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. Last Updated: 07/27/2016

Non-Compete Clause in Russia: Do the Laws Compete?

A non-compete clause or covenant not to compete is a term used in contract law meaning that one party (usually an employee) agrees not to pursue a similar profession or trade in competition with another party (usually the employer).

Such clauses are used because employees might, when they are dismissed or resign, or simply in breach of their contract, begin working for a competitor or start up their own business, consequently gaining an advantage by abusing confidential information about their former employer's operations or trade secrets, or any confidential information about, for example, customers and clients, business practices, marketing plans, etc. Thus, non-compete agreements are becoming an increasingly popular way for employers to try to limit employees and former employees in working for a competitor or divulging trade secrets, confidential information or other proprietary data.

On the other hand, a business might abuse a non-compete clause to prevent an employee from working elsewhere at all and thus to retain the employee on his own staff. Most non-compete clauses are signed either with little or without any negotiation between the employer and the employee. They are usually signed when the employee is initially hired and may have very little bargaining skill and power and the employee is generally concerned about limitations on his future employability. Yet, as soon as the employee decides to resign, the non-compete agreement may constitute a significant impediment to future employment or may prevent employees from becoming self-employed.

Most jurisdictions in which such contracts have been examined by the courts have regarded non-compete clauses as legally binding provided the clause contains reasonable limitations on both the geographical area and time period within which the employee of a company may not compete. Many foreign legal systems, such as those of the U.K. and certain U.S. states, have already elaborated adequate and more or less common criteria for non-compete enforceability.

Unfortunately, in the Russian Federation, the non-compete construction is not expressly provided for by the labor or civil legislation. Yet, at the same time, the Russian market today could hardly exist without non-compete and other similar legal constructions satisfying various day-to-day business needs.

The main problem with a non-compete clause in Russia is that it may, in certain circumstances and in certain wordings, contradict with Article 37 of the Constitution of the Russian Federation. It proclaims: "Labor is free. Everyone shall have the right to free use of his labor capabilities and choice of type of activity and profession." This rule of law just generally provides freedom of labor, but the Constitution to a certain extent allows restriction of this principal rule. For example, Article 55 stipulates that "human and civil rights and freedoms may be limited by federal law only to the extent necessary for protecting the rights and lawful interests of other persons."

Russian law thus provides for many restrictions on infringement of confidentiality -- the Labor Code, Civil Code, and other federal laws concerning information protection and secrecy. These rules make employees liable only for divulging only confidential information. Unfortunately, in practice, confidential information is usually defined separately from a particular person, in our case the employee. Yet during the period of employment, the employee may obtain not only information separated from him but many other skills and knowledge, as described above. Moreover, the employee may not only divulge the information, but also use it in his own business or work for another employer. Furthermore, the non-compete clause is an independent covenant in any particular labor relationship and cannot be simply reduced to a confidentiality covenant.

Fortunately, since the adoption of Part IV of the Russian Civil Code and as a result of the know-how provision in the Civil Code, Russian business has obtained an opportunity to recover any losses arising from breach of non-compete clauses. According to the Civil Code, all damage caused by infringement of know-how shall be restored by those who disclosed or used the information, as well as the person whose duty it was to maintain the confidentiality of a "manufacturing secret." Thus, not only an employee can be held liable for such damage, but also an employer for hiring an employee who violates a non-compete agreement with a previous employer. Another important rule of the Code is that other liability can be fixed in the contract concluded with the person, in this case the employee.

Even though the non-compete clause is an institute of Labor Law, application of the Civil Code is quite possible. In the event of non-compete, labor law provides for a general possibility of including in the employment contract any clauses or labor rules that are not prohibited by law and are contained in legal acts other than the Labor Code. In such circumstances, protection and enforcement are provided for by both civil and labor law.

Consequently, even though no abundant court practice typical of many foreign countries has yet been established, the non-compete legal construction in Russia is, nevertheless, gaining in vitality nowadays. Nevertheless, it must definitely be applied with great care and prudence and in obligatory consideration of the rules of the Constitution and the Labor Code.