Our family business produces wooden products with a unique pattern and design. We use our own technological procedures, which we consider to be our know-how. As the demand for our products has grown, we have expanded production and hired new employees. We are aware of the risk that if we teach them to work with wood and they learn our know-how, they may start their own business or disclose our procedures to a competitor. Can we prohibit competitive activity and working with competitors in the business cooperation agreement that we sign with such new collaborators? How can it be done right?
Yes, you can agree in your business cooperation agreement on the prohibition of competitive activity and cooperation with companies doing business in a competitive area.
However, such an agreement must be sufficiently specific, and it must meet the essential requirements of a “non-compete clause”. Although this clause is used primarily in commercial representation agreements, according to the judicial interpretation, the legal terms of this clause should also be adhered to in other types of agreements, including cooperation agreements.
The non-compete clause should therefore be agreed in writing and should define the details of the competitive activity that is to be prohibited. In your case, this could be any business or employment activity in the production of wooden products, which you need to specify in more detail (such as “wooden toys for children” or another particular type of toy).
The clause should also define the territory where the collaborator is prohibited from conducting competitive activities, such as the territory of the Slovak Republic and the Czech Republic, or the territory of all states of the European Economic Area.
In addition, the competition clause should define the pool of customers the prohibition relates to. As the competition clause applies to commercial representation (such as distribution of certain products to a specific pool of potential customers) within the meaning of the Commercial Code, it will be necessary to find an appropriate analogy to the “pool of customers” that could be applicable to a cooperation agreement for the production of wooden products.
In your case, the pool of customers is likely to be closely linked to the type of products that the non-compete clause applies to. So, if it is wooden toys, the pool of customers can be defined as “toy producers”, because if your collaborator decided to work with another company later on, their primary customer would be another toy producer. However, their customers can also include toy distributors and retailers, as the collaborator can supply toys directly to a retail chain.
It will be important to define the period for which you want to limit the competitive activity of the collaborator. According to the Commercial Code, it should not be more than two years after the collaborator terminated the cooperation agreement with your company. However, the period should always be reasonable, so if the collaborator was in a relationship with you for only one year and the agreement would limit them from conducting any competing activity for two further years, a court could view that as an unreasonable prohibition.
Court decisions also show that the prohibition of competition should be offset by some consideration, otherwise such a restriction could be considered disproportionate. It is not defined what a reasonable consideration is. This could be some one-off severance pay calculated based on the contractual agreement.
To ensure that the collaborator complies with the restrictions arising from the non-compete clause, you can define a contractual penalty in the agreement. It should also be clearly defined and adequate. The appropriateness of this penalty must be assessed case by case, such as when based on the income of the collaborator while working with your company, or based on the consequences that a breach of the non-compete clause may cause you.
Also note that there are other possible ways of protecting yourself against the use of your technological procedures or design by your competitors. These include a utility model and trademark registration. The cost of such registration is higher than the cost of including a non-compete clause in a cooperation agreement, but in our view, they provide better protection than a non-compete clause.