Employers frequently use non-competition clauses in employment contracts to protect their manufacturing or commercial secrets and/or their particular relationship with their clients after employees cease working for them. This Newsletter provides an overview of the latest case-law developments in this field, taking into account some recent rulings of the cantonal courts, as well as the Swiss Supreme Court.
Depending on their activity, employers have a legitimate interest in ensuring that former employees who have just ceased working for them refrain from exploiting the knowledge they have acquired during their employment. The inclusion of a post-termination non-competition clause in an employment contract may provide employers with additional protection to that provided by the usual obligation not to reveal confidential information, which already exists in law (art. 321a par. 4 CO and art. 162 CP). By accepting a non-competition clause, employees undertake to refrain from certain actions. This obligation can however jeopardize their future job prospects, which is why, in order to protect employees, the Swiss Code of Obligations makes provision, in art. 340-340c, for non-competition clauses to be subject to certain conditions, which have been strictly interpreted in many recent cases.
2. REMINDER OF THE GENERAL PRINCIPLES
The conditions governing non-competition clauses in Employment Law are set out in art. 340 CO, which states that:
a) the non-competition covenant must be made in writing (art. 340 par. 1 CO);
b) employees must be fully entitled to exercise their civil rights at the time of signature (art. 340 par. 1 CO);
c) the working relationship must make it possible for employees to have knowledge of their employer's clientele or manufacturing and commercial secrets (art. 340 par. 2 CO). Non-competition clauses based on knowledge of the client base are in principle unacceptable in circumstances where the relationship between employees and clients is essentially a personal one, based on employees' abilities and their particular relationship with clients. This will be discussed in greater detail later (see Sections 3.1 and 3.2);
d) exploitation of this information must have the potential to cause employers substantial harm (art. 340 par. 2 CO). A causal relationship must exist between the knowledge gained and the potential to cause such harm.
A non-competition clause in an employment contract which fails to meet all of these conditions renders the clause null and void.
2.2 Scope and Content
Art. 340a par. 1 CO states that prohibition must be appropriately restricted in terms of time, place and scope, so as not to compromise unfairly employees' future job prospects. It may exceed three years only in special circumstances.
Therefore, the clause prohibiting competition may not exceed the boundaries of what is justifiable by employers' interests and its effects may be reduced by the court when deemed excessive (art. 340a par. 2 CO).
Whether or not employers remunerate employees in consideration of their acceptance of the restraint is also a factor to be taken into account in assessing whether or not it is excessive.
2.3 Consequences of Violation
Employees who violate non-competition clauses are required to compensate their employers for the resultant loss (art. 340b par. 1 CO). Therefore, in order to qualify for compensation on this basis, employers must in particular prove that they have suffered a loss.
When a non-competition clause providing for a contractual penalty is violated, employers are entitled to demand payment of the specified amount of the penalty. However, courts may reduce that amount when it is considered to be excessive. To assess whether or not a penalty is excessive, they will take into account all circumstances, in particular the salary that employees were receiving from their former employers. A penalty exceeding their annual salary would rarely be found admissible. Furthermore, employees should have the option, unless agreed otherwise, to release themselves from their contractual obligation to refrain by paying the agreed penalty (art. 340b par. 2 CO).
Employers may only demand cessation of the infringement if they have expressly reserved the right to do so in writing (art. 340b par. 3 CO). However, courts will generally only comply with such requests by means of interim measures (i) if the damage or threat to employers' interests is substantial and (ii) if the employer's interests are insufficiently protected by the contractual penalty and (iii) if the employer's interests take precedent over those of the employee.
2.4 Cessation of the Restraint on Competition
The restraint prohibiting competition lapses if it is established that employers no longer have an actual interest in its continuation (art. 340c par. 1 CO). It also lapses if they terminate the employment contract without the employee having given them valid grounds for doing so, or if the employee terminates his or her contract for a justifiable reason attributable to their employers (art. 340c par. 2 CO). It should be noted that when employers give a written reference stating that an employee "is leaving us free of all obligations", or similar wording, such a clause may be interpreted, depending on the circumstances, as an irrevocable waiver of the right to rely on a non-competition clause.
3. RECENT DEVELOPMENTS
3.1 The Risk of Damage based on Knowledge of Clientele and the Personal Nature of the Client Relationship
The restraint prohibiting competition based on knowledge of the clientele presupposes that such knowledge is potentially harmful to employers.
In July 2007, the Swiss Supreme Court considered the possibility of applying a clause prohibiting competition in a case where a personal relationship had been established between the client and the employee himself, in this case a dentist. It concluded that when an employee's personality was of overriding importance, the causal link that must exist between simple knowledge of the clientele and the potential to cause harm to the employer was broken. Rather than knowledge of the employer's client base, in the case in question it was more the dentist's individual abilities that had caused clients to follow him. Legal commentators generally approve this decision.
In January 2012, the Swiss Supreme Court went a step further, finding that the personal nature of the services provided by a training coach during training sessions was decisive.
On that occasion, the Swiss Supreme Court considered that a non-competition clause based on knowledge of the clientele could only be justified if the employee, due to his knowledge of the regular clients and their habits, could easily have offered them the same services as the employer and thereby have poached them. However, the situation is different when employees create a personal relationship with a client by providing services that are essentially based on their own individual abilities.
Such a situation presupposes that employees provide a service that is characterized above all by their personal abilities, such that those abilities are more important to the client than the employers' identities. If, in such circumstances, clients turn away from the employers to follow the employees, the damage caused to the employers results from the employees' personal abilities and not simply their knowledge of the clients' names. In the opinion of the Supreme Court, if the damage potentially suffered by employers is largely due to the personal abilities of employees, the non-competition clause is invalid.
3.2 Duration of Protection for an Employer's Clientele
According to art. 340a par. 1 CO, non-competition clauses must be subject to a reasonable time-limit which, save for special circumstances, should not exceed three years. Thus, the law establishes the presumption that long-term noncompetition clauses are inappropriate. Notwithstanding this, the effect of a clause prohibiting competition lapses in any event once an employer has demonstrably no further actual interest in its continuation (art. 340c par. 1 CO). In determining the appropriate duration of the prohibition, it is important to establish the type of knowledge that has to be protected. Commercial and manufacturing secrets can usually justify a longer period of protection than that needed to protect knowledge of the clientele. The Swiss Supreme Court takes the view that knowledge of the clientele of former employers may in principle only affect the latter for a short period of time, in particular until they are able to introduce new employees to their clients. According to our Supreme Court, once this introduction has been made, former employees are no longer in a position to poach their former employers' clients simply by reason of their knowing them, but only because of their individual abilities, which would not be covered by a non-competition clause under employment law.
Some decisions had already considered it generally appropriate to limit to eighteen months, or even one year, the period of validity of a non-competition clause aiming to protect an employer's clientele.
In May 2011, the Swiss Supreme Court ruled in a case in which a sales employee, working in the construction industry, was bound by a clause prohibiting competition for a period of three years. It confirmed the finding of the Argovia cantonal court which had considered that a period of six-months was sufficient to protect the employer's clientele. Indeed, during those six months, the employer had had sufficient time to take all necessary measures to secure the loyalty of the clients for which the employee had been responsible. Beyond that time, the potential loss of clients could no longer be attributed to the employee's knowledge of them, but rather to their attachment to him personally because of his abilities.
4. SITUATION OF ASSET MANAGERS
Given the development of the aforesaid case law, the question arises as to whether or not it is useful to try to impose non-competition clauses on asset managers.
4.2 Current Case Law
To our knowledge, the Swiss Supreme Court is yet to rule on the validity of non-competition clauses included in the employment contracts of asset managers.
At a cantonal level, a decision of the Zurich employment court in 2007 is particularly noteworthy. The court found that the partial non-competition clause, limited to restraining employees from poaching clients and featuring in the employment contract of an asset manager, was inadmissible. The Zurich court explained that the relationship between the asset manager and his clients was influenced by his personal experience, by his knowledge and understanding of money markets, and by his intuition in choosing sound financial investments. Consequently, the relationship formed with the clients had to be due to the employee's personal abilities, for which reason reliance on the clause prohibiting competition was inadmissible.
4.3 Legal Commentary
In the opinion of some legal commentators, although the Zurich court decision may have been justified in the case at issue, it nonetheless poses problems insofar as it gives the impression that a non-competition clause would be inapplicable to asset managers in all circumstances.
These commentators oppose such an idea. If, in some cases, the relationship with the client is generally characterized by the personalities of the asset managers and their individual abilities, this is not always the case. Asset management is also a business in which the client may be offered standardized products or products that are specific to an employer's financial institution. The skills and abilities of the person dealing with the client are, depending on the circumstances, often of secondary importance. The mere fact that an asset manager handles clients over a period of time does not necessarily mean that a special personal relationship is created, justifying the general inadmissibility of non-competition clauses.
Therefore, according to these authors, the validity of a noncompetition clause for asset managers should be considered on a case by case basis. If a client chooses a Swiss bank for its stability, professionalism and reputation for confidentiality, the employee's individual services ought to be considered secondary and the prohibition consequently valid. On the other hand, when clients have developed a particularly amicable relationship in their dealings with managers, regarding them as confidants, or if they are particularly appreciative of the speed and clarity of the advice given by the managers, those services and personal abilities may play a key role. The clause prohibiting competition might then be deemed to be inadmissible.
A distinction may also be made in the case of clients brought in by employees at the beginning of the employment relationship. The clause prohibiting competition protects businesses against the risk of employees deriving personal benefit from employers' efforts and those of other employees in prospecting for business. A clause prohibiting competition should not, however, protect a business when the efforts were made by the asset manager before the employment relationship was established. In such circumstances, the new employer would not lose clients gained through its own efforts, and hence the non-competition clause would be invalid. The outcome might be different if employees are paid compensation for the clients they bring with them at the start of their employment contract.
Non-competition clauses based solely on knowledge of an employer's client base have found the scope for their application to be somewhat limited by recent case law. Consequently, it would be appropriate, in drafting non-competition clauses, to be more attentive to recent developments. Employer's interests in imposing a non-competition clause should be analyzed in more detail and consideration given as to whether a non-competition clause might also be based on the need to protect manufacturing or commercial secrets, given that it is less controversial. Employers might also think about alternative ways of protecting their interests, such as reinforcing clauses relating to loyalty during the period of employment, as well as the duty to return all documentation/ data belonging to employers on termination of the employment relationship.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.