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It is of great importance for businesses to draw up non-competition agreements or to include provisions addressing unfair competition in the contracts they conclude. Through a non-competition agreement signed between the parties, unfair competition can be prevented by an undertaking not to enter into a competitive relationship with the employer within a specific field of activity, in a specific geographical area and within a specific period of time. In the event of non-performance of these undertakings, a contractual penalty may be stipulated and the employer's loss may also be compensated. In this article, we set out the points to be observed so that, while the employer's legitimate interest is protected through a non-competition agreement, the employee's freedom to work and freedom of contract, which are constitutional rights, are not restricted.
I - The Importance of the Non-Competition Obligation in the Legal Protection of Trade Secrets
The legal protection of trade secrets is assessed within the concept of unfair competition. In addition to the legal provisions on the protection of trade secrets found in the Labour Law, the Turkish Commercial Code (TCC), the Law on Intellectual and Artistic Works (FSEK) and the Law on the Protection of Competition (RKHK), businesses must also identify their trade secrets by taking appropriate measures and place them under systematic protection.
For this reason, it is of great importance for businesses to draw up non-competition agreements or to include provisions addressing unfair competition in the contracts they conclude.
Through a non-competition agreement signed between the employee and the employer, the employee undertakes not to enter into a competitive relationship with the employer within a specific field of activity, in a specific geographical area and within a specific period of time, thereby preventing unfair competition; failing this, a contractual penalty may be imposed and the employer's loss may also be compensated.
II - The Non-Competition Obligation
A non-competition obligation means that persons or entities working in the same field cannot compete with one another in a manner contrary to the law. In this respect, employees who work at the workplace and who are privy to commercial information that enables the business to compete play a key role.
While the employment contract is in force, the employee is under a statutory duty not to compete even without any agreement, the source of which is the employee's duty of loyalty. Article 396/3 of the Turkish Code of Obligations (TCO) provides: “For as long as the employment relationship continues, the employee may not, in breach of the duty of loyalty, render services to a third party for remuneration and, in particular, may not compete with his or her own employer.” Accordingly, refraining from competition while the contract is in force is a statutory obligation which the employee must necessarily bear. The duty not to compete ends with the termination of the work or of the employment contract.
If it is desired that the duty not to compete continue after the employment contract has ended, a separate provision on the matter must be added to the contract when the employment contract is initially concluded, or a separate non-competition agreement must be drawn up with the employee.
The non-competition agreement is provided for in Article 444/1 of the Turkish Commercial Code: “An employee who has legal capacity may undertake in writing towards the employer to refrain, after the termination of the contract, from competing with the employer in any manner, in particular from setting up a competing business on his or her own account, from working in another competing business or, otherwise, from entering into any other kind of interest relationship with a competing business.” It concerns the employee not competing with the employer after the employment contract has ended.
III - Points to Be Observed, and Conditions of Validity, When Including a Non-Competition Clause in a Non-Competition Agreement or in the Contract Signed Between the Employee and the Employer
An employment relationship must exist between the parties. In order for a non-competition agreement to be concluded, there must first be an employment relationship between the parties.
The non-competition agreement must not be prevented by a special statutory provision. For example, under Article 13 of the Press Labour Law No. 5953, non-competition clauses are deemed invalid with respect to journalists.
The non-competition agreement must be made in writing. The form prescribed by law is simple written form; there is no requirement for an official form.
The employer must have a legitimate interest worthy of protection. In order for a non-competition agreement to be drawn up, the working conditions must give the employee;
-The opportunity to obtain information on production secrets and on the employer's affairs,
-The opportunity to obtain information on the customer base, and
-it must be likely that the use of this information, acquired by virtue of the ease afforded by the employment relationship, would cause the employer significant harm.
The non-competition obligation must be limited in terms of time, place and subject matter.
Certain limits have been introduced so that the non-competition agreement to be drawn up is valid, in that it does not restrict the employee's freedom to work and economic future.
A limitation as to place is mandatory and must be expressly stated in the agreement. The limitation as to place may be a geographical region, a city or the employer's field of activity. There must be a clear territorial limit. The limit set as to place must not exceed the employer's field of activity. The limit and the balance may be determined according to each concrete case.
A limitation as to time must be made. Article 445/1 of the TCC provides that, except in special circumstances and conditions, the duration of a non-competition agreement may not exceed two years. The starting date of that period is the date on which the employment contract ends. In special circumstances the period may exceed two years, and in that case the exception to the period may vary according to the employee's position and expertise at the workplace and the information he or she holds.
A limitation as to subject matter must be made. The prohibition must be confined to the professional knowledge the employee has acquired within the employer's field of activity and to the duties he or she performs. Provisions that prohibit competition in every subject must not be drafted, and general wording must not be used.
The non-competition obligation must not be drafted excessively. Otherwise, depending on the particulars of the concrete case, the judge may intervene and reduce the non-competition obligation to equitable limits. This may concern the scope of the agreement, its place and duration, and the contractual penalty. Article 445/2 of the TCO provides that the judge may limit the provisions of an excessively drafted non-competition agreement. In this respect, where the employer has a counter-performance, the judge may also take this into account when exercising discretion.
It is important to stipulate the sanctions to be applied in the event of breach of the non-competition agreement.
In the event of breach of the non-competition obligation, the employer's loss must be compensated. Article 446 of the TCO reads: “An employee who acts in breach of the non-competition obligation is liable to make good all losses suffered by the employer as a result.” In this case, the employer must prove that its loss arises from the conduct in breach of the non-competition obligation.
Conduct in breach of the non-competition obligation may be deterred by attaching a penalty clause to it. The amount of the contractual penalty must be expressly specified. If the employer does not wish to bear the burden of proof as to the consequence of the breach, a penalty clause may be included in the agreement; the amount of the contractual penalty may then be claimed merely by proving the existence of the breach of the non-competition obligation, without having to prove the loss suffered as a result of the breach. Whether the employer has suffered a loss is irrelevant. If the stipulated contractual penalty is insufficient to compensate the loss that has arisen, the employee will be obliged, upon proof by the employer, to make good the excess loss. If the contractual penalty is excessive, the judge may reduce it of his or her own motion under Article 182 of the TCO.
In the event of breach of the non-competition obligation, the employer may also demand that the employee remedy the breach. Provided that this is expressly set out in writing in the agreement, i.e. that the employer expressly reserves it in writing in the non-competition agreement, the employer may demand that the conduct in breach of the prohibition be brought to an end, depending on the importance of the interests infringed and the degree to which the employee's conduct is justified. The existence of a contractual penalty in the agreement does not affect the demand that the conduct constituting the breach be terminated. It is required that the employer has suffered a significant loss as a result of the breach of the non-competition obligation and that the employee's conduct in breach of the non-competition obligation is of a serious nature.
The agreement on the non-competition obligation may come to an end in more than one way. This will be the case where the term of the agreement expires, where the employer no longer has a real benefit or interest to be protected, where the employment contract is terminated by the employer without just cause, or where the employee terminates the employment contract for just cause or because of the employer's fault. In these cases, the non-competition obligation will cease.
Therefore, if the employer terminates the employment contract without any just cause attributable to the employee, THE NON-COMPETITION OBLIGATION ENDS AND THE EMPLOYEE IS RELEASED FROM THE NON-COMPETITION OBLIGATION. In other words, for the non-competition obligation to be enforced, the employer must have terminated the employment contract for just cause or valid reason. Where termination is made for an unjustified or invalid reason, the employer cannot rely on the non-competition provision. For example, where the employment contract ends for just cause because the employee's wages and social rights have not been paid, or social security premiums have not been paid or have been paid at less than the amount actually due, etc., the employee cannot be said to be under a non-competition obligation. Likewise, if the employee's reinstatement action is upheld, the employer has no right to claim under the non-competition obligation.
Court of Cassation decisions on the non-competition obligation and its breach are set out below.
Decision of the 11th Civil Chamber of the Court of Cassation (Yargıtay), File No. 2017/4543 E., Decision No. 2019/1109 K.: “…The court rejected the action on the grounds that, in view of the entire case file, the confidentiality and non-competition arrangement attached to the employment contract dated 27/02/2009 and signed between the parties imposed no condition of place or duration on the non-competition obligation and provided only that the employee could not pursue business, marketing or commercial activity in the same sector; that, although it was agreed that compensation of USD 50,000 would be paid in the event of breach of the contract, a non-competition obligation that is not limited as to place and duration is not valid; and that, in this case, the non-competition arrangement between the parties could not be regarded as valid.
The claimant's counsel appealed the decision.
In view of the information and documents in the case file, the fact that there is no procedural or statutory defect in the discussion and assessment of the evidence relied on in the reasoning of the court's decision, and the fact that Code of Obligations No. 818 is to be applied to the dispute between the parties, all of the appeal objections of the claimant's counsel are without merit..”
Decision of the 11th Civil Chamber of the Court of Cassation (Yargıtay), File No. 2019/3206 E., Decision No. 2020/1104 K., dated 10/02/2020: “…The court, in compliance with the reversal judgment, and in line with the expert report it adopted, decided to uphold the action in part and to collect TRY 10,000.00 from the defendant, on the grounds that the defendant worked on paint formulas as an R&D technician at the claimant company and was able to access the claimant company's trade secrets such as its technical know-how, production technology and special production methods; that the defendant's taking up a job of the same nature at another firm operating in the same field of activity, contrary to the contract between the parties, constituted unfair competition against the claimant and that he was therefore liable for the contractual penalty agreed in the contract, but that, as the contractual penalty agreed was excessive, it had to be reduced…”
Decision of the 11th Civil Chamber of the Court of Cassation (Yargıtay), File No. 2015/8490 E., Decision No. 2016/3062 K., dated 21/03/2016: “…The court rejected the action on the grounds that, in view of the claims, the defence and the entire case file, the scope of the non-competition obligation in the non-competition and confidentiality agreement signed between the parties had been determined without any limitation as to place; that this would cause the employee's economic ruin and the agreement was therefore invalid; and that, given the invalidity of the non-competition and confidentiality agreement, the lower price quotations given to certain customers for the company where the defendant began working could not be regarded as unfair competition through the sharing of a trade secret…”
Decision of the 11th Civil Chamber of the Court of Cassation (Yargıtay), File No. 2015/15290 E., Decision No. 2017/2808 K., dated 10/05/2017: “…In order to establish a breach of the non-competition obligation, the claimant need not have suffered a concrete loss, nor need the defendant actually have held information of the nature of trade secrets and have used it against the claimant; it must be examined whether the defendant employee had the possibility and risk of accessing such information and harming the claimant employer, whether the non-competition provision of the contract was breached must be assessed and, if necessary, a conclusion must be reached after obtaining a report from an expert in the relevant sector; accordingly, the local court's decision rejecting the action on the basis of an incomplete examination had to be reversed.
The court also rejected the action on the grounds that regulating the non-competition obligation as a unilateral prohibition on working against the defendant, covering the whole of the ... and ... Regions, violated the freedom to work. Paragraph 2 of Article 445 of the Turkish Code of Obligations, concerning the non-competition obligation, provides that the judge may limit an excessive non-competition obligation as to its scope or duration, by freely assessing all the circumstances and conditions and by equitably taking into account any counter-performance the employer may have undertaken. Accordingly, it was also incorrect for the court to reject the action by concluding, with written reasons and without making an assessment under Article 445/2 of the TCO, that the non-competition obligation provided for in the contract was contrary to the freedom to work under the Constitution, and the judgment had to be reversed on this ground as well…”
Decision of the 11th Civil Chamber of the Court of Cassation (Yargıtay), File No. 2018/3705 E., Decision No. 2019/1860 K.: “..In the concrete case, although the court should have determined whether the defendant employee, given the position held at the claimant company, had the possibility and likelihood of accessing the claimant's trade secrets, production secrets such as production technology or special production methods, or the customer base, and whether there was a possibility and risk of harming the claimant employer, and should thereby have assessed the validity of the non-competition provision of the contract and, if necessary, reached a conclusion after obtaining a report from a panel including a sector expert, it was incorrect to reject the action on the basis of an expert report and an incomplete examination in which the principles explained were not observed, and the local court's decision had to be reversed…”
Decision of the 9th Civil Chamber of the Court of Cassation (Yargıtay), File No. 2019/3155 E., Decision No. 2021/2225 K., dated 26.01.2021: “..While the employment relationship continues, the parties may agree that a provision stating that the employee will not compete after the end of the contract be included in the employment contract, or that a separate agreement (a non-competition agreement) be made on this subject. A sanction providing for a specific payment agreed by the parties in connection with a breach of the non-competition obligation is, by its nature, a contractual penalty provision. The employee's not competing with the employer for the duration of the employment contract is an obligation falling within the duty of loyalty. By contrast, while the employment relationship continues, the parties may agree that a provision stating that the employee will not compete after the end of the contract be included in the employment contract, or that a separate agreement (a non-competition agreement) be made on this subject. The employee's duty not to compete with the employer after the termination of the employment contract arises only if such an obligation has been agreed by contract.
….
Since paragraph 1 of Article 180 of the Code of Obligations provides that “Even if the creditor has suffered no loss, the agreed penalty must be performed”, the employer may demand the contractual penalty agreed in the contract without having to prove any loss. In this case, it is sufficient for the employer to prove that the non-competition obligation has been breached in order to claim the contractual penalty. (Süzek, S., İş Hukuku (Labour Law), revised 11th edition, Istanbul 2015, p. 378) In the concrete case, it appears that a non-competition agreement in accordance with Articles 444 et seq. of the TCO was concluded between the parties. The defendant employee started work at the claimant company as a sales representative under a written employment contract concluded on 02.08.2010; under Article 1 of the Non-Competition and Confidentiality Agreement of the same date, drawn up as an annex to the employment contract of 02.08.2010, the defendant declared and undertook that, both during the term of the employment contract and after its termination, he would not use professional secrets and confidential documents relating to the employer and the business for his own personal purposes or for the interests of any other person, company, institution or organisation and/or would not disclose them to any person, company or organisation; and under Article 2 of the agreement, the defendant accepted and declared that, if during the term of the employment contract or after its termination he breached in any manner the confidentiality obligations stated above, the employer, without prejudice to its right of termination for just cause, could demand and collect a penalty equal to 12 times the defendant's last monthly gross salary and, where all the losses suffered as a result of the breach exceeded the penalty, the excess part, and that the defendant would pay the penalty and the loss exceeding it to the employer within 7 days of notification of a written notice or warning to be served on him. The first instance court and the Regional Court of Appeal accepted that the agreement was valid. It is also established that the defendant employee started work, 3 days after the termination of his employment contract, at a workplace operating in the same field within the same provincial boundaries. However, the rejection of the claimant employer's claim for the contractual penalty on the ground that the existence and amount of loss had not been proven was incorrect. A contractual penalty relieves the creditor of the burden of proof. What the court must do is to uphold the claim for the contractual penalty, also taking into account the last paragraph of Article 182 of the TCO…”
Decision of the 11th Civil Chamber of the Court of Cassation (Yargıtay), File No. 2016/8414 E., Decision No. 2018/1663 K., dated 05/03/2018: “...The action concerns the collection of the contractual penalty agreed on the ground that the defendant employee acted contrary to the non-competition obligation in the contract. The court upheld the action on the grounds that the defendant had acted contrary to, and breached, the non-competition undertaking agreed in the confidentiality and non-competition protocol between the parties. However, under Article 182 of Code of Obligations No. 6098, the judge reduces of his or her own motion a penalty clause that he or she considers excessive. Although the court decided, under Article 4 of the protocol concerning the contractual penalty, to collect TRY 20,000.00, it did not discuss whether the contractual penalty was excessive and whether it should be reduced. In this case, where the court should have discussed and assessed the matters indicated and decided accordingly, giving a decision on the basis of an incomplete examination was not found correct and the decision had to be reversed…”
Through a non-competition agreement, the value of competition is placed under protection; while the employer's legitimate interest is protected, care is also taken not to restrict the employee's freedom to work and freedom of contract, which are constitutional rights.
The points set out above are, in general terms, the matters and rules to be observed; for a non-competition obligation to be valid, lawful and equitable, each concrete case must be assessed on its own particulars.
