The legal background
French case law has always considered that both employer and employee are under an implied duty of loyalty which pervades the entire employment relationship. It follows from this general obligation of loyalty that the employee is required to serve his/her employer’s interest. As a result, the employee is subject to the obligation to refrain from any act of competition against the employer and thus is generally not allowed to create his/her own business during the performance of his/her contract if such business competes with his/her employer.
But, is this still the case when the employee has only been preparing his/her future competing activity but waited until the termination of the employment contract to actually operate his/her business?
In a decision of the Supreme Court dated 11th March 2014, a sales director resigned from his position on 28th June with a notice period ending on 30th September. He created his own company, which competed directly with his employer, on 31st August (i.e. during his notice period) but only commenced his activity on 1st October. In this case, the subtlety lied in the fact that the actual operation of the business only started on the day following his last day of employment. In addition, a former supplier, which had terminated the business contract with the employer during the notice period, decided to go into partnership with the employee. Against this backdrop of events, the employee’s former employer sued the newly created company in order to seek damages for unfair competition.
The Supreme Court’s decision
The Supreme Court upheld the ruling of the Court of appeal, and deemed that the employee’s conduct did not constitute acts of unfair competition. In its decision, the Supreme Court laid down three principles:
- the setting up, by a former employee, of a business competing with his/her previous employer is not per se considered as unfair competition provided that this was not prohibited under a contractual clause and that it was not accompanied by illicit poaching of personnel or solicitation of customers;
- the employee is allowed to organize his/her future competing activity during the performance of his/her contract as long as such competition only becomes effective at the expiry of his/her employment contract;
- the mere fact that customers switch to a competing business is not per se an act of unfair competition in the absence of disloyal actions or unfair practices.
French law thus creates room for an employee to prepare, prior to the definitive termination of the employment contract, his/her future business even though such activity is to compete with his/her employer’s activity. This decision is in line with previous case law in which it was held that an employee was not at fault in very similar circumstances and that his dismissal was consequently unfair. Obviously, the situation would be different in the event the employee created his/her business during working hours or by using the employer’s resources.
In conclusion, in order to avoid such a situation, a specific clause in an employment contract may be contemplated which would cover such cases and allow the employer to take actions against the employee.