Competition Clause in Fixed-term Employment Contract Suspended

The Sub-district Court suspended the effect of a non-competition clause, included in a fixed-term employment contract, because the justification of the compelling business interest the employer had included in the clause to justify the agreement to that clause was insufficiently specific.
On 13 June 2022, a physiotherapist had started working at a physiotherapy practice under a fixed-term employment contract. The employment contract included a non-competition clause prohibiting the employee from entering the employment of another physiotherapy practice within one year of the termination of the employment contract in the employer's working area, consisting of a number of Amsterdam sub-communities, representing an area of ten kilometres around the employer's practice. The written justification of the employer’s compelling business interest in the non-competition clause, which is required for the legal validity of a non-competition clause in a fixed-term employment contract, stated that the employer had developed a vision and a new treatment method that was applied by few practices in the Netherlands only, that this vision and its protocols and treatment method would be explained to the employee and that the employer would suffer a loss of turnover if the employee were to teach them to other physiotherapy practices in the employer's working area.
On 1 September, 2022, the employee entered the employment of another physiotherapy practice in the employer's working area. By letter of 17 January, 2023, the employer summoned the employee to pay EUR 69,500 (EUR 500 per day) for forfeited fines. Subsequently, the employee applied for summary proceedings before the Sub-district Court to retroactively suspend the non-competition clause. To this end, he argued that there was no compelling business interest that would justify the inclusion of a non-competition clause in an employment contract and that the non-competition clause unfairly adversely affected him.
The Sub-district Court considered that the rationale behind the requirement of a written justification of the compelling business interest in a non-competition clause in a fixed-term employment contract is that it creates a dual disadvantage for the employee: a temporary contract on the one hand, and a limitation to find a new job on the other. That is why the standards set are high when it comes to assessing the compelling business interest. From the legislative history, the Sub-district Court deduced that the employer should give a case-by-case specific consideration and justification and that this justification may be based on the very specific knowledge or company information the employee will acquire and by which the employer would be disproportionately disadvantaged if the employee would switch to a competitor. According to the Sub-district Court, the employer did not meet this requirement because the justification did not focus on the employee. Since the justification was too general, according to the Sub-district Court there was a good chance that the judge in proceedings on the merits would rule that the non-competition clause was not legally valid and that, on that ground, the Sub-district Court judge would nullify the clause.
The Sub-district Court also held the opinion that the clause unfairly adversely affected the employee. According to the Sub-district Court, the employer had insufficiently specified that the employee had competition-sensitive information or that he had acquired so much client loyalty that the employer should fear that his clients will switch to the employee's new employer. The unique selling points of the employer's physiotherapy practice were insufficiently reflected .
For that reason, the Sub-district Court retroactively suspended the effect of the non-competition clause.

Case law shows that the additional requirement that applies to inclusion of a non-competition clause in a fixed-term employment contract, a written justification of the compelling business interest in that clause in a specific case, is a requirement very hard to be met by employers. Courts usually rule that the justification is insufficiently focused on the employee’s specific situation. This also happened in the above case, where we would believe that the justification is precisely tailored to the specific case. If this is not sufficiently specific, how much more precisely can and should it be described?
Another question that comes up is, if what is being justified also represents the reality: is the practice of the employer really so distinctive from other physiotherapy practices? During the hearing, the employer had argued that the problem was not so much the entry into employment with a competitor, but the loss of turnover resulting from the employee's departure and the difficulty of finding replacement. These interests, however, are not meant to be protected by a non-competition clause. Thus, the compelling business interest that the employer had described in the non-competition clause did not even exist.
In our opinion, however, this applies regardless of the question whether or not the justification was sufficiently specific. The same applies to the circumstance that the employment contract lasted just over two months. This may also be a reason to suspend the non-competition clause, but it does not give any answer to the question whether the justification of the compelling business interest was sufficiently specific.
The government has announced its intention to submit a legislative proposal that should make it more difficult to invoke a non-competition clause. This legislation is expected this year. Maybe, the requirement of a compelling business interest may also become applicable to employment contracts for an indefinite period. The question of what criteria for justification of the interest should be met to be sufficiently specific would become even more important then.
Finally, we are also very critical of the retroactive effect of the granted suspension of the non-competition clause. In our opinion, as a provisional measure suspension can apply only to the future. The question of whether or not the non-competition clause had been legally valid from the beginning is a question that is not at issue in summary proceedings, but in the proceedings on the merits. As an interim measure, the Sub-district Court might have ruled that the forfeited fines cannot be recovered, but no action to that effect had been brought.