Czech Constitutional Court reaffirms enforceability of non-compete clause

Czech Republic

Non-compete clauses must be interpreted in line with the highest legal principle of private law – that agreements must be kept. The Czech Constitutional Court (the “Court”) recently decided in favour of an employer (the “claimant”) in a case over the enforceability of non-compete clauses, overturning an earlier ruling by the Supreme Court.

A former employee (the “defendant”) had agreed to abstain from conducting business activities that were similar to or in competition with the business activity of the claimant, for a period of one year. The defendant was compensated for this undertaking through monetary remuneration amounting to one year’s salary. The penalty for a breach of this obligation was that the defendant had to pay a contractual fine equal to the same amount.

The defendant breached the non-compete clause by taking on employment at a competitor company for a period of four days. The claimant enforced the contractual fine upon finding out about the defendant assuming this employment.

Moving up through the judicial structure, the claim landed before the Czech Supreme Court, which delivered a surprising ruling in favour of the defendant: it rejected the claimant´s claim in its entirety and ordered the claimant to pay the defendant’s legal costs. The Supreme Court held that the claimant´s claim was contrary to good morals and took into account the (short) four-day period of employment at the competitor. The Supreme Court also stressed that the claimant should have used other statutory options for enforcing a claim involving business secrets, such as those offered by unfair competition provisions.

The claimant filed a constitutional complaint against the Supreme Court´s ruling to the Court. The Court quashed the Supreme Court´s ruling and in its reasoning reasserted the firmly established position on the overall purpose and enforceability of non-compete clauses.

The Court emphasised that the main purpose of a non-compete clause is to protect the employer against information leaks to any of its competitors through former employees. The Court stressed that non-compete clauses (as with any other contractual obligation) must be interpreted in line with the highest legal principle of private law – that agreements must be kept. The right to receive a contractual penalty arises at the time the breach of the non-compete clause occurs - it is irrelevant whether afterwards the employee used any information to the benefit of the new employer or himself/herself.

The Court also displayed a better grasp of current practice by pointing out that the transfer of sensitive information (or know-how) could take only a few minutes, and that proof of genuine misuse would be close to impossible to obtain, thereby making the duration of the wrongful employment irrelevant. Any other interpretation would give rise to uncertainty on the side of employers, thus diminishing the entire purpose of non-compete clauses. The Court also confirmed the contractual penalty in this case would have survived the necessary test of reasonableness and equality as it was equal to the amount the defendant would have gained had they not breached the obligation.

Please do not hesitate to speak to one of our team if you have concerns about the enforceability of your non-compete clauses.