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Protecting the Crown Jewels: Managing Restrictive Covenants
in
European Employment Law Wednesday, November 16, 2016
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Moderator Jan Tibor Lelley Buse Heberer Fromm Frankfurt, Germany
[email protected]
Speakers
2
mailto:[email protected]
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3
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4
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Rasmus H. Christensen Plesner Copenhagen, Denmark
[email protected] Philippe Durand August & Debouzy Paris, France
[email protected]
Speakers
5
mailto:[email protected]:[email protected]:[email protected]:[email protected]
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Jan Hofkens Lydian Brussels, Belgium [email protected]
Michael Leftley Addleshaw Goddard London, England
[email protected]
Speakers
6
mailto:[email protected]:[email protected]
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Effie Mitsopoulou Kyriakides Georgopoulos Law Firm Athens,
Greece [email protected] Sasha Stepanova Kocián Šolc
Balaštík (KSB) Prague, Czech Republic [email protected]
Speakers
7
mailto:[email protected]:[email protected]
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Alberto Testi Grimaldi Studio Legale Milan, Italy
[email protected]
Speakers
8
mailto:[email protected]
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Enforcing Non-Compete Agreements
(Contractual / Post-Contractual)
9
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Belgium
10
During employment, an employee is never allowed to compete with
his employer
After employment, the employee is not allowed
to disclose company secrets or engage in unfair competition
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Belgium – Non-Compete Clause
• Principle: free to do fair competition • Unless: non-compete
clause in employment
contract • Strictly regulated:
– Max. 12 months (international companies: 2 years) – Similar
activities – Belgium (if international: list countries) – Payment:
50% salary + benefits non-compete
period (not for sales persons) 11
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Belgium – Non-Compete Clause
• Sanction: – Reimbursement non-compete indemnity – + damages
award equal to non-compete
indemnity or real damages
• Employer can waive non-compete clause – Within 15 days from
termination
12
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Czech Republic
• Enforcement of non-compete clauses can be difficult
• Mandatory requirements on length of duration and need for
consideration
• Difference in applying non-compete and non-
poaching/non-solicitation clauses
13
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Czech Republic – Enforcing Non-Compete Clauses
• Two recent cases of court practice – One case strengthens
employer position – the
employee is not always the “weaker party” – One case weakens
employer position –
comprising the employer’s ability to withdraw from a non-compete
clause
14
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Denmark – Restrictive Covenants
• Loyalty obligation during the employment • Post contractual
covenants
– New rules came into effect on 1 January 2016. Applicable for
all employees; however, the CEO is not comprised by the new
rules.
– Non-competition clauses – Non-solicitation clauses – Non-hire
clauses (non-solicitation of
employees) 15
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Denmark – Non-Hire Clauses
• Non-hire clauses can no longer be agreed upon – Except in
cases of M&A/transfer of
undertakings; however, only for a maximum period of 6 months
16
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Denmark – Non-Competition Clauses • Requirements
– Very special position of trust – Maximum enforcement period of
12 months – At least 6 months' seniority – Information on why the
non-competition clause
is necessary – Written agreement – Compensation
17
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Denmark – Non-Solicitation Clauses • Requirements
– Only customers with whom the employee has had business
relations in the last 12 months prior to termination
– Maximum enforcement period of 12 months – At least 6 months'
seniority – Employee to be provided with a list of
comprised customers in case of termination – Written
agreement
18
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Denmark – Combined Non-Competition and Non-Solicitation
Clauses
• Fulfillment of the before-mentioned requirements in relation
to non-competition and non-solicitation clauses
• Maximum enforcement period of 6 months • Higher
compensation
19
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Denmark – Compensation
• Non-competition clause or non-solicitation clause up to 6
months: – 40% of the salary per month. Compensation for
the first 2 months paid out as a lump sum upon expiry of
employment. Compensation reduced to 16% for 3rd to 6th month if the
employee finds other suitable employment.
20
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Denmark – Compensation
• Non-competition clause or non-solicitation clause up to 12
months / combined non-competition and non-solicitation clause up to
6 months: – Compensation for the first 2 months paid out as a
lump sum upon expiry of the employment. Compensation reduced to
24 per cent for 3rd to 6th month if the employee finds other
suitable employment.
21
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Denmark – Compensation
22
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Denmark – Termination and Non-Enforceability
• Non-competition and non-solicitation clauses may be terminated
by the employer with a notice of one month
• Obligation to pay minimum compensation if the employment
relationship ends within 6 months after the termination of the
clause
• If the employment relationship is terminated by the employer
without the employee having provided reasonable cause for the
termination, the non-competition clause is not enforceable
23
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France
• While the contract is being performed: − By law, the employee
has a duty to perform
his/her contract in good faith: “loyalty duty” − Consider
confidentiality and exclusivity
provisions to be inserted in the employment contract
24
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France
• Once the contract is terminated: − Confidentiality undertaking
relevant here, as well − A restrictive convenant may be more useful
− 5 conditions to be met: protection of the
employer’s interests; restriction both in time and
geographically; prohibition to be relevant with the employee’s
duties; and compensation required
− Applicable CBA always to be checked, as its provisions may
impose different (or other) conditions
25
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Greece
• Contractual – obligation of loyalty: – During the term of the
employment agreement, the
employee is bound to the employer to refrain from any
competitive acts, as well as to respect the employer’s commercial
and industrial secrets.
• Post-Contractual: – Non-compete covenants cover the post-
employment period. No need to explicitly stipulate that such
obligation covers also the term of the employment.
26
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Greece – No Legal Provisions on Restrictive Covenants
• Since no specific law exists, non-compete, non-solicit and
confidentiality covenants are treated by case law. Non- compete
covenants are usually considered as including the non-solicit
restriction.
• Theory, but mainly case law, accept them in principle as
valid, provided that their content is not contrary to mandatory
provisions of law.
• The validity of the restrictive covenants has been left to the
courts, which are competent to decide on a case-by-case basis
whether the disputed covenant is valid. Case law has steadily
applied certain criteria in ruling the validity or invalidity of
such covenants. 27
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Greece – Validity Criteria of Enforceability of Restrictive
Covenants
• The following will be considered by the court: – Its term
(duration) – Geographical area – The activity/specific business
covered – Most importantly, the agreed consideration
28
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Greece – Validity Criteria of Enforceability of Restrictive
Covenants
• Usually a consideration amounting to approximately half the
amount of the salaries the employee would have received during the
restriction period would be considered as a reasonable compensation
for validity. On a case-to-case basis, a lower amount could also be
considered as sufficient. In case the courts find any unlawful
parts of the restrictive covenant, the entire clause would not be
null and void.
29
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Greece – Restrictive Covenants May Be Fortified by a Contractual
Penalty
• A penalty can be agreed by the non-compete covenant in case of
its breach.
• In case of breach of the non-compete and non- solicit
covenant, and if provided by same, the employer has the right to
demand the restitution of any amounts paid to the employee, as well
as the payment of the above-mentioned penal clause.
• The employer is allowed to insert a waiver from this clause by
notifying the employee in advance.
30
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Italy – General Overview • The main legislation for trade
secrets’ protection arises
from European regulations. The most recent regulation was
approved on May 27, 2016 by the European Council, and Italy has not
implemented yet the local legislation.
• There are also other local rules, such as the Intellectual
Property Code (Law Decree n. 30/2005), Law on Copyright (Law No
April 22, 1941 n. 633) and Section 2598 of the Italian Civil Code
in regard to unfair competition amongst companies.
• From an employment's prospective, Section 2105 of Italian
Civil Code binds employees during the employment relationship,
while Section 2125 is enforceable after the termination of the
employment relationship.
31
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Italy - Employee’s Duty of Loyalty
• During employment employees are bound by their duty of loyalty
under Section 2105 of the Italian Civil Code, which states that “an
employee cannot engage in business, either for his own account or
for the account of third persons, in competition with his/her
employer nor divulge information pertaining to the organization and
methods of production of the enterprise, nor use it in such a
manner as may be prejudicial to the enterprise.”
• Once employment ends, employees are free to work for a
competitor or soliciting customers/enticing away employees, unless
there is a specific written restrictive covenant prohibiting
this.
32
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Italy – Non-Compete Covenant
• Under Section 2125 of the Italian Civil Code, post-employment
non-compete covenants may be deemed valid and enforceable only if
they: – Are specified in writing; – Set forth a specific
consideration in favour of the
employee; – Have a limited scope and geographical extent; – Have
a specific duration, that shall not exceed three
years (five years for “Dirigenti”, i.e., the highest category of
employee, corresponding to, for example, top manager or
executive).
33
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Italy – Geographical Extent of the Restriction
• To assess the validity of a non-compete covenant, case law
indicates that the scope and geographical extent have to be
assessed jointly with the skill and experience of the employee.
• As general guidance, case law considered as null and void a
restriction covering the whole world (Court of Milan, 2 February
2015) or even Europe, Asia, and America (Court of Bari, 18 June
2014).
34
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Italy – Geographical Extent of the Restriction
• On the contrary, case law usually considered as valid and
enforceable a pact covering the entire Italian territory (e.g.
Court of Milan, 25 March 2011; Court of Bologna, 20 May 2008).
• A precedent of the Supreme Court also stated for the validity
of a restriction covering Italy and Europe (Court of cassation, no.
13282/2003).
35
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Italy – Consideration for the Non-Compete Restriction
• As the law does not provides for a specific amount of the
consideration, the case law requires that the compensation is
“congruous,” having regard to restrictions imposed to the
employee’s professionalism and his/her right to work. Thus, the
compensation has to be evaluated on a case- by-case basis, in the
light of the other terms agreed (i.e., duration, scope,
geographical extent and the skill and experience of the employee).
36
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Italy – Consideration for the Non-Compete Restriction
• As a general guidance, amounts ranging from 15% to 35% of the
annual salary received by the employee at the termination of the
employment relationship have been considered adequate
compensation.
37
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Italy – Payment of the Consideration During the Employment
Relationship
• Although in the past the payment of the consideration during
the employment relationship was deemed lawful, according to certain
recent case law precedents, the payment of the consideration during
the performance of the employment contract entails the nullity of
the whole non-competition covenant (Court of Milan, 6 May 2015;
Id., 28 September 2010).
• This is because the overall amount thus paid varies, depending
on the duration of the employment: this way, according to the
Judges, the parties introduce in the covenant an element of
uncertainty forbidden by the law.
38
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Italy – Withdrawal from the Non-Compete Covenant
• The compliance of clause of withdrawal (i.e., a provision
entitling the employer to withdraw from the non-competition
covenant at his/her own discretion upon a written notice to
employee) under the mandatory provisions of Article 2125 of the
Italian Civil Code has been long debated by case law.
• The latest decisions of the Supreme Court stated that such
clauses are to be deemed as null and void as contrary to the
mandatory provisions of above said Article 2125, as they prevent
the employee from evaluating the opportuneness of entering the
covenant.
39
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Italy – Withdrawal from the Non-Compete Covenant
• In particular, the Court has argued that the serious and
exceptional restriction to the freedom of the employee to use
his/her working energy is only compatible with a stably binding
non-competition covenant, which is supposed to have been accepted
by the employee as outcome of an evaluation of its convenience, and
on which basis the employee planned his/her activity following the
termination of the employment relationship (Court of Cassation, no.
212/2013).
40
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United Kingdom – During Employment
• Seniority (duty of fidelity and fiduciary duties) •
Restriction on other business activity • Preparing to compete •
Confidential information • Garden leave
41
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United Kingdom – After Employment
• Categories of restriction • Rules on enforceability •
Non-compete covenants • Practical tips
42
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Pros and Cons of Imported Templates (of Restrictive
Covenants)
43
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France
• Pros: − At best, enforceability in Court when all
conditions are met − At least, psychological effect on
departing
employee
44
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France
• Cons: − Extreme care in the drafting of the contractual
undertaking: the use of a mere template is not a good idea
without proper legal expertise.
− Even when the covenant is valid and binding at the outset,
proper “management” of the undertaking is required to avoid nasty
surprises, e.g., upon employment termination, do not forget to
waive the benefit of the clause if company wants to avoid payment
of compensation for nothing. 45
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Greece
• Pros: – Ability to introduce a more comprehensive and
extended protection already elaborated in other jurisdictions,
especially in cases of similar business activities.
– Securing the same level of protection of the company’s
interests across different countries.
– Strengthening employees’ perception of enforceability.
46
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Greece
• Cons: – Templates require careful review so that they do
not contradict with any local mandatory laws, especially on the
applicable law.
– The local entity’s specific characteristics should be taken
under consideration so as to eliminate misapplication of the
template.
– Local market practice should be put into perspective to avoid
the risk of the covenant being considered as abusive in any future
litigation
47
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Italy
• Pros: − If the legal requirements provided by Italian law
are met, enforceability in Court of the restrictive
covenants
− If not, in any case dissuasive psychological effects are
met
• Cons: − The template has to be carefully analysed to
verify if the legal requirements are met 48
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United Kingdom
• Using templates • The European angle – Brussels
Regulations,
Rome 1
49
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Belgium
• Non-compete clause must be in writing • If strict conditions
not met: unenforceable
– Geographic area: specific list – One-for-all clause does not
work
• If employer “forgets” to waive in 15 days: 6 months’ indemnity
to be paid, even when employee does not join competitor – Also in
case of dismissal for cause
50
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Czech Republic
• More cons than pros in reality • Although a template can be
reassuring
across a global organization, if it is not compliant with local
laws, it may ultimately be non-enforceable in the local courts.
51
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Denmark
• Non-Danish templates often need to be revised to comply with
Danish law, as the restrictions will otherwise be invalid
52
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The Costs of Litigation
53
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Czech Republic
• Litigation is more frequent in cases of business relationships
than employment agreements
• Litigation is both costly and lengthy in duration – clients
generally better off settling
54
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Denmark
• Most cases relating to restrictive covenants are settled
without litigation
• Besides legal fees, costs related to investigation (and proof)
of the violation must be expected
55
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France
• Restrictive covenants often have their expected effect before
reaching the stage of litigation
• Litigating restrictive covenants enforcement should be only
for extreme cases of obvious breach and where no settlement has
been possible
56
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Greece
• Cost depends on the litigation (procedure / claim) to
occur.
• Interim measures proceedings: cost includes both lawyers' fees
and procedural costs for an attorney to attend before the First
Instance Civil Court for the hearing of a case.
• Standard proceedings to seek compensation, as well as
satisfaction for moral damages: both procedural and lawyers costs
are higher – procedure is lengthier – and in most cases depend on
the amount claimed.
• A stamp duty on the claimed amount could be required to be
paid as a formal condition for the hearing of the case.
57
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Italy
• Litigation on restrictive covenants is considered an extreme
measure to implement where no settlement is possible.
58
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United Kingdom
• Costs regime in the UK • Remedies – injunction, damages,
account of
profits, springboard relief
59
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Belgium
• Arbitration not allowed for employment matters
• Employment tribunals: not expensive but 1 to 3 years until
ruling – Summary proceedings (injunction) possible
(urgency + provisional measures)
• Limited cost for serving writ (500 EUR) + lump sum
compensation legal fees for winning party (cap +/- 2,000 to 5,000
EUR)
60
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Key Take-Aways
61
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Greece
• Do not include restrictive covenants for an excessively long
time period. Opt for 6 to 8 months maximum – and not longer than 1
year.
• Select to provide them for top executives only. • Remember to
always provide consideration so as
not to risk their validity! • Check whether executive’s Stock
Option Plans or
LTIP include similar covenants to avoid having two sets of
covenants for the same employee. 62
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Italy
• Restrictive covenants are usually applied only to key
employees to be selected.
• Carefully check with the company management the existence of
restrictive covenants.
63
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United Kingdom
• Tailor restrictions to circumstances • Act promptly • Consider
the whole landscape • Policies and procedures/information
security
64
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Belgium
• Non-compete clause must comply with strict rules
• Do not forget to waive in 15 days • Confidentiality and unfair
competition in
separate clause – not covered by non-compete
65
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Czech Republic
• Be careful to specifically meet the legislative
requirements.
• Look at the overall picture and use a test of
reasonableness.
• Don’t just rely on a single non-compete clause – pay attention
also to company internal regulations and storage and handling of
confidential information.
66
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Denmark
• The detailed requirements under Danish law entail that
restrictive covenants are carefully drafted.
• Non-Danish templates need to be reviewed to ensure that they
are enforceable.
• Due to the compensation and maximum restriction periods, it
should be considered what type of restrictive covenant, if any, an
employee should be comprised by.
67
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France
• At the outset, avoid restrictive covenants with all employees:
proper selection to be conducted.
• Legal job then to be done: careful drafting and CBA provisions
to be checked.
• Make sure the business management has been made aware of: (i)
the existence of restrictive covenants, and (ii) the general manner
to handle them in practice.
68
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Contact Our Speakers for More Information
69
Rasmus H. Christensen Plesner Copenhagen, Denmark
[email protected] Philippe Durand August & Debouzy Paris, France
[email protected]
Jan Hofkens Lydian Brussels, Belgium [email protected]
Michael Leftley Addleshaw Goddard London, England
[email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]
-
Contact Our Speakers for More Information
70
Jan Tibor Lelley Buse Heberer Fromm Frankfurt, Germany
[email protected] Effie Mitsopoulou Kyriakides Georgopoulos Athens,
Greece [email protected]
Sasha Stepanova Kocián Šolc Balaštík (KSB) Prague, Czech
Republic [email protected] Alberto Testi Grimaldi Studio Legale
Milan, Italy [email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]
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