This article aims to provide an overview of Turkish law related to the validity of non-compete provisions included in employment agreements.^[1] We also discuss several of the uncertainties existing in practice about the enforceability of these provisions and make suggestions for tackling these uncertainties.

Non-competes and the Turkish Code of Obligations

Generally speaking, to be valid a non-compete clause must be in writing and by definition be with a key employee, i.e. one who would be privy to proprietary information of the employer, the disclosure of which could cause considerable damage. More specifically, Articles 444 through 447 of the Turkish Code of Obligations regulate non-competes. Thus, for example, the first paragraph of Article 444 provides that:

[A]n employee may undertake in writing not to compete after the termination of the employment agreement in any manner whatsoever, especially by setting up a competing enterprise for his/her account, working for another competing enterprise or entering into a relationship with a competing enterprise in which the employee aims to gain an interest in any other kind.

The second paragraph of this same Article specifies that a non-compete provision is valid only if the employee has access during the course of his or her employment to commercially sensitive information, such as customer lists and production secrets, when the unauthorized use of such information would be capable of causing a “significant loss” to the employer.

Article 445 of the Code of Obligations provides that valid non-compete provisions must not be unreasonable with regard to its geographical reach and duration – which in any event is not to exceed two-years, except in “special circumstances” – and the types of activities an employee is forbidden to engage in post-employment such that the future financial well-being of the employee would be put at risk.

Significantly, the second paragraph of Article 445 empowers a court that finds parts of a non-compete unreasonable to reform non-compete provisions. Before the adoption of this Article in 2011, the Code of Obligations did not provide for court reformation of non-compete provisions, and when a court found restrictions in the non-compete to be unreasonable, the entire provision would be treated as null and void. Just how, and even if, Turkish courts will use this new power to reformulate non-competes, however, is still unclear.

In addition to the factors mentioned above, Courts will also look, when considering the reasonableness of non-competes, at such things as the sophistication and experience of the employee, length of the employment agreement and characteristics of the business sector in question. Interestingly, courts have taken into account the amount of compensation – if any – an employer may have agreed to pay the employee in return for the employee’s acceptance of the non-compete obligations.

Recommended best practices

In order to avoid the risk of invalidation of non-compete provisions – and being left with none of the crucial protection sought thereunder – it is recommended parties seeking such protection propose only the most limited restrictions. For example, non-competes purporting to restrict post-termination employment in several countries or “throughout the whole of Turkey” create, in most cases, an unacceptable risk of invalidation. Similarly, post-termination restrictions on the scope of future employment should be no broader than the scope of the employee’s present employment, and not include for example a prohibition on “all the activities authorized under the Articles of Association” – a construct we have actually seen. And even though the Code of Obligations provides that the duration of non-compete limitations may exceed two-years in “special circumstances,” it is presently unclear just what circumstances might be considered “special” enough by the courts. Accordingly, it would—in almost all situations—be prudent to keep the duration of non-compete obligations to a period of two years or less.

The significance of whether an employee receives compensation in return for his or her promise to comply with non-compete obligation is also unclear. That said, and despite this factor not being referenced in the Code of Obligations, there is at least one Court of Appeals decision upholding the lower court’s finding that a non-compete provision, which also provided for liquidated damages in the event of its breach, was invalid due to the lack of any compensation paid to the employee for agreeing to the provision.^[2] Given this, to increase the chances your non-competes pass judicial scrutiny, it is recommended that “reasonable” compensation for an employee agreeing to post-termination non-compete restrictions be provided for, with the amount of this compensation specifically set forth in the employment agreement. Although it is, of course, unclear just what would be “reasonable” in any given situation, a rough and ready calculation we recommend is that an employer pay approximately 30% to 40% of an employee’s monthly salary for each month he or she is obliged to comply with the non-compete obligations post-termination.

An interesting development regarding post-termination geographical restrictions, a fairly recent Court of Appeals panel considered non-compete restrictions that were to extend throughout the whole of Turkey. Normally such broad geographical restrictions would render the non-compete null and void. The subject non-compete, however, also provided that if the employee was unable to find a new job post-termination and/or could not otherwise earn an income at least equal to what previously earned, the employer would be obligated to compensate the employee for the income the employee was deprived of during the effective period of the non-compete. The Court of Appeals found the non-compete clause valid.^[3] Even though not expressly stated in its decision, it may be inferred that providing for the payment of lost compensation to the employee in return for the employee’s compliance with the non-compete was crucial to the appellate court’s finding.  

Finally, we note that the second paragraph of Article 446 of the Code of Obligations provides that a contractual penalty—i.e. a liquidated damage provision—can be included in a non-compete provision as a remedy for its breach, while also providing that an employee may also be liable in certain situations for damages, if any, in excess of the agreed to penalty. In this regard, we recommend that when such a penalty is provided for, the party seeking the non-compete protection should also consider explicitly providing that the employee is not excused from its non-compete obligations by simply paying the penalty.

Conclusion

Despite specific provisions in the Code of Obligations applicable to non-competes, many uncertainties remain about when these will be found enforceable, such as uncertainty related to the acceptable scope of geographical restrictions, the duration of the non-compete period, restrictions on the scope of the activities allowed for post-termination and the significance of providing for compensation to be paid in return for the promise to comply with the non-compete obligations. No doubt some or all of these uncertainties will be addressed by the Court of Appeals in the years to come. In the meantime, however, the legal risk posed by these uncertainties can be limited by giving careful attention to the specific circumstances at hand and the preparation of conservative, reasonable non-compete provisions taking these circumstances into consideration.

About Balcıoğlu Selçuk Ardıyok Keki

Balcıoğlu Selçuk Ardıyok Keki Attorney Partnership is an Istanbul-based full service law firm with a team of 130+ lawyers and economists. Our practice focuses on a wide range of areas including real estate, corporate, mergers and acquisitions, banking, project finance, capital markets, competition and anti-trust, employment, litigation and arbitration, telecommunication, regulatory and public law and intellectual property. We represent and advise Turkish and multinational clients, including Fortune 500 companies, in the banking and finance, private equity, real estate, manufacturing, hospitality and leisure, retail, automotive, energy, information technology, life sciences, luxury fashion and beauty, and media sectors.