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BEWARE OF NON-COMPETITION CLAUSES IN FRANCE

by

Mary-Daphné Fishelson


French case law regarding non-competition clauses seemed well established. However, the French Supreme Court (Cour de Cassation) recently changed the rules of the game.

Definition

First, it should be reminded that a non-competition clause is a provision, which is inserted in an employment contract or in a collective bargaining agreement, according to which an employee commits himself not to work for one or several competitors of the company in a limited time period, on a limited area and in defined fields of activity, once the employment contract is terminated, no matter the ground for termination. Non-competition clauses are applicable as of the day of termination of an employment contract, i.e. usually at the end of the notice period. Should there be no notice period, this clause shall apply as of the day the employee actually leaves the company.

Origin of non-competition clauses

Non-competition clauses shall be provided for in writing and agreed by the employee concerned even though mentioned in an applicable collective bargaining agreement.

Validity of a non-competition clause

Pursuant to three very important rulings handed down by the French Supreme Court on July 10, 2002 (Cass.soc. July 10, 2002 n°2723, 2724, 2725, RJS 10/02 n° 1119), a non-competition clause must comply with five cumulative conditions, i.e. this clause must be essential to protect the employer’s legitimate interests (1), shall be limited to a specific time period (2), to a geographical area (3) and shall take the characteristics of the employee’s job into account (4) and, at last and more importantly, it must provide for a financial counterpart (5). These conditions do protect the freedom to work and will be examined hereinafter.

(1) Non-competition clauses regarding menial jobs such as window cleaners, handlers are never considered in the employer’s legitimate interests (Cass.soc. May 14, 1992 Godissard c/ Soulhiol n° 89-45.300). Indeed, employers must prove that they need to protect their clientele, a specific know-how, trade secrets etc. As a result, only employees who acquired a specific knowledge, executives, managers can be submitted to a non-competition clause.

(2, 3 and 4) A non-competition clause cannot prevent an employee from finding another job and shall therefore be limited in terms of time, area and field of activity. For instance, a French Court declared null and void a clause, which prevented an employee from working in the same field of activity as his/her previous company for one year on the French territory (Cass. soc September 18, 2002 n° 2722 : RJS 12/97 n° 1369).

Should one of these conditions of validity not be fulfilled, French Courts do not usually regard this clause as void but adapt it to the circumstances of the cause. They may, for instance, reduce the time limit or the geographic area.

(5) To be valid, a non-competition clause shall contain a financial counterpart. This condition was added in 2002 by the French Supreme Court (see reference above).

As numerous clauses agreed on before 2002 did not provide for a financial counterpart, these clauses are, to date, theoretically void.

Indeed, either a collective bargaining agreement set that non-competition clauses shall provide for a financial counterpart and every employment contract contained such financial counterpart, or the collective bargaining agreement let employers choose whether or not a financial counterpart should be provided for and few employment contracts granted an indemnity to the dismissed/resigning employee.

Even though a number of non-competition clauses are, to date, deprived of a financial counterpart, French Courts hardly ever consider these clauses void and usually regard them as valid and indemnify employees to make up for their absence (Cass. soc March 18, 2003 Dazy c/ Sté Net-O-Sol 734).

The amount of this financial counterpart usually reaches one forth to half “X” monthly gross salaries, X being the number of months during which the employee must comply with his non-competition obligation. Said amount is generally set with respect to the importance of the limitations imposed on the employees.

This counterpart remains due to any employee who found a new job in compliance with this clause or to any employee who did not suffer from any damage in connexion with this clause.

Non-competition clauses in a group of companies

In the framework of a group of companies, should an employee enter into an employment contract with one subsidiary of the group (hereinafter S1), the non-competition clause shall only target this S1 company. Therefore, if the employee resigns/is dismissed from S1 and finds a new job in another company whose activities are similar to those run by the mother company and/or other subsidiaries of the group, the non-competition clause will not be regarded as violated since the activity of S1 differs from his new employer’s (Cass.soc. May 22, 1995, n° 2243 PB, Magnaval c/ SA Fimedias, Bull.civ V page 118, n°162).

In the same way, should an employee be hired by a subsidiary of the group (S1) and sent on secondment in other subsidiaries of this group, the non-competition clause agreed upon with S1 will not apply to the other subsidiaries of this group even though the employee was, for some time, on secondment in these subsidiaries (Cass.soc December 17, 1997, n° 4864 D, SA Roudière c/ Bassi) .

Sanctions following the violation of a non-competition clause

On the one hand, should an employer fail to settle the financial counterpart, his employee will no longer have to comply with his non-competition obligation.

On the other hand, an employee, who breaches his non-competition obligation is no longer entitled to his financial counterpart and can be sentenced to reimburse the sum he received unduly. However, has this employee complied with his non-competition obligation for some time, he may keep the indemnity corresponding to this time period.

Besides, until very recently, the former employer could have the new employment contract, which violated the non-competition clause, terminated thanks to an emergency procedure (procedure de référé). This procedure was very effective compared to a regular procedure, which usually takes from 9 to 18 months to obtain the termination of the new employment contract entered into in breach of a non-competition clause.

Much to the employers’ surprise, the French Supreme Court decided on May 13, 2003 (Cass.soc May 13, 2003, SARL Vialatte Pneus c/ SNC Euromaster France) that a former employer cannot use this emergency procedure to obtain the termination of an employment contract, since this procedure was only designed to temporary decisions.

Employers therefore lost an effective means of preventing their competitors and former employees from adopting such behaviours.

Conclusion

Following the very important rulings of July 10, 2002, many non-competition clauses are, to date, theoretically void and can be regarded as potentially dangerous for employers, who should therefore negotiate the new terms of these clauses as soon as possible. Indeed, employers cannot unilaterally suppress non-competition clauses.

Besides, as French Courts tend more and more to protect employees, employers must at least understand all the new rules to be able to react properly on such issues in the future.


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