In its recent decision of 13 December 2023, Case No. 31 Cdo 2955/2023 and published on 11 January 2024 (hereinafter as the “Decision”), the Supreme Court of the Czech Republic dealt with the conditions of the employer’s withdrawal from the agreed competition clause in the employment contract, where it departed from its previous decision-making practice following the recent ruling of the Constitutional Court of the Czech Republic.
Generally
In the Decision, the Supreme Court of the Czech Republic addressed the question whether an employer may unilaterally withdraw from an agreed non-competition clause before termination of employment if “in its discretion it concludes that, in view of the value of the information, knowledge, knowledge of working and technological procedures acquired by the employee in the employer’s employment or otherwise, it would not be reasonable and/or expedient for the employer to enforce or insist on the agreed non-competition clause against the employee and to pay the agreed monetary compensation”.
In the following article, we would like to provide you with an overview of the circumstances of the Decision and the related decision-making practice of the courts, not only on the nature and meaning of the competition clause as such, but especially on the employer’s ability to withdraw from it in accordance with the law.
The factual situation
The plaintiff (employee) worked for the defendant (employer) under an employment contract dated 4 January 2016 as a director of the corporation and subsequently under an amendment to the employment contract dated 1 July 2016 as chief operating officer. In the addendum to the employment contract of 1 July 2016, the parties also agreed on a competition clause of 6 months’ duration from the termination of the employment relationship, in which the defendant undertook to provide the applicant with monetary compensation for each month of proper performance of his duties in the amount of one month’s salary. The non-compete clause also included an agreement that the employer may, during the term of the employee’s employment, withdraw from the non-compete clause if (among other things) it concludes, in its sole discretion, that, in view of the value of the information, knowledge, knowledge of work and technological processes acquired by the employee in the employer’s employment or otherwise, it would not be reasonable and/or expedient for the employer to enforce or insist on the agreed non-compete against the employee and to pay the agreed monetary compensation.
The applicant’s employment relationship ended with his dismissal on 31 October 2016. However, prior to the termination of the employment relationship, the defendant served the plaintiff with a withdrawal from the non-competition clause on 20 October 2016 on the grounds that, given the value of the information, knowledge, knowledge of working and technological processes which he had acquired as its employee, it would not be reasonable or expedient for the defendant to enforce or insist on the agreed non-competition clause against him and to pay monetary compensation for it. During the notice period, the plaintiff established his own company through which he started a business not in competition with the defendant, and he also refused a job offer under which he would have performed work that did not comply with the terms of the non-compete clause.
In its first decision in this case, the Supreme Court[1] first followed the dicta of its existing case law when it held that an arrangement that leaves it to the “discretion” of the employer whether an employee has acquired information in the course of employment with the employer that is trade secret or of that nature, that it is capable of giving a competitor a significant competitive advantage, is in its consequences analogous to a situation where the employer would be free to withdraw from a non-compete clause “without giving any reason” or “for any reason” and is absolutely void for contrary to law.[2] .
However, after this judgment was handed down, the Constitutional Court of the Czech Republic, in its ruling of 21 May 2021, Case No. II ÚS 1889/19 (hereinafter as the “Ruling”) (in the context of a different case, but under similar facts), addressed the issue of the case law prohibition on the employer’s withdrawal from a competition clause without stating a reason, and this ruling, which in its essence draws opposite conclusions to the existing case law of the Supreme Court of the Czech Republic, became a new starting point for the courts of appeal. Subsequently, the whole case came before the Supreme Court of the Czech Republic again and the Supreme Court ruled differently on the matter – the agreement on withdrawal from the competition clause is valid.
General on the competition clause
Pursuant to Section 310 (1) of Act No. 262/2006 Coll., the Labour Code, as amended (hereinafter as the “Labour Code”), by agreeing on a competition clause, an employee undertakes to refrain from engaging in gainful employment for a certain period of time after the termination of employment, but no longer than 1 year, which would be identical to the employer’s business or which would be competitive to the employer.
In contrast, the employer is obliged to provide the employee with reasonable financial compensation of at least one half of the average monthly earnings for each month of the employee’s performance of the obligation under the competition clause.
In order to be able to negotiate a competition clause at all, the conditions under section 310 (2) of the Labour Code must be met, i.e. that it is possible to fairly require the employee to do so in view of the nature of the information, knowledge, knowledge of working and technological procedures which he or she has acquired in the course of employment with the employer and the use of which in the activities referred to in section 310 (1) of the Labour Code could make the employer’s activities seriously more difficult.
As for the employer’s ability to withdraw from the clause, the Labour Code is very brief – it can only do so for the duration of the employee’s employment[3] . The employee can withdraw from the competition clause even after the employment relationship ends. In both cases, withdrawal from the competition clause is possible only if the statutory conditions for withdrawal are met according to the CC or according to the conditions for withdrawal agreed between the employee and the employer.
Fundamental rights on the one hand and on the other
Until the Ruling, the constant conclusion of the case law of the Supreme Court of the Czech Republic[4] was that the possibility for the employer to withdraw from a competition clause without giving any reason or for any reason would be an advantage to the employer at the expense of the employee’s rights, contrary to the principle of labour relations consisting in the special legal protection of the employee’s position[5] . However, according to the opinion of the Constitutional Court of the Czech Republic expressed in the Ruling, this is problematic especially in the context of the area of fundamental rights and constitutionally protected interests, both of the employee on the one hand and of the employer on the other.
The constitutional guarantee of free action, autonomy of will and freedom of contract under Section 2 (3) of the Charter of Fundamental Rights and Freedoms should be fully applied in the legally free space created by the mandatory regulation in Section 310 (4) of the Labour Code in conjunction with Section 2001 of Act No. 89/2012 Coll., the Civil Code, as amended (hereinafter as the “CC”) – the employer and employee must be able to freely regulate their mutual rights and obligations in the contract within the limits set by the above-mentioned provisions. The protection of the employee as the weaker party in labour relations is sufficiently regulated in the already mentioned Section 310 (4) of the Labour Code, which sets a fixed time frame for the employer to withdraw from the competition clause, even in the inactive phase – the so-called dormant contract, which the competition clause is.
However, the Constitutional Court adds that the employer’s right to withdraw from a competition clause even without stating a reason, if this possibility was expressly agreed upon by the parties, does not mean that the employee should not be afforded any protection against potential arbitrariness or abuse of this right by the employer. Arbitrariness or abuse of the employer’s right to withdraw from a non-competition clause without giving reasons must be established and proven in the court proceedings in the light of the specific facts of the case, and not automatically presumed. A blanket prohibition on contractual arrangements expressly allowing an employer to withdraw from a non-compete clause for the duration of an employee’s employment without giving a reason, established only by the case law of the general courts and not by statute, is a constitutionally impermissible judicial refinement of the law.
Arbitrariness or abuse of the employer’s right to withdraw from a competition clause even without giving a reason must be established and proven in the court proceedings in the light of the specific facts of the case, taking into account in particular circumstances such as (i) the time when the employer’s withdrawal from the competition clause took place, (ii) the facts suggesting that, that the employer acted arbitrarily or abused its right to withdraw from the non-compete clause, (iii) facts suggesting that the employee chose his or her future employment or other career in light of his or her commitment to the non-compete clause, or (iv) the reasons why the employer withdrew from the non-compete clause just before the end of the employment relationship.
Nature of the competition clause according to the courts
Although the competition clause is a synallagmatic legal relationship, it serves primarily to protect the employer’s rights and interests, since the meaning and purpose of the competition clause is primarily to protect the employer’s rights and interest in preventing the leakage and subsequent misuse of certain types of valuable information in competition through (former) employees.
On the contrary, it is in the employee’s interest not to be bound by the competition clause, as it restricts it from further employment after the termination of the employment relationship, limiting the applicability of its special knowledge or skills. In a sense, it can be said to ‘devalue’ the employee on the labour market and exposes him to the risk that the employer may require him to pay a contractual penalty in the event of even a minor breach of the competition clause.
In this respect, according to the Constitutional Court of the Czech Republic, it cannot be concluded that the employee has an automatic interest in being bound by the competition clause in connection with the fact that he or she receives a certain economic benefit from the employer as a result.
In the context of the aforementioned conclusions of the Ruling, the Supreme Court of the Czech Republic subsequently concluded that an employer may withdraw from a competition clause with regard to its nature during the duration of an employee’s employment relationship also on the basis of a contractual arrangement according to which the employer is entitled to withdraw from the competition clause during that period without giving any reason or for any reason, or on the basis of an otherwise similarly agreed withdrawal option.
However, in proceedings in which an employee seeks monetary compensation from the employer under a non-compete clause, the court is obliged to protect the employee’s fundamental rights and legitimate interests if it is proven that the employer acted arbitrarily or abused its contractually enshrined option to withdraw from the non-compete clause.
Conclusion
The Ruling, together with the Decision in question, significantly changes the view of the nature of the competition clause and, inseparably with it, the legal possibilities to withdraw from it.
Until now, employers have been severely and unfairly restricted in the ways and circumstances of resignation in the context of the relatively strict existing case law, as the emphasis on the unlimited protection of the employee in almost any situation did not give wide possibilities to “contractually manoeuvre” between the mandatory provisions of the Labour Code and the Civil Code.
That is now changing, however, and an assessment of the specific contractual arrangements and individual circumstances of any given case has been given precedence over a blanket, court-imposed ban, in accordance with the constitutionally guaranteed rights of employers.
Finally, however, it should also be noted that, although the Decision is unambiguous in its conclusion regarding the departure from the existing case law limiting the employer’s ability to withdraw from a competition clause even without stating a reason or for contractually agreed reasons (thus rendering the existing case law in this matter inapplicable in the future), the Decision also opens up a space of interpretation and the associated legal uncertainty regarding the “boundaries” of the new judicial view on this issue. Indeed, in the context of the cited decisions, the employer must assess whether it is acting arbitrarily or perhaps abusing its contractual authority in the event of withdrawal from a competition clause.
Employers can therefore be clearly advised to specify precisely the reasons for withdrawal from the competition clause in the employment contract (or to agree that the employer is entitled to withdraw from the competition clause even without stating a reason). Despite this provision in the employment contract, employers can be further advised not to rely on its enforceability without further consideration and to assess in advance in the specific case the aspects outlined in the Decision or the Ruling, the application of which could find the use of the contractual provision in breach of the law.
If you have any questions about negotiating a competition clause or employment law in general, please do not hesitate to contact us.
[1] Judgment of the Supreme Court of the Czech Republic of 5 November 2020, No. 21 Cdo 4779/2018-249.
[2] Cf. Sections 580 and 588 CC.
[3] See Sec. 310 (4) of the Labour Code.
[4] Cf. the judgment of the Supreme Court of the Czech Republic of 20 September 2011, Case No. 21 Cdo 4986/2010, the judgment of the Supreme Court of the Czech Republic of 28 March 2012, Case No. 21 Cdo 4394/2010, or the judgment of the Supreme Court of the Czech Republic of 28 November 2012, Case No. 21 Cdo 18/2012.
[5] See Sec. 1a (1) (a) of the Labour Code.
Mgr. Kateřina Lansdorfová, junior lawyer – lansdorfova@plegal.cz
Ráchel Kouklíková, legal assistant – kouklikova@plegal.cz
Mgr. Martin Heinzel, senior attorney-at-law – heinzel@plegal.cz
Mgr. Jakub Málek, managing partner – malek@plegal.cz
24. 1. 2024