The importance of restrictive covenants: 5 ton fine for former employee

A former employee must pay €500,000 in contractual fines to his former employer for violating the competition, relationship and confidentiality clauses existing between them. The former employer found out about the various violations and claimed, among other things, payment of €1,000,000 in forfeited fines. Employers frequently lose out in such proceedings. However, the Amsterdam subdistrict court ruled in this case that the former employee should have complied with the clauses and must pay (part of) the forfeited fines. In this blog, Annemarie van Woudenberg and Bas Blaauwhof explain the ruling and the importance of restrictive clauses in the employment contract.

Restrictive clauses

An employer wants to protect its trade secrets and customer base as much as possible. Employers often include a non-disclosure, non-compete and non-solicitation clause in the employment contract, with the goal of preventing employees from taking all knowledge and trade secrets to and using them with (direct) competitors.

A non-compete clause restricts the employee's fundamental right to freedom of employment choice. Indeed, the non-competition clause restricts the employee's right to be employed by a competitor after the termination of his employment contract. Thus, the non-competition clause is quite intrusive, which is why it is subject to some legal requirements. These requirements also apply to the agreement of a legally valid non-solicitation clause. A non-solicitation clause is a clause that prohibits an employee from approaching and/or doing business with relations of his former employer.

The confidentiality clause is not regulated by law, but can be derived from the standard of good employee conduct. Based on that standard of principle, the employee is bound by loyalty and discretion to his employer. However, it is wise to agree a confidentiality clause with employees who will gain knowledge of trade secrets. Thus, the employee is bound to keep the trade secrets to himself even after termination of employment.

Typically, restrictive covenants are coupled with a penalty clause. The purpose of agreeing to a penalty clause is to deter employees from violating one of the clauses. After a violation, the employer can claim in court that the employee must pay the fines to the employer. Nevertheless, it frequently happens that employees violate agreed-upon clauses, after which a judge finds that the employee's interest - freedom in the labor market - outweighs the employer's interest in protecting its business flow. Any fines forfeited are then mitigated or even not awarded. Recently, however, the Amsterdam court ruled in favor of the employer.

Amsterdam subdistrict court ruling

Brief statement of facts

In the case before the Amsterdam subdistrict court, the (former) employer and the (former) employee had agreed on an employment contract that included a non-competition clause, a non-solicitation clause and a confidentiality clause. The employee resigned and went to work for a competitor. The employer claimed payment of a penalty, among other things, for breach of the agreed restrictive clauses.

The former employee argued that the terms had not been validly agreed upon. The court did not agree. The employer had discussed the (consequences of) the clauses with the employee upon entering into the employment contract and offered the employee the opportunity to seek legal advice. The employee knew that a possible transfer to his new employer would be sensitive, but he did not expect to be held to the clauses. He therefore switched to a competitor anyway, approached customers of his old employer and shared company information of his old employer. By doing so, the (former) employee violated the restrictive clauses. The subdistrict court did moderate the duration of the non-competition and non-solicitation clauses to twelve months instead of two years.

Fine mitigated to 'only' €500,000

Within these 12 months, the employee violated the non-competition clause twice, the non-solicitation clause at least three times and the confidentiality clause at least 20 times.

The agreed penalty clause provided that each violation of one of the restrictive clauses resulted in a penalty of €50,000, plus €500 for each day that the violation continued, with a maximum penalty amount of €1,000,000. Since the employee had committed at least twenty-five violations, the former employer claimed a fine in the amount of the maximum fine; namely, €1,000,000.

The subdistrict court may mitigate a fine on its own initiative when the amount of the fine is excessive under the circumstances and therefore leads to an unacceptable result. In this case, the fine was mitigated to €500,000. To this end, the Subdistrict Court considered that the substantiation of the damages suffered by the (former) employer due to the violations was not concrete enough to support a higher amount. Despite the mitigation of the fine, the amount remains quite high. The Subdistrict Court took into account that the (former) employee himself had resigned and had (consciously) chosen to seriously violate the non-competition and confidentiality clauses in order to obtain a better position himself. With this, the Subdistrict Court also wants to give a signal to the other employees of the (former) employer to respect the restrictive clauses.

Tips

Therefore, despite the fact that the employer regularly loses out in proceedings about restrictive clauses, it still makes sense to agree them. A validly agreed clause linked to a penalty clause can at least offer some financial compensation after an employee breaches it. The ruling of the Amsterdam subdistrict court offers some points of interest for employers to strengthen their position when agreeing restrictive clauses:

1. Discuss with your employee what clauses are included in the employment contract and their consequences;
2. If necessary, offer your employee the space to seek legal advice about it (and document that you will allow the employee to do so);
3. Make sure it is clear why the restrictive clauses are necessary and what interests it serves for you as an employer;
4. Consider how far the restrictive clauses must necessarily go in the specific case (in terms of the nature of the clause (possibly only a relationship clause or only a non-disclosure clause) duration, geographic scope, etc.) to protect employer interests;
5. Provide specific substantiation of damages to reduce the chances of the court moderating the fine.