Validity of Non-Competition Clauses in the Employment Contracts
1. Legislation Regarding Employee’s Duty of Non-Competition
Article 444 of the Turkish Code of Obligations No. 6098 (the “TCO”) regulates the non-competition clauses in employment contracts as follows:
“An employee with the capacity to act may undertake in writing to avoid competition with the employer, particularly to avoid establishing a competing business, working for a competing business or developing relations for the benefits of a competing business.
Non-competition clause shall be valid provided that the employment relationship enables the employee to access information in relation to client portfolio and production secrets or information regarding activities of the employer and use of such information would cause serious damage to the employer.”
2. Conditions for a Valid Non-Competition Clause
Employers tend to restrict employees to compete with themselves after the termination of their relationship because the employees may have access to the clients and may obtain commercial secrets and information while working for the employer. Non-competition clauses and/or contracts aim to restrict competing activities of the employee and to protect legitimate interests of the employer accordingly. Application of non-competition duty is subject to certain restrictions and criteria in the light of the legislation and court of appeal precedents by taking into consideration principle of interpretation in favour of the employees.
According to the Article 445 of the TCO, duty of non-competition shall be subject to limitations in terms of place, time and type of work. In this vein, non-competition clauses shall be void unless following limitations are applied:
- Limitation on Place: Non-competition clause shall be limited to a certain place.
- Limitation on Time: Non-competition clause shall be limited to 1 year or a few years at the most.
- Limitation on Type of Work: Non-competition clause shall be limited to certain types of works within employer’s activities.
These limitations are listed in Court of Cassation 9th Civil Chamber’s judgement dated 15.04.2010 for the Case No. 2008/24493 and Decision No. 2010/19480 as follows:
“…limitation on place may be seen on cities or certain regions according to the type of the work… In terms of time, non-competition duty shall be one-year or a few years at most. Otherwise, it would cause economic devastation of the employee.
Non-competition clause shall expressly be limited to certain work types of the employee. Particularly, considering activities are declared in general in trade registry records in our country, it is not possible to limit working in all fields of business. Therefore, it shall be limited to the works that the employee is performing in the workplace of the employee or the works that are within the main field of activity of the employer.”
In another decision of Court of Cassation, it was considered sufficient for application of non-competition clause that the employee had been working in a position in which he could reach client portfolio and trade secrets such as production secrets and might share such information with its new employer:
“Non-competition contracts are defined as contracts prohibiting the employee from acting in a way that may compete with the employer for a certain time period, in a certain place and in a certain work type after employment contract is terminated since the employee may have access to the employer’s clients and business secrets through its employment. The employee has a negative obligation with this non-competition clause in which he undertakes not to act in a certain way after the employment contract is terminated. In another word, non-competition contracts partly limit economic activity freedom and economic future of the employee. (Sabah Altay, Non-Competition Contracts between Employers and Employees According to the Provisions of the Turkish Code of Obligations, MÜHF-HAD, C.14, p.3, p.179 ff)
It is sufficient for validity of the non-competition clause that the employee has been working in a position that he may access client portfolio and business secrets such as production secrets of the employer and it may share such information with its new employer which is a competitor of its former employer. (Court of Cassation 11th Civil Chamber Case No. 2018/3705 Decision No: 2019/1860)”
There are also judgements of Court of Cassation in which non-competition clauses were considered as breach of freedom of work when such clauses are not in compliance with the restrictions provided in the legislation:
“In the present case, time of non-competition clause is regulated as 1 year in articles 1.1. and 1.2 to be applied within Marmara Region and such clause was not limited in terms of the type of the work. Article 445/1 of the TCO regulates restrictions in terms of place, time and type of work in these contracts and the second paragraph of this article also grants the authority to limit non-competition clauses in terms of scope or time to the courts. Under these circumstances, decision of the court regarding dismissal of case since non-competition clause was not limited in terms of the scope and therefore it constitutes a breach of freedom of labour was not correct and shall be reversed since the court should have examined the non-competition clause within the scope of Article 445/2 of the TCO.” (Court of Cassation 11th Civil Chamber Case No. 2016/13653 Decision No: 2017/6322)
Therefore, restrictions regulated in the legislation and Court of Cassation precedents shall be taken into consideration in drafting non-competition clauses in the employment contracts.
3. Breach of Non-Competition Clause and Penal Clauses
In practice, it is seen that the parties agree on a penalty to be paid to the employer by the employee in the event of breach of non-competition clauses. In addition to the aforementioned matters in relation to validity of non-competition clauses, amount of the penalty is also of great importance since exorbitant penalties may be reduced by the courts according to the Article 182 of the TCO.
Pursuant to article 446 of the TCO “The employee acting in breach of non-competition clause shall compensate all damages that the employer has incurred due to such breach. If such breach is subject to a penalty and the contract does not regulate otherwise, the employee may be discharged of its debts in relation to non-competition clause; yet the employee shall compensate damages exceeding such amount. The employer may also request cease of behaviour that constitutes breach of the non-competition clause if importance of the employer’s interests that are breached or jeopardized and behaviour of the employee justify accordingly, provided that it is expressly reserved in writing in the contract.
Although it is generally accepted by the academics and Court of Cassation that the penalty clauses under employment contracts should be reciprocal to be binding on the employee, we are of the opinion that imposing such an obligation and penalty to be applied to the employer in the non-competition clauses would not be applicable and would be contrary to the nature of such legal relationship and natural pace of life. For instance, if a penalty is regulated in an employment contract to be applied in the event of breach of notice periods by the employee, such clause may also be drafted in a manner applicable to the employer. This general principle is emphasized by the Court of Cassation General Civil Assembly as follows:
“The penalty to be applied should be regulated to be applied reciprocally to both parties to be valid. It is not acceptable to deem a penalty valid when it solely binds the employee, but it is not applicable to the employer.” (Court of Cassation General Civil Assembly Case No: 2014/13-1013 Decision No: 2016/319, Date: 16.03.2016)
However, it is not practicable to impose an obligation on the employer as the penalty clause to be applied in case of breach of non-competition clause is solely agreed for the purposes of protecting the interests of the employer. Indeed, it is stipulated by the Court of Cassation 9th Civil Chamber that the general rule requiring penalty clauses to be drafted reciprocally under the employment contracts is not applicable to the penalties regulated in relation to non-competition clauses in employment contracts as follows:
“…although the undertaking dated 07.06.1993 was deemed invalid since it involves an one-sided penalty to be applied to the employee… one-sided penal clause to be applied in the event of breach of non-competition clause does not render the contract invalid … It is a wrong decision to reverse this case without taking into consideration that the non-competition clause which is the subject matter of this dispute is valid.”
In this vein, we are of the opinion that non-competition obligation of the employee constitutes an exception to the general rule requiring the penalty clauses to be reciprocal. Indeed, such penal clauses merely aim to protect interests of the employer and to prevent the employee from damaging the employer by way of using information obtained during its employment.
Validity and application of non-competition clauses are subject to certain conditions according to the relevant legislation and high court precedents based on the fact that application of such clauses excessively may otherwise prejudice economic future and constitutional freedom of work of the employees after termination of their employment contracts. In this vein, non-competition clauses are rendered invalid unless such clauses are drafted in a manner that limits its application in terms of place, time, and type of work undertaken by the employee. Further, while the general rule is that one sided penalty clauses drafted in favour of the employers under the employment contracts are considered invalid, we are of the opinion that one-sided penalty clauses drafted to be applied in the event of breach of non-competition clauses by the employees should be held valid as an exception of the referred general rule, provided that other validity requirements under the law are met.
@Çağla Barut, LLM