Case Law Clarifies the Legality of Noncompetition Clauses

Dutch employment law changed significantly in 2015. Most of those changes were related to termination and severance, but some other changes have received less attention. One of those changes concerns using noncompetition clauses. Some recent cases have shed light on when they may be lawfully used.

Prior to 2015, there was no restriction on the use of a non-competition clause in an employment agreement, provided it was agreed upon and set out in writing. At the time, if there was a significant change in position or an extension of a contract, contracts may need to be reviewed to ensure restrictions are still suitable. Generally, that position remains unchanged. However, under a new provision introduced in 2015, a noncompetition clause is—in principle—no longer allowed in a fixed-term contract.

There is an exception to the rule: if the employer can demonstrate why there is a pressing need for a noncompetition clause for a specific employee and this rationale is included in the contract, a noncompetition clause may be permissible in a fixed-term contract. Given the fact that this is an exception to the rule (and that Dutch employment law tends to favor the party deemed to be weaker; i.e., the employee) the bar is fairly high for the applicability of this exception.

This phenomenon was borne out by case law that followed relatively soon after the change, which consistently overruled noncompetition clauses in fixed-term contracts where the justification was too general, such as where it related to the company as a whole and not the specific position of the specific employee that was burdened with the clause.

However, more recent case law has been more favorable to employers and demonstrates that if an employer puts sufficient effort into the justification argument, the noncompetition clause can survive a challenge in court, even if the clause is used for more than one specific position. In one case, a clause that applied to different employees (who had the same job title but quite different backgrounds and diverse work) survived a challenge. A key reason for this is that the fixed-term contracts contained a general description of the knowledge that the employees would get during their employment and the damage that would occur if that knowledge fell into the hands of competitors. Their claim that the clause was too generic given that it applied to different people did not result in nullification of the clause.

Comment

As a result, employers may still want to evaluate whether or not a noncompetition clause is warranted in a fixed-term contract. Employers may want to pay close attention to the wording and justification rationale when using a noncompetition clause, which remains a useful tool in these times of fierce competition and increasingly mobile employees.

Written by Arco Siemons of Wieringa Advocaten and Roger James of Ogletree Deakins