Insights

14/04/2015

Not so fast.

The Finnish Supreme Court recently clarified the circumstances where an employer can add a non-competition clause into an employment agreement.

Pursuant to the Finnish Employment Contracts Act, particularly “weighty reasons” related to the operations of the employer or to the employment relationship are required for an enforceable non-competition obligation agreed in the employment agreement or otherwise in the beginning or during the employment.

In July 2014, the Finnish Supreme Court issued a precedent (KKO:2014:50) where it was assessed whether weighty reasons for a non-competition agreement existed in a case regarding an employee who was working as an automation engineer in a company providing automation and robotic systems for the food industry.

Does the employer really need the protection?

The Supreme Court ruled that the employer did not have particularly weighty reasons for the non-competition clause limiting the employee’s right to engage in new employment for four months after the termination of employment.

The Supreme Court’s principle reasoning was that only a small part of the employee’s duties was of such nature that the employer would have needed protection through a non-competition clause.

The employee did not accrue essential research knowledge or take part in confidential sales activities of the company during the employment. Nor did the employee’s position support the need for a non-compete restriction because of its low level in the employer’s organisation. Additionally, the employee’s salary level – a monthly basic salary of slightly below EUR 2,400 at the time of the termination of employment – was regarded as so low that it could not have been regarded sufficient to compensate the restriction caused to the employee.

In relation to the employee’s duties as the main user of the employer’s server, the Supreme Court assessed that the confidentiality provision, including liquidated damages of EUR 20,000, was sufficient to protect the business and trade secrets of the employer.

Moreover, the Supreme Court referred to the Finnish Criminal Code prohibiting the violation and misuse of business secrets and stated that the protection under criminal liability, in addition to the risk of liquidated damages, were sufficient to ensure the protection of the confidential information against competing actions.

Consequently, the non-competition clause was not binding and the employer was not entitled to liquidated damages for the employee’s breach of the non-competition clause.

Assessing the existence of particularly weighty reasons

Under Finnish law, an employee’s right to conclude a new employment contract with a competing employer or to engage in competing activity on his or her own account can be limited for a maximum period of six months, if particularly weighty reasons exist.

To determine if weighty reasons exist such to justify the non-competition clause, employers are required to analyse the following:

the nature of the employer’s operations and need to protect business or trade secrets;
possible special training given to the employee by the employer; and
status and duties of the employee.

Firstly, with regard to the employer’s operations, if the work consists of product development, the need for a non-competition clause is considered to be more significant in terms of the need for protection against competing companies.

Additionally, an agreement of non-competition is generally justifiable if the employee, due to his or her position, receives confidential information or if the employee accrues special knowledge as a result of his or her duties.

As a rule, it can be said that the higher the employee’s position within the employer’s organisation is, the more likely it is that particularly weighty reasons are deemed to exist.

Grounds for a non-competition clause may exist if an employee carries out his or her duties independently or otherwise with a high level of responsibility, or if the salary level is regarded as high.

Although there is no statutory requirement to pay any compensation to the employee for a non-competition obligation that is valid for less than six months after the termination of employment, a low salary level may often indicate that the employee’s position or duties do not constitute weighty grounds for a non-competition clause to be enforceable.

Field of work an important consideration

Additionally, the type of field of business of the employer may have an impact on the assessment on whether there are justified grounds for the non-competition clause at hand.

In some fields of business, in which renewal of new information and development of technologies/methods is fast and essential, correspondingly the need to protect business secrets against competitors is vital.

Also, ensuring the confidentiality of information related to customers and trade secrets (such as pricing) may support the justifications for a non-competition agreement.

Other ways to protect an employer’s vital interests

Although non-competition clauses are in many cases recommended, it is to be noted that if particularly weighty reasons are not deemed to exist, the non-competition clause is null and void.

Moreover, there are certain other limitations with respect to the enforceability of non-competition clauses. In instances where the enforceability of a non-competition clause is uncertain, you may wish to consider if there are other ways, such as through use of confidentiality clauses, that you can best protect a company’s vital interests.

Contact(s):

Share: