WHAT IS THE COST OF AN OVERPROTECTIVE NON-COMPETE AGREEMENT IN HUNGARY?

20 April 2023

Non-competition agreements are popular for protecting the employer’s economic interest in Hungary. While employers try to secure their businesses as much as possible by stipulating excessive restrictions in the non-compete clauses, it is not always the right tactic, as shown by a recent decision of a Hungarian appellate court. The analysis of this decision provides a perfect opportunity to see how not to fall into the pitfall of an invalid non-competition agreement in Hungary.

1. Facts

The defendant worked as a recruiter at the claimant, a private healthcare provider. Based on the non-competition agreement concluded by the parties, the defendant, among others, undertook not to be employed at a domestic or foreign company carrying out a similar activity as the claimant, or at any other company having a business interest in or a business relationship with such company. Under similar activity especially the activity of private healthcare and dental service providers, health insurance providers and welfare funds shall be understood.

After the defendant terminated his employment relationship, the ex-employer claimant informed him that it partially withdrew from the non-competition agreement and reduced the non-competition period. The defendant notified the claimant that he considers the agreement null and void and established an employment relationship at the competitor of the claimant.

2. First instance judgement

The claimant sued the defendant for penalty and damages claiming that he breached the non-competition agreement as he established an employment relationship at the claimant’s competitor, a Hungarian private health service provider.

The defendant requested the court to dismiss the claimant’s action since the restriction of the non-competition agreement was unfair and disproportionate both geographically and in terms of the scope of the prohibited activity.

The first instance court dismissed the claimant’s action. In the court’s view, the agreement did not clearly define what the parties understood under foreign company, so the geographical scope of the agreement is unclear.

In addition, the court found that the restriction based on which the defendant could not be employed at a company who has a business relationship with a domestic or foreign company carrying out a similar activity as the claimant, is way to excessive. The court therefore found that the non-competition agreement shall be considered as null and void.

3. The decision of the appellate court

The appellate court agreed with the findings of the first instance court and dismissed the claimant’s appeal.

The second instance court established that the non-competition restriction does not comply with the principle of fairness.

First, it prohibits the employment at a foreign company engaged in the similar activity as the claimant, without delimiting its geographical location. Second, although the agreement regulates the scope of forbidden activities, it does not define them clearly, but only contains a specific list. Finally, it also prohibits the employment at companies which have business relationship or interest in companies carrying out similar activities as the claimant which is a too broad definition.

Altogether, the activity covered by the non-competition clause could not be clearly identified by the defendant, and therefore the claimant could basically decide at his own discretion, whether the employment at a particular company infringed the non-competition clause or not.

According to the appellate court, the agreement contained further unfair terms. The contractual condition stipulating that first half of the compensation shall be paid within 60 days as of the termination of the employment, while the other half shall be paid at the end of the non-competition period, was unbalanced and highly detrimental to the defendant. The clause which provided the possibility only to the claimant to withdraw from the agreement even during the notice period was also regarded as unfair.

4. Comment

The above case is a perfect example of the slogan ‘less is more’. As the facts show, the defendant established an employment relationship at the competitor of the claimant, a private healthcare provider in Hungary. The defendant did not even dispute that his new employer was the claimant’s competitor. However, the agreement could not protect the interests of the employer in this rather clear situation as it contained vague terms and a too wide range of restrictions without geographical limitation.

Thus, in case of non-competition clauses, instead of using way to broad definitions and excessive restrictions, it is better to limit the restriction the area and activities which could really endanger your business.

 

This article was originally published on CEE Legal Matters on 25/04/2023