Insights | October 16, 2018

Recent rulings on non-solicitation clauses

In recent years, the prevalence of non-compete clauses in employment agreements has been a hot topic on the Swedish labour market. Non-compete clauses restrict an employee from taking up employment with a competitor of the employer or starting up a competing business after the employee’s termination or resignation. Such clauses are governed by (i) sections 36 and 38 of the Swedish Contracts Act; and (ii) the collective bargaining agreement on non-compete clauses entered into in 2015 between the confederation of Swedish Enterprise (Sw. Svenskt N√§ringsliv) and the Federation of Salaried Employees in Industry and Services (Sw. PTK).

Many employers include non-solicitation clauses instead of, or combined with, non-compete clauses in contracts with employees. Such clauses restrict the employees, after their termination or resignation, from soliciting, contacting or dealing with customers and/or employees of the employer. Non-solicitation clauses are explicitly excluded from the 2015 collective bargaining agreement. The use of non-solicitation clauses that restrict the solicitation and hiring of employees has therefore remained relatively unregulated and case law has been scarce within the area up to now. However, on 5 October 2018, the Swedish Labour Court (Sw. Arbetsdomstolen) ruled on two different cases regarding non-solicitation clauses that restricted the solicitation and hiring of employees (AD 2018 no. 61 and AD 2018 no. 62).

The cases concerned actions brought by the video game developer MachineGames Sweden AB (“MachineGames”), which is based in the Swedish city of Uppsala, against its former employees and the competing companies Bad Yolk Games AB (“Bad Yolk”) and Neon Giant AB (“Neon Giant”). Under their employment agreements with MachineGames, certain employees were bound by a clause restricting them, after their termination or resignation, from soliciting and hiring MachineGames’ employees for a period of two years. In the event of a breach of the clause, the relevant employee was liable to pay liquidated damages amounting to six months’ salary. However, in spite of these clauses, former employees of MachineGames now work for Bad Yolk and Neon Giant. MachineGames brought an action against Bad Yolk, Neon Giant and their representatives that were bound by the non-solicitation clauses.

On 4 July 2018 and 22 August 2018, the Uppsala District Court issued interim injunctions against Bad Yolk, Neon Giant and the former MachinesGames’ employees, preventing them from hiring or soliciting any MachineGames employees.

The Swedish Labour Court has now decided to cancel the interim injunctions, since the non-solicitation clauses are not deemed reasonable. According to the Swedish Labour Court, a non-solicitation clause should be assessed based on the same statutory provisions as non-compete clauses. An overall assessment as to the reasonableness of a non-solicitation clause must be made, taking into consideration e.g. to what extent the employer has a legitimate interest in the restriction being in place, to what extent the clause restricts the employee from carrying out professional activities, and whether the employee is compensated for the restriction.

The court found that even though non-solicitation clauses are less restrictive than non-compete clauses, there are reasons to be restrictive when it comes to allowing non-solicitation clauses. The former employees’ knowledge of and personal relationships with MachineGames’ employees could not be regarded as trade secrets or know-how, and the purpose of the clauses was not to protect long-term customer relationships, which could have constituted a legitimate interest. However, since the former employees had gained a competitive advantage over other potential employers through their employment with MachineGames in terms of recruiting MachineGames employees, MachineGames could have a legitimate interest in the non-solicitation clause being upheld a transitional period, in order to adapt their business to the new competitive situation. Furthermore, MachineGames could have a legitimate interest in preventing an employee leaving the company from inducing other employees to leave the company as well, which could justify a non-solicitation clause being upheld for a short period of time.

Despite its finding that MachineGames could have a legitimate interest in a non-solicitation clause being in place, the court found that the non-solicitation clauses went beyond what may be considered reasonable with respect to the legitimate interest. The reason for this was that the clauses restricted the former employees not only from actively soliciting employees that they had worked with and therefore had knowledge of, but also from hiring any employees of MachineGames that voluntarily sought employment with the new employers. Furthermore, since at the time of the judgments a considerable period of time had elapsed (6, 15 and 18 months, respectively) since the employees terminated their employment with MachineGames, the legitimate interest seemed to have already decreased to such an extent that it could not be considered reasonable to uphold the non-solicitation restrictions.

Main takeaways for employers from the recent rulings

So, what implications do these recent rulings have for employers that want to impose non-solicitation clauses that restrict the solicitation and hiring of employees on their employees? It has now been fairly clarified that such non-solicitation clauses will be assessed in the same way as non-compete clauses, which means that the employer must first of all assess whether it has a legitimate interest in a non-solicitation clause being in place. If the employer does have such a legitimate interest, it may implement a non-solicitation clause, but the clause cannot go beyond what is considered reasonable. It is therefore advisable to formulate the non-solicitation clause so that the relevant employee is only restricted from actively soliciting employees that the employee has worked with (i.e. not all employees of the former employer, regardless of whether they have voluntarily applied for employment with the new employer or whether they have worked together with the employee that is covered by the non-solicitation clause).

Furthermore, the restrictive period cannot go beyond what is considered reasonable. The reasonable time period seems to be very short and the Swedish Labour Court found that even after a relatively short period of six months, it was unreasonable to uphold a non-solicitation clause. Consequently, employers should carefully assess the length of time it is necessary for them to restrict former employees from soliciting employees in order to protect their legitimate interest.