A frequently topic discussed among the parties on the Swedish labour and employment market is the significance of the duty of loyalty. The duty of loyalty is a legal principle derived from the employment, according to which the employee is obligated not to use or reveal information relating to the employer's business and not to be engaged in a competing business. Once the employment has expired, the employee is no longer bound by the duty of loyalty.
The employer may provide protection for its trade secrets and customer relations of the employment by including a non-compete and/or confidentiality clause in the individual employment agreement to be applied after the agreement has expired. Trade secrets are also protected by the Act on Protection of Trade Secrets (the Act).
During the past two years the Swedish Labour Court has made some interesting clarifications concerning the use of non-compete clauses and trade secrets.
Non-compete and non-solicitation clauses
With the aim of limiting the use of non-compete clauses in individual employment agreements, the Confederation of Swedish Enterprise (Sw. Svenskt Näringsliv) and some trade unions have entered into an collective agreement regarding the use of non-compete clauses in individual employment agreements (the Agreement). Employers within the industry have agreed to obey the Agreement. The Agreement has been applied since 1969 and has had an almost normative impact on the labour and employment market.
According to the Agreement, a non-compete clause can be used mainly with the aim to protect manufacturing secrets. Such clauses can restrain for example an engineer from initiating competing business or take employment with a competitor.
Outside the scope of the Agreement, other variants of clauses can be used with the aim to protect customers by prohibiting the employee to try to entice away the employer's customers to his new employer (a "non-solicitation clause"). Principles for when a non-solicitation clause may be used and how the clause should be construed to be considered reasonable have been further developed in case law.
According to case law, a non-solicitation clause is only valid if it can be considered reasonable based on an overall assessment of all circumstances at hand. The employer must have a legitimate purpose for using a non-solicitation clause. It has been clarified through case law (for example, AD 2002 nr 115) that the aim to protect established customer relations is legitimated, especially when the company has established and developed the relationships. In a recent case (AD 2010 nr 53) the Labour Court concluded that a non-solicitation clause, which more than marginally restricted the employee from operating in the same position during a five-year period without economic compensation to the employee for the inconvenience of the clause, was unreasonable due to its effects.
Earlier this year the Labour Court made a further clarification. The case (AD 2015 nr 8) concerned an accountant who had terminated an employment in order to take another employment with a competitor. Shortly thereafter, a large number of customers (approx. 80 customers) left the employer for the competitor. The accountant's employment agreement contained a non-solicitation clause, which obligated the accountant to pay compensation to the former employer corresponding to 35 per cent of the revenue from the relevant customers for a period of two years after the expiration of the employment. The court noted that the non-solicitation clause covered all customers, regardless of whether the accountant had been personally appointed by the customers or not, and that the accountant was more than marginally restricted to operate in the same position. The court considered all circumstances of the case and concluded that the non-solicitation clause was unreasonable and declared the clause invalid.
According to the Act, an employee is liable to pay damages (both economic and punitive damages) to the employer, if the employee wilfully or negligently exploits or reveals a trade secret, which the employee has received in the course of the employment and which the employee understands, or ought to understand, is not allowed to be disclosed. If the tortious act takes place after the employment has expired, the employee is only liable to pay damages if extraordinary reasons apply. Extraordinary reasons could be that the employee has brought with him trade secrets in written or in electronic form.
In a recent case (AD 2013 nr 24), the Labour Court declared that the new employer of an employee, who previously has been employed by a competitor, may be liable to pay damages to the competitor for loss or harm caused by the employee. The case concerned an employee who had terminated an employment with a factoring company and taken employment with a competitor. The employee had transferred a register of customers of the factoring company and, without the knowledge of his new employer, used the information in order to establish new customer relations. The court ruled that the employee had violated the regulations of the Act. In the light of an employer's vicarious liability of its employees, the court ruled that the employee and the employer were jointly and severally liable for the damages the employee had caused.