Non-competition Clauses: Key Aspects in Company Law and Employment Law
Non-competition clauses are a valuable tool for both companies and employers to protect business interests. The aim is to prevent the use of internal knowledge, contacts and other competitive advantages for competing purposes.
A non-competition clause prohibits people from operating a business on their own account which competes with the company and from working or participating in a competing business.
Non-competition clauses are partly provided for by law or can be contractually agreed. The statutory rules aim to create a fair balance between the interests of the company and the economic freedom of the individual.
Company law non-competition clauses
Under Swiss company law, non-competition clauses are primarily relevant for managing directors and board members. For individuals with management responsibility, whether they also have shareholdings or not, the Swiss Code of Obligations in principle states that they must not undertake any activities which compete with the company.
However, the law does not impose competition restrictions on members (Gesellschafter) of a limited liability company (GmbH) or shareholders (Aktionäre) of a company limited by shares (AG). Such restrictions could, however, be included in the articles of association of a GmbH. In contrast, non-competition clauses for shareholders of an AG are only possible within the scope of a shareholder agreement.
If the prohibition on competing activities extends beyond the termination of the business relationship, this must be expressly agreed by executives as well as by members or shareholders.
Non-competition clauses in employment contracts
Employees are prohibited by law for the duration of the employment relationship from undertaking any competing activity, because of their fiduciary duty to the employer.
Non-competition clauses which exceed the termination of the employment relationship must be agreed in writing and must not unnecessarily hinder the employee’s economic progress. Any such clause must be restricted in terms of geographical area and purpose and may not exceed a maximum of three years.
Non-competition clauses in employment contracts will not apply if it can be proved that the employer no longer has a legitimate interest in enforcing it, or if the employment relationship is terminated and the employee is not responsible for the termination. Excessive non-competition clauses can be restricted by the courts.
Legal consequences of infringement
An infringement of a non-competition clause will primarily have civil law consequences. On the one hand, the infringement can represent good cause for terminating an existing contractual relationship and on the other hand can give rise to liability for damages.
Non-competition clauses frequently contain provisions for contractual penalties. A contractual penalty has the advantage that the violated party only needs to prove that the non-competition clause was infringed in order to establish a payment obligation.
Whether and to what extent any loss has arisen is not relevant, which makes it much easier to implement such claims through the courts. This is because, in practice, it can be very difficult or even impossible to evidence and quantify what financial loss has been caused by a prohibited competing activity.