Ercüment Erdem Att. Ozgur Kocabasoglu

Non-Competition Clauses for Employees: Limitation of Non-competition Clauses In Terms of Place, Time, Subject and Restriction Authority of the Judge

November 2017

Introduction

Provisions regarding non-competition agreements between employers and employees that limit competition liberty and economic future of the employees[1] are stipulated in Articles 444-447 of Turkish Code of Obligations numbered 6098 (“TCO”). Valid conclusions of non-competition agreements are subject to the conditions regulated in Article 444 of the TCO. If these conditions; i.e. employee’s capacity to act, a written agreement and legitimate interest of the employer that is worth protecting, are not present, or if there is no possibility of obtaining information for the employee regarding the circle of customers of the employer, production secrets or the works conducted in the workplace, or if there is no possibility that the employee may harm the employer, then the contract shall be subject to sanction of nullity and is, therefore, invalid[2]. According to Article 6 of the Turkish Civil Code, the burden of proof for the presence of the validity conditions stipulated by the TCO rests on the employer[3].

In addition, pursuant to Article 445/1 of the TCO, the obligation of non-competition of the employer as regulated by the non-competition agreement must be determined in a limited manner in terms of place, time and works that are within the scope of the prohibition; otherwise, Article 445/2 of the TCO recognizes the authority of the judge to limit extensive non-competition clauses in terms of scope or time:

The judge may limit the extensive non-competition clause in terms of scope and time by freely evaluating all the circumstances and the conditions, and by taking into consideration the opposing deed that may be undertaken by the employer, in a just manner.”

The Court of Cassation is of the opinion that the non-competition clause shall not be valid so long as it is not limited in terms of place and type of work, and limitations should be determined according to the characteristics of the work, and even to the features of the employee. Nevertheless, in this context, application of Article 445/2 of the TCO of the Court of Cassation demonstrates inconsistency. Below, decisions of the Court of Cassation in relation to this authority of the judge to limit non-competition clauses will be examined.

Practice of the Court of Cassation Regarding Agreements that were Terminated during the Term of Code numbered 818

Firstly, it is vital to indicate that according to the established case-law of the Court of Cassation, Article 349 of the Code of Obligations numbered 818 is applied to the non-competition clauses in the employment agreements that were terminated before the TCO’s entry into force. Pursuant to this provision, in a dispute before the Court of Cassation, the Court deemed invalid a non-competition clause stipulating that the employee cannot be involved in any kind of work or activity in the area of business of the company in three designated areas for a time period of two years after the termination of the contract, as the limitation of geographical area that incorporates a significantly large area could result in the financial destruction of the employee[4]. Although dissenting votes in the aforementioned decision indicate that the judge can uphold the agreement by exercising his judicial discretion by applying the provisions of Code of Obligations numbered 818, the Court of Cassation’s application in this respect appears to be consistent. Therefore, as there is no regulation that permits a judge’s intervention in the agreement according to Code of Obligations numbered 818, in contrast to Article 445/2 of the TCO, the sanction of nullity of the agreement shall be applied to the non-competition clauses that violate the law (that involves limitations that incorporate a significantly large scope, and that could result in financial destruction of the employee).

Practice of the Court of Cassation Regarding Agreements that were Terminated after the TCO’s Entry into Force

The Court of Cassation Decisions that Invalidates the Non- Competition Clause

The Court of Cassation’s case-law demonstrates inconsistency concerning the agreements involving non-competition clauses during the term of the TCO regarding the application of Article 445/2 of the TCO. In certain decisions of the Court, specifying the geographical limits of the non-competition clauses as being within the Republic of Turkey is deemed to be contradictory to Article 445/1 of the TCO, and considered so as to not specify any particular area. For this reason, the Court deemed the non-competition clause invalid as it violates the liberty of labor that is protected under the Constitution. In the dissenting vote of the aforementioned decision, it is argued that alleging that the agreement is invalid with respect to the same province, and even to the same neighborhood, by only giving the justification of inferring a considerably large area in the agreement, even if the agreement’s identifying the whole of the Republic of Turkey is not right[5]. However, in the aforementioned decision of the 11th Civil Chamber, Article 445/2 of the TCO is not mentioned, and the judgment is based on a constitutional justification regarding the liberty of labor.

Court of Cassation Decisions that Adopt the Opinion of a Judge’s Authority to Limit Non-Competition Clauses in a way that sustains the Clause

In many Court of Cassation decisions, it is emphasized that pursuant to Article 445/2 of the TCO, the judge may limit an extensive non-competition clause in terms of scope and time by freely evaluating all the circumstances and the conditions, and by taking the opposing action that may be undertaken by the employer into consideration, in a just manner[6]. In this respect, the Court of Cassation deems it inappropriate to render the non-competition clause invalid in agreements in which the limitation is made in a broad manner, without making an evaluation under Article 445/2 of the TCO. For example, the Court of Cassation reversed the decision of the first instance court that qualified an agreement stipulating a 5 year time limitation period for non-competition as a tying contract[7]. In this respect, the Court of Cassation reached the conclusion that under Article 445 of the TCO, the judge may limit this time period. According to the decision of the 11th Civil Chamber, in the event there is an extensive non-competition clause, taking the Constitution and other legislation provisions and the concrete case into account, the authority to make adaptation in terms of the scope and time of the prohibitions is granted to the judge, and this authority could be exercised both in a case of adaptation and in a case of compensation claims that would be commenced in case of a breach.

In terms of non-competition agreements that do not make any limitations, there is no consistency with regard to the Court of Cassation decisions. In a decision regarding the validity of a non-competition agreement that does not include any limitation, the 11th Civil Chamber analyzed the topic as follows:

“… Although provisions that stipulate non-competition inside the borders of the country are deemed invalid, limitation inside the borders of a province or a district could be seen valid as regards to the qualification of the case. In this specific case, when the provisions regulating the non-competition between the plaintiff and the defendant and the provisions referring to non-competition are evaluated, the fact that the time period for the non-competition in the noncompetition agreement is decided as one year, but there is no limitation with regard to the locus and business time is adopted as the reasons of invalidity, the claim is dismissed. However, it is stated in the agreement that the defendant employee cannot operate in the same context as the subject of the agreement in other companies and institutions operating in the same field. It is also stated that the non-competition shall be industry-specific and a penal clause shall be added in the event of infringement of the non-competition clause, irrespective of the existence of the company’s damage. The defendant worked in the claimant company inside the borders of … Province as sales manager and in the company where he lately started working with the title of sales manager, and his work field is determined as … Province … District. Although, there is no explicit regulation with respect to locus in the non-competition agreement, it is apparent that the defendant works in another company in the same sector, within the borders of the same province, under the same title. Moreover, it is understood that the defendant who is in the position of sales manager in the plaintiff company acquired information regarding the circle of customers of the company, and usage of this information is potentially harmful and to the detriment of the plaintiff company.”[8]

Therefore, the case-law of the Court of Cassation supports the opinion that the judge may sustain the agreement even if there is no limitation in the non-competition clause, provided that the employee works in the same area, operation field and type of work, in the specific case. Moreover, the Court of Cassation, in another dispute that it elaborated upon in this respect, is of the opinion that Article 445/2 constitutes a special provision with respect to the other provisions of law:

It may be inferred that the reasoning underlying this provision is to give the judge the authority to limit the non-competition clause at the legal and appropriate level by way of considering the equitable principles pursuant to Article 4 of the Civil Code, in the event that the non-competition agreement exceeds the limitations that are stipulated in the TCO. The sanction of nullity shall not be applied, as Article 445/2 of the TCO is deemed as a special norm with respect to Articles 27/1 of the TCO and 23/2 of the Civil Code. Considering these explanations, although the first instance court accepted that the sanction for the expression of “Whole World” in the agreement concluded between the parties was a nullity, Articles 445/1 and 2 of the TCO gives the judge the authority to take the measures to sustain the agreement against the excessive clauses and to interfere in the agreement. In this case, as the will of parties corresponds, there is no situation of nullity, but an invalidity that can be eliminated by the intervention of the judge.”[9]

The 11th Civil Chamber of the Court of Cassation, in another decision along the same line, emphasizes that Article 445/1 of the TCO stipulates locus and time limitation for non-competition clauses, and that pursuant to the second paragraph of this provision, the judge can limit the non-competition clauses in respect of scope and time in the event that they contain excessive limitations[10]. The 11th Civil Chamber, considering the fact that the employee has commenced work with another competitor enterprise, which operates in the same city as the employer, holds that alleging the nullity of the non-competition clauses, because the latter addresses a very broad geographical area, would be inconsistent with Article 2 of the Civil Code. In other words, in this case, the Court of Cassation acknowledges that the judge may use his/her authority to limit the non-competition clause under Article 445/2 of the TCO and sustain the agreement, if alleging the nullity of the non-competition agreement constitutes an abuse of right.

Conclusion

In conclusion, in the event that the labor agreement that is subject to the dispute is terminated during the term of the TCO, much of the Court of Cassation’s decision regarding the limitation of the non-competition clause accepts that Article 445/2 shall be applicable, and that the judges may use their discretion in cases where there is an extensive limitation, or where there is no limitation in the agreement. In these decisions, whereas the Court of Cassation leans upon various reasoning, generally, the Court considers the conditions of each case, and acknowledges the discretion of the judge to limit the non-competition clause in the event that the employee starts working in the same district as the employer, in its operation field, and under the same title. Nevertheless, there is also a Court of Cassation decision in which the Court ignored the judge’s authority to adapt the non-competition clause that contains extensive limitations, and held that the extensive non-competition clause is rendered invalid as it breaches the liberty of labor, as is protected under the Constitution. On the other hand, the Court of Cassation has established case-law determining that in the event that the agreement is terminated during term of Code of Obligations numbered 818, the judge may not sustain the non-competition agreement that is not in conformity with the legal limitations, and that the related contractual provision shall be deemed invalid.

[1] Eren, Fikret: Borçlar Hukuku Özel Hükümler, 2nd Edition, Ankara 2015, s.567.

[2] Süzek, Sarper: “Yeni Türk Borçlar Kanunu Çerçevesinde İşçinin Rekabet Etmeme Borcu”, İÜHFM

C.LXXII, S.2 s. 457-468, 2014, s.462.

[3] Süzek, Sarper: “Yeni Türk Borçlar Kanunu Çerçevesinde İşçinin Rekabet Etmeme Borcu”, İÜHFM

C.LXXII, S.2 s. 457-468, 2014, s.462.

[4] Court of Cassation 11. HD. , T. 16.3.2017 , E. 2016/2751, K. 2017/1589 , http://www.kazanci.com.tr/

(Access Date: 23.11.2017).

[5] Court of Cassation 11. HD., T. 14.5.2015, E. 2015/1789, K. 2015/ 6904, http://www.kazanci.com.tr/

(Access Date: 23.11.2017).

For examples see: Court of Cassation 11. HD, T. 10.5.2017, E. 2015/15290, K. 2017/2808; Court of Cassation 11. HD., T.19.4.2017, E. 2015/ 14741, K. 2017/2261; Court of Cassation 11. HD., T. 17.11.2016, E. 2015/12799, K.2016/8956; Court of Cassation 11. HD, T. 16.6.2016, E. 2015/12450, K. 2016/6672; Court of Cassation 11. HD., T. 30.3.2016, E. 2015/8396, K. 2016/3470; Court of Cassation 11. HD., T. 1.3.2016; E. 2015/1658, K. 2016/2244; Court of Cassation 11. HD., T. 22.2.2016, E. 2015/7354, K. 2016/1838 http://www.kazanci.com.tr/ ( Access Date: 23.11.2017).

[7] Court of Cassation 11. HD. , T. 19.4.2017, E. 2015/ 14741, K. 2017/2261, http://www.kazanci.com.tr/

(Access Date: 23.11.2017).

[8] Court of Cassation, 11. HD, T. 30.3.2016, E. 2015/8396, K. 2016/3470, http://www.kazanci.com.tr/

(Access Date: 23.11.2017).

[9] Court of Cassation 11. HD, T. 16.6.2016, E. 2015/12450, K. 2016/6672, http://www.kazanci.com.tr/

(Access Date: 23.11.2017).

[10] Court of Cassation 11. HD. , T. 22.2.2016, E. 2015/7354, K. 2016/1838, https://www.lexpera.com.tr

(Access Date: 24.11.2017).