This article discusses significant legal developments in International Employment Law in 2023.
This article highlights important non-compete and restrictive covenant developments in Brazil, Poland, Canada, Ireland, India, and the Netherlands and offers a comparative perspective on changes in the United States, the United Kingdom, and Singapore.
Restrictive covenants are commonly used in Brazil in the context of employment relations, especially in contracts executed with senior employees. As it happens in other jurisdictions, companies in Brazil use restrictive covenants to safeguard legitimate business interests. This section of the paper will discuss developments in 2023 and explore the nuances surrounding the negotiation, execution, and enforceability of such covenants in Brazil while examining the legal framework and their practical implications, especially regarding post-employment non-compete covenants. Although restrictive covenants can be found in agreements executed with independent contractors, consultants, and non-employed officers and directors, in this section only restrictive covenants executed in the context of employment relationships will be considered.
The Brazilian legal system recognizes the autonomy of contracting parties, allowing them to define the terms of their agreements. Although employment contracts have certain limitations provided for in the employment legislation—including mandatory benefits, severance, limits to working hours and other mandatory rules—there is no legislation governing or preventing restrictive covenants in Brazil. For this reason, the labor courts have issued several precedents on restrictive covenants—especially on post-employment non-compete clauses—setting their limits.
Generally, these clauses restrict a party from engaging in activities that compete with the other contracting party. In the context of employment specifically, employees agree not to compete with their current or former employer’s businesses.
Non-compete clauses that are in force during the employment are generally enforceable as the relevant employee is rendering services to their employer and receiving monthly wages in return. In other words, these non-compete covenants have a similar effect to an exclusivity clause limited to the employer’s business. As exclusivity clauses are widely accepted in employment relations in Brazil, there are no legal issues in implementing non-compete clauses that are in force while the relevant employee is still working for the company.
By contrast, enforcing post-employment non-compete covenants can be challenging. Labor courts generally uphold the validity of post-employment non-compete clauses only if they are reasonable in scope, duration, and geographic reach, and if they provide proper compensation for the individual during the period, they are prevented from competing with their previous employer.
Agreements that prohibit the solicitation of clients, employees, providers of services and goods, or business associates are enforceable in Brazil. Non-solicitation covenants are also not regulated by legislation. Different from non-compete clauses, non-solicitation covenants are rarely challenged before labor courts in Brazil. For this reason, there are no specific requirements set in the case law for the validity of such covenants, although it is advisable that non-solicitation clauses be drafted such that they are not overly broad or unreasonable under general principles of contracts. This remains the case in 2023.
Confidentiality provisions that protect sensitive business information are recognized and enforceable under Brazilian law, with an emphasis on the principle of good faith. Like non-solicitation covenants, confidentiality provisions are rarely challenged before labor courts.
As pointed out above, the only restrictive covenant that has clear requirements set out by labor courts in Brazil is the post-employment non-compete type. The following is a more detailed list of criteria that Brazilian courts apply to determine the enforceability of such covenants, including some notable developments:
· Reasonableness: To assess the reasonableness of the covenant, courts consider factors such as duration, geographic scope, and the nature of the restricted activities.
· Legitimate Interest: Enforceability hinges on the protection of the legitimate interest of an employer to protect its business from the competition of a former employee who developed skills when working at the company and who had access to trade secrets or other proprietary information.
· Good Faith: Non-compete covenants must be drafted and enforced in good faith, and any ambiguity is generally construed in favor of the former employee.
· Compensation: Post-employment non-compete covenants must provide for compensation during the period when the former employee is restricted from competing with their previous employer. According to the labor courts, this requirement is justified because the relevant employees will encounter difficulty obtaining new work in the same sectors or businesses (usually similar to their previous employer’s business).
In conclusion, restrictive covenant case law continued to evolve in 2023 with no major shifts, still playing a crucial role in protecting the interests of contracting parties of an employment relationship in Brazil. By continuing to adhere to the principles of reasonableness, legitimate interest, and good faith, these covenants can continue to serve as effective tools that allow companies to mitigate risks and foster a secure and competitive business environment.
In 2021, a prohibition on non-competes in employment contracts was introduced through amendments to the Ontario Employment Standards Act, 2000 (“ESA”). As of December 2023, Ontario is the only common law province in Canada that has made non-compete agreements illegal in employment contracts. A body of caselaw has since developed, with relevant impacts across 2023, which are explored below.
As a threshold, the ESA defines a non-compete as “an agreement, or any part of an agreement, between an employer and employee that prohibits the employee from engaging in any business, work, occupation, profession, project or other activity that is in competition with the employer’s business, after the employment relationship between the employee and the employer ends.” Currently, there are no express restrictions on non-solicit agreements. The non-compete restrictions also do not apply to C-Suite executive positions.
The Courts have recently interpreted the new ESA restriction on noncompetes. The Courts found that the new amendments are not to be applied retroactively and would only apply to employment agreements signed after the amendments came into effect.
In Parekh et al. v. Schecter et al., the Plaintiff purchased a dental practice in 2020, retaining a few employees including the Defendant, who was a dentist. The Defendant had an employment agreement which pre-dated the Plaintiff’s acquisition of the practice, and that agreement contained a non-compete provision. The provision read:
Non-Competition. The Associate shall not during the Term of this Agreement and for two (2) years thereafter, either directly or indirectly, whether as a proprietor, partner, shareholder, employee, associate or otherwise, carry on or be engaged in the practice of dentistry anywhere within a five (5) kilometer radius of the Premises.
The following year, the Defendant left the practice and began working in dentistry within a five-kilometer radius of his previous employer. The Plaintiff applied to the court for interlocutory relief, seeking to enforce the non-compete clause.
The Defendant argued that the new amendments to the ESA made the non-compete illegal and thus void. Furthermore, he argued that the provision applied retroactively “by necessary implication.”
The Court considered the intent of the Legislature, recognizing that the Legislature had included a specific date upon which the provisions were intended to come into force—October 25, 2021. Given this express legislative intent, the Court concluded that the amendments were not applicable to the Defendant’s employment agreement as it was entered into prior to October 25, 2021. However, this did not end the Court’s inquiry as it was nevertheless required to determine whether the non-compete was otherwise enforceable under the common law. The Court held: “[at] most, and in respect of this case, the new ESA provisions confirm the public policy against restraint of trade, which has already been accepted in the common law.”
The common law test for assessing the enforceability of a non-compete involves assessing the reasonableness of the clause having regard for such factors as the clarity of the language, the breadth of the geographical limits, the temporal scope of the restriction, and the scope of prohibited activities. The Court found that the language in the clause was not ambiguous. The temporal scope and geographic scope were clear and specific. The proscribed activity was not ambiguous. Notably, the Defendant had been involved in negotiating the agreement, including the geographic scope of the non-compete. Ultimately the Court found that, the non-compete was not unreasonable with reference to the public interest and, having regard for the entirety of the circumstances including the Defendant’s negotiations around the agreement, the Court concluded that it was enforceable at common law.
This ruling remains impactful in 2023 in that the Courts established—and continue to hold—that the legislative amendments do not presumptively invalidate non-competes entered into prior to October 25, 2021. The evaluation of a pre-October 25, 2021, non-compete clause remains, however, subject to an evaluation of its enforceability at common law.
The employee in this case, Norton, began working for Hometown IDA pharmacy as a pharmacist in 1980. IDA was later purchased by M & P Drug Mart Inc. in 2014. At this time, Norton entered into an employment agreement with M & P that contained a non-compete provision. The noncompete clause provided as follows:
The Employee agrees that during the Employee’s employment with the Company and during the one year period following the termination of the Employee’s employment with the Company, for any reason whatsoever, the Employee shall not carry on, or be engaged in, concerned with, or interested in, directly or indirectly, any undertaking involving any business the same as, similar to or competitive with the business within a fifteen (15) kilometre radius of the business located at 10 Main Street East, Huntsville, Ontario P1H 2C9. [the address of Hometown IDA].
In 2020, following his resignation with M & P, Norton began working as a pharmacist at Campus Trail Pharmacy, which was under three kilometers from his previous employer. The employer commenced proceedings against Norton, alleing that Norton breached the non-compete provision in his employment contract. At trial, Justice Bale found the non-compete to be unenforceable since it was overly broad and ambiguous. This decision was appealed.
At the Ontario Court of Appeal, Justice Zarnett reiterated the analysis in Parekh et al. v. Schecter et al. These events occurred prior to the coming into force in December 2021 of the Working for Workers Act, 2021, S.O. 2021, c. 35 (the “WWA”), which prohibits non-competes, subject to certain narrow exceptions. The parties’ rights were therefore governed by the common law principles that treat such a covenant as unenforceable, even if freely entered into, unless it is reasonable as between the parties and with respect to the public interest.
Having agreed that the new prohibition did not apply, the Court of Appeal reiterated the framework for assessing the enforceability of non-competes in Ontario as follows:
· The general rule is that, on public policy grounds, a provision in a contract that restrains a vendor of a business from competing with the purchaser, or an employee upon leaving employment from competing with the employer, is prima facie unenforceable.
· The exception to the general rule is that the provision will be upheld if it is reasonable in reference to the interests of the parties and the public, judged in light of the circumstances at the time the covenant is made.
· In order to determine whether a non-competition agreement is reasonable, the extent of the activity sought to be prohibited, the geographic coverage of the restriction, and its duration are all relevant.
· A non-competition covenant in an employment agreement that restricts the post-termination activities of an employee is subject to more rigorous scrutiny than a non-competition covenant in a sales agreement that restricts the post-sale activities of the vendor.
· The party seeking to enforce the restrictive covenant has the onus of demonstrating that it is reasonable as between the parties; the party seeking to avoid enforcement has the onus of showing the covenant is unreasonable with respect to the public interest.
· In order to withstand scrutiny, a covenant must be clear as to activity, time, and geography. A covenant that is ambiguous on any of these matters is prima facie unenforceable.
· The court is not permitted “to rewrite a restrictive covenant in an employment contract in order to reflect its own view of what the parties’ consensus ad idem might have been or what the court thinks is reasonable in the circumstances.”
Ultimately, the Court of Appeal agreed with the lower courts and dismissed the employer’s appeal. The provision was too broad as it restricted activities beyond working as a pharmacist for a competitor. It was also ambiguous as to what activity was restricted, and the Court was not empowered to revise the covenant to make it reasonable.
Dymon Storage Corporation, the Plaintiff, builds self-storage units in Ottawa and the Greater Toronto Area. The Defendant, Bliss Edwards, resigned from Dymon and began working at a competitor, Smartstop. Dymon alleged that Edwards breached the non-compete provision in her employment contract and shared confidential information.
The non-compete clause restricted Edwards from working in any business that would compete with Dymon for a period of ten years, throughout Canada. Again, since the clause was entered into before October 25, 2021, the new ESA amendments were not applicable, and the Court assessed the enforceability of the restrictive covenant under the common law. The Court found the geographical scope to be overly broad as the restriction was Canada wide but—Dymon only operated in the Ottawa and Greater Toronto Area, and the lengthy 10-year scope of the restriction was beyond what other courts have found to be enforceable.
This case also offers insight into the distinction between “know-how” and confidentiality. There are three elements comprising the law of confidentiality: (i) it must have the necessary quality of confidence; (ii) the information must be communicated in confidence; and (iii) the information must be used to the detriment of the owner of the information. Assuming the last two elements were met, the Court considered the first element. To have the necessary quality of confidence, the information must not be of a general nature, rather it must be specific. The court identified the following considerations in determining whether information has the necessary quality of confidence, including:
a. The extent to which the information is known outside the business;
b. The extent to which it is known by employees and others involved in the business;
c. Measures taken to guard the secrecy of the information;
d. The value of the information to the holder of the secret and to its competitors;
e. The effort or money expended in developing the information;
f. The ease or difficulty with which the information can be properly acquired or duplicated by others; and
g. Whether the holder and taker of the secret treat the information as secret.
The above was contrasted to “know-how” which the Court described as follows:
“Where information derives from a professional’s experience, knowledge, practice, or skill; or is commonly known within an industry, it is not confidential to another party.” Put differently, information is not confidential when it derives from a professional’s techniques that are known in the field and could easily be duplicated by one with rudimentary skills in the trade.
The Court concluded that there was insufficient specific evidence that confidential information had been shared and accordingly declined to issue any order relating to confidentiality.
In his play Romeo and Juliet, Shakespeare wrote “That which we call a rose by any other name would smell as sweet.” Likewise, a non-solicitation agreement that has the same effect as non-competition clause will be interpreted as such. Like non-competes, non-solicits are unenforceable unless the party seeking enforcement can demonstrate that they are reasonable and necessary to protect business interests.
Traditionally, non-solicits have been easier to enforce than non-competes because a well-crafted clause is less restrictive and focuses on the relationship between customers and the departing employee. While challenges to nonsolicits as “non-competes in disguise” are not new, it can be anticipated that with the introduction of the legislative prohibition on non-competes, these arguments will be pursued with increased vigour. For contracts entered into after October 25, 2021, it is likely reasonableness will not be a consideration if it can be established that a non-solicit is really a non-compete, and therefore prohibited under the ESA.
The Plaintiff was employed in the roles of President and Co-Head of Banking with the Defendant, PearTree. The Plaintiff alleged he was wrongfully dismissed and that he was underpaid from C$3.194 million to C$3.927 million. PearTree denied the allegation of wrongful dismissal and brought a counterclaim against the Plaintiff, alleging that he had breached both the non-solicit and non-compete clauses in his employment agreement. After finding the non-compete clause to be overly broad, the Court went on to consider the non-solicit. The objectionable portion of the non-solicit clause read as follows:
You … agree that during the term of your employment and for a period of 24 months after the cessation of your employment for any reason, you shall not … directly or indirectly, solicit … any customers or suppliers (which includes issuers, brokers and other intermediaries) of Peartree to secure engagements to underwrite securities offerings or otherwise obtain allocations of securities under those offerings for the purpose of gifting arrangements or other tax structured products.
The provision was found to be “a camouflaged non-competition clause designed to eliminate competition.” The clause restricted the Plaintiff from contacting issuers regarding any “flow-through offering,” not just charitable flow-through products. As PearTree did not facilitate traditional flow-through offerings, the Court found that the non-solicit was even more restrictive than the non-compete. This clause is a perfect example of when a non-solicit is overly broad and overly restrictive, essentially becoming a non-compete.
The inclusion of the prohibition on non-competes in the ESA has not changed the Ontario Courts’ approach to considering the enforceability of restrictive covenants, including non-competes (in relation to those in effect prior to October 25, 2021). Courts maintain that restrictive covenants of any kind are prima facie unenforceable unless their reasonableness is sufficiently established. Courts continue to consider the geographical scope, temporal scope, and clarity of language in assessing non-competes. Further, Courts will consider balancing the public interest in not unduly restricting competition and protecting the ability of individuals to earn a living, against the proprietary interests of employers.
Non-compete clauses have always been hard to enforce in Ontario. Now that they are illegal in Ontario other than for select executive employees, we can expect added scrutiny of non-solicits. Any restrictive covenant should be drafted clearly, keeping the restrictions as reasonable as possible to protect the employer’s interests.
In Ireland, certain terms are implied into the employment relationship. For example, employees owe an implied duty of fidelity to their employer. Frequently, employers include express protections in an employee’s contract, for example, a provision to the effect that for the duration of the employment, the employee will not compete with their employer’s business, solicit its clients or customers, or disclose confidential information regarding its business. In this way, employers often seek to protect their business from potential damage during the employment relationship. Employers also often wish to seek to protect their business for a period of time after terminating an employee by imposing certain restrictions on former employees competing with their business or soliciting the same potential customers.
Restrictive covenants may seek to prohibit an employee from competing with their former employer or from canvassing or soliciting its clients or employees. As restrictive covenants seek to impede a person’s right to earn a living, they are treated as being prima facie void. As we have continued to see in 2023, however, this does not mean that restrictive covenants will never be enforced before an Irish court. Rather, it means that it is increasingly difficult to persuade a court to do so. The courts will assess the balance of interests between the employer’s right to protect its legitimate business interests and the employee’s right to earn a livelihood.
The Irish courts will generally consider the following when assessing the potential enforceability of restrictive covenants: (i) whether the employer has a legitimate interest to protect; (ii) whether the restraint on trade is reasonable and does not go beyond what is necessary to protect the legitimate commercial interests of the employer; and (iii) the duration and geographical extent of the restraint.
Ryanair v. Bellew is a recent case concerning the enforceability of restrictive covenants. Mr. Bellew was the Chief Operations Officer of Ryanair prior to his resignation in 2019. His original contract of employment with Ryanair contained a restrictive covenant that restricted him from working directly or indirectly in any capacity for any business that was wholly or partly in competition with Ryanair. Following his resignation, he started a new role as Chief Operations Officer for another airline, easyJet, a direct competitor of Ryanair. Ryanair brought proceedings in the High Court seeking to enforce the restrictive covenant.
Mr. Justice Allen recognized that Ryanair had a legitimate interest in protecting its commercial information. However, he held that the restriction was void and unenforceable as it went far beyond what was necessary to protect Ryanair’s interests. It was noted that the restrictive covenant not only applied to low-cost airlines, but also to “legacy or flag or high cost” airlines. Mr. Justice Allen found that the restriction applying to low-cost, legacy, or flag airlines was too wide. He further held that the commercial information to which Mr. Bellew had been privy in his role with Ryanair did not justify restricting him from taking up employment with an airline which operated in a different market area (i.e., not in the low-cost market).
Furthermore, Mr. Justice Allen took particular issue with Mr. Bellew being restricted from employment “in any capacity” with a competitor of Ryanair. He found that this restrictive covenant, if construed literally, would prevent Mr. Bellew from working as a pilot or an air steward for another airline. Mr. Justice Allen therefore ultimately held that this restriction went beyond the protection of a legitimate business interest and was an unjustifiable restraint on trade.
In conclusion, the Irish courts will hold that a restrictive covenant is unenforceable where the restriction goes beyond what is necessary and proportionate to protect the employer’s legitimate business interests. Employers should carefully consider and identify the specific business interests that are sought to be protected by the restrictive covenant. Any employer seeking to rely on a restrictive covenant needs to ensure that the scope of the activities restricted is as narrow as possible to reduce the risk of it later being deemed unenforceable. Particular care should also be taken to define as narrowly as possible the geographical area of any noncompete. Crucially, any restrictive covenant should be limited to a certain length of time post-termination. The longer the restriction the more likely that the courts will deem it unenforceable, with a one-year restriction seeming to be the upper limit in most cases. Ultimately, however, the validity and enforceability of each restrictive covenant will depend on the facts of the case, the nature of the employment relationship, and how well the covenant is drafted.
The Indian legal landscape has been active for several decades regarding employers seeking enforcement of restrictive covenants, such as noncompete or non-disclosure clauses. Such restrictive covenants have seen significant developments in recent years, including in 2023.
In India, the issue of enforcement of restrictive components such as noncompete and non-solicitation clauses has always been a contentious matter before the Indian Courts. Article 19 (g) of the Constitution of India clearly provides every citizen the right to practice any profession, trade, or business, subject to reasonable restrictions.
Section 14(1)(a) of the Specific Relief Act, 1963 provides that a “contract for the non-performance of which compensation in money is an adequate relief” cannot be specifically enforced. Section 27 of the Indian Contract Act, 1872 (“Contract Act”) provides that “every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.” The exception is that 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 as well as an agreement made by the partners in anticipation of certain situations such as dissolution of the firm.
While the Contract Act is a pre-independence statute, it is unlike the law in the United Kingdom in that it does not distinguish between partial and total restraint of trade. Therefore, if a clause in an agreement, especially in an employment contract, amounts to a post-termination restraint, then it is void.
While interpreting Section 27 of the Contract Act, Courts in India have recently affirmed that under Section 27 of the statute:
(a) a restrictive covenant extending beyond the term of the contract is void and not enforceable;
(b) the doctrine of restraint of trade does not apply during the continuance of the contract for employment, rather it is applied only when the contract ends; and
(c) this doctrine is not limited to contracts of employment, rather it also applies to all other contracts such as promotional, advertising, endorsement, and event management agency contracts.
Therefore, to determine whether a restrictive covenant in a contract would be reasonable or valid, the Courts in India have highlighted the following salient aspects:
i. Negative covenants tied up with positive covenants during the subsistence of a contract, be it of employment, partnership, commerce, agency, or the like, would not normally be regarded as being in restraint of trade, business, or profession unless they are unconscionable or wholly one-sided;
ii. Negative covenants between employer and employee contracts pertaining to the period post-termination and restricting the employee’s right to seek employment, and/or to do business in the same field as the employer, would be in restraint of trade and, therefore, a stipulation to this effect in the contract would be void. In other words, no employee can be confronted with the situation where they have to either work for the present employer or be forced into idleness;
iii. While construing a restrictive or negative covenant and determining whether such covenant is in restraint of trade, business, or profession, the courts take a stricter view in employer-employee contracts than in other contracts, such as partnership contracts, collaboration contracts, franchise contracts, agency or distributorship contracts, and commercial contracts. The reason is that in the latter kind of contracts, the parties are expected to have dealt with each other on an equal footing, whereas in employer-employee contracts, the norm is that the employer has an advantage over the employee, and it is quite often the case that employees have to sign standard form contracts or not be employed at all; and
iv. The question of reasonableness as also the question of whether the restraint is partial or complete is not required to be considered at all whenever an issue arises on whether a particular term of a contract is in restraint of trade, business, or profession.
C. Recent Developments
Recently, the Delhi High Court in the judgment of Global Music Junction Pvt. Ltd. v. Shatrughan Kumar Aka Khesari Lal Yadav & Ors., in its order dated September 5, 2023, upheld the restrictive covenant in an agreement executed between the music company and the singer, holding that the agreement between the parties was neither “excessively one sided” nor imposed a “bondage” on the singer. Hence, the singer cannot be permitted to renege on his promises under the garb of a restriction allegedly violating any law.
On the other hand, in a case involving an injunction against an employee from carrying on any business in breach of a non-disclosure agreement (NDA), the Delhi High Court in the judgment of Manipal Business Solutions Private Limited v. Aurigain Consultants Private Limited and Ors. in its order dated August 17, 2022, observed that not every customer and client database would qualify as confidential information or trade secrets. The Court held that the party claiming relief must establish that the confidentiality of such database was of economic, business, or commercial value.
Section 27 of the Contract Act, though contained in legislation from the year 1872, on promulgation of the Constitution of India in the year 1950, confers the right to practice any profession or to carry on any occupation, trade, or business, today has a different connotation. The Law Commission of India, in its 13th Report, favored a more liberal attitude towards non-compete restraints as reasonable not only between the parties to the agreement but also as regards the general public. It opined that circumstances have changed from a time when trade was underdeveloped and the object underlying enacting Section 27 was to protect trade from restraints, whereas today, trade in India does not lag far behind that in England and USA. Therefore, this report recommended amending Section 27 of the Contract Act, by substituting the words “is to that extent void, except insofar as the restraint is reasonable having regard to the interest of the parties to the agreement and of the public” in place of the existing words, “is to that extent void.”
While restrictive covenants such as post-employment non-competes have been seen as violative of the right of an employee to earn a livelihood, under both the Constitution and the Contract Act, covenants involving protection of confidential information have been upheld by the Court, provided the party seeking protection under law demonstrates the need to safeguard the information.
As of now, there is no apparent initiative being taken to amend Section 27 of the Contract Act. However, it is possible that unless and until an amendment is implemented, the judiciary may continue to set certain standards for the enforcement of restrictive covenants.
This segment describes the main characteristics of the non-compete clause as used within the relationship between an employee and an employer under Dutch law, highlighting a proposed legislative amendment in the area of non-competes in 2023, which would have a significant impact on noncompete rules in the Dutch jurisdiction.
Article 7:653 of the Dutch Civil Code defines a non-compete clause as an agreement between an employer and an employee by which the employee is limited in his or her right to work after termination of their employment. Under Dutch employment law, non-compete clauses (including business relationship clauses) can be included in employment contracts for an indefinite period of time if the clause is agreed to with (i) an adult employee (at least 18 years old); and if (ii) the clause is agreed to in writing. If one or both of these requirements have not been met, the non-compete clause is null and void. A non-compete clause does not have to be included in the employment agreement but can also be laid down in writing separately. Dutch law does not (yet) include any specific restrictions on non-compete clauses in terms of duration or scope, though there is a vast body of case law as to these restrictions in case specific situations.
An employer is in principle not permitted to include a non-compete clause in a fixed-term employment contract. This is only different if the employer substantiates in the non-compete clause that the clause is necessary on the grounds of major business interests (zwaarwegende bedrijfs- of dienstbelangen). Those major business interests must exist both at the time of the conclusion of the employment contract and at the moment the employer invokes the non-compete clause. In the end, it will be up to a Court to decide whether the non-compete clause is validly agreed upon and should remain in force in its original form. The Court may mitigate or even wholly or partially annul the non-compete clause, as discussed below.
Violation of a non-compete clause by a former employee generally constitutes a breach of contract. Consequently, the former employer may apply to the Court in summary proceedings or proceedings on the merits, seeking an injunction to stop such violation. In general, the former employer will file summary proceedings due to the urgent importance of the case. These summary proceedings will usually take place before the Court within several weeks. The Court may order the employee to refrain from the breaching activities, if necessary, by imposing a penalty for violating this obligation. The Court may, however, also deny the claim on the basis of its preliminary opinion that a request to the Court by the former employee to wholly or partly annul or mitigate the non-compete clause, would probably be granted.
Article 7:653 of the Dutch Civil Code gives an employee the opportunity to seek annulment or mitigation (as to time, geographical, or functional scope) of the non-compete clause in proceedings on the merits. However, this procedure takes a significant amount of time. The employee will therefore be more likely to be forced to start summary proceedings.
The court judgment in such proceedings will in principle not give a definitive solution as either party could initiate proceedings on the merits. In practice, however, it is likely that proceedings on the merits will not be initiated after summary proceedings.
In assessing whether the non-compete obligation should be temporarily (wholly or partially) suspended, the court will—after it has established the non-compete clause as lawfully agreed upon—weigh the interests of the parties involved. A Court will look at all relevant facts and circumstances and weigh, among others, the following interests:
(a) change in position of the employee;
(b) duration and geographical scope of the restrictions;
(c) importance of the skills and knowledge of the employee;
(d) trade secrets known to the employee;
(e) personal contacts the employee has with relations/customers;
(f) age, position, and ability to acquire another good position (without violation of non-compete obligations) of the employee;
(g) if the new job results in a considerable improvement for the employee;
(h) the circumstances under which the agreement was terminated; and
(i) employer’s investment of time and money in the employee from which the new employer may profit.
Despite the diversity in case law, some themes on this balancing of interests can be identified. In several decisions, the courts emphasise that the non-compete clause is intended to protect the employer’s market position, namely the know-how, reputation and goodwill built up by the employer through insight, effort, and knowledge, and is not intended to bind employees.
In a letter dated June 2, 2023, the Dutch Minister of Social Affairs and Employment announced an amendment to the current statutory regulation of the non-compete clause. The Minister proposes to include the following in a bill:
· limitation of the duration of the non-compete clause;
· an obligation to specify and justify the geographical reach in the clause;
· a non-compete clause can only be included in case this is needed for compelling business interests, also for indefinite-term employment contracts (currently only required for fixed-term employment contracts); and
· when invoking the non-compete clause, the employer is in principle obliged to pay compensation (a certain legally determined percentage of the employee’s last earned salary).
It is still unclear whether and, if so, when these changes will be implemented. The Minister expected that a draft bill would be submitted for internet consultation at the end of 2023. Due to the fall of the Dutch government and the elections on November 22, 2023, it remains to be seen how the legislative process will develop further. In the meantime, a non-compete clause can be agreed upon based on the current legislation. On September 8, 2023, the Tilburg subdistrict court judge ruled that the Minister’s plans are not yet concrete enough to anticipate in current cases.
In the Polish labor law system, two types of clauses regulating the subject of competition are allowed: non-competition clause during the employment contract and restrictive covenant after the termination of the employment relationship.
A non-competition clause reserved contractually either for the duration of the work or a restrictive covenant after termination of cooperation are both legally non-obligatory restrictions of employees’ involvement in competitive activities, voluntarily imposed by the will of the parties. Therefore, it is an additional obligation of the parties to the employment contract rather than an obligatory requirement for the effective conclusion of an employment contract in Poland.
However, if a contract is concluded, the source of the scope of the agreed-upon competition restrictions is usually solely the text of the clauses. Sometimes, however, especially in cross-border relations, an additional source of interpretation of what the parties have agreed to are the provisions of the Labor Code, which apply regardless of the working conditions agreed upon by the parties. It is not only about situations where the parties have been too restrictive despite the employment contract balancing interests, which the Polish Labor Code strives for. Another example is the general obligation of an employee not to disclose business secrets. It is one of the main duties of an employee specified in the Labor Code. Therefore, the existence of this obligation does not depend on the conclusion of an additional clause of the non-competition agreement after the termination of the employment relationship. Hence, an employee who has not even concluded appropriate non-competition clauses is obliged to maintain confidentiality.
In accordance with the Polish Labor Code (the core provisions of Article 101(1) and Article 101(2) of the Labor Code), the non-compete and restrictive covenants must be concluded in writing under pain of invalidity. However, Polish labor law is not restrictive as to the integrity of these clauses within the basic document of the employment contract. This means that the regulation of “exclusivity” or other competition issues may constitute a part of the employment contract, i.e., a separate paragraph regarding such clauses, or they may constitute a document separate from the employment contract, for example, in the form of an additional agreement on competitive issues.
Given the provisions noted above, the substantive legal restrictions of restrictive covenants regarding the period after the termination of the employment relationship deserve special attention. Namely, such a restrictive covenant must be justified by 1.) business secrecy; and 2.) protection of the employer’s legitimate interests. Additionally, this clause cannot 3.) violate the principles of social coexistence; or 4.) restrict the employee to an excessive extent.
As these criteria are broad, in the event of a dispute, they may be understood in a completely different way by the parties to the employment contract. Therefore, judicial decisions in Poland play a very important role in guiding the interpretation of non-compete and restrictive covenants in practice. Polish labor courts not only check the compliance of clauses with the current provisions of Polish labor law, but also decide on proportionality, so-called reasonableness, and adequacy applied by the parties to the disputed employment relationship, analyzing the specific circumstances of a given case. Therefore, the judicial practice of the Polish labor judiciary is a source of predicting whether the non-competition structure designed by the parties to the contract is objectively permitted.
An employer in Poland may implement a restrictive covenant applicable after the termination of the employment relationship only with respect to an employee who has access to particularly important information. An objective measure of whether information is particularly important is whether its disclosure may expose the employer to material or non-material damage. Information that causes damage to the employer if disclosed includes, in particular, trade secrets. A trade secret should be understood as undisclosed technical, technological, or organizational information of the enterprise or other information of economic value, for which the entrepreneur has taken the necessary measures to maintain its confidentiality. The concept of a trade secret therefore covers all spheres of an enterprise’s activity, and the competitiveness criteria provided for in the provisions regulating competition protection are used to assess this issue.
From the perspective of jurisdictional differences, the restrictive covenant in Poland can only be a fixed-term clause. The Polish legislature did not specify the maximum period for which the parties may terminate the restrictive covenant, but ordered the parties to determine its validity period. The minimum amount of remuneration that an employee must receive for ceasing competitive activity after employment depends on the duration of the covenant. This means that the restrictive covenant for an indefinite period is invalid as it is contrary to Polish civil law. The labor court in Poland also found in one of the cases that an agreement providing for an unpaid ban on competitive activity after the termination of the employment relationship is not invalid, but the gratuitous nature of the clause is automatically replaced by statutory compensation.
When entering the Polish labor market, it is important that employers, when concluding non-compete and restrictive covenants with a Polish employee, can choose a different substantive law applicable to the contract than Polish law. However, the condition for the effectiveness of such a reservation is that the selected foreign law will not be less favorable than Polish law.
Within the scope of the requirements of Polish law, it is permissible to apply both non-compete and restrictive covenants even when the employer’s goal is not to achieve a positive economic result. For the Polish labor judiciary, it is irrelevant whether the violation of the non-competition clause will lead to property damage because, from a theoretical point of view, noncompete and restrictive covenants do not necessarily result in damages if the employee violates the non-competition clause. When constructing such clauses, the labor court requires that the employee’s obligation itself be distinguished from the consequences of its violation. Therefore, in Poland, a competitive obligation and the effect of a breach are separate categories. This encourages the use of competition protection tools in the form of non-compete and restrictive covenants because, under Polish law, these clauses make it significantly easier to hold a dishonest employee accountable. In the Polish market, it is in practice sometimes difficult to assess the employer’s economic harm directly caused by the employee’s competitive activities, and without proper additional contractual protection of the foreign employer’s competitive interests, its protection under general principles may be purely illusory.
The US Federal Trade Commission (FTC) proposal to prohibit noncompetition clauses in employment contracts has ignited a contentious debate. Proponents laud it for the potential entrepreneurship, innovation, and economic growth that it may stimulate, as the ban asserts potential benefits for over thirty million private sector workers, projecting a $250 to $296 billion increase in earnings if implemented. Opponents, however, contend that non-competes are essential for safeguarding confidential information, raising questions about the FTC’s legal authority. While the outcome remains uncertain, the proposal has garnered 5000 public comments.
The proposed ban’s impact may vary across states. In New York, where restrictive covenants are “disfavored,” enforceability hinges on protecting legitimate business interests without unreasonably limiting an employee’s ability to earn a living. Legal precedent, such as BDO Seidman v. Hirshberg, emphasize the importance of narrowly tailoring non-competes. In a state like New York, there may be limited changes to the strict scrutiny already applied to restrictive covenants. In other states, such as the more pro-employer Maryland, the ban, if adopted, would mean a more drastic shift in policy.
Examining non-competition practices in the United Kingdom (UK) and Singapore provides valuable insights. In the UK, the enforceability of non-competes adheres to common law principles and statutory regulations. Recent cases, such as Tillman v. Egon Zehnder Ltd. and Marathon Asset Management LLP v. Seddon, demonstrate the courts’ scrutiny of reasonableness and necessity. The UK’s strict approach ensures that overly broad or restrictive clauses can render non-competes unenforceable.
Singapore, known for its employer-friendly approach, enforces non-competes that protect legitimate business interests and exhibit reasonableness in scope, duration, and geographical coverage. The courts scrutinize clauses more strictly than in New York, particularly when overlapping with other contract provisions addressing confidential information.
Although legal tests in these jurisdictions are similar, outcomes differ due to varying public policy considerations. The UK prioritizes promoting competition and preventing trade restrictions, demanding narrowly tailored non-competes. Singapore, in contrast, generally accepts non-competes as long as they adhere to specified boundaries. In the US, large corporations’ significant influence on labor market fluidity, extending even to fast-food workers and entry-level employees, underscores the importance of the FTC’s proposed rule. Whether implemented or not, U.S. employers are advised to explore alternative mechanisms for safeguarding confidential information, trade secrets, and goodwill.
The FTC’s proposal to ban non-competes has sparked a nationwide discourse, with contrasting opinions on its potential impact. Analyzing practices in the UK and Singapore highlights the nuances in how different jurisdictions balance employer and employee interests. Regardless of the outcome, the proposal prompts a reevaluation of mechanisms for protecting vital business assets.
Rafael Bispo de Filippis (Brazil), Victor Gielen (Netherlands), Jakub Gladkowski (Poland), Anna Hollywood (Ireland), Amanda Hunter (Ontario, Canada), Malgorzata Kieltyka (Poland), Cara Pronk (Netherlands), Deirdre Lynch (Ireland), Nadia Moynihan (Singapore, US, UK), Manish Pathak (India), André Seto Takeguma Utikawa (Brazil), Falon Wrigley (Editor).
