Non-Compete Clauses. An International Guide

Transcription

1 Non-Compete Clauses. An International Guide A bespoke edition produced for Karina Herring Jensen Norrbom Vinding

2 PDF file created on: 5 December 2013

3 Nothing stated in this book should be treated as an authoritive statement of the law on any particular aspect or in any specific case. Action should not be taken on the basis of this book alone. For specific advice on any particular matter you should consult the relevant country representitive listed inside. 3

4 Ius Laboris is an alliance of leading Human Resources law practitioners. With more than 2,500 locally qualified lawyers in over 40 countries, the Alliance is able to provide deep local Human Resources law knowledge on a global scale to help clients operating at home or abroad. Even in an international context, Human Resources law remains steadfastly local. Your employment issues are global, but the solutions will need to be adapted to the local market. Ius Laboris is the only alliance that can provide you with local legal expertise to solve your Human Resources issues on a global scale. The Human Resources law expertise and experience of Ius Laboris member and affiliate firms is impressive. Our member and affiliate firms are consistently ranked among their country's best. Each of our members and affiliates must be a top-ranking Human Resources or Pensions law firm in their respective locality to be invited to join Ius Laboris. We welcome into our Alliance only firms that possess focused expertise in all disciplines of labour, employment and pensions law. Our lawyers understand the issues and challenges associated with managing a workforce, wherever it is located. To help you navigate complex Human Resources law issues wherever you operate, our lawyers collaborate closely together. International Practice Groups (IPGs) have been created to further the skill and know-how of our lawyers and to share specific knowledge with clients. The IPGs bring together lawyers from across the Alliance with expertise in key areas of Human Resources law including Data Privacy, Discrimination, Employee Compensation and Benefits, Global Mobility, Individual Employment Rights, Occupational Health and Safety, Pensions and Restructuring. Our IPGs meet regularly and are well placed to coordinate regional and worldwide requests, drawing on each individual lawyer s wealth of experience. Clients using our services will benefit from the ongoing exchange of expertise snd knowledge that occurs between members of the Alliance in the IPGs. For additional information, please visit our website ( or feel free to contact us. Ius Laboris 280 Boulevard du Souverain B-1160 Brussels, Belgium Tel Fax info@iuslaboris.com 4

5 Contributors AUSTRALIA Darren Perry George Raptis Freehills MLC Centre, 19 Martin Place, Sydney NSW 2000, Australia T F E darren.perry@freehills.com E george.raptis@freehills.com AUSTRIA Natalie Seitz Kunz Schima Wallentin Porzellangasse Vienna Austria T F E natalie.seitz@ksw.at BELGIUM Ann Witters Claeys & Engels 280, Boulevard du Souverain 1160 Brussels Belgium T F E ann.witters@claeysengels.be CANADA Jonathan Dye Heenan Blaikie 1250 Boulevard René-Lévesque Bureau 2500 H3B 4Y1 Montréal Canada T F E jdye@heenan.ca CHILE Cristian Olavarria Philippi, Yrarrázaval, Pulido & Brunner El Golf 40, piso 20 Las Condes Santiago C.P Chile T F E colavarria@philippi.cl DENMARK Sabrina Sahl Morten Langer Norrbom Vinding Dampfærgevej Copenhagen Denmark T F E ssa@norrbomvinding.com E ml@norrbomvinding.com 5

6 FRANCE Anne-Laure Peries; Laurent Deschaud Capstan 83 rue La Boétie Paris France T F E alperies@capstan.fr; ldeschaud@capstan.fr GERMANY Christoph Crisolli Kliemt & Vollstädt Speditionstraße Düsseldorf Germany T F E christoph.crisolli@kliemt.de GREECE Alexia Stratou Kremalis Law Firm Kyrillou Loukareos Str Athens Greece T F E astratou@kremalis.gr INDIA Puneet Arora Manishi Pathak Kochhar & Co. 11th Floor, Tower A, DLF Towers Jasola Jasola District Center New Delhi India T F E puneet.arora@kochhar.com E manishi.pathak@kochhar.com IRELAND Jennifer O'Neill LK Shields Solicitors 39/40 Upper Mount Street Dublin 2 Ireland T F E joneill@lkshields.ie ITALY Aldo Bottini Toffoletto De Luca Tamajo e Soci Via Rovello Milan Italy T F E sab@toffoletto.it 6

7 LITHUANIA Julija Lisovskaja Raidla Lejins & Norcous Lithuania Lvovo Vilnius Lithuania T F E julija.lisovskaja@rln.lt LUXEMBOURG Alexandra Castegnaro CASTEGNARO 67 rue Ermesinde 1469 Luxembourg Luxembourg T F E alexandra.casteganro@castegnaro.lu NETHERLANDS Erik Deur Bronsgeest Deur Advocaten De Lairessestraat HJ Amsterdam The Netherlands T F E e.deur@bd-advocaten.nl NORWAY Claude A. Lenth Hjort Akersgaten 51 P.O. Box 471 Sentrum 0105 Oslo Norway T F E cal@hjort.no POLAND Grzegorz Ruszczyk Raczkowski i Wspólnicy Sp.K. ul. Ciasna Warsaw Poland T F E grzegorz.ruszczyk@raczkowski.eu PORTUGAL Bruno Soeiro Barbosa Pedro Pinto, Bessa Monteiro, Reis, Branco, Alexandre Jardim & Associados Avenida da Liberdade 110 6º Lisbon Portugal T F E bruno.barbosa@pbbr.pt 7

8 RUSSIA Olga Pimanova ALRUD 17 Skakovaya Street Moscow, Russian Federation T F E opimanova@alrud.ru SLOVAKIA Jaroslav Skubal Peter Varga PRK Partners s.r.o. Gorkeho 3, Bratislava, Slovak Republic T F E jaroslav.skubal@prkpartners.com E peter.varga@prkpartners.com SPAIN Gisella Alvarado Caycho Iñigo Sagardoy Sagardoy Abogados C/Tutor Madrid Spain T F E gac@sagardoy.com E is@sagardoy.com SWEDEN Ulrika Runelov Elmzell Advokatbyrå AB Gamla Brogatan Stockholm Sweden T F E ulrika.runelov@elmzell.se SWITZERLAND Urs Baumgartner; Rayan Houdrouge Lenz & Staehelin Bleicherweg 58, 8027 Zurich (Switzerland) T F E urs.baumgartner@lenzstaehelin.com; rayan.houdrouge@lenzstaehelin.com TURKEY Pelin Tirtil Maria Çelebi Bener Law Office Yapi Kredi Plaza C Block, 4th. Floor Levent, Istanbul Turkey T F E pelin.tirtil@bener.av.tr E maria.celebi@bener.av.tr 8

9 UNITED KINGDOM Richard Miskella Lewis Silkin LLP 5 Chancery Lane Clifford's Inn London EC4A 1BL United Kingdom T F E richard.miskella@lewissilkin.com UNITED STATES Eric A Savage Littler Mendelson PC 1085 Raymond Blvd, 8th Floor, Newark, NJ 07102, USA T F E esavage@littler.com 9

10 Contents Introduction Australia Austria Belgium Canada Chile Denmark France Germany Greece India Ireland Italy Lithuania Luxembourg Netherlands Norway Poland Portugal Russia Slovakia Spain Sweden Switzerland Turkey United Kingdom United States

11 Introduction Non-compete covenants are amongst the most sophisticated contractual instruments in employment law today. This is even truer in a global work environment, where employees choose their workplace in an increasingly international context and employers interests in discouraging former employees from engaging in competition or soliciting customers run the risk of infringing employees fundamental rights to professional freedom on a large geographic scale. On behalf of Ius Laboris, an alliance of leading Human Resources law practitioners, we are delighted to introduce a publication, which explains the essential principles of post-employment competition restrictions in a large number of countries, with a focus on relevant domestic standards. This guide outlines each country's rules on non-compete covenants, the formal requirements, and principles regarding compensation, scope and permissible duration, along with guidance on local enforceability. Its purpose is to provide employers with a comprehensive overview of each national system in its global context and to facilitate the protection of legitimate interests without imposing overly broad restrictions. The question of whether a postemployment covenant is enforceable in cross-border employment relationships is as essential as whether it adequately compensates the employee for the restrictions placed upon him. The authors are aware that although the law consists of standards that may be relatively easy to formulate, they may be difficult to apply with certainty in any given case. Nevertheless, adhering to each country s standards will enable employers to reduce the number of invalid covenants and potentially the number of disputes. All authors are lawyers from across the Alliance and have extensive practical experience in advising international clients on labour and employment law. We would like to express our appreciation to all member firms for their contributions and knowledge sharing. Christoph Crisolli Kliemt & Vollstädt, Frankfurt, Germany Erik Deur Bronsgeest Deur Advocaten, Amsterdam, Netherlands Co-chairs of the Individual Employment Rights IPG 11

12 1. INTRODUCTION CONDITIONS REQUIREMENTS ENFORCEABILITY SPECIAL SITUATIONS 14 12

13 Australia Australia 13

14 1. INTRODUCTION Employment agreements will often contain a clause that restricts the activities of an employee after termination of the agreement, commonly known as a restraint of trade provision. Common restrictions that employers may seek to impose upon former employees include: time-limits regarding the commencement of employment in a similar field; non-disclosure of certain information and know-how acquired during employment; and geographical limitations on markets in which an employee can work. The purpose of these provisions is to protect the employer s legitimate business interests, such as trade secrets, confidential information and established customer connections. The common law underpins the Australian approach to restraint of trade clauses in employment law. Under the common law, all restraint of trade clauses are prima facie void, as they are considered to be against public policy. Concerns surrounding the public impact of restraint of trade clauses were discussed in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd, in which Lord MacNaughten stated that: The public have an interest in every person s carrying on his trade freely; so has the individual. All interference with individual liberty of action in trading, and all restraint of trade of themselves, if there is nothing more, are contrary to the public policy, and are therefore void. That is the general rule. This United Kingdom decision was approved by the High Court of Australia in Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Co Pty Ltd. The presumption in the Nordenfelt case may be rebutted, however, by establishing that a restraint clause is reasonable. Successful restraints therefore largely depend upon whether the employer has any legitimate protectable interest and if so, whether the restraints are no more than is reasonable for the protection of those interests. 2. CONDITIONS 2.1 General A restraint of trade clause must satisfy the following preconditions for validity. If it does not satisfy these preconditions, the clause will most likely be determined to be invalid. Such a determination will often occur without analysis of whether the clause meets with the common law requirements for validity in restraint of trade clauses. While an employment relationship continues to exist between an employer and employee, the employee s duty of fidelity will support extensive restraints on competing with the employer. Although restrictions during employment are generally not considered contentious by Australian courts, there may be problems in applying the restraint of trade doctrine after termination of employment. Moreover, it may be difficult to determine whether a sufficient employment relationship continues to exist between the employer and employee. The doctrine also extends to restraints imposed by contractual agreements between employers and third parties or organisations. For example, in the case of Buckley v Tutty, the rules of the New South Wales Rugby Football League controlling the transfer of players (who were contracted to individual clubs) were void as they constituted a restraint of trade. 2.2 Age Persons over the age of 18 years are generally considered to have the capacity to enter into a binding contract of employment. Where a person over the age of 18 enters into a contract that includes a restraint of trade provision, there is a rebuttable presumption that they are able to consent to such restraints. This presumption may be rebutted by evidence of vitiating factors, such as mental illness or incapacity. Contracts of employment that include restraint of trade provisions may theoretically be enforceable against a minor. It will be necessary, however, to satisfy the court that the employment contract is substantially for the minor s benefit when construed as a whole, having regard to the circumstances of the case If the court can be satisfied that the contract, including the restraining provision, can be regarded as to the minor s benefit, then the contract and the restraint may be enforceable. An early 20th century judgment held that where a minor is found to have the capacity and power to elect whether he will keep or surrender the benefit of the contract, then if he retains the benefit, he is to be taken as ratifying the bargain and to be bound by its obligations, including the restraint of trade. However, the 14

15 Australian courts may adopt a slightly different approach to such a contract today. 2.3 Written form The general law will not restrain a former employee from seeking employment with a competitor. Therefore any employer seeking to prevent a former employee from competing with their business must rely on an enforceable clause in their contract of employment with the former employer. Thus, it must be in writing and acknowledged by both parties. Australian common law has established that in order to be enforceable, the terms of a restraint of trade must be clear, certain and not vague. Thus, even if an employer has a valid need to protect its interests, the restraining clause must be drafted with sufficient clarity and certainty. 2.4 Renewal Under Australian law, a renewal of a contract of employment is a variation of or replacement of the original contract of employment. If the contract of employment is replaced entirely on renewal, it will be necessary for new noncompete clauses to be included in the replacement contract. The test for the enforceability of these provisions will be the same as those in the original contract. Alternatively, if the renewal comprises a replacement of only part of the original contract of employment (for example, as part of a review of remuneration), in the absence of any new non-compete provisions in the renewal contract, the original non-compete provisions will continue to operate in accordance with their terms. 2.5 Liability for compensation on dismissal A restraint of trade clause is invalid in situations where the employer is liable for unfair dismissal. Where it is determined that an employee s termination was harsh, unjust or unreasonable, any clause within their contract of employment purporting to restrain trade will be invalid. 3. REQUIREMENTS 3.1 General The High Court of Australia has held that restraint of trade provisions may be upheld if the party seeking to enforce them shows that circumstances exist which make the restraint reasonably necessary for the protection of the employer s business and that it is not contrary to public interests. The common law has also established that it is necessary that clauses purporting to restrict trade be expressed in a clear manner that is not vague about the type and extent of restrictions sought. Reasonableness The determination of reasonableness is at the discretion of the courts and will take into account the individual facts and circumstances of each case. Reasonableness is assessed in terms of the activities which the employee is being required to refrain from, taking into account the geographical reach and duration of the restraint and the activities subjected to the restraint. The case of Tullett Prebon encapsulates the Australian common law position for the enforcement of restraint of trade provisions. The court in that case summarised that in order for a restraint of trade to be held enforceable by the courts, the party seeking to enforce the restraint must show that the covenant is reasonable, in the sense that: the covenant is intended to protect some legitimate interest of the employer and the extent of the restriction imposed on the employee is commensurate with that interest, being no greater than is strictly necessary to protect it. The question of reasonableness is examined at the time of entry into the contract. Evidence of later relevant events, which were foreseeable at the time of entering the contract is admissible. Prospective future developments, for example, promotion, within the contemplation of the parties as an ordinary incident of employment will be relevant in assessing the reasonableness of the restraint clauses in a contract of employment. Legitimate interest To be valid, a restraint of trade provision must protect a legitimate interest of the employer. The employer cannot 15

16 seek to prevent the employee from competing with the employer in general. It is a legitimate interest of the employer to prevent a former employee from appropriating aspects of the employer s goodwill such as confidential information or knowledge of and influence over the employer s customers. It is firmly established in case law that an employer may only legitimately use a post-employment restraint to protect trade secrets or established customer connections. Trade secrets and confidential information A trade secret is usually regarded as information an employee must deliberately memorise or copy, rather than knowhow or skill that has been learned over a period of time. At the very least, the information must itself have the necessary quality of confidence about it and it must have been communicated in circumstances importing an obligation of confidence or secrecy. In addition, a person who received information in confidence is not allowed to use it as a springboard for activities detrimental to the person who provided the information, even if all features can be ascertained by inspection by any member of the public. In order to justify a restraint covering trade secrets or other confidential information, the employer must be able to show that they are legitimately seeking to protect information that is genuinely confidential, and the scope of the covenant is no wider than is reasonably necessary. There is, however, no need for the employer to isolate the particular information they want the employee to refrain from using; it is enough that some such information exists to provide the necessary legitimate interest. The restraint can refer to the relationship between the customer and the employer, but not to the ownership of customers, as customers are always free to take their business elsewhere. The restraint of trade clause will only be valid if it is reasonably necessary to protect the employer s legitimate interest. Courts are more likely to uphold restraint of trade provisions relating to the protection of customer connections if the employee is in frequent face to face contact with customers, where the employee alone knows the customers and their requirements, where the contact takes place away from the employer s premises, or where the employee is relatively skilled and not merely working under the supervision of others. Former employees can also be restrained from using customer lists and other information about customers obtained through employment with the employer. Courts have found that where an ex-employee approaches a former customer, solicitation may be made out, and this may amount to a breach of a non-solicitation clause in the employment contract. Non-compete covenants restrain employees from competing with his or her former employer. Such behaviour would involve engaging in trading activity by illegitimately seeking to use confidential information, tools and client information of their former employer. Generally, non-compete covenants will be invalid unless they are necessary to prevent disclosure of trade secrets or use of a connection built up by the employee with customers, and the protection of the former business is jeopardised in some way by the actions of the former employee. However, Australian courts held that the fact that an employee has agreed to a non-compete restriction may be in itself evidence that the restriction is reasonable. When courts have upheld non-compete clauses as valid restraints of trade, they have usually limited them to a relatively short period of time. The time period that is held to be reasonable will depend upon the facts. Public interest Restraints of trade are presumed on the face of them to be void in most Australian jurisdictions because they are considered contrary to public policy. This is because they are often deemed to interfere with an individual s liberty to carry on their trade and contract freely. This presumption is rebuttable, and thus the onus is on the party seeking to enforce the restraint of trade provision to show that the provision is not against the public interest. Tullett Prebon summarised the common law approach to rebutting this presumption, stating that a restraint of trade is not contrary to public policy if it is reasonable as between the parties, and not unreasonable in the public interest, so that while affording adequate protection to the party in whose favour it is imposed, it is not injurious to the public. In New South Wales, however, because of legislative differences, the Restraint of Trades Act 1976 provides that a restraint of trade clause is valid to the extent that it is not against public policy. The court will focus on the reasonableness of the particular provision when evaluating the implication of public policy. In these circumstances, the court may instead read down and enforce a reasonable restraint falling within the terms of the express restraint, even though the expressed restraint is too broadly formulated and is deemed contrary to public policy. This approach allowing reading down of clauses also demonstrates another significant difference between the approach in the State of NSW and the other Australian States and Territories. 3.2 Geographical, functional and temporal limitations 16

17 Consideration of the duration and geographical scope of purported restraining clauses is an important aspect when determining the restraint s reasonableness. As the time of the restriction lengthens and the space of its operation extends the onus upon the employer increases. Determination of reasonableness will depend upon the facts. For example, a restraint clause preventing an executive from working with competitors for a 12 month period was found to be unfair because it was contrary to public interest to deprive the community of his services for such a long time. Moreover, it was found to be unfair to protect the former employer from competition for such an extensive period of time and was unreasonably harsh as it would impose a serious financial burden for no good reason. In this case, the New South Wales Industrial Relations Commission held that a six month restraint would be reasonable. However, in another case of a 12 month restraint, in instances where an ex-employee was entitled to payment for the entire 12 month period of restraint, the court upheld the restraint as reasonable. Australian courts will also give consideration to the nature of activities that are purported to be restricted. For example, the Supreme Court of the State of Western Australia held in the case of Sear v Invocare Australia Pty Ltd that a restraint clause was invalid because it effectively prevented a former funeral parlour manager from being involved in the funeral industry in any capacity whatsoever. Such a restriction was found to be unreasonably broad for the protection of legitimate business interests. Determining reasonableness may also involve an interrelated consideration of duration, geography and role. For example, where a vast geographical area is specified, the court may determine it is only reasonable to enforce such a restriction for a limited time period or for specified roles. Similarly, the court may be more likely to enforce a lengthy restraint clause where it only relates to a small geographical area and specified roles. 3.3 Job changes When the job of an employee changes, the question arises as to whether any non-compete provisions in their contract of employment continue to operate. This will depend upon whether the contract of employment contemplates the changes that are made to the job. For example, the contract may provide that the employee is initially appointed to a role and that alternative roles may be allocated to the employee from time to time. In a contract of this kind, the changes to the employee s job will not change the terms of his or her contract of employment (including the non-compete provisions). However, the analysis will be different where the new job is not contemplated by the original contract of employment. In this case, the original contract of employment may cease to operate and be replaced by an unwritten contract of employment comprised of terms that are orally agreed and terms that are implied by law. These terms will not include a non-compete provision, such that the change in the job may result in the non-compete provisions ceasing to apply. This makes it important to ensure that, either: the existing contract is reviewed on the change of job to ensure that it will still apply to the job or a new contract of employment is entered into which contains appropriate provisions relating to noncompetition. 4. ENFORCEABILITY 4.1 General In many cases, non-compete provisions are difficult to enforce in Australian jurisdictions. In order to demonstrate that a prohibition on competition is reasonable, and therefore enforceable, it is generally necessary to show that the former employee has, in his or her possession, confidential or other sensitive information which cannot be protected in an effective way in the absence of a non-compete provision. Provisions which stop short of prohibiting competition, for example, by prohibiting the solicitation of clients or employees, are generally easier to enforce. The key to the enforcement of these provisions is demonstrating that the employee has a sufficiently close connection to the client or employee to make it reasonable to prevent them from soliciting them away from the employer. It will also assist enforcement of these provisions if they are limited to a geographic area which correlates to the area in which the employee has particular influence over customers or employees. Similarly, the operation of the provision in time should be limited to a period which is no more than strictly necessary to ensure that the employee does not obtain an unfair advantage by using the connections they have with customers and employees of their former employer. 17

18 4.2 Balance of interests Post-employment restraints are treated more strictly than restraints in other commercial covenants, for example, vendor restraints. This is because vendor restraints are justifiable by reference to purchaser s acquisition of substantial good will and equal bargaining power of parties. Restraint clauses will only be enforced if they reasonably protect the legitimate interests of the party seeking to enforce the restraint. The onus is on the employer to show special circumstances that warrant protection, and to show that the clause is reasonable and goes no further than protecting the employer s interests with respect to its trade secrets or customer connections. The onus of proof in establishing that a restraint of trade is reasonable as between the parties is upon the party seeking to enforce the restraint. The onus of proof in establishing that a restraint of trade is not reasonable in the public interest is upon the party burdened by the restraint of trade. A court may sever any clauses, or even parts of a clause, that they determine go unreasonably far in restraining trade. If the court is satisfied that what remains after severance is still consistent with both parties' contractual intentions, they may then decide to enforce what remains of the restraining provision. This process is also known as the blue pencil test, as it is important that the remaining provisions continue to reflect both parties contractual intentions once the offending provisions have been severed by the use of a blue pencil. Severance is only possible in particular circumstances, where the terms of the contract are such that they still represent the parties intentions after the terms have been severed. In circumstances where terms may be severed for unreasonable restrictions, it may be useful for parties to utilise cascading clauses to ensure that their intentions can be discerned by the courts in instances of unreasonableness. Cascading clauses contain a series of overlapping obligations that vary in extent and scope. These clauses have been enforced in Australia where the contracts stipulate that invalid portions can be severed without affecting the validity of the whole clause, and that the clause operates as separate restraints, although the restraints may be cumulative and overlapping. The New South Wales case of Hitech Contracting Ltd v Lynn for example, contained a cascading provision in relation to the duration and geography of the restraint. In that case, the duration of the restraint cascaded from twelve months, to six months, to three months, while the geographical area restrained cascaded from the entire east coast of Australia to the State of NSW. The court in this case found that it was reasonable to uphold the restraint for a period of three months, in the geographical area of the State of NSW. However, when utilising cascading terms, it is necessary that the parties ensure that the terms are sufficiently certain such that the court can evince clear contractual intentions. Unlike courts in the United Kingdom, courts in most Australian States and Territories will not read down a restraint clause that is otherwise too wide to be enforceable. If a court finds that a restraint of trade provision is not reasonable, then a court will find the whole clause to be invalid and therefore unenforceable. In NSW, however, the courts take a different approach due to the Restraint of Trades Act Section 4(1) allows a court to read down the terms of a restraint clause to modify it until it is reasonable. This means that the court may enforce a reasonable restraint falling within the contracted restraint, even though the expressed restraint is too widely formulated and contrary to public policy. The court may therefore vary the terms of the restraint, such as restricting the geographical scope of a non-compete clause or reducing the time period for which behaviour is constrained. The courts in NSW can therefore read down clauses, in addition to applying the techniques of severance and cascading. In determining whether to enforce a restraint of trade provision, the courts will take into account where the balance of convenience, or the balance of the risk of injustice, lies between the parties. The court weighs the injustice to the defendant if a restraint of trade clause is enforced, against the injustice to the plaintiff if relief for breach of a restraint of trade provision is wrongly declined. 4.3 Remedies Remedies are available to the party seeking to enforce the restraint for a breach or threatened breach of the restraint. The main remedies available are interlocutory injunctions, final injunctions and damages for loss as a result of the breach. An interlocutory injunction is the most common relief sought, and where it is granted most cases will not proceed to final hearing. Injunctions are equitable remedies, and so it is at the court s discretion whether to grant the injunction. In granting an interlocutory injunction the court takes into account whether there is a serious question to be tried, the balance of convenience and the likelihood of success at trial. Since an interlocutory injunction effectively puts an end 18

19 to the proceedings, the court will look closely at the degree of likelihood of success at trial. Breach of one aspect of a restraint can justify sufficient concern about breach of another aspect to warrant the grant of an injunction. 4.4 Penalty clauses Sometimes a non-compete provision provides for the employee to make a payment to the former employer in the event that there is a breach of the provision by the employee. Such a provision will be unenforceable under Australian law unless the amount that the employee is required to pay closely corresponds to the loss which the employer has suffered. A pre-determined fixed sum will rarely satisfy this test. 4.5 Damages Damages are rarely a sufficient remedy for a breach of a restraint of trade as it is difficult to quantify the damage that may be suffered and that which may accrue over time. In order to obtain damages, it is necessary to show that there is a financial loss which the employer has suffered as a direct consequence of the particular breach by the employee. For example, in obtaining compensation for breach of a non-solicitation of customer provision, it will be necessary to point to a particular customer who has been solicited and to prove particular loss arising out of the solicitation of that customer. Due to the difficulties in assessing compensation in this area, the usual remedy for breach of a non-compete is generally an injunction restraining the breach. Commonly, injunctions are obtained on an urgent and interim basis and few matters proceed to final hearing on compensation. 4.6 Liability of new employer Generally speaking, the new employer will not be liable for the acts of an employee who has left his or her former employer in breach of a non-compete provision. That is because the new employer is not a party to the relevant contract which contains the non-compete obligation. It is, however, possible for the new employer to be liable for damages for the tort of interference with contractual relations. This liability will arise where the new employer is aware of the terms of the non-compete and intentionally acts in a way that gives rise to a breach of the provisions by the employee. In this case, damages can be awarded for the loss occasioned to the former employer by the acts of the new employer. 5. SPECIAL SITUATIONS 5.1 No clause Where there is not a non-compete clause in a contract of employment, an Australian Court will not imply a provision into the contract. This means that the employees will be free to compete against their former employer. However, they will remain subject to their duty not to use or disclose the confidential information of their former employer. 5.2 Transfers of undertakings Whether a transfer of undertaking has implications for a non-compete provision depends upon the structure of the transfer. Where the undertaking is disposed of by way of a sale of the shares in a company, the terms of the contracts between the company and its employees will not be affected. Accordingly, any non-compete provision in a contract of employment will continue to operate (except in the rare case where the contract expressly provides for the non-compete to cease operating if there is a sale of the organisation). Where the undertaking is transferred by way of a sale of assets, the position is different. In this scenario, the employment of the employee with the transferor will come to an end. Any provisions that survive termination of employment will operate for the benefit of the transferor for a period of time from the transfer. The employee may then enter into a new contract of employment with the transferee. This will be a matter for negotiation and a prudent party acquiring a business will negotiate an appropriate non-compete with employees who join it as a result of the transfer. 5.3 Cross-border competition A restraint of trade clause should contain a geographical limitation. Generally, this limitation will cover the region of a city, state or territory or in rare circumstances, Australia-wide. Nevertheless, a restraint of trade clause does not have to be geographically limited to Australia alone. It is possible for an employer and employee to agree to a cross-border 19

20 geographical limitation, for example both Australia and New Zealand. Whether such a restraint of trade clause will be considered enforceable depends upon the balance of the interests of the employer in protecting their legitimate business interests and the interests of the employee to carry on their trade freely. For example, where an oligopoly exists both for the Australian and New Zealand markets of a particular industry, an employer has a strong business interest in preventing the employee from working for a competitor. In return, an employee could argue that such a geographical limitation is unreasonable given that his or her expertise is so highly specialised, rendering employment opportunities outside that market impossible. Ultimately, the courts will balance the employer s and employee s competing interests in determining whether a cross-border limitation is enforceable. International law issues may also arise in the determination of cross-border restraint of trade clauses. For instance, where an employee is subject to a cross-border geographical limitation and begins working for an organisation abroad in breach of the restraint clause, an employer is faced with two options. The employer may either seek an Australian judgment be made in the absence of the employee and begin legal proceedings in the courts of the subject foreign country to enforce this judgment or have the foreign court make a ruling on the Australian non-compete clause under their jurisdiction. The success of the proceedings will be dependant upon the local laws of the country in combination with international law. 5.4 Non-solicitation clauses Covenants for non-solicitation of customers can be framed broadly or narrowly. Broadly, to prevent a former employee soliciting any of the employer s customers; or narrowly so as to prohibit solicitation of those employer s customers with whom the employee dealt. There has been recent Australian case law supporting the view that an employer can restrict a former employee from soliciting staff of the former employee. In Cactus Imaging Pty Ltd v Peters, the employment contract of a former employee of Cactus contained a restraint of trade provision preventing the former employee from (amongst other things) soliciting clients and customers of Cactus. The Judge held that the former employee was restricted from soliciting other employees of Cactus, because this represented a legitimate interest of the company. It was acknowledged that solicitation of employees was still an issue in the context of restraints of trade. Whether such a restraint would be enforced would depend on the relationship between the employer and former employee. If the employee exerted some influence over his or her former colleagues then the restraint would be more likely to be enforced. An anti-poaching clause was not upheld in Aussie Home Loans v X Inc Services because the clause was too broad in scope and duration. However, the court noted that a restraint against enticing employees away from their employer will be justified if it is designed to prevent the disclosure of trade secrets, or to protect a trade connection, which could be construed to include confidential information which the ex-employee has about the relations between the former employer and its employees. 5.5 Insolvency Whether a restraint of trade clause is enforceable when an employer becomes insolvent will depend on the ramifications of insolvency upon the organisation s legal status. Where an organisation ceases to trade and is no longer a legal entity, a restraint of trade clause for that organisation s former employees will no longer be enforceable. Should that organisation continue trading in the hands of an administrator, a restraint of trade clause will still bind an employee and the employer organisation will still retain its rights in relation to that clause. 5.6 Enforceability of foreign non-compete clauses Sometimes employees will be subject to non-compete clauses in contracts with foreign organisations or contracts that are governed by foreign law. The test for the enforceability of these provisions in Australian jurisdictions will be the same as set out above. However, in the absence of the employer having significant confidential information or customer connection in the Australian jurisdiction, these provisions may be difficult to enforce. 20

21 1. INTRODUCTION CONDITIONS REQUIREMENTS ENFORCEABILITY SPECIAL SITUATIONS 23 21

22 Austria Austria 22

23 1. INTRODUCTION After termination of the employment relationship the employer might have an interest in the employee not working for a competitive business. This is contrary to the employee's interest in pursuing his or her future career and using his or her knowledge and abilities in the employment market as well as possible. A non-compete clause can only be agreed if the employee earns a certain salary and provided the restriction does not go beyond one year and does not transcend the specific type of business in question. Whether a non-compete clause is enforceable depends on the way in which the employment is terminated. 2. CONDITIONS 2.1 General For white-collar workers Section 36 and following of the Act for White-Collar Workers (Angestelltengesetz AngG ) and for blue-collar workers Section 2c of the Employment Law Harmonisation Act ( Arbeitsvertragsrechts- Anpassungsgesetz ), contain corresponding provisions. A duty not to compete can extend beyond termination of employment only if this has been explicitly agreed upon in the employment contract. The law places several restrictions on post-contract non-compete clauses, including that: 2.2 Age the employee's gross salary for the last month of the employment relationship must not exceed 17 times the daily ceiling amount set out in Section 45 of the General Social Insurance Act ( Allgemeines Sozialversicherungsgesetz ). This salary limitation only applies to non-compete clauses concluded after 17 March 2006 (for white-collar workers) or after 18 March 2006 (for blue-collar workers) the restriction may only apply specifically to the employer's type of business and must not run for more than one year (Section 36 para 1 no 2 AngG) the non-compete clause must not place restrictions on the employee that unfairly impede the employee s job opportunities in comparison to the business interests of the employer (Section 36 para 1 no 3 AngG). In addition to the above, an agreement to a non-compete clause is only valid insofar as the employee was not a minor when the agreement was entered into (Section 36 para 1 no 1 AngG). 2.3 Written form Under Austrian law neither employment contracts generally nor non-compete clauses in particular need be in writing, but for the purpose of evidence, written form is highly recommended and very common. 2.4 Renewal If an employment contract which was concluded for a fixed period of time and which originally contained a noncompete clause is renewed and thereby extended, the non-compete clause will not be affected and will remain valid. If on the other hand, the text of an employment contract is revised, then the new provisions are relevant. A noncompete duty only exists if this has been explicitly agreed upon in the provisions of the revised employment contract. 2.5 Liability for compensation on dismissal The employer is restricted from enforcing a non-compete clause if the employer has (i) caused the grounds for immediate or ordinary termination by the employee, or (ii) has terminated employment without just cause. In the latter case, the employer may still invoke the non-compete clause if it is willing to continue full payment of salary or wages to the former employee for the period of the non-compete clause. Frequently, non-compete clauses are secured by penalty clauses. Any such clause is subject to equitable review and reduction by the courts. The existence of a penalty clause prevents the employer from enforcing the non-compete clause by any means other than the penalty (such as cease and desist orders or additional damages). 3. REQUIREMENTS 3.1 General 23

24 The employer may only invoke a non-compete clause in certain types of termination (Section 37 of the Act for White- Collar Workers (Angestelltengesetz AngG ) and Section 2c para 3 and 4 of the Employment Law Harmonisation Act, Arbeitsvertragsrechts-Anpassungsgesetz ). The employer is restricted from enforcing a non-compete clause if the employer has: given the employee grounds for immediate or ordinary termination terminated employment without cause. In the latter case, the employer may still invoke the non-compete clause if he or she is willing to continue full payment of salary to the former employee for the period of the non-compete clause ( Karenzentschädigung ). To oblige the employee to adhere to a non-compete clause in a case of employment termination by the employer without just cause (Section 37 para 2, case 2 of the AngG), the employer must consent to pay the last received salary for the duration of the limitation. This kind of compensation is known as a waiting allowance and it need only be awarded in this specific case. In addition, voluntary compensation can be agreed upon which is lower than the last received salary, but this should be considered carefully by the employer because, in order for this to be sufficient, there must be a shift in the balance of interests in the employer s favour. 3.2 Geographical and functional and temporal limitations The more specific the wording of the clause, the more likely the court will be to consider the employer s interest in enforcing the clause as reasonable. This is especially true as concerns the geographical scope of the clause and the scope of the type of work. The more specific the non-compete clause, the higher the chances are that the clause will not be annulled in any court procedure. According to Section 36 para 1 no 2 of the AngG, a non-compete clause is only valid insofar as the limitation applies to the employer's type of business or occupational activity ( business branch ). In view of the interests of the employee and the employee's position as regards his or her fundamental rights, the term business branch must be very specific and must not extend further than necessary. That is why the Austrian Supreme Court would not uphold a non-compete clause by a refrigerator producer preventing its former employee from marketing dishwashers. The validity of the obligations depends on the circumstances of each individual case. The inclusion of an entire area of business in particular if it does not involve a high degree of specialisation and where this is not relevant to the employee s job, would be likely to be invalid. 3.3 Job changes Where the employee's job changes, this can have an effect on the enforceability of a non-compete clause if prohibited activities are clearly defined in the non-compete clause but these are no longer applicable because of the change. Therefore, when an employee changes jobs it is advisable to re-examine the non-compete clause to check whether any prohibited activities are still relevant and if necessary, amend it, possibly by appending a side-letter to the employment contract. 4. ENFORCEABILITY 4.1 General In considering the validity of a non-compete clause, the court will take all relevant circumstances into account. This interest assessment will balance the limitations placed on the employee's employment as a result of the protection of the employer's business from competitive activities by the employee. 4.2 Balance of interests The non-compete clause will be invalid, if the employee's occupation does not involve any competition the employee has had to let his or her knowledge and professional experience go to waste or was forced to give up his or her specialism and change to a branch of trade which pays less well purely in order to stay within the terms of the non-compete clause. 4.3 Remedies 24

25 Employee In theory, the employee could take declaratory action at court against the employer, by requesting a declaration that the non-compete clause is too broad or invalid. In practice an employee who leaves employment usually takes a new job and, if so, it will be up to the former employer to decide whether to enforce a claim. Only then will the employee need to argue that the non-compete clause is invalid. Employer If the employee infringes a validly concluded non-compete clause, the employer may demand adherence to the agreement (i.e. ask the court for an injunction to prevent the employee doing the job). To secure injunctive relief, it is often necessary to obtain an interim injunction first. The employer must attest to the existence of potential harm. This might arise, for example, from the threatened loss of clientele. In addition, if there is culpable violation of the clause the employer may claim compensation, but to obtain this the employer will need to prove actual accrued damage. 4.4 Penalty clauses If a penalty clause was agreed upon for the infringement of provisions of the non-compete clause, the employer may only claim that penalty (Section 37 para 3 of the Act for White-Collar Workers (Angestelltengesetz AngG ) and Section 2c para 5 of the Employment Law Harmonisation Act Arbeitsvertragsrechts-Anpassungsgesetz ). This is, however, subject to the court's right to modify the penalty (Section 38 of the Act for White-Collar Workers and Section 2c para 6 of the Employment Law Harmonisation Act). Nevertheless, by paying the penalty fee, the employee may manage to satisfy the employer. The Labour and Social Court in Vienna rated a penalty fee of six months gross salary as too high in an average scenario in which there were some modifying aspects in favour of the employee. 4.5 Damages The employer is restricted from enforcing a non-compete clause if the employer has (i) caused the grounds for immediate or ordinary termination by the employee, or (ii) has terminated the employment without just cause. In the latter case, the employer may still invoke the non-compete clause if it is willing to continue full payment of salary or wages (Karenzentschädigung) to the former employee for the period of the non-compete clause. 4.6 Liability of new employer If the new employer were to be required to pay a penalty to the old employer on behalf of the employee, this would be regarded as unconscionable by the Austrian Supreme Court. 5. SPECIAL SITUATIONS 5.1 No clause A duty of non-compete extends beyond termination of employment only if this has been explicitly agreed upon beforehand. If no non-compete clause applies the employee is free to enter into service with any direct competitor or start his or her own competing business. In addition, the employee will be permitted to aim at the same market and customers as those of the ex-employer, with the exception that certain legal limitations are placed on professionals such as public accountants and tax consultants. 5.2 Transfers of undertakings In the case of a transfer of undertaking, if there is a continuous employment relationship, a non-compete clause will pass to the purchaser pursuant to Section 3 para 1 of the Austrian Labour Contract Law ( AVRAG ). If an employee who is subject to a non-compete relationship (Konkurrenzklauselverhältnis) has already resigned, the situation is different. If the undertaking passes to the purchaser by universal succession, the competition clause relationship will pass to the purchaser as well, but if it is a case of singular succession, the purchaser should include legal concepts such as cession of goods or assignment of contract in the new agreement in order to secure its interests. 5.3 Cross-border competition Contrary to earlier opinions regarding internationalisation, the view now held is that it would be too narrow if an employee's obligations were generally to be regarded as inequitable and unenforceable abroad. There can be circumstances in which a non-compete clause beyond national borders will be valid, based on special economic or 25