Employees may have access to important and confidential information related to the employer, including the company’s operations, clientele and trade secrets. Use of such information without employer’s knowledge may harm the legitimate interests of the employer. In this respect, an employee should not compete with his/her employer according to the duty of fidelity during the term of the employment agreement. As this is a statutory duty imposed on the employee, there is no need for such non-compete obligation to be explicitly set out in the employment agreement.
On the other hand, parties are allowed to extend the competition prohibition for a certain period after the termination of the employment agreement. However, not all non-compete clauses are enforceable under Turkish law. Accordingly, certain conditions must be for a non-compete clause to be enforceable under Turkish law. As such, those clauses must be reasonable in terms of both protection of commercial life and trade secrets of the employer as well as professional and economic freedom of the employee. In this respect, a non-compete clause which constitutes an exception to constitutionally protected freedom of work and the equally protected right to free development of economic or professional activity of the employee is only deemed valid if stipulated within the legal boundaries.
In this Article, validity of non-compete clauses after the expiry or termination of the employment agreement [post-employment] will be discussed.
I. Conditions for an Enforceable Non-Compete Agreement
Non-compete obligation of the employees can be regulated either in an employment agreement [non-compete clause] or alternatively by a separate agreement [non-compete agreement]. As non-compete obligations limit the freedom to work of employees, the law imposes several requirements for the validity of those clauses/agreements. Accordingly, the Turkish Code of Obligations No. 6098 ["TCO"] regulates the below conditions for a non-compete clause/agreement to be enforceable under Turkish law.
Non-compete agreements must be in writing to be valid and enforceable [TCO art.444/1].
Non-compete obligation cannot be imposed unilaterally. It must be agreed upon by and between the employer and the employee in writing [whether within the employment agreement or via a separate agreement]. Thus, only referring to an internal regulation or a similar document will not be sufficient for validity of a non-compete clause.
It should be noted that the writing requirement constitutes a crucial criterion for the validity of a non-compete clause post-termination. Accordingly, even though Turkish law does not require employment agreements to be in written form, non-compete agreements must be in writing.
Non-compete agreement cannot be signed with all employees.
Non-compete clause is deemed enforceable if it protects legitimate interests of the employer in preventing the competitive activities of the employee. On the other hand, the employee should be in a position to harm the legitimate interests of the employer by accessing the relevant information regarding employer’s business. Such information may be related to production secrets that cannot easily be reached by third parties, or professional activities that should be kept confidential for the business of the employer, or the clientele.
Use of confidential information must have the potential of a significant loss for the employee.
Disclosure and use of the relevant information to the benefit of the employee or another company must have the potential of negatively affecting the employer's business. Whether this loss would occur in the ordinary course of business and its severity are vital points in evaluating validity of the clause. As a result, adverse consequences such as loss of profit and customers, regression in competitive capacity in the market, and/or reduction of work capacity should arise in case of a breach.
Non-compete agreement should not unreasonably jeopardise financial future of the employee [TCO art.445/1].
Non-compete clauses should be reasonably limited with regard to place, scope and duration of the prohibition.
- Geographical scope of the restricted area should not be extended beyond the territory where the employer is carrying out its business activities. This area may be a city, region, or any place where the use of confidential information could lead to damages to the employer’s interests. Yet, it is a matter of debate whether the radius of the geographical area can be determined as the entire territory of Turkey. While the Court of Cassation issued several judgements ruling unenforceability of non-compete clauses covering the whole country, such clauses may be deemed valid provided that the employee had received an adequate consideration.
- It is also crucial to limit the duration of the non-compete obligation. While the legitimate professional interests of the employer on the protection of the trade secrets can lose its importance in the long run, the excessive duration of the prohibition might limit the employee’s economic freedom. As a matter of fact, the TCO states that the duration of the non-compete obligation should not exceed 2 [two] years, unless there are special circumstances [TCO art.445/2].
- The scope of the prohibited professional activity of the employee must be reasonable in terms of the position and work description of the employee. That being said, the Court of Cassation rendered non-compete clauses which relate to the entirety of the employee's activities to be invalid. Accordingly, a non-compete clause should only be adopted with regards to the employer's actual position within the company.
II. Burden of Proof and Discretionary Power of Judge
Employer will have the burden of proof regarding the validity of the non-compete clause/agreement. If the relevant clause is held to be invalid, the remaining provisions of the employment agreement will remain in full force and valid.
In addition, courts are entitled to restrict the non-compete obligation if it exceeds the legally set limitations in terms of geographical place, scope and duration of the prohibition. For instance, they can shorten the duration or narrow the radius of restricted area [TCO art.445/2].
Nevertheless, it should be emphasized that there are various decisions of the Court of Cassation in which non-compete clauses/agreement that do not meet the requirements explained above were ruled invalid by the court.
III. Breach of Non-Compete Agreement
In case of breach of the non-compete obligation, the employer may claim all damages suffered by it [TCO art. 446/1]. Unless the employee’s action is proven not to be based on fault, s/he will be held liable for the breach. As such, if the employment agreement provides for the payment of a penalty in case of a breach, the employer is entitled to receive the penalty amount along with the damages exceeding the penalty [TCO art. 446/2].
IV. Termination of Non-compete Agreement
Undoubtedly, the non-compete obligation will be automatically terminated upon the expiration of the agreed duration. On the other hand, if the employee’s use of the relevant information would no longer harm the employer’s interests [e.g., in case the information became publicly known], the non-compete obligation may be deemed to be terminated before the expiration of the term.
Employer and employee may also execute a release agreement any time for the purposes of termination. Further, should the employer terminate the employment agreement without a justifiable cause, or should the employee terminate the employment agreement due to a reason attributable to the employer, non-compete clause would also be terminated [TCO art. 447/2].
By M. Tarik Guleryuz, Partner, and Zahide Altunbas Sancak, Partner, Guleryuz & Partners