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Be cautious about non-competition clauses

Be cautious about non-competition clauses

By Claude D Zacharias

Translated by James Hurst (Authorised Translator), ELT - English Law Translations

1. Introduction

1.1 The Labour Court recently concluded in its judgment of 11 February 2015, 8/15, Case no. B 102/14[1] that a non-competition clause between an accountant, who had terminated his employment, and a major accounting firm was unreasonable according to Section 38 of the Contracts Act. The case involves an accountant who was an office manager and who, together with his father, was the only representative of the accountancy firm in the district. The Labour Court has developed extensive-case law relating to non-competition clauses, which is worth citing:

The point of departure in Swedish law is that an employee, after their employment has been terminated, is basically free to pursue activities that compete with their former employer. An employer and employee may conclude an agreement concerning non-competition clauses, limiting the employee's opportunities to pursue activities that compete with the employer's activities after the employment has been terminated or to accept employment with another party that pursues such activities. Non-competition clauses may not conflict with a collective agreement that binds the employer and employee. Non-competition clauses are in large parts of the labour market regulated by the 1969 Agreement relating to the restriction of non-competition clauses, which was concluded between, of the one part, the Swedish Employers' Confederation (SAF) and, of the other part, the Swedish Union of Clerical and Technical Employees in Industry (SIF), the Swedish Foremen's and Supervisors' Union (SALF) and the Swedish Association of Graduate Engineers (CF) (now the Confederation of Swedish Enterprise, Unionen, the Swedish Organisation for Managers and the Swedish Association of Graduate Engineers). It was not claimed that [the accountancy firm] and/or [the accountant] are bound by the 1969 Agreement (cf. AD[1] 1984 no. 20). It is stated in Section 38 of the Contracts Act that an employee is not bound by a non-competition clause if this goes beyond what is reasonable. When assessing reasonableness, a comparison should be made with the 1969 Agreement. There is extensive case-law from the Labour Court illustrating how reasonableness should be assessed. This case-law is characterised by a very restrictive approach (AD 2010 no. 53 and AD 2001 no. 91). The consideration comprises an overall assessment of the reasonableness of the clause. When doing this, consideration is first taken of the extent to which the employer's aim with the restriction on competition is justified. Justified purposes include, for example, protecting such technical or other company-specific expertise that the employer has acquired or developed (see 1969 Agreement and, for example, AD 2009 no. 63). The aim of protecting existing client relations has also been accepted as a justified purpose, particularly if the clients have been obtained through active canvassing or the like on the part of the employer (see, for instance, AD 2013 no. 24, AD 2010 no. 27 and AD 2002 no. 115). The purpose of protecting business secrets may also constitute a justified interest (cf. AD 1984 no. 20). On the other hand, the purpose of retaining an employee with specialised knowledge and competence is not deemed to be a justified interest (see, for example, AD 2001 no. 91 and AD 1991 no. 38). Furthermore, the extent to which the non‑competition clause limits the employee's opportunities to pursue their professional activities as an employee or business operator should also be considered. In this connection, account is taken of such circumstances as the scope of the activities that the employee is prohibited from pursuing and the length of the period during which they are bound. The sanctions linked to violations of the clause may also be considered. In addition, the court takes account of whether the employee is to receive any compensation during the period during which they are bound or whether the employee's pay or employment conditions were otherwise fixed with reference to the restrictions imposed by the clause (see, for example, AD 2009 no. 63). If the clause only marginally restricts an employee's opportunities to pursue professional activities, the clause may be reasonable even if no compensation is payable (see, for instance, AD 2010 no. 27 and AD 2002 no. 115). In addition, other factors that ought to be taken into account are whether the clause was subject to actual negotiations between the parties (see, for instance, AD 1993 no. 40), the employee's position and period of employment (see, e.g. AD no. 9). It should also be possible to consider the public interest in maintaining competition on the market in which the companies operate (AD 1994 no. 65).

1.2 When considering the present case, the Labour Court concluded that the aim of the non‑competition clause for the accountancy firm – to protect its existing client relations – as such constitutes such a legitimate interest as may justify a non-competition clause. However, the Labour Court took as its starting point the fact that the clause was not restricted to clients that the accountancy firm had when the accountant was employed (Cf. AD 1992 no. 9), but also covered clients that had been subsequently been taken on and that these clients had also predominantly appointed the accountant personally as their accountant. Furthermore, it was considered that the accountant's opportunities, considering the length of time he had been employed by the accountancy firm (23 years), were manifestly restricted should he be prevented from approaching his clients. The Labour Court also concluded that the obligation to pay compensation according to the non-competition clause could in fact be equated as regards its impact with damages that more than marginally restricted the accountant's opportunities to practise as an accountant. In addition to this, the clause did not provide for any compensation for the accountant from the accounting firm for the period during which the accountant was bound. Furthermore, the parties had not discussed the implication of the clause, although the wording was considered to be unclear in several respects.

1.3 The Labour Court was of the opinion that the non-competition clause was unreasonable according to Section 38 of the Contracts Act and it was consequently not applied.

2. Conclusion

2.1 If a restriction of competition is written into the employment contract for an employee or into a contract in conjunction with the person ending their employment, the generally dismissive approach taken by Swedish labour law in respect of such provisions should be borne in mind. An absolute precondition for such a clause to be held valid is that it reflects a justified interest of the employer. This should thus involve such specific expertise that it is possible to say that the firm will 'stand or fall' with it or in any event would suffer great harm if the expertise were disclosed to a third party. Existing client relations are worthy of protection, but it should be noted that just because clients brought in by the employee are as such the employer's clients, it is less evident that these clients should also be deemed to be covered by the term 'existing client relations'. It was concluded in the present case that it was the accountant that had personally held the assignments and not the accounting firm, which as such would have been possible according to the current Swedish Companies Act. If an employee's opportunities to pursue professional activities are restricted – whether as an employee or independent business operator – this suggests that a clause restricting competition is deemed to be unreasonable. The employee may be offered certain financial compensation to avoid this. Indeed the longer the non-competition clause applies, the greater the risk that it will be deemed to be unreasonable. As indicated by the judgment, several factors need to be considered. However, what appears to be clear is that the employer risks losing everything that they were trying to attain if a clause is deemed to be unreasonable. The be‑all and end-all is consequently a well‑balanced clause – if such a clause is actually ever to be considered valid between the parties.

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[1] Translator's note: Labour Court law report series

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