1. INTRODUCTION
In the employment agreement a clause can be included with regard to the activities of the employee after termination of the employment agreement: a non-compete clause. By means of a non-compete clause, the employer is able to prevent an employee from performing activities for a competitor or establishing his or her own business after termination of the employment contract. A non-compete clause will necessarily limit the employee’s freedom of employment.
Generally, non-compete clauses do not fall within the scope of Lithuanian labour legislation. They qualify as civil contracts and are therefore regulated by general principles contained in the Civil Code. However, the Civil Code only provides the basic principles of prohibition of competition by commercial agents (Article 2.164) and does not provide any rules about the conclusion, validity or enforcement of non-compete clauses. In practice non-compete clauses are executed in accordance with the basic guidelines set out in recent case law.
2. CONDITIONS
2.1 General
Lithuanian labour law does not set out any conditions for non-compete clauses. However, recent case law provides certain conditions that must be followed.
2.2 Age
There are no rules covering this point.
2.3 Written form
A non-compete clause must be executed in written form, which is either incorporated in the employment contract or signed as a separate document.
2.4 Renewal
In cases of renewal of an employment contract or any important change in the position of the employee within the organisation, it is also advisable to make sure that the non-compete clause in the initial employment contract remains applicable.
2.5 Liability for compensation on dismissal
Compensation for compliance with a non-compete obligation is the principle condition of validity of any such clause. According to the practice of the Lithuanian courts, a non-compete clause should establish fair and proper
compensation for the restrictions placed on employees’ rights, i.e. the right to freedom of employment. However, the Lithuanian courts have not laid down any minimum amount of compensation. Article 2.164 of the Civil Code provides that the compensation payable to a commercial agent is a matter of agreement between the parties and may amount to the annual payment to the agent. If a non-compete obligation is set to run for the maximum of two years, the minimum amount of compensation for compliance with it should be at least 50% of the employee’s monthly salary. In practice, this percentage is the most often used.
3. REQUIREMENTS
3.1 General
According to the practice of the Lithuanian courts, the purpose of a non-compete clause is to protect a business entity from unfair competition by its employee(s). Therefore, a non-compete clause must be connected to the employment contract and should be binding upon the employer and the employee during the employment relationship and after its termination.
Because the non-compete clause limits the employee’s freedom of employment, he or she must be made fully aware of the clause and its contents. Therefore, in order for a non-compete clause to be valid, it must be agreed in writing in an individual employment contract, or in a separate addendum to the employment agreement.
Date of Accuracy: 01/05/2010
Further, according to court practice, an organisation may exercise its right to release the employee from compliance with a non-compete obligation. If it does, no compensation is payable and the employee may compete with the former employer.
Case law provides certain requirements for validity of a non-compete clause and these are set out in the sections that follow.
3.2 Geographical, functional and temporal limitations
A non-compete clause should provide the geographical scope of the obligation. According to the recent case law, the exact territory within which the employee is prohibited to compete with the former employer should be indicated. With regard to functional limitations, the employer should, as far as possible, specify the activities of the employee that are forbidden after termination of an employment contract. A limitation which completely deprives an employee of the right to work after termination, may not be included in a non-compete clause.
Even though case law is silent on the maximum duration of a non-compete obligation, it can be established by analogy with Article 2.164 of the Civil Code. According to this Article, non-compete agreements with commercial agents may be concluded for a period not exceeding two years. In practice, non-compete clauses tend to be valid for one to two years.
3.3 Job changes
A change in the position of an employee does not influence the validity of a non-compete clause, unless otherwise agreed between the employer and the employee.
4. ENFORCEABILITY
4.1 General
According to the practice of the Lithuanian courts, non-compete clauses are recognised as enforceable if they aim to protect a legitimate business interest of the employer, do not limit the former employee’s rights excessively and meet certain conditions.
4.2 Balance of interests
Case law provides that a non-compete clause should maintain the balance between the parties’ interests. This means that the employer’s interests in protecting its business from unfair competition will be weighed against the interests of the employee in exercising his or her right to work. A non-compete clause may not automatically be concluded with any employee at all, but case law does not elucidate the criteria for the selection of employees who could be obliged not to compete with the employer in this way.
4.3 Remedies
A non-compete clause may be deemed void by the courts in accordance with the general principles on invalidity of contracts, provided in the Civil Code.
Employee
The employee may lodge an action either during the employment or after it has ended. The employee may ask the court for payment of compensation for observing the clause if the employer fails to pay it. Furthermore, the employee may also ask the court to annul or moderate the scope of a non-compete clause in an action on the merits.
Employer
If the employee does not comply with a non-compete obligation, the employer may apply to the court for specific performance.
4.4 Penalty clauses
In order to safeguard adherence to a non-compete clause, a penalty clause can be included in the employment contract. The penalty will consist of an amount corresponding, for example, to one month’s gross salary for every infringement, as well as an amount for every day the infringement continues. If the parties have agreed upon a penalty clause, it can be claimed in court without the employer having to prove actual harm or financial loss. The
reason for the claim will simply be for breach of the non-compete clause.
The employer should include a reasonable penalty for breach of the non-compete clause, that is, one which is high enough to deter the employee from breaching the clause (or the new employer from paying the penalty) and low enough to prevent reduction of the penalty in court. The court has the power to reduce the penalty and this cannot be excluded by contract.
4.5 Damages
If the parties have not agreed upon a penalty clause, the employer may also claim damages from the employee for breach of the non-compete clause. When claiming damages however, the burden of proof for the actual loss lies with the employer. It is possible to claim both the penalty and damages in excess of the penalty, from the employee.
4.6 Liability of new employer
Not only the employee, but also the new employer can act wrongfully against the former employer. In general, a new employer will not be liable for damages by the mere fact that it has hired an employee who was known to be
restricted by a non-compete clause. Special circumstances can however imply liability for the new employer, for example where the new employer knew the employee was bound by a non-compete clause and has hired the employee in order actively to approach the customers of the competitor by making use of trade secrets that the employee gained in his former position. Actions of this kind may amount to unfair competition. The burden of proof of these circumstances lies with the ex-employer.
5. SPECIAL SITUATIONS
5.1 No clause
If no non-compete clause applies, the employee is free to enter into service with a direct competitor or start a competing business of his or her own. In addition, the employee may aim at the same market and customers as the ex-employer.
The employee will only be liable for damages, if he or she acts wrongfully against the former employer either as a self-employed person or as a representative (e.g. employee) of a business. The court may deem the actions of the former employee or his or her new employer as unfair competition if, for instance, the employee systematically contacts the customers of the ex-employer whilst making use of the knowledge and information that the employee had gained during his employment with the ex-employer. The burden of proof of this wrongful act lies with the ex- employer.
5.2 Transfers of undertakings
In cases of transfers of undertakings, all rights and obligations of both employer and employee will transfer to the transferee, unless otherwise provided in the relevant agreement. This includes any rights and obligations pursuant to a non-compete clause.
5.3 Cross-border competition
A non-compete clause should contain a geographical limitation. In most cases the limitation will be within the territory of Lithuania. However, it is also possible for parties to agree upon a far more extended region, e.g. the EU. Further international law problems might arise if the employee moves abroad and starts working from there for a competitor within the scope of a Lithuanian non-compete clause. The employer might then face the situation where it needs to start legal proceedings locally either to enforce a Lithuanian judgment or to ask the local court to rule on a Lithuanian non-compete clause. How successful this might be will very much depend on local rules in combination with international law.
5.4 Non-solicitation clauses
Non-solicitation covenants prevent an employee from approaching the former employer’s customers and soliciting former colleagues to work with him or her. There are no criteria set for non-solicitation clauses either in Lithuanian labour law or in recent case law. Note that in practice non-solicitation clauses are usually incorporated into non- compete clauses.
5.5 Insolvency
There are no rules regulating the enforcement of a non-compete clause where an employer has become insolvent.
5.6 Enforceability of foreign non-compete clauses
If a foreign employer has already obtained a judgment in its own jurisdiction it may try to enforce this judgment in Lithuania, based on international agreements and/or EU law. Depending on the circumstances of the case, before enforcing the judgment the foreign employer might need to ask for recognition of the judgment by the competent Lithuanian courts.
Should the foreign employer ask for an injunction in Lithuania, assuming that the Lithuanian court is competent, it will, in principle, be required to follow the chosen foreign law and rule accordingly, both with regard to the validity of the clause and its scope.