As globalization and employee mobility continue to increase at a dizzying pace, employers frequently ask their counsel whether a covenant not to compete (non-compete) is enforceable in a particular jurisdiction. The issue arises in a variety of contexts, including when a company is considering hiring a candidate burdened by a non-compete, whether to include a non-compete in an executive employment agreement or sometimes whether, and to what extent, a non-compete can be enforced against a departing employee. Employers, especially in knowledge-based industries, understandably wish to protect themselves against the risk that their human capital will — after receiving training, developing relationships with customers and/or having access to the company’s most sensitive proprietary information — walk out the door and go to work for a competitor.
Unfortunately, the enforceability of a non-compete usually depends on the law of the jurisdiction where the employee lives and works, and the applicable legal principles vary widely from country to country and even, as in the US, from state to state. Most companies do business — and have employees — in multiple jurisdictions, and many employees cross state or national boundaries in the performance of their jobs. Accordingly, determining the enforceability of a non-compete in the cross-border context is often a vexing and fact-specific inquiry. This article provides a brief summary of the legal principles used in major countries around the globe. (Note: that this article does not address related topics that should be considered, such as the definition and protection of trade secrets, the enforceability of nondisclosure covenants, and the common law duties of officers, directors and partners).
In the US, non-competes are generally considered to be restraints on trade that will be evaluated under a “rule of reason” and enforced only if they are reasonable in geographic scope and duration. What is “reasonable” will be decided on a case-by-case basis depending on the individual circumstances. Some states (such as New Jersey and Virginia) tend to enforce non-competes somewhat liberally, while others (such as California) deem them invalid unless they were entered into by a seller in connection with the sale of a business. Individual states have particular requirements that present many permutations of factors such as: the employee’s occupation (physicians and lawyers are often exempt from non-competes), the employer’s “protectable interests” (that is, the existence of trade secrets, special training, customer good will, etc.), the nature and timing of the “consideration” provided to the employee for the non-compete, the significance of involuntary termination of employment, the burden of proof in an action to enforce a non-compete, the willingness of courts to reform (or blue pencil) a non-compete if it is excessive in scope or duration, and the showing required to obtain injunctive relief.
Some states have particular technical requirements, such as defining with specificity the geographic scope, describing the relevant “business,” or limiting the non-compete to matters with which the employee was personally involved. Most states will not protect against “ordinary competition,” and will refuse to enforce a noncompete if doing so would prevent the employee from earning a living. In addition, most states will enforce a non-solicitation of customers clause more readily than an outright non-compete, and will view a non-compete more favorably if it was given in connection with the sale of a business. Some states will enforce non-competes accompanied by economic incentives (such as payment of salary during the non-compete period) more readily than a “naked” non-compete without such incentives. Finally, “choice of law” clauses in agreements containing a non-compete will usually not be dispositive if the law of the state in which an action to enforce the non-compete is brought is contrary to the “chosen” state’s law.
Non-competes in the UK are generally viewed as a restraint of trade unless they are reasonably necessary to protect a “legitimate business interest” of the employer. They must also be reasonable in geographic scope and duration (the UK courts have upheld a 12-month restriction as being reasonable in certain circumstances but suggested it would be very unlikely that restrictions longer than 12 months would be enforceable). What is reasonable in particular circumstances will depend very much on the facts of the situation: What is the interest that needs protection? How senior was the employee and what confidential information might she have? What damage could she cause? However, much like with certain states in the US, the following general principles apply in the UK:
- The restriction is very unlikely to be upheld unless the former employee is actually competing with the business of his former employer by either working for a competitor or dealing with his former employer’s customers.
- In non-dealing and non-solicitation of customers covenants, the restriction is more likely to be enforceable if it is restricted to customers with whom the employee had material dealings in a defined period prior to termination — such as six months.
- A non-poaching of employees clause is more likely to be upheld if it is restricted to senior employees or those who have confidential information.
- Non-dealing, non-solicitation and non-poaching covenants are more likely to be upheld than broader “non-competes.”
Drafting is crucial because the UK courts will not rewrite the covenant. If a covenant contains particular words or clauses that render it unenforceable, the court can delete them if the remaining words would still make sense, but it will not make substantive revisions. For example, if the covenant lasts for 12 months which is too long to be reasonable on the facts of the case, it will not substitute 6 for 12 so the covenant can be enforced.
Because all employees in the UK have a notice period (and executives often have a 6 to 12 month notice period), one alternative to trying to enforce restrictive covenants is to put the executive on “garden leave,” where the executive remains employed but stays at home and has no contact with clients, employees and others. It is often easier to enforce the garden leave clause (and thereby prevent the executive from working for a competitor) than enforcing a restrictive covenant.
According to the French courts, a post-employment non-compete is only enforceable against an employee where it is necessary to protect the legitimate interests of the employer, where the specificities of the employee’s position are taken into account, where the non-compete is limited in its scope (duration and geography) and where financial compensation is paid to the employee.
Drafting or testing the lawfulness of a non-compete governed by French law is a matter of proportionality. Non-competes that cover a large number of countries are usually struck down. In terms of duration, restrictions usually operate between 12 to 24 months. Financial compensation is usually comprised between one-third and two-thirds of former wages, paid monthly during the non-compete period.
In this context, restrictive covenants should always provide the employer with the ability to waive the non-compete upon termination of employment in its discretion (in which case no compensation is owed to the employee).
Collective bargaining agreements sometimes address the question of non-competes. An individual non-compete must be compatible with the provisions of the bargaining agreement applicable to the employer’s business, meaning that it cannot be less favorable to the employee than what is provided for by the collective bargaining agreement (in terms of minimum compensation or maximum duration for example).
Unlawful non-competes are voidable by the employee, and in the event a non-compete is unlawful, the employee may not only repudiate (thus becoming free of the restrictions), but may also seek substantial damages against the former employer.
In Germany, a post-employment non-compete is generally only permitted if it is reasonably necessary to protect a “legitimate business interest” of the employer. In particular, it has to be reasonable in its duration (not exceeding two years), geographical scope and content. The clause must protect a legitimate proprietary business interest of the company (for example, trade secrets or other confidential information) and only relate to activities in competition with the employer. This proprietary interest must be paramount to the employee’s interest to find new employment and must not unduly restrict the employee.
Care in drafting is necessary because a court will not necessarily modify what it deems to be unreasonable, and there is a significant risk that the entire non-compete clause, including portions that would otherwise be deemed reasonable, will be declared void.
Importantly, a post-employment non-compete in Germany is only binding if the employer pays compensation throughout the duration of the restriction equal to at least one-half of the employee’s most recent contractual remuneration at termination (including all parts of salary and monetary benefits in addition to base salary). The non-compete compensation needs to be granted to the employee as a part of the non-compete covenant. The employer may waive the non-compete at any time prior to the expiration of the employment relationship, but will have to pay at least one year’s compensation to validly “buy out” this contractual entitlement.
Non-competes are neither expressly permitted nor prohibited under Russian law and, to date, their enforceability has not been extensively tested in Russian courts. The dearth of available court decisions, inapplicability of stare decisis as a governing legal principle and absence of any other formal guidance from the Russian legislature make it difficult to predict with real certainty how an individual non-compete would be viewed by a Russian court or tribunal.
However, the prevailing view held by legal commentators and practitioners is that non-competes governed by Russian law are not enforceable (or would only be enforceable to the extent they achieve results expressly protected by legislation, such as the protection of trade secrets) and may be found to violate Russian antimonopoly laws.
In particular, the Federal Antimonopoly Service (the Russian antimonopoly regulator) may try to invoke several independent grounds under the Competition Protection Act to challenge the validity of non-competes and impose large turn-over fines if it finds a violation.
Further, non-competes are seen to restrict unconstitutionally the freedom of labor and/or the freedom of entrepreneurship guaranteed by the Russian Constitution. Non-competes also potentially violate the Russian Labor Code, to the extent that they purport to restrict or divest an employee of rights otherwise guaranteed by Russian labor legislation.
In addition, in Russia, non-competes are often incorporated into agreements governed by foreign law that contain international arbitration provisions. The enforceability of such non-competes will depend not only on the applicability of the choice of law and the substantive analysis of the non-compete under the governing law of the transaction, but also the ability of a party to enforce any arbitral award it obtains in Russia. Although there is no meaningful judicial precedent available on this issue, a Russian court might (consistent with the Russian Arbitral Code and the NY Convention) deny enforcement of a foreign court order or arbitral award where recognizing the non-compete would otherwise violate public policy, such as by unlawfully restricting the freedom of labor and/or the freedom of entrepreneurship guaranteed by the Russian Constitution.
The enormous variation among jurisdictions regarding the enforceability of non-competes highlights the importance to global employers of consulting with knowledgeable counsel in the country or state in question.