Non-competition clauses - often enforceable contrary to widespread opinion

Requirements for the enforcement of a non-competition clause

The post-contractual prohibition of competition repeatedly leads to controversy as to whether it can be enforced at all. Courts often have to deal with this question. The opinion that a non-competition clause cannot be enforced and that it can therefore be easily signed is firmly anchored in many people's minds. However, this is a fallacy: the prohibition of competition is anything but unenforceable - as long as the requirements are fulfilled.

To ensure that the non-competition clause pursuant to Art. 340 et seq. CO is complied with and the non-competition clause is valid and therefore enforceable, the following requirements must be fulfilled:

1) Written Form and Signature of the Employee

For the non-competition clause to be valid, it must be written and signed by the employee concerned (capable of acting). Only the signature of the employee is required, as only he/she is obligated.

In addition, the question arises what requirements must be placed on the written form. In principle, simple written form (i.e. with signature) is sufficient and, according to federal court rulings, the non-competition clause does not need to be specifically emphasised. There is a doctrine dispute as to whether a global reference to general working conditions, regulations or collective employment agreements which contain the non-competition clause and do not require a signature should be valid. However, cantonal case law and a presumably predominant part of the doctrine view such a non-competition clause as null and void. The reason given is that the protective purpose of the provision is that the employee should know all objectively and subjectively essential contractual points and agree to them in writing. The Federal Council's dispatch also sees the requirement for the written form as an intended warning for the employee. On the other hand, it is quite possible to regulate a non-competition clause in a separate document that is separate from the employment contract, but only under the condition that this separate document is signed by the employee.

2) Competitive Activity

The concept of competing activity, to which a non-competition clause refers, is self-evident at first glance, but complex on closer inspection. The competing activity must be actual or imminent and requires a competitive relationship between the employer and the employee or a third party (the new employer). A distinction is made between a company-related and an activity-related prohibition of competition (the former being a prohibition of any activity in a competitor company and the latter in the previous field of activity), whereby it refers only to competition on the supply market and not to the demand market. According to the Federal Supreme Court, the concept of competition must also be interpreted more narrowly in labour law than in unfair competition law.

According to federal court rulings, the offer of services is decisive for the question of whether a competing activity exists in an individual case. If the former employer and the former employee offer services of the same kind which satisfy the same or similar immediate needs and are directed at a target group which at least in part overlaps, then a competing activity exists. The services are similar even if they are able to replace each other with regard to the same customer need.

3) Insight into the Clientele or Into Manufacturing or Trade Secrets

Furthermore, the competition clause is only valid if the employee concerned gains insight into the clientele or into manufacturing or trade secrets. When looking into the clientele, enough intensive customer contacts are needed to enable the employee to get to know the needs and characteristics of the customers. When looking into manufacturing secrets (technical knowledge) or business secrets (commercial knowledge), it is crucial that this knowledge is described by the employer as confidential or that the will to secrecy can be inferred from the circumstances. Furthermore, the knowledge must only be known to a certain circle of persons and may only be discovered with difficulty. Consequently, knowledge that can be acquired in all companies in the same sector is not a manufacturing or trade secret.

4) Considerable Damage to the Employer due to Insight into the Clientele or into Manufacturing or Trade Secrets.

The insights just mentioned must also be able to cause considerable damage to the employer, i.e. there must be an adequate causal link between the insight and the possibility of damage. This is the case if the information and knowledge obtained through the insight could be exploited competitively by the former employee or his new employer. The possibility of damage is merely a hypothetical behaviour of the employee, i.e. no actual damage must have taken place. According to federal court rulings, an insight into the clientele can result in damage, in particular, if the employee concerned is aware of the wishes and concerns of the customers as a result of his contact with them and therefore has the opportunity to make offers that are aligned to the concrete needs of the customer at an early stage in the process.

At this point, however, it should be noted that a non-competition clause based on an insight into the customer base is ineffective if the customers attach greater importance to the employee's personal performance and skills than to the employer's identity and therefore wish to stay with him. This is often the case, for example, in the liberal professions (lawyer, doctor, architect, hairdresser, etc.).

5) No Lapse of the Non-Competition Clause

It goes without saying that the validity of the non-competition clause presupposes that the non-competition clause must not have lapsed. Possible reasons for this are the loss of considerable interest, the circumstances of the termination or a waiver. The possibilities for the termination are provided for in art. 340c CO, which will soon be explained in more detail in a further article.

No Unfair Compromise of the Employee’s Future Economic Activity

If the above conditions are fulfilled, a valid and enforceable prohibition of competition exists. In a final step, however, it must still be examined whether the non-competition agreement unfairly compromises the employee’s future economic activity. To avoid such a case, the non-competition clause must be limited in terms of place, time and object (art. 340b CO). As a rule, a non-competition clause can last a maximum of three years, unless special circumstances justify a longer non-competition clause. It must be decided on a case-by-case basis whether the economic progress of the employee is compromised in such a way that it is no longer justified by the employer's interests. If it is not sufficiently limited, the prohibition of competition continues to be valid. However, the "excessive" competition clauses are reduced accordingly by the court.

What Does Enforceable Mean? What Sanctions Are Possible?

In art. 340b CO, the law provides for three types of sanctions in the event of a violation of a valid prohibition of competition: contractual penalty, compensation for damages and actual fulfilment.

The main type of sanction relevant in practice is the contractual penalty. A contractual penalty is often agreed in the employment contracts in order to secure the non-competition clause. If the damage is higher than the contractual penalty, the employee remains liable for this damage if he is at fault.

Compensation may also be claimed irrespective of the agreement of a contractual penalty, but in practice it is of lesser importance. The reason for this lies in the employer's burden of proof: he must prove, among other things, the exact damage as well as the causal link between the breach of contract and the damage, which in practice many employers fail to do.

From the employer's point of view, one of the advantages of the contractual penalty - as opposed to damages - is that the damage and the causal link do not have to be proven. Thus, if a contractual penalty has been agreed and the employee has violated the (valid) non-competition clause, he owes the amount stipulated in the contractual penalty. In practice, however, conventional penalties are often too high, which is why the courts regularly reduce the amount owed. Reasons for such a reduction could be, for example, a low salary, a short period of employment, a one-time breach of the non-competition clause or no damage. The case law sees the employee's annual salary as the upper limit of the contractual penalty, with practice regularly setting the amount at one to a few monthly salaries.

Finally, there is a third type of sanction provided for by law: real fulfilment. This is the employer's right to the employee to cease the competing activity. Strict conditions must be met in order to enforce the real fulfilment, as the real fulfilment may make the employee's only sources of income impossible. The actual fulfilment must be agreed upon in an explicit and written agreement, among other things. It must also be justified by the injured and threatened interests of the employer and the conduct of the employee. In principle, it can be stated that the conditions are often difficult to fulfil in practice and therefore the actual fulfilment is only granted in exceptional cases, such as the threat to the existence of the employer.

Conclusion

In summary, several requirements must be fulfilled for the non-competition clause to be valid. Federal case law also stipulates that the scope of application must be interpreted narrowly and, in cases of doubt, decided against the employer. However, if the conditions are met, the non-competition clause is valid and enforceable. From the employer's point of view, it is advisable to always include a contractual penalty, since proof of damages is very difficult to provide. From the employee's point of view, a non-competition agreement should be carefully studied when signing, as the professional consequences can be significant.

March 2019 | Authors: Michèle Stutz, Martina Schmid

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