Protecting the Crown Jewels: Managing Restrictive Covenants in European Employment Law. Wednesday, November 16, 2016

Transcription

1 Protecting the Crown Jewels: Managing Restrictive Covenants in European Employment Law Wednesday, November 16, 2016

2 Speakers Moderator Jan Tibor Lelley Buse Heberer Fromm Frankfurt, Germany 2

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5 Speakers Rasmus H. Christensen Plesner Copenhagen, Denmark Philippe Durand August & Debouzy Paris, France 5

6 Speakers Jan Hofkens Lydian Brussels, Belgium Michael Leftley Addleshaw Goddard London, England 6

7 Speakers Effie Mitsopoulou Kyriakides Georgopoulos Law Firm Athens, Greece Sasha Stepanova Kocián Šolc Balaštík (KSB) Prague, Czech Republic 7

8 Speakers Alberto Testi Grimaldi Studio Legale Milan, Italy 8

9 Enforcing Non-Compete Agreements (Contractual / Post-Contractual) 9

10 Belgium 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 10

11 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

12 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

13 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

14 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

15 Denmark Restrictive Covenants Loyalty obligation during the employment Post contractual covenants New rules came into effect on 1 January 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

16 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

17 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

18 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

19 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

20 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

21 Denmark Compensation Non-competition clause or non-solicitation clause up to 12 months / combined noncompetition 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

22 Denmark Compensation 22

23 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 noncompetition clause is not enforceable 23

24 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

25 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

26 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 postemployment period. No need to explicitly stipulate that such obligation covers also the term of the employment. 26

27 Greece No Legal Provisions on Restrictive Covenants Since no specific law exists, non-compete, non-solicit and confidentiality covenants are treated by case law. Noncompete 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

28 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

29 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 caseto-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

30 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 nonsolicit 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

31 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

32 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

33 Italy Non-Compete Covenant Under Section 2125 of the Italian Civil Code, postemployment 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

34 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

35 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 /2003). 35

36 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 caseby-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

37 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

38 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 noncompetition 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

39 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

40 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

41 United Kingdom During Employment Seniority (duty of fidelity and fiduciary duties) Restriction on other business activity Preparing to compete Confidential information Garden leave 41

42 United Kingdom After Employment Categories of restriction Rules on enforceability Non-compete covenants Practical tips 42

43 Pros and Cons of Imported Templates (of Restrictive Covenants) 43

44 France Pros: At best, enforceability in Court when all conditions are met At least, psychological effect on departing employee 44

45 Cons: France 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

46 Pros: Greece 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

47 Cons: Greece 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

48 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

49 United Kingdom Using templates The European angle Brussels Regulations, Rome 1 49

50 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

51 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

52 Denmark Non-Danish templates often need to be revised to comply with Danish law, as the restrictions will otherwise be invalid 52

53 The Costs of Litigation 53

54 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

55 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

56 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

57 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

58 Italy Litigation on restrictive covenants is considered an extreme measure to implement where no settlement is possible. 58

59 United Kingdom Costs regime in the UK Remedies injunction, damages, account of profits, springboard relief 59

60 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

61 Key Take-Aways 61

62 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

63 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

64 United Kingdom Tailor restrictions to circumstances Act promptly Consider the whole landscape Policies and procedures/information security 64

65 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 noncompete 65

66 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

67 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

68 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

69 Contact Our Speakers for More Information Rasmus H. Christensen Plesner Copenhagen, Denmark Philippe Durand August & Debouzy Paris, France Jan Hofkens Lydian Brussels, Belgium Michael Leftley Addleshaw Goddard London, England com 69

70 Contact Our Speakers for More Information Jan Tibor Lelley Buse Heberer Fromm Frankfurt, Germany Effie Mitsopoulou Kyriakides Georgopoulos Athens, Greece Sasha Stepanova Kocián Šolc Balaštík (KSB) Prague, Czech Republic Alberto Testi Grimaldi Studio Legale Milan, Italy 70

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