Legal knowledge

Non Competition Rules under Italian Law

Often companies and individuals make investments that are based on persons and on their intrinsic value to a business. However, once the value is created, often the way to preserve it, or at least to protect the investments made, is to ensure that once such persons are no longer part of the business, their capacity to undermine the business by way of competition is limited. The rules governing those limitations are dynamic and evolving. Obviously, competition has an enormous importance to innovation and the evolution of the economy. Therefore, in order to preserve the importance of competition and the value related to the freedom of occupation, non competition covenants have become highly regulated globally, as well as in Italy. Following such rules is extremely important for those who wish to impose the non competition covenants, otherwise, they could be often challenged and rendered non enforceable.

1. Non competition between employer and employee

The Italian Civil Code regulates both the non competition obligation during the term of employment and after its termination.

1.1 Non competition obligation during the employment agreement

The Italian Civil Code (“ICC”) sets forth a loyalty obligation by the employee towards its employer. Like in many jurisdictions, also Italian law sets forth various criteria for the constitution of an employer – employee relation, amongst which are the employee’s lack of autonomy and subordination to the decisions of the employer not only with respect to the scope of the work but also on its organization and performance.

Such loyalty obligation consists of abstaining from:

Having part in transactions or doing business, even on behalf of third parties, in competition with the employer; and

Divulging information concerning the organization or the methods of production of the enterprise, or using them in a way that may jeopardize the enterprise itself.

Since such obligation is set forth by the law, it exists even if the employment agreement does not contain any language on the matter and for the entire period in which the employment agreement is in force.

The violation of the loyalty duty toward the employer is punishable with sanctions which have to be proportional to the gravity of the violation and could end up in the dismissal of the employee for just cause or subjective justified reason¹.

1.2 Non competition after the termination of the employment agreement

The mandatory regulation of the ICC is aimed to restrict the scope of the non competition clause between the employee and the employer over the period following the termination of the employment agreement.

In particular, the ICC sets forth that the post employment non competition covenant is void if (i) it is not made in writing, (ii) the employee does not receive a specific compensation for such commitment or (iii) if the limitation is not specific with regard to the object, the duration and the territory.

In any case, such commitment cannot be longer than 5 years for managers and 3 years in all the other cases. If the agreed duration is longer, it is automatically reduced to the maximum duration provided by the law.

       2. Non competition in other cases

The non competition agreements among subjects which are not in an employment relations can surge to relevance under two different perspectives: from a wider point of view, the competition is seen as a value to be protected by means of the regulations against cartels, while, from a narrower point of view, the non competition clauses are seen as a limitation of the economic, and notably entrepreneurial, freedom of each subject to be protected by rules concerning each and every non competition clause regardless of its effect on the market.

2.1 General non competition clauses

Under the ICC, each non competition agreement (i) has to be proven in writing, (ii) has to be specifically limited to well defined object and territory and (iii) cannot be longer than 5 years. As already mentioned, even in this case, if the agreed duration is longer than the mandatory limit, it is automatically reduced to the maximum duration provided by the law.

The case law, however, has stated that such maximum duration only refers to the non competition agreements which are not linked to other agreements, but represent a sole undertaking which is not included in a wider contractual framework.

Therefore, in case the parties have entered into an agreement which has a duration longer than 5 years, the non competition clause which (i) is contained in such agreement and (ii) is functionally linked to the obligations of the parties, can exceed the 5 years limit.

The reasoning behind such case law is that in such cases the acceptance of the non compete restriction is due to an advantage which can only be inferred by the wider contractual relationship between the parties.

On the contrary, whenever the non competition undertaking stands alone and such advantage is not clear, the Legislator made an evaluation of the different principles involved and provided for a proper limit on the maximum term in order to preserve the freedom to compete.

Moreover, some scholars and part of the case law maintain that such provision would only apply to those agreements concluded between subjects that compete on the same market level (i.e. horizontally) and it would not apply to the agreements between subjects operating on different market levels (i.e vertically).

2.2 Cartel legislation

The Italian legislation on cartels is derived by the European regulations. It is important to note that a cartel differs from a mere non compete covenant since the cartel is the agreement between two or more independent subjects, normally companies, which agree on anti competitive practices, such as prices fixing, production limitations, customers or markets divisions, in order to obtain higher revenues than the ones they would obtain in a competitive market. Under Italian law no. 287 / 1990, any agreement, with no regard to its nature, which has as its object or effect a significant prevention, restriction or distortion of competition is prohibited and, thus, is null and void. The parties of such agreements can also be subject to financial penalties. It is important to note that, under Italian law, the only forbidden agreements are those which actually have an adverse impact on the competition, while, if such impact is only possible or potential, but not in effect, the agreement is lawful. Such threshold, which is actually higher than the one enforced by the EU Commission, implies that a great number of agreements do not need to obtain an authorization from the Italian Competition Authority, since such authorizations, which have been rarely granted (17 cases since 1991), only concern the agreements which actually breach the competition rules, but also have positive effects which compensate for such breach.

Ariel Nachman
Simmons & Simmons
www.simmons-simmons.com