The non-compete covenant: a covenant that does not lose its attractiveness

In July 2002, the social chamber of the Court of Cassation overturned the economics of the non-compete covenant by requiring the payment of a financial compensation to the employee¹. Today, even if the changes are more subtle, the non-compete covenant continues to fuel litigation.

The various judgments handed down in this area this year provide a good opportunity to recall the conditions for the validity of non-compete clauses and the sanctions applicable in case of breach.

1) Conditions for the validity of a non-compete clause

Although well known, the conditions of validity of non-compete clauses continue to raise questions.

As a reminder, a non-compete clause must :

- Be in writing;

- Be essential to the protection of the legitimate interests of the company;

- Be limited in time;

- Be limited in space;

- Include a financial consideration;

- Take into account the specificities of the employee's job.

While in theory these conditions are easy to understand, in practice their articulation and determination can be more difficult.

Since the above-mentioned rulings of 10 July 2002, the non-compete clause must include both a temporal and a geographical limit. While the temporal limit is relatively fixed, the clause generally being applicable for a period of 6 months to 2 years, the geographical limit has recently been the subject of further clarification by case law.

Faced with the ever-increasing globalization of activities, more and more companies or groups wish to extend the non-compete clause beyond French territory to apply it in certain European countries, or even over on an even wider territory. As the Court of Cassation recalled this year, a non-competition clause applicable “worldwide” cannot be considered as geographically delimited². On the other hand, a clause applicable in Europe and the Asia-Pacific region is not necessarily void³.

It should be examined whether, as a result of this restriction, the employee was in fact unable to perform an activity in line with his/her training, knowledge and professional experience.

This last condition of validity is undoubtedly the most difficult to apprehend because, even if the other criteria would be theoretically valid, if, in practice, the employee is not able to find a job, the non-compete clause is likely to be declared null and void.

If the above-mentioned validity conditions are not met, the non-compete clause will be null and void. However, if the employee has complied with the clause, he/she will be entitled to damages if he/she has suffered prejudice as a result. On the other hand, the employer may not use this nullity to request reimbursement of the financial compensation paid to the employee⁴.

If, on the other hand, the conditions of validity are met, the non-compete clause will be applicable and enforceable against the employee. The financial compensation will then be due to the employee, without the amount of this compensation being subsequently re-evaluated by the judge. Indeed, the Court of Cassation has considered that this financial compensation has the nature of an indemnity and not a penalty clause⁵. In this case, the employer ordered to pay 80,000 euros in financial compensation for non-competition had tried to argue, in vain, that this compensation had the nature of a penalty clause and could therefore be adjusted (in this case reduced) by the judge.

The employer may, however, decide at the end of the employment relationship to waive the application of this clause. Here again, the risk of error is not far away. On the one hand, the possibility of waiving its application must be initially provided for in the non-compete clause. On the other hand, this waiver will have to be exercised within the time limit and in the form laid down in the contract. In any event, it must be exercised before the employee's effective departure. It should be noted that, for companies subject to the national collective agreement for the chemical industry, the employee will be entitled to compensation, even if the waiver of the application of this clause is valid.

What if the employer forgot to waive this clause? It can always conclude a settlement agreement to resolve the conflict. It should be noted that if a settlement agreement relating to the performance and termination of the employment contract is concluded, it will cover all issues relating to the non-compete clause, even if the question of the validity or application of this clause has not been expressly mentioned in the settlement agreement⁶. Indeed, the social chamber of the Court of Cassation considers that the reciprocal obligations of the parties under a non-compete clause are included in the subject matter of a settlement agreement by which the parties have declared themselves fulfilled of all their rights, put an end to any present or future dispute and renounce to any action relating to the execution or termination of the employment contract.

This waiver of all rights will apply not only to the employee's action for payment of the financial compensation, but also to the employer's action for breach of the non-compete obligation.

2) Sanctions for breach of the non-compete clause

What can be done if an employee violates the non-compete clause? On the other hand, what does a company risk if it hires an employee bound by such a clause?

If an employee violates his/her non-compete clause, he:she will be exposed to the following sanctions:

- The loss of his/her right to financial compensation: This loss will only be partial if the employee has briefly respected the non-compete clause. On the other hand, it will not matter if the breach has subsequently ceased, as the loss of the right to the financial compensation is definitive.

- A sentence to pay damages for the prejudice suffered by his/her former employer: The amount of these damages may be anticipated by means of a penalty clause stipulated in the non-compete clause.

- A sentence to cease competing activity: This action, which may be brought before emergency proceedings of the labour courts, will only allow the employee to be ordered to cease his/her competing activity. The emergency proceedings judge cannot, however, order the termination of the new employment contract⁷.

In parallel, a company which knowingly hires an employee bound by a non-compete clause may be prosecuted for unfair competition. In addition to awarding damages to the former employer, the company may be ordered, under penalty, by the commercial court ruling in emergency proceedings, to stop employing the employee⁸. It should be noted that this decision of the emergency proceeding judge (juge des référés) may be taken even if the labour court judge (conseil de prud’hommes), which is dealing with the issue of the violation of the non-compete clause, has not yet given a ruling⁹.

What if the company learns of the existence of the non-compete clause during the course of the contract? This discovery will most often be made by the receipt of a letter from the employee's former employer. In such case, in order to avoid the company being held liable, the employee's employment contract should be terminated, bearing in mind that the concealment of a non-compete clause is considered as a serious misconduct allowing for a dismissal without notice and without payment of a severance indemnity.

Useful for protecting the interests of companies, the non-compete clause remains a contractual tool to be handled with care. It is often accompanied by a non-solicitation clause prohibiting the employee from approaching the clients of his/her former employer. Although more flexible and free of charge, the use of this clause must nonetheless be justified, as the Court of Cassation recently recalled by considering that such a clause, which infringes on the freedom to work and the freedom of entrepreneurship, must be proportionated to the aim pursued¹⁰.

Could the Court of Cassation be about to reinforce the conditions of validity of this non-solicitation clause by taking inspiration from those set for the non-compete clause?