Author: Hazel Coşkun Baylan
A non-compete covenant prohibits employees from competing on their own or a third party's behalf in the same field of activity as their former employer for a certain period of time after the termination of an employment contract. By the execution of a non-compete covenant, the employer aims to eliminate the risk of incurring a loss by preventing the information obtained by the employee about the business organization, production process and customer environment during their work from being used after the end of the employment relationship. Even if an employee undertakes a non-compete obligation, there is a risk that the employee may not fulfil it. In case of breach of a non-compete covenant, it can be quite difficult for the employer to calculate the damages arising from such a breach. In practice, therefore, such agreements often include penalty clauses. As per article 420 of the Turkish Code of Obligations No. 6098 (“TCO”), nonreciprocal penalty clauses in employment contracts designated only against the employees are invalid. In this article, the validity of non-compete covenants and penalty clauses stipulated for its breach, as an exception to the prohibition of penalty only against the employee, are examined through the decision of the 11th Civil Chamber of the Court of Cassation dated 6.1.2020 and numbered 2019/2294E. 2020/40K.
Review of the Decision of the Court of Cassation
The validity of a penalty clause set forth in a non-compete agreement executed between an employer and its employee was the subject of a decision of the 11th Civil Chamber of the Court of Cassation dated 6.1.2020 and numbered 2019/2294E. 2020/40K. In this lawsuit brought by the employer against the employee, an employment contract and a separate non-compete agreement were signed between the parties on 09.09.2013. Following the termination of the employment contract by the employee, the employee started to work in a third company operating in the same field of business. The employer filed a lawsuit, asserting that the employee directed the customers of the plaintiff company to the employee’s new employer and caused the plaintiff company to incur losses, and therefore breached the non-compete obligation. The employer requested the collection of a penalty amounting to TRY 250,000 as indicated in the non-compete agreement.
