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Post contractual non-compete clauses are subject to a number of conditions, which vary according to each jurisdiction. These conditions may include temporal and territorial limitation or proportionality to the legitimate interests involved in the transaction. In some cases, a compensation of the non-compete obligation is required. This QuickCounsel reviews the regime of compensation of post contractual non-compete clauses in employment contracts, as well as in a number of commercial contracts. It focuses on the rules applicable in France, while highlighting some particularities in other European countries.


Existence of an obligation to compensate

Under French employment law, post contractual non-compete clauses must provide for a financial compensation. This is also the stance adopted by Spain (article 21.2 of the Workers' statute), Belgium (article 65 of the Act of July, 3rd 1978), Italy (article 2125 of Italian Civil Code), Germany (§74 of the German Commercial Code), and Poland (article 101 of Polish Labor Code). The French Court of Cassation, held, on the 10th of July 2002, that non-compete clauses were licit only if it contained an obligation for the employer to financially compensate the non-compete obligation (Cass. soc., July, 10th, 2002, 00-45387). According to the Court, the absence of compensation is a breach of the fundamental principle of freedom of work. Additionally, it is a breach of the article L1121-1 of French Labour Code, which provides that individual and collective freedoms may not be subjected to restrictions that are not justified by the nature of the task, or not proportionate to the objective sought. The regime of non-compete clauses in France may be completed by collective bargaining agreements. Pursuant to article L2251-1 of French Labor Code, such agreements cannot reduce the protection offered to the employee by law, but the agreements may provide for stricter rules regarding the modes of payment of the compensation. In practice, it often provides for the amount of the compensation to be paid to the employee.

Extent of the obligation to compensate

French case law later added that compensation is required regardless of the motive of the termination of the employment contract. In this sense, the non-compete clause shall still be compensated in case of dismissal for serious misconduct (Cass. soc., June, 28th, 2006, 05- 40990) or resignation (Cass. soc., May, 31st, 2006, 04-44598). Case-law extended the obligation even more when it decided that the obligation to compensate could not be affected by the circumstances of the termination of the contract (Cass. soc., September, 24th, 2008, 07- 40098), and the possibility for the employee to work for a competitor or not. It follows from this decision that an employee is entitled to receive compensation for a non-compete obligation, even if he has retired.

Sanctions of the obligation to compensate

Because the compensation is a condition for the non-compete clause to be valid under French employment law, the sanction for not having compensation is the nullity of the clause. In addition to the nullity of the clause, the employee is entitled to obtain damages for the loss suffered. According to the French Court of Cassation, allowing an illicit non-compete provision necessarily causes a damage for the employee (Cass. soc., January, 11th, 2006, 03- 46933).

A non-compete provision is also held to be void if its financial compensation is considered insignificant (Cass. soc., November, 15th, 2006, 04-46721) (i.e., not proportionate to the restrictions imposed on the professional activity of the employee), which is also assessed by the judge. The situation is different in Germany, where article §74(2) of German Commercial Code provides that an insignificant compensation does not render the clause void, but rather the clause becomes non-binding for the employee.

Avoiding the obligation to compensate

One way for an employer to avoid paying compensation is to waive the non-compete clause. This may be relevant in any case where the employee cannot effectively work for a competitor after the termination of the contract, for instance, if he retires. However, an employer may unilaterally waive a non-compete clause only if this ability was provided for in the employment contract (Cass. soc., February, 27th, 2007, 05-43600) or in the collective bargaining agreement. In order to ensure the effectiveness of the waiver, the employment contract should also define precisely the forms of the waiver, and especially the time limit during which the employer must notify the employee. It has to be noted that, under Belgian law, the possibility of waiver is foreseen and restricted by the law itself, as article 65 of the Act of July, 3rd 1978 provides that the employer may waive the non-compete clause within 15 days following the termination of the contract.

The employer may also avoid paying the compensation of the non-compete clause by choosing an applicable law that does not require the payment of compensation. However, this choice appears risky for two reasons. First, the judge of a given country may consider that the requirement of compensation is an overriding mandatory rule of its own country, and hold the non-compete clause as void even if the applicable law does not contain such requirement. Second, the judge of a European country would apply the Rome 1 Regulation on the law applicable to contractual obligations. By virtue of its article 8, the choice of law applicable to an individual employment contract may not deprive the employee of the protection afforded to him by mandatory provisions under the law of the country where he habitually carries out his work, or, if inapplicable, the country where the place of recruitment is located, or the country with which the contract is more closely connected. Therefore, the employer should be particularly careful as to whether one of these laws provide for a mandatory compensation.


In commercial contracts, post-contractual non-compete obligation is not to be compensated. The absence of an obligation to compensate is justified by the freedom of contract.

In sale of business contracts

The French Court of Cassation ruled that the seller of a business has to respect the warranty of quiet possession to the benefit of the buyer, in consideration of article 1626 of the French Civil Code. This article provides for the legal warranty of quiet possession, which is applicable to all sales, and therefore to the sale of business. This warranty amounts to an obligation not to compete with the seller who is therefore forbidden to divert the clientele of the sold business. Such action would be considered as an unlawful eviction of the business sold. This interpretation of article 1626 is well settled (Cass. civ., May, 11th, 1898) and regularly upheld by the French Court of Cassation (Cass. com., May, 5th, 2005, 02-19704).

This warranty is legal by nature and applies even in the case of default of stipulation of a non- compete clause under the sale contract. No compensation has to be awarded to the seller, even if a non-compete clause specifying the extent of the warranty of quiet possession is included in the sale contract. In the case of contribution of a business to a company, the contributor of the business also warrants the company under article 1626 of the French Civil Code (Cass. com., January, 18th, 1966).

In sale of shares contracts

The warranty of quiet possession may also apply in the specific case of sale of shares. But it was judged that this warranty does not include an interdiction for the seller of the shares to reestablish, except if this reestablishment results in an impossibility for the buyer of the shares to pursue the economic activity and achieve the object of the target company (Cass. com., January, 21st, 1997, 94-15207). Therefore, it is strongly advised to introduce a non-compete clause in such contracts and not to rely only on article 1626 of the French Civil Code. A non-compete clause in such contracts shall not be compensated (Cass. com., October, 8th, 2013, 12-25984).

The absence of an obligation to compensate knows one limit in the event that the seller of the shares is an employed shareholder. In this situation, the Commercial chamber of the French Court of Cassation converges with the Social chamber and upholds the criteria of the financial compensation as a condition of validity of the non-compete clause. The fact that the non- compete clause is included in the employment contract or the shareholder agreement is irrelevant (Cass. com., March, 15th, 2011, 10-13824).But such seller shall be entitled to financial compensation only to the extent that:

  1. He was an employee of the said company at the time of the sale of shares; and A non-compete agreement was entered into with this company. The obligation to provide for a financial compensation is thus subjected to a strict temporal and formal condition (Cass. com., October, 8th, 2013, 12-25984).

When drafting a non-compete clause in a sale of shares agreement, negotiators shall keep in mind that the financial compensation, mandatory when the seller of the shares is bound by an employment contract, can be validly integrated directly in the price of the shares under the sale contract. This integration would be valid in the situation the non-compete clause states that the valuation of the shares was made in consideration of the introduction and the respect of a non-compete obligation in the contract (Cass. soc., February, 2nd, 2013 11-27625).

In commercial agency contracts

The conditions of validity of non-compete clauses in commercial agency contracts derive directly from the directive 86/653 EEC. Its articles 20.2 and 20.3 provide for the conditions of validity which are required to be implemented in the national law of the member states of the European Union. Compensation is not one of them. Most European countries actually followed the directive and incorporated the conditions of validity of articles 20.2 and 20.3 in their own national law. For example, in the Netherlands, the conditions of validity of a non-compete clause in a commercial agency contract are set out under article 7:443 of the Dutch Civil Code, and compensation is indeed not one of the conditions listed.

However, it is expressly stated under article 20.4 of the directive 86/653 EEC that this set of conditions does not exclude any other conditions of validity, which shall be required under any national law. Therefore, some Member States include in their national law compensation as a condition for the validity of non-compete clause in commercial agency contracts. The best example is Germany whose Commercial Code provides that "the principal is obliged to pay for the duration of the non-compete clause a reasonable compensation" (§90a of the German Commercial Code, Handelsgesetzbuch).

In France, the conditions of validity of the non-compete clause are set out by article L134-14 of the French Commercial Code. The compensation of the said clause is not among them. The doctrine argued that no specific exclusion of compensation under article L134-14 shall lead to an extension of the case-law of the Social chamber of the French Court of Cassation on non-compete clauses in employment contracts to commercial agency contracts. In addition to the requirements of article L 134-14, proportionality was introduced by a case as a condition of validity of non-compete clauses in commercial agency contracts (Cass. com., June, 4th, 2002, 00-14688). The proportionality is contemplated in consideration of the protection of the legitimate interest of the company to the benefit of which the clause was stipulated. Therefore, it was thought by the doctrine that compensation could also be introduced as a condition of validity.

The Commercial chamber of the French Court of Cassation answered negatively in 2007 (Cass. com., December, 4th, 2007, 06-15137): article L134-14 was strictly interpreted by the French Court of Cassation which ruled that "the French legislator had no intention for a financial compensation as a requirement for the validity of the non-compete clause which respects the conditions of article L. 134-14 of French Commercial Code."

In franchising contracts

Validity of non-compete clauses in this category of contracts when European law is applicable is regulated by the Commission Regulation (EU) No 330/2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerned practices. The vertical restraint is defined under article 1.b and is prohibited. Article 2 of the Regulation provides for exemption of such prohibition. The exemption shall apply only to non-compete obligations fulfilling a set of conditions stated under article 5.3 of the Regulation. Financial compensation of non-compete clauses in the vertical agreement is not one of these conditions. As a consequence, under European law, the compensation of the non-compete clause in franchising contracts is not a requirement of validity of the clause.

Under French law, the usual conditions of validity apply: The non-compete clause must be limited in time and geographic scope, and be proportional to the legitimate interests of the franchisor (Cass. com., November, 24th, 2009, 07-17650; Cass. com., January, 31st, 2012, 11- 11071). However, compensation is not required.

An indemnity was granted to a franchisee because it was considered that the presence of a non-compete clause in the franchising contract led to an expropriation of his very own clientele when the franchisor was the one who terminated the contract (Cass. com., October, 9th, 2007, 05-14118). Though this case did not establish compensation as a condition of validity of non-compete clauses in franchising contracts, the obligation to indemnify the franchisee would lead in practice to the inclusion of compensation in the non-compete clause. This decision was based on article 1371 of the French Civil Code and the theory of unjust enrichment.

Though this case was considered as a first breach in the position of the Commercial chamber, it was overturned (Cass. com., October, 23rd, 2012, 11-21978) on the ground that unjust enrichment cannot be invoked when the alleged enrichment results from the performance or the termination of the contract concluded by the parties.

Sanctions of non-compete clauses in commercial contracts as to their compensation

The Commercial chamber of the French Court of Cassation seems to be oriented towards the validity of non-compete clauses without any compensation. However it judged that the default of compensation of non-compete clauses, which are not proportional to the object of the contract gravely, violates the freedom of commerce. Such non-compete clauses are therefore avoided (Cass. com., December, 13th, 2011, 10-21653). The concerned contract was a share purchase agreement. Therefore, contract drafters should be aware that non-compete clauses in commercial contracts have to be proportionate with regard to the object of the contract in France. Otherwise they could be avoided for default of compensation.

Another problem concerning commercial contracts is their requalification as employment contracts. Such "disqualification" of the commercial contract would lead to the application of the regime of non-compete clauses under employment contracts. Therefore, if a non-compete clause in a commercial contract does not include compensation and this contract is reclassified as an employment contract, the non-compete clause will be nullified. Contract drafters should ensure that the clauses of the contract may not be interpreted as "subordination clauses" which are characteristic of employment contracts (Cass. soc., January, 18th, 2012, 10-16342) and that the contractor retains his autonomy.

Opportunity of the compensation of non-compete clauses in commercial contracts

The fact that non-compete clauses in commercial contracts do not generally have to be compensated shall not be considered as an incentive towards an absolute no-compensation policy. Indeed, compensation of non-compete clauses in commercial contracts may present a strategic interest regarding their respect by the debtor of the non-compete obligation: a compensation paid by installments could reward such respect.

Compensation clauses based on future profits of the creditor of the non-compete obligation may also serve as an incentive for commercial agents to bring more customers to their principals. For the seller of a business, compensation of a non-compete obligation could be drafted in such a way that a significant portion of the price would be paid by installments for the duration of the non-compete clause, and be subject to the performance of the non-competition obligation. As a consequence, compensation of non-compete clauses in commercial contracts may prove opportune for negotiators and be used as a tool for the other party to comply with this non- compete obligation. Moreover, a penalty provision may be added in the non-compete clause to sanction the breach of the non-compete obligation. In France, a penalty clause sanctioning breaches of a non-compete clause, both included in the articles of association of a cooperative corporation, was considered valid and enforceable (Cass. com., June, 26th, 2012, 11-20538). The carrot and stick approach would be to provide for compensation and penalty under the non-compete clause, so as to reward its performance or sanction its breach.


The need for compensation of non-compete clauses will differ whether they are stipulated in an employment or a commercial contract. While the first have to be compensated, the second do not, except in specific cases. In any case, the duration of non-compete clauses and accessory provisions should be limited. Time affects both their validity and their likelihood to be challenged. Contract drafters have to think beyond termination of the contract and include post- contractual non-compete clauses when appropriate.



Region: Europe
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