Nullity of the non-competition clause

Legitimate interests of the company, restriction of scope and financial compensation   (Cass. Soc. May 22, 2024, n°22-17.036)   In a decision dated May 22, 2024, published in the Bulletin, the Social Division of the French Supreme Court (Cour de cassation) clarified the consequences, for both the employer and the employee, of the nullity of a non-competition clause.   As a reminder and as a preliminary, it should be noted that, according to established case law, a non-competition clause – because it constitutes an obstacle to the employee’s freedom of work/enterprise – must be limited in time and space; in addition, it must provide for the payment of financial compensation to the employee concerned, and be justified by the protection of the company’s legitimate interests (Cass. Soc. July 10, 2002, no. 00-45.135). Should the clause fail to meet one or more of these conditions, the judge may declare it unlawful and annul it. In this case, an employee had been hired as a “technical sales representative” by a company offering building aeraulics services, under an employment contract that included a one-year non-competition clause covering the whole of France, concerning “the trading, distribution or sale of all products relating to the distribution, diffusion, filtration, ventilation, insulation of all air ducts, fire protection, air treatment and in general all equipment relating to aeraulics in the building trade. ” Following the employee’s resignation, the employer brought an action before the industrial tribunal, seeking a declaration that the employee had breached the non-competition obligation, and an order to repay the financial compensation paid in this respect. In a ruling handed down on March 23, 2002, the Paris Court of Appeal held that: – the non-competition clause was null and void – insofar as its geographical scope was excessive and unjustified, particularly in view of the duties actually carried out by the employee during the course of his employment; – the employer’s request for reimbursement should not be granted, insofar as the latter could not obtain any restitution of the sums paid, since, although the employee had breached the clause, it was deemed null and void. The employer then appealed to the French Supreme Court, complaining that the ruling : – Declare the non-competition clause null and void, without having (i) concretely assessed the restriction on the employee’s freedom to work brought about by the said clause, and (ii) sought to preserve the said clause by limiting its geographical scope of application to the area corresponding to the legitimate interests of the company; – Dismiss his claim for reimbursement of the non-competition indemnity paid for the period during which he had not complied with the obligation set out in the cancelled clause. In its ruling of May 22, 2024, the French Supreme Court (Cour de cassation) overturned and annulled the appellate court’s ruling on the third part of this argument, holding that the trial judges should have examined whether or not the employee had breached the non-competition clause to which he was subject during the period in which the non-competition clause was in force.  

• Excessive restriction given the duties actually performed by the employee

The mere geographical scope of application of a non-competition clause does not, in itself, make it impossible for the employee to pursue a professional/entrepreneurial activity, so that a clause containing, for example, a ban on competition throughout France is not necessarily null and void (Cass. Soc. December 15, 2009, no. 08-44.847). It is only in conjunction with other elements, and more specifically the scope of the clause and the specific nature of the activity carried out, that the geographical scope of application can then characterize an excessive/unjustified hindrance to freedom of work (Cass. Soc. October 23, 2001, n°99-44.219). And in order to declare the non-competition clause null and void, it is up to the lower courts to establish, in the light of the evidence presented, how the employee is prevented from exercising an activity in keeping with his training, knowledge and professional experience (Cass. Soc. December 15, 2021, no. 20-18.144). In this case, the employer criticized the Court of Appeal for limiting its review of the proportionality of the non-competition clause to an in abstracto assessment of the geographical scope of the prohibition on competition alone, without establishing that the geographical scope, which covered the whole of France, made it impossible for the employee to carry out an activity in line with his training, knowledge and professional experience. However, the Court of Cassation disagreed, approving the Court of Appeal’s annulment of the non-competition clause in question: – After noting that “the competitive and changing nature of the company’s business”, as invoked by the employer, did not justify the restriction on the employee’s freedom to work, which was excessive in view of his qualification as a “technical sales representative” and the geographical area (i.e. Paris region) in which he was employed. And thus showed that this clause, taking into account the duties actually performed, was not indispensable to the protection of the company’s legitimate interests.  

• No reduction in the scope of the non-competition clause without a request to that effect from the employee

In its ruling of May 22, 2024, the French Supreme Court also clarified its jurisprudence concerning the possibility for a judge to reduce the scope of a non-competition clause. In principle, when a non-competition clause – even if essential to protect the legitimate interests of the company – does not enable the employee to pursue an activity in keeping with his or her training and professional experience, the judge may restrict its application by limiting its effect in time, space or other terms (Cass. Soc. September 18, 2002, no. 00-42.904). And this is precisely what the employer was arguing in this case, in the following terms: “while a non-competition clause is null and void when one of the conditions for its validity is lacking, the judge has the power to simply reduce the scope of the prohibition laid down by a clause that satisfies all the said conditions but is deemed excessive; the clause can then be applied within its new limits, insofar as it is proportionate to the legitimate interests of the company”.   However, this did not take into account the fact that the French Supreme Court had previously ruled, in the case of a non-competition clause incompatible with the stipulations of a collective bargaining agreement, that the judge could not proceed with such a reduction, provided that only nullity was invoked by the employee (Cass. Soc. October 12, 2011, no. 09-43.155). Accordingly, the French Labour Court rejected the employer’s argument, confirming the solution referred to above, beyond the context of a clause incompatible with the requirements of the collective bargaining agreement: if the employee does not ask the court to reduce the scope of the non-competition clause, but merely requests its outright annulment, then the court cannot do so of its own motion, nor can the employer make such a request.  

• Fate of financial consideration

Last but not least, in this ruling of May 22, 2024, the Social Division of the French Supreme Court (Cour de cassation) ruled on the consequences of an employee’s breach of a non-competition clause, even if the clause is deemed null and void by the judge. In principle: When a non-competition clause is annulled, the employee who has complied with this unlawful clause may claim compensation for the fact that the employer, by imposing a void obligation on him/her, has infringed his/her freedom to pursue a professional activity, on the basis of article L.1121-1 of the French Labor Code (“No one may restrict the rights of individuals or individual and collective freedoms in a way that is not justified by the nature of the task to be performed, nor proportionate to the aim pursued”) (Cass. Soc. November 17, 2010, no. 09-42.389). As a result, the employer is not entitled to claim restitution of the sums paid in respect of the financial compensation for the non-competition obligation which the employee has actually complied with, as the cancellation of the clause would have no retroactive effect. An employee who breaches the non-competition clause to which he is subject retains the right to payment of the financial compensation relating to the previous period during which he complied with his obligation (Cass. Soc. February 18, 2003, no. 01-40.194). However, the employee is no longer entitled to such compensation, even if he once again complies with his non-competition obligation (Cass. Soc. January 24, 2024, no. 22-20.926). Here, the High Court has applied its case law to the case of an employee’s breach of a non-competition clause deemed null and void, laying down the following principle: once the employer is able to prove that the employee breached the non-competition clause during the period in which it was effectively applied, he is well and truly entitled to claim reimbursement of the financial consideration thus unduly paid, as from the date on which the breach is established. Consequently, in order to reject the employer’s claim for reimbursement for breach of the non-competition clause, the Court of Appeal could not simply state that the said clause was null and void, without investigating whether or not the employee had actually breached it.   A common-sense decision.