Clauses restricting competitive activity in agreements with game developers | In Principle

A game is only as good as its creators. Therefore, it is in the interest of game development companies to keep their staff happy, so they don’t even think about switching to the competition. In addition, however, it is worth taking preventive measures, e.g. including clauses in contracts preventing the poaching of valuable employees and independent contractors.

Sometimes, regardless of the industry, companies include clauses in contracts preventing actions unfavourable to them. The most common of such clauses ban:

• Solicitation
• Poaching
• Disclosure
• Competition.

These types of clauses also appear in contracts in the video game industry (e.g. in contracts with employees or independent contractors). Given the notorious mobility within the game industry, it might seem that such clauses are more of a fiction and are not enforced in court. But examples from other countries show that these clauses are not a dead letter. It is worth taking a closer look at them.

Non-solicitation and no-poaching

These two clauses concern the phenomenon of employee poaching, a term that captures its essence quite well. Such clauses are intended to restrict the ability to contact, solicit or hire the company’s employees and contractors.

Usually, no-poaching agreements are concluded between two companies, often in competition with each other, which may also raise problems under competition law. Non-solicitation agreements usually deal with the prohibition of “picking up” former colleagues from work by people who find employment with another employer or start their own business.

If a company works with a game developer (programmer, designer, graphic designer, etc) conducting business activity on the basis of a cooperation or service contract (B2B), a no-poaching or non-solicitation clause unambiguously banning the game developer (here, a business operator) from hiring employees of the former counterparty may prove ineffective. If improperly drafted, such clauses may be held invalid, if they are found to violate the fundamental principles of labour law, including the freedom to take up employment.

There are still not many court rulings on such cases, but an interesting example is a 2015 judgment from an appellate court holding that the only legally permissible form for protecting an employer against the risk of losing employees who have trained or raised their professional qualifications at the employer’s expense is to conclude with such an employee an appropriate agreement (a non-competition agreement or a loyalty agreement for working off the training costs). Thus, the crux of the matter is that the restriction on the principle of freedom to work must arise from the will of the specific employee, and not be established over his head by two employers (Szczecin Court of Appeal judgment of 23 April 2015, case no. I ACa 134/15).

Because of doubts about the validity of such obligations between the parties, and thus their practical effectiveness, it is more common to see a milder version of these clauses, merely prohibiting active efforts to solicit employees (persuasion to terminate the contract with an existing employer or service recipient) and not hiring of those persons as such.

Confidentiality clause

Inclusion of a confidentiality clause in an agreement, or conclusion of a separate confidentiality agreement, is uncontroversial, and perceived as a standard element of a legal relationship. These clauses are intended to protect information, knowledge or knowhow that is particularly important to the company, constituting a trade secret and often among its most valuable resources.

There are typical templates for confidentiality clauses, but it is worth adapting them to the needs of the specific agreement, to determine the scope of information and data effectively relevant from the perspective of the company. It is also useful to specify the duration of the confidentiality obligation. Although under current law in Poland, employees can be bound to maintain confidentiality indefinitely, paradoxically, this may provide less protection than limiting the validity of the clause in time. This follows from the principle of civil law prohibiting perpetual obligations (Civil Code Art. 365¹), which, at least in theory, allows for termination of such a perpetual confidentiality agreement.

Non-competition

To understand what can be prohibited, it is first useful to clarify what competitive activity means.

Competition is rivalry, a contest between entities or individuals interested in achieving the same goal. This term is not defined by law, but court decisions recognise that engaging in a competing business is equivalent to acting for profit or participating in ventures or commercial transactions whose effects relate (or may potentially relate), at least in part, to the same clientele (Supreme Court judgment of 12 February 2013, case no. II PK 166/12).

Competitive activity may include, for example, taking up employment with a competitor or serving on the governing bodies of a company with a similar profile, as well as developing one’s own business aimed at the same group of clients. The parties may also decide whether they will define the non-competition clause broadly, e.g. as covering all types of games developed by the employer, or limit it to a certain genre or form of games (e.g. the prohibition will cover only games developed for mobile devices, which will exclude PC games from that category). Employers often seek to define competitive activity to include non-profit activity in a particular area.

A non-competition clause may occur in two variants:

• A prohibition covering only the period of employment or cooperation
• A prohibition requiring the individual to restrict his professional activities also for some time after termination of employment or cooperation.

Depending on the type of agreement between the company and the game developer, the scope of freedom of the parties to regulate their mutual rights and obligations varies.

• Non-competition clause in employment contracts

In the case of an employment contract, a prohibition of competitive activity during the term of the employment is essentially a fixed element of the agreement. Moreover, it is assumed that even if there is no explicit provision in the agreement, a prohibition on undertaking competitive activity is imposed on the employee pursuant to the Labour Code, according to which the employee is obliged to “take care of the good of the workplace, protect its property and keep secret information whose disclosure could expose the employer to a loss” (Labour Code Art. 100 §2(4)). The employer does not have to provide any compensation in exchange for refraining from competitive activity during employment.

An agreement on non-competition after termination of the employment relationship can be concluded only with an employee having access to particularly important information, the disclosure of which could expose the employer to a loss. It is up to the employer to assess whether the information to which the employee has access meets this condition, and is based on a subjective belief. Usually, this category is equated to trade secrets, understood as technical, technological, organisational or other information of economic value not disclosed to the public.

However, if the prohibition of competitive activity covers the period after termination of employment, the former employee is entitled to compensation, the minimum amount of which is determined by the Labour Code. Therefore, the former employer will be obliged to pay at least 25% of the salary received by the employee prior to termination of employment for the period when the non-competition clause applies. However, this amount should be suited to the actual burdensomeness of the non-competition clause.

• Non-competition clause in civil contracts

The situation is different in the case of cooperation with a game developer based on a civil contract. Under the principle of freedom of contract (i.e. that the parties entering into an agreement may arrange the legal relationship as they see fit, as long as the substance or purpose of the relationship does not contradict the nature of the relationship, the law, or principles of social coexistence), in a B2B arrangement and in the case of a game developer who does not run his own business, both parties to civil contracts can agree on a non-competition clause both during and after the termination of their contract.

However, this does not mean that the parties to a civil contract can agree on anything without restrictions, such as a ten-year, unpaid non-competition clause so broad that it practically forces the game developer to change professions. Freedom of contract is limited by principles of social coexistence and the nature of the given legal relationship. Based on these grounds, the Polish courts have held that it is not permissible to oblige a contractor to refrain from competitive activity after termination of the contract without any payment (Supreme Court judgment of 11 September 2013, case no. III CKN 579/12). According to the court, an obligation on the contractor not to engage in competitive activity for three years after termination of the contract, without any payment in lieu, is inconsistent with principles of social coexistence.

But in another judgment, it was held that in a contract between two companies, a competition clause without a fee, with the reservation of a contractual penalty for its breach, although asymmetrical, served an economic purpose and fell within the bounds of contractual loyalty, and thus was not contrary to the nature of the legal relationship or principles of social coexistence (Supreme Court judgment of 5 December 2013, case no. II CSK 30/13). In that case, the court found that the contractor was not the weaker party, and the knowledge he obtained would threaten the economic interests of the former counterparty if used in the interest of another business.

So everything will depend on the circumstances of the particular case. But it is worth remembering that an unpaid non-competition clause may ultimately prove ineffective.

• Scope of the non-competition clause

For a non-competition clause to be effective, its scope should be precisely defined. The parties may regulate the material, personal, temporal and territorial scope of the non-competition clause, but must take into account the subject of the company’s business. This is relevant in determining the following elements of the clause:

• Subject of activity. The non-competition clause will not be effective if it takes the form of an absolute prohibition against performing any activity in a given industry. It must relate to activity actually performed by the company (main or secondary) or planned activity (not a hypothetical possibility).
• Duration. The provisions do not specify the maximum permissible duration of a non-competition clause, but if it is of very long duration, disproportionate to the existing threat to the company’s interests, it may be found to be unacceptable (i.e. conflicting with the nature of the legal relationship or principles of social coexistence). Due to the aforementioned prohibition on creating perpetual obligations, it is also risky to introduce an indefinite non-competition clause, but it should be considered acceptable for the parties to specify in the agreement the earliest date from which it will be possible to terminate the agreement by notice.
• Territory of validity. This may be wider than the territory in which the company currently conducts its business, but it should be justified (e.g. the area of operations of the capital group to which a given company belongs).

Depending on the circumstances, if the non-competition clause is too broad, the court may narrow its scope (reduce the real protection, which is not usually accompanied by a reduction in the amount of the agreed compensation or fee for non-competition) or even invalidate the clause.

In this context, the issue of whether it is possible to ban an employee from undertaking any activity, including an activity that is not competitive, during the term of the contract seems particularly interesting. As a general rule, such a restriction will not be valid, because it violates the principle of the freedom to work, but it may be permissible if it is justified by the employer’s actual interest and the employee is paid enough to compensate for the imposed restrictions (Supreme Court judgment of 6 December 2018, case no. II PK 231/17). However, this scope should exclude the possibility of creating programs or games as a hobby for one’s own needs in free time, outside working hours.

When the interests of the company are infringed

In case of breach of contractual obligations, a company is entitled to take action as provided for in the contract and the law. First of all, if a violation of the non-competition clause occurs during the employment relationship, it may constitute a justifiable reason for termination of the employment contract, including without advance notice. In the case of civil contracts, it is worthwhile for the parties to stipulate that such a breach of obligations may constitute grounds for immediate termination of the contract between the parties.

Subsequently, it may be possible to seek damages for the loss caused to the company by breach of the contractual obligations in question. Proving such damages and accurately determining the amount can be difficult in practice. For this reason, liquidated damages are commonly used to claim a predetermined amount. The law does not regulate their amount, but in case of a dispute the court may mitigate the amount, i.e. reduce it if it finds that the contractual penalty is grossly excessive. It is worthwhile to ensure in advance, i.e. at the stage of concluding the agreement, that the value is somehow determined objectively (e.g. tied to the potential injury or the benefit received in exchange for the non-competition clause), so as to increase the chances of defending it in the event of a conflict between the parties.

Even if the agreement does not contain any the clauses discussed above, it does not mean that the employee or contractor can act with impunity. It could still constitute an act of unfair competition. If an employee or contractor discloses or uses information at another employer, e.g. about the former employer’s confidential marketing plans, he exposes himself to liability for infringement of a trade secret (Art. 11 of the Unfair Competition Act).

It is also an act of unfair competition to induce a person who performs work for a company under an employment relationship or other legal relationship to fail to perform, or improperly perform, the employee’s duties or other contractual duties, in order to benefit oneself or third parties or to harm the company. It is also an act of unfair competition to induce the company’s customers or other persons to terminate an agreement with the company, or fail to perform, or improperly perform the agreement, in order to benefit oneself or third persons or to harm the company (Art. 12 of the Unfair Competition Act).

Commission of an act of unfair competition may result in civil liability (e.g. payment of damages for the loss suffered) and, under certain circumstances, even criminal liability. In particular, this applies to a case of disclosing to another person, or using in one’s own business activity, contrary to a prohibition, information constituting a trade secret, if this causes serious injury to the company. Such an act is punishable by a fine, probation, or imprisonment for up to 2 years.

Summary

It is worth seeking to ensure the loyalty of employees and contractors, but also protecting one’s own interests, by using appropriate clauses limiting the outflow of competent game developers, and with them the potential loss of confidential information to the competition. However, the key is to construct these clauses correctly.

Leaving aside the legal aspects, such as the validity and effectiveness of the clause, it is also worth considering the potential deterrent effect of overly strict non-competition clauses. A company that erects a high legal firewall may discourage talented game developers from cooperating with it. In practice, it may be more effective to narrowly define the scope of the non-competition clause (e.g. with respect to a specific project or a specific territory), combined with appropriate data safeguards.

The need to safeguard one’s own interests is perfectly understandable, but the key is to balance the needs of both parties.

Izabela Dziubak-Napiórkowska, attorney-at-law, Employment practice, Wardyński & Partners