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Recent court cases bring Lithuanian non-compete agreements into question

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Recent court cases bring Lithuanian non-compete agreements into question

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Although non-competition agreements between employer and employee are not prohibited in Lithuania, there is a gap in the regulation of covenant not to compete. Lithuanian Labour Code and Civil Code do not specifically govern noncompete agreements, but there is a possibility to apply the Civil Code by analogy. Therefore, the case law and especially judgements of the Supreme Court are of crucial importance while interpreting non-compete agreements. Up to now the duty to pay non-compete compensation to an employee was set forth by the judgements of Lithuanian Supreme Court only in such cases when his/her possibility to compete was limited after the termination of employment relationships.

However, in two recent cases the court clearly established that compensation must be paid not only for non-competition after the termination of employment but also during the employment.

First Judgement of 12 February 2016

Facts: An employee submitted a claim against his employer for wrongful dismissal. The employee was dismissed because of a gross violation of labour discipline as he during his work time, did not perform his duties. By signing an employment agreement, the employee undertook without prior employer’s permission directly or indirectly not to work, act or participate in any other company or business outside the- employer’s company. However, the employee by using the employer’s car and petrol promoted another company’s goods and acted in the interest of his spouse, but not in his  employers. The lower courts agreed that the employee had committed violation of the labour discipline, however, the imposed sanction was too severe, and established that noncompeting obligation restricted an individual’s constitutional right to choose work, therefore, recognized the noncompetition agreement null and void. The employer disagreed with the lowest courts’ decision and brought a cassation claim before the Supreme Court.


Judgement of the Supreme Court and its reasoning

The Supreme Court upheld the decisions of the lower courts stating that the non- competition agreement- requesting prior permission of the employer and setting forth the obligation directly or indirectly not to work, act or participate in any other company or business outside the employer’s company- to some extent restricted the person‘s right to freely choose job and occupation established by the Constitution of the Republic of Lithuania and at the same time restricted the person‘s chances to receive higher income. The Court further noted that such restriction in all cases should be of fixed-term and accordingly it should establish compensation adequate to the restriction.

Second Judgement of 24 March 2016

Facts: An employee, a PR manager of a regional museum, had a non-compete agreement under which the employee agreed.

The employer terminated the employment due to a gross violation of the labour discipline, namely for unlawful competition with the employer, solicitation of customers and improper performance of job regulation. The employee submitted a claim against her employer for wrongful termination of the employment agreement. Lower courts found the non-competition agreement null and void due to the reason that no compensation was established and paid.

However, the courts stated that the employee had breached her duty of loyalty, prescribed by the Labour Code by competing unlawfully with the employer and solicitation of its customers. The employer disagreed with the lower courts’ decision and brought a cassation claim before the Supreme Court.

Judgement of the Supreme Court and its reasoning

The Supreme Court upheld the decisions of the lower courts. By evaluating non – competition agreement, the Court noted that a non-compete covenant that is valid during the employment relationships must be compensated. As the compensation for the restrictions to compete was not established and was not paid, therefore the aforementioned non-compete obligation was duly recognized null and void by lower courts.

According to the Supreme Court, the sanction (termination of the employment) for the violation of labour discipline was too severe.

Comments

The two judgments made by the Supreme Court rotated its interpretation of the terms for invalidity of non-competition agreements by 90 degrees. The Court set forth that the compulsory payment shall be paid to an employee during the employment for the restriction to work or be engaged in the same activity as the employer’s activity.

Following the former practice of the Supreme Court it was crystal clear that a relevant compensation must be paid to the former employee after the termination of employment agreement, and there was no need to pay an adequate compensation during the term of employment. The obligation not to compete with the employer, not to solicitate the employer‘s employees and customers is a cornerstone of the employee‘s duty of loyalty to the employer. It is reasonably understandable that a salary which is paid by the employer to an employee covers this restriction not to compete. But the aforementioned judgements of the Supreme Court deliver the message that non-compete agreements executed with employees that do not provide for the compensation during the validity of employment relationships may be acknowledged as null and void by the court.

Furthermore, the employees that do not compete with the employer and do not receive non-compete compensation could apply to the employer requesting to pay a compensation for noncompetition during the validity of employment relationships.

On the other hand the ongoing a full-scale employment and labour law reform in Lithuania should resolve all vagueness in the regulation of non-competition agreements and the new labour code based on the best examples from the western countries will provide clear rules for the business and employees.

It is recommended for the time being to review non-compete agreements concluded with employees and to assess whether the restrictions established whereby are not too strict and (or) to set forth the terms providing in providing in what cases the compensation should also be paid during the validity of employment agreement.

First published on Ius Laboris Global HR.