When is a non-compete agreement invalid? The latest Supreme Court ruling

According to the Supreme Court ruling of 23 June 2022, case reference I PSKP 67/21, a resolution of the supervisory board is required for the proper conclusion of a non-competition agreement with a cooperative bank.

Factual background

The claim for compensation for the period of the non-competition obligation was filed by the president of the cooperative bank, who was employed by the defendant. The core of the dispute was whether a valid non-competition agreement was concluded after the termination of employment, that is, whether the representation requirement under Article 46 § 1 point 8 of the Cooperative Law was observed.

The non-competition agreement was signed in 2012 by two representatives of the supervisory board. No resolution was adopted in this matter. The agreement included a clause on payment of compensation for refraining from competitive activity for one year after the termination of the employment relationship. However, after the president was dismissed in December 2015, the supervisory board shortened the prohibition period by resolution to 19 days following the termination of the employment contract.

The claimant applied to the court for payment of compensation for the one-year period of refraining from competitive activity. The first-instance court, however, found the non-competition agreement invalid, as no resolution of the Supervisory Board was adopted, and only two members of the management board signed the agreement. The claimant appealed this ruling.

The court of second instance ruled that the Supervisory Board’s resolution was valid and shortened the period of the non-competition agreement. Therefore, compensation was due to the president for the period of 19 days.

The claimant filed a cassation appeal against the above ruling, arguing that the non-competition agreement had been in force since 2012, and since two persons from the management board were authorised to conclude such an agreement, it was valid. In the procedural filing, the defendant, in turn, raised the issue of possible abuse of rights under Article 8 of the Labour Code.

Supreme Court’s position

In its ruling of 23 June 2022, the Supreme Court dismissed the cassation appeal of the former president. It established that although the formal requirement under Article 101(3) of the Labour Code was met, i.e. the non-competition agreement after termination of employment was concluded in writing under pain of nullity, another mandatory element was missing — namely, a resolution of the supervisory board. Such a resolution had to be adopted in accordance with the Cooperative Law prior to signing the agreement.

The court stated that if concluding the non-competition agreement with the president of the bank was limited solely to signing the document without adopting a collective resolution of the supervisory board defining the content, scope, and conditions of such an agreement, the agreement is invalid. The court also did not find grounds for abuse of rights in this case.