Ruling on non-compete obligations

At a glance

• The Curia, Hungary’s most senior court (Court), decided that competitive activities include future potential competition.
• Even if the company where the ex-employee is now employed has not yet introduced competing products or services to the market, this does not preclude the possibility of the courts determining a violation of the non-compete obligation.

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Background

Post-termination restrictions play an important role in the protection of the business interests of the employer. Such restrictive covenants prevent former employees from joining a competing company right after the termination of their employment, inserting a ‘cooling period’ between the termination date and the date of joining a competitor.

If an employee disregards these restrictions, the former employer may initiate a lawsuit for compensation of damage arising from the breach of the restrictive covenants by the employee. If parties agreed on liquidated damages, the former employer must prove the fact of the breach only; there is no need to prove the actual amount of damage suffered.

In such litigation cases it is often a matter of proving whether the new employer shall be considered a competitor or not.

The case at hand

According to a recent decision of the Court, the competitive activities also include future potential competition. The Court found that employees breach the non-compete obligation if they join a company which had made efforts and investment to start a new business with competing products or services. The fact that the company has not yet entered the market with the competing products or services would not prevent the courts from establishing a breach of the non-compete obligation and to oblige the employee to pay liquidated damages to the former employer.