In its recent decision (resolution file No. II. US 3101/18), the Constitutional Court upheld the right of employers to enforce effective contractual penalties in case of breaches of non-compete clauses by their former employees.
The case at hand concerned an employee, who had undertaken an obligation to refrain from working for a competitive entity within 1 year from the termination of her employment. Due to a breach of this obligation, the employer enforced a contractual penalty of CZK 420,000. During the dispute, the employee argued, among others, that the employment relationship, which triggered the breach of the non-compete clause, lasted for only a few days. Based on this argument, the Czech Supreme Court concluded that the claim for contractual penalty is against good morals and dismissed the action (decision of the Supreme Court No. 21 Cdo 1922/2018).
The judgment of the Supreme Court was cancelled based on a constitutional complaint of the employer. The Constitutional Court referred to the general principle that contracts should be fulfilled (pacta sunt servanda) and determined that the judgment of the Supreme Court constitutes a violation of the employer’s freedom to conduct business. The court logically remarked that a transfer of know-how and destruction of a commercial advantage may occur within hours (or even quicker) and, thus, the duration of the breach is irrelevant. Making the contractual penalty dependent on its duration could hinder the effective enforcement of non-compete clauses altogether.
Thus, it follows that the duration of the competitive act has no influence over the employer’s right to claim a contractual penalty for a breach of a non-compete clause.
Please keep in mind that the decision does not affect the existing case law regarding the validity of non-compete clauses. In case you intend to protect your know-how by a non-compete clauses, feel free to contact us. We are happy to help.
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