Constitutional Court reversing the Supreme Court’s opinion on employer’s entitlement to a penalty under a non-compete clause
Less than half a year ago we wrote about a rather surprising Supreme Court ruling concerning the proportionality of a penalty under a non-compete clause. The case involved a sales director who had breached her obligation not to work for her former employer’s competitors for one year after the termination of her employment. As her new employment had only lasted four days, according to the Supreme Court it had been just a negligible breach of duty, and demanding the penalty under the non-compete clause would be contrary to good morals. The Constitutional Court was of a different opinion, and disagreed with the Supreme Court’s conclusion.
By a non-compete clause, an employee undertakes to abstain from carrying out gainful activity that would be identical with their employer’s scope of business or competing with it by its nature, for a certain time after the termination of their employment, however, for no longer than one year. For each month of observing the non-compete obligation, the employee is entitled to at least one half of their average earnings. It is also possible to agree that in the event of a breach of the clause, the employee will pay a contractual penalty.
The employer’s right to demand a contractual penalty was recently challenged by the Supreme Court. Although the Labour Code stipulates no such condition, according to the court, the employer’s entitlement to the penalty depends on the extent of the breach of the clause, and a four-day breach is not enough. According to the court, the employer should have addressed the situation by suing for damages or by invoking protection against unfair competition. This judgement considerably limited the practical use of a non-compete clause.
The case then appeared before the Constitutional Court. The court held that the Supreme Court’s decision had been against the elementary principles of justice – namely the constitutional right to own property, the right to free enterprise, and the pacta sunt servanda principle. The court emphasised the purpose and meaning of the non-compete clause, which is to protect the employer against information being leaked to competitors. Therefore, in terms of the entitlement to the penalty, it was only relevant whether the former employee had breached their obligation not to carry out the competing activity, not the duration of such a breach. It was also irrelevant whether the employee did indeed use the protected information for the benefit of the competitor.
The Constitutional Court thus demonstrated a much better orientation in common practices – pointing out that sensitive information or know-how may be transferred within minutes. The court further noted that requiring the former employer to prove the actual abuse of information by the ex-employee as a prerequisite for successfully claiming damages was rather unrealistic.
The Constitutional Court’s judgement cannot be generally applied to all situations. The Constitutional Court agreed with the Supreme Court that in some cases the amount of the contractual penalty may be reduced with respect to good morals. In the case in question, however, there was no reason for this, as the penalty was agreed upon in the same amount as the remuneration that the employee would have received for observing the obligation.
The case illustrates that even the highest judicial instance, the Supreme Court, may draw a conclusion that does not conform to the constitution, and it may be worthwhile not to give up and pursue all remedies available, including a constitutional complaint.