Non-Compete Clauses An International Guide - Ius Laboris

Non-Compete Clauses
An International Guide

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. Human Resources challenges need local expertise within a global
framework. The complexities of national employment law demand it and the
Ius Laboris members provide it.
In today’s global marketplace, businesses increasingly operate on a regional or
international scale. Companies that coordinate their employees across
multiple jurisdictions must comply with the rules and regulations governing
employment, labour, pensions, and immigration law in each of those
jurisdictions. As a result retaining legal experts with knowledge and experience
in both international and local Human Resources law is essential for
businesses of all sizes.
Each of our members must be a top-ranking Human Resources or Pensions law
firm in their respective locality to be invited to join Ius Laboris. We welcome
into our Alliance only firms that possess focused expertise in all disciplines of
labour, employment and pensions law. 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
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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.
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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:
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 darren.perry@freehills.com
george.raptis@freehills.com
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 natalie.seitz@ksw.at
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 ann.witters@claeysengels.be
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 jdye@heenan.ca
www.heenan.ca
Ius Laboris
280 Boulevard du Souverain
1160 Brussels
Belgium
T +32 2 761 46 10
F +32 2 761 46 15
E info@iuslaboris.com

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 colavarria@philippi.cl
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 jaroslav.skubal@prkpartners.com
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 ml@norrbomvinding.com
ssa@norrbomvinding.com
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 alperies@capstan.fr
Laurent Deschaud
Capstan
509, avenue du Prado
13008 Marseille
T +33 4 91 29 03 90
F +33 4 91 29 03 99
E ldeschaud@capstan.fr
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 christoph.crisolli@kliemt.de
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 astratou@kremalis.gr
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 manishi.pathak@kochhar.com
puneet.arora@kochhar.com
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 joneill@lkshields.ie
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 sab@toffoletto.it
www.toffoletto.it
LITHUANIA
Julija Lisovskaja
Raidla Lejins & Norcous
Lvovo 25
09320 Vilnius
Lithuania
T +370 5250 0800
F +370 5250 0802
E julija.lisovskaja@rln.lt
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 alexandra.castegnaro@castegnaro.lu
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 e.deur@bd-advocaten.nl
www.bd-advocaten.nl

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 cal@hjort.no
www.hjort.no
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 opimanova@alrud.ru
www.alrud.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 ulrika.runelov@elmzell.se
www.elmzell.se
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 richard.miskella@lewissilkin.com
www.lewissilkin.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 grzegorz.ruszczyk@raczkowski.eu
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 jaroslav.skubal@prkpartners.com
peter.varga@prkpartners.com
www.prkpartners.com
<
SWITZERLAND
Urs Baumgartner
Rayan Houdrouge
Lenz & Staehelin
Bleicherweg 58
8027 Zurich
Switzerland
T +41 58 450 8000
F +41 58 450 80 01
E urs.baumgartner@lenzstaehelin.com
rayan.houdrouge@lenzstaehelin.com
www.lenzstaehelin.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 esavage@littler.com
www.littler.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 bsb@ppradv.com
www.ppradv.com
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 is@sagardoy.com
gac@sagardoy.com
www.sagardoy.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 maria.celebi@bener.av.tr
pelin.tirtil@bener.av.tr
www.bener.av.tr

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 17
2.2 Age 18
2.3 Written form 19
2.4 Renewal 19
2.5 Liability for compensation on dismissal 19
3. REQUIREMENTS 19
3.1 General 19
3.2 Geographical, functional and temporal limitations 22
3.3 Job changes 23
4. ENFORCEABILITY 24
4.1 General 24
4.2 Balance of interests 24
4.3 Remedies 26
4.4 Penalty clauses 26
4.5 Damages 27
4.6 Liability of new employer 27
Australia
5. SPECIAL SITUATIONS 27
5.1 No clause 27
5.2 Transfers of undertakings 28
5.3 Cross-border competition 28
5.4 Non-solicitation clauses 29
5.5 Insolvency 29
5.6 Enforceability of foreign non-compete clauses 30

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
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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.
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.
2.2 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.
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.
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.
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.
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.
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.
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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.
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
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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
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:
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• 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.
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
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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.
4.4 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.
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 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.
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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
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.
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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.
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1. INTRODUCTION 35
2. CONDITIONS 35
2.1 General 35
2.2 Age 35
2.3 Written form 36
2.4 Renewal 36
2.5 Liability for compensation on dismissal 36
3. REQUIREMENTS 36
3.1 General 36
3.2 Geographical, functional and temporal limitations 37
3.3 Job changes 37
4. ENFORCEABILITY 38
4.1 General 38
4.2 Balance of interests 38
4.3 Remedies 38
4.4 Penalty clauses 39
4.5 Damages 39
4.6 Liability of new employer 39
Austria
5. SPECIAL SITUATIONS 39
5.1 No clause 39
5.2 Transfers of undertakings 39
5.3 Cross-border competition 40
5.4 Non-solicitation clauses 40
5.5 Insolvency 40
5.6 Enforceability of foreign non-compete clauses 41

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 (‘Arbeitsvertragsrechts-
Anpassungsgesetz’), 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).
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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.
2.5 Liability for compensation on dismissal
The employer is restricted from enforcing a non-compete clause if the employer
has (i) caused the grounds for immediate or ordinary termination by the
employee, or (ii) has terminated employment without just cause. In the
latter case, the employer may still invoke the non-compete clause if it is
willing to continue full payment of salary or wages to the former employee for
the period of the non-compete clause.
Frequently, non-compete clauses are secured by penalty clauses. 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).
3. REQUIREMENTS
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
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.
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.
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.
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.
3.3 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
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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.
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.
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.
4.6 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
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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.
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.
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1. INTRODUCTION 45
2. CONDITIONS 46
2.1 General 46
2.2 Age 46
2.3 Written form 46
2.4 Renewal 46
2.5 Liability for compensation on dismissal 46
3. REQUIREMENTS 47
3.1 General 47
3.2 Geographical, functional and temporal limitations 49
3.3 Job changes 50
4. ENFORCEABILITY 50
4.1 General 50
4.2 Balance of interests 50
4.3 Remedies 50
4.4 Penalty clauses 51
4.5 Damages 51
4.6 Liability of new employer 51
Belgium
5. SPECIAL SITUATIONS 52
5.1 No clause 52
5.2 Transfers of undertakings 52
5.3 Cross-border competition 52
5.4 Non-solicitation clauses 52
5.5 Insolvency 53
5.6 Enforceability of foreign non-compete clauses 53

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.
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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.
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
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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.
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.
Special non-compete clauses
A special non-compete clause is less restrictive, but it may only be used for
certain categories of companies and for white collar employees (except sales
representatives) with specific functions.
The employers concerned must comply with one of the following conditions:
• they must have an international scope of activities or significant
economic, technical or financial interests in the international markets or
• they must have an internal research and development division.
With those employers, a special non-compete clause may only be used for
employees whose duties allow them, directly or indirectly, to obtain
knowledge of practices specific to the organisation, whose use outside the
organisation could be harmful to it.
If these conditions are met, it is possible to deviate from a general
non-compete clause on the following points:
• limitation to within Belgian territory (the fields of operation of the
organisation and the name of the countries to which the clause applies
and in which the employee concerned is operating should be mentioned
specifically)
• the maximum period of 12 months (a clause applicable for two or three
years can be reasonable).
Further, a special non-compete clause will only be valid if:
• the clause is in writing
• the employee's annual salary exceeds EUR 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.
Non-compete clauses for sales representatives
Specific rules regarding non-compete clauses apply for sales
representatives.
These clauses are less restrictive than the general and special non-compete
clauses and are only available for sales representatives. Such a clause will only
be valid if:
• it is in writing
• the employee’s annual salary exceeds EUR 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.
If the aforementioned conditions are not observed, the non-compete clause
will not be enforced by the courts.
The non-compete clause must not be dependent on payment of a one-off
lump-sum or any other sum to be enforceable.
3.2 Geographical, functional and temporal limitations
A general non-compete clause must be geographically limited to places where
the employee could in fact compete with the employer and this may not
extend outside Belgium.
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A competition prohibition for sales representatives must be territorially limited
to places where the sales representative works and this may extend outside
Belgium. A special non-compete clause must cover the geographical scope of
its application and this must be limited to the territory in which the
employee operates. It may extend outside Belgium.
All non-compete clauses are restricted to activities which are similar to those
of competitors.
3.3 Job changes
Under a non-compete clause, an employee is prohibited from carrying out
similar activities to those performed at the end of his or her employment
contract, for a competitor. A non-compete clause will only prohibit the
employee from performing functions which are similar to his or her last
functions and therefore cannot prohibit the employee from performing a
different function for a competitor.
4. ENFORCEABILITY
4.1 General
In practice, it is often difficult to enforce a non-compete clause, as the
employer often fails to prove that the employee is in fact performing similar
activities for a competitor.
4.2 Balance of interests
In considering the validity of a non-compete clause, the court will examine
whether the legal conditions and requirements are met. If one of the legal
conditions or requirements is not respected, the clause will be void and
unenforceable. The employee may, however, decide to accept the clause as it
exists.
4.3 Remedies
In some non-compete cases interlocutory proceedings are initiated, because
the parties have an interest in obtaining a judgment quickly. The employer
wishes to prevent harm to the organisation as soon as possible and the
employee will wish to take up employment with the new employer. In
interlocutory proceedings, only provisional judgments can be issued and these
are applicable up to the decision in the action on the merits.
If the employee wishes to have a non-compete clause annulled or the
employer wishes to obtain indemnification, full court proceedings should be
commenced.
Employee
The employee may ask the labour court to declare a non-compete clause void.
There will be grounds for such a claim if the clause does not comply with all
legal conditions and requirements.
If the non-compete clause is deemed to be valid, the employee will be entitled
to payment of a non-compete indemnity (except in the case of sales
representatives).
Employer
If the employee does not comply with the obligations of a non-compete
clause, the employer may claim reimbursement of any non-compete indemnity
that was paid, and, in addition an amount equivalent to this
indemnity. The courts may, however, grant a higher indemnification at the
request of the employer provided that the existence and extent of harm
caused is proven.
For cases of violation of non-compete clauses involving sales representatives,
the employee must pay to the employer a lump-sum indemnity equivalent to
three months’ remuneration, unless the employer claims and proves greater
harm was caused.
4.4 Penalty clauses
An employee who breaches the terms of a non-compete clause will be obliged
to compensate the employer for any proven damage he or she has caused. The
penalty is fixed by law at double the compensation the employee receives for
not competing (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
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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.
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1. INTRODUCTION 57
2. CONDITIONS 58
2.1 General 58
2.2 Age 60
2.3 Written form 60
2.4 Renewal 60
2.5 Liability for compensation on dismissal 61
3. REQUIREMENTS 61
3.1 General 61
3.2 Geographical, functional and temporal limitations 62
3.3 Job changes 63
4. ENFORCEABILITY 63
4.1 General 64
4.2 Balance of interests 64
4.3 Remedies 65
4.4 Penalty clauses 65
4.5 Damages 65
4.6 Liability of new employer 65
Canada
5. SPECIAL SITUATIONS 65
5.1 No clause 65
5.2 Transfers of undertakings 66
5.3 Cross-border competition 66
5.4 Non-solicitation clauses 66
5.5 Insolvency 67
5.6 Enforceability of foreign non-compete clauses 67

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
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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.
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.
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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.
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.
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
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.
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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.
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
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:
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• the restriction protects a legitimate proprietary interest of the employer
• the scope of the restriction is reasonable
• 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.
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
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.
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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).
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
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1. INTRODUCTION 71
2. CONDITIONS 72
2.1 General 72
2.2 Age 73
2.3 Written form 73
2.4 Renewal 73
2.5 Liability for compensation on dismissal 73
3. REQUIREMENTS 73
3.1 General 73
3.2 Geographical, functional and temporal limitations 74
3.3 Job changes 74
4. ENFORCEABILITY 74
4.1 General 74
4.2 Balance of interests 75
4.3 Remedies 75
4.4 Penalty clauses 76
4.5 Damages 76
4.6 Liability of new employer 76
Chile
5. SPECIAL SITUATIONS 76
5.1 No clause 76
5.2 Transfers of undertakings 77
5.3 Cross-border competition 77
5.4 Non-solicitation clauses 77
5.5 Insolvency 77
5.6 Enforceability of foreign non-compete clauses 77

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.
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2. CONDITIONS
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
health, or unless it is so demanded by public interest, or the law so declares it,
no activity may be forbidden.
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
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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:
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.
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
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).
4.3 Remedies
Employer
If the employee does not comply with the obligations set out in a
non-compete clause during the employment relationship, the employer may
terminate the employment contract and the employee will not be entitled to
any severance payment by virtue of Article 160 No 2 of the Labour Code. If
the employee breaches the non-compete clause after termination of the
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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 SITUATIONS
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.
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.
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1. INTRODUCTION 81
2. CONDITIONS 81
2.1 General 81
2.2 Age 83
2.3 Written form 83
2.4 Renewal 83
2.5 Liability for compensation on dismissal 83
3. REQUIREMENTS 84
3.1 General 84
3.2 Geographical, functional and temporal limitations 85
3.3 Job changes 86
4. ENFORCEABILITY 87
4.1 General 87
4.2 Balance of interests 87
4.3 Remedies 87
4.4 Penalty clauses 88
4.5 Damages 89
4.6 Liability of new employer 89
Czech Republic
5. SPECIAL SITUATIONS 89
5.1 No clause 89
5.2 Transfers of undertakings 89
5.3 Cross-border competition 90
5.4 Non-solicitation clauses 90
5.5 Insolvency 90
5.6 Enforceability of foreign non-compete clauses 90

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.
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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.
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.
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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.
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.
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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
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).
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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).
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.
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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).
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1. INTRODUCTION 95
2. CONDITIONS 95
2.1 General 95
2.2 Age 97
2.3 Written form 97
2.4 Renewal 98
2.5 Liability for compensation on dismissal 98
3. REQUIREMENTS 98
3.1 General 98
3.2 Geographical, functional and temporal limitations 99
3.3 Job changes 100
4. ENFORCEABILITY 101
4.1 General 101
4.2 Balance of interests 101
4.3 Remedies 101
4.4 Penalty clauses 102
4.5 Damages 103
4.6 Liability of new employer 103
Denmark
5. SPECIAL SITUATIONS 103
5.1 No clause 103
5.2 Transfers of undertakings 104
5.3 Cross-border competition 104
5.4 Non-solicitation clauses 104
5.5 Insolvency 107
5.6 Enforceability of foreign non-compete clauses 108

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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,
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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
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.
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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.
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.
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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.
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.
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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.
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.
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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
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.
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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.
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.
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.
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.
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.
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.
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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.
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1. INTRODUCTION 113
2. CONDITIONS 114
2.1 General 114
2.2 Age 115
2.3 Written form 115
2.4 Renewal 116
2.5 Liability for compensation on dismissal 116
3. REQUIREMENTS 116
3.1 General 116
3.2 Geographical, functional and temporal limitations 118
3.3 Job changes 119
4. ENFORCEABILITY 119
4.1 General 119
4.2 Balance of interests 119
4.3 Remedies 120
4.4 Penalty clauses 120
4.5 Damages 120
4.6 Liability of new employer 121
France
5. SPECIAL SITUATIONS 121
5.1 No clause 121
5.2 Transfers of undertakings 121
5.3 Cross-border competition 121
5.4 Non-solicitation clauses 122
5.5 Insolvency 122
5.6 Enforceability of foreign non-compete clauses 123

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.
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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.
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.
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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).
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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.
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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.
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.
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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.
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
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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).
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.
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1. INTRODUCTION 127
2. CONDITIONS 127
2.1 General 127
2.2 Age 127
2.3 Written form 127
2.4 Renewal 128
2.5 Liability for compensation on dismissal 128
3. REQUIREMENTS 128
3.1 General 128
3.2 Geographical, functional and temporal limitations 131
3.3 Job changes 131
4. ENFORCEABILITY 131
4.1 General 131
4.2 Balance of interests 132
4.3 Remedies 133
4.4 Penalty clauses 133
4.5 Damages 134
4.6 Liability of new employer 134
Germany
5. SPECIAL SITUATIONS 134
5.1 No clause 134
5.2 Transfers of undertakings 135
5.3 Cross-border competition 135
5.4 Non-solicitation clauses 135
5.5 Insolvency 136
5.6 Enforceability of foreign non-compete clauses 136

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.
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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.
Wording
As is the rule with all contractual provisions, a non-compete clause should be
carefully worded. This is especially important as the clause is subject to
interpretation if its meaning remains unclear. Generally, courts tend to
interpret the scope of the clause in a restrictive way with the effect of an
‘employee-friendly’ result.
Compensation
As a non-compete clause is a clear restriction of the employee’s right to freely
choose his or her employment, a clause will be void if it does not
provide for compensation. According to Section 74 para 2 of the German
Commercial Code, a covenant not to compete is only binding if the
consideration for it is at least 50% of the previous year’s total remuneration
(including all monetary and non-monetary benefits) for each year during which
the clause is in effect.
However, it will only be invalid if it does not foresee any compensation at all.
If the compensation is too low or otherwise insufficient, the covenant is not
void but only ‘non-binding’ (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.
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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.
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).
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A non-compete covenant is considered to be ‘non-binding’:
• if the compensation is too low. The employee may then choose whether
he or she wants to abide by it and take the compensation or compete and
not claim the compensation
• if and insofar as a non-compete covenant does not serve to protect a
legitimate business interest of the employer. A legitimate interest can be
assumed if the employer uses the non-compete covenant to protect
itself from disadvantages that may arise from prospective competitive
activities by the employee. Therefore, it would, for example, not be a
legitimate interest if the employer used the clause exclusively for the
purpose of binding the employee to the business
• if the scope, term and geographical area are not limited to the extent
necessary to protect the legitimate business interests of the company
• if the scope, term and geographical area unreasonably impede the
employee’s professional career and ability to earn a living in light of the
promised compensation.
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.
4.3 Remedies
Employee
If the employer does not comply with its obligation to pay compensation even
though the employee duly fulfils his or her part of the non-compete clause, the
employee may make a claim for payment of compensation before a court.
If there is a dispute between the parties as to whether or not a clause is
binding, the employee may ask the court to make a ruling on this.
Employer
If the employee does not comply with the obligations of the non-compete
clause the employer may file for 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
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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.
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
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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.
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.
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1. INTRODUCTION 141
2. CONDITIONS 141
2.1 General 141
2.2 Age 141
2.3 Written form 142
2.4 Renewal 142
2.5 Liability for compensation on dismissal 142
3. REQUIREMENTS 142
3.1 General 142
3.2 Geographical, functional and temporal limitations 143
3.3 Job changes 143
4. ENFORCEABILITY 144
4.1 General 144
4.2 Balance of interests 144
4.3 Remedies 144
4.4 Penalty clauses 145
4.5 Damages 145
4.6 Liability of new employer 145
Greece
5. SPECIAL SITUATIONS 145
5.1 No clause 145
5.2 Transfers of undertakings 146
5.3 Cross-border competition 146
5.4 Non-solicitation clauses 146
5.5 Insolvency 146
5.6 Enforceability of foreign non-compete clauses 146

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
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(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.
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.
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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
Employee
After termination of the employment contract, the employee may file for a
petition to claim the agreed compensation included in the non-compete
clause.
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Employer
If the employee breaches an obligation to abstain from competitive activity
after the agreement has terminated, the employer may, according to Article
374 of the Civil Code, refuse to make any outstanding payments. Moreover,
the employer may request compensation for failure to perform the agreement
and, if a penalty clause has been agreed, may demand payment under that
clause (Article 406 of the Civil Code). The employer may file an interim
measures petition requesting the court to order the employee not to compete.
4.4 Penalty clauses
In order to safeguard adherence to a non-compete clause, a penalty clause can
be included in the employment contract. Just as the court may rule the scope
of a non-compete clause excessive, it may also hold that a penalty is excessive
and decrease it to a more reasonable amount. If the clause stipulates a
contractual penalty, the employee may relieve him- or herself of liability by
paying the penalty.
4.5 Damages
In cases of breach of a non-compete clause by the employee, he or she will be
liable to compensate any loss incurred by the employer as a result of the
breach. The court will evaluate the scope of the non-compete clause,
taking into consideration the limitations 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.
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According to the general duty of fidelity, the employee must not inform third
parties of any facts that should not be disclosed (e.g. trade or/and business
secrets). To defend its interests, the former employer may claim compensation
for harm caused by the disclosure of trade secrets. In addition to compensation
for harm, the employer may seek an injunction to prevent the employee from
disclosing any further secrets.
5.2 Transfers of undertakings
All rights and obligations of the transferor in relation the employment contract
or employment relationship are automatically transferred to the transferee
upon transfer. The transferee will then take on all rights and obligations of the
transferor toward every employee.
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.
However, under Article 6, regardless of the chosen governing law, an employee
may still rely on the protection of the ‘mandatory rules’ of the law of the
country in which he habitually carries out his work or the country in which the
business is situated. Such ‘mandatory rules’ apply regardless of choice, for
example, this could include statutory laws protecting health and safety or
those affording minimum employment protection rights.
For employees habitually working in Greece, restrictive covenants can be
expected to be enforced according to Greek law and disputes about them
heard in Greek courts. Where an employee works regularly in various
countries, this may present some additional problems. The judge will
investigate which law applies on a case by case basis in accordance with lex
fori principles.
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.
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1. INTRODUCTION 151
2. CONDITIONS 151
2.1 General 151
2.2 Age 153
2.3 Written form 153
2.4 Renewal 154
2.5 Liability for compensation on dismissal 154
3. REQUIREMENTS 154
3.1 General 154
3.2 Geographical, functional and temporal limitations 156
3.3 Job changes 157
4. ENFORCEABILITY 157
4.1 General 157
4.2 Balance of interests 157
4.3 Remedies 158
4.4 Penalty clauses 159
4.5 Damages 159
4.6 Liability of new employer 160
India
5. SPECIAL SITUATIONS 160
5.1 No clause 160
5.2 Transfers of undertakings 160
5.3 Cross-border competition 160
5.4 Non-solicitation clauses 161
5.5 Insolvency 161
5.6 Enforceability of foreign non-compete clauses 161

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.
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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.
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.
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
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.
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.
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
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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.
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
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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.
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.
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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.
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.
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:
• 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.
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.
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.
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.
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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.
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.
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1. INTRODUCTION 165
2. CONDITIONS 165
2.1 General 165
2.2 Age 165
2.3 Written form 165
2.4 Renewal 166
2.5 Liability for compensation on dismissal 166
3. REQUIREMENTS 167
3.1 General 167
3.2 Geographical, functional and temporal limitations 167
3.3 Job changes 168
4. ENFORCEABILITY 168
4.1 General 168
4.2 Balance of interests 169
4.3 Remedies 169
4.4 Penalty clauses 170
4.5 Damages 171
4.6 Liability of new employer 171
Ireland
5. SPECIAL SITUATIONS 171
5.1 No clause 171
5.2 Transfers of undertakings 172
5.3 Cross-border competition 172
5.4 Non-solicitation clauses 172
5.5 Insolvency 172
5.6 Enforceability of foreign non-compete clauses 173

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
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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.
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.
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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
• 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
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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
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
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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.
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.
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1. INTRODUCTION 177
2. CONDITIONS 177
2.1 General 177
2.2 Age 177
2.3 Written form 177
2.4 Renewal 178
2.5 Liability for compensation on dismissal 178
3. REQUIREMENTS 178
3.1 General 178
3.2 Geographical, functional and temporal limitations 179
3.3 Job changes 180
4. ENFORCEABILITY 180
4.1 General 180
4.2 Balance of interests 181
4.3 Remedies 181
4.4 Penalty clauses 181
4.5 Damages 182
4.6 Liability of new employer 182
Italy
5. SPECIAL SITUATIONS 182
5.1 No clause 182
5.2 Transfers of undertakings 183
5.3 Cross-border competition 183
5.4 Non-solicitation clauses 183
5.5 Insolvency 184
5.6 Enforceability of foreign non-compete clauses 184

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.
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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.
On this matter, case law provides that compensation cannot be considered
‘congruous’ if it is manifestly unfair and disproportionate to the sacrifice
requested from the employee and to his or her reduced earning power, as
considered separately from the benefit that could be derived by the employer
from the restriction.
Although employers 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).
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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.
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.
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However, if no penalty clause has been agreed by the parties, the employer
may take the matter to court, but it will be required to prove the harm
suffered.
4.5 Damages
The parties may provide that the employer is entitled to the amount specified
in a penalty clause, without prejudice to any further compensation payable if
damages are awarded which exceed the amount of the penalty. For that to
happen the employer must prove both the harm suffered and a causal
relationship between the behaviour of the employee and the harm itself.
4.6 Liability of new employer
In general a new employer is not liable for damages by the mere fact that it
has hired an employee who was known to be restricted by a non-compete
clause, as non-compete restrictions can be 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 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.
Case law identifies some elements as signalling unfair competition in the case
of poaching of employees and enticement of clients, and these can be
summarised as follows:
• the number of employees/clients ‘poached’ in relation to the size of the
company
• professional qualifications and seniority of the employees poached or value
of clients
• potential damage to the competitor in terms of turnover, reputation or lost
revenue
• breach of a non-compete covenant between the poached employees
and former employer
• the timing of the enticement or poaching
• any disclosure of confidential information, strategy, know-how, etc.
5.2 Transfers of undertakings
Pursuant to Article 2112 of the Civil Code, if a transfer of undertaking is
carried out, employees are automatically transferred on the terms and
conditions of employment that they previously held with the former employer,
and both transferor and transferee are jointly liable for the employee’s
entitlements at the time of the transfer.
Therefore, in the case of a transfer of undertaking all rights and obligations of
both employer and employee will transfer to the transferee. This includes the
rights and obligations pursuant to a non-compete clause.
5.3 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,
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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.
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1. INTRODUCTION 189
2. CONDITIONS 189
2.1 General 189
2.2 Age 189
2.3 Written form 189
2.4 Renewal 189
2.5 Liability for compensation on dismissal 190
3. REQUIREMENTS 190
3.1 General 190
3.2 Geographical, functional and temporal limitations 190
3.3 Job changes 191
4. ENFORCEABILITY 191
4.1 General 191
4.2 Balance of interests 191
4.3 Remedies 191
4.4 Penalty clauses 192
4.5 Damages 192
4.6 Liability of new employer 192
Lithuania
5. SPECIAL SITUATIONS 193
5.1 No clause 193
5.2 Transfers of undertakings 193
5.3 Cross-border competition 193
5.4 Non-solicitation clauses 193
5.5 Insolvency 194
5.6 Enforceability of foreign non-compete clauses 194

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.
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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.
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
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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.
Employer
If the employee does not comply with a non-compete obligation, the employer
may apply to the court for specific performance.
4.4 Penalty clauses
In order to safeguard adherence to a non-compete clause, a penalty clause can
be included in the employment contract. The penalty will consist of an amount
corresponding, for example, to one month’s gross salary for every
infringement, as well as an amount for every day the infringement continues.
If the parties have agreed upon a penalty clause, it can be claimed in court
without the employer having to prove actual harm or financial loss. The
reason for the claim will simply be for breach of the non-compete clause.
The employer should include a reasonable penalty for breach of the
non-compete clause, that is, one which is high enough to deter the employee
from breaching the clause (or the new employer from paying the penalty) and
low enough to prevent reduction of the penalty in court. The court has the
power to reduce the penalty and this cannot be excluded by contract.
4.5 Damages
If the parties have not agreed upon a penalty clause, the employer may also
claim damages from the employee for breach of the non-compete clause.
When claiming damages however, the burden of proof for the actual loss lies
with the employer.
It is possible to claim both the penalty and damages in excess of the penalty,
from the employee.
4.6 Liability of new employer
Not only the employee, but also the new employer can act wrongfully against
the former employer. In general, a new employer will not be liable for
damages by the mere fact that it has hired an employee who was known to
be restricted by a non-compete clause. Special circumstances can however
imply liability for the new employer, for example where the new employer
knew the employee was bound by a non-compete clause and has hired the
employee in order actively to approach the customers of the competitor by
making use of trade secrets that the employee gained in his former position.
Actions of this kind may amount to unfair competition. The burden of proof
of these circumstances lies with the ex-employer.
5. SPECIAL SITUATIONS
5.1 No clause
If no non-compete clause applies, the employee is free to enter into service
with a direct competitor or start a competing business of his or her own. In
addition, the employee may aim at the same market and customers as the
ex-employer.
The employee will only be liable for damages, if he or she acts wrongfully
against the former employer either as a self-employed person or as a
representative (e.g. employee) of a business. The court may deem the actions
of the former employee or his or her new employer as unfair competition if,
for instance, the employee systematically contacts the customers of the
ex-employer whilst making use of the knowledge and information that the
employee had gained during his employment with the ex-employer. The
burden of proof of this wrongful act lies with the ex-employer.
5.2 Transfers of undertakings
In cases of transfers of undertakings, all rights and obligations of both employer
and employee will transfer to the transferee, unless otherwise provided in the
relevant agreement. This includes any rights and obligations pursuant to a
non-compete clause.
5.3 Cross-border competition
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.
Further international law problems might arise if the employee moves abroad
and starts working from there for a competitor within the scope of a
Lithuanian non-compete clause. The employer might then face the situation
where it needs to start legal proceedings locally either to enforce a Lithuanian
judgment or to ask the local court to rule on a Lithuanian non-compete clause.
How successful this might be will very much depend on local rules in
combination with international law.
5.4 Non-solicitation clauses
Non-solicitation covenants prevent an employee from approaching the former
employer’s customers and soliciting former colleagues to work with him or her.
There are no criteria set for non-solicitation clauses either in Lithuanian labour
law or in recent case law. Note that in practice non-solicitation clauses are
usually incorporated into non-compete clauses.
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5.5 Insolvency
There are no rules regulating the enforcement of a non-compete clause where
an employer has become insolvent.
5.6 Enforceability of foreign non-compete clauses
If a foreign employer has already obtained a judgment in its own jurisdiction it
may try to enforce this judgment in Lithuania, based on international
agreements and/or EU law. Depending on the circumstances of the case,
before enforcing the judgment the foreign employer might need to ask for
recognition of the judgment by the competent Lithuanian courts.
Should the foreign employer ask for an injunction in Lithuania, assuming that
the Lithuanian court is competent, it will, in principle, be required to follow the
chosen foreign law and rule accordingly, both with regard to the validity of the
clause and its scope.
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1. INTRODUCTION 199
2. CONDITIONS 199
2.1 General 199
2.2 Age 199
2.3 Written form 199
2.4 Renewal 200
2.5 Liability for compensation on dismissal 200
3. REQUIREMENTS 200
3.1 General 200
3.2 Geographical, functional and temporal limitations 200
3.3 Job changes 201
4. ENFORCEABILITY 201
4.1 General 201
4.2 Balance of interests 203
4.3 Remedies 203
4.4 Penalty clauses 204
4.5 Damages 204
4.6 Liability of new employer 204
Luxembourg
5. SPECIAL SITUATIONS 204
5.1 No clause 204
5.2 Transfers of undertakings 205
5.3 Cross-border competition 205
5.4 Non-solicitation clauses 205
5.5 Insolvency 206
5.6 Enforceability of foreign non-compete clauses 206

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.
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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
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.
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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.
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.
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.
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.
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.
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.
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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.
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.
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
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.
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.
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.
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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.
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1. INTRODUCTION 211
2. CONDITIONS 211
2.1 General 211
2.2 Age 211
2.3 Written form 212
2.4 Renewal 212
2.5 Liability for compensation on dismissal 212
3. REQUIREMENTS 213
3.1 General 213
3.2 Geographical, functional and temporal limitations 213
3.3 Job changes 214
4. ENFORCEABILITY 215
4.1 General 215
4.2 Balance of interests 215
4.3 Remedies 216
4.4 Penalty clauses 216
4.5 Damages 217
4.6 Liability of new employer 217
Netherlands
5. SPECIAL SITUATIONS 218
5.1 No clause 218
5.2 Transfers of undertakings 218
5.3 Cross-border competition 219
5.4 Non-solicitation clauses 219
5.5 Insolvency 220
5.6 Enforceability of foreign non-compete clauses 220

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.
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2.3 Written form
Because a non-compete clause limits the employee’s freedom of employment,
the employee must be made fully aware of the clause and its contents.
Therefore, in order for a non-compete clause to be valid, it must be agreed in
writing in an individual employment contract, or in a separate addendum to
one.
A general non-compete clause in, for example, a personnel handbook or
collective labour agreement is not considered legally valid. However, 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.
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
• 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
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.
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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.
A general promotion from, for example, junior to senior manager or
consultant would be seen as a logical and foreseen move on the employee’s
career path and will hence not automatically be considered as an ‘important
change’ in position. A promotion from sales manager into, for example, a
board of directors will most likely be seen as an increase in the position that
would make the current non-compete clause void.
As the answer to whether or not a non-compete clause has become
partially void always depends on the factual circumstances, the outcome of
any court procedure will always remain uncertain. It is therefore recommended
that in confirming a promotion to an employee the agreed non-compete
clause should be reaffirmed in writing. This can be done by having both the
employer and the employee sign a promotion letter containing a non-compete
clause.
4. ENFORCEABILITY
4.1 General
Provided that a non-compete clause 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:
• 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.
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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.
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
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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
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.
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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.
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1. INTRODUCTION 225
2. CONDITIONS 225
2.1 General 225
2.2 Age 227
2.3 Written form 227
2.4 Renewal 227
2.5 Liability for compensation on dismissal 227
3. REQUIREMENTS 228
3.1 General 228
3.2 Geographical, functional and temporal limitations 228
4. ENFORCEABILITY 229
4.1 General 229
4.2 Balance of interests 229
4.3 Remedies 229
4.4 Penalty clauses 230
4.5 Damages 230
4.6 Liability of new employer 231
Norway
5. SPECIAL SITUATIONS 231
5.1 No clause 231
5.2 Transfers of undertakings 231
5.3 Cross-border competition 231
5.4 Non-solicitation clauses 231
5.5 Insolvency 232
5.6 Enforceability of foreign non-compete clauses 232

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).
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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.
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.
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.
As mentioned above, any non-compete clause should be considered on a case
by case basis.
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.
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.
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.
2.5 Liability for compensation on dismissal
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.
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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.
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
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.
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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.
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
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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 237
2.2 Age 237
2.3 Written form 237
2.4 Renewal 238
2.5 Liability for compensation on dismissal 238
3. REQUIREMENTS 238
3.1 General 238
3.2 Geographical, functional and temporal limitations 238
3.3 Job changes 239
4. ENFORCEABILITY 239
4.1 General 239
4.2 Balance of interests 239
4.3 Remedies 240
4.4 Penalty clauses 240
4.5 Damages 240
4.6 Liability of new employer 241
Poland
5. SPECIAL SITUATIONS 241
5.1 No clause 241
5.2 Transfers of undertakings 241
5.3 Cross-border competition 241
5.4 Non-solicitation clauses 241
5.5 Insolvency 242
5.6 Enforceability of foreign non-compete clauses 242

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.
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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.
2.5 Liability for compensation on dismissal
A non-compete agreement will be valid even if the employer is liable for
unlawful dismissal.
Further, the employer has the right to dismiss any employee who refuses to
enter into a non-compete agreement.
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.
There is no legal definition of competitive activities and the agreement should
therefore define these. The activities defined as competitive must be truly
competitive to the employer, i.e. they must be actual or planned activities.
A non-compete agreement for the duration of the employment is binding until
termination of the employment.
A non-compete agreement following termination of employment is
binding for an agreed period following termination. There are no statutory
restrictions on the length of non-compete agreement after termination of
employment. However, the employee’s non-compete obligation expires when
the ‘reasons for the non-competition expire’. In such cases, however, the
employer’s obligation to pay compensation remains 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,
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).
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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.
In the case of a breach of a non-compete obligation after termination of
employment, the employer is not obliged to pay the agreed compensation to
the employee and can claim damages in full. The employer can also enforce a
contractual penalty, if this is provided for in the agreement.
4.4 Penalty clauses
A contractual penalty is not permitted in a non-compete agreement during the
period of employment.
By contrast, a penalty is permitted in non-compete agreements for the
period following termination of employment. The court may reduce the
amount if the penalty is excessive.
4.5 Damages
An employee bears financial liability towards its employer for harm which the
employer suffered through non-compliance or imperfect compliance with a
non-compete agreement. The burden of proof is on the employer. The
employer must prove: (1) the illegality of the act; (2) harm suffered; (3)
culpability; (4) a causal nexus between the act and the harm, which can be
very difficult. 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.
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.
5. SPECIAL SITUATIONS
5.1 No clause
By Article 100 of the Labour Code, employees have a statutory obligation to
act respectfully in relation to the interests of the employer. In theory, to a
certain limit this also prevents an employee from conducting competing
activities (compare with section 1. above).
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
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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 247
2.2 Age 248
2.3 Written form 248
2.4 Renewal 248
2.5 Liability for compensation on dismissal 248
3. REQUIREMENTS 248
3.1 General 248
3.2 Geographical, functional and temporal limitations 249
3.3 Job changes 249
4. ENFORCEABILITY 250
4.1 General 250
4.2 Balance of interests 250
4.3 Remedies 250
4.4 Penalty clauses 251
4.5 Damages 251
4.6 Liability of new employer 252
Portugal
5. SPECIAL SITUATIONS 252
5.1 No clause 252
5.2 Transfers of undertakings 252
5.3 Cross-border competition 252
5.4 Non-solicitation clauses 253
5.5 Insolvency 253
5.6 Enforceability of foreign non-compete clauses 253

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.
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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
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.
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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.
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.
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:
• 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
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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 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.
• 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.
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:
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1. INTRODUCTION 257
2. CONDITIONS 257
2.1 General 257
2.2 Age 258
2.3 Written form 258
2.4 Renewal 258
2.5 Liability for compensation on dismissal 258
3. REQUIREMENTS 258
3.1 General 258
3.2 Geographical, functional and temporal limitations 258
3.3 Job changes 259
4. ENFORCEABILITY 259
4.1 General 259
4.2 Balance of interests 259
4.3 Remedies 259
4.4 Penalty clauses 259
4.5 Damages 259
4.6 Liability of new employer 259
Russia
5. SPECIAL SITUATIONS 259
5.1 No clause 259
5.2 Transfers of undertakings 259
5.3 Cross-border competition 259
5.4 Non-solicitation clauses 259
5.5 Insolvency 260
5.6 Enforceability of foreign non-compete clauses 260

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
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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.
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.
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.
2.2 Age
Not applicable.
2.3 Written form
Not applicable.
2.4 . Renewal
Not applicable.
2.5 Liability for compensation for dismissal
Not applicable.
3. REQUIREMENTS
3.1 General
Not applicable. See above.
3.2 Geographical, functional and temporal limitations
Not applicable.
3.3 Job changes
Not applicable.
4. ENFORCEABILITY
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.
4.6 Liability of new employer
Not applicable.
5. SPECIAL SITUATIONS
5.1 No clause
Not applicable.
5.2 Transfers of undertakings
Not applicable.
5.3 Cross-border competition
Not applicable.
5.4 Non-solicitation clauses
The term ‘non-solicitation clause’ does not exist in Russian law and is thus not
applicable.
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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 266
2.2 Age 266
2.3 Written form 266
2.4 Renewal 266
2.5 Liability for compensation on dismissal 266
3. REQUIREMENTS 266
3.1 General 266
3.2 Geographical, functional and temporal limitations 266
3.3 Job changes 266
4. ENFORCEABILITY 266
4.1 General 266
4.2 Balance of interests 267
4.3 Remedies 267
4.4 Penalty clauses 267
4.5 Damages 267
4.6 Liability of new employer 267
Slovak Republic
5. SPECIAL SITUATIONS 267
5.1 No clause 267
5.2 Transfers of undertakings 267
5.3 Cross-border competition 267
5.4 Non-solicitation clauses 267
5.5 Insolvency 267
5.6 Enforceability of foreign non-compete clauses 268

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.
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Non-Compete Clauses - An International Guide - SLOVAK REPUBLIC
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.
2.5 Liability for compensation for dismissal
Not applicable.
3. REQUIREMENTS
3.1 General
Slovak law sets out no requirements for non-compete clauses, since
concluding any such clause is prohibited.
3.2 Geographical, functional and temporal limitations
Not applicable.
3.3 Job changes
Not applicable.
4. ENFORCEABILITY
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