SC on proportionality of penalty under non-compete clause in employment contract

A non-compete clause can be included in an employment contract of an employee who while performing their work may gain information significant for the employer’s competition. It stipulates the employee’s obligation not to carry out work identical or in competition with the former employer’s activity for a certain time (one year at maximum) after the termination of employment. The clause is used by employers to protect valuable information, knowledge, processes or technologies. However, this protection does not come free-of-charge – to their employees, employers have to pay a remuneration of at least one half of an average monthly salary for each month of compliance with the obligation. The employee’s adherence to the clause may be secured by a contractual penalty; by paying such a penalty, the employees may liberate themselves from the obligation.

Under the law, the amount of the contractual penalty must be proportionate. Its proportionality may be reviewed by court, on a case by case basis, both in terms of its purpose, the nature and significance of information protected, and of the amount of the remuneration the employee is entitled to for complying with the clause.

In the case in question, the proportionality of the penalty was at the heart of the dispute. The court found the amount of the penalty adequate – the employee had gained competition-relevant information while performing the work, and the amount of the penalty was not higher than what employee would have gained from the employer had she complied with the clause. Nevertheless, the court ruled in favour of the employee, as it took into account the fact that her employment with the new employer had only lasted a few days, and held that she had only breached her obligation to a negligible extent. The former employer’s demand to pay the contractual penalty was thus dismissed on the grounds of being contrary to good morals. The court also stated that the situation could still be addressed by seeking damages or invoking remedies against unfair competition.

With the described judgement, the Supreme Court further narrowed the already rather limited possibilities of employers to protect their know–how. Not only do they have to correctly assess the vague criteria of proportionality, they also have to deal with whether any breach of a non-compete clause is “negligible” – no matter that sensitive information may be disclosed within minutes. The non-compete clause thus seems to be a rather expensive tool for employers, providing them with only limited protection. Seeking damages or claiming a breach of fair competition regulations is a rather theoretical option – it is difficult enough for employers even to find out that their former employee subject to a non-compete clause is working for the competition, and even harder to prove that the employee has actually disclosed any sensitive information.