Evaluation of the Geographical Limitation Requirement of the Prohibition of Competition Clause in the Light of the Decisions of the Court of Cassation

In the Turkish law system, the prohibition of competition is regulated under Article 444 of the Turkish Code of Obligations ("TCO"), and the restrictions, which constitute the subject matter of this article, are regulated under Article 445 of the TCO as follows;

"The prohibition of competition may not contain unfair restrictions to compromise worker’s economical future in an appropriate form for time and types of work and the term of prohibition may not be more than two years except for specific cases and conditions.

The judge may limit the prohibition of competition by freely evaluating all conditions and circumstances as well by considering counter-performance of the employer in a just manner for the scope or time.”

In this respect, elements of the non-competition agreement are;

• To determine the maximum period (maximum for 2 years) for which the employee must comply with the non-competition obligation,
• To draw the provincial/territorial borders where the non-competition obligation will apply,
• To settle the subjects/what type of work to be performed are in scope of the non-competition obligation of the employee.

Agreements that do not carry out the regulations stipulated under TCO on the aforementioned 3 factors are not considered valid. However, in practice, it is observed that the maximum limitation concerning time is generally complied with in non-competition agreements/ provisions, but geographical restrictions are not imposed or the restrictions are kept broad. Surely, the reason for the legislator to stipulate the above-mentioned time and geographical region limitations is that the legislator aspires to protect the commercial interests of the employer while protecting the employee's constitutional right to work and economic freedom. Apparently, the legislator is trying to protect the balance of interests, especially since it is generally accepted that employees have relatively less negotiating power compared to employers. The Court of Cassation has also decided in one of its decisions[1] that non-competition clauses that do not include a geographical limitation shall not be valid;

“In the substantial case, the non-competition provision in the service contract subject to the lawsuit between the parties is lack of a geographical area limitation, and since this deficit jeopardizes the economic future of the employee unfairly, the contractual provision regarding the non-competition must be deemed null and void according to the freedom of work and legal regulations explained above. While the court should have decided by considering this issue, its acceptance with the written justification was not correct and the decision had to be reversed for this reason."

On the other hand, it is known that the Court of Cassation may conclude different decisions regarding the matter. For instance, if the non-competition clause in the employment agreement is not subject to a geographical restriction or is agreed on a large scale that endangers the economic freedom of the employee, it has been ruled by the Court of Cassation[2] that these limits should be drawn by the court if the potential danger is high and/or the counter-performance undertaken by the employer is also high. 

"In the substantial case, although there is no restriction in terms of the geographical area in the non-competition clause in the employment agreement between the parties, Article 445/2 of the TCO stipulates that the court may limit the excessive non-competition clause in terms of the scope or duration of the excessive non-competition provisions by freely evaluating all the circumstances and conditions and by taking into account the counter-performance that the employer may have undertaken equitably. In line with this regulation, while a limitation should be imposed by the court in terms of geographical area, it is not appropriate to rule that the non-competition agreement is invalid."

The above-mentioned decisions of the same chamber of the Court of Cassation, which dated closely to each other, indicate that the evaluation may vary in each case and that the criteria such as the employee's salary from the previous employer, his/her fund of knowledge, and the possibility of causing serious commercial damage to the previous employer are meticulously examined. In fact, there is even a decision of the Court of Cassation[3] stating that even a 10-year non-competition clause, which may greatly jeopardize the economic freedom of the employee, should be determined reasonably by the judge in accordance with Article 445/2 of the TCO;

“In the substantial case, the agreement between the parties stipulated a 10-year non-competition period, and the place where the non-competition would be valid was determined as the provinces and districts within the Aegean and Marmara Region, especially Kemalpaşa district. Paragraph 445/1 of the TCO regulates the limitation of time and place for such agreements, and the second paragraph of the same article provides that the court may limit the scope or duration of excessive non-competition provisions.

In this case, while the court should evaluate and discuss the contract dated 19/01/2012 between the parties within the framework of Article 445/2 of the TCO No. 6098 and reach a conclusion, it was not appropriate for the Regional Court of Appeal to decide to reject all of the plaintiff's claims on written grounds, and it required a reversal."

To summarize, it is seen that the Court of Cassation, especially in the recent period, has significantly valued Article 445/2 of the TCO, and in order to ensure the balance of interests that the legislator aims to achieve, the non-competition clauses in the agreements are adjusted in terms of duration and limitations according to the circumstances of the particular case, the gain and potential danger possibilities of the parties. Considering the recent and contradictory decisions of the same chamber, we would like to express that we strongly believe that it is beneficial to agree on non-competition clauses in accordance with Articles 444 and 445 of the TCO from the outset.

[1] 11th Civil Chamber of the Court of Cassation decision numbered 2017/3251 and 2019/805, dated 04.02.2019

[2] 11th Civil Chamber of Court of Cassation decision numbered 2017/200 and 2018/6359, dated 16.10.2018

[3] 11th Civil Chamber of Court of Cassation decision numbered 2018/1016  and 2019/6713, dated 24.10.2019

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