Managing Restrictive Covenants in the European Pan-Nordic Region

Tuesday, January 26, 2016

Rasmus Christensen Plesner

Denmark rhc@plesner.com

Moderator & Speaker

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HOUSEKEEPING

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Please submit your questions via the Q and A box on the bottom right side of your screen and send them to “all presenters” to make it easier to respond. We will answer questions verbally but also in writing. If your question is not answered during the webinar, we will do our best to answer it afterwards.

Suvi Kettunen Castrén & Snellman

Finland suvi.kettunen@castren.fi

Speaker - Finland

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Sanna Alku Castrén & Snellman

Finland sanna.alku@castren.fi

Speaker - Finland

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Speaker - Sweden

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Frida MattssonVinge

Sweden

frida.mattsson@vinge.se

Lise Berntsen Kvale

Norway lbe@kvale.no

Speaker - Norway

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HOW TO PROTECT YOUR

CONFIDENTIAL INFORMATION

DURING THE EMPLOYMENT ?

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•  In Finland, the Employment Contracts Act sets forth the employee’s confidentiality obligation during employment.

-  Chapter 3(4): ”During employment, the employee may not utilize or disclose to third parties the employer's trade or business secrets.”

•  The law does not define the precise meaning of trade or business secrets.

•  The statutory confidentiality obligation does not continue after the employment, unless the employee has obtained confidential information unlawfully.

•  It is common and advisable to conclude a non-disclosure agreement that extends the employee’s confidentiality obligation also to the time after the employment.

FINLAND

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•  In Finland, the law does not restrict the use of non-disclosure agreements.

-  There are no statutory limitations to the scope of the employees with whom a non-disclosure agreement can be concluded with.

-  There are no statutory limitations to the term of the confidentiality obligation.

-  There are no statutory limitations to the amount of contractual penalties, but courts may adjust unreasonable penalties.

-  A non-disclosure clause in the employment agreement and a separate non-disclosure agreement are equally valid.

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FINLAND

•  In Finland, it is advisable to take the following issues into account when concluding non-disclosure agreements:

-  Term of the confidentiality obligation: Both during and after the employment without any limitations in time.

-  Definition of confidential information: Extensive but not exhaustive list of information that is considered confidential (e.g. all non-public financial information and information of customers, products, pricing, sales, R&D etc.).

-  Sanctions: Contractual penalty, typically corresponding to the employee’s 6 to 12 months’ salary.

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FINLAND

•  No general statutory confidentiality obligation. However, part of the ordinary loyalty obligation.

•  Trade secrets are protected in Section 19 of the Danish Marketing Practices Act.

•  Section 19 (2) applies both during and after the employment.

•  It is common to include a non-disclosure clause in the employment contract.

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DENMARK

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•  No statutory confidentiality obligation for employments

•  General duty of loyalty during the employment - Scope depends on type of business, position etc. - Vs. freedom of speech (e.g. on social media)

•  Act on the Protection of Trade Secrets (penal act) - Limited scope since it only applies to “trade secrets”

•  Contractual freedom on non-disclosure agreements - Definition of “confidential information” important - During and after the employment - Penalty clause

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SWEDEN

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•  No statutory confidentiality obligation for employments only •  The Penal Act

-  Unlawful use of, or making known to others, trade secrets obtained during an employment/engagement

-  Unlawful use of drawings , descriptions, formulas , models or similar technical aids in business activity obtained during employment/engagement

-  Unlawful acquirement of the above -  No limitations in time

•  Marketing Practice Act -  Trade secrets and "know-how”

•  Contractual freedom on non-disclosure agreements -  Information required by law to make known -  Unreasonable and contrary to good business practice

NORWAY

WHAT TYPE OF POST-

TERMINATION CLAUSES TO

INCLUDE IN THE EMPLOYMENT

CONTRACT?

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•  Non-competition clauses

•  Non-solicitation clauses

•  Non-hire clauses (non-solicitation of employees)

•  New rules coming into effect on 1 January 2016.

-  Applicable for all employees, however, the CEO is not comprised by the new rules.

Post-termination Clauses

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DENMARK

•  Non-hire clauses can no longer be agreed upon

-  Except in cases of transfer of undertakings; however, only for a maximum period of 6 months.

•  Non-hire clauses agreed upon before 1 January 2016

-  Written agreement with the affected employees.

-  Compensation payable to the affected employees.

Non-hire Clauses

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DENMARK

•  Very special position of trust -  Before: Special position of trust

•  Maximum enforcement period of 12 months -  Before: No maximum enforcement period

•  At least 6 months' seniority

•  Information on why the non-competition clause is necessary

•  Written agreement

•  Compensation

Non-competition Clauses - Requirements

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DENMARK

•  Only customers with whom the employee has had business relations in the last 12 months prior to termination

-  Before: 18 months or “customer list”

•  Maximum enforcement period of 12 months -  Before: No maximum enforcement period

•  At least 6 months' seniority •  Employee to be provided with a list of comprised customers in

case of termination

•  Written agreement •  Compensation

Non-solicitation Clauses - Requirements

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DENMARK

•  Fulfillment of the before-mentioned requirements in relation to non-competition and non-solicitation clauses

•  Maximum enforcement period of 6 months

•  Higher compensation

Combined Non-competition and Non-solicitation Clauses

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DENMARK

•  Non-competition clause or non-solicitation clause up to 6 months:

-  40 per cent of the salary per month. Compensation for the first 2 months paid out as a lump sum upon expiry of the employment. Compensation reduced to 16 per cent for 3rd to 6th month if the employee finds other suitable employment.

•  Non-competition clause or non-solicitation clause up to 12 months / combined non-competition and non-solicitation clause up to 6 months:

-  Compensation for the first 2 months paid out as a lump sum upon expiry of the employment. Compensation reduced to 24 per cent for 3rd to 6th month if the employee finds other suitable employment.

Compensation

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DENMARK

•  Non-competition and non-solicitation clauses may be terminated by the employer with a notice of 1 month.

•  Obligation to pay minimum compensation if the employment

relationship ends within 6 months after the termination of the clause.

•  If the employment relationship is terminated by the employer without the employee having provided reasonable cause for the termination, the non-competition clause is not enforceable.

Termination and non-enforceability

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DENMARK

•  Under the Swedish Contracts Act, covenants restricting competition must be reasonable in order to be valid.

•  There are no other statutory regulations on post-termination

clauses; the application of such clauses has been governed by a CBA from 1969, market practice and case law.

•  A new CBA came into effect on 1 December 2015 regarding non-competition clauses.

•  Employees in managerial positions are exempted from the CBA. •  Non-solicitation clauses (employees and customers) are still

governed by market practice and case law. •  No specific restrictions on combined non-competition and non-

solicitation clauses.

Post-termination clauses

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•  For employers who handle trade secrets, and who are likely to get harmed in terms of competition if such trade secrets are disclosed.

•  For employees who have access to, or become aware of, trade secrets and have a possibility to use such trade secrets in a way that may cause harm to the employer in terms of competition.

•  Maximum enforcement period of 9-18 months (as a main rule).

•  Compensation -  60 % of salary including variable parts such as bonus etc. -  Deduction of income from new employment

•  Penalty clause -  Six average monthly salaries

Non-competition clauses - Requirements

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•  In practice, similar requirements as for non-competition clauses but without the obligation for the employer to pay compensation.

Non-solicitation clauses (employees and customers) - Requirements

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SWEDEN

•  New rules came into effect 1 January 2016 -  Non-competition clauses -  Non-solicitation clauses -  Non-hire clauses (non-solicitation of employees) between the

employer and a company -  CEO may be exempted in a prior written agreement providing

him with severance pay

•  Non-hire clauses (non-solicitation of employees) between employer and employee -  Only void if unreasonable or contrary to market practice to

make applicable

•  No restrictions on combined non-competition and non-solicitation clauses

Post-termination Clauses

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NORWAY

•  Non-hire clauses between the employer and other companies can no longer be agreed upon. -  Except in transfer of undertakings

-  During the negotiations and up to 6 months after negotiations have been concluded without success; or

-  6 months after transfer date if the employees have been informed in writing

•  Non-hire clauses agreed upon before 1 January 2016

-  New laws apply from 1 January 2017

Non-hire Clauses

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NORWAY

•  Particular need for protection against competition -  Before: Not unduly restricts the employee's possibility to work or

go further than necessary to protect against competition

•  Maximum enforcement period of one year -  Before: No statutory limitations

•  Written agreement

•  Compensation -  Relates to G – the basic amount under the National Insurance

-  100 % of salary up to 8 G (currently approx. NOK 720 000) -  70 % of salary from 8 G and upwards, possible to cap at 12

G (currently approx. NOK 1 080 000) -  Before: None

Non-competition Clauses - Requirements

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NORWAY

•  Customers which the employee has been in contact with or responsible for, for the past year

-  Before: No limitations on the customers comprised by the restriction

•  Maximum enforcement period of one year

–  Before: No statutory limitations

•  Written agreement

Non-solicitation Clauses - Requirements

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NORWAY

Written statement from the employer •  Must state

-  If and to what extent the clause will be enforced -  For Non-competition clauses: why the clause is necessary (why

there is a particular need for protection) -  For Non-solicitation clauses: List of customers comprised

•  During employment •  Upon termination

Annulment of Non-competition and Non-solicitation clauses •  Failure to meet requirements prescribed by law •  Failure to provide written statement within deadlines •  Written termination of the non-competition clause from employer •  Reason for termination of employment

Common provisions for Non-competition and Non-solicitation Clauses

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NORWAY

•  In Finland, the Employment Contracts Act restricts the use of non-competition clauses

-  Applies to all employees; does not apply to CEOs -  Requires agreement between employer and employee

•  Requirement for ”particularly weighty reason” -  Nature of employer’s operations -  Business and trade secrets -  Special training given to the employee -  Employee’s position and duties

•  Not valid, if no particularly weighty reason exists or employment is terminated on grounds deriving from the employer

Non-competition Clauses

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FINLAND

•  In Finland, the maximum duration of non-compete obligation is 6 months

-  If employee is paid a reasonable compensation, may be up to 12 months

•  Agreement on contractual penalty instead of compensation for loss

is allowed -  Contractual penalty may amount to employee’s salary of 6

months at maximum

•  Aforementioned restrictions on the maximum duration and amount of contractual penalty do not apply to employees in certain managerial positions; however, clauses must be reasonable

Non-competition Clauses

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FINLAND

•  In Finland, no specific provisions in law -  No statutory limitations to the scope of employees with

whom a non-hire and non-solicitation clause can be agreed upon

-  No statutory limitations to the maximum duration of such restrictions and/or amount of contractual penalty, but courts may adjust unreasonable clauses

-  Usually, the duration is aligned with the duration of non-compete obligation (6 – 12 months)

Non-hire and Non-solicitation Clauses

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FINLAND

HOW TO DEAL WITH

SUSPICION OF

INFRINGEMENT?

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•  Which control measures can be taken by the

employer?

-  E-mail correspondence

-  Other data

-  Surveillance -  Routines when employments are terminated

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•  How to discover infringements?

•  How should an employer deal with suspicion of infringement?

-  Personal integrity and the right to privacy

-  IT forensics -  Termination of employment

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•  What actions can an employer take if confidential information is used by a competitor?

-  Worst case scenario - “Dawn raid”

-  Court actions

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•  Protection of personal data -  EU Directive on protection of personal data

(95/46/EC)

•  The Norwegian Working Environment Act

•  The Norwegian Marketing Control Act

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NORWAY

•  Control measures and implementation thereof.

•  The Danish Marketing Practices Act also protects against a competitor using trade secrets.

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DENMARK

•  The Finnish privacy laws restrict the controlling and/or discovering measures that the employer can take (e.g. surveillance of employees’ emails and other electronic data).

•  Depending on the nature of infringement, disciplinary actions such as termination of employment or warning, are possible

-  A mere suspicion without actual evidence may not suffice, as the employer bears the burden of proof regarding the employee’s actual misconduct

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FINLAND

HOW AND WHEN SHOULD YOU

SEEK PROTECTION AT COURT?

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Court actions •  Temporary precautionary measure

-  Stop the illegal actions from the employee/"new" employer -  Written or oral process -  Appeal

•  Ordinary legal proceedings for the main claim -  Action for declaration

-  Employee's actions are contrary to the restrictive covenants -  Restrictive covenants are valid

-  Compensation for economic and non-economic loss -  Basis of liability -  Documented economic loss -  Proximate cause

-  Liquidated damages

•  Actions towards -  The employee -  The "new" employer/company recruiting customers/employees -  The employee as a shareholder

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NORWAY

•  Precautionary measures -  Applicant’s strict liability for damages caused by unnecessary resort

to precautionary measure - Usually obligation to provide security for potential damage

-  Legal proceedings for the main claim to be initiated within one month -  The opposing party shall usually be reserved an opportunity to be

heard, unless it may endanger the function of the precautionary measure

•  Compensation for damages -  Employee’s liability to pay compensation for damages is somewhat

restricted, especially in case of slight negligence -  Due to potential difficulties in demonstrating the actual damage it is

recommended to agree on contractual penalty

•  Potential criminal sanctions for violation or misuse of business secrets

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FINLAND

•  The contract penalty may be set aside by the courts if the amount

of penalty is considered unreasonably high.

•  The courts have approved contract penalties amounting to approx.

3-6 months' salary.

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DENMARK

•  Temporary precautionary measures

- Securing evidence via “dawn raids” (only for IP infringements) •  Ordinary legal proceedings for the main claim

- Under the new CBA, disputes regarding non-competition clauses shall

be governed by arbitration

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QUESTIONS?

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