15 October 2019

How to phrase a (post-employment) non-competition clause?

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For a post-contractual non-compete obligation to be valid in an employment agreement several provisions must be considered. The Swiss Federal Supreme Court has recently published a new decision on this matter.

  • Martina Aepli

    Legal Partner

  • Michèle Stutz

    Legal Partner
Swiss law provides in Art. 340 para. 1 OR that an employee ""may give the employer a written undertaking to refrain from engaging in any activity that competes with the employer once the employment relationship has ended and in particular to refrain from running a rival business for his own account or from working for or participating in such a business”. Art. 340a (1) OR then provides that the prohibition ""must be appropriately restricted with regard to place, time and scope such that it does not unfairly compromise the employee’s future economic activity"". In principle, there is a designated maximum duration of three years.

How to agree on such post-contractual non-competition clause? 

 

It is important that the parties reach an agreement in written form (in the employment contract or in a separate document). This means that a signature is required. E-mail correspondence on this topic is therefore not deemed sufficient.

With regards to content, it is decisive that the non-competition clause is expressly described in the written agreement in terms of place, time and scope. In a new decision (BGer 4A_208/2018 of 4 April 2019; scheduled for publication) published on 4 September 2019, the Federal Supreme Court (FSC) set out important points in this regard:

 

  • A post-contractual non-competition clause that does not expressly describe the place, time and subject is not valid. This statement is new to FSC rulings. Previously, literature based on FSC-case law had held that a non-competition clause was valid even without explicit reference to the circumstances of place, time and/or subject. This view can no longer be upheld.
  • For the purpose of describing the subject it is sufficient to reproduce the wording of the law (e.g. any competing activity is prohibited, in particular the employee may not conduct for his own account a business which competes with that of the employer, nor be active in such a business or participate in it.). It is not a condition of validity that this is described in more detail. In order to be valid, a non-competition clause must not only state that a competing activity is prohibited, but also in what territory (local restriction) and for what period of time (maximum of three years).

In order to be valid, a non-competition clause must not only state that a competing activity is prohibited, but also in what territory (local restriction) and for what period of time (maximum of three years).

In this context, it is important to know that courts can always reduce non-competition clauses, which in the court's opinion are formulated too comprehensively, to the permitted extent. This means that a non-competition clause, e.g. agreed for two years, can be reduced to six months by the court, e.g. if the court considers that six months is sufficient to protect the employer's interests. In order to be assured to the greatest possible extent that a non-competition clause is fully protected by the courts, it is therefore advisable to formulate the non-competition clause narrowly (short duration / narrow localized scope). In this context, it is also recommended that the subject of the non-competition clause be described in more detail by adding examples of what should not be permitted or, for example, by expressly mentioning certain competitors. Another element that can help to ensure that a non-competition clause is enforced as intended is what is known as compensation for non-competition. This is a special compensation paid by the employer to the employee for agreeing the non-competition clause. However, this compensation is not compulsory.

The exact nature of the content of the non-competition clause is individual and also depends on the objectives of the parties: if the written agreement is to be as legally binding as possible, it is advisable to use a narrow definition with compensation for non-competition. If the employee is to be deterred as widely as possible, a broad wording is perfectly suitable even without compensation for non-competition. The advantages and disadvantages in this respect must be assessed on a case-by-case basis.

In addition to the above points, it is also important to clearly agree on the consequences of the violation of the non-competition clause. The so-called specific performance, i.e. the actual enforcement of the non-competition clause by prohibiting the employee from taking up a competing position, a contractual penalty and damages, may be considered. As a rule, it is advisable to combine the three options. The decisive element here is not specific performance - which in practice is often not enforceable - but the contractual penalty. In the absence of such an agreement, the employer must specifically prove that the employee has caused financial damage to the employer as a result of the competing activity. Experience has shown that this is very difficult on a regular basis. The contractual penalty should not exceed one year's salary of the employee. However, courts can reduce the contractual penalty in individual cases at their own discretion.

For the sake of completeness, it should be mentioned that a non-competition clause - which has itself been validly agreed - may no longer apply for various reasons (e.g. background to the termination of the employment relationship). The correct formulation of the non-competition clause alone is therefore only the starting point for successful enforcement. Enforceability cannot be guaranteed at the time the non-competition clause is agreed.

Possible model example of a post-contractual non-competition clause (without compensation for non-competition)

The employee agrees to refrain from any competition with the employer within the territory [e.g. the city of Zurich/Switzerland] [possibly: in the business areas [list of areas]] for the duration of [duration up to max. three years] after termination of this employment contract within the territory [e.g. the city of Zurich/Switzerland], in particular

  • not to establish or participate in any enterprise which pursues, in whole or in part, the same purpose as the Company or provides, in whole or in part, the same services,
  • not to accept employment as an employee in such a company,
  • not to provide services of any kind to such company, whether in a dependent or independent capacity (e.g. as consultant).

For each violation of the non-competition clause, the employee pays the company a contractual penalty of CHF [amount up to a maximum of approximately one year's salary]. Payment of the contractual penalty does not release the customer from the obligation to comply with the non-competition clause.

The employer has the right to demand, in addition to the contractual penalty and compensation for further damages, the elimination of the breach of contract.

 
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