The Legal 500

An employee?s undertaking not to work for a competing company after termination of his or her employment is a common limitation in employment contracts of many employees in Israel. Due to increasing competition between companies, especially in the hi-tech industry, employers use various tactics to reduce the flow of employees and knowledge to competing companies. For many years, the trend in labor courts in Israel was to enforce non-compete clauses incorporated into employees? contracts so long as the restriction was reasonable in terms of the time limit, geographical area and the expertise of the employee. However, in recent years, the labor courts, in a number of dramatic decisions, reduced significantly the possibility of restricting employees from competing with former employers. Below are the main principles of the new trends, the problems resulting there from and practical recommendations to increase the chances of enforcing non compete clauses today.

1. Non Compete Obligations Will Be Enforced In Limited Circumstances Only

In general, according to the general attitude of the labor courts in Israel today, the freedom of individuals to work, the public and employees’ interest in free competition, the flexibility of employees’ movement and the free flow of professional knowledge are of great importance and take priority over the protection of employers’ property and the freedom of contract. Employees are perceived as the weaker party in negotiations with employers on their respective employment terms. Today it is therefore not enough that the employee has undertaken certain contractual restrictions limiting him or herself from moving to a competing company. The labor courts have ruled that the non-compete clause in personal employment contracts, should not in and of itself, be given much weight unless it is reasonable and protects the interest of both sides and the trade secrets of the former employer.

The new attitude of the labor courts in Israel is to provide less weight to the contractual perspective and to examine the non-compete provisions on a proprietary level according to “legitimate interests”. Therefore a “naked obligation” to not compete, i.e. one which does not protect a legitimate interest of the employer, will not be enforced.

An example of an employer’s legitimate interest is that of protecting its property such as its trade secrets and customer lists. The list of legitimate interests is not ‘closed’, and in considering such interests, the labor courts will consider the bona fide intentions of the parties and elements such as the decency and trust between the parties and general legitimate commercial attitudes.

To ensure that the non-compete provision in an employment agreement is enforced, the employer must first prove that at least one of the following special circumstances has been fulfilled:

a. If the employee is recruited to a competing company there is a real danger that trade secrets will be exposed;

b. Special training was provided in consideration for which the employee has undertaken to work for the former employer for a certain period of time and not to compete with such employer after termination of employment;

c. Special payment has been received by the employee in consideration for his or her undertaking not to compete against the former employer;

d. A special justification for enforcing the non compete clause in circumstances where there was a breach of trust between the employer and the employee and behavior which breached the good faith relations of the parties.

In practice, due to the above restrictions and criteria, in many instances in recent years, the labor courts have not enforced the non compete provisions of employers against their employees.

2. How To Increase The Chances Of Ensuring That The Non Compete Provision Is Enforced

It is recommended that the employer carefully draft the non-compete clause in the employment contract such that it reflects the recent trends in the labor courts. The employer should ensure that the clause is clear, precise and reasonable and drafted in such a way that it clearly reflects the employer’s intention that the aim of the clause is to protect the employer’s legitimate interest (such as protection of its trade secrets). In addition, agreeing on a special payment in consideration for the employee’s agreement not to compete may also assist in increasing the chances that the clause will be enforced.

Naturally each case will be examined on its own merits and the labor courts are ultimately the only body authorized to decide whether such provisions will be enforced or not. However, consulting a professional in advance in drafting the non compete clause in the spirit of the guiding principles set out by the labor courts may indeed increase the chances that such a restriction will be enforced today as well.

Dekel, Ofer
Karmon, Ofer

The GKH International Commercial Law Update is prepared as an informational service to clients and colleagues of Gross, Kleinhendler, Hodak, Halevy, Greenberg & Co., and the information presented is not intended to provide legal opinions or advice. Readers should seek professional legal advice regarding