In a recent decision, the Supreme Court of Serbia invalidated a non-compete clause from an employment agreement because it prohibited the employee from entering into an employment relationship with the employer’s competitor, rather than from taking a specific job with a competitor.
Facts of the case
The decisions of the Serbian Supreme Court are succinct and usually do not give a detailed account of the facts. What one can gather from this decision is that the employment agreement was between a pizza-making business as an employer and an employee whose job was to prepare pizzas. The non-compete clause prohibited the employee from entering into an employment relationship with another entity that pursues the same business as the employer in the same municipality, for a period of one year after the termination of the current employment. The employee resigned and soon thereafter found a new job with another pizza place in the same municipality.
The defendant maintained in the first-instance proceedings that he knew how to prepare pizza even before his employment with the plaintiff and that he, in any event, did not work for the second employer on pizza making but as a dishwasher. However, according to the recap given by the Supreme Court, the appellate court determined that it was undisputed that the employee did acquire new important knowledge about pizza preparation technology during his employment with the plaintiff and that his job with the second employer did involve pizza preparation. Accordingly, it seems that the defendant’s job for the competitor was substantially the same as the job he had while working for the plaintiff.
The former employer sued for breach of the non-compete undertaking and claimed damages which consisted of the amount the plaintiff had spent to train the defendant for the job.
The relevant provisions of the Labour Act
The Serbian Labour Act provides in Article 161 that an employment agreement may designate the work an employee cannot perform on their own behalf and for their own account, as well as on behalf and for the account of another legal or natural person, without the consent of the employer. Furthermore, such non-compete is permissible only if, by working for the employer, the employee can gain new particularly important technological knowledge, a wide circle of business partners, or access to important business information and secrets. The non-compete obligation must be subject to a defined geographical scope, which depends on the activities in question. If the non-compete extends post-termination, it cannot be longer than 24 months and the employee must be remunerated for the undertaking.
The decisions of the courts in the case at hand
The first-instance court dismissed the employer’s claim on the following grounds:
(i) the non-compete cannot be agreed upon as a prohibition of taking employment with another employer who is in the same line of business as the current employer, but only as a prohibition of taking up a specific type of work; and
(ii) there was no causation between the alleged breach and the amount claimed on the account of damages, because the cost of the employee’s training was not a consequence of the alleged breach.
The appellate court reversed the first-instance judgment and granted the claim.
The Supreme Court reversed the appellate decision and reinstated the first-instance judgment, holding that the disputed non-compete clause is not enforceable because it prohibits the employee from entering into an employment relationship with a competitor, rather than from performing specific work..
Commentary
The subject-matter scope of non-compete
The Supreme Court refused to uphold the non-compete clause because it was drafted as a prohibition of employment with a competitor, and not as a prohibition of taking specific types of work with a competitor. It consequently did not analyze at all what the lower courts determined with respect to whether the defendant was indeed exposed to a specific know-how while working for the plaintiff and whether he indeed took substantially the same job with the competitor. In our view, the court took a too formalistic approach. In the context of the specific employment agreement, the prohibition of working for another pizza-making business could have been reasonably interpreted to include the prohibition of working there in a job that involves pizza-making, so the facts related to the former and to the new role should have been considered as relevant to the outcome of the case.
Because the reasoning of the Supreme Court’s decision is written in a rather succinct and abstract fashion, it remains unclear whether the court indeed considers that a non-compete must be limited to only those activities that constitute the employee’s current job or it can include other activities or jobs reasonably related to protected information to which the employee is exposed in the current role.
Damages v. contractual penalty
In the case discussed here, the plaintiff’s claim for damages would have fallen under any interpretation of the non-compete clause. This is because a claim for damages requires the plaintiff to prove the breach, a decrease in the value of its assets or foregone increase of such value, and the casual link between the two. The cost incurred to train the departed employee does not satisfy the causality requirement because that type of cost is, by definition, incurred before the breach of the non-compete obligation and not as a consequence of the breach. Because proving damages resulting from a breach of non-compete can be difficult, if not impossible, a contractual penalty is a better suited remedy. However, an earlier decision of the Supreme Court casts doubts on the enforceability of contractual penalties in employment agreements.
Key take-aways
- Non-compete clauses in employment context are controversial. The courts tend to take a pro-employee interpretation.
- The subject-matter scope of a non-compete clause should be carefully drafted to preserve its enforceability.
- Because the reach of a non-compete clause remains uncertain, it should be combined with a confidentiality undertaking to maximize the protection of employer’s confidential information.
- Damages are often inadequate remedy for breach of either non-compete or confidentiality undertaking. Employers should include in the employment agreement a contractual penalty clause, even if the enforceability of such clause in an employment context is questionable.
