Non-Competition Law in France and the EU

In France, like in the U.S., covenants not to compete are not prohibited per se. They are unlawful only if they create unreasonable restraints upon employees' freedom to work. In the same way, Article 340 of the Swiss Code of Obligations and Article 2125 of the Italian Civil Code do no prohibit employment agreements that limit employees' rights to perform their activities to subsequent employers, provided that the scope of the restrictions do not prevent employees from finding an alternate job.

However, in the international arena, U.S. employers should refrain from seeking to blindly impose the “American way” of drafting and implementing restrictive covenants in an attempt to harmonize their employees' working conditions all over the world. Indeed, there is simply no such a thing as a standard restrictive covenant that could be implemented whatever the location of the workplace in the world. More generally, U.S. companies that choose to “go global” should never forget that employment laws in the international arena significantly differ according to the legal, social, political and economic background in each country. While employment relationships in the U.S. are governed by private arrangements that are voluntarily entered into between employers and employees, they generally consist, in other industrialized countries, of a comprehensive and paternalistic set of legal rules the main purpose of which are to protect employees in their subordinate relations vis-'-vis their employers. Consequently, most employment laws in industrialized countries and in particular in Western Europe are more employee-friendly than U.S. employment law (including California law).

Employee's Obligation of Loyalty

Under French employment law, the non-compete clause is dormant until the employment agreement is terminated. This does not mean, however, that the employee may not be subject to any restrictive covenant while his/her employment agreement is in force. Indeed, the French Supreme Court has ruled that during the term of his/her employment agreement, the employee is bound by an obligation of loyalty vis-'-vis the employer. In other words, as of his/her hire date and until the last working day of his/her prior notice period, the employee must refrain from carrying on or engaging in a competing business with the employing company. The same holds true under Austrian law.

In France, the employee's obligation of loyalty is enforceable by the employer through disciplinary sanctions, eg, terminating the employee's employment agreement for reckless misconduct or even gross fault.

Employee's Confidentiality Obligation

Most EU countries recognize that it is legitimate for an employer to prevent the alienation of its confidential or proprietary business information. For instance, in Denmark, under '10 of the Marketing Act, employees are forbidden to procure or seek to procure knowledge or possession of the company's trade secrets by “improper” means. In almost all EU jurisdictions, it is compulsory when drafting a confidentiality covenant to demonstrate the existence of an interest that is vital to maintaining the company's business and competitiveness. As an example, customer or contact lists may not be considered confidential if the information can be assembled just by accessing public data.

In France, the employer who fails to specify a confidentiality obligation in an employment agreement is not deprived of any protection as it could rely on the well-established principle of French case law that an employee is necessarily bound by an obligation of “discretion” during the term of his/her employment agreement.

Covenants Not to Compete

Non-compete clauses are generally defined as provisions prohibiting the former employee from operating, controlling or performing a competing activity, business or profession in a defined area, for a specified period of time, after the termination of his/her employment with that employer. US employers should feel familiar with the rules in force in the EU countries as a majority of them (if not all of them) restrict covenants not to compete like many states in the U.S. To be enforceable in France, restrictive covenants must meet the following requirements:

Legitimate interest

A prohibition of competition can be imposed only to the extent that it is reasonably necessary to protect legitimate interest of an employer. For example, French courts refuse to enforce a non-compete clause against a former employee whose duties in the company did not allow him/her to have access to any valuable technical or commercial information such as a maintenance worker.

Limitation in time and space

French courts generally uphold restrictions ranging from 1 to 2 years after the termination of the employment agreement. In Ireland, courts have upheld restrictions ranging from 6 to 12 months after the termination of the employment agreement. In Austria, according to Section 36 of the Employee's Act, the enforceability of such a covenant restriction should not exceed 1 year. In The Netherlands, the duration of non-compete clauses is limited to 12 months. According to the provisions of Swiss law, the prohibition on competition cannot remain in effect for a period longer than 3 years, unless justified, for example, if an infringement of manufacturing secrets is at stake. In Italy, the duration of the non-compete agreement cannot exceed 5 years if the employee is an executive and 3 years in any other case.

The geographical scope of a non-compete clause must not exceed what is reasonably necessary to protect the employer's business, or unreasonably restrict the employee's ability to work. In determining whether a geographical restriction is reasonable or not, courts consider the nature of the employer's business and the geographical area serviced by that business. In this respect, there is a strong likelihood that a restrictive covenant, which would force the employee to leave France in order to be able to continue his/her profession, would be invalidated by French courts.

No unreasonable restrictions in finding new job

The restrictive covenant must be limited to a specific sphere of activity and should not prevent the employee from finding an alternate job matching with his/her skills. Article 2125 of the Italian Civil Code contains similar provisions. Generally, in jurisdictions where restrictive covenants are enforceable, courts mainly focus on whether the restrictive covenant prevents the employee from continuing his/her profession and earning a living.

Compensation

In three decisions rendered on July 10, 2002, the French Supreme Court ruled that compensating the employee for the period of non-competition is a prerequisite to validate a covenant not to compete. Italy has a similar rule. The rationale of this compensation is to indemnify employees, at least partially, for limiting their career opportunities. As these decisions remain silent on the level of compensation to be granted to the employee, it is necessary to refer to the applicable collective bargaining agreement. If the collective bargaining agreement does not provide any particular information, it is reasonable to believe that an employee is validly compensated when receiving a lump sum ranging from 20% to 50% of the employee's monthly gross salary and multiplied by the number of months during which the covenant remains in force.

In Germany, a non-compete clause is valid and enforceable only if it provides for adequate compensation during the post-contractual, non-competition period. The indemnity must not be less than one half of the employee's total compensation (including salary, bonuses, commission, monetary value of use of company car, etc.) at the time of termination.

Violation of a non-compete clause

In France, an employee who violates a non-compete clause is exposed to different types of legal actions. He/she loses any right to compensation under the non-compete clause, even if the breach was only temporary. A judge can order the employee to pay his/her former employer damages and/or order a temporary or permanent injunction from engaging in the competitive activity. Typically, a non-compete clause will contain a contractual liquidated damages clause, which is enforceable in principle, even though a French judge may blue-pencil the amount if it is deemed excessive. Generally speaking, contractual penalties are valid in France up to 12 months' salary. Furthermore, under the French and the Italian employment laws, the new employer of an employee prohibited from working in a particular area or activity by a non-compete clause may also be exposed to damages payable to the former employer if the former employee can prove that the new employer was aware of the non-compete clause. In addition, a court may order the new employer to terminate the agreement of the employee. If the employee lied to the new employer about his status, such a court-ordered termination will be for gross fault.

Unfair Competition in Absence of Non-Compete Agreement

In principle, an employee whose employment agreement does not contain a non-compete clause is free, at the end of his/her prior notice period, to go to work with a competitor or to set up his/her own competing business. However, an individual's freedom to work is not absolute as French courts set limits as to the manner in which an employee may compete against his former employer, even in the absence of a non-compete clause in his/her employment agreement. For instance, French courts are inclined to hold employees liable for soliciting and poaching within a short period of time their former employer's long-standing clients for the benefit of the business they have recently set up.

Conclusion

As they are finding new commercial opportunities overseas, U.S. employers may be tempted to use uniform restrictive covenants used for all employees all over the world. However, each country has developed its own legislation or case law relating to restrictive covenants. Therefore, U.S. employers should seek local counsel's advice for drafting and/or dealing with issues concerning non-disclosure and non-competition agreements to ensure compliance with the applicable legal requirements of the particular jurisdiction.

In France, like in the U.S., covenants not to compete are not prohibited per se. They are unlawful only if they create unreasonable restraints upon employees' freedom to work. In the same way, Article 340 of the Swiss Code of Obligations and Article 2125 of the Italian Civil Code do no prohibit employment agreements that limit employees' rights to perform their activities to subsequent employers, provided that the scope of the restrictions do not prevent employees from finding an alternate job.

However, in the international arena, U.S. employers should refrain from seeking to blindly impose the “American way” of drafting and implementing restrictive covenants in an attempt to harmonize their employees' working conditions all over the world. Indeed, there is simply no such a thing as a standard restrictive covenant that could be implemented whatever the location of the workplace in the world. More generally, U.S. companies that choose to “go global” should never forget that employment laws in the international arena significantly differ according to the legal, social, political and economic background in each country. While employment relationships in the U.S. are governed by private arrangements that are voluntarily entered into between employers and employees, they generally consist, in other industrialized countries, of a comprehensive and paternalistic set of legal rules the main purpose of which are to protect employees in their subordinate relations vis-'-vis their employers. Consequently, most employment laws in industrialized countries and in particular in Western Europe are more employee-friendly than U.S. employment law (including California law).

Employee's Obligation of Loyalty

Under French employment law, the non-compete clause is dormant until the employment agreement is terminated. This does not mean, however, that the employee may not be subject to any restrictive covenant while his/her employment agreement is in force. Indeed, the French Supreme Court has ruled that during the term of his/her employment agreement, the employee is bound by an obligation of loyalty vis-'-vis the employer. In other words, as of his/her hire date and until the last working day of his/her prior notice period, the employee must refrain from carrying on or engaging in a competing business with the employing company. The same holds true under Austrian law.

In France, the employee's obligation of loyalty is enforceable by the employer through disciplinary sanctions, eg, terminating the employee's employment agreement for reckless misconduct or even gross fault.

Employee's Confidentiality Obligation

Most EU countries recognize that it is legitimate for an employer to prevent the alienation of its confidential or proprietary business information. For instance, in Denmark, under '10 of the Marketing Act, employees are forbidden to procure or seek to procure knowledge or possession of the company's trade secrets by “improper” means. In almost all EU jurisdictions, it is compulsory when drafting a confidentiality covenant to demonstrate the existence of an interest that is vital to maintaining the company's business and competitiveness. As an example, customer or contact lists may not be considered confidential if the information can be assembled just by accessing public data.

In France, the employer who fails to specify a confidentiality obligation in an employment agreement is not deprived of any protection as it could rely on the well-established principle of French case law that an employee is necessarily bound by an obligation of “discretion” during the term of his/her employment agreement.

Covenants Not to Compete

Non-compete clauses are generally defined as provisions prohibiting the former employee from operating, controlling or performing a competing activity, business or profession in a defined area, for a specified period of time, after the termination of his/her employment with that employer. US employers should feel familiar with the rules in force in the EU countries as a majority of them (if not all of them) restrict covenants not to compete like many states in the U.S. To be enforceable in France, restrictive covenants must meet the following requirements:

Legitimate interest

A prohibition of competition can be imposed only to the extent that it is reasonably necessary to protect legitimate interest of an employer. For example, French courts refuse to enforce a non-compete clause against a former employee whose duties in the company did not allow him/her to have access to any valuable technical or commercial information such as a maintenance worker.

Limitation in time and space

French courts generally uphold restrictions ranging from 1 to 2 years after the termination of the employment agreement. In Ireland, courts have upheld restrictions ranging from 6 to 12 months after the termination of the employment agreement. In Austria, according to Section 36 of the Employee's Act, the enforceability of such a covenant restriction should not exceed 1 year. In The Netherlands, the duration of non-compete clauses is limited to 12 months. According to the provisions of Swiss law, the prohibition on competition cannot remain in effect for a period longer than 3 years, unless justified, for example, if an infringement of manufacturing secrets is at stake. In Italy, the duration of the non-compete agreement cannot exceed 5 years if the employee is an executive and 3 years in any other case.

The geographical scope of a non-compete clause must not exceed what is reasonably necessary to protect the employer's business, or unreasonably restrict the employee's ability to work. In determining whether a geographical restriction is reasonable or not, courts consider the nature of the employer's business and the geographical area serviced by that business. In this respect, there is a strong likelihood that a restrictive covenant, which would force the employee to leave France in order to be able to continue his/her profession, would be invalidated by French courts.

No unreasonable restrictions in finding new job

The restrictive covenant must be limited to a specific sphere of activity and should not prevent the employee from finding an alternate job matching with his/her skills. Article 2125 of the Italian Civil Code contains similar provisions. Generally, in jurisdictions where restrictive covenants are enforceable, courts mainly focus on whether the restrictive covenant prevents the employee from continuing his/her profession and earning a living.

Compensation

In three decisions rendered on July 10, 2002, the French Supreme Court ruled that compensating the employee for the period of non-competition is a prerequisite to validate a covenant not to compete. Italy has a similar rule. The rationale of this compensation is to indemnify employees, at least partially, for limiting their career opportunities. As these decisions remain silent on the level of compensation to be granted to the employee, it is necessary to refer to the applicable collective bargaining agreement. If the collective bargaining agreement does not provide any particular information, it is reasonable to believe that an employee is validly compensated when receiving a lump sum ranging from 20% to 50% of the employee's monthly gross salary and multiplied by the number of months during which the covenant remains in force.

In Germany, a non-compete clause is valid and enforceable only if it provides for adequate compensation during the post-contractual, non-competition period. The indemnity must not be less than one half of the employee's total compensation (including salary, bonuses, commission, monetary value of use of company car, etc.) at the time of termination.

Violation of a non-compete clause

In France, an employee who violates a non-compete clause is exposed to different types of legal actions. He/she loses any right to compensation under the non-compete clause, even if the breach was only temporary. A judge can order the employee to pay his/her former employer damages and/or order a temporary or permanent injunction from engaging in the competitive activity. Typically, a non-compete clause will contain a contractual liquidated damages clause, which is enforceable in principle, even though a French judge may blue-pencil the amount if it is deemed excessive. Generally speaking, contractual penalties are valid in France up to 12 months' salary. Furthermore, under the French and the Italian employment laws, the new employer of an employee prohibited from working in a particular area or activity by a non-compete clause may also be exposed to damages payable to the former employer if the former employee can prove that the new employer was aware of the non-compete clause. In addition, a court may order the new employer to terminate the agreement of the employee. If the employee lied to the new employer about his status, such a court-ordered termination will be for gross fault.

Unfair Competition in Absence of Non-Compete Agreement

In principle, an employee whose employment agreement does not contain a non-compete clause is free, at the end of his/her prior notice period, to go to work with a competitor or to set up his/her own competing business. However, an individual's freedom to work is not absolute as French courts set limits as to the manner in which an employee may compete against his former employer, even in the absence of a non-compete clause in his/her employment agreement. For instance, French courts are inclined to hold employees liable for soliciting and poaching within a short period of time their former employer's long-standing clients for the benefit of the business they have recently set up.

Conclusion

As they are finding new commercial opportunities overseas, U.S. employers may be tempted to use uniform restrictive covenants used for all employees all over the world. However, each country has developed its own legislation or case law relating to restrictive covenants. Therefore, U.S. employers should seek local counsel's advice for drafting and/or dealing with issues concerning non-disclosure and non-competition agreements to ensure compliance with the applicable legal requirements of the particular jurisdiction.