Non-Compete Clauses An International Guide - Ius Laboris

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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

Alliance with expertise in key areas of Human Resources law; including

Individual Employment Rights, Discrimination, Restructuring and Labour

Relations, Pensions, Employee Benefits and Tax, and Immigration.


Contributors

In our experience, local expertise in these areas of law is crucial to developing

coherent Human Resources strategies that work within a global framework.

Our IPGs meet regularly and are well placed to coordinate regional and

worldwide requests, drawing on each individual lawyer’s wealth of experience.

Clients can access the work of our IPGs, which complement our extensive

portfolio of services.

The Individual Employment Rights IPG brings together lawyers from across

the Alliance with expertise on the unique issues that arise at different stages

in the employer-employee relationship. Members of this practice group

advise clients on a range of issues from structuring employment contracts,

identifying and implementing alternative working week arrangements,

creating and implementing performance management plans, staff training,

creating cross-border employment policies, terminations and settlement

agreements, labour audits and due diligence inquiries for corporate

transactions.

For any additional information, please visit our website (www.iuslaboris.com)

or feel free to contact us:

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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41


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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123


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.

184


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.

206


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:

252

253


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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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

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

Not applicable.

5.5 Insolvency

Not applicable.

4.1 General

If a non-compete clause were to be concluded, it would be unenforceable.

Thus the employer and employee cannot successfully require fulfilment of such

a clause before a court.

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5.6 Enforceability of foreign non-compete clauses

There is no Slovak case law which would relate to this issue. Therefore, we may

not exclude the possibility that the Slovak courts would consider foreign

non-compete clauses to be unenforceable as contrary to mandatory rules

which do not permit the conclusion of non-compete clauses (although,

unfortunately, there is no list of Slovak mandatory rules to which we can refer).

However, we believe that each non-compete clause should be considered

separately on its merits, so that for example, if the clause were to contain

compensation corresponding to the employee’s previous salary (which is

obligatory in the Czech Republic, for example), we could imagine that if the

employee him- or herself required enforcement, the clause would in fact be

enforceable in Slovakia.

268


1. INTRODUCTION 273

2. CONDITIONS 273

2.1 General 273

2.2 Age 275

2.3 Written form 275

2.4 Renewal 275

2.5 Liability for compensation on dismissal 275

3. REQUIREMENTS 276

3.1 General 276

3.2 Geographical, functional and temporal limitations 277

3.3 Job changes 278

4. ENFORCEABILITY 278

4.1 General 278

4.2 Balance of interests 278

4.3 Remedies 278

4.4 Penalty clauses 279

4.5 Damages 279

4.6 Liability of new employer 279

Spain

5. SPECIAL SITUATIONS 279

5.1 No clause 279

5.2 Transfers of undertakings 279

5.3 Cross-border competition 280

5.4 Non-solicitation clauses 280

5.5 Insolvency 280

5.6 Enforceability of foreign non-compete clauses 280


Non-Compete Clauses - An International Guide - SPAIN

1. INTRODUCTION

Article 38 of the Spanish Constitution recognises the freedom of business

within the market economy and incorporates the concept of a liberal

economy and market system into the Spanish legal system. This system

consists of private companies which compete with each other to succeed in

their respective markets.

In order to prevent market disruption as well as abusive or unfair competition,

and following the instructions given by the European Union, the Spanish

legislator has enacted several laws in order to protect competition and to

discourage unfair competition.

The concept of an unfair (disloyal) act appears in Article 5 of the Unfair

Competition Law and this is defined as ‘any behaviour which goes objectively

against good faith’. Extrapolating unfair competition regulation to the labour

field, Article 13 of the Unfair Competition Law describes as unfair ‘the

spreading and exploitation of industrial secrets or any other company secrets

which the worker has accessed legitimately, without the owner’s consent’.

Furthermore, the Workers’ Statute establishes that it is the duty of every

worker to not to compete with the activity of the company in the way

described in that Statute.

2. CONDITIONS

2.1 General

The Workers’ Statute does not ban workers from working in more than one

setting and so, as a general rule, every worker has the right either to work for

more than one organisation or to work for himself in addition to the services

he renders to the organisation that hires him. In Spanish law this is called

‘multiple jobs’ or ‘multiple activities’.

Multiple jobs (‘moonlighting’) is defined in the social security rules as

rendering services for more than one organisation at the same time – and the

same social security system is used for both/all jobs.

‘Multiple activity’ on the other hand, consists of rendering services in more

than one company at the same time but having different social security

regimes. The most common example of this is where the worker, in addition

to his job in a company is also self-employed.

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As mentioned, labour law does not ban any of these activities expressly and so

both are permitted in the Spanish labour market. However, both are subject to

certain legal limitations in order to prevent them from being used in an

abusive, unfair or disloyal way.

Unfair competition

In an employment relationship the employee is required to act in good faith,

as suggested in Articles 5a) and 20.2 of the Workers´ Statute. The duty of

good faith consists of not competing with the employer and is the second limit

to the freedom to ‘moonlight’. The employee cannot work for another

employer that competes directly in the market with its real employer because

even though the employee must show loyalty to his or her employer, it may be

very difficult for the other employer not to take advantage of any sensitive

data or exclusive knowledge obtained by the worker from the real employer.

Thus, the concept of unfair competition has been defined by the Supreme

Court as economic or professional activities performed by workers in order to

satisfy their private interests, which are in economic competition with the

employer because of their influence in the same market area with the same

potential customers.

In order to determine whether unfair competition exists, the courts will look at

whether the jobs are actually in competition and whether they are impacting

on the same industrial or commercial sector. The test requires that goods

and/or services offered by the employer coincide with those of competitors in

terms of subject matter, geographical scope and time. If all three aspects are

found to match, it will be considered that the competitor’s activity influences

the same market as the employer’s and the collaboration will be deemed

unfair.

No damage to the original employer or benefit to subsequent ones need be

proved for unfair competition to exist, as the courts have established that

potential damage is sufficient, as long as some simple preparatory acts aimed

at competing with the employer are found to have been made.

Unfair competition requires the following three elements:

• the carrying out of an economic activity by the employee that a) satisfies

his or her interests; and b) is within the scope of the employer’s

commercial interests and in competition with them

• the use by the employee of experience and skills acquired from the

employer

• potential damage to the interests of the employer.

However, there is no unfair competition when the employer knows and

consents or if the employee does not conceal it. Further, it will not amount to

unfair competition if employer and employee have agreed to extend the

non-compete obligation to non-work periods, such as holidays or over a

period of leave.

Non-compete after termination

Labour law does allow for a non-compete agreement to prohibit a former

employee from working in a different organisation once the contract has

expired with the first employer. However, this can only be done by agreement,

as the notion that an employer can prevent an employee from working for

another organisation after termination is contrary to the principles described

in section 1 above.

2.2 Age

There are no age restrictions on non-compete clauses.

2.3 Written form

There is full freedom as to how a non-compete agreement may be

concluded by the parties to it, but if it is not made in writing, this could cause

evidential difficulties. An agreement of this kind may be made at any time,

even during a probationary period.

2.4 Renewal

Article 21.2 of the Workers´ Statute establishes that a non-compete agreement

applicable after termination of the employment contract must not last for

more than two years for ‘technical’ employees and six months for

others. Hence, any renewals may only be made to the extent that they remain

with these timelimits.

2.5 Liability for compensation on dismissal

Non-compete agreements after termination

The employee’s dismissal will not affect the validity of the non-compete

agreement unless parties have agreed that it will terminate by reason of the

dismissal.

Exclusive dedication agreements

If the employee does not comply with an exclusive dedication agreement, this

will give rise to a right to dismiss the employee for having an unlawful source

of income contrary to good faith. This is separate from any right that the

employee may have to compensation. Courts often quantify damages in terms

of the amount set out by parties as compensation in their agreement.

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3. REQUIREMENTS

3.1 General

Article 21.1 of the Workers’ Statute regulates ‘exclusive dedication

agreements’, by which the employee is banned from having more than one

job. This prevents the employee from working either for any other company or

for himself.

As in any agreement which limits the freedom of one of the parties, the

company is obliged to provide the employee with financial compensation.

This means that although the parties are given the freedom to set the amount

and the method of payment of compensation, the agreement must contain

compensation and this must be expressly stated. It cannot be included in

salary, for example. If no compensation is agreed the agreement will be void.

Note also that such an agreement is not absolutely binding, as the employee

may terminate it with 30 days’ advance notice, so recovering his or her

freedom to work for other companies but losing the right to the agreed

compensation.

The purpose behind this kind of agreement is normally not to curb unfair

competition but to ensure the commitment of employees to the organisation.

Therefore the compensation is intended to make up for the employee’s having

abstained from other activities at the same time.

Reasonably enough, if the employee does not comply with the agreement, this

will give rise to a right to damages for the company, including the right to

dismiss the employee for having an unlawful source of income, in breach of

his or her ‘good faith’ obligations.

On the other hand, the effectiveness of any non-compete agreement is

dependent on the legal requirement that the employer must provide adequate

financial compensation to the employee, given that the agreement restricts the

employee’s the right to work and limits his or her ability to find a new job

within his or her specialisation. If the financial compensation is inadequate, the

agreement will be invalid. Further, compensation must be determined at the

time the agreement is signed and cannot be fixed at a later time.

What is ‘adequate’ will depend on the circumstances, but the following

criteria are used:

• the shorter the duration of the non-compete agreement, the less

compensation is required

• if the non-compete agreement is signed at the time when the

employment contract terminates, the amount of compensation should

increased

• the smaller the field of competition, the lower the compensation should

be.

As for the method of payment, it may be a lump sum or paid by monthly

instalments during the employment relationship or at the termination of the

contract. The compensation will not be subject to social security but will be

taxable, and is therefore compatible with unemployment benefit.

According to the provisions of Article 1303 of the Civil Code, if a non-compete

agreement is declared void the employee must return any compensation paid

and the employer must release the employee from his or her obligation not to

compete.

3.2 Geographical, functional and temporal limitations

‘Industrial interests’ involve in the broadest sense possible, the manufacturing

process of any kind of product, while ‘business interests’ include, in as

general a sense as possible, sale and distribution and any related activities.

However, in a non-compete agreement the interests protected should be

limited to a particular geographical area, as the courts have held that any

absolute prohibition of employment activities will be invalid. Further, it is

necessary that the job position and functions performed by the employee for

the new employer should be similar to those performed for the former

employer.

The maximum duration of a non-compete agreement is two years for

‘technical’ employees and six months for others. For high ranking managers

and commercial agents, the maximum length is two years.

A technical worker is defined as a qualified employee who has knowledge of

business techniques related to production, organisational or commercial

matters and someone who is in touch with business strategy personnel.

If the duration of a non-compete agreement is longer than the period

mentioned above, the Supreme Court has indicated that it will be shortened

and the amount of compensation will be reduced accordingly.

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3.3 Job changes

If the job or functions performed by the employee for a new employer are

different from those performed for the former employer, no breach of the

non-compete agreement could be claimed to have occurred. The same applies

if the job performed for the old employer changes.

4. ENFORCEABILITY

4.1 General

The Workers´ Statute does not include any regulations relating to remedies

that an employee or employer can use to enforce a non-compete

agreement. However, in section 4.3 below we analyse the remedies that the

parties have pursuant to case law.

By contrast, Article 21.3 of the Workers´ Statute establishes that exclusive

dedication agreements may be terminated by the employee upon 30 days´

advance notice. By terminating in this way the employee will recover his or her

freedom to work for other organisations but will lose the right to the agreed

compensation.

4.2 Balance of interests

In case of disputes, the Courts will establish whether or not the terms and

conditions of a non-compete agreement are appropriate (i.e. not

excessive). The judge has wide discretion and will consider whether the

industrial or business interests of the former employer are real and whether the

financial compensation is adequate.

4.3 Remedies

Employee

If the employer fails to pay the agreed compensation the employee may

terminate the non-compete agreement and/or require the employer to pay

what it was agreed.

Conversely, it is lawful for the employer to fail to pay compensation if

industrial or commercial interests have been lost for reasons beyond the

employer’s control, such as the incapacity of the worker.

Employer

If there is a breach of a non-compensation agreement, the employer is entitled

to request a refund of any compensation paid to the employee and to request

damages. Of course, allegations must be proved in court if damages are to be

awarded. The employee may also be required to carry out his or her

non-compete obligations. Although the courts tend not to make rulings

requiring compliance with a non-compete obligation, some courts have done it.

4.4 Penalty clauses

The Supreme Court has ruled that penalty clauses incorporated in

non-compete agreements are valid. Hence, the parties may determine the

compensation that the employee will have to pay to the former employer if

there is a breach of the obligation not to compete. If the compensation is not

proportionate or appropriate, the courts may consider the clause to be

partially invalid.

4.5 Damages

If the employee does not comply with an exclusive dedication agreement, this

will give rise to a right to damages for the employer, including the right to

dismiss the employee for having an unlawful source of income in breach of his

or her obligation to act in good faith. Further, if there is a breach of a

non-compete agreement, the employer may be entitled to ask the former

employee for damages. In both cases the allegations for which damages are

requested must be proved in court.

4.6 Liability of new employer

A non-compete agreement which applies after termination of the employment

contract binds only the parties to it. Hence, new employers will not be liable

for any obligation arising from breach of that agreement.

5 SPECIAL SITUATIONS

5.1 No clause

Despite the fact that there is full freedom as to how exclusive dedication

agreements and non-compete agreements are concluded by the parties, if

they are not made in writing this could cause evidential difficulties later on. If

any dispute arises from the agreement, the parties will be required to prove its

terms and conditions before the court.

5.2 Transfers of undertakings

According to Article 44 of the Workers´ Statute, all rights and obligations of

both employer and employee will be transferred to the transferee by operation

of law. This includes any rights and obligations in relation to non-compete

agreements or exclusive dedication agreements.

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5.3 Cross-border competition

The Workers´ Statute does not regulate cross-border competition but the

parties may draft a non-compete agreement in accordance with the rules

described above, including the criteria followed by the Supreme Court. These

state that in a non-compete agreement, the interests protected should be

limited to a particular geographical area and any absolute prohibition of

employment activities will be invalid. However, if there is a dispute, the courts

will analyse each case on its merits and decide whether or not the restrictions

are excessive.

5.4 Non-solicitation clauses

The parties enjoy full freedom to agree the terms of non-solicitation

agreements. However, in any dispute, the courts will take each case on its

merits and decide whether or not the clause is excessive.

5.5 Insolvency

Insolvency proceedings (which are different from cases of winding-up) allow

the continuation of the employer’s activities. Thus, in the case of exclusive

dedication agreements employees will continue be obliged to refrain from

working for any other employer.

In addition, the validity of any non-compete agreement will be unaffected if

the employer is involved in insolvency proceedings. However, if the

employer fails to pay the agreed compensation because of its insolvency, the

employee may terminate the agreement and recover his or her freedom to

work.

5.6 Enforceability of foreign non-compete clauses

According to the provisions of Article 10.6 of the Civil Code, the parties are

free to choose which legal system applies to non-compete agreements made

between them and in the absence of any such choice any agreements will

be governed by the law of the country in which the employee performs work

pursuant to the employment contract.

280


1. INTRODUCTION 285

2. CONDITIONS 285

2.1 General 285

2.2 Age 286

2.3 Written form 286

2.4 Renewal 286

2.5 Liability for compensation on dismissal 286

3. REQUIREMENTS 286

3.1 General 286

3.2 Geographical, functional and temporal limitations 288

3.3 Job changes 288

4. ENFORCEABILITY 288

4.1 General 288

4.2 Balance of interests 289

4.3 Remedies 289

4.4 Penalty clauses 290

4.5 Damages 290

4.6 Liability of new employer 290

Sweden

5. SPECIAL SITUATIONS 291

5.1 No clause 291

5.2 Transfers of undertakings 291

5.3 Cross-border competition 291

5.4 Non-solicitation clauses 292

5.5 Insolvency 292

5.6 Enforceability of foreign non-compete clauses 292


Non-Compete Clauses - An International Guide - SWEDEN

1. INTRODUCTION

During employment, the employee has a far-reaching duty to exhibit loyalty

towards the employer. The employee may not act in any manner which is

detrimental to the employer, e.g. the employee may not compete with the

employer. However, when the employment relationship terminates, the duty to

be loyal, including the obligation not to compete, expires. If the employer

wishes to protect itself after the termination of employment, this can be

attained through a non-compete prohibition in the individual employment

agreement.

Although non-compete clauses are valid, they can be moderated or set aside

entirely by the courts on the basis of the Contracts Act if they go beyond what

is deemed reasonable. In addition, limits are imposed on the use of

non-compete clauses under a 1969 collective agreement covering white-collar

workers in the manufacturing industry (the ‘CBA’).

2. CONDITIONS

2.1 General

There is nothing in Swedish legislation prohibiting the use of non-compete

clauses in employment relationships per se but according to Article 38 of the

Contracts Act, a person is not bound by a pledge not to pursue an activity of

a certain kind, or not to seek employment with another employer, if the pledge

is more far-reaching than is reasonable. Further, a non-compete clause may be

tested against the general clause of the Contracts Act (Article 36) and

adjusted to the advantage of the employee if found unreasonable. This

usually happens in relation to the amounts of any penalties for breach.

In relation to Article 38 of the Contracts Act, case law is usually based on the

CBA mentioned above. The CBA has over the years become a source of great

importance to the application of the law with regard to non-compete clauses

for employees.

The aim of the CBA is to limit and regularise the use of competition and

secrecy clauses in detail. Employers bound by the CBA (the majority of the

employers in industry) are legally prohibited from agreeing non-compete

clauses that are less favourable to the employee than the provisions laid down

in the CBA. Hence, deviations from the CBA can only occur in other, smaller

parts of the Swedish labour market.

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2.2 Age

A minor can enter into an employment relationship, including a non-compete

clause, if his or her guardian consents to it. Consent is not required from the

age of 16 if the minor enters into a new employment relationship of a similar

nature.

2.3 Written form

There are no formal legal requirements for the validity of a non-compete

clause. However, the employee must be fully aware of the clause and its

contents and it is recommended that it should be in writing. Further, the EU

Directive on an employer´s obligation to inform employees of the conditions

applicable to his or her contract or employment relationship (91/533/EEC),

which was incorporated into Swedish law by Article 6c of the Employment

Protection Act, requires the employer to inform the employee in writing of all

important employment conditions, which would include any non-compete

clause.

2.4 Renewal

In cases of extension and/or renewal of the employment agreement or

an important change to the job of the employee within the organisation, it

is advisable to make sure that the non-compete clause from the previous

agreement remains applicable.

2.5 Liability for compensation on dismissal

The non-compete prohibition cannot be invoked by the employer where:

• the employer terminates the employment agreement and the termination

is not the result of a breach of contract by the employee. This means that

the non-compete prohibition cannot be invoked when the employment

is terminated for redundancy or

• the employee terminates the employment agreement because of a breach

of contract by the employer.

3. REQUIREMENTS

3.1 General

Case law has established a restrictive use of non-compete clauses.

A non-compete clause may not be too hard on the employee, i.e. it must be

reasonable and hold the balance between the employer’s need for protection

of its business and the employee’s opportunities to earn a living. Case law

shows that the courts will regard any non-compete clause that is not within

the scope of the CBA unfavourably. Hence, the central elements of the CBA

are listed below.

Scope

• non-compete clauses should only be used by employers which are

dependent on independent products and method development and which,

by means of such development work, acquire manufacturing secrets or

comparable knowledge, the disclosure of which might entail significant

detriment.

• non-compete clauses should only apply to employees who, during their

employment, receive knowledge of manufacturing secrets or comparable

knowledge which they have the opportunity to use through training or

experience.

A note in the minutes to the CBA adds that sales and administrative

personnel may also be bound by non-compete clauses, but only on

condition that the objective requirements of the CBA are met.

Prohibitions

A non-compete clause could prohibit the employee from:

• taking up employment with any other organisation which is directly or

indirectly in competition with the former employer within a specific area,

and the new employer could consider using trade secrets known to the

employee through his or her former employment or

• becoming engaged as a partner in such a company or assisting them in any

other way, such as by giving them advice etc. or

• running or carrying out any type of business which is in competition with

the former employer on his or her own behalf or on behalf of someone

else.

The employer must compensate the employee for the inconvenience caused

by the non-compete clause. According to the CBA the compensation must

correspond to the difference between the employee’s new salary and the

employee’s salary at the time of termination of the employment. However, the

employer may choose to cap the compensation at 60% of the employee’s

salary at the time of termination of the employment. It must not be paid out

for longer than the duration of the non-compete restriction and the employee

must keep the employer informed of the level of income he or she is receiving

from other work.

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Compensation for a non-compete clause could also be included in the

employee´s salary or in the form of severance pay.

The employer is however at any time entitled to waive the non-compete

restriction and if this is done the employer´s obligation to pay compensation

will immediately cease.

3.2 Geographical, functional and temporal limitations

Although not clearly mentioned in the Contracts Act or in the CBA, the more

specifically the non-compete clause is formulated the more likely the court will

be to find the clause reasonable. This is especially true in relation to

geographical scope and the scope of the work. The more specific the

non-compete clause is, the higher the chances that the clause will not be

moderated or set aside in any possible court procedure.

The duration of the non-compete clause should not be longer than the

estimated life of the know-how of the employer subject to protection.

Generally, taking into account the employee´s interest in working freely, the

duration should not exceed 24 months or, if the estimated life of the

know-how is short, 12 months.

3.3 Job changes

Where an employee´s job changes, this could have an affect on the

enforceability of a non-compete clause, for example, if prohibited activities are

defined in the non-compete clause but these are no longer applicable because

of the changes. It is therefore recommended that in confirming any job

changes to an employee the agreed non-competetition clause should be

reaffirmed or amended if necessary, in writing.

4. ENFORCEABILITY

4.1 General

In considering the validity of a non-compete clause, the court will take all

relevant circumstances into account. The legislator has, however, stated in

preparatory works that Article 38 of the Contracts Act should be compared to

and interpreted in accordance with the CBA, although it noted that the fact

that conditions in different areas of the labour market vary considerably,

should be taken into account.

4.2 Balance of interests

Case law demonstrates that the Labour Court has taken the last remark quite

literally. Thus, the court has declared that a non-compete clause which is

outside the scope of the CBA, for example in the consulting business or IT,

cannot be regarded as unreasonable and invalid per se, but that it should,

nevertheless, be interpreted very restrictively. All cases that have been heard in

the Labour Court so far have concerned disputes about non-compete clauses

where the CBA has not directly applied (disputes about CBAs are

generally resolved by arbitration in special proceedings). Further, the Labour

Court has declared that a non-compete clause whose sole purpose is to retain

an employee with specialist knowledge or competence, is not lawful. The

Labour Court has also taken the following factors into account when

weighing the parties’ interests: the position of the employee; whether the

prohibition is especially harsh to the employee or more marginal for the

employee´s chances of finding new employment or carrying out his or her own

business; whether the employer´s interests in protecting its business are

justified; whether the clause really acts to protect the employer from ordinary

market competition; whether the employee is compensated for the existence

of the clause – which, quite apart from compensation envisaged under the

CBA, may involve generous employment conditions or high severance pay.

4.3 Remedies

Interlocutory proceedings may be initiated in relation to a non-compete clause,

as both parties have an interest in obtaining a speedy judgment. The

employer will wish to prevent loss or damage as soon as possible and the

employee will wish to ensure that he or she can enter into the service of a new

employer. Only provisional judgments may be made in interlocutory

proceedings and these will apply until a decision is made on the merits of the

case.

Employee

An employee may bring an action to suspend a non-compete clause in

interlocutory proceedings and may bring a full action on the merits to

moderate or set the clause aside. Whether or not the employee’s claim will be

granted will be a matter of balancing the interests of the employer in

retaining the non-compete clause against the interests of the employee in

having it set aside.

The employee may start proceedings either during employment or after it has

ended.

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Employer

If the employee does not comply with a non-compete obligation, the employer

may claim specific performance of the non-compete obligations and the court

may issue a prohibition, enforceable by a fine, to prevent the employee from

avoiding complying with the non-compete prohibition.

4.4 Penalty clauses

In order to safeguard adherence to a non-compete clause, a penalty clause

may be included in the employment contract. A contractual penalty should

have a reasonable correlation with the employee’s salary. According to the

CBA, a penalty equal to six months’ salary for every infringement should give

sufficient protection. If the parties have agreed upon a penalty clause, this can

be claimed in court without the employer having to prove actual harm or

financial loss. Breach of the non-compete clause is reason enough to claim the

agreed penalty.

If the parties have not agreed upon a penalty clause the employer may claim

damages from the employee for breach of the non-compete clause. When

claiming damages however, the burden of proof for the actual loss lies with

the employer. In order to prevent having to prove loss in this way, most

employers in Sweden insert a penalty clause in the employment contract.

It is possible to claim both the penalty and damages from the employee if the

actual loss exceeds the penalty.

4.5 Damages

An employee who has engaged in competitive actions, including breaching a

non-compentition clause, and in so doing has caused the employer financial

loss, will be liable for any such loss in accordance with the law of torts in

Sweden.

The big practical problem here is that it will often be very difficult for the

employer to show either that a loss has been suffered at all or its size, yet this

is necessary for a claim of damages to succeed. Calculating loss is rarely easy

since the indicators that employers would typically use, such as turnover, are

also affected by factors other than the employee´s breach of a non-compete

clause. The problems involved in calculating loss are one of the reasons for

introducing penalty clauses.

4.6 Liability of new employer

Not only the employee, but also the new employer may act wrongfully

towards the employer. In general, a new employer is not liable for damages by

the mere fact that it has hired an employee who was known to be restricted

by a non-compete clause. However, according to the Trade Secrets Act, special

circumstances may impose liability on the new employer, for example, if the

new employer knew that the employee was bound by a non-compete clause

and hired him or her in order actively to approach customers of the competitor

by making use of trade secrets that the employee had gained in his former

position. The burden of proof of these circumstances lies with the

ex-employer.

5. SPECIAL SITUATIONS

5.1 No clause

If no non-compete clause applies after termination of the employment, the

employee is free to enter into service with a direct competitor or start his or

her own competing business. In addition, the employee may target the same

market and customers as the ex-employer. The general rule is that employees

are free to make use of knowledge they have acquired, including knowledge

of the trade and business secrets of a former employer. However, a duty of

confidentiality continues to apply where there are particular reasons, such as

in a situation where an individual has entered into an employment relationship

with the deliberate intention of gaining knowledge of trade secrets in order to

be able to make use of them either on his or her own account or in the

employment of a competing employer.

5.2 Transfers of und