26.06.2024

Skrevet af

Non-competition clause was forfeited

An employer could not obtain an injunction against a former employee performing consultancy work for a competitor. The district court found that the employer had forfeited the opportunity to enforce the non-competition clause, and the high court dismissed the appeal because the restricted period had expired. 

Skrevet af

Sara Baldus

Malene Langermann-Nielsen

The courts can, upon application, grant an interim injunction against an employee’s employment or business activities if the employee is in breach of an agreed non-competition clause and if the employer can prove or establish that it has the right that is sought protected. The interim injunction must subsequently be followed by legal proceedings to determine whether or not the employee has breached the non-competition clause. Interim injunctions are a pre-emptive measure aimed at preventing a breach until the actual proceedings are finalised, so the question is when an injunction is relevant and when it is too late? This question was addressed in a recent ruling by the Eastern High Court.

The case concerned an employee who had agreed a non-competition clause with their employer. The clause was applicable for 6 months after the effective date of termination, and the employee was entitled to compensation in accordance with the Act on Post-Termination Restrictions. In addition, the employee was required to pay an agreed penalty corresponding to 3 months’ salary in the event of a breach.

The employee resigned in June 2023 and left their position at the end of July. In September, another company announced that the employee would be performing consultancy work for them. Against this background, the former employer looked into the situation and, shortly after that, applied for an interim injunction against the employee’s performance of consultancy work for the competing company. Subsequently, the former employer also filed a claim against the employee for payment of the agreed penalty.

A question of sufficient interest
During the injunction proceedings before the district court, the employee and their trade union rejected being bound by the non-competition clause because the employer had not paid the minimum compensation under the provisions of the Act on Post-Termination Restrictions at the effective date of termination. At that time, the former employer had no basis for claiming breach of contract on the part of the employee. The former employer argued, however, that the employee had performed competing activities both during and after the resignation and that the employee had therefore forfeited their right to compensation, but that the employee was still bound by the clause.

The district court rejected the former employer’s application for an interim injunction on the grounds that the employer had forfeited the right to enforce the non-competition clause by failing to pay compensation. Among other things, the court emphasised that the employee had resigned and had not been dismissed summarily, and that it was not until after the effective date of termination, when a part of the compensation should have been paid, that the former employer came to the conclusion that the employee had breached their obligations.

The former employer appealed the ruling to the Eastern High Court approx. 2 weeks before the non-competition clause expired, and the High Court heard the appeal approx. 3 weeks later. The High Court did not decide whether the non-competition clause could be enforced, but the employer’s appeal of the district court’s decision was dismissed on the grounds that the High Court could not decide in injunction proceedings whether the employee had acted in breach of the non-competition clause at a time when the non-competition clause had expired. Thus, the former employer did not have sufficient interest in appealing the district court’s decision to the High Court.

Norrbom Vinding notes

  • that the ruling illustrates the importance of keeping in mind that the possibility of applying for an interim injunction etc. in connection with an employee’s breach of non-competition and non-solicitation restrictions will only be relevant if an ongoing breach can be stopped or prevented, and that this will not be the case if the employer chooses to pursue a breach by claiming an agreed penalty and damages but without applying for an injunction; and

  • that the ruling also exemplifies that it is a requirement for enforcing a non-competition clause that the employee receives compensation in accordance with the provisions of the Act on Post-Termination Restrictions.

The content of the above is not, and should not be a substitute for legal advice.