Non-Compete Clauses in Employment Agreements – Are they Enforceable under Israeli Law?

Published in Walla in August 2014

By Moshe Kahn

Israeli Courts do not tend to automatically support this clause, which restricts competition and infringes on the freedom of occupation. Attorney Moshe Kahn explains when an employer is permitted to restrict its employees, and when the employee’s covenant not to compete, will be enforced.

Many employers have experienced this at least once. A key employee, who has been cultivated by them for years, privy to the innermost secrets of the company, abandons the company and leaves to work for a competitor or sets up his own competing business. He then begins to compete with the former employer, its clients, and its employees with whom he had previously worked and tries to solicit them to join him. This is a difficult experience for an employer to endure, who will do anything to prevent a recurrence of this experience.

As a result, many employers request their employees to sign a non-compete clause. This clause prohibits the employee from competing against the employer in the future, whether by establishing a competing business or by leaving to work at an actively competing business, all after the termination of his employment at the employer. This clause is intended to limit the possibility of an employee competing with his former employer, by using the knowledge and expertise accumulated by the employee at his previous employer, thereby causing damage to his employer. The non-compete clause was intended to minimize this damage, which consists of two factors.

The first factor is the loss of “human capital” for the business, i.e., the loss of such quality employee, and the longer he was employed, the longer his training had lasted and, in a small business, he is sometimes considered the pillar of the business, so that the damage caused by his departure is greater. Nothing can be done from a legal aspect against this damage. You cannot force an employee, be junior or senior, to work for an employer.

The second factor is the actual move of such an employee to the competing business, taking with him the knowledge and expertise with he had accumulated at his former employer, which can often include trade secrets, customer lists, and, of course, information regarding the strengths and weaknesses of the previous employer. This is the main damage that employers seek to prevent by means of the non-compete clause.

When can a non-compete clause of an employee be enforced and when can it not? Attorney Moshe Kahn explains when an employer can, and when he cannot, enforce such a covenant not to compete.

In general, Israeli courts have often ruled that a non-compete clause that prevents an employee from working in his line of profession, without it protecting the legitimate and concrete interests of the employer, is not valid. The free market rules require every business owner to deal with competition, including former employees. All the more so, if such an agreement limits the employee’s freedom to engage in his line of the profession for an exceptionally long period of time, the court will tend to invalidate such agreement.

Notwithstanding the above, there are still circumstances in which it is possible to enforce the employee’s covenant not to compete, although it must be limited in time and scope.

1. Protection of Trade Secrets - In certain cases, labor courts in Israel will agree to enforce the non-compete clause, if the departing employee is in possession of a trade secret belonging to the previous employer, and he is likely to make unlawful use thereof at the new employer or at his new business. “Trade secret” is defined as commercial information which cannot readily be discovered and which grants its owner a commercial advantage. In this case, the employer must prove the existence of such a secret and even demonstrate it, in a form of a formula, software or confidential customer list, and he needs to prove that he has taken measures to protect the secret and to prevent it being leaked from within the business.

2. Duty of good faith and trust - Israeli labor courts tend to enforce the non-compete clause, if it is proven that the departing employee has acted maliciously in order to harm his former employer, for example, by blatantly soliciting clients to move to his new business, or taking steps to set up the competing business while still employed at such employer.

3. Special Consideration - In cases where the employee has received special compensation, separate from his salary, from the employer for signing a covenant not to compete, especially if the compensation is paid as a salary after the end of his employment and throughout the non-compete period, the court will usually recognize the employee’s covenant not to compete and will enforce it during the period for which the employee has received adequate compensation. Usually, the court will require a written covenant by the employee in this regard.

4. Special Training - If the employee has received special training from his employer and, in return, undertook not to resign from the business or compete with the employer for a certain period of time. In such cases also, a written covenant by the employee is usually required.

 
These four circumstances do not constitute a closed and exhaustive list, and there may certainly be other circumstances in which the court will enforce the non-compete covenant if it is proved that failure to enforce the covenant against the employee may harm the legitimate interests of the employer.

The above indicates that when an Israeli employer seeks to protect himself against competition from his former employee, through a contractual clause, he needs to check whether the covenant is valid under the specific circumstances, he needs to properly word the clause, and he needs to check what his legitimate interests are which he seeks to protect. With respect to professional secrets, it is recommended to specify them and indicate what would be considered a violation thereof. Regardless of contracts, it is recommended that the employer not put the business secrets in the hands of one or two employees, regardless of their status, and he should ensure overlap between the areas of expertise of the employees, in order to avoid substantial damage in the case that an employee leaves and seeks to compete with his former employer.