Non-compete covenants: An overall analysis of the institution in light of the legislation in force and different case-law orientations
8 Ottobre 2021
Thanks to Giulia Conforto for collaborating on this article

A very recent order from the Supreme Court of Cassation (No. 23723 of September 1, 2021, the “Order”), whereby a clause included in a non-compete covenant that only allowed the employer to waive the agreement during the course of the relationship was deemed null and void, provides an opportunity for broad analysis of the institution of a non-compete covenant between employer and employee.

 DEFINITION AND SCOPE

A non-compete covenant, regulated by Section 2125 of the Italian Civil Code, is a written agreement between employer and employee whereby the parties agree to extend loyalty obligations pursuant to Section 2105 of the Italian Civil Code, imposed on the employee during the execution of the relationship itself, for a period following termination of the employment relationship.

By means of this agreement, the employer offers the employee compensation designed to prevent the employee from carrying out, on their own or on behalf of others, competing activity at the end of the employment relationship.

A non-compete covenant, which can also be signed at the end of a contract, cannot, however, prejudice the entire future activity of the employee, nor disproportionately limit development of their professional expertise.

Section 2125 of the Italian Civil Code establishes specific requirements to which the validity of the agreement itself is subordinate.

In particular, a non-compete must: a) be drawn up in writing; b) establish a limit of the obligation with respect to subject, territorial scope, and duration; c) provide a monetary indemnity for the employee.

 PERIMETER OF THE OBLIGATION

The perimeter of the obligation must be kept within certain limits of subject, time, and place.

  • Beginning with the subject, the prohibited activity must be expressly identified in the agreement. This activity may concern duties carried out by the employee but also other company activities within a boundary, as stressed repeatedly by the Supreme Court of Cassation (seeg., sentence no. 15253 of December 3, 2001 and sentence no. 7835 of April 4, 2006), that cannot be so wide as to prevent the former employee, at the end of their contract, from disproportionately compromising their earning ability and professional expertise.
  • If the territorial area is too wide, the employee’s future potential must be safeguarded via introduction of a limitation referring only to certain areas, as there is a strong risk that establishing a very wide geographic area could, in the case of litigation, lead to the agreement being declared null. For example, case law has deemed limitation to the entire world valid, as long as the subject limitation was tightly restricted.
  • The third issue concerns duration, which, obviously, cannot go beyond certain limits: a maximum of three years (five for executives, Dirigenti in Italian) starting from the termination of employment. Any longer term will not be applied and will be reduced to the maximum limit provided by the regulation.

For indemnity, the regulation does not give any particular indications; however, case law has stressed that the indemnity must be reasonable, both in relation to the conditions imposed on the employee and in view of the limits arising from the agreement. Case law (e.g., Supreme Court of Cassation, Order no. 23418 of August 25, 2012) has also noted that the agreement must not provide symbolic or manifestly unfair or disproportionate compensation in relation to the sacrifice required of the worker and the reduction of the worker’s earning potential.

TERMINATION OF THE COVENANT

A non-compete covenant can only be terminated with the consent of both parties: clauses that entrust the possibility of termination to the employer alone are therefore to be considered null and void. The order of the Court of Cassation at issue also falls under this interpretative framework. That order affirmed that the provision of termination of the non-compete covenant, left to the arbitrary decision of the employer, constitutes a clause that is null and void due to conflict with mandatory regulations.

According to the Supreme Court, withdrawal from a non-compete agreement while the relationship is ongoing cannot be justified, given that the mutual obligations were “codified and crystallized” at the time of stipulation. These obligations cannot be terminated at a later date, given that the effects are already underway and cannot be affected by unilateral termination at the will of the employer.

In the opinion of the court, attaching the covenant to the contract from the start prevents the employee from planning future employment, restricting the employee’s freedom: said restriction, therefore, cannot take place without the employer taking on an obligation to compensate for it, and that obligation would end up being excluded if the employer were allowed to free itself ex post from that constraint.

On these grounds, the Supreme Court upheld the appeal filed by the employee, establishing her right to receive the amount agreed upon by way of a non-compete agreement.

CONCLUSIONS

In view of the above, we recommend that a clause that gives an employer the right to terminate a non-compete covenant during the course of a relationship be accompanied by provision of a fair indemnity to compensate the employee for any sacrifice already suffered.

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