Abstract
The validity conditions of a non-competition agreement, which is signed between the employer and the employee and applied after the termination of the employment agreement, are regulated under the Turkish Code of Obligations as mandatory rules. In this article, the aforementioned conditions and the way to incorporate these conditions into non-competition agreements are examined.
I. INTRODUCTION
Employee’s duty of loyalty towards the employer, which exists during the term of employment agreement, is a liability1 determined by the Labor Law2 and the Turkish Code of Obligations3. (“TCO”) . The non-competition obligation, which becomes applicable after the termination of the employment agreement as it is agreed by the employee and employer, constitutes the subject of the article.
The provisions regarding the prohibition of competition are regulated under the TCO between the Articles 444 and 447. Accordingly, the parties may insert a non-competition clause into an employment agreement or execute a non-competition agreement while employment agreement is in force to be applied after the termination of the employment agreement.
In the first chapter of the article, the validity conditions for the establishment of a non-competition agreement will be assessed and the limitations of non-competition agreement will be mentioned in the following chapter. In the last chapter of our article, the intervention of the judge to the non-competition agreement will be mentioned and general evaluation of the article will take place.
II. THE VALIDITY CONDITIONS FOR THE ESTABLISHMENT OF A NON-COMPETITION AGREEMENT
The employee and the employer may execute a valid non-competition agreement by inserting a clause into the employment agreement or by making a separate non-competition agreement apart from the employment agreement, pursuant to the restrictions determined in the Articles 444 and 445 of the TCO.
Non-competition agreement shall be valid in the event that the employee has the capacity to act when the agreement is signed; the requirement of written form is fulfilled; the employee has the opportunity to obtain information regarding the employer’s client portfolio, production secrets or works and activities of employer within the employment relationship and if there is a possibility to cause substantial damage to the employer by using such information. Since these conditions are mandatory, it should be investigated, in every concrete case, whether they are fulfilled. At this point, we would like to point out that even if one of the abovementioned conditions is not fulfilled, the non-competition agreement shall be considered invalid4. The burden of proof regarding the existence of these conditions, which are regulated by law, is borne by the employer5.
In addition to the above-mentioned conditions, there should not be any special regulation6preventing the non-competition agreement to be made between the employee and the employer or the subject of the employment relationship should not fall within the scope of the occupational groups that personal skills and qualifications have importance (e.g. coiffure, doctor)7. We should also note that, as argued by some scholars, since non-competition agreements restricts the right to work and constitutes one of the strictly bonded personal rights in nature, they cannot be regulated under collective employment agreements8.
Nonetheless, even if prohibition of competition meets the abovementioned conditions, the judge has the authority to evaluate the concrete case and its conditions within the restrictions determined under the Article 445 of the TCO. Thus, the judge may fairly restrict the scope or term of the prohibition of competition by taking into consideration the facts of the concrete case and whether or not a payment is made in return to the employee for execution of a non-competition agreement9.
A. The Employee’s Legal Capacity to Contract
The employee should have the legal capacity to enter into a contract pursuant to the provisions of the Turkish Civil Code in order to make a valid non-competition agreement. Accordingly, the employee shall be able to execute a non-competition agreement only if he has the capacity in terms of age and mental ability and if he/she is not under legal disability. In case lack of these features, the non-competition agreement shall be null and void. Thus, the condition of “employee’s capacity to contract” is stated clearly under the Article 444 of the TCO. In this context, even if an adult employee who has legal and mental abilities approves the non-competition agreement that is concluded when he/she was not adult, the agreement in question will not become valid. In such a case, a new non-competition agreement has to be made right after the employee becomes legal adult10.
B. Being in Conformity with Form Requirements
In principle, unless stated otherwise in the agreement, the employment agreement is not subject to written form requirement11. However, according to the Article 444 of the TCO, since non-competition agreement constitutes a nonperformance obligation in nature, which is brought against the employee, the agreement should meet simple written form requirement in order to inform the employee about the scope of prohibition of competition for protecting his/her benefits12. In this respect, a non-competition agreement which has not been concluded in written form shall be invalid.
Due to the fact that the employee usually incurs liability under a non-competition agreement, it is sufficient to only have the signature of employee13. We would like to point out that, the non-competition agreement must be signed by the employee personally; it cannot be regulated by an internal regulation or directive14. Nevertheless, in the event that the employer undertakes an obligation as well, (e.g. payment of an amount to the employee in consideration of non-competition) both parties must sign the agreement15. Besides, with respect to the form requirements, such agreement shall be subject to the Art. 12 ff of the TCO16.
C. Establishment of a Valid Employment Relationship Between the Parties
In order for the application of the Article 444 ff of the TCO, a valid employment relationship should exist between the employer and the employee. In principle, prohibition of competition shall be effective after the termination of the relationship. It is not possible to determine prohibition of competition before the establishment or after the termination of the employment agreement17. In such a case, the employer will not have a benefit which deserves protection18.
D. Existence of a Rightful Benefit of the Employer
The aim of making a non-competition agreement is to prevent the employee from using the information regarding the work and/or workplace obtained during the employment relationship, after the termination of that relationship, in the firms carrying out business in the same field and which might be a competitor of the employer and thus, to eliminate the damage that the employer might suffer.
With regard to the scope of prohibition of competition, the Article 444/2 of the TCO states as follows; “Competition provision shall be valid only if the business relationship provides the employee with an opportunity to acquire information about the client portfolio or production secrets or business activities done by the employer and use of such information has the potential of causing a substantial damage to the employer.”
Since non-competition agreement economically limits the employee, it can only be made if the employer has a legitimate interest. Therefore, the position of the contracting employees and the quality of the information which may be obtained by the contracting employee regarding work and/or workplace has to be assessed in accordance with the conditions of a concrete case19. In this regard, employee’s acquaintance with customers or being in a position that would allow him/her to know the employer’s business secrets or activities, constitute a presumption with regard to the existence of a possibility20 that the employee’s activities may cause a substantial damage to the employer after the termination of the contract . The circumstances that may cause a substantial damage to the employer within the scope of the TCO are examined in detail below.
1. The Employee’s Acquaintance with the Employer’s Client Portfolio
Client portfolio is a group consisting of person or persons who purchase the goods or services that produced or marketed by an enterprise within more or less regular business connections21. The client portfolio does not include the persons to whom goods and services are supplied by the employer for only once
Within the scope of prohibition of competition, the employee’s position has to allow him/her to penetrate into the employer’s client portfolio and to know individual characteristics of the customers and their needs22. Having knowledge only about the names and titles of customers does not mean that the employee may cause the employer to incur a loss. Also, the employee’s acquaintance with the client portfolio and his/her use should be qualified to cause a significant loss for the employer23. In other words, the employee has to obtain an economic benefit for his/her own account by using the client portfolio acquired from his/her former employer, and therefore a decrease should take place in client portfolio and business activities of his/her former employer. Apart from that, in cases where the client portfolio is formed by the employee’s personal skills and knowledge (e.g. coiffeur and doctors), it is justifiably argued that noncompetition agreements concluded with these persons are not valid24.
2. The Employee’s Acquaintance with the Production Secrets and Works of the Employer
For the appliance of prohibition of competition, the employee should have opportunity to obtain information related to the work done by the employer or the production secrets. In either situation, the aforementioned information should have the potential of causing a substantial damage to the employer. At this point, it is more important to identify whether the information is crucial enough to be assumed within the scope of non-competition rather than to determine which part of the information is classified as the production secret or in the scope of work done by the employer. Although the concept of production secret is not defined by law, Süzek suggested the following doctrinal definition; “facts that are related with the business, known by a limited community, would not be reached by outsiders easily, whose confidentiality would serve to a just benefit of the employer”25. The following can be cited as an example to the business secrets of employer; production technologies, ingredients of a special product, organization of the business which is not known by everyone, sources of raw materials, credit sources, calculation plans and techniques of the investment and balance sheet26.
It is not required that the employee had actually reached the aforesaid information, it is sufficient if the employee has a position where he/she can acquire the production secret due to his/her work. For that reason, as it cannot be expected from non-skilled employees or employees who work in low levels to be able to obtain production secrets or information about the works of the employer. In such a case it is assumed that the employer does not have a benefit deserving protection and thus, the employer cannot conclude non-competition agreements with these kinds of employees27. Likewise, the employer cannot conclude a non-competition agreement with employees who possess information that can be known by everyone28. Supreme Court stated in a decision29that “since the employee served as a color technician; data that can be possessed by most of the firms that carry on businesses in the sector and can be reached by the employee through his professional knowledge and experience and similar manufacturing techniques do not fall within the scope of work secrets that are protected by prohibition of competition.”
Interest of the employer in preserving the business secrets should be balanced with the interest of the employee in benefiting from his/her existing knowledge and skills. This balance can be distorted if the employee, who obtained the business secrets of his/her employer, starts a competing business in the same field of activity by using the business secrets acquired from his/her former employer, or starts to work in a competing enterprise30. In this circumstance, it is possible to argue that the employer has an interest which is worth protection.
3. The Possibility of Suffering Substantial Damage
The use of business secrets obtained by the employee should cause the employer to suffer substantial damage. The notion of “substantial damage” means the possible damage the impact of which is gross and not easily recoverable. For instance, in the situations that limit the business opportunities of the entity, and cause a dramatic decrease in the number of orders, it can be argued that there is substantial damage31. One of the most important reasons of the above-mentioned criteria is to protect the employee. The possibility of the employer to suffer “any kind of damage” is not sufficient for concluding a non-competition agreement32.
With respect to the “possibility of suffering substantial damage”; it is important to emphasize that, it is not necessary to be suffered actual, material or moral damage by the employer. Existence of the possibility of suffering such damage is sufficient and it shall be determinedaccording to the facts of the concrete case. Supreme Court’s decision in a relevant case33 is as following; “…it is not required for the employer to suffer a tangible damage against the competition clause while the possibility of the employee causing a considerable damage to the employer by using the information he/she gained during the performance of his/her job in a competitor company which the employee is employed, is sufficient…”
Additionally, the notion of substantial damage is taken into consideration with regard to the scope of compensation that will be calculated as a result of the breach of prohibition of competition.
III. LIMITATION OF NON-COMPETITION AGREEMENT
Parties do not have full and absolute freedom in determination of the scope of terms and conditions of a noncompetition agreement. Lawmaker demarked the contractual freedom of the parties in the Article 445 of the TCO. In order to make a legally valid non-competition agreement, it has to be limited in terms of time, place and type of works. Along with these limitations, noncompetition agreement should not be regulated in such a manner to risk the economic future of the employee in an unjust way and limit the right to work and freedom of contract of the employee. For above-mentioned reasons, the terms of the contract have to be in conformity with the facts of the concrete case, namely the position and financial situation of the employee34. Otherwise, the non-competition agreement will be invalid. Besides, in order to have a valid non-competition agreement, the restrictions stated under the Article 445 have to be understandably and clearly stated in the text of the agreement
A. Limitation in Terms of Duration
Since a certain time was not stipulated in the former Code of Obligations, the duration may be settled by parties with regard to non-competition obligation used to be decided by judge pursuant to the circumstances of the concrete case and equity. In that period, the Supreme Court often was of the opinion that non-competition agreements could not exceed one year or a few years, otherwise it could cause economic devastation of the employee35.
On the other hand, the Article 445/1 of the new TCO explicitly stipulates that a non-competition agreement shall not exceed 2 years, except in special circumstances and conditions. Prohibition of competition should be equitably limited with regards to time by taking the rules of objective good faith set forth under the Article 2 of the Turkish Civil Code into account and by establishing a balance between the employer’s benefits and the employee’s economic future. The mentioned two years period shall commence on the termination date of the employment agreement. While determining the period of non-competition agreement, whether the employee has an opportunity to work in a job that does not fall within the scope of prohibition of competition, should be taken into consideration36. Besides, two years period set forth by the aforementioned provision is the general rule of time limitation to non-competition agreements; exceptions to this rule may be brought in special circumstances.37. Scholars exemplify these circumstances as follows; the employee has knowledge regarding the employer’s technical business secrets on production or the employee is a senior manager 38.
B. Limitation in Terms of Territory
The prohibition of competition to be brought against an employee must be limited with a territory. In this regard, prohibition of competition should be limited to a geographical area, city or field of activity of the employer. This limitation can be set either by indicating a specific residential area or setting a distance. It is utterly important to emphasize that this limitation cannot extend beyond the fields of activity of the employer39.
It is controversial whether prohibition of competition can be set forth all across Turkey or not. According to the decisions of the Supreme Court, non-competition agreements that cover a very wide geographical area or all of Turkey shall be invalid. The Supreme Court stated in a decision that;40 “…as non-competition agreement is set forth for all Turkey and for all fields of activities, it can unfairly damage the economic future of the employee, the prohibition of competition set forth under the service agreement and the penal clause anticipated for the breach of prohibition of competition is invalid according to the Article 445 of the TCO...”. On the other hand, another doctrinal view suggests that, prohibition of competition set forth against the employee which covers all across Turkey, and accordingly which obliges the employee to work outside of Turkey or in another field, shall only be possible if the scope of the regulation is very narrow in terms of time and subject matter of the work41. Yet, it is important to underline that the employee’s knowledge, which was gained in the field of activity in many years, and whether the mentioned work is the only work that the employee can carry out should be taken into consideration. Such prohibition of competition should not endanger the economic future of the employee 42. Additionally it should be noted that, in one of its decision, the Supreme Court43 deemed a clause regarding the prohibition of competition that covers all Turkey valid, since the employer accepts to pay a price, namely counter performance to the employee in return for acceptance of the non-competition clause.
In another decision,44 the Supreme Court deemed a non-competition agreement, which stipulated that the employee who worked as a sales representative shall not work in the territory of Central Anatolia, Marmara and Aegean regions in the same business field with the employer company, void due to the following reason; “…as the scope covers a wide area that will exterminate financial future of the employee, 45 it is incompatible with legislative regulations with regard to freedom of contract and freedom of employment and therefore the provision of agreement regarding penal clauses has to be deemed void.”
C. Limitation in Terms of Subject
A non-competition agreement has to be limited with the field of activity of the employer and professional knowledge of the employee.45 The field of activity of the employer does not mean the field stated in the articles of association of the company; it is the field that the company carries out its actual activities. Nevertheless, the subject of the non-competition agreement should not be limited with the actual field of activity of the employer, should be limited by the position of the employee and his/her concrete duty in the enterprise. At this point, in order to determine the breach of non-competition, the field in which the employee is actually working in the company that he/she is employed after his/her employment agreement is terminated should also be clarified.
In another relevant decision46 of the Supreme Court, it is stated that “the profession/s of the employer that is subject to the restriction of the non-competition should be determined clearly. Especially in our country, because of the registration of companies to the trade registry with a wide scope of field of activity, it is not possible to limit the working of the employee in the whole field of activity of the company. It should be limited with regard to the works that are directly related to the work which has been performed by the employee in the workplace of the employer and the works fall into the main field of activity of the employer”.
However, a non-competition clause significantly limiting the employee’s professional prospect,47 unless it is not indispensable to protect rightful interest of the employer, shall be found excessive. In other words, such a clause may limit the economic future of the employee in case that it is essential to protect rightful interest of the employer.
IV. INTERVENTION OF A JUDGE TO A NON-COMPETITION AGREEMENT
In principle, ex officio intervention of a judge in a valid agreement is not allowed. However, in cases where one of the parties is in a weak position or the agreement includes severe conditions for the debtor, and if the law gives authority of intervention to a judge, provisions of the agreement shall be limited by a judge.
The Article 445/2 of the TCO states that: “A judge may limit the non-competition agreement in excessive qualification in terms of time and scope by freely evaluating all the situations and conditions and fairly considering the performance that might be undertaken by the employer.” As mentioned above, within the scope of this provision, a judge may limit a non-competition agreement in terms of time or subject by considering whether a payment is made to the employee in return for the acceptance of the non-competition agreement and also the situations and conditions of the parties. A provision stipulated in a very extensive manner in terms of subject of non-competition agreement, for instance, the provision which states that the employee who is a color technician shall not work in the “chemistry” area may also be limited or the period of two years may be reduced to one year.
Supreme Court also accepts intervention48 to an agreement indicating an excessive penal clause and states that “…the penal clause indicated in the agreement is prohibitory and a fair amount should be determined by making essential discount pursuant to the last paragraph of the Article 161 of the TCO.” Hence, it is accepted that prohibitory panel clause should be determined again in an equitable way.
V. CONCLUSION
The provisions and conditions of a non-competition agreement that we have analyzed pursuant to the TCO should be carefully evaluated by employers and should be regulated in compliance with the aforementioned validity conditions. Otherwise, non-competition agreements shall be null and void, and the employees who are in essential positions, have business secrets and client portfolio of the employer may work in competing firms and accordingly the employer may face substantial damage. At this point, we would like to state that, even if all of these validity conditions are fulfilled, in case that the employment agreement of the employee, who has engaged in the non-competition agreement, is unjustly terminated by the employer or by the employee with a valid reason, the non-competition agreement shall expire and penal clause stipulated under that agreement cannot be demanded49.
In conclusion, we would like to state that, in the event that a penal clause is set forth with regard to the prohibition of competition as per the Article 446/2 of the TCO and unless otherwise provided under the agreement, due to the fact that the regulation enables the employee to discharge from prohibition of competition by paying the penalty determined in the agreement, it is important for the employer to stipulate a clear provision stating that the employee cannot discharge from prohibition of competition by paying the penalty in the agreement.
BIBLIOGRAPHY
Eda Manav, “İş Hukukunda Rekabet Yasağı Sözleşmesinin Geçerlilik Koşulları”, TBB Dergisi, V. 87, 2010.
Esra Başkan, “6098 sayılı Türk Borçlar Kanunu Hükümleri Çerçevesinde Rekabet Yasağı Sözleşmesi”, Hacettepe Hukuk Fakültesi Dergisi, 2(2), 2012.
Kazım Yücel Dönmez, İşçinin Borçları, Ankara 2000.
Nevzer Sebla Demirtaş, İşçinin Rekabet Etmeme Borcu, Ankara 2012.
Sarper Süzek, İş Hukuku, Ed. 11, Istanbul 2015.
Savaş Taşkent/Mahmut Kabakçı, Rekabet Yasağı Sözleşmesi, Mess Sicil İş Hukuku Dergisi, November 2009.
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FOOTNOTE
1 Supreme Court Assembly of Civil Chambers, dated 27.02.2013, numbered E. 2012/9-854, K. 2013/292.
2 Labor Law Numbered 4857, Official Gazette (OG) dated 10.06.2003, numbered 25134.
3 Turkish Code of Obligations, OG dated 04.02.2011, numbered 27836, Art. 444.
4 Sarper Süzek, İş Hukuku, Ed. 11, Istanbul 2015, p. 376; Eda Manav, “İş Hukukunda Rekabet Yasağı Sözleşmesinin Geçerlilik Koşulları”, TBB Dergisi, V.87, 2010, p. 326.
5 Turkish Civil Law Numbered: 4721, OG dated 08.12.2001, numbered 24607, Art. 6.
6 Law on the Regulation of Relations Between Employers and Employees in Media Sector Numbered: 5953, OG dated 20.06.1952, numbered 8140, Art. 13/2.
7 Manav, p. 342.
8 Manav, p. 328-329.
9 Süzek, p. 376.
10 Nevzer Sebla Demirtaş, İşçinin Rekabet Etmeme Borcu, Ankara 2012, p. 90.
11 Labor Law No: 4857, Art. 8.
12 Esra Başkan, “6098 sayılı Türk Borçlar Kanunu Hükümleri Çerçevesinde Rekabet Yasağı Sözleşmesi”, Hacettepe Hukuk Fakültesi Dergisi, 2(2) - 2012, p. 118.
13 TCO, Art. 14.
14 Süzek, p. 371.
15 Kazım Yücel Dönmez, İşçinin Borçları, Ankara 2000, p. 236.
16 TCO, Art. 12- Unless otherwise provided, the validity of agreements does not bind any form. The form that is set forth in the Law for the agreements, as a rule, is the validity form. The agreements which are concluded by not complying with the set forth form shall not be effective.
17 Supreme Court ACC, dated 27.02.2013, numbered E.2012/9-854, K.2013/292,
18 Savaş Taşkent/Mahmut Kabakçı, “Rekabet Yasağı Sözleşmesi”, Mess Sicil İş Hukuku Dergisi, December 2009, p. 34.
19 Supreme Court ACC, dated 22.09.2008, numbered E. 2008/9-517, K. 2008/566.
20 Demirtaş, p. 91.
21 Taşkent/Kabakcı, p. 27.
22 Taşkent/Kabakcı, p. 27.
23 Başkan, p. 118.
24 Süzek, p. 373.
25 Süzek, p. 372.
26 Süzek, p. 372.
27 Taşkent/Kabakçı, p. 25.
28 Başkan, p. 119.
29 Supreme Court, 11th C.C., dated 06.05.2015, numbered E. 2014/18207, K. 2015/6420.
30 Demirtaş, p. 93.
31 Taşkent/Kabakçı, p. 28.
32 Manav, p. 341.
33 Supreme Court, 11th C.C., dated 19.10.2015, numbered E. 2015/9892, K. 2015/10660.
34 Demirtaş, p.95.
35 Supreme Court, 9th C.C., dated 24.12.2009, numbered E. 2009/26954, K. 2009/36791.
36 Manav, p. 346.
37 Başkan, p. 121.
38 Başkan, p. 121.
39 Başkan, p. 120.
40 Supreme Court, 11th C.C., dated 05.11.2015, numbered E. 2015/474, K.2015/11615.
41 Başkan, p. 121.
42 Manav, p. 349.
43 Supreme Court, 7th C.C., dated 08.04.2013, numbered E. 2013/2542, K. 2013/5823.
44 Supreme Court, 11th C.C., dated 08.06.2015, numbered E. 2015/2156, K. 2015/7881.
45 Manav, p. 350.
46 Supreme Court, 9th C.C., dated 24.12.2009, numbered E. 2009/26954, K. 2009/36971.
47 Manav, p. 343.
48 Supreme Court, 9th C.C., dated 29.05.1997, numbered E. 1997/6252, K. 1997/10506.
