Legal Briefing

Employee competition: how to avoid it

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Human Resources | 04 June 2011

How can employers prevent their employees from competing with them when their employment contracts end? A non-competition and/or non-solicitation clause often solves this problem, but restrictions also apply to former employees who are not bound by such clauses. Both situations are addressed in this article.

POST-CONTRACTUAL CLAUSES

In the Netherlands employers often include the following provisions in employment contracts:

  1. a non-competition clause;
  2. a non-solicitation clause;
  3. a prohibition of employee recruitment clause; and
  4. a penalty clause (an amount for each violation, as well as an amount for each day on which the violation continues).

The non-competition clause limits the former employee’s ability to compete with the business of their previous employer. Such a clause usually remains in force during a limited period of one or two years after the employment has ended. Some employment contracts also limit the geographical scope of such clauses because, to be enforceable, they must be reasonable in terms of the time and area of restriction. In the Netherlands it is not customary to regulate that the employer will pay the former employee compensation for each month in which the ban on competition applies.

The other clauses are intended to prohibit the former employee from approaching clients and/or employees for the purpose of persuading them to terminate their employment or other contracts with the former employer. These clauses are usually limited to those clients or employees with whom the employer did business during the period in which the former employee was still employed.

The above clauses are generally held to be valid and enforceable provided that they are ‘reasonable’ in terms of both their duration (two years generally being the maximum period) and geographical restriction. Non-competition clauses must be concluded in writing and signed by the employee to be valid and enforceable. An employee who enters into such a clause must have reached the age of 18.

The aim of a penalty clause is to impose an immediately enforceable financial penalty on the employee if they are in breach of certain contractual provisions, such as the non-competition clause. It therefore serves as a deterrent to breach. The level of the penalty specified in the clause may be reduced by the court in certain circumstances. On the other hand, the employer may waive its right to the penalty and hold the employee liable for all the loss resulting from such breach.

Regardless of whether the employment contract includes a penalty clause, an employer is entitled to ask the court for an injunction under which the employee is ordered to refrain from (further) breach of one or more of the aforementioned contractual provisions. The court is authorised to impose a penalty on any breach.

In certain circumstances the old employer can claim damages from the new employer. This might be the case if the new employer has deliberately induced the employee to breach their contractual provisions and the new employer unlawfully profits from such a breach.

In the event that an employer is liable for damages towards an employee, because it has terminated the employment contract without giving notice or without observing the provisions relating to notice and, in the case of wrongful dismissal, the employer may not invoke the non-competition clause.

In certain circumstances the former employee may prevent invocation of the non-competition clause by the employer, because they are free to request the court at any time to annul or reduce the scope of the clause. If the employer’s legitimate business interests unreasonably impede the employee in finding another job, such a claim might be successful. In that event, the court might even rule that the clause must be maintained but order the employer to pay compensation to the employee.

CONFIDENTIALITY CLAUSE

In addition to the post-contractual clauses, most employment contracts or collective labour agreements contain a confidentiality clause. Such a clause obligates the employee to refrain from disclosing any particulars relating to the employer’s business. The employee is thereby bound to observe confidentiality regarding, for example, trade secrets and other confidential and commercially sensitive information, whose disclosure may be harmful to the employer and any of its associated companies. It is usually agreed that the confidentiality clause will remain in force both during and after the employment. In practice, it is difficult for an employer to prove that a former employee has violated the confidentiality clause. It is also likely that there will be discussion as to whether or not information should be considered confidential and commercially sensitive.

UNLAWFUL COMPETITION

What about an employee who is not bound by a non-competition and/or non-solicitation clause? Can they freely compete with their former employer? In principle they can: after their employment has ended, such an employee is free to enter the employment of another employer or they can set up a business. That former employee may then operate in the same field as their former employer and may also contact its customers. However, that freedom is not unlimited. Established case law and legal literature provide that, in certain circumstances, former employees who are not bound by a non-competition clause may also be acting wrongfully towards their former employers if they are guilty of unlawful competition. The Boogaard/Vesta judgment from 1955 is decisive in determining whether competition by a former employee is admissible. The following ‘principal rule’ has been formulated in legal literature and case law on the basis of the Supreme Court’s considerations in that judgment. If the following requirements have been met: (1) systematic and substantial damage to (2) the long-term market of the former employer that the employee has helped establish in the context of the employment contract, (3) using the tools with which the employee was confidentially provided for that purpose by their former employer, the former employee is abusing their freedom of contract and wrongful competition is involved.

In determining whether wrongful competition is involved it must be established whether the circumstances of the case jointly fulfill the three requirements referred to above. The most relevant circumstances are:

  • abusing the knowledge, experience and personal goodwill acquired at the former employer;
  • making advantageous offers, by which the former employer is sidelined;
  • making incorrect, negative, harmful or derogatory statements about the former employer;
  • referring to the former employment;
  • creating confusion and preparing competition during the employment;
  • stealing customers by systematically contacting them; and
  • stealing employees.

It is apparent from case law that several additional circumstances must usually be involved that jointly constitute the wrongful competition. The former employer must argue and prove those circumstances.

EVIDENCE

It follows from case law that an employer’s claims are often disallowed because the employer cannot adequately prove the wrongful competition. Gathering and presenting evidence often present problems. In that context an employer might consider holding a provisional hearing of witnesses. The former employee and their new employer, if any, are then heard under oath before the court. Alternatively, access to or copies of certain documents may be demanded, such as correspondence with the former employee and invoices that they have sent to customers. Such a claim must be as specific as possible, otherwise it will be disallowed.

ACTIONS

How can an employer force a former employee, who is not bound by a non-competition clause, to stop the competition if it has some form of evidence? The employer will usually first order the former employee in writing to cease the wrongful competition with immediate effect. If that does not help, the employer can request the court, usually in summary proceedings, among other things:

  • to order the former employee to cease and desist from all wrongful acts with immediate effect;
  • to prohibit the former employee from contacting and maintaining contacts with customers or other contacts of the employer;
  • to order the former employee to submit a full statement of the contacts that already have already taken place (when and what was discussed);
  • to order the former employee to inform contacts of the employer in writing of the termination of their activities and/or business, while at the same time providing the employer with copies of those statements;
  • in so far as applicable, to order the former employee to observe the duty of confidentiality recorded in the employment contract or the applicable collective bargaining agreement;
  • to order the former employee to return all digital and other company information of the employer that is in the employee’s possession, accompanied by a written statement signed by the former employee that they no longer have any digital and/or written copies of that information in their possession;
  • all of this on pain of a penalty payable immediately for each violation of any of these injunctions and orders; and
  • to order the former employee to pay the employer an advance on the loss incurred.

CONCLUSION

Contractual clauses that relate to the prohibition of competition after termination of the employment are permitted and are advisable with a view to avoiding competition by a former employee. A former employee who is not bound by such a clause is free, in principle, to compete with their former employer after their employment has ended. However, wrongful competition is not permitted. In the event of systematic and substantial damage to the former employer’s long-term market, which the employee has helped established in the context of the employment contract, using tools with which the employee was confidentially provided by their former employer, that constitutes wrongful competition. In that context the former employer may demand termination of the wrongful competition in summary proceedings, among other things, on pain of a penalty. It must then sufficiently prove that wrongful competition is involved, which is often difficult in practice, but certainly not impossible.

 

Boekel De Nerée is a leading independent Dutch law firm of advocaten and civil law notaries.

The firm offers full bilingual, cross-cultural specialist services to clients from English- and German-speaking countries. There are offices in Amsterdam and London.

www.boekeldeneree.com