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TURKEY: Recent interpretation of post non-competition terms in vertical agreements by the Turkish Supreme Court.

11th Civil Chamber of the Court of Appeals held through its two recent and successive (with one year interval) decisions[1] 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.

Hikmet KOYUNCUOGLU - 19.11.14
Country expert

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

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 detriment[2] 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

The post non-competition obligation (as a concept) has also 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

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 Law on the Protection of Competition (“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 force[4]. 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

A post non-competition obligation shall be justifiable provided that the conditions stated below[5] are met in whole. In this respect a post non-competition obligation shall need to be;      

i.       related to the goods and services which compete with the goods and services subject to the agreement

ii.       limited with the facilities and the land on which activity shall be displayed during the agreement term,

 iii.       obligatory to protect the know-how transferred to the party who requires to comply with post non-competition obligation,

 iv.       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.

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-how[6] transferred to the undertaking under post non-competition obligation. 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.

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.

Finally it shall be noted that, 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.

 

3. Conclusion

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 agreements[7]. 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.

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.

 

Hikmet Koyuncuoglu, franchising country expert for Turkey.

 

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

[6] 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.

 [7] 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.  

 

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