Non-Compete Agreements

NON-COMPETE AGREEMENTS

Introduction

The rapid increase in competition in today’s business life has brought about the necessity for companies to protect their trade secrets, customer portfolios, and production strategies. In this context, the legal system has envisaged various mechanisms in order to prevent the knowledge and experience acquired by employees from being used against their former employers. One of these mechanisms is the non-compete agreement, which is added to employment contracts and imposes on the employee an obligation not to compete for a certain period after the termination of the employment relationship.

In Turkish law, the non-compete obligation is essentially regarded as an extension of the employee’s duty of loyalty; however, the non-compete obligation for the period following the termination of the employment contract is specifically regulated under Articles 444 to 447 of the Turkish Code of Obligations. In addition, Article 396 of the TCO explains the employee’s duty of loyalty and non-compete obligation toward the employer during the continuation of the employment relationship. On the other hand, in the event that the employee violates the non-compete obligation, the employer acquires the right to terminate the employment contract for just cause pursuant to Article 25/2 of the Labor Law.

However, non-compete agreements are important not only in the context of the employee–employer relationship, but also in terms of preventing unfair competition among employers. Such agreements serve to balance labor mobility while limiting information leaks, customer losses, and unethical conduct within the sector.

Legal Nature and Validity Conditions of the Non-Compete Obligation

A non-compete agreement is a binding agreement that restricts the employee from engaging in activities similar to the employer’s field of activity for a certain period after the termination of the employment relationship and is supported by legal sanctions. The purpose of such agreements is to protect the employer’s trade secrets, customer information, and marketing strategies that have been transferred to the employee. However, since this restriction limits the constitutional freedom to work, it is subject to strict validity conditions.

According to Article 444 of the Turkish Code of Obligations, the following conditions must be met for a non-compete agreement to be valid:

• Written Form Requirement: A non-compete agreement is valid only if it is concluded in writing. This rule aims to facilitate proof and to prevent arbitrary restriction of the employee’s fundamental rights.
• The Employee Must Have Had Access to the Employer’s Customer Portfolio or Production Secrets: The law accepts the employee’s access to the employer’s customer base, production methods, or business activities as the basis for the non-compete obligation.
• The Use of Such Information Must Be Likely to Cause Damage to the Employer: The restriction must protect a legitimate interest. For example, there must be a possibility that the employee may gain unfair advantage by using such information in their own business or transferring it to another employer.

Moreover, for a non-compete agreement to be enforceable, it must be limited in terms of place, duration, and subject matter. If any of these three elements is not explicitly determined, the judge may determine these limits ex officio (TCO Art. 445). In practice, excessive restrictions such as “nationwide applicability, a duration of five years, and covering all sectors” are deemed invalid by the Court of Cassation.

In this respect, the non-compete agreement has a mixed structure that aims to balance both the employer’s economic interests and the employee’s professional freedom of movement. Exceeding the limits of the agreement may lead to legal sanctions and may also constitute a violation of the employee’s constitutional rights.

Non-Compete Agreements Between Employers

Conceptual Framework

In Turkish law, there is no directly regulated concept of a “non-compete agreement” between employers. However, agreements between employers that restrict competition are evaluated primarily within the framework of Law No. 4054 on the Protection of Competition, as well as unfair competition, protection of trade secrets, the duty of loyalty, and the principle of good faith, and they give rise to significant legal consequences in practice.

Such restrictions are mostly encountered within the scope of franchise agreements, dealership relationships, partnership agreements, or know-how and consultancy relationships between companies.

Areas of Application

Non-compete arrangements between employers often arise in the following situations:

• Including a non-compete clause in an agreement to prevent one of the parties from operating in the same sector after the termination of a partnership.
• Provisions in dealership or distributorship agreements that require one party not to engage in similar activities in the same sector for a certain period after the termination of the agreement.
• Restrictions imposed in franchise systems to ensure that the franchisee does not act independently in a manner that would compete within the same sector.

Such agreements are evaluated within the framework of Article 4 of the Competition Law and the general provisions of the TCO, particularly freedom of contract (Art. 26), the principle of good faith (Art. 2), and the prohibition of abuse of rights (Art. 2/2).

Validity Conditions

The validity of non-compete agreements between employers depends on compliance with the principle of proportionality in terms of:

• Duration,
• Geographical area,
• Subject matter,
• Sectoral scope

Unfair Competition and Protection of Trade Secrets (TCC Art. 54 et seq.)

Although non-compete obligations are not directly regulated between employers, the provisions on unfair competition under Article 54 et seq. of the Turkish Commercial Code come into play. In particular, the transfer or use of a former employer’s trade secrets by a person who has left the employment relationship, either for a new employer or in a newly established company, constitutes unfair competition.

Pursuant to TCC Art. 55/1-c, the unauthorized use of trade secrets may give rise to separate tort liability even if it does not constitute a violation of a non-compete obligation. In such cases, the injured employer may claim compensation, cessation and prevention of the act, and even publication of the judgment.

Competition Authority and the Prohibition of Restricting Competition

In some cases, non-compete arrangements between employers are subject not only to private law scrutiny but also to public law oversight. Pursuant to Law No. 4054 on the Protection of Competition, agreements between two companies that restrict competition may be reviewed by the Competition Authority. If such agreements involve objectives such as restricting free competition, abuse of dominant position, cartel formation, or price fixing, significant administrative sanctions may be imposed.

For example, in mergers and acquisitions, non-compete obligations imposed between the parties are valid only if they are limited to a “reasonable duration and area.” Otherwise, they may be subject to proceedings under Law No. 4054.

Legal Grounds of the Non-Compete Obligation Within the Framework of the Turkish Code of Obligations and the Labor Law

TCO Art. 396: Duty of Loyalty and Non-Compete During the Term of Employment

Article 396 of the Turkish Code of Obligations regulates the employee’s duty of loyalty toward the employer and the non-compete obligation as a reflection of this duty during the term of the employment relationship. The relevant provisions are as follows:

• TCO Art. 396/1: The employee may not act contrary to the obligations arising from the employment contract and is obliged to show loyalty to the employer.
• TCO Art. 396/2: Without the employer’s consent, the employee may not provide services to a third party and, in particular, may not engage in competition with the employer.

Pursuant to this article, the employee may not directly or indirectly compete with the employer in the same field during the term of employment. In the event of a breach of the non-compete obligation, the employer may have the right to claim compensation, and in some cases, the act may constitute a just cause for termination under the Labor Law (Labor Law Art. 25/II).

TCO Arts. 444–447: Conditions of the Post-Termination Non-Compete Obligation

The non-compete obligation that continues after the termination of the employment contract is regulated under Articles 444 to 447 of the TCO.

TCO Art. 444: Conditions:

A non-compete obligation is deemed valid only if the following conditions are met:

• The employee has obtained information regarding the employer’s customer portfolio, production secrets, or business relations.
• Such information is of a nature that may cause damage to the employer.
• The agreement is concluded in writing.
• The duration, geographical area, and scope of activity are determined in a proportionate manner.

According to the Court of Cassation, a non-compete obligation imposed on an employee who has acquired only general information is not valid. Access to specific and employer-specific information is required.

TCO Art. 445: Limitation and Judicial Intervention:

This provision regulates that the non-compete obligation must include reasonable limitations. In particular, the limits regarding duration, area, and scope of activity must be specific and proportionate. The judge has the authority to narrow down restrictions deemed excessive.

TCO Art. 446: Termination of the Non-Compete Obligation:

Pursuant to this article, the non-compete obligation automatically terminates if the employer waives it in writing or if the employment contract is terminated due to the employer’s fault. In addition, the employer has the right to withdraw from such waiver within three months from the date of waiver.

TCO Art. 447: Sanctions:

An employee who violates the non-compete obligation becomes obliged to pay the contractual penalty and may also be required to compensate the employer’s actual damages. If a contractual penalty is stipulated in the agreement, there is no need to prove damages for that amount. However, the employer must prove the existence of the violation.

Labor Law Art. 25/II: Immediate Termination and Non-Compete Obligation

Article 25/II of the Labor Law regulates cases granting the employer the right to terminate the employment contract for just cause and with immediate effect. Certain subparagraphs of this provision are directly related to violations of the non-compete obligation:

• 25/II-e: Acts such as abuse of the employer’s trust, theft, or disclosure of the employer’s trade secrets.
• 25/II-ı: Unauthorized use of the employer’s documents or engagement in activities that may cause damage to the employer.

Such acts are evaluated as both a breach of the duty of loyalty and a violation of the non-compete obligation. In this case, the employer may terminate the contract immediately and claim compensation.

In the decisions of the Court of Cassation, for terminations based on these grounds to be deemed valid, the violation must be of a serious nature and must undermine trust.

Legal Consequences of Breach of the Non-Compete Obligation

General Overview

A breach of the non-compete obligation refers to liability arising when the employee or employer acts contrary to the provisions of the restriction. In the event of a breach, sanctions may arise both from contractual non-performance and from acts constituting tortious conduct.

In general, the consequences that may arise in the event of a breach include:

• Application of the contractual penalty clause,
• Compensation for damages incurred,
• Requests for interim injunctions to stop the violation,
• Termination and immediate termination of the employment contract for just cause,
• Filing an unfair competition lawsuit.

Contractual Penalty (TCO Art. 447)

Article 447 of the Turkish Code of Obligations regulates the contractual penalty in the event of a breach of the non-compete obligation:

“An employee who violates the non-compete obligation is obliged to pay the agreed contractual penalty. The contractual penalty may be applied even if no damage has occurred.”

Pursuant to this provision, if a contractual penalty included in the employment contract is clear, specific, and reasonable in amount, it may be claimed directly in the event of a violation. There is no need for the employer to prove damages; however, if the employee denies the violation, the burden of proof lies with the employer.

According to the case law of the Court of Cassation, the contractual penalty must not be excessive. The judge may reduce an excessive penalty ex officio pursuant to TCO Art. 182.

Compensation Liability

In addition to the contractual penalty, the employer may also claim compensation for damages incurred. Such damages may consist of material or moral losses, such as loss of customers, decrease in profit margins, or damage to reputation due to the employee’s breach of the non-compete obligation.

However, if a contractual penalty has been agreed upon and the agreement stipulates that it “does not prevent compensation for damages,” the employer may claim both the contractual penalty and additional damages. In this case, proof of damage is required.

Termination and Immediate Termination for Just Cause

An employee’s breach of the non-compete obligation may constitute a just cause for termination under Article 25/II of the Labor Law in an ongoing employment relationship. In this case, the employer may:

• Terminate without observing the notice period,
• Terminate without paying severance pay,

and immediately terminate the employment contract. In addition, if the employee’s breach involves intent to cause damage to the employer, such conduct may also give rise to criminal sanctions such as abuse of trust or disclosure of trade secrets.

Interim Injunction and Action for Prohibition

Upon learning of the employee’s breach of the non-compete obligation, the employer may immediately request an interim injunction from the court. Through such injunction, the employee may be prevented from starting a new job or the current activity may be suspended. In addition, pursuant to Articles 117 et seq. of the TCO, the employer may file an action for prohibition to stop, prevent, and restore the previous state due to the breach of the non-compete obligation. Such actions are frequently used, particularly in cases involving the use of trade secrets, acquisition of customer portfolios, and claims of unfair competition.

Unfair Competition Lawsuit (TCC Art. 54 et seq.)

If the employee’s breach of the non-compete obligation also constitutes unfair competition within the meaning of Article 54 et seq. of the Turkish Commercial Code, the employer additionally has the right to file a lawsuit on this basis. Pursuant to TCC Art. 56, the following actions may be filed:

• Determination of unfair competition,
• Prevention of unfair competition,
• Elimination of the consequences of unfair competition,
• Material/moral compensation,
• Publication of the unfair competition.

In this context, the Court of Cassation explicitly considers the transfer of customer lists to a new employer, removal of internal company data, or leakage of sectoral information as unfair competition.

Conclusion and Evaluation

The non-compete obligation is a sensitive and multidimensional legal institution that seeks to establish a balance between economic freedom and the protection of trade secrets for both employees and employers. Proper understanding and application of this institution are of great importance for the balanced protection of the parties’ interests in employment relationships.

An employee’s engagement in competition with the employer constitutes a clear violation of the duty of loyalty and the principle of good faith. For this reason, a non-compete obligation has been imposed during the term of employment under Article 396 of the TCO, and the employee’s obligations toward the employer have been shaped on the basis of a relationship of trust. In certain cases, the employee’s ability to compete with the employer is restricted even after the termination of the employment contract. In regulating these cases under Articles 444–447 of the TCO, a delicate balance has been sought between the employer’s legitimate interests and the employee’s economic future.

In particular, where the employee has had access to the employer’s customer portfolio, production secrets, or commercial information, it is possible to impose a non-compete obligation toward the employer. However, for such a restriction to be valid, it must be limited to reasonable measures in terms of duration, location, and subject matter. Otherwise, the non-compete obligation becomes an excessive restriction of the employee’s right to work and is deemed invalid.

Between employers, although there are no direct provisions similar to TCO Arts. 444 et seq., it is possible to restrict competition within the framework of freedom of contract and the principle of good faith. However, it should be remembered that such arrangements may result in unfair competition, market monopolization, and significant administrative fines imposed by the Competition Authority.

The sanctions applicable in the event of a breach of the non-compete obligation cover a wide range. Pursuant to TCO Art. 447, various remedies are available, including claiming the contractual penalty, compensation liability, termination of the employment contract for just cause, interim injunctions, and unfair competition lawsuits. However, for these sanctions to be applied, the violation must be clear, provable, and based on the contractual provisions.

In conclusion, when drafting non-compete agreements, both labor law and obligations law provisions must be taken into account, and a fair balance between the parties must be observed. In line with the case law of the Court of Cassation and doctrinal opinions, the validity and enforceability of such agreements can only be ensured through compliance with the principle of proportionality, the written form requirement, and objective assessment criteria.

Sincerely,

Atabay Law Office