Landmark decision by the Czech Constitutional Court on the employer’s right to walk away from a non-compete clause

On 21 May 2021, the Constitutional Court issued a ruling (Case No. II. ÚS 1889/19) which represents a major departure from the Supreme Court case law on withdrawal from non-compete clauses: the Constitutional Court found that a withdrawal from a non-compete clause by an employer for which no reason was given is not automatically null and void.

In a case that made it before the Constitutional Court, an employer and an employee had agreed on a non-compete clause during the existence of the employment agreement between them. The employer committed to the payment of financial compensation to the employee for their observance of the undertaking not to compete with the employer’s business for a period of six months from termination of the employment. In the non-compete clause, the parties had agreed that the employer should be allowed to walk away from the non-competition arrangement at any time during the existence of the employment relationship, by giving written notice, without having to give any reason. The employer eventually made use of this option to withdraw from the non-compete clause before the employment agreement had expired. The employee believed this withdrawal to be invalid and therefore sued for payment of an amount corresponding to the financial compensation which they would have received were it not for the (invalid, in their eyes) withdrawal from the non-compete clause. The Ostrava District Court, the Ostrava Regional Court, and finally the Supreme Court all found in the employee’s favor, whereas their judgments were based on the settled jurisprudence of the Supreme Court – which in the past had adjudicated that for a withdrawal from a non-compete clause to be admissible, it is not enough that this option be agreed as a part of the clause, but the parties must moreover agree on the specific reasons for which the employer may withdraw from the non-compete clause. These reasons may never be of such nature as to allow for an abuse of the right at the expense of the employee. Given that a withdrawal from a non-compete clause without giving reasons could cause material harm to the employee’s interests and infringe upon their financial circumstances, such an act – said case law – was null and void.

As one can see, the Supreme Court perceived non-compete clauses to be a tool which ensures legal certainty in relation to the employee, which is why they should primarily be considered valid and operative, and why any withdrawal from them on the part of the employer should be reviewed to strict standards. The Supreme Court also emphasized the fact that a non-compete clause represents a contractual relationship between the employee and the employer, and concluded, with reference to the principle of pacta sunt servanda, that the stability of employment relationships deserves protection; within such a relationship, employers should only be allowed to walk away from the non-compete clause for pre-agreed, narrowly defined reasons.

The Constitutional Court was tasked with the decision whether the previous decisions by the general courts may be considered constitutional, and whether the inferred prohibition of an employer’s withdrawal from a non-compete clause without giving reasons really means that such withdrawal is null and void even where the parties expressly agreed that it should be allowed.

In its deliberations, the Constitutional Court arrived at the conclusion that the primary objective of non-competition clauses is to protect the interests and rights of the employer. For the employee, on the other hand, this legal institution means a restriction, so that the non-existence of any non-compete clause is actually in the employee’s interest. According to the Constitutional Court, any judicial review of a withdrawal from such clause by the employer must certainly take into account such criteria as the moment in which the withdrawal occurred, i.e., whether the employer did so very shortly before the lapse of the term of employment, the rationale behind the withdrawal, and a number of other circumstances. However, the fact that no reasons were given for the withdrawal need not mean, in and by itself, that the act of withdrawing from the non-compete clause is necessarily null and void.

In the view of the Constitutional Court, the constitutionally protected autonomy of the will to contract and the freedom of contract do not merely offer the choice to negotiate and agree on the terms of an obligation (i.e., here, the non-compete clause), or the content of contractual parties’ mutual rights and obligations, but also the choice to agree on the terms under which such an obligation ceases to exist. The Constitutional Court then looked into the issue of judicial law-making and found that the absolute nullity of contractual arrangements which enshrine an option for employers to withdraw from non-compete clauses without giving reasons had been inferred by the judiciary in an unconstitutional manner. The conflict with the constitutional order, in the eyes of the Constitutional Court, was rooted in particular in a failure to adhere to the purpose of the law and a faulty understanding of the principles behind the legal system. The Constitutional Court also considered it important that the arguments presented by the Supreme Court were not strong and substantive enough to support the notion that a withdrawal without stated reasons should be null and void even though this does not follow from the language of the Labor Code. On the other hand, the Constitutional Court concedes that in individual cases, the withdrawal from the non-compete clause may be disproportionate, and may even represent an abuse of rights.

All these facts ought to be taken into account on a case-by-case basis where a withdrawal from a non-compete clause has occurred. On a general level, nothing prevents an employer from negotiating a withdrawal option that is unlimited in time and unlimited as to the grounds for withdrawal, but on the other hand and in practical terms, the employer will always have to act in accordance with the law and cannot abuse its option to withdraw from the non-compete clause to the employee’s disadvantage. However, in the new light of the Constitutional Court decision, agreeing on an option for withdrawal from a non-compete clause without giving reasons no longer causes the absolute nullity of such withdrawal. In other words, the decision discussed in this article allows for the conclusion that the withdrawal from a non-compete clause, based on a previous agreement which anticipates the possibility of such withdrawal, will on balance tend to be valid and operative.

Ruling II. ÚS 1889/19 by the Constitutional Court

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