Trade secret and employees’/ partners’ prohibition for exercising of competing activity

 

One of the most common questions we receive from young entrepreneurs is whether it is possible to run their own business during or after the termination of their employment relationship, given the non-compete clauses in their contracts, as well as what their situation would be if they are partners.

In order to provide an answer, a number of questions should be explored, and with this article we will try to address as many scenarios as possible.

 

  • Prohibition of competition after termination of the employment relationship

After the repeal of Art. 15 of the Protection of Competition Act (“PCA”) (Ed. 1991), the Commission on Protection of Competition (“CPC”) established a constant case law saying that there are no violations of the PCA in cases where former employees have undertaken competing to their previous employer activities, despite the fact they have signed declarations or annexes to their employment contracts, which prohibit this (CPC Decision № 29 of 11.03.2003 on case with entry № CPC – 156/2002, CPC Decision № 935 of September 17 on case with entry № CPC-354/2009).

There is plenty of case law on the issue. According to the Supreme Administrative Court (“SAC’’), with the annulment of Art. 15 of the PCA (1991) “the idea of the legislator was obviously to encourage free competition with all the favourable effects from it… Therefore, in their economic activity, traders must take into account the fact that the prohibition on ex-employees to engage in a competitive to their employer activity for up to three years from the termination of the employment contract has been lifted, and thus to develop, as an employer, such a market policy, which would guarantee against any competitive business from former employees. Signed declarations or clauses in the employment contracts of such employees, with which they oblige not to engage in competitive economic activity, have no legal value, because they contradict the idea of free and rapid development of the Bulgarian market by stimulating competition and are therefore contrary with the accepted principles of morality as per Art. 26 of the Obligations and Contracts Act (SAC Decision №. 246/15.01.2004 on Administrative Case № 3921/2003; SAC Decision № 8921/22.07.2008 on Administrative Case № 3376/2008).

A number of acts of the Supreme Court of Cassation (“SCC”) also incorporate the idea of inadmissibility of the prohibition of competing after the termination of the employment relationship (Decision № 656 of 25.10.2010 on case № 1954/2009, IV; Decision № 417 of 21 May 2010 on case № 1228/2009, III; Decision № 535 of 30 June 2010 on case 309/2009, IV). Firstly, they emphasize that the agreement, which restricts employees from competing for a period of time after the termination of the contract, violates the constitutionally recognised right to engage in work. Next, the employer has no right to prohibit his employees, who have specialised in a specific area, from choosing an occupation after the termination of their employment “as this would mean to restrict their right to engage in work in the future, which is the reason such a clause to be considered void”.

 

  • Prohibition to engage in competitive activity after termination of participation in the company as a partner

The prohibition to establish legal entities by persons who were partners and managers of companies, competitive to the newly formed one, established by the norm as per Art. 15, para. 1 of the PCA of 1991, was lifted with the repeal of this law. The existing prohibition on competitive activity as per Art. 142 of the Commerce Act (“CA) affects the managers of legal entities only while they execute the role. Therefore, signed agreements, which prohibit partners and managers from establishing or participating in competing legal entities have no legal value, as they contradict the principles of free business initiative, stimulation of competition and the right of every business entity to participate on the relevant market /Decision № 8921 of 22.07.2008 of the Supreme Administrative Court of the Republic of Bulgaria, VII/.

The case law of the Supreme Court of Cassation is consistent, that the right, as per Art. 48, para. 3 of the Constitution of the Republic of Bulgaria, to choose an occupation and place of work, shall not be subject to actual refusal or restriction, expressed in a private agreement, including as a clause of an employment contract, respectively other agreement. In this regard is  also Decision № 417 of 21.05.2010 on civil case № 1228/09 г., III, SCC.

The right to work and choose an occupation is imperatively guaranteed by Art. 48, para. 3 of the Constitution. The case law is clear that a restriction on this right could not be a subject of a legal transaction. Therefore, the forfeiture agreementin case of a failure to comply with such a restriction is null and void. The case law is consistent that the provision of Art. 48, para. 3 of the Constitution of the Republic of Bulgaria is relevant not only to legal relations, established under an employment contract. In this regard is Decision 417 of 21.05.2010 on civil case № 1228/09, III, SCC; Decision 682of 16.12.2010 on civil case 2132/08, IV, SCC.

 

  • Prohibition on disclosure of trade secrets

During the time of the relevant relationship and after its termination, the employee/partner must protect the manufacturing and trade secrets of the employer/company.

The Trade Secret Protection Act (“TSPA”), promulgated on 05.04.2019, regulates the terms and procedure for protection against unlawful acquisition, use and disclosure of trade secrets. The TSPA is not the only law that governs trade secret issues. Legislation is also available in the Protection of Competition Act (“PCA”).

According to the TSPA, “trade secret’’ is any commercial information, know-how and technological information that simultaneously meets the following requirements:

  1. is secret in such a way, as a whole or in its exact configuration and combination of elements, that is not generally known or easily accessible to persons from the areas, where such type of information is commonly used;
  2. has a commercial value due to its secret character;
  3. in relation to it, measures have been taken to keep it confidential from the person, who has control over the information.

The definition of trade secret excludes irrelevant information and the experience and skills acquired by employees in the normal course of their work, and information that is generally known or easily accessible to persons from the areas, where such type of information is commonly used.

As per the legal definition given in § 1(9) of the Additional  Provisions of the PCA “Industrial or trade secret“ shall mean facts, information, resolutions and data related to business activities, the confidentiality of which is in the interest of their rightful owners, in view of which the latter have taken appropriate measures.

The above definitions clearly show that they do not contradict each other. On the contrary, they complement each other.

It is also clear that not all, but only a certain type of information should be regarded as a manufacturing or trade secret – one that has been explicitly declared by the eligible company and which protection has been guaranteed by the necessary measures.

When determining information and facts, which are considered as a company and trade secret, most companies use an approach for defining trade secret as all available information, related to the performed business activity. Such an approach contradicts the purpose of the law /CPC Decision № 319 of 30.03.2017 on case with entry № CPC-577/2016/.

Including the same clauses in all the employment contracts, additional agreements, declarations and others, related to the employment contract documents, signed by all employees of the company, containing confidentiality obligations regarding all available company information, do not meet the requirement for undertaking special measures from the enterprise to protect its trade secret. The trade secret should be specified in an appropriate for the features of the business and the organisation of the company manner, in specific types/categories of data, documents or processes, or in any other appropriate way that creates clarity and certainty of confidential information and the persons who have the right to use it, the persons who have access to trade secret information and what measures have been taken to preserve that information and data. Law ensures the provision of specific data, protected by special means after a management decision has been made.

 

  • Restriction of the possibilities of signing additional employment contract with another employer

As per Art. 111 of the Bulgarian Labour Code, the worker or employee may also conclude employment contracts with other employers for a job outside his working hours under his primary employment relationship (outside additional work), unless otherwise stipulated by his individual employment contract under his primary employment relationship. This norm has been often analyzed in the Bulgarian labor law theory and thus it can be generally concluded that such a prohibition is admissible in the individual employment contract.

 

  •  Prohibition to engage in competitive activity in another form, in parallel with the existence of an employment relationship

As we mentioned above, the provision of Art. 111 of the Labour Code allows the prohibition of employment under additional employment, but not in other forms: performance under a civil contract, pursuing a freelance profession, establishing or partnering in a company, etc. Outside the scope of the above-mentioned restriction to conclude a second employment contract, remain a number of other forms in which competitive activity may be pursued, in parallel with the existence of an employment relationship. At the same time, however, there are scenarios in which the employee’s liability may still be held.

Let’s have a look at the following example: Ivan Ivanov, an employee, works simultaneously under an employment relationship with the employer “X” OOD and establishes his own company “Ivanov” EOOD with the same or similar subject of activity as that of the employer “X” OOD. In carrying out the activity of the newly established company Ivan Ivanov takes advantage of information about clients, partners, counterparties of his employer, as he contacts them and negotiates for the benefit of the newly formed company and thus attracts clients of the employer.

In this way, Ivanov used in bad faith his position to start, facilitate and develop his independent business activity, which creates a competitive advantage for “Ivanov” EOOD, that also leads to the obstruction of contracts of the employer “X” OOD with its customers.

The actions of ”Ivanov” EOOD, expressed in the use of information about the activity, customers and partners of “X” OOD, initiating and maintaining contacts with them and providing services, through current employees of the competitor and without his knowledge and consent, represent a complex behavioural pattern, conducted in violation of the good faith and the established practices of trade – expression of unfair competition in accordance with the rule of Art. 29 of the PCA. Such behaviour damages the interests of competing companies, as “Ivanov” EOOD acquires unjustified competitive advantage through unfair methods. In accordance with the provision of Art. 2, para. 1, p. 4 of the PCA, the law also applies to individuals when they commit or assist in committing a violation under the CPA. Thus, in addition to “Ivanov” EOOD, Ivan Ivanov himself will be responsible for unfair competition.

In practice, other scenarios may arise where the employer, in one form or another, may still be able to hold the employee liable. Therefore, the broad interpretation of Art. 111 of the Labour Code on the possibility of working in other forms, in parallel with the existence of an employment relationship, should not be taken unambiguously and every specific case should be considered in the light of specific facts and circumstances.

 

*Without pretending to be all exhaustive, we hope that the current article will be of use to you.

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