest, namely its trade secrets, confidential information, intellectual property, etc. Consequently, over the years the Indian courts have held negative 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 period of 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 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. 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 has been dealt with in the case of American Express Bank Ltd. v Ms. Priya Malik (2006) III LLJ 540 Del. The Hon’ble 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 some period 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 or in pursuance of training during employment, the courts have recognised that the acquisition of skills involves a long process in the career of an individual, and no employer can have any proprietary right or interest in their acquisition. Therefore, depending on the facts of a case, an employee may be restrained from divulging the 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 his 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 155 Ius Laboris courts in India have repeatedly held that an employment contract in which an employee binds him or herself to serve the employer exclusively for the term of the agreement is lawful, binding and enforceable. 3.2 Geographical, functional and temporal limitations Where a negative covenant in an employment contract restricts an employee from taking up certain employment after the termination of the employment contract, the geographical and functional limitations prescribed in the covenant are irrelevant. As discussed earlier an employer would only be entitled to protect his proprietary interest, namely his trade secrets, confidential information, intellectual property, etc. and can in no way restrict an employee from working with anyone after termination of the contract. 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. The level of care which must be taken when drafting such a clause was discussed briefly in the case of Superintendence Company of India (P) Ltd. v Krishan Murgai AIR 1980 SC 1717. The Hon’ble Supreme Court of India held that where the covenant is too widely worded, the court may interpret the clause as one which survives the termination of a contract thereby imposing post-contractual restrictions on the employee, which are deemed void. Employees’ covenants should also be carefully scrutinised because of the inequality in bargaining power between the parties, which inclines the courts towards non-enforcement of such covenants. In this regard, the courts have observed that generally no bargaining actually occurs at the time when the agreement is made, as the employee is presented with a standard form of contract, to accept or reject, and the employee usually gives little thought to the restriction because of his eagerness for 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 the time he originally commenced his employment. In concluding that the covenant did not protect a proprietary interest, the Hon’ble Bombay High Court held that the relief of injunction can only be granted to protect the proprietary interest of the plaintiffs. To prevent the pilots from leaving, the plaintiffs and joining competitor would not protect any proprietary interest of the plaintiff and it would clearly be against public policy to compel the defendant to be forced to work with the plaintiff merely because of the covenant. 156 Non-Compete Clauses - An International Guide - INDIA The Hon’ble Supreme Court of India has also observed in this regard that such a situation would amount to ‘economic terrorism’ or a situation creating conditions of ‘bonded labour’. The freedom to change employment to improve service conditions is a vital and important right of an employee which cannot be restricted or curtailed on the grounds that the employee is privy to data and confidential information with regard to customers. 3.3 Job changes Where an employee’s role and/or designation warrants a stringent 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 the termination of the employment contract remains the same. It may be pertinent to note that in a case of senior management, where an employee is privy to information which is highly confidential in nature, a non-solicitation clause may be arguable. 4. ENFORCEABILITY 4.1 General Indian courts generally do not look favourably upon negative covenants which operate after the termination of an employment contract, whether partial or general and have time and again refused to enforce them as being prima facie void. However, depending on the facts of the case, an employer may succeed in procuring an interlocutory or permanent injunction restraining an employee from divulging confidential and proprietary information, plus damages. Note that a restraint in an employment contract by which an employee binds himself during the term of the agreement directly or indirectly, not to take up employment or service with any other employer or be engaged by any third party has been held as valid and not a ‘restraint of trade’ contrary to Section 27 of the Indian Contract Act 1982. 4.2 Balance of interests As discussed earlier, an employer cannot restrict an employee from seeking employment with competitors after the termination of the employment contract, under any circumstances. An employer would only be able to protect his proprietary interest, namely his trade secrets, confidential information, intellectual property, etc. In such cases, the Courts may enforce negative covenants which restrict an employee from disclosing confidential information to competitors and soliciting clients, agents etc., of the employer. 157 Ius Laboris The case of Jet Airways Ltd. v Mr. Jan Peter Ravi Karnik (discussed in 3.2 above) indicates the stance of the Indian courts with regard to balancing an employer’s right to protect its proprietary interest and an employee’s right to employment. 4.3 Remedies The remedy for enforcement of a negative covenant is to seek an injunction from a competent court. Generally speaking, an injunction, whether permanent or temporary, is usually granted by the courts in cases where the harm arising from the breach of a negative covenant 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 negative covenants. It provides that the court does have the power to grant an injunction to perform a negative agreement, as long as the plaintiff has not failed to perform the contract so far as it is binding on him. The Hon’ble 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 negative 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 from disclosing confidential information (not general in nature) and trade secrets, the court may issue an injunction to enforce such a covenant. Non-Compete Clauses - An International Guide - INDIA Employee An employee can be restricted from seeking employment with any competitor only during the subsistence of the employment contract and not after termination of the same. 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 violates a negative covenant regarding confidentiality or solicitation, an employer may file a suit for injunction and damages. It may be pertinent to note that in the event of breach of such clauses, Courts in India 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 its breach. Damages cannot be awarded for any remote or indirect loss or circumstances. Hence, in such a situation an employer would have to prove loss of business/profits which are a direct consequence of the breach by the employee and which the parties knew at the time of making the contract, were likely to arise. 4.4 Penalty clauses As discussed earlier, since a negative covenant which operates after the termination of an employment contract is void, a penalty clause for its breach would also be unenforceable. However, a penalty clause may be incorporated in the employment contract to act as a deterrent. Relief by way of interlocutory injunction is granted to mitigate the risk of injustice to the employer during the period before the uncertainty regarding breach of the negative covenant can be resolved. The employer's need will be weighed against the need of the employee to be protected against injury arising, where he is prevented from exercising legal rights. The court weighs one need against another and determines where the 'balance of convenience' lies. A penalty clause which relates to breach of a confidentiality or non-solicitation clause may be enforceable. However, as mentioned above, the courts can only award damages which are a direct consequence of a breach and which the parties knew were likely to arise in the event of such breach, at the time of making the contract. In the event the parties to the employment contract had agreed on liquidated damages, the non-breaching party can only be entitled to reasonable damages, not exceeding the agreed amount. The grant of an interlocutory injunction during the pendency of legal proceedings is at the discretion of the court. In exercising this discretion the court applies the following tests: 4.5 Damages The question of damages with regard to breach of a post-employment negative covenant does not arise, as post-employment restraints are void and cannot be enforced. However, damages could be claimed by an employer from the employee in the case of breach of an employee’s obligations relating to protection of confidential information, trade secrets and intellectual property. • • • 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 his claim for an interlocutory injunction is disallowed. 158 159 Ius Laboris Non-Compete Clauses - An International Guide - INDIA 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 in breach of 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’ or ‘exclusivity’ clause in the employment contract whereby the employee is required to serve the employer exclusively during the term of the contract. Further, in cases of non-solicitation and confidentiality clauses, it is essential that such 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 the 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 the 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. 160 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 either by the legislature or the judiciary. It is quite common for an employee to be required to sign a non-solicitation agreement at the time of employment, where 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. However, the enforceability of such a clause is still a grey area, though in theory the odds may be in favour of enforcement. In VFS Global Services Private Limited v Mr. Suprit Roy, the Hon’ble 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 be in restraint of trade. The clause also restricted him from interacting with UK Visas and from using any contacts made with embassies or consulates while he was employed with the former employer. However, in Desiccant Rotors International Private Limited v Bappaditya Sarkar and Anr, the Hon’ble 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 are effective after termination of the employment contract, as they are void ab initio. A non-compete clause which operates during the term of employment would remain enforceable so long as the employment contract subsists, irrespective of insolvency of the employer. 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 being against public policy. 161 1. INTRODUCTION 165 2. CONDITIONS 165 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 165 165 165 166 166 3. REQUIREMENTS 167 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 167 167 168 4. ENFORCEABILITY 168 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 168 169 169 170 171 171 5. SPECIAL 171 SITUATIONS 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 171 172 172 172 172 173 Ireland Non-Compete Clauses - An International Guide - 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 165 Ius Laboris 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. However, notwithstanding the above, 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. 166 Non-Compete Clauses - An International Guide - IRELAND 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 for longer than six months is likely to be upheld. 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. 167 Ius Laboris 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 the factors referred to above. However the Courts 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: • • 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 168 Non-Compete Clauses - An International Guide - IRELAND • • 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. In terms of demonstrating that, 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 169 Ius Laboris upon both parties to confirm that they will not breach or induce the employer 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 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 170 Non-Compete Clauses - An International Guide - IRELAND 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 held up 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 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 171 Ius Laboris 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 As mentioned in section 3.2 above, 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. 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 publication of 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. 172 Non-Compete Clauses - An International Guide - IRELAND 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 Article 8(1) of the Rome I 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 work or the country in which the business is situated. Article 8(2) provides that to the extent that the law applicable to the individual employment contract has not been chosen by the parties, the contract shall be governed by the law of the country in which or, failing that, from which the employee habitually carries out his work in performance of the contract. Jurisdiction A jurisdiction clause enables the parties to agree which country’s Courts will have jurisdiction to hear a dispute arising out of a contract. In the absence of an effective jurisdiction clause, under EU law the forum for the hearing of disputes will be determined by Council Regulation 44/2001/EC on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (the ‘Brussels I Regulation’). Articles 18-21 of the Brussels I Regulation provide that an employer domiciled in a Member State may be sued either in the Courts of his domicile or in the Courts of a Member State where the employee usually works or worked or (where the employee does/did not carry out work in one place), where the business which engaged the employee is situated. The employer, however, may only bring proceedings against the employee in the Courts of the country in which the employee is domiciled. 173 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 177 177 177 178 178 3. REQUIREMENTS 178 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 178 179 180 4. ENFORCEABILITY 180 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 180 181 181 181 182 182 5. SPECIAL 182 SITUATIONS 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 182 183 183 183 184 184 Italy Non-Compete Clauses - An International Guide - ITALY 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 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 at 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. 177 Ius Laboris The parties can also provide for the right of one of them (usually the employer) to withdraw from the non-compete agreement. Case law states that this right must be exercised before the termination of the employment relationship, as if not, this option would be void. 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. 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. Non-Compete Clauses - An International Guide - ITALY considered separately from the benefit that could be derived by the employer from the restriction. Although employers need not 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 15-35% of their last annual gross remuneration for each year of a non-compete period, although in some recent cases compensation of more than 10% of the last annual gross remuneration for each year of the non-compete period has been deemed fair. 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. 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 will not be subject to social security contributions and 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 was held that a non-compete covenant throughout the whole of the EU was valid. However, again, it must not prevent the employee from having a source of income (e.g. a non-compete covenant that purported to extend world-wide). 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 178 179 Ius Laboris The parties are free to agree on the types of restricted activities. Case law has held that this resctriction 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 (see section 3.1 above), 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. 180 Non-Compete Clauses - An International Guide - ITALY 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: 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 (see section 4.4 below) 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 organisation 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. 181 Ius Laboris Non-Compete Clauses - An International Guide - ITALY 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. 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: 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 direclty 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 likely to injure another’s business (‘animus nocendi’). 5. SPECIAL 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. 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 can not be considered unfair competition. 182 • • 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. 5.3 Cross-border competition As explained in section 3.2 above, 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 extention 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 he or she can try to persuade clients, 183 Ius Laboris 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. 184 1. INTRODUCTION 189 2. CONDITIONS 189 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 189 189 189 189 190 3. REQUIREMENTS 190 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 190 190 191 4. ENFORCEABILITY 191 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 191 191 191 192 192 192 5. SPECIAL 193 SITUATIONS 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 193 193 193 193 194 194 Lithuania Non-Compete Clauses - An International Guide - 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 As mentioned in section 1 above, 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 this point – see section 1 above. 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. 189 Ius Laboris 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. 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 employee(s). 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. 190 Non-Compete Clauses - An International Guide - LITHUANIA 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. 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 191 Ius Laboris observing the clause if the employer fails to pay it. Furthermore, the employee may also ask the court to annul or moderate the scope of a non-compete clause in an action on the merits. Non-Compete Clauses - An International Guide - LITHUANIA 5. SPECIAL SITUATIONS Employer If the employee does not comply with a non-compete obligation, the employer may apply to the court for specific performance. 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. 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 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. 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. 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. 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. 5.3 Cross-border competition As explained above, 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. It is possible to claim both the penalty and damages in excess of the penalty, from the employee. 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. 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 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. 192 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. 193 Ius Laboris 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. 194 1. INTRODUCTION 199 2. CONDITIONS 199 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 199 199 199 200 200 3. REQUIREMENTS 200 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 200 200 201 4. ENFORCEABILITY 201 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 201 203 203 204 204 204 5. SPECIAL 204 SITUATIONS 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 204 205 205 205 206 206 Luxembourg Non-Compete Clauses - An International Guide - LUXEMBOURG 1. INTRODUCTION A non-compete clause must be agreed in writing and included in the employment contract. By virtue of a non-compete clause, the employee declares that, following the end of his or her employment, he or she will not engage in any independent activities which correspond to those of his or her former employer and which compromise the employer’s interests. Note that in Luxembourg it is not possible to prevent an employee from working in competition with the former employer if this is done through a new employer, as the Luxembourg labour code only serves to prevent former employees from running their own businesses and does not stop employees from working for competitors within the framework of new employment contracts. The legal provisions concerning non-compete clauses contained in employment contracts are laid down in Article L. 125-8 of the Luxembourg Labour Code. This article defines the conditions for the validity of non-compete clauses contained in employment contracts. 2. CONDITIONS 2.1 General Article L. 125-8 of the Luxembourg Labour Code sets out a number of formal conditions in order for the non-compete clause to be valid. Notably, the annual gross salary of the employee concerned must be at least EUR 47,875.60 (current threshold) on the day when the employee leaves the undertaking (Luxembourg salaries are indexed and this amount corresponds to the current index, 702.29). A non-compete clause applied to an employee who earns less than this amount is considered as non-existent. 2.2 Age A non-compete clause must be in writing (if not, the clause is void) and must be included in the employment contract or in an addendum to the employment contract. 2.3 Written form An employee who signs an employment contract or any modification of one containing a non-compete clause must be at least 18 years old. If the employee is less than 18 years old, the clause is considered as not having been written. 199 Ius Laboris 2.4 Renewal In the case of an extension and/or renewal of a fixed-term 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 from the previous contract remains applicable. If the employment contract did not include a non-compete clause, Luxembourg law does not prohibit employers from making any promotion conditional upon the employee signing a non-compete agreement. 2.5 Liability for compensation on dismissal A non-competion clause will not apply and cannot be enforced if the employer has terminated the employment contract with immediate effect for gross misconduct without the statutory right to do so or if the employer has terminated the employment contract without having observed the notice period provided for by Article L. 124-3 of the Luxembourg Labour Code. 3. REQUIREMENTS 3.1 General Note that 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 act in real competition with the employer, bearing in mind the nature of the company and its reach. It cannot be extended outside the Grand-Duchy of Luxembourg. A non-compete clause must also to be restricted to a specific professional sector as well as to professional activities which are similar to those performed by the employer. Note however, that the professional activities do not have to be similar to those performed by the employee – only those performed by the employer. A non-compete clause 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 the factors described in this and the previous section 200 Non-Compete Clauses - An International Guide - LUXEMBOURG have not been observed, the non-compete clause will not be applicable, insofar as it is contrary to law. 3.3 Job changes Luxembourg law does not prevent employers making a promotion conditional upon the employee signing a non-compete agreement, but the conditions and requirements described above must be respected. No distinction is made between different types of promotions. 4. ENFORCEABILITY 4.1 General Non-compete covenants must only be executed in line with the validity conditions set out above. The law does not require the payment of consideration. However, the employment contract may provide for consideration. In this case, the amount of it or the means of determining it must be clearly indicated in the contract. A mere indication that the amount will be determined in a further agreement between the parties is not precise enough. If the non-compete clause provides for payment of consideration by the employer, the employer may only unilaterally refuse to comply with the clause if the clause provides that option. If the employment contract does not allow for the employer to refuse to apply the non-compete clause, the employer can only do so with the employee’s consent. If, in litigation, the court decides that part of the non-compete clause is void, this part will not be applied by the court, but the rest of the clause will remain enforceable. For example, a clause prohibiting any activity similar to those conducted by the employer after the termination of the contract is contrary to law, because the law only authorises non-compete clauses which relate to independent activities. A clause prohibiting activities that are similar to those of the employer after the termination of the contract will not invalidate the entire non-compete clause, but the court will consider it to be enforceable only as it applies to independent activities of the employee after termination of the employment contract. Note that even if the entire non-compete clause is declared invalid, the employee will still be expected to respect the general principal of good faith (Article 1134, para 3 of the Civil Code). From the court’s point of view, wrongful acts of competition are disallowed by this article, both during and after termination of the employment contract. 201 Ius Laboris Generally, Luxembourg law provides for two kinds of actions in relation to unfair competition: • • a specific procedure called ‘action en cessation’, set out in the Law of 30 July 2002 on unfair competition Luxembourg common law – more specifically, contractual liability and liability in tort. The Law of 30 July 2002, as amended, prohibits unfair competition and implements Directive 97/55/EC, amending Directive 84/450/EEC concerning misleading advertising, so as to include comparative advertising. According to Article 14 of the Law, competition is considered unfair when an economic entity, whether a natural or legal person, undertakes, within its domain of activities and against one of its competitors, a wrongful act (i.e. an act contrary to honest commercial, industrial, trade and liberal practices or a breach of contractual obligations) in order to divert a part or all of its competitor’s customer base or to affect its competitor’s ability to compete. The Law allows any economic entity, whether a natural or legal person, to bring a ‘summary action’ or, an ‘action en cessation’ (i.e. an injunction) in order to obtain an order against a person infringing the Law before a summary judge. According to Article 23 of the Law, the action should be brought before the president of the District court in commercial matters (‘Tribunal d’arrondissement siégeant en matière commerciale’) and follows the same procedure as the summary procedure provided for by Articles 932 to 940 of the Civil Code of procedure. Non-Compete Clauses - An International Guide - LUXEMBOURG The main aim of Article 23 of the Law however, was not to provide for claims of damages but to enable any affected person, approved association or group to request the cessation of a wrongful practice without the need to prove harm was caused by it. If proceedings are initiated by the public prosecutor, the burden of proof rests with him or her, it being understood that the ‘parties civiles’ may bring further evidence in support of the action and their claim for 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 law. In so doing, the court is not entitled to weigh the interests of the employer in keeping the non-competion 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 or moderate the scope of a non-compete clause. 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. It should be stressed that an ‘action en cessation’ (injunction) procedure does not allow for financial compensation but only for a court order prohibiting the unfair commercial practice and publication of that order. Employer If the employee does not comply with the obligations contained in a non-compete clause, the employer may claim specific performance of the non-compete obligations. The court can be requested to impose penalty payments for as long as the employee does not comply with the non-compete obligations. Article 23 of the Law further provides for criminal sanctions and allows any person, professional grouping or representative consumer protection association, to sue a person for civil injury (‘partie civile’) before the criminal courts. This may be initiated either by the public prosecutor or by the parties themselves. The purpose of this procedure is to claim damages. If, despite the non-compete clause, the employee is running his own business in competition with his former employer’s business, the former employer may also bring a ‘summary action – employer’, that is, an ‘action en cessation’ (i.e. an injunction) in order to obtain an order against the former employee provided however that the employee is performing acts of unfair competition. 202 203 Ius Laboris Non-Compete Clauses - An International Guide - LUXEMBOURG If the employee fails to respect the non-compete clause, the employer may also bring an action before the Luxembourg courts based on tort, i.e. Articles 1382 and 1383 of the Civil Code. These provide that compensation is payable for any fault, act, negligence or imprudence. former employer’s customers by using the latter’s customer database. The employer will also have to prove that it suffered financial damage as a result of wrongful acts and that the damage is directly linked to the employee’s wrongful acts. Legal actions based on Articles 1382 and 1383 of the Civil Code require the plaintiff to prove that there was a failure to respect the non-compete clause, that harm was caused as a result of that failure and that there is a causal relationship between the failure to respect the clause and the harm caused. 5.2 Transfers of undertakings Pursuant to article L. 127-3 of the Luxembourg Labour Code, in the case of the transfer of an undertaking all rights and obligations of both the employer and employee will transfer to the transferee by operation of law. This includes all rights and obligations pursuant to any existing non-compete clause. 4.4 Penalty clauses It is in principle possible to stipulate that an employee is subject to a penalty payment if he or she breaches non-compete restrictions. 4.5 Damages Luxembourg law does not provide for any obligation to pay compensation as a means of enforcing a non-compete clause. However, the employment contract can provide for such compensation, though the amount of it, or a way to determine it, must be clearly indicated in the contract. 4.6 Liability of new employer There can be no liability of a new employer under Luxembourg law, as a non-compete clause merely asserts that, following the end of his or her employment, the employee will not engage in any independent activities corresponding to those of his or her former employer, which compromise the employer’s interests. 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 that of his or her former employer. The employee will only be liable for damages, if he or she acts wrongfully in relation to his or her former employer. As mentioned in section 4.1 above the employee must observe the general principal of good faith even after the end of the employment contract. The burden of proof of any wrongful act lies with the ex-employer and will be assessed very strictly. The former employer will have to be able to prove that the former employee had used unlawful methods, for example, contacting the 204 5.3 Cross-border competition As mentioned in section 3.2 a non-compete clause cannot be extended outside the Grand-Duchy of Luxembourg. Luxembourg law does not allow the parties to widen the geographical scope of non-compete restrictions to other countries. 5.4 Non-solicitation clauses According to case law, the following constitute acts of unfair competition as prohibited by Article 14 of the Law: the use by an economic entity of a competitor’s corporate name (‘protection de la dénomination commerciale contre le risque de confusion’), defamation of competitors and disparagement of competitors’ products (‘dénigrement’), poaching customers and employees of competitors (‘débauchage de clientèle et de salariés’). With regard to the poaching of employees or the solicitation of customers, case law considers that, although in general this is not reprehensible per se, it is an unfair practice deliberately to entice away employees or customers of competitors with the intent and effect of hampering or prejudicing competitors in their business or for the purpose of injuring, or destroying competitors, or preventing competition. The Law does not therefore prohibit competition, poaching or solicitation per se, but rather, the use of unfair methods. In the case of an act of unfair competition, for example the poaching of employees or the solicitation of customers by using unfair methods, the employer may also bring an action before the Luxembourg courts based on tort, i.e. Articles 1382 and 1383 of the Civil Code. Articles 1382 and 1383 of the Civil Code provide that compensation is payable for any fault, act, negligence or imprudence. 205 Ius Laboris Particularly in relation to poaching or solicitation, legal actions based on Articles 1382 and 1383 of the Civil Code require the plaintiff to prove the alleged unfair actions of the competitor, the harm caused and a causal relationship between the fault committed by the competitor and the harm caused. The assessment of any fault/act/negligence/imprudence will be analysed in abstracto, i.e. the judge will assess the fault by referring to the concept of an ‘homme normalement diligent, prudent et avisé, le bon père de famille’ (i.e. any person with a normal level of diligence, prudence and wisdom). Notwithstanding this objective analysis, the judge must also consider external circumstances, i.e. make a comparison between the behaviour of the accused and any wise individual confronted with a similar situation. 5.5 Insolvency If a company becomes insolvent, employment contracts will be terminated with immediate effect and the employees will in principle no longer be bound to any non-compete clause. As an alternative, the administrator may try to find a way to sell off valuable activities and/or restart the organisation. The administrator may therefore have an interest in holding the former employees to the obligations set out in a non-compete clause. 5.6 Enforceability of foreign non-compete clauses Foreign non-compete clauses will in principle be enforceable in Luxembourg on condition that foreign law applies and that the clauses are valid under the laws of the jurisdiction in question. 206 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 211 211 212 212 212 3. REQUIREMENTS 213 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 213 213 214 4. ENFORCEABILITY 215 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 215 215 216 216 217 217 5. SPECIAL 218 SITUATIONS 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 218 218 219 219 220 220 Netherlands Non-Compete Clauses - An International Guide - 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 Pursuant to 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. Apart from conditions of a substantive nature, the law sets out the following formal conditions in order for a non-compete clause to be valid. 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. 211 Ius Laboris 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, recently 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. Non-Compete Clauses - An International Guide - NETHERLANDS • • the employment is terminated without the correct notice period the employer gives the employee justifiable cause to terminate the employment with immediate effect. According to the Surpreme Court, a non-compete clause remains valid if the employer and employee upon termination of the employment have agreed that the employer will pay a severance amount. Based on recent case law it is advisable to explicitely mention the applicability of the non-compete clause in the termination agreement. The lower courts sometimes find reason to hold employers quite broadly liable, meaning that where an employer is found to be fully to blame for a termination of employment, a related non-compete clause may also be declared invalid 3. REQUIREMENTS 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 confirmingextension/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 An employer cannot invoke a non-compete clause if the employer is liable for damages following wrongful termination of the employment. Liability of this kind occurs in the following situations: • • the employer has terminated the employment of the employee with immediate effect, without justifiable cause the employer has terminated the employment of the employee with immediate effect, but has not informed the employee in a timely way of the reason for the dismissal 212 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 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. 213 Ius Laboris 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 recently 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. Non-Compete Clauses - An International Guide - NETHERLANDS 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 complies with the formal requirements described above, 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: • • • • • 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. • • • 214 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. 215 Ius Laboris 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 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 4 (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. 216 Non-Compete Clauses - An International Guide - NETHERLANDS 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 4 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. 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. There was a legislative proposal to make compulsory the payment of compensation for the full duration of non-compete clauses, but this was rejected by the Upper House (Eerste Kamer) in 2006 and the law remained as it was. 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 217 Ius Laboris Non-Compete Clauses - An International Guide - NETHERLANDS 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 (as discussed in section 3.3). 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. In a recent case of the lower court in The Netherlands it was decided that the transfer of an undertaking into another legal form or the division of the organisation will not in all circumstances qualify as 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 218 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 As explained in section 3.2, 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. 219 Ius Laboris 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. 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. 220 1. INTRODUCTION 225 2. CONDITIONS 225 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 225 227 227 227 227 3. REQUIREMENTS 228 3.1 General 3.2 Geographical, functional and temporal limitations 228 228 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 229 229 229 230 230 231 5. SPECIAL 231 SITUATIONS 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 231 231 231 231 232 232 Norway Non-Compete Clauses - An International Guide - NORWAY 1. INTRODUCTION 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 competitive business after termination of the employment contract. During the employment, any potential competitive activities by the employee will normally be regarded as a (serious) breach of the unwritten duty of loyalty in the employment relationship. It is, therefore, normally not necessary to include a non-compete clause in the employment agreement regulating the situation for the duration of the employment agreement. The non-compete clauses addressed in this document are entered into between an employee and an employer with effect for a period after termination of the employment agreement. However, non-compete clauses also occur in other similar circumstances, e.g. as part of a Share Purchase Agreement with an entrepreneur or in relation to the transfer of a business. Clauses preventing an employee from having contact or taking over the former employer’s customers (non-solicitation clauses) or employees (non-poach clauses) are briefly commented on in section 5.4 below. 2. CONDITIONS 2.1 General Non-compete clauses are regulated by Article 38 of the Norwegian Contract Act of of 31 May 1918 No 4 (Contract Act). The main rule is that a non-compete clause cannot be agreed upon with employees who do not have managerial positions. There are, however, some exceptions, for Employees without managerial positions, see below. Further, a non-compete clause may be invalid, either completely or partially: • • if the clause is found to unreasonably limit the employee´s access to work or if the clause is regarded as including more than necessary to prevent the former employee from acting in competition. If one of these conditions is fulfilled the clause may be held invalid or reduced by the court. A non-compete clause may also be held invalid based on the grounds for termination of the employment contract (see section 2.5 below). 225 Ius Laboris In the following we will describe the situations in which a non-compete clause may be invalid, either completely or partially, according to Article 38 of the Contract Act and based on case law. Agreements that unreasonably limit the employee´s access to work In principle the employer and the employee may agree upon limitations in the employee's access to work as long as these are not unreasonable. Whether the agreement is unreasonable is subject to an overall evaluation. Both the employer's and the employee's situation must be considered, though the employee's situation after termination is particularly important (see section 3.2 below). If an employee is granted compensation in consideration for agreeing to a non-compete clause, the fact that compensation has been offered and the amount of it, will be significant. It is, however, not a condition for validity that compensation is agreed upon. Agreements that include more than necessary to prevent competition According to Article 38 Section 1 of the Contract Act, a non-compete clause may also be considered invalid if the clause is regarded as being more extensive than necessary to prevent competition. Non-Compete Clauses - An International Guide - NORWAY Employees without managerial positions Pursuant to Article 38 Section 2 of the Contract Act, a non-compete clause cannot be agreed upon with employees who do not hold managerial positions. There are however some exceptions. A non-compete clause may be agreed upon between an employer and an employee who is not a manager if the employee has knowledge of the employer’s clientele and trade secrets and this knowledge may be used to significantly harm the employer. The clause may however still be invalid or reduced in court if it: • • is found to limit the employee´s access to work unreasonably or is regarded as going further than necessary to prevent the former employer from competing. Precisely which non-managerial employees could be considered is not exhaustively regulated and must be considered case by case. 2.2 Age Minors will normally not be in a position where a non-competiton clause will be valid, see 2.1 above. An employee's knowledge of the employer's clientele and trade secrets may justify a non-compete clause. A knowledge of trade secrets may, however, not necessarily justify a lengthy non-compete clause if the information will not remain current for long. Knowledge which is well-known within the corporate market in question will not be considered to be a trade secret and will not normally be sufficient to justify a non-compete clause for a longer period. Further, within businesses where trade secrets are uncommon it will be more difficult to enforce a non-compete clause. On the other hand, know-how and information that is time-consuming to attain may be considered to be trade secrets in this respect and justify the non-compete clause. 2.3 Written form According to Article 14-6 of the Norwegian Working Environment Act of 17 June 2005 No 62, the contract of employment must state factors of significance for the employment relationship. It is, therefore, advisable to insert any non-compete clause in the employment agreement and ensure it is signed by both parties. With regard to knowledge of the employer's clientele, the evaluation of the validity of a non-compete clause involves assessing whether the employer's relations have been stable and longlasting. Further, the employee's personal relations to clientele may be of significance. 2.5 Liability for compensation on dismissal As mentioned above, any non-compete clause should be considered on a case by case basis. 226 2.4 Renewal There are no particular regulations regarding the renewal of contracts. The same conditions as described in Articles 14-6 of the Working Environment Act will apply. Termination of the employment based on circumstances relating to the employer Pursuant to Article 38 Section 3 of the Contract Act, a non-compete clause will automatically be invalid if the employer terminates the employment based on circumstances relating to the employer`s situation. Non-compete clauses will for instance, therefore, lapse if the employer terminates the employment contracts because of a reorganisation or redundancy. 227 Ius Laboris Further, a non-compete clause will lapse if the employee’s resignation is caused by the employer`s failure to fulfill its obligations under the employment contract, e.g. non-payment of salary. It is, however, an open question as to whether a non-compete clause would lapse if the employee´s resignation were caused by circumstances other than breach of the employment contract by the employer, e.g. harassment between colleagues (bad work environment) etc. Termination of the employment based on circumstances relating to the employee If an employment agreement is terminated because of circumstances relating to the employee, the issue will be whether or not the dismissal is objectively justified under Article 15-7 of the Working Environment Act. If it is justified, the non-compete clause will remain valid. If the dismissal is unlawful the clause will lapse should the employee decide to leave the company as a consequence of the unlawful dismissal. 3. REQUIREMENTS 3.1 General The wording of a non-compete clause should be clearly formulated. Case law shows that any lack of clarity in the wording of a non-compete clause must be explained in terms of the intentions and expectations that both parties could reasonably have had from each other when they agreed on the clause. If this does not provide the necessary clarity, the clause will generally be interpreted in a way which is favourable to the employee. 3.2 Geographical, functional and temporal limitations The more specific the non-compete clause, the higher the chances that it will not be annulled in any possible court procedure. This is especially true as concerns the geographical scope of the clause and the type of employment (business sector). When considering the reasonableness of the clause, any limitation of business sector(s) and/or geographical scope will be of significance. A clause may more easily be found invalid if it involves large business sectors and/or geographical scope. It will also be of significance if the employee is very specialised within the business sector and, therefore, has fewer options for finding work outside that sector. Non-Compete Clauses - An International Guide - NORWAY and find work, it does not guarantee the right to find the same kind of work, or work within the same business sector. The maximum length of a non-competion clause is not determined by law, but case law seems to accept that a non-compete clause without compensation may last for up to one year. In a few cases a limitation of up to two years has also been accepted. However, non-compete clauses should always be considered on a case by case basis. 4. ENFORCEABILITY 4.1 General The former employer can bring an action against the employee and/or the competitor/new employer before the court of justice and claim temporary precautionary measures to stop the breach of the non-compete clause. Based on case law, former employers often succeed if they can prove a breach of contract and the need for a preliminary prohibition. 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 interests are often relevant: • • • • • • • • the employee´s position the reason for termination of the employment the employee´s access to work on the labour market after the termination any potential financial loss stemming from the employee’s knowledge of specific trade secrets of the company and/or contact with customers or other important relations of the employer length of service before termination duration of the non-competiton clause compensation geographical scope. 4.3 Remedies Interlocutory injunctions are often initiated by the employer in conflicts regarding non-compete clauses to prevent harm and competition. In interlocutory proceedings, only provisional measures can be issued and these rulings apply until the court has settled the dispute. The impact of a non-compete clause on an employee´s ability to find work will be of significance. However, although the provision protects the right to try 228 229 Ius Laboris Employee The employee may also bring interlocutory injunction proceedings against the employer; file a petition to suspend the non-compete clause in interlocutory proceedings; and issue a writ in order to annul or moderate the non-compete clause. This is, however, rather unusual. Normally it is the employer who first files for interlocutory injunctions. Employer If the employee does not comply with the obligations set out in a non-compete clause, the former employer can choose to start interlocutory injunction proceedings against the employee to prevent him/her from entering into service with a competitor. The former employer can also make a similar claim against the competitor/new employer to prevent it from employing the employee in a competing business. Whether or not an interlocutory 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 a preliminary prohibition 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 also issue a writ claiming non-compliance with non-compete obligations and claim for damages (both for actual and potential harm). Such a writ may be issued at the same time as a request for an interlocutory injunction or at a later stage. 4.4 Penalty clauses In order to safeguard adherence to a non-compete clause, a penalty clause can be included in the employment contract consisting of a particular sum. 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. 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 to be invalid by the court, either wholly or partially, if it would be considered unreasonable under Article 36 of the Contract Act. 4.5 Damages The former employer can claim damages for a variety of harm caused by breach of a non-compensation clause and documented by evidence. The type of compensation will vary from business to business and whether the claim is brought against the (former) employee against or the competitor/new employer. 230 Non-Compete Clauses - An International Guide - NORWAY 4.6 Liability of new employer Not only the employee, but also the new employer can be found to have acted wrongfully against the former employer if it hires an employee in breach of a non-compete clause to which the employee is subject. The new employer may be considered to have acted in defiance of good business practice under Article 25 of the Norwegian Marketing Control Act of 9 January 2009 No 2, if it has appointed an employee who is bound by a non-compete clause or has instructed him or her to work in breach of a non-compete clause. In these cases, interlocutory measures may be granted against the new employer (see also section 4.3 above). 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 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 if the employee has acted negligently and, as a result, caused loss to the former employer, e.g. by the disclosure of business secrets. The burden of proof that a wrongful act took place lies with the former employer. Interlocutory measures may also be granted against the new employer. 5.2 Transfers of undertakings All rights and obligations of both employer and employee will transfer to the transferee by operation of law and 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 Norway or a region of Norway. It is possible for the parties to agree on a wider territory, e.g. Europe. Whether the employer will be able to enforce a restrictive covenant in other jurisdictions will depend on how the employer’s interests are weighed against the employee’s. 5.4 Non-solicitation clauses A non-solicitation obligation means that the employee is not allowed to contact clients/customers/relations of the former employer for a certain period 231 Ius Laboris after termination of the former employment relationship. Compliance with a non-solicitation clause can be linked to a penalty clause. However, a ‘non-solicitation clause’ is not a legal term and general contract law applies, in particular, Article 36 of the Contract Act. Similarly, a ‘non-poach clause’, i.e. a clause in which an employee is prohibited from recruiting or encouraging a person to recruit the former employer´s employees, is not a legal term and general contract law will apply in the same way. 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 activities or make a restart. The administrator may, therefore, have an interest in ensuring the employees keep to any obligations they may have pursuant to a non-compete clause. However, a non-compete clause will automatically be void if the dismissal is caused by the 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 conflict of 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. 232 1. INTRODUCTION 237 2. CONDITIONS 237 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 237 237 237 238 238 3. REQUIREMENTS 238 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 238 238 239 4. ENFORCEABILITY 239 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 239 239 240 240 240 241 5. SPECIAL 241 SITUATIONS 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 241 241 241 241 242 242 Poland Non-Compete Clauses - An International Guide - POLAND 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. 237 Ius Laboris Non-Compete Clauses - An International Guide - POLAND 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. 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. 2.5 Liability for compensation on dismissal A non-compete agreement will be valid even if the employer is liable for unlawful dismissal. 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 in force. 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 risk attached to making agreements for too long, Further, the employer has the right to dismiss any employee who refuses to enter into a non-compete agreement. 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 20% of the employee’s earnings from the last year of employment. It is recommended that the compensation be paid in monthly installments. 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. 238 A non-compete agreement for the duration of the employment is binding until termination of the employment. 3.3 Job changes Changes in position do not influence non-compete agreements. 4. ENFORCEABILITY 4.1 General The enforcement of non-compete clauses by means of specific performance is extremely 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. See also section 4.5. 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 and limitation of duration) as well as the general requirements for contracts (e.g. the intention of the parties to conclude an agreement). 239 Ius Laboris Non-Compete Clauses - An International Guide - POLAND 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. 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. 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. 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. In theory, to a certain limit this also prevents an employee from conducting competing activities (compare with section 1. above). 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. The employee’s liability is limited, as described in section 4.3 above. 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’ According to a recent Supreme Court ruling, 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. The right to terminate a non-compete agreement ‘upon notice’ can be exercised only in the circumstances specified in the agreement. 240 5. SPECIAL SITUATIONS 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. It is however a matter of debate as to whether a non-compete agreement which operates after termination of employment would be binding on the employee and the transferee. 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 (see section 3.2 above). 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 241 Ius Laboris 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. 5.5 Insolvency Insolvency does not affect non-compete obligations. A non-compete agreement following termination of employment may be withdrawn with immediate effect if an organisation had been declared ‘bankrupt’ by the court. 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. 242 1. INTRODUCTION 247 2. CONDITIONS 247 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 247 248 248 248 248 3. REQUIREMENTS 248 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 248 249 249 4. ENFORCEABILITY 250 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 250 250 250 251 251 252 5. SPECIAL 252 SITUATIONS 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 252 252 252 253 253 253 Portugal Non-Compete Clauses - An International Guide - PORTUGAL 1. INTRODUCTION The Portuguese Constitution sets forth the general principle of freedom to work. This principle forbids unreasonable limitations to 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 CBA 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 also the legitimate interests of the employer, it is possible to agree a non-compete clause, provided that the conditions described below 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 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 or indirect harm may be covered. 247 Ius Laboris 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. 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 (see section 3.3 below). 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 248 Non-Compete Clauses - An International Guide - PORTUGAL 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. 3.2 Geographical functional and temporal limitations For the employer, any competition is a risk, either from a geographical or from a 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 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). According to the Code, a non-compete clause is valid for a maximum period 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 For the reasons explained above, 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. 249 Ius Laboris 4. ENFORCEABILITY 4.1 General The enforceability of a non-compete clause is dependent on its reasonableness. The factors to be taken into account in determining reasonableness have been described above, 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. Non-Compete Clauses - An International Guide - PORTUGAL 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 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: • 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. • • 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 250 251 Ius Laboris Non-Compete Clauses - An International Guide - PORTUGAL employee’s basic 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 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 • • 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 therefore subject to the same legal regime as described above. 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. 5.2 Transfers of undertakings According to the 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. 5.5 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. 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: 252 253 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 257 258 258 258 258 3. REQUIREMENTS 258 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 258 258 259 4. ENFORCEABILITY 259 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 259 259 259 259 259 259 5. SPECIAL 259 SITUATIONS 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 259 259 259 259 260 260 Russia Non-Compete Clauses - An International Guide - 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 set forth in Article 2 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 the abovementioned 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 Russian Labour Code stipulates that 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, e.g. via the conclusion of confidentiality agreements with employees in order to ensure 257 Ius Laboris Non-Compete Clauses - An International Guide - RUSSIA that they do not use information comprising commercial secrets (production secrets) of the company in order to violate its interests, either whilst employed with the company or afterwards. 3.3 Job changes Not applicable. The provisions of Russian law on the protection of information comprising commercial secrets (including production secrets) of the company are 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 the 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. 4. ENFORCEABILITY The obligation not to disclose to any person and keep confidential any information comprising commercial secrets (i.e. production secrets, as defined by law) of the company, its clients, its affairs, finances or business other than information which is generally known or easily accessible by the public, applies until the exclusive right of the company to the relevant production secret ceases. 4.1 General As mentioned above, 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. 2.2 Age Not applicable. 4.6 Liability of new employer Not applicable. 2.3 Written form Not applicable. 5. SPECIAL 2.4 . Renewal Not applicable. 5.1 No clause Not applicable. 2.5 Liability for compensation for dismissal Not applicable. 5.2 Transfers of undertakings Not applicable. 3. REQUIREMENTS 5.3 Cross-border competition Not applicable. 3.1 General Not applicable. See above. SITUATIONS 5.4 Non-solicitation clauses The term ‘non-solicitation clause’ does not exist in Russian law and is thus not applicable. 3.2 Geographical, functional and temporal limitations Not applicable. 258 259 Ius Laboris 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 thereunder 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 fundamentally opposed to the mandatory statutory norms of Russian legislation. 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 of his or hers which are located outside Russia. 260 1. INTRODUCTION 265 2. CONDITIONS 266 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 266 266 266 266 266 3. REQUIREMENTS 266 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 266 266 266 4. ENFORCEABILITY 266 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 266 267 267 267 267 267 5. SPECIAL 267 SITUATIONS 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 267 267 267 267 267 268 Slovak Republic Non-Compete Clauses - An International Guide - SLOVAK REPUBLIC 1. INTRODUCTION Non-compete clauses which apply after termination of employment are not permitted under Slovak law. The Slovak Labour Code provides for a general prohibition on employees from performing gainful activities for any other undertaking that carries out the same type of business as their employer during the term of the employment contract. This prohibition applies to all employees and to whatever kinds of activities the employee might perform for other undertakings carrying out the same business activities as their employer (regardless of the job performed by the employee), i.e. the prohibition does not apply to the job performed by the employee but to the activity of the employer. An employer’s activity is found in the company’s listing in the Commercial Register. Please note that Slovak courts interpret competitive activity very formally based simply on the trade licences listed in the Commercial Register. Therefore, even two companies selling goods in different areas (e.g. selling cars and toys) may be considered as competitors. Please note that the Labour Code only prohibits performing competitive activities during an employee’s employment relationship. It is not possible, however, to restrict an employee’s competitive activity after his or her employment has terminated. If the employment agreement contains a clause governing the activities of the employee after termination of the employment agreement (a ‘non-compete clause’), this could not have been validly agreed and would therefore be void and unenforceable. In addition, the Work Inspectorates can impose a fine of up to EUR 100,000 if they discover that the employer has concluded a non-compete clause with its employee. The employer thus has no means of preventing 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 cannot limit an employee’s right to freedom of employment or freedom of performance of a gainful activity. The only restriction that can be imposed on employees is the prohibition of unfair competition regulated by the Commercial Code. The Commercial Code also considers the exploitation of trade secrets to be unfair competition. The protection relating to the exploitation of trade secrets lasts even after termination of the employment relationship with the employee. 265 Ius Laboris 2. CONDITIONS 2.1 General The conclusion of a non-compete clause is prohibited, even if compensation would be provided for the employee for not competing. Competing during the term of employment is prohibited directly by the Labour Code (conclusion of a separate agreement is not required), unless the employer has provided the employee with written consent for performance of a gainful activity for another employer. 2.2 Age Not applicable. 2.3 Written form Not applicable. 2.4. Renewal Not applicable. Non-Compete Clauses - An International Guide - SLOVAK REPUBLIC Note that if the employee breaches the non-compete obligation during the term of employment, he or she breaches the obligations arising from the Labour Code. The employer may thus consider this as a breach of work discipline that may establish grounds (if all conditions stipulated by the Labour Code are met) for dismissal of the employee. 4.2 Balance of interests Not applicable. 4.3 Remedies Not applicable. 4.4 Penalty clauses Not applicable. 4.5 Damages Not applicable. 4.6 Liability of new employer Not applicable. 2.5 Liability for compensation for dismissal Not applicable. 5. SPECIAL 3. REQUIREMENTS SITUATIONS 5.1 No clause Not applicable. 3.1 General Slovak law sets out no requirements for non-compete clauses, since concluding any such clause is prohibited. 5.2 Transfers of undertakings Not applicable. 3.2 Geographical, functional and temporal limitations Not applicable. 5.3 Cross-border competition Not applicable. 3.3 Job changes Not applicable. 5.4 Non-solicitation clauses Not applicable. 4. ENFORCEABILITY 5.5 Insolvency Not applicable. 4.1 General If a non-compete clause were to be concluded, it would be unenforceable. Thus the employer and employee cannot successfully require fulfilment of such a clause before a court. 266 267 Ius Laboris 5.6 Enforceability of foreign non-compete clauses There is no Slovak case law which would relate to this issue. Therefore, we may not exclude the possibility that the Slovak courts would consider foreign non-compete clauses to be unenforceable as contrary to mandatory rules which do not permit the conclusion of non-compete clauses (although, unfortunately, there is no list of Slovak mandatory rules to which we can refer). However, we believe that each non-compete clause should be considered separately on its merits, so that for example, if the clause were to contain compensation corresponding to the employee’s previous salary (which is obligatory in the Czech Republic, for example), we could imagine that if the employee him- or herself required enforcement, the clause would in fact be enforceable in Slovakia. 268 1. INTRODUCTION 273 2. CONDITIONS 273 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 273 275 275 275 275 3. REQUIREMENTS 276 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 276 277 278 4. ENFORCEABILITY 278 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 278 278 278 279 279 279 5. SPECIAL 279 SITUATIONS 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 279 279 280 280 280 280 Spain Non-Compete Clauses - An International Guide - SPAIN 1. INTRODUCTION Article 38 of the Spanish Constitution recognises the freedom of business within the market economy and incorporates the concept of a liberal economy and market system into the Spanish legal system. This system consists of private companies which compete with each other to succeed in their respective markets. In order to prevent market disruption as well as abusive or unfair competition, and following the 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’. Furthermore, 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 services he renders 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 rendering 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 rendering 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. 273 Ius Laboris As mentioned, labour law does not ban any of these activities expressly and so both are permitted in the Spanish labour market. However, both 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, as suggested in Articles 5a) and 20.2 of the Workers´ Statute. 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 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. 274 Non-Compete Clauses - An International Guide - SPAIN However, there is no unfair competition when the employer knows and consents or if the employee does not conceal it. Further, it will not amount to unfair competition if employer and employee have agreed to extend the non-compete obligation to non-work periods, such as holidays or over a period of leave. 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 notion that an employer can prevent an employee from working for another organisation after termination is contrary to the principles described in section 1 above. 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 timelimits. 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 unless parties have agreed that it will terminate by reason of the dismissal. Exclusive dedication agreements If the employee does not comply with an exclusive dedication agreement, this will give rise to a right to dismiss the employee for having an unlawful source of income contrary to good faith. This is separate from any right that the employee may have to compensation. Courts often quantify damages in terms of the amount set out by parties as compensation in their agreement. 275 Ius Laboris Non-Compete Clauses - An International Guide - SPAIN 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: 276 • 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 increased the smaller the field of competition, the lower the compensation should be. 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 the provisions of 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. 277 Ius Laboris 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. However, in section 4.3 below we analyse the remedies that the parties have pursuant to case law. 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. Non-Compete Clauses - An International Guide - SPAIN 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. 4.2 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 consider whether the industrial or business interests of the former employer are real and whether the financial compensation is adequate. 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. 4.3 Remedies 5 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 it was agreed. 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. 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-compensation agreement, the employer is entitled to request a refund of any compensation paid to the employee and to request 278 SPECIAL SITUATIONS 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. 279 Ius Laboris 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 rules described above, 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. 280 1. INTRODUCTION 285 2. CONDITIONS 285 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 285 286 286 286 286 3. REQUIREMENTS 286 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 286 288 288 4. ENFORCEABILITY 288 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 288 289 289 290 290 290 5. SPECIAL 291 SITUATIONS 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 291 291 291 292 292 292 Sweden Non-Compete Clauses - An International Guide - SWEDEN 1. INTRODUCTION During employment, the employee has a far-reaching duty to exhibit loyalty towards the employer. The employee may not act in any manner which is detrimental to the employer, e.g. 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 the 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 on the basis of the Contracts Act if they go beyond what is deemed reasonable. In addition, limits are imposed on the use of non-compete clauses under a 1969 collective agreement covering white-collar workers in the manufacturing industry (the ‘CBA’). 2. CONDITIONS 2.1 General There is nothing in Swedish legislation prohibiting the use of non-compete clauses in employment relationships per se but according to Article 38 of the Contracts Act, 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. Further, a non-compete clause may be tested against the general clause of the Contracts Act (Article 36) and adjusted to the advantage of the employee if found unreasonable. This usually happens in relation to the amounts of any penalties for breach. In relation to Article 38 of the Contracts Act, case law is usually based on the CBA mentioned above. The CBA has over the years become a source of great importance to the application of the law with regard to non-compete clauses for employees. The aim of the CBA is to limit and regularise the use of competition and secrecy clauses in detail. Employers bound by the CBA (the majority of the employers in industry) are legally prohibited from agreeing non-compete clauses that are less favourable to the employee than the provisions laid down in the CBA. Hence, deviations from the CBA can only occur in other, smaller parts of the Swedish labour market. 285 Ius Laboris 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. Non-Compete Clauses - An International Guide - SWEDEN the scope of the CBA unfavourably. Hence, the central elements of the CBA are listed below. Scope • 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), 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 any non-compete clause. 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. • 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 could prohibit the employee from: • 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 or 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 286 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. • • 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. 287 Ius Laboris 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 mentioned in the Contracts Act or in the CBA, the more specifically the 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 24 months or, if the estimated life of the know-how is short, 12 months. Non-Compete Clauses - An International Guide - SWEDEN 4.2 Balance of interests Case law demonstrates that the Labour Court has taken the last remark quite literally. Thus, the court has declared that a non-compete clause which is outside the scope of the CBA, for example in the consulting business or IT, cannot be regarded as unreasonable and invalid per se, but that it 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 CBA has not directly applied (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 to 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 compensation envisaged under the CBA, may involve generous employment conditions or high severance pay. 3.3 Job changes Where an employee´s job changes, this could have an affect 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-competetition clause should be reaffirmed or amended if necessary, in writing. 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. 4. ENFORCEABILITY 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. 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 that Article 38 of the Contracts Act should be compared to and interpreted in accordance with the CBA, although it noted that the fact that conditions in different areas of the labour market vary considerably, should be taken into account. 288 The employee may start proceedings either during employment or after it has ended. 289 Ius Laboris 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. 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. Non-Compete Clauses - An International Guide - SWEDEN the mere fact that it has hired an employee who was known to be restricted by a non-compete clause. However, according to the Trade Secrets Act, special circumstances may impose 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 It is possible to claim both the penalty and damages from the employee if the actual loss exceeds the penalty. 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 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. 4.5 Damages An employee who has engaged in competitive actions, including breaching a non-compentition 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. 5.2 Transfers of undertakings Pursuant to Section 6b of the Employment Protection Act all rights and obligations of both employer and employee will transfer to the transferee by operation of law. This includes any rights and obligations in relation to non-compete clauses. 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. 5.3 Cross-border competition As explained in section 3.2, 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, e.g. Europe. 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. 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 290 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, 291 Ius Laboris 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. Non-Compete Clauses - An International Guide - SWEDEN In sum, if the Swedish regulation regarding non-compete clauses is more favourable to the employee than the law chosen by the parties, the Swedish regulation will apply. 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 fulfill 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 1980 Rome Convention on the law applicable to contractual obligations, and this was incorporated into Swedish law by an Act of 1998. The basic principles of the Convention, and hence the Swedish Act, are that the contracting parties 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, inter alia, 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). 292 293 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 297 298 298 299 299 3. REQUIREMENTS 299 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 299 300 301 4. ENFORCEABILITY 301 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 301 302 302 303 303 303 5. SPECIAL 304 SITUATIONS 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 304 304 304 305 305 305 Switzerland Non-Compete Clauses - An International Guide - SWITZERLAND 1. INTRODUCTION By virtue of his or her general duty of fidelity, the employee is prohibited from competing against the employer for the period of the employment relationship. Thereafter, the employer maintains, to a certain extent, a justifiable economic interest in restricting competing activities from former employees. In this context, in order to extend the non-compete obligation of employees after the end of the employment relationship, the employer is permitted to incorporate a ‘non-compete clause’ in the employment agreement. If the employment contract includes a non-compete clause, the employer may be entitled to prevent employees from performing activities for a competitor or establishing his or her own business even after the end of the employment relationship. Inasmuch as a non-compete clause represents a significant restriction on the employee’s economic freedom, its validity and enforceability are subject to several conditions and limitations. Further, even if these conditions and limitations are met, Swiss courts must always take into consideration all the concrete circumstances at hand in order to determine whether the application of the non-compete clause would represent an unreasonable impairment of the employee’s economic interests. 2. CONDITIONS 2.1 General As a matter of principle, the parties to the employment contract are free to agree upon a non-compete clause, provided that the conditions and limitations of Articles 340 and following of the Swiss Code of Obligation (‘CO’) are complied with. According to Swiss law, a non-compete covenant is only binding if the employee has access during the employment relationship (i) to customers or (ii) to manufacturing or business secrets, and (iii) the use of these could significantly harm the employer. The law does not aim to protect occasional or prospective customers but is focussed on regular clientele of the employer. According to the Swiss Federal Supreme Court, an employee has access to customers if he or she has a 297 Ius Laboris personal relationship which allows him or her to know customers’ requests and needs as well as their views and peculiarities. Manufacturing secrets cover all kinds of technical information. Business secrets refer to commercial aspects of the company (e.g. price structure, suppliers, etc.). The term ‘secrets’ comprises all facts that should be kept from the public and are not considered to be common knowledge. An employee has access to such secrets if he or she has the opportunity to gain knowledge of them, regardless of whether use is made of the opportunity. The employer will be considered to suffer significant harm if it is established that there is any direct or indirect interference with the employer’s competitiveness or any deterioration of its economic position. In addition, a non-compete clause will lapse as soon as the employer ceases to have any substantial interest in its enforcement. For example, this may be the case if the employee cannot cause any significant damage to the employer by using the relevant knowledge; or in the event of business closure or if there is a change in the employer’s line of business. That being said, a non-compete clause will lapse only if the employer’s interest ceases to exist for the whole of the remaining period of the non-compete obligation. It does not lapse if the employer’s interest only ceases for a temporary period. 2.2 Age A non-compete clause may only be entered into with an employee who has legal capacity, i.e. the employee has reached the age of maturity (he or she 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, it will be void. Non-compete clauses may not be included in an apprenticeship contract. 2.3 Written form A non-compete clause must be in writing. It is advisable to include such clause in the individual employment contract which is signed by both parties. A separate, written and signed addendum to the employment contract may represent an alternative. Generally, a simple reference to an unsigned regulation or personnel handbook containing a non-compete clause, does not fulfil the requirement of an agreement in writing. 298 Non-Compete Clauses - An International Guide - SWITZERLAND 2.4 Renewal There is no statutory provision which requires a non-compete clause to be renewed upon the renewal of an employment contract. However, it may be advisable to review the non-compete clause upon the renewal of an employment contract. Please note that any modification of a non-compete clause must be done in writing (see section 2.3 above). 2.5 Liability for compensation on dismissal In order for a non-compete covenant to be enforceable after the end of the employment relationship, either the employer must terminate the employment relationship for a justified reason or the employee must terminate the employment relationship without any justified reason. Otherwise, the non-compete clause will lapse even if it states that it will survive the end of the employment contract irrespective of the cause of termination. In this context, the grounds for termination must be based upon the employee’s behaviour. Purely objective reasons (such as internal corporate reorganisation) are not sufficient to maintain the validity and enforceability of the non-compete clause after termination of the employment contract. According to the Swiss Federal Supreme Court, in cases where the employment relationship is termined by mutual agreement, a non-compete clause may still lapse for lack of justified reasons for termination. To avoid such a lapse, it is recommended that an explicit non-compete covenant should be included in a written termination agreement and, depending upon the circumstances, it should provide for a specific indemnity as compensation for the non-compete obligation. 3. REQUIREMENTS 3.1 General According to Swiss law, a non-compete clause must be limited in terms of geographical scope, duration and subject matter in order to prevent an unreasonable impairment of the employee’s economic prospects. Mandatory provisions of Swiss law state that the economic prospects of the employee may be affected only when justified by the employer’s legitimate interests. This requires a case by case analysis of both parties’ interests: the interests of the employer in applying the non-compete clause and the opposing interests of the employee. In balancing these interests, the principle of economic freedom, guaranteed by the Swiss Constitution, must be taken into account. 299 Ius Laboris Non-Compete Clauses - An International Guide - SWITZERLAND Non-compete clauses often constitute a unilateral commitment by the employee, but they may provide compensation for the employee for compliance with its terms. Even though compensation is not compulsory under Swiss law, it is of great significance in practice and it will significantly increase the chance that the courts may find the clause fully enforceable (please see section 4.2 below). The scope of a general prohibition covering all activities conducted by the employer but not related to the specific activities performed by the employee is likely to be deemed excessive if looked at by the courts and, bearing in mind the employer’s legitimate interests, may be reduced to enable the employee to develop his or her career. Irrespective of any payment for compliance, a non-compete clause must be reasonably limited in terms of duration, geographical scope and subject matter. In any event, a non-compete clause will be binding only to the extent that the employment relationship gives the employee access to business secrets and the use of that knowledge could significantly harm the current employer. Finally, in the following circumstances, a non-compete-clause will be deprived of any legal effect (i) if the employment relationship is terminated by the employer without any justified reason (Article 340c para 2 of the CO), and (ii) if the employment relationship is terminated by the employee for a justified reason for which the employer is responsible (Article 340 para 2 of the CO). A non-compete clause may be agreed upon for a period of up to three years after the end of the employment relationship. The duration may exceed three years only under special circumstances. If the clause is considered by the courts, it will be a question of fact as to whether the duration is deemed reasonable. 3.2 Geographical, functional and temporal limitations A non-compete covenant must be reasonably limited geographically. Therefore it must indicate the geographical scope within which it applies. Usually, geographical limits are acceptable in the areas where the employee’s special knowledge applies or is used. Accordingly, the geographical scope of the non-compete clause may be broader, for example, for a high level global manager than for a local manager. With respect to time limitation, access to customers is usually deemed to be potentially damaging for a shorter period than access to manufacturing secrets. Thus, if the non-compete clause aims to protect regular clientele, one year’s duration should in principle be sufficient for the consolidation of relationships with the new job holder. By contrast, in the case of manufacturing secrets, a longer duration (up to three years) could be deemed appropriate. However, a non-compete clause covering not only the countries where the employee has worked but also any part of the world where the organisation directly or indirectly conducts its operations is likely to appear excessively broad. Such a broad clause will probably cover places where the employee did not have access to specific confidential knowledge, and to that extent a non-compete obligation would in principle not be justified. Having said that, failure to delimit a reasonable geographical scope does not mean that the non-compete covenant is necessarily invalid. A non-compete covenant which is deemed too broad may be narrowed by the courts. Note that the Swiss courts have a certain discretion in relation to balancing the employer’s and the employee’s interests and considering the particular circumstances and they may take into account how the non-compete obligation is compensated (see section 4.2 below). As regards limitation of subject matter, any prohibited business fields must be described as clearly as possible and adapted to the responsibilities and activities of the individual employee. 300 In practice, non-compete clauses are often agreed upon for a period of one to two years. When reviewing the validity and enforceability of non-compete clauses, Swiss courts usually pay particular attention to the compensation offered in return for the non-compete obligation (see section 4.2 below) and this may have a significant impact on its enforceability. 3.3 Job changes An employee’s contract may require amendment in the event that he or she moves from one position to another within the same organisation. In such a scenario, the parties should review the clause, because it is likely that the clause will need to be amended or made more extensive. If it needs modification, this must be done in writing (see section 2.3 above). 4. ENFORCEABILITY 4.1 General A non-compete clause may represent a useful tool to protect the employer’s interests at the end of the employment relationship. It may act as a deterrent 301 Ius Laboris and also be practically enforceable – in other words it may help to prevent harmful conduct by the employee and/or provide a mechanism to indemnify the employer for harm caused as a result of breach. 4.2 Balance of interests According to mandatory Swiss law a non-compete clause must be reasonably limited in terms of place, time and subject-matter in order to preclude an unreasonale impairment of the employee’s economic prospects (see sections 3.1 and 3.2 above). When considering the validity of a non-compete clause, the court must take all relevant circumstances into account. It is not uncommon for parties to agree upon specific compensation paid by the employer to the employee in order to compensate him or her during the non-compete period, i.e. after the employment contract has ended (see section 3.1 above). Such compensation may significantly increase the chances that the non-compete clause will be deemed fully enforceable. In practice, this is frequently coupled with an opt-out right, according to which the employer may waive adherence to the non-compete obligation in exchange for no longer being obliged to pay the compensation. The non-compete clause may also provide that part of the basic salary paid during the employment relationship includes compensation for the non-compete obligation. However, this mechanism may be viewed as a little artificial, in that the indemnity is not quantified, nor is it paid during the period of applicability of the non-compete obligation, i.e. after the employment contract has ended. 4.3 Remedies If a right for specific enforcement is included in the employment contract, this will serve to enable the employer to require, including by way of interim measures, the immediate cessation of any activities of the employee which breach the non-compete obligation. Employee If the employer does not comply with its obligation to pay compensation, the employee may file a claim for payment of damages before the Swiss courts (provided, of course, that he or she duly complies with his or her non-compete obligation). In the event of 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. 302 Non-Compete Clauses - An International Guide - SWITZERLAND Employer Under Swiss law an employer may seek a court injunction and request the elimination of a breach insofar as this is justified by the employer’s interests and the employee’s behaviour. Provided that conditions for a measure are met, the court may order the immediate suspension of an activity which breaches the non-compete clause. However, enforcement of this kind is only possible if the clause has specifically been agreed upon in writing. In practice, some Swiss courts are reluctant to prevent an employee from working for his or her new employer if this would be considered to be very harmful for the employee. Experience shows that court injunctions are only granted under limited circumstances. 4.4 Penalty clauses Generally, if an employee breaches non-compete obligations, he or she must compensate the employer for the resulting harm. In the absence of any further provision in the non-compete clause, it will be for the employer to prove the harm caused by the employee. In practice, it may be very difficult to prove and so it is strongly recommended to insert the penalty clause in the employment contract, as this will obviate the need for the employer to provide evidence of harm in order to obtain compensation – the fact of the breach itself will be enough. A penalty worth several months’ salary would be market practice in Switzerland and is likely to be enforceable by the Swiss courts. That said, Swiss law does not provide any specific guidance in this respect. If a Swiss court were to consider the amount of a penalty payment excessive given all the circumstances, it may reduce the amount. 4.5 Damages The employment contract may provide that the employer may claim compensation in excess of the amount of the penalty. This allows the employer to claim compensation for any potential loss that exceeds the amount of the penalty. However, the burden of proof for damages in excess of an agreed penalty lies with the employer. 4.6 Liability of new employer In general, a new employer is not liable for damages due to 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 held liable. This may be the case, for example, in the event of an inducement of breach of contract. The burden of proof of these circumstances rests with the former employer. In practice these circumstances are very difficult to prove. 303 Ius Laboris 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. The employee may compete in the same market and for the customers of the former employer. However, it is worth mentioning that the employee will continue to be bound by 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 duty of fidelity, the employee must not make use of or inform third parties of any facts that should not be disclosed. The employee is prohibited from disclosing trade secrets (such as customer lists) to third parties or to any new employer. 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 According to Article 333, para 1 of the CO, 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, unless the employee rejects the transfer. If the employee rejects the transfer of the employment relationship to the acquiring party, most commentators consider that the clause will lose its validity. By contrast, if the employee does not reject the transfer, any non-compete obligation will in principle also be transferred to the acquiring party and thus remain valid. However, the way the non-compete clause is worded may not be an exact fit with the business of the new employer. Therefore, depending upon the circumstances, it may be wise for the acquiring party to enter into a new non-compete clause. 5.3 Cross-border competition As mentioned above in sections 3.1 and 3.2, a non-compete clause should be reasonably limited geographically. Theoretically, there is nothing to prevent the parties to the employment contract from agreeing a clause with international scope. 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. 304 Non-Compete Clauses - An International Guide - SWITZERLAND 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. According to the Swiss Federal Supreme Court, the validity and enforceability of a non-solicitation clause is subject to the rules provided by Articles 340 and following of the CO inasmuch as a non-solicitation clause usually affects the employee’s economic freedom to the same extent as a non-compete clause. As a matter of principle, it is also possible to agree upon a non-poaching clause of employees. However, Swiss law does not provide for any clear guidance in this respect. For the time being, a reasonable and prudent approach would be to consider that the conditions and limitations set out in Articles 340 and following of the CO also apply to the validity and enforceability of this type of clause. 5.5 Insolvency Generally, the insolvency of the employer does not affect the employment agreement, including the non-compete clause. However, according to Article 340c para 1 of the CO a non-compete clause lapses if it can be proven that the employer no longer has any significant interest in its maintenance – and this is in principle the case in the event of insolvency. Further, by Article 340c para 2 of the CO the prohibition will lapse if the employer terminates the employment relationship without a justified reason (see section 2.1 above). In the case of insolvency, the termination of the employment contract would not be deemed to be justified within the meaning of Article 340c para 2 of the CO. 5.6 Enforceability of foreign non-compete clauses A jurisdiction clause enables the parties to agree which country’s courts will have jurisdiction to hear disputes arising out of the employment contract. In addition, a governing law clause may be used to determine the substantive law that will apply to disputes arising from the contract. Jurisdiction In the absence of a valid jurisdiction clause, the competent courts within Europe will be determined according to terms of the Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters of 16 September 1988 (the ‘Lugano Convention’). A revised version of 305 Ius Laboris the Lugano Convention will enter into force on 1 January 2011. The new Artilce 19 of the Lugano Convention will provide that an employer domiciled in a State bound by the Lugano Convention may be sued (1) before the courts of the State where he is domiciled, or (2) in another State bound by the Convention: (a) before the courts of the place where the employee usually carries out his or her work or before the courts of the last place where he did so; or (b) if the employee does not or did not usually carry out his or her work in the same State, before the courts of the place where the business which employed him or her is located. Further, according to the new Article 20 para 1 of the Lugano Convention, an employer may start proceedings only before the courts of the State bound by the Convention in which the employee is domiciled. If the Lugano Convention does not apply, the competent courts will be determined by the Swiss Federal Act on Private International Law (the ‘IPRG‘). According to Article 115 of the IPRG the Swiss courts of the defendant’s domicile or of the place where the employee usually performs his or her work are competent. A claim initiated by an employee may also be brought before the courts of his or her domicile, or usual residence in Switzerland. Governing Law Whether a non-compete clause under foreign law can be enforced in Switzerland will be determined on the basis of the Swiss conflict of law rules. Generally, a non-compete clause under foreign law is valid and enforceable in Switzerland, but under very limited circumstances a foreign non-compete clause may violate the Swiss concept of public order. 306 1. INTRODUCTION 311 2. CONDITIONS 311 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 311 312 312 312 312 3. REQUIREMENTS 313 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 313 313 314 4. ENFORCEABILITY 314 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 314 314 314 314 315 315 5. SPECIAL 315 SITUATIONS 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 315 315 316 316 316 316 Turkey Non-Compete Clauses - An International Guide - TURKEY 1. INTRODUCTION Employment legislation does not contain any provisions expressly regulating non-compete clauses. This being said, Labour Law number 4857 (the ‘Labour Law’) lists loyalty as one of the obligations of employees toward 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 (‘non-compete clauses’). Though limitations on activities are recognised for the term of the employment, the Labour Law does not stipulate, explicitly or implicitly, any limitation on activities following termination of the employment agreement. However, the subject is regulated in the Turkish Code of Obligations (‘TCO’), under the title ‘ban on competition’. According to relevant provisions of the TCO, 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) as set out by the TCO and case law established by Court of Appeal decisions on the subject. Note, however that according to these decisions 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 such 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 Following termination of the employment agreement, 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. 311 Ius Laboris According to Article 348 of the TCO, 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. Moreover, such 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. Pursuant to Article 352 of the TCO 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 accordance with the TCO, the conditions for a valid non-compete clause are as set out in the sections that follow. 2.2 Age Pursuant to Article 348 of the TCO, 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 According to Article 350 of the TCO, in order for a non-compete clause to be valid, it must be in writing. As explained above, 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. However, note that the Court of Appeal’s time limitation is likely to apply and the total term of the non-compete clause, including the term of renewal, may 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 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, any non-compete clause will be considered void. 312 Non-Compete Clauses - An International Guide - TURKEY 3. REQUIREMENTS 3.1 General As explained above, 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 349 of the TCO (see below). 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 Most non-compete clauses have a territorial limitation. Unfortunately there is no explicit guidance on what constitutes an excessive limitation on territory and the courts evaluate this on a case by case basis. While most Court decisions lean towards the opinion that citing an entire country (e.g. Turkey), as the territory where the non-compete clause applies is excessive, even very small territorial limitations may be deemed invalid 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. According to Article 349 of the TCO, the type of work prohibited must be limited. Thus, an employee may not be completely banned from seeking employment for a certain period of time, even in a very narrow territory and the restrictions set out in the non-compete clause should relate to work performed under the former employer’s control. While neither the Labour Law nor the TCO provide a time limit for the application of non-compete clauses, most such clauses are limited in order to avoid imposing an unnecessary burden on the employee. In accordance with Supreme Court decisions, non-compete clauses of up to two years are deemed acceptable; whereas those over two years are deemed excessive. This being said, as explained above, 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. 313 Ius Laboris 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, as stated previously, the courts are likely to deem any clause which is too restrictive invalid. 4. ENFORCEABILITY 4.1 General In considering the validity of a non-compete clause, the court will take all relevant circumstances into account. As explained above, 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 excessiveness 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 manner which threatens the interests of the employer, the employer may request an order from the court obliging the employee to stop breaching the 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- or herself of liability by paying the penalty. Even then, if the amount of harm incurred by the employer 314 Non-Compete Clauses - An International Guide - TURKEY 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 look at the items listed in the section on ‘Conditions’ above and 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 limitations listed in the section on ‘Requirements’ (above). 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 348 of the TCO 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 As per Article 16 of the Labour Law, 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 315 Ius Laboris employment agreement was terminated, prior to the transfer of the undertaking. 5.3 Cross-border competition The TCO does not address cross-border competition but the parties may draft a cross-border non-compete clause in accordance with the rules described above. 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 whereby an employee is permitted to enter into a service contract with a competitor after termination of the employment agreement, but is banned 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 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. 316 1. INTRODUCTION 321 2. CONDITIONS 321 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 321 323 323 323 324 3. REQUIREMENTS 324 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 324 325 326 4. ENFORCEABILITY 326 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 326 327 328 329 329 329 5. SPECIAL 329 SITUATIONS 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 329 329 329 329 330 330 United Kingdom Non-Compete Clauses - An International Guide - UNITED KINGDOM 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 Non-dealing Non-solicitation Non-poaching preventing an employee from entering into competition against the employer preventing an employee from accepting business from current or former clients preventing an employee from contacting current or former clients, though not preventing the employee from accepting business if the client is not induced and 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 and confidentiality, and 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. At all times during work he must not disclose confidential information and this applies to ‘trade secrets’ after termination. This would not however stop the employee from pursuing other activities outside of his employer’s time. 321 Ius Laboris 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, often the best 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 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 remains under an implied duty of good faith and fidelity to his employer – issues of enforceability and reasonableness of any restrictive covenants (which are only at issue after the employment relationship has ended) will be irrelevant and will not need to be looked at. 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. Legitimate business interest The main legitimate business interests which an employer may be entitled to protect are: • • trade connections goodwill 322 Non-Compete Clauses - An International Guide - UNITED • • KINGDOM stability of the workforce and trade secrets/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 according to the factors discussed further at section 3.2 below. 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 non-compete clause 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 non-compete clauses 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, even if covenants appear in a separate handbook. 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 be required and a deed is often used, incorporating a payment of £100 or more. 2.4 Renewal Non-compete clauses 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. 323 Ius Laboris 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 restrictions are lost is where the employer has not given the employee his 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 again, any restraint clauses will not be enforceable. If an employee terminates his employment, serves his notice and leaves, then any restrictive covenants may be enforceable. If however the employee resigns in the face of a gross 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. Non-Compete Clauses - An International Guide - UNITED KINGDOM 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 have the desired effect. Likewise, whilst an undertaking not to misuse confidential information is the standard and least restrictive way for an employer to protect itsconfidential 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 he worked for a competitor that he would use confidential information gleaned from his former employer. This will typically only arise with very senior employees. For example, if the CEO of McDonalds became CEO of Burger King, McDonalds would be entitled to enforce a non-compete clause for as long as the confidential information was useful, because it would be inevitable that in his new role the CEO would make use of his knowledge of McDonald's strategy in making decisions. This would be the case even if he did his best not to do so. When assessing whether a restraint clause 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. REQUIREMENTS 3.1 General As stated above, 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 void. 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 total non-compete restriction. It would be enough for the employee simply to be restrained from working with the clients of his former employer with whom he had had contact. 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. 324 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. Whilst at the same time trying to restrict the geographical area in which an employee is prevented from working, a clause may also restrict the type of work that can be done. For example, a clause may prevent an investment banker from working in the finance industry within a particular geographical area, though the more precise the clause is, the more likely it is to be reasonable (such as a restriction from working within only the investment 325 Ius Laboris banking industry or even covering only the trade of interest rate derivatives in the investment banking industry). For a restrictive covenant to be valid, the employer 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. 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, as stated above, 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 be 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 increase protection for itself. In practice, the employer’s best point of leverage is to make the promotion conditional upon the signing of a new contract. Non-Compete Clauses - An International Guide - UNITED KINGDOM have some 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. Whilst a court may not rewrite an unreasonable, overly-broad restraint clause, it does have some discretion in the way in which it interprets a clause. Though a narrow clause will not be interpreted in a way that makes it workable for the employer, a broad, sweeping clause may be read in a way which makes it workable. For example, a clause prohibiting someone from ‘working within 3km of the employer’s offices’ could be interpreted to mean ‘working in a particular industry…’. However, the court may simply strike out the clause for unreasonableness. It is likely that a court would tend to interpret one element more narrowly, rather than striking out the whole clause, if the clause would otherwise be valid, but for this offending element. The court may also strike out any offending unreasonable elements to make it reasonable. 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. 4. ENFORCEABILITY 4.2 Balance of interests Most disputes about non-compete clauses are considered at an interim stage by the court before a final determination. In practice, in most cases that interim relief hearing resolves the dispute one way or another as the parties will normally settle following such a hearing – although that is by no means universally the case. 4.1 General The enforceability of a restraint clause is dependent upon the reasonableness of the clause. The factors to be taken into account in determining reasonableness have been described in detail above, though the courts may At this interim stage, the court 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 326 327 Ius Laboris 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 Non-Compete Clauses - An International Guide - UNITED KINGDOM 4.4 Penalty clauses There is no concept of a penalty clause in this context. As outlined above, if the effect of a clause is to restrain the employee beyond that which is reasonably necessary to protect the employer, it will be void and unenforceable. 4.5 Damages As indicated above, in addition to obtaining an order from the court restraining the employee from competing, a court may award damages. In practice, however, in most cases, the injunction is the primary remedy. Employee As explained above, 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. 4.6 Liability of new employer The new employer may be held to be as liable as the employee if he has knowingly encouraged the employee to breach his contract or otherwise act unlawfully. 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 will not be sufficient. This may be applicable if a former employee is about to steal 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. 5. SPECIAL 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 and the balance of convenience must favour granting the order. The factors relevant to this are: i. whether damages alone would be a sufficient remedy ii. 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 iii. whether more harm than good will be done by granting the injunction. 328 SITUATIONS 5.1 No clause If there are no express restraints, the employee is completely free to act as he wishes after termination of his employment provided he does not misuse confidential information. 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 the requirements of reasonableness, discussed above). 5.3 Cross-border competition There is no reason in principle why a covenant cannot prevent cross border competition but enforcement is much more complicated – see below. 5.4 Non-solicitation clauses Applying the principles set out above, there is no reason why an appropriately drafted non-solicitation of clients, prospective clients, or employee provision would not be enforced and, indeed, as the least restrictive of typical post-termination restraints, it is the form of restriction most likely to find favour with a court. 329 Ius Laboris 5.5 Insolvency When an employer becomes insolvent and winds up trading completely, no clause will continue to 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. 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 much greater extent than one that was not struggling. 5.6 Enforceability of foreign non-compete clauses Governing law The law that is applicable in a contract is determined according to 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 statutory laws protecting health and safety or affording minimum employment protection rights. The recent case of Duarte v Black & Decker dealt with this issue of governing law. Mr Duarte lived and worked in the UK. Mr Duarte’s share incentive scheme contained restrictive covenants prohibiting him from joining any of 500 named competitors and hiring any of 25,000 named staff. The share scheme was governed by the law of the state of Maryland, USA. Mr Duarte sought a declaration that the restraints were unenforceable, whilst Black and Decker sought an injunction against Mr Duarte. The court held that UK law did not replace the Maryland law as the governing law of the contract under Article 6. That is what one would expect. More surprisingly however, the court also held that the principles of enforcing restrictive covenants set out above are not mandatory rules. Therefore the enforceability of the clause was entirely a matter of Maryland law. This is 330 Non-Compete Clauses - An International Guide - UNITED KINGDOM because UK law on restrictive covenants is part of the general law on commercial contracts and restraint of trade. As it happened, the clause was too broad to be enforceable under the law of Maryland and so Mr Duarte was successful in obtaining the declaration sought. The court then went further however and discussed what the position would be even if the clause had been enforceable under Maryland law. 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’. So, if, in the case of Duarte, applying the Maryland laws would be contrary to UK public policy, the court could refuse to do so. 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 described above 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 In the case of Samengo-Turner v J & H Marsh & McLennan (Services) Ltd, the employer (Marsh & McLennan) wanted to sue three former employees in the New York courts for breaches of restrictive covenants. The employer subsequently issued claims in New York. These three employees lived and worked in the UK, but the employment contracts stated that the New York courts had jurisdiction over any disputes. The employees submitted claims in the UK courts seeking a worldwide anti-suit injunction and a declaration that the UK courts had jurisdiction. Under EU law (Regulation 44/2001/EC) disputes over employment contracts are to be heard in the place where the employee is domiciled. As the employees were domiciled in the UK – they were living and working there – it meant that regardless of what the contract said, if the employer wished to bring an action against them, it would have to do it in the UK. The court granted an anti-suit injunction to stop the New York proceedings. From both the above cases, it can be seen that for employees habitually working in the UK, restrictive covenants can be expected to be enforced 331 Ius Laboris 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, consideration should also be given 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 (so as to have a better chance of satisfying the Article 16 issue if you have to enforce in those other jurisdictions). 332 1. INTRODUCTION 337 2. CONDITIONS 337 2.1 General 2.2 Age 2.3 Written form 2.4 Renewal 2.5 Liability for compensation on dismissal 337 341 341 341 341 3. REQUIREMENTS 342 3.1 General 3.2 Geographical, functional and temporal limitations 3.3 Job changes 342 342 343 4. ENFORCEABILITY 343 4.1 General 4.2 Balance of interests 4.3 Remedies 4.4 Penalty clauses 4.5 Damages 4.6 Liability of new employer 343 344 345 346 346 346 5. SPECIAL 347 SITUATIONS 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 347 347 348 348 349 349 USA Non-Compete Clauses - An International Guide - USA 1. INTRODUCTION Unlike many areas of employment law in which there is federal legislation, such as federal civil rights law, family leave requirements, pension rules and the like, the United States has no national rule or law concerning non-compete agreements. Instead, these agreements are the subject of fifty-one separate sets of rules (one for each state, and one for the District of Columbia). Most of these rules can be found in an examination and analysis of the judicial decisions of the individual states, although there exist a number of state statutes which govern specific situations. With the exception of California, which severely limits the permitted extent and enforcement of such restrictions and North Dakota, which declares such agreements to be illegal, the general rule which emerges from a review of the laws of the states is that non-compete agreements are enforceable as long as they are (a) set forth in writing signed by the employee under relatively fair circumstances, (b) are necessary to protect legitimate interests of the employer and/or the public at large and reasonably related to that interest, (c) are not unduly harmful to the employee, and (d) reasonable in time and geographic scope. However, despite this general rule, there are significant variations among the states. This can mean that certain types of businesses are subject to specific statutes. In addition, there are variations as to whether courts will either reject in full or amend a provision that does not meet the rules of the applicable state. Further, there are questions as to whether a non-compete agreement can be assigned in the event of corporate reorganisation. 2. CONDITIONS 2.1 General Of the 51 jurisdictions in the United States, 25 have neither enacted any statute concerning non-compete agreements nor dealt with the matter in their state constitutions.(1) Some states have enacted statutes dealing with specific industries. For example, Arizona, Colorado, Connecticut, Maine, and Massachusetts all have statutes which limit the ability of a broadcasting industry employer to enforce a restrictive covenant against its employees. Connecticut’s statute also provides protection to security guards. Delaware and Tennessee statutes restrict the enforceability of restrictive covenants as to health care providers. Vermont has put into place a statute which bars schools (1) In addition to the federal government, this includes Alaska, Arkansas, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Minnesota, Mississippi, Nebraska, New Hampshire, New Jersey, New Mexico, New York, Ohio, Pennsylvania, Rhode Island, South Carolina, Utah, Virginia, Washington, West Virginia and Wyoming. 337 Ius Laboris of barbering or cosmetology from requiring the execution of a restrictive covenant by someone seeking training at the school. The states which have statutes or constitutional provisions concerning non-compete agreements, either generally or with regard to specific industries, are Alabama, Arizona, California, Colorado, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Hawaii, Louisiana, Maine, Massachusetts, Michigan, Missouri, Montana, Nevada, North Carolina, North Dakota, Oklahoma, Oregon, South Dakota, Tennessee, Texas, Vermont and Wisconsin. A detailed summary of the provisions of each of these statutes is beyond the scope of this chapter, although common themes will be discussed below. It is important to note that as a result of this profusion of laws, the assessment of any restrictive covenant matter necessarily begins with a determination of which law will govern. Typically, any organisation which has made it a priority to have key employees sign non-compete agreements will have provided in the agreement that the document is to be interpreted under the law of a particular state. Since choice of law clauses are frequently enforced, counsel can limit its legal research to the decisions of the courts of the relevant state, or the federal courts which sit in that state, for guidance about the enforcement of the non-compete. However, since non-compete laws are so state-specific, organisations seeking to understand their rights under a restrictive covenant must be careful to review the law of the specific state at issue: authority from other states is unlikely to be useful or persuasive. Moreover, courts in California will often refuse to enforce non-compete agreements when applied to residents of that state, even where the agreement provides that it is to be governed by and enforced under the law of a state which does permit these agreements. As a result, any advice about drafting or enforcing a restrictive covenant is necessarily state-specific, and consultation with counsel with expertise in the law of that state is essential. In virtually every state (leaving aside California and North Dakota), the optimal time to have an employee sign a restrictive covenant is at the inception of employment. Agreements signed at that point are generally viewed as having adequate consideration to support the non-compete, in the form of a new job and compensation. Some states have refined this basic rule. For example, in Idaho, a restriction intended to last more than 18 months following the end of employment requires some additional consideration beyond the job itself. In Minnesota, Missouri and Oregon, the terms of the proposed restrictive covenant must be made explicit in the initial offer of employment; if those terms do not appear in the original offer, the company will be required to offer 338 Non-Compete Clauses - An International Guide - USA additional consideration to support the agreement. Mississippi provides that an agreement entered into at the start of the job is enforceable, but probably not if the employee is discharged shortly after signing the agreement. In Texas, even if the non-compete is signed at the inception of employment, it will not be enforced if the employment is at-will. West Virginia will enforce agreements of this nature if signed at the start of the employment and if it is part of a contract which contains mutual promises between the employer and the employee. The more difficult question is what happens when an employer wants existing employees to sign such agreements, either because management has decided to implement a new policy, or because an employee has received a promotion, usually with an increase in compensation, or has moved into an area of the company in which he or she will have access to information of higher sensitivity. Leaving aside California (for which see below) and North Dakota, which essentially prohibits restrictive covenants, the vast majority of states will enforce non-compete agreements executed by the employee during the term of employment. However, most states also require that the employee receive something of value in exchange for a new agreement which limits post-employment opportunities. For many states, continued employment for a reasonable period of time will suffice as consideration for a new non-compete. However, some states mandate something in addition to continued employment. Thus, for example, Arizona requires that the employee be given a substantial promotion or be afforded continued employment for a substantial period. There are variations to be found on this theme in Colorado, Delaware, Idaho, Illinois, Iowa, Kansas, Kentucky, Minnesota, North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Washington, West Virginia, and Wisconsin. As noted above, these rules are most typically the product of case law rulings by judges asked to decide specific issues with particular fact patterns. The result is that these rules are subject to modification, sometimes minor and sometimes quite significant. An employer which decides to ask an existing employee to execute a non-compete agreement during the course of employment is always well advised to provide the employee with some tangible benefit in exchange for the agreement. This may take the form of a promotion or new title, a change in salary or other compensation, increased responsibility, conversion of the employee from at-will status to employment for a definite term, or something else. American courts tend to approach agreements of this sort with caution, so the more the employer can make the 339 Ius Laboris case that the employee received something of value in exchange for executing the agreement, the more likely the agreement is to be upheld and enforced. California California’s geographic size and the extent of its economy warrant separate discussion because of its highly unusual rules in this area. In essence, except in very specific circumstances, enforcement of a restrictive covenant is close to impossible in California, meaning that while employers there face fewer challenges in hiring than companies in other states, they also have fewer options with regard to departing employees. Section 16600 of the state’s Business and Professions Code provides that any contract which restrains someone from engaging in a lawful profession, trade or business is void, at least in that regard. As a result, a contract provision which bars a former employee from working for a particular time period, in a certain geographic area, or for a class of defined competitors, cannot be enforced. Moreover, employers cannot accomplish this goal by others means, such as by depriving former employees of profit sharing or by imposing other penalties. The same statute makes clear that these types of provisions will not be enforced. The statute leaves open a very narrow range of circumstances in which postemployment restrictions can be enforced. It allows enforcement of covenants not to compete in which the former employee is selling or disposing of stock, assets or other business interests and transferring goodwill to the buyer, assuming that the transfer is of such a substantial interest in the company that the company’s goodwill is being transferred. Nonetheless, the agreement to compete must be reasonably limited in time, scope and geographical area, such as the cities or counties in which the business being purchased is operated. The other exception concerns the dissolution of partnerships, in which the withdrawing partner can be the subject of a non-compete agreement. Sometimes, companies will try to avoid the problem by having employees located in California sign employment agreements which provide that the employment relationship is governed by the law of another state, and that disputes must be litigated in that other state. Although this might appear to be a logically sound solution, it often proves unavailing, particularly where the employee at issue is a Californian resident. Californian courts are extremely reluctant to enforce such agreements against Californian residents. A California-based employee who wishes to avoid the effect of a non-compete agreement in another state can bring an action for injunctive relief in 340 Non-Compete Clauses - An International Guide - USA California to bar enforcement of the agreement and very often, the courts will handle such matters on an expedited basis with a view towards issuing a final judgment before the court in the other state has ruled. If and when that situation occurs, the courts of the other state are required to accept the decision of the Californian court under the ‘full faith and credit’ clause which appears in Article IV, Section 1 of the United States Constitution. California residents are still barred from engaging in unfair competition, such as by using the former employer’s documents and materials in the service of their new employer. Improper activity of that nature is still subject to policing by the courts and, in a proper setting, will support injunctive relief against the employee. However, even such wrongful conduct will not support an application to enforce a restrictive covenant. 2.2 Age There are no special requirements which concern how old a contracting party must be in order to sign an enforceable non-compete agreement. In almost all states, 18 is the age of legal consent; Nebraska and Alabama declare the age of majority to be 19 and in Mississippi, a person must be 21 in order to enter into a binding contract. As long as the employee signing the contract has reached the age of majority in his or her state, a non-compete agreement signed by that person is valid and enforceable. 2.3 Written form Non-compete agreements must be in writing in order to be enforceable. 2.4 Renewal If the employee is working under a contract for a definite period, a non-compete agreement signed as part of a renewal or extension of that agreement will be enforceable. However, and as discussed above, if the terms of the non-compete are changed, such as by extending its term, the geographic scope or the types of businesses from which the employee is barred during the restricted period, the employee may be entitled to additional compensation or consideration to support the more extensive non-compete. 2.5 Liability for compensation on dismissal If the employee is working under an employment-at-will arrangement, dismissal of the employee does not give rise to monetary liability for the employer. By contrast, if the employee has an agreement which entitles him or her to employment for a period of time and the employer terminates the agreement prematurely, that action may give rise to an action for damages. However, many contracts identify conditions which allow employers to end 341 Ius Laboris their relationships with an employee without liability. In either event, and as discussed in Section 4.3 below, the termination of the employment relationship by the employer does not necessarily prevent the enforcement of the restrictive covenant 3. RESTRICTIONS 3.1 General One theme which runs throughout the jurisprudence of this area, at least in the states which permit non-competes, is that the restrictive covenant must be reasonable, taking into account the duration of the restraint, the geographic scope of the restriction, and the type of activity barred to the employee. Part of the analysis will be the reasonable concerns of the employer and the importance of the employee, including the function that he or she served, the extent of the employee’s access to confidential information, and the harm which might befall the employer if the information were used improperly. 3.2 Geographical, functional and temporal limitations As noted above, any restrictive covenant must be reasonable in time and geographic scope in order to be enforced. However, as businesses take on more of a national scope through enhanced distribution channels and the Internet, the concept of a geographical restriction has become less useful. Years ago, for example, a salesperson could be subject to a meaningful restriction that he or she not engage in a competing business within 50 miles of the former employer. However, with sales personnel now able to deal with customers all over the country and all over the world via email and mobile phones without ever leaving home, employers have looked for more meaningful ways to protect themselves from what they view as unfair competition. Non-Compete Clauses - An International Guide - USA The question often arises about what happens if the customer chooses to continue to do business with the former employee. Issues of this sort often turn on the specific facts of the case. Typically, the former employee and the new employer will need to demonstrate that the customer contacted them, and not the other way around. This may involve issues of electronic discovery (i.e. whether emails reflect that the former employee tried to undercut the non-compete). It is impossible to categorise all of the factual scenarios which might come into consideration, but it should be noted that courts tend to be sceptical about the argument that the customer chose to follow the former employee. Anyone seeking to establish such a claim will need to demonstrate his or her good faith in adhering to the terms of the non-compete. However, with respect to professionals such as doctors, lawyers and accountants, there is authority that the wishes of a customer or client must be respected. Thus, while the doctor, lawyer or other professional will be required not to solicit the business of the client or customer of the former employer, courts often emphasise the right of the client to continue to receive professional services from whoever they choose. 3.3 Job changes If an employee who has signed a non-compete agreement changes positions within an organisation, the contract will in all likelihood continue to be enforceable. Of course, if the employee transfers to a jurisdiction which is hostile to these agreements, such as California, that may affect the company’s ability to enforce the agreement. In fact, promotions or favourable transfers offer good opportunities for companies to seek execution of such documents by employees who had not been subject to a non-compete. 4. ENFORCEABILITY As a substitute for the more traditional geographic restriction, many employers have instead drafted agreements which bar former employees from contacting or doing business with their customers for a defined but reasonable period of time. As a general rule, many states will enforce these restrictions and particularly if they are limited to customers with whom the employee did business.(2) However, other states insist on a geographical location as a precondition for an enforceable non-compete(3). (2) Alabama, Alaska, Arkansas, Colorado, Connecticut, Delaware, District of Columbia, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming. (3) Arizona, Florida, Louisiana. 342 4.1 General Employers tend to draft non-compete agreements as broadly as possible, giving regard to the limitations imposed by the law of the state at issue. Inevitably, however, some employers will draft the restrictive covenant too strictly, making the restriction too long-lasting, or giving it a geographic scope that a court will decline to enforce. This phenomenon has given rise to the doctrine of the ‘blue pencil’, a term referring to whether a court will modify the terms of the non-compete to make it comply with state law rather than discard the agreement in full. 343 Ius Laboris Courts in most states take the position that they have the power to redraft, or “blue pencil” provisions of restrictive covenants (e.g. changing the duration from two years to one year).(4) They do so under the theory that if the parties agreed that there would be some post-employment restrictions, and as long as they acted in good faith, the court should try to put that agreement into effect, even if the contract must be modified to comply with state law. A few states have their own variations. Colorado, for example, will edit an agreement, but only if the non-compete has both time and geographical restrictions. Georgia courts will limit territorial restrictions if the covenant arises in the context of a sale of business, but not in other circumstances. In Louisiana, courts will reduce the length of a non-compete to meet the statutory requirements but will not alter the geographical scope of a restrictive covenant. Perhaps the most interesting variation is Texas, where courts are allowed by statute to reform the non-compete, but if they do so, and if the employer sues to enforce the modified non-compete, the employer cannot recover damages or counsel fees arising from the employee’s breach and is limited to an injunction forbidding the employee from engaging in prohibited conduct. In addition, if the contract was understood to be overbroad when it was entered into, the employee can recover counsel fees. Arkansas, Nebraska, and Nevada (probably) do not edit or modify non-compete agreements and several states (Hawaii, Maine Montana, New Mexico and Utah) have not yet provided clear answers. As a result, employers are well advised to review the laws of the relevant state before drafting, or trying to enforce a non-compete agreement. Although they will find the courts of a significant number of states prepared to modify agreements which were entered in good faith but which nonetheless fail to meet the standards of that state, employers cannot always count on a sympathetic ear to such an argument. This is clearly a situation in which time and care at the drafting stage represent a valuable investment. 4.2 Balance of interests This element of a court's analysis is necessarily vague, and may at times appear almost subjective. A court assessing a non-compete will attempt to determine whether the restrictions are reasonable in light of the employee's duties and (4) The states which have so held, assuming that the original covenant was drafted in good faith, include Alabama, Alaska, Arizona, Colorado, Connecticut, Delaware, the District of Columbia, Florida, Idaho, Illinois, Indiana, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Vermont, Virginia, Washington, West Virginia and Wyoming. 344 Non-Compete Clauses - An International Guide - USA position with the company compared to the importance of confidential information the employee possesses and the competitive harm the company might suffer if the employee is allowed to use the information in the service of a competitor. Such determinations are highly fact-sensitive. 4.3 Remedies Courts in states which permit restrictive covenants have little difficulty in enforcing the agreements when the employee leaves for a competing entity. The more difficult issue is what happens when the employer is the one which both let the employee go and then wants to bar him or her from working for a business adversary. In this area, the employer’s good faith and reasons for termination are key. In some states, courts will tend to enforce the agreement when the employer has terminated the agreement, absent unusual factors, such as a short term of employment, or if the employer intended to terminate the employee at the time the agreement was signed.(5) The restrictions are more likely to be enforced if the termination is for cause. By contrast, an employer which lets an employee go without cause, for poor performance, or because its financial condition prompted a reduction in force, or which itself breached its employment agreement with the employee, will find it much harder to prevail on any claim for relief.(6) There are other states where the courts are in conflict or where there have been no clear rulings on the matter. It is important to note that actions to enforce non-compete agreements are addressed to the equity powers of the court, in which, as a general rule, the fairness of the company’s actions will play a major role in the court’s decision. In some cases, and particularly in Florida, allegations of discrimination or sexual harassment by the employer have been cited as the basis for a defence against enforcement of a restrictive covenant. The employer needs to be able to establish that it acted in good faith the employee such that a court will not feel uncomfortable about restricting the employee’s economic options. Employee In rare circumstances, an employee (or more likely the new employer) can file a lawsuit seeking to have the restrictive covenant declared unenforceable. In such an action, the court would consider all of the factors normally present in an action to enforce the agreement. However, since employees concerned that (5) Alabama, Connecticut, Delaware, Idaho, Louisiana, New Jersey, Ohio, Utah. (6) Arizona, Arkansas, District of Columbia, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, New Mexico, New York, North Carolina, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Vermont, Wisconsin, Wyoming. 345 Ius Laboris they may be in violation of the agreement are usually not eager to attract attention to themselves and their new situation, these types of cases are highly unusual. Employer The most typical action involving a non-compete agreement is an action by the former employer seeking an injunction barring the employee from working for a competitor or otherwise acting in violation of the agreement. Note that US courts cannot order the employee to remain at his or her old company, but merely not to work for the new company. Employers are also free to seek damages upon a showing of actual losses arising from the employee's breach. 4.4 Penalty clauses American courts recognise the concept of liquidated damages, under which a contract will provide a specific, pre-set and reasonable amount of damages to be paid by one party if it is found to have breached the contract. In theory, an employer embarking on a contractual relationship with a new employee or one being promoted could include such a provision in a non-compete, but it is rarely done. 4.5 Damages Employers who prove the breach of a non-compete are entitled to recover damages that they can prove resulted from the actions of the employee. Such damage claims are typically focused on lost sales, but the employer must prove what sales it would have made if the employee had not violated the contract. Typically, this will require either testimony from the customer or a sudden deviation from an established pattern of sales which a court can attribute to the deeds of the former employee. If the actions of the employee are especially egregious, and particularly if they involve conduct much worse than merely going to work for a competitor, such as theft of documents or tampering with a company's data, the employee may be subject to a claim for punitive damages. Such damages are not related to the harm suffered by the former employer, but are based on the deliberate and outrageous conduct of the employee and designed to punish him or her for the actions. 4.6 Liability of new employer An employer which hires an employee who is subject to a non-compete is not automatically responsible for a breach of the agreement However, if the new employer is placed on notice of the agreement and the claimed breach, it does subject itself to liability if it turns out that the employee has acted improperly. For this reason, attorneys who place the employee on written notice of what they believe to be potential or actual violations of the employee's 346 Non-Compete Clauses - An International Guide - USA non-compete will often write a separate letter to the new employer placing the company on notice of their client's position. For this reason, and particularly for high-level employees, many companies will include provisions in employment contracts by which the new employee represents that he or she is not a party to any restrictive covenant, or at least to any such agreement which would bar the candidate from taking the position with the new company. Such provisions often include language which permits the new employer to terminate the new employee on a ‘with cause’ basis and without liability if it turns out that the employee is party to such an agreement. 5. SPECIAL SITUATIONS 5.1 No clause Non-compete agreements are never presumed. Thus, unless an employee has signed a contract which contains an explicit restrictive covenant, he or she may go to work for the employer’s competition at any time. 5.2 Transfers of undertakings In a business climate in which businesses are bought, sold and merged with frequency, employers often find themselves with restrictive covenants executed by employees who were employed by a predecessor company at the time of execution. Non-compete agreements are, of course, personal in nature, since they restrict the activities of a specific employee because of his or her role in a particular organisation. The question is what happens if that organization no longer exists. There is a number of states in which no definitive answer yet exists. Thus, employers in Alaska, Arizona, Arkansas, Idaho, Illinois, Minnesota, Montana, Nebraska, New Hampshire, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, West Virginia and Wyoming simply lack guidance on the issue and will be reduced to making policy arguments and citing law from other states to support their position. A more limited number of states provide approval for the assignability of restrictive covenants, including Alabama, Kansas, New Jersey, New York and Texas, while decisions in other states (District of Columbia, Maine, North Carolina, Ohio and Utah) suggest that such contracts can be assigned to a successor entity, at least if the employee’s job function remains essentially unchanged. Many other states do not allow such agreements to be assigned unless the original agreement specifically allows, or unless there is some additional consideration given to the 347 Ius Laboris Non-Compete Clauses - An International Guide - USA employee, examples of which include Florida, Indiana, Maryland, Massachusetts, Nevada, New Mexico, Oregon, Pennsylvania, and Vermont. Decisions in Delaware, Iowa, Virginia, West Virginia and Wisconsin suggest that assignment is not an option in those states under any circumstances. In addition, departing employees who engage in solicitation efforts while still employed by the former company may expose themselves to damage claims, either under a non-solicitation clause or under a common law theory of breach of duty of loyalty to the former employer. In many states (Colorado, Connecticut, Georgia, Hawaii, Kentucky, Louisiana, Michigan, Mississippi, and Missouri) assignment is permitted only in connection with a sale of a business. 5.5 Insolvency Under American bankruptcy law, the filing of a bankruptcy petition suspends all litigation pending against the insolvent person or organisation. This provision, known as the automatic stay, provides a temporary stop for all lawsuits, including the enforcement of any judgments rendered against the bankrupt. Thus, if an employer is in the middle of a lawsuit against a former employee (or his or her new employer) for breach of a restrictive covenant, the filing of a bankruptcy petition will automatically suspend the litigation. However, the plaintiff has the right to ask the Bankruptcy Court to lift the stay and allow the case to continue. Most courts which have addressed the issue have held that the action concerning the non-compete should be allowed to proceed. Any claims for monetary relief will probably remain suspended and handled during the bankruptcy proceeding. It should be noted that this rule is not universally applied and companies needing guidance in the area will need state-specific guidance. Since sales of businesses can be somewhat common, and since purchasers of companies often place great value on the lines of business they are buying and the protected status of the information, documents and other components of the business, it is prudent for any drafter of such an agreement to make clear that the restrictive covenant being presented to the employee is fully assignable in the event of the sale of the business or substantially all of its assets and can be enforced by the successor in the same manner and to the same extent as allowed to the original employer. 5.3 Cross-border competition The analysis of an agreement which bars the employee from working for a competing entity outside the US is much the same as that for a provision which covers employment inside the country. An employer seeking to prevent an employee from working for a competitor outside the US may have a harder time convincing the court that the restriction is reasonable and necessary, but it is not impossible. However, if the employer wants to preserve its ability to do so, it will need to include a provision in the agreement by which the employee specifically consents to the jurisdiction of the courts of a particular state for the adjudication of lawsuits concerning the agreement and that the laws of that state will govern. Whether and how the employer can serve process on the employee (such as through the Hague Convention) and whether the foreign court will enforce the order of an American court on such a question are separate issues which need to be evaluated in the context of the specific dispute. 5.4 Non-solicitation clauses It is entirely proper for restrictive covenants to bar employees from making efforts to lure former co-workers to the new company or from approaching customers and clients of the old company in service of the new employer. It does often happen that co-workers or clients and customers will follow a departing employee, and will do so without any improper actions on the part of the former employee However, as discussed in section 3.2, the new employer and employee must be prepared to establish that the changes came about with no encouragement, explicit or tacit, from the departing employee. 348 5.6 Enforceability of foreign non-compete clauses There is no per se prohibition which bars the enforcement in the United States of non-compete clauses entered into outside the country, as long as the restrictive covenant is fair and reasonable under the circumstances. In this sense, the analysis is similar to that governing the enforcement of a non-compete agreement elsewhere. However, there are a few litigation issues that non-US companies may wish to consider. First, if there is a dispute about the validity of the agreement under the laws of the country of execution, expert testimony on the law of that nation is likely to be necessary and in fact, if the goal of the plaintiff company is to secure prompt injunctive relief, submitting an affidavit from the foreign law expert with the initial injunction application may be useful. Second, if a foreign company files suit directly in the US (as opposed to a suit filed by its US subsidiary), it is subjecting itself to possible counterclaims by the former employee and possibly the new employer. American courts routinely hold that if the foreign organisation avails itself of US courts to protect its rights, it cannot prevent the defendant from pressing its own claims, and the foreign company will probably be required to submit its witnesses to deposition in the United States. 349 Ius Laboris Finally, if the foreign organisation is seeking to enforce not merely a non-compete but a decision or judgment of court from its home country, the issues change. In that event, the US court will scrutinise the fairness of the proceeding in the other court and the substantive law involved. The issues in such an event are too complicated to discuss here, but suffice it to say that a non-US company should not assume that an American court will automatically enforce a judgment issued by a court from another country. 350
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