When the going gets tough, the tough get going – especially in the case of employees seeking greener pastures. Companies therefore need to safeguard their vital business secrets when professionals choose to move on. According to a panel of Roschier experts from Finland and Sweden, restrictive covenants – contractual arrangements that help protect a company’s trade secrets – may assume increased importance in today’s mutable business environment.
Essentially, restrictive covenants aim to ensure that employees don’t make inappropriate use of confidential information they’ve accumulated during the course of their careers with a particular company. Typical restrictive covenants include non-compete, non-solicitation (of employees, clients or suppliers) and non-disclosure obligations.
Such contractual undertakings take effect post-termination and aim to protect businesses from the threat of employees using trade secrets - either with a new employer, in the public domain, or on their own account.
Non-competition clauses in particular prohibit employees from leaving their employer and taking company secrets to a rival and are commonly used for executive-level professionals and other key employees. Finland differs from Sweden in that no specific compensation needs be paid to the employee where the non-compete obligation does not exceed six months post-employment. However, occasionally the parties may agree on the payment of separate compensation. If compensation will be paid it is advisable to agree on the terms on which the employer can release the employee from the non-compete obligation and the instances when the employer is not obligated to pay compensation.
“During the last recession we began to see employers in many occasions weighing their actual need to maintain non-compete obligations against the agreed separate payment obligation,” says Nina Isokorpi, Roschier Partner, who heads the Employment & Benefits practice in Helsinki.
The desire to ensure that a company’s trade secrets and highly valuable intellectual property don’t end up in the wrong hands is a powerful defense for non-competes. However they can act as a barrier to the free movement of professional expertise, says Jenny Welander Wadström, Head of Roschier's Employment & Benefits practice in Stockholm.
“A non-competition provision is also something which can be a restriction for an employer. We don't want a society or environment where people are prohibited from leaving one employer to go to another. It's not in the interest of the individual, corporations or society to have a locked down system. So freedom to move from one employer to another is also important to corporations,” observes Magnus Wallander, a Stockholm-based partner in Roschier’s Employment & Benefits practice.
In general, says Jenny Welander Wadström, restrictive covenants aim to balance the interests of the employer and the employee.
“Companies want to protect their business and ensure that competition is fair and that no other interests are making use of their know-how or intellectual assets,” Wadström points out.
“Employees want to be able to use the knowledge that they have accumulated over a period of years in the service of an employer, when they move on to another company at some point in the future,” she adds.
Swedish Collective Bargaining Agreement under review
Roschier’s Stockholm-based employment experts note that the rules governing how companies protect their business interests in employment contracts date back to 1969, when a labor market collective bargaining agreement on non-compete restrictions (CBA) was introduced in Sweden.
According to Wallander, that CBA - which is currently undergoing an overhaul - applies specifically to technical workers. He notes however, that modern companies may want to protect other kinds of valuable, non-technical information.
“It could be, for example, commercial information which a company wants to protect. This may be possible when the company is not directly bound by the CBA. In Sweden, companies within for example the IT, media and PR industry aren't normally bound by the CBA, so in those cases you have a somewhat wider freedom to apply restrictive covenants,” Wallander expands.
Wadström agrees, noting that much has changed in the Swedish business environment since the collective bargaining agreement was originally drafted 45 years ago.
“Everything is moving faster and it's even more important today to protect know-how because it spreads easily by technology. People are also changing jobs more frequently and the contest for knowledge has become more global so it's increasingly difficult to control,” she adds.
Sectoral variations evident in Finland
Finnish law offers the employer adequate protection for trade secrets and unfair competition during the term of an employment contract. However Roschier’s panel points out that many employers do not understand that they are have no similar protection after an employment contract is terminated.
“It's not uncommon to see employers that have no non-competition covenants at all - sometimes this depends on the industry,” notes Isokorpi.
She points out that Finnish employment contracts law defines the restrictions that can be applied to various employee groups. However she says many employers fail to consider the competitive risk posed by different employees and misguidedly apply standard clauses that may prove to be inadequate when they need to be enforced.
Janne Nurminen, a Senior associate in Roschier’s Employment & Benefits team in Helsinki, adds that there may even be sectoral differences in how covenants such as non-competition obligations are used.
“For example in sectors where technology and R&D are important there is greater awareness of the need for protection of trade secrets with non-compete obligations. However in companies which may not possess as much high-tech competence or information there is the potential to forget that some employees can still hold information that is crucial to the business, for example client lists or pricing information,” Nurminen explains.
Magnus Wallander says that in Sweden legislation protecting business secrets was introduced as awareness increased of the drastic consequences of possible breaches of non-competition agreements. He remarks that many companies naively believe that the law provides full protection, which is not the case.
“One alternative to having non-compete provisions, for which the company would have to pay, is to be more strict in confidentiality undertakings in employment contracts - specifying the period of time that employees should safeguard the confidentiality of a former employer,” he recommends.
Clarity essential for drafting solid covenants
Jenny Welander Wadström calls on companies to be clear on what types of information they want to protect. She adds that the key to building up adequate protection is to draft solid employment contracts.
“They should try to make non-competes as clear as possible. They should try as much as possible to tailor them to the situation, rather than adding clauses without thinking about the specific need or situation and its consequences. It’s also important to have clear sanctions and penalties attached to non-competes as it's very difficult to prove damage even if a breach has occurred,” she observes.
Nina Isokorpi agrees and notes that, on the other side, clients looking to bring new personnel on board are advised to check the restrictive covenants of the candidates and to consider the potential risks of hiring employees from their competitors.
Isokorpi also points out that employers often fail to revisit the restrictive covenants of their long-time employees, whose positions may change several times during their career.
“The assessment as to what kinds of covenants should be agreed should be made each time the employee is promoted to different roles. The more senior the employee, the more often protection and covenants should be reviewed and agreed,” she states.
Roschier’s legal advisors agree that clients should also include non-solicitation provisions in their employment contracts. They point out that while it’s fair for employees to be able find positions with another company without onerous restrictions, it’s generally accepted that it’s not fair to cause harm to a former employer for example by soliciting employees or customers.