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New judgment from the Danish Supreme Court on non-competition clauses

July 2005 - EU & Competition. Legal Developments by Norrbom Vinding Law Firm, member of ius laboris.

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In April 2005, the Danish Supreme Court rendered a judgment regarding a former employee's right to compensation for an unenforceable non-competition clause. The employee had been dismissed due to factors relating to the company. According to the employment contract, the employment was governed by the Danish Salaried Employees Act, and the employee was bound by a non-competition clause for up to 1 year after the effective date of termination.

Section 18 of the Danish Salaried Employees Act governs non-competition clauses in respect of salaried employees. The said section stipulates that a non-competition clause shall be compensated by at least 50% of the employee's salary on the effective date of termination if the employee is to be bound by the clause. Compensation for the first 3 months shall be paid as a lump sum payment on the effective date of termination. The employer may terminate the non-competition clause with 1 month's notice, but if the clause is terminated within 6 months prior to the effective date of termination, the employee will still be entitled to a lump sum payment to the first 3 months' compensation.

However, the provisions on non-competition clauses governed by the Danish Salaried Employees Act are covered by section 38(2) of the Danish Contracts Act stipulating that if an employee is dismissed without having given reasonable cause to be so, the non-competition clause cannot be enforced.

In its judgement of 12 April 2005, the Danish Supreme Court interpreted section 18 of the Danish Salaried Employees Act to mean that a salaried employee will not be entitled to compensation under a non-competition clause, if the employee is dismissed due to factors which would prevent the employer from enforcing the clause pursuant to section 38 (2) of the Danish Contracts Act. Further, when a non-competition clause is unenforceable pursuant to section 38(2) of the Danish Contracts Act, the Danish Supreme Court held that the employee's entitlement to the said lump sum payment of compensation was not conditional on the employer's specific termination of the clause.

As the dismissal of the employee was due to factors relating to the company, the employer could not enforce the non-competition clause pursuant to section 38(2) of the Danish Contracts Act, and consequently, the employee was not entitled to compensation.

The judgement is in accordance with the interpretation appearing from Danish employment law literature. Thus, by this judgement the Danish Supreme Court has definitively confirmed the legal position of the coherence between section 38 (2) of the Danish Contracts Act and section 18 the Danish Salaried Employees Act.

For further information please contact
Torben Mølgaard Hededal
tmh@nv-law.dk
Phone +45 35 25 39 40