NON-COMPETE CLAUSE IN EMPLOYMENT CONTRACTS

I. INTRODUCTION

Individuals employed in managerial and similar positions within companies acquire valuable knowledge about the business and industry during their employment. In today's market, dominated by free enterprise and competition, it is highly likely that these individuals will use the experience, customer relationships, and general know-how they have acquired in their current company to compete with their former employers by starting their own ventures or working for a competitor. To prevent this, companies often enter into agreements with their employees, both during their employment and after the termination of the employment relationship, stipulating that they will not engage in competitive activities.

While non-compete clauses allow companies to ensure that former employees do not use the experience they gained within the company against them, overly broad restrictions on competition can result in employees having their economic futures restricted and becoming overly dependent on the company.

In this article, we will examine the legal nature, elements, and validity requirements of non-compete clauses in employment contracts in light of higher court decisions.

II. LEGAL NATURE OF THE NON-COMPETE CLAUSE IN AN EMPLOYMENT CONTRACT

In employment law, a non-compete agreement is defined as a contract that prohibits an employee, after the termination of their employment contract, from engaging in competitive activities with their former employer. This restriction is typically limited to a specific geographic area, time period, and type of activity, and is usually imposed due to the employee's access to the employer's customers or trade secrets.

Through this non-compete agreement, the employee assumes a negative obligation towards the employer, agreeing to refrain from certain actions after termination of employment. In other words, the non-compete agreement partially restricts the employee's economic freedom and future.

The Turkish Law on Obligations ("TLO") provides examples of competitive acts in Article 444, including opening a competing business or working for a competitor. Therefore, activities such as opening a business in the same sector and region as the former employer, working as a representative, consultant, or in a similar position for a competitor, or providing consulting or auditing services to such businesses can be considered competitive acts.

It's important to note that a non-compete agreement takes effect after the termination of the employment contract. During the employment period, employees already have a legal duty of loyalty to their employer. In other words, if an employee engages in competitive activities while employed, this is a breach of their duty of loyalty and can be grounds for the employer to terminate the contract with a valid cause. However, a non-compete clause can also include a penalty clause for violations that occur during the employment period, and the employer can claim damages resulting from such violations.

A non-compete agreement can be agreed upon either when the employment contract is signed or after the employment relationship has begun. Non-compete agreements made before or after the employment contract is signed are not subject to the provisions of Article 444 of the TLO and are not subject to the same restrictions.

III. CONDITIONS OF A NON-COMPETE CLAUSE

The conditions for the validity of a non-compete clause are enumerated in Article 444 of the Turkish Law on Obligations (TLO). If any of these conditions are missing, a valid non-compete clause cannot be established.

1. Capacity to Act

As with almost every contract, the parties must have the capacity to act at the time of entering into a non-compete agreement for it to be valid.

2. Written Form Requirement

A non-compete agreement must be in writing. The written form is a formal requirement, and an oral non compete agreement is not valid.

3. The Employee Must Have Access to the Employer's Customer Base, Trade Secrets, or Business Operations

The purpose of a non-compete agreement is to prevent an employee from using the employer's customer base, trade secrets, or business operations, to which they have obtained during their employment, to compete with the employer. Consequently, the employee restricted from competition must have access to this information. Otherwise, it would be unfair to restrict the economic future of an employee who has no advantage over the employer. To prevent this, the law explicitly requires that the employee restricted from competition must have access to the employer's customer base, trade secrets, or business operations as a condition of validity.

Information related to the customer base generally includes the customers' titles, professions, addresses, phone numbers, and the type and quantity of goods or services they purchase. If an employee has access to the employer's customer base, the benefit of a non-compete agreement is that the employee may have established personal relationships with customers, know their needs and demands, and may use this information to their economic advantage in a competing business, potentially causing the former employer to lose customers.

It is not sufficient for the employee to merely have access to the customer base; they must also have access to significant information that could be used to compete (e.g., the customer's business volume, pricing and delivery terms, the customer's own business strategy).

“The employee's familiarity with customers and knowledge of the customer base” refers to the employee having personal knowledge of the employer's customers or having obtained important information such as their addresses and phone numbers. However, when determining whether the employee has access to customer information, it is necessary to consider the employee's position within the company and whether they have access to specific, important information about the customers, rather than any ordinary information. Another important point is that both the employee's familiarity with customers and knowledge of the customer base, and the employee's access to trade secrets and production secrets, create a significant potential for harm to the employer." (Supreme Civil Court Ruling - 9. HD. E. 2016/32244 K. 2016/20637 T. 22.11.2016)

Employees who have access to customer information can be exemplified by sales representatives, managers, and regional managers.

Production secrets, on the other hand, encompass information related to the company's internal operations. The information protected here includes both technical and operational knowledge. Technical information refers to all information related to the company's manufacturing system, methods, inventions, secrets, techniques, and access to related documentation, as well as information about raw materials and production secrets used in certain sectors. Engineers and technicians can be given as examples of employees who possess such information.

“The defendant is employed in the accumulator production department of the plaintiff company, and their job scope is related to accumulator production. The defendant is fully aware of all the technical secrets of the plaintiff company in this regard.” (Supreme Civil Court Ruling - Y. 11. HD. E. 2022/1639 K. 2023/5441 T. 28.09.2023)

By 'the employer's business', it is meant information related to the company's financial status, income and expense balance, pricing and growth strategies, future goals, investments, corporate structure, and management. Examples of individuals who have access to such information include accounting managers, middle and upper-level managers, human resources managers, and industrial engineers

4. Existence of a Significant Risk of Harm to the Employer

For a non-compete clause to be valid, the employee must have the ability to cause significant harm to the employer by using the information listed in the previous section (Section 3). By 'significant harm', we mean harm that is substantial to the company. For example, a significant decrease in the employer's turnover, loss of customers, or leakage of production or operational secrets in the region covered by the non-compete clause can be considered significant harm.

It is not necessary for the harm to actually occur for the non-compete clause to be valid; the mere existence of a risk of harm is sufficient. In practice, employees who are in influential and authoritative positions within the company are often found to meet this requirement. For example, while a sales representative who has contact with a small portion of the company's customer portfolio may not pose a significant threat, a sales manager who has contact with all customers and who knows and develops the company's sales strategies is considered to have the potential to cause significant harm to the employer

“It is established that the defendant, after leaving the plaintiff company on September 27, 2013, started working at Evolog Nak. ve Loj. Hizm. Tic. Ltd. Şti. on October 2, 2013. During their time at the plaintiff company, the defendant worked as an operations manager and later as a line development leader. Both the plaintiff company and the third party Evolog Nak. ve Loj. Hizm. Tic. Ltd. Şti. operate in similar sectors, and the defendant performed similar tasks in both companies. It is clear that, in this context, particularly with regard to transportation activities to France, the information obtained about the customer base, customer agreements, and pricing falls within the scope of trade secrets. Therefore, given their position, the defendant, who is aware of this trade secret information, would likely cause significant harm to the plaintiff company if they were to use this information at a competing company.” (Supreme Civil Court Ruling - YHGK E. 2020/670 K. 2022/1544 T. 17.11.2022)

III. Limitations on Non-Compete Clauses

Given that a non-compete clause is a contract that restricts an employee's economic future, the legislature has imposed limitations on the scope of non-compete clauses. Accordingly, non-compete clauses can be applied within the limitations specified below in terms of duration, location, and subject matter.

1. Duration: Non-compete agreements are valid for a maximum of two years after the termination of the employment contract.

2. Location: Non-compete agreements are only valid in the places where the employer has its headquarters or branches. If the employer operates in many countries domestically or internationally, geographic boundaries are determined by balancing the economic future of the employee with the interests of the company.

3. Subject Matter: Non-compete clauses are only valid with respect to the sectors in which the employer operates. The employer cannot restrict the employee from working in another sector or establishing a business in that sector."

IV. Breach of Limitations on Non-Compete Clause

Previously, contracts that exceeded the limitations described in the heading above were entirely deemed invalid by the Court of Cassation and were termed "shackling contracts." However, in recent years, there has been a change in this jurisprudence, and referring to Article 445/2 of the Turkish Law on Obligations, which states "The judge may, by freely evaluating all circumstances and conditions, and by taking into account in an equitable manner any counter-performance that the employer may have undertaken, limit the scope or duration of an excessive non-compete clause," it has been ruled that non-compete clauses can be reviewed and excessive restrictions can be limited. In other words, the judge has the authority to evaluate the non-compete clause and the parties in the dispute before them and, if they find the clause to be excessive, to limit it in terms of place, time, and subject matter in accordance with the law.

“In the concrete case, a 5-year non-compete period was stipulated in the agreement between the parties, but no geographic limitation was imposed. While Article 445/1 of the Turkish Commercial Code (TCC) stipulates time and place limitations for such contracts, the second paragraph of the same article also states that the court may limit the scope or duration of excessively restrictive non-compete provisions. In this case, the court should have evaluated the agreement dated July 6, 2010 between the parties within the framework of Article 445/2 of the TCC and reached a conclusion after deliberation. However, it was incorrect to dismiss the case with a written judgment; the decision should be overturned.” (Supreme Civil Court Ruling - Y. 11. HD. E. 2022/3035 K. 2022/4680 T. 09.06.2022)

V. Consequences of Breaching Non-Compete Agreements:

An employee who breaches a valid non-compete agreement is obligated to compensate the employer for damages and, if agreed upon, pay liquidated damages.

The obligation to compensate for damages arises from the breach of contract and is independent of the employee's fault in breaching the non-compete clause. In other words, proof of breach of contract is sufficient to establish liability for damages. The employer's damages are generally calculated by experts as a loss of profit, shrinkage, and market share within the region covered by the non-compete clause, or based on the know-how possessed by the competing employee.

If agreed upon in the contract, the employee who breaches the non-compete clause will also be obligated to pay liquidated damages. According to the explicit provision of the law, an employee who pays liquidated damages is released from the non-compete obligation, but the employer can still claim compensation for damages exceeding the liquidated damages.

Finally, if expressly agreed upon in the contract, the employer may request a judgment ordering the termination of the breach of the non-compete clause. Although it is practically impossible to enforce such a judgment (as it is not possible to issue a judgment against a third party, such as the new employer of the competing employee), it is theoretically considered that the employee themselves could be ordered to cease their activities.

VI. TERMINATION OF NON-COMPETE CLAUSE

A non-compete agreement can be terminated in two special cases, other than by the parties' free will or the expiration of the specified period:

1. Termination of the Employment Contract by the Employer Without Just Cause or Termination by the Employee for Just Cause:

The law stipulates that if the employment contract is terminated by the employer without just cause or by the employee for just cause, the non-compete clause becomes null and void. In the case of termination without just cause by the employer, the existence of the just causes of termination listed in Articles 25 of Labor Law and 435 of TLO is directly sought. If the employer terminates the employment contract without relying on one of the just causes of termination specified in Article 25 of the Labor Law, the non-compete clause will automatically become invalid. Similarly, if an employee terminates the employment contract for a reason attributable to the employer, as indicated in Article 24 of the Labor Law, the employer's fault must also be sought. Therefore, if the employment contract is terminated by the employee for just cause based on the provisions of Articles 25/I-b and 25/III of the Labor Law, which allow for termination for reasons not attributable to the employer, the non-compete clause will remain valid.

2. Absence of a Legitimate Interest of the Employer in the Continuation of the Non-Compete Clause:

If the employer no longer has a legitimate interest in the continuation of the non-compete clause, the employee's continued obligation under this clause becomes unfair and the non-compete clause automatically terminates. The absence of a legitimate interest of the employer may result from various reasons. For example, the employer may completely cease operations in the region covered by the non-compete clause or may completely withdraw from the industry. In such cases, the employer no longer has an interest in the continuation of the non-compete clause, as there is no risk of the bound employee harming the employer by competing. Such cases are frequently encountered in practice, and the existence of the employer's interest in the continuation of the non-compete clause should be evaluated in each concrete case.

BIBLOGRAPHY

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