Turkey: Post Non-Competition Terms

Abstract: This essay discusses the validity of post non-competition terms as a result of the recent approach of the Turkish Court of Appeals which indicated in its two successive decisions that such clauses are invalid as they violate Turkish Code of Obligations as well as the Constitution of the Turkish Republic on the basis of restricting the freedom to work. In such regards the study emphasises the necessity of taking the competition law regulations into consideration while discussing the validity of such post non- competition terms.

Keywords: Post non-competition, freedom to work, restriction of contractual freedom and tying agreements.

11th Civil Chamber of the Court of Appeals held through its two recent and successive (with one year interval) decisions1 that the post non-competition terms are invalid since such terms initially violate the freedom to work, and besides they have the effect of restricting the economic freedom of the counter party that is under obligation. As such reasoning would have a negative impact on dynamics of the commercial and business life, it has been deemed necessary to analyse the issue by taking the relevant regulations of the Turkish Law into account.

1. Regulation Relating to Post Non-Competition Terms in Employment Agreements within the Turkish Code of Obligations

Employment agreements are dealt in a separate title within our study as they are kind of agreements which the issue of non-competition has specifically been regulated. The relevant chapter of the Turkish Code of Obligations ("TCO"), under certain circumstances accepts the validity of post non-competition terms that are imposed on the employee. This is a remarkable issue as the general tendency of the relevant chapter of the TCO dealing with employment agreements is to protect the employee against employers, as is in most of the jurisdictions. Accordingly, Article 444 of the TCO reads as follows:

"Employee, having the capacity to act, may undertake in writing against his employer not to compete after the expiry of the agreement in any manner whatsoever, especially via setting up a competitor enterprise for his account, working for another competitor enterprise or apart from that refraining from entering into a relationship with the competitor enterprise in which the employee aims to gain interest in any other kind".

Mentioning the above said provision as the general principle of post non–competition terms to be brought to the employee, it has also been indicated within the second paragraph of the same article (Art. 444/p.II) under which circumstances such post non-competition obligation shall be imposed on the employee and the following paragraph (Art. 444/p.III) deals with the limits of such clauses even if the conditions stipulated in the preceding paragraph are met.

Accordingly, post non-competition terms imposed on the employee shall only be justifiable if, the employee would have the available venue to obtain information regarding the clientele or production secrets or the commercial activities of the employer while performing his/her duties and besides, usage of such information obtained by the employee shall cause serious detriment2 to the employer. However, such post non-competition terms (even if such conditions exist) shall not include restrictions that may jeopardise the economical capacity of the employee in future and shall not exceed the time limit of two years except special circumstances. Additionally, the judge is authorised to interfere in the limits of post non-competition terms stipulated within the agreement (Art. 445/p.II).

As can be inferred from above, although it has been restricted through the regulation itself and that judges have been authorised to interfere in the content of post non-competition terms, such terms imposed on the employee are valid if the pre-requisites designated by law are met. Consequently, in case of breach of a valid post non-competition term by the employee, the employee shall be obliged to compensate the loss incurred by his/her former employer.

2. Regulation Relating to Post Non-Competition Terms in Competition Law

Within the foregoing section, post non-competition regulations for employment agreements, regulated under TCO have been explained in short. Apart from the referred articles, the TCO does not include any other specific regulation with respect to post non-competition obligations. However, the post non-competition obligation (as a concept) has been regulated in relation to vertical agreements under the Communiqué on Block Exemption on Vertical Agreements ("Communiqué) which has been implemented by the Competition Board.3

a. The General Purpose of the Law on the Protection of Competition and Secondary Regulations

The statement of the grounds of the Law on the Protection of Competition ("Competition Act") indicates that;

"All regulatory and prohibitive legal regulations related to preventing agreements between undertakings or decisions with the aim of affecting markets and restricting competition in respect of goods and services as well as concentrations leading to abuse of dominant position, monopolization or distortion of competition are called in short "competition law".

As can be inferred from above, competition law aims the effective establishment of competition and prohibits the agreements restricting competition. In this context, the approach of the competition law (together along with its secondary legislation) to the concept of non-competition (including post) clauses (defined as tying agreements) has the utmost importance and shall be decisive. It should be noted that the effect of competition law arise both in the area of public law and private law and therefore it has been defined as a composite law discipline.

b. Provisions of the Communiqué

The Competition Board is authorised (in line with Art. 5 of the Competition Act) to exempt agreements having certain qualifications and meeting certain conditions in block, from being defined as an anti-competitive agreement and to determine requirements for such exemption. In accordance with such authorisation, the Competition Board has issued the Communiqué numbered 2002/2, which is currently in force4. Through this Communiqué, agreements executed for purpose of composing distribution channels and have the pro-competition effect between undertakings are exempted from being defined as anti-competitive agreements in accordance with Art. 4 of the Competition Act, provided that they meet the conditions mentioned within the Communiqué. Vertical agreements are defined within the Communiqué as "agreements concluded between two or more undertakings operating at different levels of the production or distribution chain, with the aim of purchase, sale or resale of particular goods or services". It is clear from the definition that many important types of agreements fall into the scope of such definition.

c. Post Non-Competition Obligation As Regulated within the Communiqué

Non-competition obligation has been defined as "any kind of obligation, prohibiting the buyer from supplying (or producing itself) the goods or services subject to the agreement from any other supplier" under Art.3 of the Communiqué5. In principle, it is not possible to enforce a post non-competition obligation within the agreement. On the other hand, the Communiqué also stipulates exceptions on post non-competition obligations to be brought to the counter party. Accordingly a post non-competition obligation shall be justifiable provided that the conditions stated below6 are met in whole. In this respect a post non-competition obligation shall need to be;

  1. related to the goods and services which compete with the goods and services subject to the agreement,
  2. limited with the facilities and the land on which activity shall be displayed during the agreement term,
  3. obligatory to protect the know-how transferred to the party who requires to comply with post non-competition obligation,
  4. limited with the period of one year following the expiry of the agreement.

d. Evaluation

As can be inferred from the above mentioned, the Communiqué justifies the post non-competition obligations to be brought to the counter party only on very limited occasions. The utmost important restriction is the requirement related to the limitation of such obligation with the facilities and the land on which activity shall be displayed during the agreement term. This restriction, in its essence, points out the assumption that the clientele in fact belongs to the undertaking imposing the non-competition obligation and the perception by the customers that the new facility (store, shop, etc) belongs to a different undertaking would lead to the result that such customers would not prefer the new undertaking. In other words, the aim is not to impede the commercial activity of the undertaking which post non-competition obligation has been imposed. The aim is; to avoid the undertaking under obligation, to get advantage of the clientele of its former contractual party after the term of the agreement.

Foregoing perception is in conformity and integrity with the other condition of justifying post non-competition obligation; which is being obligatory for the protection of the know-how7 transferred to the undertaking under post non-competition obligation. The undertaking under post non-competition obligation, during the term of the agreement, obtains trade secrets and confidential information of the undertaking imposing post non-competition obligation, which can be converted into competitive advantage after then. This presumption puts forth the requirement of protecting the undertaking imposing non-competition obligation, even after the expiry of the agreement8. Besides all, the Communiqué limits the post non-competition obligation with a certain period and regulates that such obligation can only be imposed at most for a period of one year following the expiration of the agreement.

It shall be noted that the post non-competition conditions regulated under the TCO pertaining to employment agreements which are briefly discussed above are based on similar ratio legis with that of the Communiqué. Both regulations aim to prevent the usage of the know-how or the confidential information and trade secrets obtained by the party subject to post non-competition obligation against the interest of the party imposing such obligation, for a definite period of time. The actual goal is to protect the party imposing such obligation against unfair competition of the party subject to such obligation.

Besides, we see that the conditions set forth for justifying a post non-competition obligation under the Communiqué are more restrictive than the conditions regulated for justifying a post non-competition obligation regulated within the TCO in respect to the employment agreements. Above all, the Communiqué restricts the post non-competition term for a period of one year unlike the period stipulated under the TCO as two years. Additionally and as mentioned above, a post non-competition obligation regulated within the scope of the Communiqué, can only be imposed for the facilities or the land on which activity is displayed during the term of the agreement. In other words, with regards to the undertaking to which post non-competition obligation is imposed within the scope of the Communiqué, there is no need for any kind of further protection like the awards of the Court of Appeals limiting the post non-competition obligation imposed on employees with a certain geographical location in order to preserve the freedom of work for such employees. The provisions of the Communiqué are already in such nature providing de jure protection. The undertaking under post non-competition obligation shall not carry out its commercial activities at the facility or on the land that she used to operate during the term of the agreement, but is free to continue its activities anywhere else without any restriction.9

The last issue that we intend to tackle at this point is the legal status of a post non-competition obligation within a vertical agreement that is in breach with the conditions stipulated within the Communiqué. The post non-competition obligation imposed in contrary to the provisions of the Communiqué would not be eligible to be exempted from being defined as an anti-competitive agreement as regulated under Art. 4 of the Competition Act. However, this shall not automatically result that such an agreement term would be qualified ipso jure as an anti-competitive agreement.

Such term may be able to benefit from the individual exemption provided that it meets the conditions stated under Art. 5 of the Competition Act and may therefore still not be qualified as an anti-competitive agreement. Evaluation in this respect will be carried out by the Competition Board. In the event that the Competition Board resolves that the conditions stated under Art. 5 of the Competition Act are not met, the post non-competition obligation shall then be considered as an anti-competitive agreement.10 Furthermore, the contractual term relating to the post non-competition obligation shall be deemed invalid in line with Art. 56 of the Competition Act and the parties which incurred loss thereof will have the right to claim for compensation, based on tort liability.

3. Conclusion

As has been summarized above, competition law aims free and effective competition in the market and hence, the core aim is to protect public interest. Additionally, it has the aim of protecting the consumers as well. Consequently, competition law has generally been classified within the branch of public law rather than private law considering such targets which competition law aims to protect. With regards to non-competition clauses in general, competition law and other codes in private law (which the issue of non-competition has been regulated) are in opposite interaction as the aim of competition law is to eliminate every hindrance against free and effective competition, whereas the aim of non-competition clauses within the codes of the private law is to ensure that the parties do not compete for the specific term designated.11

However, it is worth to mention that even competition law, which aims to eliminate every hindrance against free and effective competition, justifies post non-competition clauses under certain conditions and for certain types of agreements12. Therefore, it shall not be appropriate to consider the post non-competition obligations (which competition law regulations justify under certain conditions in spite of being contrary to its existence – raison d'etre) invalid in private law on basis that they shall be regarded as "tying" clauses which restricts the working freedom of the party under obligation. From such perspective, it shall also be noted that the undertaking which is alleged to be tied and deprived of its freedom to work by virtue of the post non-competition clause, is one of the main elements' which competition law aims to regulate.

In today's business life, most types of agreements that regulate know-how transfer between parties include post non-competition clauses (which are brought taking the competition law regulations into account). Declaration of such post non-competition clauses as invalid under private law and especially with determination of being in breach with the basic principles indicated within the Constitution of the Turkish Republic ("Constitution"); will increase legal uncertainty with respect to many agreements having such character. Furthermore, such a perception would negatively affect the harmonisation process to acquis communitaire.

Moreover, aforementioned decisions of the Court of Appeals include explicit and implied determinations indicating that post non-competition terms are in breach with Art. 48 and following articles of the Constitution regulating "Freedom to Work and Contract". In line with this determination, the court of first instance which deals with a dispute concerning a post non-competition clause, shall refer the dispute to the Constitutional Court with the assumption that the regulations regarding post non-competition clauses13 are in breach with the said provisions of the Constitution. In such a case the court of first instance shall also adjourn the case until the determination of the Constitutional Court on the matter.

Due to all stated above, the evaluation with regards to a post non-competition clause as defined within the Communiqué shall be realized by the court of first instance (dealing with the dispute), on basis of its compliance with the conditions stipulated in the Communiqué. If, as a result of such evaluation, the post non-competition clause is determined to be in compliance with the conditions stipulated in the Communiqué, such a post non-competition term shall be deemed valid in line with the principle of freedom of contract.

SOURCES

Yılmaz Aslan, Rekabet Hukuku, Ekin Kitabevi, 3. Baskı, Ankara, 2005.

Akın Ünal, Kelepçeleme Sözleşmeleri, Adalet Yayınevi, Ankara, 2012.

www.legalbank.net

Footnotes

1 1-11th Civil Chamber of the Court of Appeals 2011/13747E, 2012/356K, dated 19.01.2012. 2-11th Civil Chamber of the Court of Appeals 2012/17736E, 2013/9814K, dated 13.05.2013 (www.legalbank.net)

2 The Court of Appeals held that each case needs to be evaluated considering its own features while determining the concept of serious detriment. (9th Civil Chamber of the Court of Appeals 2010/25792E, 2013/10539K, dated 28.03.2013, www.legalbank.net)

3 Furthermore, the concept which is indicated as "ancillary restraint" in competition law also refers to non-competition obligations. However, there is no regulation dealing with ancillary restraints. Ancillary restraints are defined as reasonable, objective restraints of competition limited with certain period, which may be inserted into merger-acquisition contracts.

4 Communiqués issued by the Competition Board namely Communiqué on Block Exemption on Exclusive Distribution Agreements numbered 1997/3, Communiqué on Block Exemption on Exclusive Purchase Agreements numbered 1997/4, Communiqué on Block Exemption on Franchise Agreements numbered 1998/7 are superseded by this Communiqué and their scope is extended by the same as well. Apart from that, the Communiqué on Vertical Agreements and Concerted Practices in Motor Vehicle Sector numbered 2005/4 is also in force.

5 In line with the definition of non-competition obligation; allowing the buyer to purchase up until 20% of the goods and services subject to the agreement from competitors during the term of the agreement, does not preclude such provision from being considered as non-competition obligation.

6 The reference EU legislation regulates the issue in the same way (Art.5/III of the Commission Regulation nr. 330/2010).

7 Know-how has been defined within the Communiqué as the non-patented, application oriented, confidential, substantial and specified information package obtained through the experiences and experiments of its owner. The concepts "confidential", "substantial" and "specified" are defined separately.

8 The underlying mentality of non-competition obligation is that the party subject to such obligation possesses information on the inside story of the business and therefore becomes aware of the secrets about such business, gain experience and get knowledge of the clientele. (Akın Ünal, Kelepçeleme Sözleşmeleri, Adalet Yayınevi, Ankara, 2012, p.145)

9 The obligation regarding the requirement of "acting as a prudent businessman while conducting business (Art.18/II of the Turkish Commercial Code ("TCC")), may be deemed as an indicator that an undertaking under post non-competition has well evaluated the risks associated with such obligation including the competency of carrying its commercial activities under existence of such an obligation.

10 In such a case, the administrative fine stated under Art. 16 of the Competition Act shall be imposed on the party/parties in breach with the Competition Act.

11 Yılmaz Aslan, Rekabet Hukuku, Ekin Kitabevi, 3. Baskı, Ankara, 2005, p.18,19.

12 Such types of agreements are vertical agreements as mentioned above and non-competition obligations set forth in such agreements are generally examined as the subject matter of competition law. Vertical agreements between gas stations and their dealers, franchise agreements including de-facto transfer of know-how as well can be mentioned as examples to such types of agreements.

13 The legal basis of the clauses might well be the TCO which regulates non-competition clauses for the employees (Art. 444 – 447), TCC (regulates non-competition clauses for agencies; Art. 123) or the Communiqué, scope and purpose of which are specified above.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Hikmet Koyuncuoglu
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