Unfair employee competition

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Date:
05 Apr 2022

By:
Thomas van der Toorn

In order to counter competition from former employees, a non-competition clause is often included in the employment agreement. To enforce this clause, it is often combined with a penalty clause. The non-competition clause - provided it has been validly agreed - is generally easy to enforce in the Netherlands. However, in the absence of this clause, action against the more general 'employee competition' is more complicated. After all, in that case the former employee is in principle free to go wherever he/she wants and therefore also to compete with the former employer, even if this is to the disadvantage of the former employer. The question here is which instruments an employer has in those situations to take action against competition. Before elaborating on these instruments, we will first discuss the risk that a (valid) non-competition clause is not enforceable.

Validity of non-competition

It happens quite regularly that no non-competition clause has been agreed upon. Another - perhaps more frequent - scenario is that the non-competition clause is not valid, has lost its validity in the course of time or turns out to be voidable.

For a non-competition clause to be valid, it must have been agreed in writing with an adult employee. Moreover, this clause may in principle only be included in employment agreements for an indefinite period of time. In the case of fixed term contracts, a non-competition clause is only permitted if it contains a written substantiation of the employer showing that the clause is necessary because of serious business or service interests. A substantiation may lie in very specific knowledge or business information that the employee will acquire, whereby the employer would be disproportionately disadvantaged if the employee were to transfer to the competitor. The employer will therefore have to assess in each individual case whether there is such compelling business or service interest. If there is no such interest, the clause could be annulled in a possible court procedure.

If a non-competition clause has been validly agreed, it may also lose its validity in the course of time. This is the case when such a drastic position change takes place during the employment that the non-competition clause has become considerably more burdensome. This relates to unforeseeable position changes (i.e. changes which do not fit in with a normal career development or usual extensions of tasks and responsibilities). The position change will be considered to have become more burdensome if, in case of enforcement of the non-competition clause, it actually constitutes an obstacle for the employee to find a new, equivalent job as an employee or self-employed. 

Furthermore, also the situation may arise in which the employer cannot rely on the non-competition clause due to the circumstance that the termination or non-renewal of the employment agreement is the result of the employer’s seriously culpable acts or omissions. Finally, a clause may be nullified (fully or partly) if the employee is unfairly disadvantaged by the clause in relation to the employer's interest to be protected. In that case, in a possible court procedure, for example, the functional or geographical scope of the clause could be limited. Also the duration of the non-competition clause can be limited, if this is considered to be unreasonably long. In general, a term of one year is considered reasonable.

Furthermore, the Dutch Minister of Social Affairs and Employment recently informed the House of Representatives about possible policy options for reforming the rules on non-competition clauses (click here for the parliamentary letter). There is a chance that these rules will be amended in the (near) future. The explored policy options make clear that the enforceability of the non-competition clause will in all likelihood diminish. 

Alternative possibilities

Considered the above, the risk exists that the employer will not be able to rely on a (valid) non-competition clause. The option left to the employer to take action against employee competition is to claim (in court) that the former employee acts unlawful. This is the case when there is so-called unfair competition. As said, the fact that the former employee is competing with his former employer is not in itself unfair. In order to be able to speak of unfair competition, it will have to be proven that there is a systematic and substantial destruction of the sustainable business assets of the former employer by using knowledge and data confidentially obtained by the former employee from the former employer. This follows from the so-called Boogaard/Vesta ruling of the Dutch Supreme Court (click here for the judgment).

Such systematic and substantial destruction may, for example, be the case if the former employee systematically manipulates the customers of his former employer in order to persuade them to break the contractual relationship with the former employer and switch to the competitor. Case law of lower courts show that unfair competition is inter alia considered to have taken place, if it can be proven that the former employer has lost a large part of its turnover because it lost customers due to the actions of the former employee and if additional circumstances are present (click here for the judgment). Additional circumstances are, inter alia, that the former employee has prepared certain things during the employment by using the confidential knowledge (e.g. information on pricing of the ex-employer, specific quality requirements of the customers or other information in breach of the confidentiality obligation).

The threshold for unfair employee competition is therefore very high and its requirements cannot be met easily. An impeding factor is that unfair employee competition is difficult to prove. See for example the judgment of the Rotterdam District Court of 13 October 2021, in which a claim for damages on the basis of unfair employee competition was rejected due to insufficient evidence (click here for the judgment).

In order to counter employee competition, it remains vital to include a legally valid non-competition clause and to keep it up-to-date. If you have questions about the manner to address this, please do not hesitate to contact us.