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Penalty for breach of fidelity clause contrary to Danish Salaried Employees Act

March 2005 - Employment. Legal Developments by Norrbom Vinding Law Firm, member of ius laboris.

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Judgment from the Danish Eastern High Court.

The case concerned the question whether an employee, M, was in breach of a fidelity clause and a non-competition clause.

M was employed with the company S as an IT worker. M's employment contract contained a duty of fidelity pursuant to which M was prohibited from being active or interested in other undertakings with the exception of the undertaking personally owned by M. The latter was, however, conditional upon the said undertaking not in any way carrying on any business competing with S. Any one breach of the said clause would entail an obligation on the part of M to pay an agreed penalty in the amount of DKK 50,000.

Further, the contract contained a non-competition clause pursuant to which M was prohibited from competing with S anywhere in Denmark within specified business areas for a period of 12 months.

Following M's termination, when M reminded S of payment of compensation for the non-competition clause, S claimed that M was in breach of the said clause by carrying on an independent business within the same business area. S later submitted that M was also in breach of the duty of fidelity during the employment.

As for the duty of fidelity, the Eastern High Court based its judgment of 28 October 2004 on the naming of M's business as the rightful owner of a program developed by M's business prior thereto, but applied vis-Ă -vis one of S's clients, not being contrary to the duty of fidelity as the director of S was found to have known that the said program was developed by M's business.

In respect of certain consultancy assignments carried out by M, the High Court found that such assignments were competing with the activities of S, and that M was therefore in breach of the duty of fidelity. Based thereon, the court fixed an estimated compensation at DKK 50,000 to cover the loss which S had suffered by the breach; the court did not order M to pay the agreed penalty as the agreement thereon was found to entail an obligation exceeding what follows from section 4 of the Danish Salaried Employees Act, for which reason the penalty clause was set aside as being contrary to section 21 of the Danish Salaried Employees Act.

As for the question of whether M was in breach of the non-competition clause, the High Court found that certain information on the homepage of M's business concerning M's previous employment combined with the other content of the homepage had to be deemed a description of the competencies of M's business and hence an offer of services within the described business areas. As activities within a number of the described business areas would involve competition with S, the content of the homepage was deemed to constitute a breach of the non-competition clause, for which reason M was ordered to pay a penalty of DKK 50,000.

The judgment establishes:

that it may not be imposed upon a salaried employee to pay, in addition to damages for an employer's loss, penalty for breach of a fidelity clause applicable to the employment relationship; and

that advertising on a webpage, such as in the present case, may be deemed an offer of services contrary to a non-competition clause.

For further information please contact
Marlene Voss
Phone +45 35 25 39 40