CA
6601/96 Appeal and Counter-Appeal
1. AES Systems
(appellant in appeal and respondent in counter appeal)
2. Bamberger Rosenheim Ltd. (appellant in appeal and
respondent in counter appeal)
v.
1. Moshe Sa’ar
(respondent in appeal and appellant in counter appeal)
2. State of
The Supreme Court Sitting as the Court of Civil Appeal
[August 28th, 2000]
Before President A. Barak,
Justices T. Or, E. Rivlin
Appeal and counter appeal on the Judgments
of the Tel-Aviv District Court (Justice A. Goren) on June18th,
Facts: Appellant No.1 developed independent computer
word processing systems. Appellant
no. 2 was the exclusive distributer of
the systems in
The respondent was fired after
twenty eight months of work, and started a business of computer systems
services. He advertised his services in
the newspaper as a repair and maintenance technician for computer systems,
including Linear systems, he approached the customers of the appellant
directly, using a customer list of the appellant’s. The newspaper advertisement led to a contract
with The Armament Development Authority (RAFAEL-operated by respondent number
two), according to which respondent would provide Linear services to
RAFAEL. These services replaced the
repair and maintenance services that had been given in the past to RAFAEL by
the appellant.
Against the background of these
events three suits were filed in the District Court. In one suit, in the framework of which a
temporary injunction was issued prohibiting the respondent from dealing
directly or indirectly in the sale or provision of service to Linear word
processors for a period of eighteen months from the day the respondent was
fired, which did not apply to the contract with RAFAEL, the appellant sued the
respondent, for violation of his obligations to it, for doing damage to its
property rights and its reputation, and for appropriating its trade secrets. In the second suit the appellants claimed
that the respondent made use of the magnetic disks and diskettes which store
backup programs, application programs and diagnostic programs that were
developed by the appellant and disks that were prepared for use by them, thereby
doing damage to their property rights, and violating their copyright. In this suit it was claimed that RAFAEL is
assisting the respondent in his prohibited actions. The appellants demanded damages from the
respondents, and from RAFAEL. RAFAEL filed a third-party notice. The third suit, directed by the appellant
against RAFAEL, sought the return of hardware equipment and software lists that
were lent by the appellant to RAFAEL and for payment of fair use. RAFAEL filed a countersuit in which it sought
removal of a barrier that the appellant created in its workspaces. It also demanded equipment that it purchased
and did not receive, and payment in the amount of
The District Court
(Vice-President, Justice A. Goren), in its judgment, dismissed the appellants’
claims inasmuch as they related to violation of copyright or damage to
reputation. It was also held that the
respondent violated the agreement not to compete with the appellant’s business,
and that the respondent made use of the customer list of the appellant within
the eighteen month period, and that a contract with RAFAEL resulted from the violation
of the agreement not to compete. It was
also held that it was not proven that contracts with other customers resulted
in agreements between those customers and the respondent, within the eighteen
month period, and therefore it was not shown that agreement of the respondent
in this matter was violated. The court
also held that as a result of the agreement between the respondent and RAFAEL,
RAFAEL ceased receiving Linear System maintenance services from the appellants. The court determined compensation for the
appellants in the amount of $25,000.
Additionally, the State of Israel (under whose aegis RAFAEL was
operating) was ordered by the court to pay the appellant for the value of
certain hardware and software items, which were given to RAFAEL by the
appellants, and which remained in their possession. The appeal and the counter-appeal were
directed against the judgment of the District Court.
Held: The
Court allowed the respondent’s appeal voiding the award of damages to the
appellant for the contract with RAFAEL.
The court denied the appellants’ appeal and the appeal of respondent no.
2. The Court also denied the
respondent’s appeal inasmuch as it related to software and hardware. The
appellants were ordered to pay the respondent’s costs in the sum of
For the appellant—Z Hubers
For Respondent no. 1 —A. Loit
For Respondent no. 2 –R.
Zakai-Newman
Basic laws cited:
Basic Law: Human Dignity and
Basic Law: Freedom of
Occupation, s. 4.
Legislation cited:
Contracts (General Part) Law
5733-1973, ss. 19, 25(b), 30, 31..
Restrictive Trade Practices Law
5748-1988.
Commercial Torts Law 5759-1999.
Contracts (Remedies for Breach
of Contract) Law 5731-1970, ss. 3(4), 4.
Israeli Supreme Court cases
cited:
[1]
CA 614/76 Jane Doe v. John Doe IsrSC 31(3) 85.
[2]
CA 294/91 Chevra Kadisha KAHSHA “Kehillat Yerushalayim” v. Kestenbaum
IsrSC 46(2) 464.
[3]
CA 239/92 “EGGED”
[4]
HCJ 1683/93 Yavin Plast Ltd. v. The
[5]
LCA 5768/94 A.S.I.R Import, Manufacture, and Distribution v.
Accessories and Products Ltd. IsrSC 52(4) 289.
[6]
HCJ 1703/92 C.A.L. Cargo Airlines Ltd. v. The Prime Minister,
IsrSC 52(4) 193.
[7]
HCJ 28/94 Tzarfati v. Minister of Health IsrSC 49(3) 804.
[8]
CA 2247/95 General Director of the Antitrust Authority v. T’nuvah
Center for Cooperation and Marketing of Agriculture Products in
[9]
LCA 371/89 Leibovitz v. Eliyahu Ltd. IsrSC 44(2) 309.
[10]
HCJ 588/84 K.S.R. Asbestos
Trade Ltd. v. President of the Antitrust Tribunal IsrSC 40(1)29.
[11]
CA 312/74 Cable and Electric Cable Company in Israel Ltd. v. Martin
Christianpalour IsrSC 29(1) 316.
[12]
CA 4/74 Berman v. Misrad Lehovalat Masaot Pardes Hana – Carcur “Amal”
Ltd. IsrSC 29 (2) 718.
[13]
CA 618/85 Ma’ayanot Hagalil Hamaravi Ltd. v. Tavori BEHAR Soft Drinks
Ltd. IsrSc 40(4)343.
[14]
CA 2600/90 Elite Israeli Company for Manufacture of Chocolate and
Candies Ltd. v. Serengah IsrSC 49(5) 796.
[15]
CA 1142/92 Vargus Ltd. v. Camax Ltd. IsrSC 51(3) 421.
[16]
CA 136/56 Fuchs. v. Eylon and Etzioni Ltd. IsrSC 11 358.
[17]
CA 136/64 “Francitext”Ltd. v. Utzitel Ltd. IsrSC 18(3) 617.
[18]
CA 238/73 Sharabi v. Chamtzani, IsrSC 28(1) 85.
[19]
CA 157/88 “EGGED”
[20]
HCJ 935/89 Ganor v. State Attorney IsrSC 44(2) 485 at pp. 513.
[21]
CA 155/80 Rav Bariach Ltd. v. Amgar IsrSC 35(1) 817.
[22]
CA 566/77 Dicker v. Moch IsrSC 32(2) 141.
[23]
CA 1371/90 Damati v. Ganor IsrSC 44(4) 847.
[24]
CA 901/90 Nahmias v.
[25]
LCA 672/96 “EGGED”
[26]
CA 369/74 “TromAsbest” Company for Assembly of Pre Structures Ltd. v.
Zakai, IsrSC 30(1) 793.
[27]
CA 4628/93 State of
[28]
CA 214/89 Avneri v. Shapira IsrSC 43(3) 840.
[29]
LA 164/99 Frumer and Checkpoint Software Technologies Ltd. –
Redguard Ltd. (not yet reported).
[30]
LC 54 3-110/ First Class Service Ltd. – Mati Kosacks LCC 26, 451
at p. 462.
[31]
LC 42 3-74/ Vardi-City of Netanyah LCC 14 59.
English cases cited:
[32]
Hepworth Manufacturing Co. v. Riyott, [1920] 1 Ch 1, 12.
[33]
Nordenfelt v. Maxim Nordenfelt Guns and Ammunition
[34]
Gledhow Autoparts Ltd v. Delaney [1965] 3 All. E.R. 288, 291.
[35]
Esso Petroleum Co. Ltd. V. Harper’s Garage (Stourport)
Ltd [1967] 1 All E.R. 699.
[36]
Kores Manufacturing Co. v. Kolok Manufacturing Co. [1959]
[37]
Lansing Linde Ltd v. Kerr [1991] 1 W.L.R 251.
French cases cited:
[38]
Cass. 5OC. 14 Mai 1992 Droit Social No. 12, 976 (1992).
Israeli books cited:
[39]
D. Friedman and N. Cohen Contracts 15 (Vol. A, 1991).
[40]
E. Zamir Contract Interpretation and Supplementation (1996).
[41]
A. Barak Interpretation in Law, Vol. 2, Statutory
Construction (1993).
Israeli articles cited:
[42]
Porat ‘Considerations of Justice Between Parties to a Contract and
Considerations of Guiding Behaviors in Israeli Contract Law’ Iyunei Mishpat
22.
[43]
Friedman “Contracts of Adhesion, Good Faith and Public Policy” Iyunei
Mishpat 7, 431 at p. 433 (1979).
[44]
Gilo, ‘Toward a New Legal Policy toward Non-Compete Terms,’ Iyunei
Mishpat 23, 63 (2000).
[45]
Cohen, ‘Freedom of Trade and Commercial Competition’ Iyunei Mishpat
19, 353 (1995).
[46]
Hermon, ““Public Policy” and the Limitations on Freedom of Occupation in
the Perspective of Israeli and English Case Law,” The Cohen Book,
393,403 (1989).
[47]
Goldberg, ‘Limiting Freedom of Occupation of the Employee by Contract’
Mechkarei Mishpat 4, 7 (1987).
[48]
Goldberg ‘Freedom of Contract in Labour Law’ 672, 678 (1972)
[49]
Goldberg ‘Good Faith in Labour Law’ Sefer Bar-Niv 13 (1987).
Foreign books cited:
[50]
I. T. Smith and G.
Thomas, Industrial Law 86 (1996).
[51]
R. Upex, The Law of Termination of Employment 432 (5th. Ed.,
1997)).
[52]
[53]
Chitty, On Contracts 890 (Vol. 1, 28th ed., 1999).
[54]
Trertel, The Law of Contract 416 (9th ed., (1995).
[55]
M. Weiss, Labour Law and Industrial
Relations in
[56]
A. Berenstein, Labour Law and Industrial Relations in
[57]
R.W. Arthure et al, Labour Law and Industrial Relations in Canada
138 (1993).
Foreign articles cited:
[58]
Hanna Bui-Eve, ‘To Hire or Not to Hire: What Silicon Valley Companies
Should Know About Hiring Competitor’s Employees,’ 48
[59]
Gilson, ‘The Legal Infrastructure of High Technology Industrial
Districts:
[60]
O’Malley, ‘Covenants Not to Compete in the
Other:
[61]
Restatement 2d, Contracts,
§§188, 188(1)(a).
JUDGMENT
President A. Barak
The Facts
1.
Appellant No.1 developed independent computer word processing
systems. It used systems called “Linear
systems”. Appellant no. 2 (hereinafter, “the appellant”) received
from appellant no. 1 the right of exclusive distribution of the systems in
“The
employee hereby undertakes not to compete with B/R [the appellant A.B.] either directly or indirectly, whether or not
he acts in his capacity as an employee of B/R, to the extent that any loss is
caused by such competition to the business of B/R as distributor, marketer and
service provider for equipment made by Linear and/or any other name by which
such equipment will be called in the future.
So too the employee undertakes not to take any action that would
undermine, eliminate, or damage B/R’s relationships with its customers."
The respondent signed an
“Agreement to Protect Confidentiality.”
According to it he was obligated to maintain the absolute
confidentiality of information that he might obtain in the framework of his
employment. The respondent was obligated
not to make use of such information nor utilize it for commercial
purposes. Information that the
respondent already possessed before beginning his employment and information
that was available to the public was outside the purview of the agreement. Both agreements were not limited in
time.
2. After twenty eight months of work, the
respondent was fired. He started a
business of computer systems services.
He took out an advertisement in the newspaper offering his services as a
repair or maintenance technician for computer systems, including Linear
systems. In addition, he directly
approached the customers of the appellant, using a customer list of the
appellant’s that he had. As a result of the newspaper advertisement a contract
was signed between the respondent and the Armament Development Authority
(RAFAEL-operated by respondent number two) according to which the respondent
would provide Linear services to RAFAEL.
These services came in place of the repair and maintenance services
which the appellant had given in the past to RAFAEL.
3. Against the background of these events three
suits were filed in the District Court.
In one suit, the appellant sued the respondent for violation of his
obligations toward it, for doing damage to its property rights and its
reputation, and for appropriating its trade secrets. In the framework of this suit the District
Court granted a temporary injunction which prohibited the respondent from
dealing directly or indirectly in the sale or provision of services for word
processors of the Linear type until the expiry of eighteen months from the day
the respondent was fired. The injunction
did not apply to the contract with RAFAEL.
In the second suit the appellants claimed that the respondent made use,
in the course of providing services to his customers, of the magnetic disks and
diskettes which store backup programs, application programs and diagnostic
programs that were developed by the appellant and disks that were prepared for
use by them. In this the respondents,
according to the appellants’ claim, violated their property rights and
infringed on their copyright. In this
suit it was claimed against RAFAEL that it is aiding the respondent in his
prohibited actions. The appellants
demanded compensation from the respondents, and from RAFAEL, for causing by
their behavior the breach of contracts between the appellant and its customers,
the breach of an implied term that arose from the work relationship between the
appellant and the respondent, and for unjust enrichment. RAFAEL for its part filed a third-party
notice. The third suit was directed by
the appellant against RAFAEL, for the return of hardware equipment and software
materials that were lent by it to RAFAEL and for payment of fair use for
them. RAFAEL for its part filed a
countersuit in which it requested removal of a block that the appellant created
in its workspaces. It also demanded the
supply of equipment that it purchased and did not receive, and payment in the
amount of
4. In a
comprehensive and thorough judgment the District Court (Vice-President, Justice
A. Goren) dismissed the claims of the appellants inasmuch as they related to
infringement of their copyright or damage to their reputation. On the other hand, it was held that the
respondent breached the agreement not to compete with the appellant’s
business. So too it was held that the
respondent had made use of the customer list of the appellant. Breach of the agreement not to compete
yielded – within the eighteen months during which the temporary injunction was
issued (this being the period to which the appellant limited its claims) – the
contract with RAFAEL. As for contracts
with other customers based on the customer list in the possession of the
respondent, it was held that it was not proven that these yielded -- during the
limitation period of eighteen months -- agreements between those customers and
the respondent and therefore it is not to be said that the respondent’s
agreement in this matter was breached.
The Court held that as a result of the agreement between the respondent
and RAFAEL, RAFAEL ceased to receive maintenance services from the appellants
for the Linear systems in RAFAEL’s possession.
For these losses the court held that the respondent was to compensate
the appellants in the amount of $25,000.
So too, a court ordered the State of Israel (under whose aegis RAFAEL
was operating) to pay the appellant the value of certain hardware and software
items given to RAFAEL by the appellants, and which remained in their
possession.
The Appeals
5. The appeal and the counter-appeal before us
are directed against this judgment. The
appellants’ claim that it should be determined that the respondent made
prohibited use of the programs that were developed by them and these actions
damaged their property rights and their reputation. They also claim that the District Court erred
in holding that the marketing and advertising actions undertaken by the
respondent during the eighteen months are not to be seen as a breach of their
agreements with the appellants, even if this breach did not result in
transactions. The respondent, for his
part, appeals the decision requiring him to pay damages to the appellant for
his contract with RAFAEL. He also
appeals (alternatively) the amounts that were awarded. The State of Israel (which operates RAFAEL)
claims, in an appeal that was filed on its behalf, that it was inappropriate to
require it to pay the appellants the value of the software and hardware items,
either because they were not supplied to it at all or because the appellant is
not entitled to payment for them.
Property Rights of the
Appellant, Damage to Reputation, and Compensation for Software and Hardware
Items
6. The parties’ claims on these matters ask us
to intervene in the factual findings of the trial court. We will not do so. The decisions of the District Court are based
on findings that were determined on the basis of expert opinions and
testimony. These findings are well
anchored in the evidentiary material and we will not interfere in them. This also applies to the property rights of
the appellant and to the damage to its reputation. We have also not found that it would be
appropriate to intervene in the judgment of the District Court as to the
compensation for software and hardware items that were handed over to RAFAEL. The factual findings in these matters rely on
proper interpretation of the relevant documents and of the evidence that was
brought before the District Court; we will not interfere in them.
Limiting Freedom of Occupation
7. There are two questions before us: The one is
whether the obligation of the respondent not to compete with the appellant is
lawful; the second is whether it was lawfully determined that the respondent is
not liable for the use that he made of the customer list, as this usage did not
result in a contract with the customers within the period of eighteen
months. These two questions are related
to one central issue, which relates to the validity of agreements which limit
the freedom of occupation. But the
fundamental starting point for examining these issues is found in the
provisions of section 30 of the Contracts (General Part) Law 5733-1973 which
establishes:
"a
contract whose execution, content, or purpose are illegal, immoral or against
public policy -- is void."
"Public policy" reflects
the fundamental approaches of Israeli society as to the appropriate level of
behavior in contractual relationships.
It expresses the position of Israeli law as to what is permitted and
what is prohibited in contractual relationships. The content of public policy changes from
society to society; it changes in any given society from one point in time to
another point in time (see CA 614/76 Jane Doe v. John Doe [1] at p.
94). The judge learns about the core
values of Israeli society and the approach of Israeli law as to what is
permitted and what is prohibited from the totality of values of the legal
system. Primary among these values are
the constitutional values of the law and the regime. Therefore, human rights anchored in the basic
laws constitute a central source – even if not the only source -- from which
the judge draws the values which come together to form the Israeli “public
policy". And note: human rights in
the basic laws are directed toward public entities. They do not grant, on their own and directly,
rights to an individual as against another individual. However, the basic rights -- and other
constitutional provisions anchored in the basic rights -- establish a system of
values and core concepts in the framework of which the law (the public and the
private) operates and develops (see CA 294/91 Chevra Kadisha KAHSHA
“Kehillat Yerushalayim” v. Kestenbaum
[2] at p. 531; see CA 239/92 “EGGED”
8. The values of a legal system, its core
values, purposes and interests, are in constant conflict. When this conflict takes place in the
framework of the basic laws themselves, it is resolved by the balances
(vertical and horizontal) which apply to the matter (as to the vertical
balance, the limitation clause in section 4 of the Basic Law: Human Dignity and
Public Policy and Clauses
Limiting Freedom of Occupation
9. What does "public policy" require
as to terms between employer and employee which limit the freedom of occupation,
and in our case, terms by which upon termination of employment an employee
agrees not to compete with the employer and not to make use of information
received during his period of employment?
In order to develop "public policy" in this context it is necessary
to understand the values, principles and interests competing for primacy, and
the proper balance between them (see the judgment of the National Labour Court
LA 164/99 Frumer and Checkpoint Software Technologies Ltd. – Redguard Ltd.
[29] (para. 11) (hereinafter: "the Checkpoint
case”)). We will open with values,
principles and interests which support granting validity to the contractual
obligations the parties have taken upon themselves. A first principle that is to be taken into
account is freedom of contract. From
this principle the approach is derived that contracts are to be kept: pacta
sunt servanda. The contract is the
"law" that the parties have established between themselves and which
they must keep. A civilized society
cannot exist and develop if contracts that are made are not
honored. The public interest – an interest that
reflects concepts of justice, morality and social efficiency together – is that
obligations that a(n adult) person takes upon himself will be
honored by him (see D. Friedman
and N. Cohen Contracts 15 (Vol. A, 1991)[39]; E. Zamir Contract
Interpretation and Supplementation (1996)[40]; A. Porat ‘Considerations of
Justice Between Parties to a Contract and Considerations of Guiding Behaviors
in Israeli Contract Law’ [42] at 647). And note: I do not hold that it is "public
policy" that contracts are to be kept.
Public policy is the weighted result which results from the internal
balancing of values and principles which are under consideration. However, I am of the opinion that freedom of
contract and the performance of contracts are central values and interests
which come together to form – in their balancing with other interests and
values -- "public policy" in Israel (see Friedman “Contracts of
Adhesion, Good Faith and Public Policy” [43] at p. 433). The principle of freedom of contract is to be
given substantial weight, as it reflects a constitutional right and a central
public interest.
10. A second interest that is to be considered is
the personal advantage (to the employer) and the public advantage (to society
as a whole) in protecting the employer from competition by the employee in
general, and from use of information that he acquired from the appellant, in
particular (see HCJ 1683/93 Yavin Plast Ltd. v. The
11. I have explained two considerations which
support the validity of clauses limiting freedom of occupation. What are the values, principles, and
interests which are found at the core of the approach which desires to
invalidate these clauses? A first
principle that is to be considered is freedom of occupation. This is a constitutional principle, and is
anchored in the Basic Law: Freedom of Occupation. It is derived from human dignity, and from
freedom of thought and action. The
significance of freedom of occupation is, inter alia, the freedom of an
employee who concluded an employment relationship with his employer to contract
with any employer with whom he desires as well as the freedom of the employee
to start a business of his own, without being bound by agreements limiting
trade. Freedom of occupation is derived
from freedom of competition. (See HCJ
1703/92 C.A.L. Cargo Airlines Ltd. v. The Prime Minister [6]; HCJ 28/94 Tzarfati
v. Minister of Health [7]). However,
freedom of competition is a public interest that stands on its own (see CA
2247/95 General Director of the Anti-Trust Authority v. T’nuvah Center for
Cooperation and Marketing of Agriculture Products in Israel Ltd. [8] at p.
229). It was justly noted that "free competition is likely to bring about
reduced prices, improved quality of the product and improvement of the service
which is given with its sale" (President Shamgar in LCA 371/89 Leibovitz
v. Eliyahu Ltd. [9] at p. 327; HCJ 588/84 K.S.R. Asbestos Trade Ltd. v. President of the
Antitrust Tribunal [10] at p. 37; Cohen “Commercial Competition and Freedom
of Occupation [45] at p. 354 (1995)).
Expression for this public interest has been given in Israeli law inter
alia in anti-trust legislation (See
the Restrictive Trade Practices Act 5748- 1988)
At the foundation of this law is competition, which was intended to
ensure efficient allocation of resources and increased efficiency (see 2247/95 supra,
at 229) Judge Adler rightly emphasized
in the Checkpoint case that:
“The
modern market is based on the existence of free competition in the open market
and a free economy, inter alia, as to capital, and particularly human
capital.... Free competition advances
the marketplace and brings about, inter alia, reduction in prices for the
consumer. A competitive market
encourages establishment of new companies, including companies started by
employees who compete with their previous employers. The employees offer their talents to various
employers and compete with each other for places of work. The employers on their part, offer improved
working conditions with the goal of attracting skilled
labor. . . Society is interested in rapid and free
transfer of information in the marketplace." (Ibid. para. 14).
This principle of freedom of
occupation -- and the freedom of competition derived from it -- is to be given
heavy weight, as it reflects a constitutional right and important public
interest.
12. A second interest which is to be considered
is the employee himself. His
labor is his property, spiritual and
physical. It is the basis for his
self-realization and fulfillment. His freedom
of choice is his life. His capacity to
choose an occupation for himself is the source of his existence and his
property. His training is the means by
which he will be able to compete in the workplace. Keeping him from his work for a specified
period of time may remove him entirely from the workforce and bring about the
destruction of many years of training.
"A person's place of work, where he spends at least a third of his
day, is not merely a means of support, but a place from which he hopes to
achieve self-realization and fulfillment. Limiting the
mobility of the employee will damage his right to personal
fulfillment" (The Checkpoint
case, paragraph 14). This is primarily
so in the context of employment in the field of high-tech. These interests are first and foremost the
interests of the employee. But they also
constitute the interest of the public.
"The good of the public demands that generally, knowledge, rules
and professional skills acquired by an employee in his work will be used
without limitation, as such use is a blessing to the individual and the public
as one" (Justice Berinson in CA 312/74 Cable and Electric Cable Company
in Israel Ltd. v. Martin Christianpalour [11] at p. 320; Hermon, ““Public
Policy” and the Limitations on Freedom of Occupation in the Perspective of
Israeli and English Case Law,” [46] 403).
This is primarily so in the fields of high-tech, in which the public as
a whole has an interest in their development for the good of society. Indeed, the public good justifies recognizing
the freedom of the employee to choose for himself employment at his will. This was justly noted by Judge Astbury in the
Hepworth case (Hepworth Manufacturing Co. v. Riyott [1920] [32]) when he
said:
“A
man’s aptitude, his skill, his dexterity and his manual and mental ability may
not, nor ought to be, relinquished by an employer. They are not his masters [sic] property, they
are his own, they are himself.”
Moreover, in a contractual relationship, the employer and the employee
are not of equal status. The employer
generally is in a stronger bargaining position.
Justice Berinson discussed the “weakness of the employee versus the
employer, who may dictate the terms of the employment contract." (CA 4/74 Berman v. Misrad Lehovalat Masaot
Pardes Hana – Carcur “Amal” Ltd. [12] at p. 722).
The
Balance between Conflicting
Considerations
13. The various considerations which come
together to form "public policy" do not all lead in one
direction. We have before us
"competing" considerations (Vice-President Ben-Porat in CA 618/85 Ma’ayanot
Hagalil Hamaravi Ltd. v. Tavori BEHAR Soft Drinks Ltd. [13] at p. 348; see
also CA 2600/90 Elite Israeli Company for Manufacture of Chocolate and
Candies Ltd. v. Serengah [14] at p. 808).
The one pair of considerations leads in most cases to the recognition of
the validity of contractual clauses limiting the freedom of occupation of the
employee. The second pair of
considerations also leads in most cases to invalidating such contractual
terms. The normative content that will
be given to the concept of "public policy" constitutes, therefore,
the result of the balance between the conflicting values, principles, and
interests. I have explained this in one
of the cases, when I noted:
“As
against the freedom of occupation stand other values, which the law also seeks
to protect. The protection given to
freedom of occupation is a result of the balance that stems from the
confrontation between freedom of occupation on the one hand and other
individual liberties (such as freedom of property, freedom of contract (as part
of human dignity and liberty) on the other, and the confrontation between the
freedom of occupation and the public interest (such as the public interest in
the protection of professional secrets).
. . . as against the freedom of occupation of the employee and the new
employer stand the interests of the original employer that are worthy of
protection, including his property (section 3 of the Basic Law: Human Dignity
and
14. Israeli case law, in the footsteps of English
case law, has determined that the criterion for balance between the competing
interests is reasonableness. A contractual
limitation on the freedom of occupation of the employee will not damage “public
policy” if the limitation is reasonable in terms of the interests of the
parties and in terms of the public interest.
Lord MacNaghten’s words are well known:
“It is a sufficient justification, and indeed
it is the only justification, if the restriction is reasonable -- reasonable,
that is, in reference to the interest of the parties concerned and reasonable
in reference to the interests of the public, so framed and so guarded as to
afford adequate protection to the party in whose favour it is imposed, while at
the same time it is in no way injurious to the public” (Nordenfelt v. Maxim
Nordenfelt Guns and Ammunition Co. Ltd [1894] [33]).
These words and similar ones
have been quoted at length in Israeli case law (see CA 136/56 Fuchs. v.
Eylon and Etzioni Ltd. (hereinafter: “the Fuchs case”) [16] at p.
361; CA 136/64 “Francitext”Ltd. v. Utzitel Ltd. [17] at p. 626; CA
238/73 Sharabi v. Chamtzani [18]; CA 4/74 [12] supra; CA 157/88 “EGGED”
Israel Transport Cooperation Society v. Meiron [19] at p. 526). Of course the reasonableness test is an
appropriate and good test. However, it
does not advance us very much, as the key question is what are the tests for determining
the reasonableness of the contractual limitation. Reasonableness means proper balance between
competing values, interests and principles.
(See HCJ 935/89 Ganor v. State Attorney [20] at p. 514; A. Barak Interpretation
in Law, 663 (volume two, 1993) [41]).
The balance is appropriate if we give the correct weight to the various
considerations that are to be taken into account. What is the proper weight -- and what,
therefore, is the proper balance -- among the various considerations that are
to be taken into account in providing an answer to the question whether the
employee’s agreement not to compete is reasonable?
"Legitimate Interests”
15. The fundamental starting point should be to
avoid the approach of "all or nothing". It is not to be said that all clauses
limiting the freedom occupation of the employee who departs his workplace are
consistent with "public policy."
So too, it is not to be said that all such clauses go against
"public policy." The validity
of clauses which limit freedom of occupation should be determined by the
legitimate interests which they protect.
Indeed, this was the approach taken by the Supreme Court when it placed
the "legitimate interests of the parties and the public” in the center of
its analysis. Justice Berinson explained
this, noting:
"the
limitation must meet the double condition that it is necessary for the
protection of the legitimate interests of the employer from whose workplace the
employee has departed and that it is for the good of the public" (CA
312/74 [11] supra at 319).
Justice Bechor reiterated this
approach noting:
"the
general law is that there exists the right to freedom of occupation in the
field of the employee who has left a place of work with an employer. And if there is an agreement which limits him
in this freedom of occupation after the conclusion of his work with the
employer, two conditions must be met, in order for this limitation to be
valid. The first condition is that it is
necessary to protect the legitimate interests of the employer from which the
employee has left, and the second condition is that this is also necessary for
the good of the public in terms of the interests of the two parties" (CA
155/80 Rav Bariach Ltd. v. Amgar
[21] at p. 825).
M. Goldberger wrote in a
similar vein:
"there
is nothing wrong with limiting the right of a person to choose their occupation
and employment up to the boundaries of the ‘limited right’ of his former
employer in protecting his legitimate interests" (Goldberg, ‘Limiting
Freedom of Occupation of the Employee by Contract’ [47] at 27 (1987)).
Professor Cohen takes a similar
approach:
"a
valid limitation of freedom of occupation is one that protects a legitimate
interest of one in whose favor it is applied, and it must be reasonable both in terms of the parties
and in terms of the public (Cohen, ‘Freedom of Trade and Commercial
Competition’ [45]).
Comparative law undertakes a
similar approach (as to the appropriate use of comparative law in the matter of
limitation of freedom of occupation see CA 566/77 Dicker v. Moch [22] at
p. 146). The American Restatement 2d
(Contracts) [61] establishes that a non-competition clause between an employer
and employee is not reasonable if (section 188(1) (a)):
"The
restraint is greater than is needed to protect a promisee’s legitimate
interests."
English law takes a similar
approach (see I. T. Smith and G.
Thomas, Industrial Law 86 (1996) [50] as well as Gledhow
Autoparts Ltd v. Delaney [1965] [34]).
This approach is also common in French law (see Cass. 5OC. 14 Mai 1992 Droit
Social No. 12, 976 (1992) [38]. Indeed,
the relevant question is what are the interests considered legitimate -- in
terms of the parties and the public --by the legal system, which clauses
limiting freedom of occupation lawfully protect.
16. In connection with "legitimate
interest" it has occasionally been emphasized in the case law that both
the legitimate interests of the parties and the legitimate interests of the
public are to be considered, and that the public interest is secondary to the
legitimate interests of the parties. The
following words of Justice Berinson which relate to the consideration of
"the public good" are typical:
"the
public good remains important; however, it has always been of secondary
importance compared with the first reason which relates to the interest of the
parties themselves" (CA 4/74 [12] supra, at p.722; see also CA
1371/90 [23] supra; CA 238/73 [18] supra at p. 91).
However, it has been emphasized
"there exist extraordinary cases, as in the example of the creation of a
harmful monopoly, in which the public interest would be sufficient to justify
invalidating a clause of that type" (CA 901/90 Nahmias v. Columbia
Trade and Manufacture Ltd. [24] at p. 264).
Personally, I do not believe it is appropriate to distinguish between
the legitimate interests of the parties and the legitimate interests of the
public. This is a matter of invalidating
a contractual clause on the grounds of "public policy." It appears that the perspective is that of
the public. The legitimacy of the
parties’ interest is determined, therefore, from the perspective of public
policy. Moreover: the various human
rights -- such as freedom of contract, freedom of occupation, property rights
and other human rights -- express both the private interest and the public
interest. Indeed, we must not separate
between the legitimate interests of the parties (as opposed to an undefined
interest) and the public interest. This
is a matter of the public interest, which takes account of the totality of the
facts, including the legitimate interests of the parties. Lord Pierce discussed this in a key case on
this issue:
“Although
the decided cases are almost invariably based on unreasonableness between the
parties, it is ultimately on the ground of public policy that the court will
decline to enforce a restraint as being unreasonable between the
parties... There is not, as some cases
seem to suggest, a separation between what is reasonable on the ground of
public policy and what is reasonable as between the parties. There is one broad question: is it in the
interest of the community that this restraint should, as between the parties,
be held to be reasonable and enforceable?"(Esso Petroleum Co. Ltd. V.
Harper’s Garage (Stourport) Ltd [1967] [35] 724).
Indeed, the employer has his
own interest and the employee his own interest.
Those interests may be different from the public interest. But we are not interested in the parties’
interest. We are interested in the
legitimate interests of the parties. And
the legitimacy of the interest is determined by general considerations of the
legal system, its principles and approaches.
The public interest and the legitimate interests of the parties are one
and the same. Therefore, whilst I will
continue to discuss the legitimate interests of the parties and the legitimate
interests of the public, I do not see them as separate concepts, but a uniform
concept of the legitimate interests of the public ("public policy")
which takes into account for its part, inter alia, the parties’
interests, whereby some of them will be protected (the "legitimate"
ones) and the others will not be protected.
17. From the perspective of the legitimacy of the
interests the following conclusion is warranted: as a rule, the employer does
not have "a legitimate interest" that a non-competition agreement
will be given validity, without any other connection to the other interests of
the employer; similarly, as a rule the employee does not have a
"legitimate interest" that a non-competition agreement will be
invalidated, without any connection to the other interests of the
employer. Indeed, as a rule, the
employer's interest in preventing a former employee from competing with him,
without this coming to protect additional interests (beyond the non-competition),
such as trade secrets or customer lists, is not a legitimate (nor a
"protected") interest.
Non-Competition for its Own
Sake
18. I will open with the employer’s interest that
a former employee not compete with him.
In this matter we must presume that the employer does not have trade
secrets or customer lists or another “legitimate interest” which he seeks to
protect. The single interest claimed by
the employer is his wish – a wish that is expressed in a non-competition
clause– that his employer not compete with him.
Is this “bare” interest – non-competition “on its own” – a “legitimate”
interest to be protected, in such a manner that a non-competition clause will
not be considered against “public policy”?
This problem came before the court in the Fuchs case, in which
Justice Landau distinguished between an employee’s agreement with his employer
not to compete with him and a contract in which the seller of goodwill
undertakes an obligation vis-à-vis the buyer not to deal in a competing
business. In relating to the first type
of case – the type we are dealing with in this appeal – Justice Landau writes:
“The
tendency to invalidate the agreement is much greater in the first type. The reason for this is that in such cases the
employer is not protecting an existing interest but is trying to obtain an
advantage he is not entitled to, as the rules of commerce require him to resign
himself to the competition of any person dealing in similar trade, and this
includes the competition of his employee, after he has left his employment,
with the condition that the employee is not utilizing to his advantage the
trade secrets of his employer or the special ties which he made with the
clients of his employer during the period of his employment with the employer. Therefore, the court provides a remedy for
the employee on whom the employer has imposed, due to his superior bargaining
position, an agreement which limits his freedom of occupation – and permits the
prohibited.” (Fuchs case, p. 361)
In a similar vein Justice
Bechor held:
“The
general law is that there exists a right to freedom of occupation in the
profession of the employee who has left his employer’s workplace. If there is an agreement which limits him in
this freedom of occupation after the conclusion of his work with the employer,
two conditions must be met so that this limitation will be valid. The first condition is that it is necessary
for the protection of the legitimate interests of the employer which the
employee has left, and the second condition is that the matter also is
necessary for the good of the public in terms of the interest of both
parties. The good of the public requires
that the departing employee will generally be able to make use, without limitation,
of the general knowledge and skill that he acquired in his work. The legitimate interest of the employer is to
protect his trade secret, and that is the first condition necessary to justify
the conditioning of the limitation of freedom of occupation” (CA 155/80 [21] supra,
at p. 825).
Justice Bejski repeated the
same principal:
“Inasmuch
as it is a matter of general knowledge and even professional skill that was
acquired during the course of employment, the public interest requires that the
employee will be able to used them with another employer or as an
independent. If you say otherwise, this
may sentence the employee to abandoning the immediate profession for which he
has qualified and he may become a burden on the public. Not so as to special trade secrets which
typify a specific business, the use of which by the employee may cause a loss
to the employer. As to the latter, and
this includes ties with suppliers and customers, the employer is entitled to
protection” (CA 1371/91 [23] supra, at p. 854).
This is also the approach of the
National Labour Court. In the Checkpoint
Case the National Labour Court emphasized that “absent ‘trade secrets’ the
principal of freedom of occupation prevails over the principal of freedom of
contract” (Ibid, para. 14).
President Adler noted that “a
legal system protects the property of the employer, even during consideration
of suits whose purpose is to limit an employee who worked with an employer from
handing over trade secrets which belong to him.” We find that as a rule a “bare” agreement not
to compete, which does not protect the interests of the employer beyond the
interest of non-competition “for its own sake” (such as his interests in
protecting trade secrets and customer lists) does not shape a “legitimate
interest” of the employer, and is subject to be invalidated as being against
“public policy” (but see LCA 672/96 “EGGED” Israel Transport Cooperation
Society v. Rachtman [25]).
19. This is also the law in
“To
be enforceable, such covenants must protect the employer’s legitimate business
interests, either trade secrets or goodwill and trade connections. It is not
possible to prevent competition as such” (R. Upex, The Law of Termination of
Employment 432 (5th. Ed., 1997)) [51].
Jenkins, L.J. discussed this, noting:
“An employer has no legitimate interest in
preventing an employee, after leaving his service, from entering the service of
a competitor merely on the ground that the new employer is a competitor” (Kores
Manufacturing Co. v. Kolok Manufacturing Co. [1959] [36] 125).
Similar law applies in the
20. We will now turn to the employee's interest
in competing with the employer. Our
premise here is that the employee undertook not to compete with his employer
after the conclusion of his employment.
The employee seeks to be released from this obligation. His claim is that this obligation damages his
ability to compete with his employer. Is
this "bare" interest -- the competition "for its own sake"
-- a "legitimate" interest that is to be protected, in a manner that
a contractual obligation which limits it will be against "public
policy"? Similar to the matter of
the employer, here too the answer is that only a legitimate interest of the
employee will be sufficient to justify invalidating clauses limiting freedom of
occupation. The employee does not have a
"legitimate interest" in competing with his employer under all
circumstances. There exist employer
interests (such as his interest in protecting trade secrets and customer lists)
which are worthy of protection. In the
framework of these interests, the employee's interest in competing retreats,
and the employee's obligation not to compete with his employer is validated
(see the Fuchs case, p. 361; CA 155/80 [21] supra, at p. 825).
Justice Berinson explained this, noting:
"The
big difference between the employee's duty to protect the employer’s
professional secrets and secret information and the limitation of freedom of
occupation of the employee after his departure from employment with the
employer must be pointed out. Trade
secrets and secret information are property rights of their owners and the
employee is prohibited from using them for his own purposes or from revealing
them to others at any point in time" (CA 312/74 [11] supra at
319).
In a similar vein Justice
Bejski noted, when relating to a term between an employer and employee limiting
the freedom of occupation of the employee:
"The
tendency to invalidate a restrictive clause
in an agreement of the first type is stronger -- because in that case
the employer attempts to achieve an advantage that he is not entitled to, and
this is as long as the employee does not take advantage of trade secrets or
commercial ties that he established
during his work with the employer.” (CA 369/74 [26] supra at 796)
21. What are the reasons that lie at the base of
the approach that freedom of competition is not absolute, and that it does not
always exist (as the employee claims) and is not always to be prevented (as the
employer claims relying on a contractual obligation)? My answer is that at the base of this
approach there are three reasons: First there is the proper balance
between the constitutional rights of freedom of contract on the one hand and
freedom of occupation on the other. This
balance requires mutual concessions.
Freedom of contract is recognized.
The obligation of the employee not to compete with his employer is
fulfilled. However, it holds only where
it protects a legitimate interest of the employer. Similarly, freedom of occupation and the
right to compete which derives from it -- are recognized. The right of an employee to find himself an
occupation, even if he is competing with his employer, is fulfilled. However, it does not apply where it damages a
legitimate interest of the employer.
Thereby, a proper balance between human rights which are competing for
supremacy is found; second is the proper balance between the employer's
interest in protecting his business and the employee's interest in fulfilling
his employment potential. This balance
is achieved according to considerations of the public good. As a rule, the public good demands that the trade
secrets and customer lists of the employer are protected from use by an employee
after his departure. The same public
good generally demands that the employee be enabled to compete with his
employer and develop his employment potential, without being bound by an
obligation that he undertook under conditions of what are largely unequal
bargaining conditions. Goldberg
explained this, noting:
“The public, as such, has an interest in
developing the potential of the employee, and an employer is not entitled to
prevent competition by his former employee even if said employee obtained all
his knowledge from the employer.
However, if the employer has "a pure property interest" in
preventing competition of this type, it is possible... to enforce a clause
limiting freedom of occupation." (Goldberg ‘Freedom of Contract in Labour
Law’ [48] at 678 (1972); 1371/90 [23] at 854).
Third, this balance reflects the relationship of
trust that exists between an employee and employer. This relationship of trust justifies obliging
the employee not to do damage to the employer by means of use of secret
information that has come into his possession during his employment (see LC 42
3-74/ Vardi-City of Netanyah [31] 59; Goldberg ‘Good Faith in Labour
Law’ [49]). I explained this in one of
the cases when I noted:
"The
employee has an obligation, derived from the relationship of trust between him
and his employer and anchored in the contract with the employer and in the need
to implement a contract in good faith, to protect the employer's trade secrets,
not to use them for his own purposes or for the purposes of others and not to
reveal them other than with the employer's permission" (HCJ 1683/93 [4] supra
at 707).
So too this balance reflects
the proper laws of commerce (see Commercial Torts Law 5759-1999), the principle
of good faith and the fair conduct between employer and employee in our society
(compare LCA 5768/94 [5] supra).
Justice Strasberg-Cohen explained this in one of the cases:
"One
must consider the public interest in establishing a
behavioral norm characterized by
fairness and good faith. In principal,
such a balance requires that an employee who has left a workplace protect the
trade secrets of his previous employer, live up to his duty of trust in him and
not be unjustly enriched at his expense" (CA 1142/92 [15] supra at
429).
22. Thus, the reasons I have explained justify a
middle ground, according to which in the overall balance freedom of occupation
prevails when all that stands against it is the employer's interest in
non-competition, while freedom of contract prevails when alongside it stands a
legitimate interest of the employer such as a "proprietary" or
"quasi-proprietary” interest of the employer. It is then the case that limiting competition
“for its own sake” – a “bare” limitation which does not protect the employer’s
interest beyond the interest in non-competition – does not protect any
“legitimate interest” of the employer at all.
It goes against the public good and it will be invalidated in the
framework of “public policy”.
On the other hand, limitation
of competition which is intended to protect the interests of the employer in
trade secrets, customer lists, reputation and the like the "legitimate
interests" of the employer, and as a rule does not go against public
policy. This overall balance is achieved
entirely in the framework of “public policy” and is shaped by “public policy”
considerations... ,There may therefore
in a special case be a public interest that will justify deviation from this
overall balance (see Gilo, ‘Toward a New Legal Policy toward Non-Compete Terms’
[44] at p. 75 (2000)).
Protection of the “Legitimate
Interests” of the Employer
23. Thus, limitation of freedom of occupation
operates, as a rule, in the framework of the “legitimate interests” of the
employer. Examining these interests raises three questions: the
first, what are these interests, and how are they characterized; the second,
what is the extent of the protection given to “legitimate interests” and what
are the limitations which apply to a contractual obligation not to compete in
the framework of the “legitimate
interests”; the third, what are the remedies that the employer is
entitled to when the employee breaches his obligation not to compete in the
framework of the “legitimate interests.”
We will discuss these questions separately. We will do so only to the extent that the
appeal before us raises those questions.
The Essence of the “Legitimate
Interests”
24. The case law recognizes trade secrets and
customer lists as legitimate interests of the employer worthy of
protection. Occasionally these interests
are described as “proprietary rights” of the employer (see for example CA
312/74 [11] supra, at 319). In
English literature the “proprietary interests” of the employer are referenced
(see Upex [51] Ibid. at 433).
This list is not comprehensive and is not closed. The “proprietary” language in this context
raises difficult questions. In my
opinion, it is appropriate to move away from these characterizations. The reasons found at the basis of the law,
and not the label given to them, should determine the scope of the “legitimate
interests” of the employer. In the
framework of this appeal it is not necessary to examine these questions in
depth. Thus, for example, I accept that
the appellant’s customer list, in the circumstances of the matter before us,
constitutes a “legitimate interest” for the appellant which enables limitation
of the freedom of occupation of the respondent.
The Scope of the Protection
Given to the Protected Interests
25. Identifying the “protected interests” – such
as trade secrets and customer lists – is only the beginning of the road in
establishing the legality of limitation on freedom of occupation. After it was determined that the contractual
clause limiting freedom of occupation relates to the employer’s “legitimate
interests”, the question arises whether the extent of the limitation is
lawful. Smith and Thomas discussed this,
noting:
“Once
there is a legally protected interest, the question which then arises concerns
the extent to which the employer can bind the employee’s future conduct in
order to protect that interest” (Ibid. [50] p. 88).
In a similar vein Chestire,
Fifoot and Furmston note:
“The
existence of some proprietary or other legitimate interest... must first be
proved, and then it must be shown to the satisfaction of the court that the
restraint as regards its area, its period of operation and the activities
against which it is directed is not excessive”
(Chestire, Fifoot and Furmston’s, Law of Contract 420 (13th. Ed., 1996)).
Even if an employer is entitled
to the protection of his “legitimate interests” such protection is not
absolute. This is relative protection
which must take into account the public interest (including the “legitimate
interests” of the employee). Justice
Strasberg-Cohen explained this when she noted:
“Hand
in hand with the recognition of the right to protect trade secrets, barriers
and brakes have been created and relevant considerations have been established
for bounding the limits of the protection that is afforded . . . the confidentiality is relative and is not
viewed as absolute. It changes in
accordance with the circumstances” (CA 2600/90 [14] supra at 807).
The test is one of
reasonableness or proportionality. The
employer is entitled to protection of his “legitimate interests” to the
appropriate proportion. Beyond this
proportion, the interest ceases to be legitimate. What is this reasonableness or
proportionality and how does it operate?
26. The reasonableness or proportionality test
seeks to ensure that the protection of the “legitimate interests” of the
employer do not deviate beyond that which is necessary. In this context the extent of the limitation
is to be examined in terms of time, place, and type of activity. The question in every case is whether the
timeframe, limits, and type of limitation do not deviate beyond that which is
reasonable and necessary in order to protect the legitimate interests of the
employer. President Adler explained this
in the Checkpoint case, noting
"In
the framework of the judicial balance, the courts must apply the
proportionality and reasonableness test; –that is, they must examine whether
the limitation on freedom of occupation passes the reasonableness test under
the circumstances. In this context, one
must consider the reasonableness of the period of limitation, including the
need to safeguard the trade secrets which belong to the prior employer, its
scope, and its geographic range... So
too the measure of damage to the employee is to be examined as well as the
measure of damage to the prior employer...
It is to be noted that the reasonableness test is a broad test, which
includes the protection of many and varied interests of the employer. However, the protected interest, generally,
is the trade secrets which belong to him" (Ibid. paragraph 12).
The restrictive means must be
adapted to the "legitimate interest" entitled to protection, and must
not deviate from it (the test of time, place and type). In this context the “legitimate interests” of
the employee are also to be considered.
A limitation which denies to the employee the capacity to work in his
field of expertise should not be recognized.
A limitation that denies to the employee his ability to make a living is
not to be justified. The restatement
explains this, noting:
"The
harm caused to the employee may be excessive if the restraint inhibits his
personal freedom by preventing him from earning his livelihood if he quits”
(Restatement, Second, Contracts [61] par.
188, comment c. p. 43).
It is in this context that one
may consider, inter alia, the question whether an employment contract
guarantees the employee a (full or partial) salary during the period of
limitation. This practice (known as
"Garden leave") is common in
27. Alongside the employee interest one must also
consider the public interest. The public
interest may demand invalidation of the limitation on freedom of occupation,
which from other perspectives appears proportional. The public interest is expressed, inter
alia, in the needs of the marketplace, the development of industries and
encouragement of competition. Such is
generally the case (see Gilo [44] Ibid.). This is so in particular in high-tech
industries (see Hanna Bui-Eve, ‘To Hire or Not to Hire: What Silicon Valley
Companies Should Know About Hiring Competitor’s Employees’[58];Gilson, ‘The
Legal Infrastructure of High Technology Industrial Districts: Silicon
Valley, Route 128, and Covenants Not to Compete’ [59]; O’Malley, ‘Covenants Not
to Compete in the Massachusetts Hi-Tech Industry: Assessing the Need for a
Legislative Solution’ [60]).
28. One may ask: if the validity of clauses
limiting freedom of occupation is
limited only to situations in which the employer has a "legitimate
interest," what need is there for such clauses, as generally the
"proprietary" interest or the "quasi-proprietary" interest
of the employer is protected without the need for an explicit clause (see
HCJ1683/93 [4] supra) The answer
is that with the development of duties in the law which protect the "legitimate
interests" of the employer, indeed the importance of clauses limiting
freedom of occupation has diminished.
However, they are not superfluous, and this is so for two primary
reasons: First, there is not complete overlap between the protection given
by the general law to the "legitimate interests" of the employer and
the protection given them in the framework of clauses limiting freedom of
occupation; this is primarily so in all that relates to considerations of
trust, fairness, good faith and fair dealing.
In these matters the general law is still in its early stages of
development (compare LCA 5768/94 [5] supra) and therefore there is
importance to the explicit contractual clause; second, the contractual
clause has “evidentiary” importance. On
can see by it what is regarded by the parties as a trade secret or customer
list or other "legitimate interest,” the importance attributed to it, the
degree of knowledge that they had as to it, and the proportionality of the
limitation (see Chitty [53] at 891).
Remedies
29. Clauses limiting freedom of occupation beyond
the legitimate interests of the parties go against "public policy,"
and are therefore void (section 30 of the Contracts (General Part) Law, also
taking into consideration section 31 of the Contracts Law). A clause which limits freedom of occupation
in the framework of the legitimate interests of the parties is valid, and the
party in breach is entitled to all the remedies given for breach of contract. These remedies raise complex questions
inasmuch as they relate to fulfilling the "legitimate interest" of
the employer and to his protection.
These questions do not arise before us and I will not express an opinion
on them. I will only note that
occasionally the question arises as to whether the court may limit the scope of
a limitation on freedom of occupation in order to bring it within the
requirements of reasonableness and proportionality. Such was the action of the court in the case
before us in limiting a limitation which had no timeframe to the timeframe of
eighteen months. The court will do so
first and foremost through the use of the rules of construction. “Where a contract is open to various
interpretations, an interpretation which validates it is preferable to an
interpretation according to which it is void” (section 25(b) of the Contracts
(General Part) Law). Indeed the
presumption is that the purpose of a contract is that the freedom of occupation
of the employee is limited as far as the legitimate interests of the employer. If this presumption can be realized – taking
into consideration other presumptions and the parties’ perspective, as it
emerges from the contract and from the circumstances (see CA 4628/93 State
of Israel v. Efromim Residence and Initiative (1991) Ltd. [27]) – via the
language of the contract, the court will do so.
In this context, it is possible, in a suitable case, to limit general
language by the purpose at its core, in such a manner that it will be
constructed as applying only to the “legitimate interests” of the
employer. But what if the general rules
of construction are not sufficient to save the clause from being voided? In such a case the court may bring the
limitation on freedom of occupation within the boundaries of the proportional
or reasonable, and this by way of “severance” between the void portion and the
valid portion (section 19 and section 31 of the Contracts (General Part) Law),
but even in the absence of the option of severance -- and as a condition of
enforcement (section 3(4) and section 4 of the Contracts (Remedies for Breach
of Contract) Law 5731-1971) -- the court may limit the scope of the limitation
to its proper proportion (see CA 1371/90 [23] supra at 856). “If a person has undertaken an obligation as
to the protection of a trade secret of another and it is too broad an
obligation, there is no bar to limiting it and adjusting it to the
proportionality of the secret within the information” (Justice Strasberg-Cohen
in CA 2600/90 [14] supra at 808).
30. Frequently in the type of case before us an
interlocutory order is sought. Generally
the granting of an interlocutory order is sufficient to determine the entire
conflict as the final order may be granted after the period of limitation has
passed. From this derives the importance
of taking great care in this area. An
interlocutory order should not be general, and should be adapted to the
legitimate interests of the employer.
Thus, for example, the order would not prevent employment of the
employee by a new employer, but would prohibit him from handing over trade
secrets and customer lists (see Lansing Linde Ltd v. Kerr [1991]
[37]). Such a careful approach is
necessary partially due to the nature of freedom of occupation as a
constitutional right (compare CA 214/89 Avneri v. Shapira IsrSC
[28]). The remedy of the employer will
be in the proportion of damages he will be awarded, if it turns out at the end
of the day that limiting the employment protected his “legitimate
interests".
Interim Conclusion
31. Before I move on to the special circumstances
of the appeal before us, it would be proper to summarize the main points. My position can be summarized by the
following four propositions: first, a
clause between employer and employee limiting the freedom of occupation of the
employee after the conclusion of his employment without protecting the
”legitimate interests" of the employer is void as going against
"public policy"; second, a "legitimate interest" of the
employer -- that gives validity to a clause limiting the freedom of occupation
of the employee -- is a "proprietary" or
"quasi-proprietary" interest of the employer in his trade secrets and
customer lists (to the extent they are confidential). This is not a closed list, and in determining
the list of "legitimate interests” the relationship of trust between the
employer and the employee, proper trade laws, and the duty of good faith and
fairness between the employer and employee are to be considered; third, the
protection given to the "legitimate interests" of the employer are
not absolute. Its extent is determined
by tests of reasonableness and proportionality, which take into account its
timeframe, scope and the type of the limitation; fourth, as a rule, an employer
does not have a "legitimate interest" in his employee not competing
with him after conclusion of his employment.
Therefore, limitation of the freedom of occupation of the employee which
only realizes the employer’s interest that the employee not compete with him
("non-competition for its own sake") is against public policy. The voidness of this limitation stems from
the lack of a "legitimate interest" at its core, and therefore, as a
rule, it is not appropriate to examine the reasonableness or proportionality of
such a limitation.
From the General to the Specific
32. The factual basis in the framework of which
the legal problems in this appeal are examined is the one established by the
District Court. According to it the one
legal question before us is whether the respondent breached a duty to the
appellant by contracting with RAFAEL? In
my opinion, the answer to this question is in the negative.
33. What is the duty that was breached by the
respondent in the RAFAEL case? The
respondent did not breach his duty not to make use of the customer list of the
appellant. The reason for this is that
it has not been proven that the respondent approached RAFAEL on his own
initiative and in any case his business ties with them are not to be seen as a
result of use of the appellant's customer list.
Indeed, the duty that was breached by the respondent is the duty not to
compete with the appellant. This agreement of the respondent not to compete
with the appellant is a "bare" agreement (see paragraph 18 supra). This is an agreement of "non-competition
for its own sake". Let us
re-examine (see paragraph 1 supra) this agreement:
“The
employee hereby undertakes not to compete with B/R [the appellant] either
directly or indirectly, whether in his capacity as an employee of B/R or not,
to the extent that there shall be in such competition any loss caused to the
business of B/R as a distributor, marketer and service provider for equipment
made by Linear and/or any other name by which such equipment will be called in
the future. So too the employee
undertakes not to take any action that would undermine, eliminate, or damage
B/R’s relationships with its customers."
This agreement-- in accordance
with its construction, language and purpose – was intended to protect the
appellant from competition “for its own sake”.
When the appellant wanted to protect itself from damage to its property,
it did so in the framework of an additional agreement signed by the respondent,
which included an “Agreement to Protect Confidentiality,” according to which
the respondent undertook to keep in confidence information that he might obtain
in the framework of his employment.
Indeed, the obligation of the respondent not to compete with the
appellant – and this is the only obligation that was breached by the respondent
– does not protect the “proprietary” or “quasi proprietary” interest of the
appellant. It does not protect a
“legitimate interest” of the appellant.
It goes against “public policy,” and therefore is to be declared
void. All the appellant sought was to
ensure for itself immunity from competition.
It is not entitled to do this, as such immunity goes against “the public
interest.” As to this, there is no
significance to the reasonableness or proportionality of the obligation that
the respondent took upon himself. It is
not proper to examine whether the limitation to eighteen months is reasonable
or proportional. The obligation in its
entirety is void and voided.
34. Until now I dealt with the obligation of the
respondent not to compete with the appellant.
What about the additional obligation that he undertook to keep in
confidence any information that he may obtain in the framework of his
employment? As to this matter, the
appellant’s appeal is to be denied, if only for the reason that no causal
connection has been shown between the breach of the obligation and the
appellant’s losses. Indeed, even if in
the use of the respondent’s customer list the respondent breached his
obligation, this breach did not cause the appellant any loss, as it has not
been proven that within the eighteen months to which the obligation was
limited, relationships between the respondent and those customers were
developed. This is sufficient to deny
the appellant’s appeal on this matter.
Therefore, there is no need for me to deal with the question as to whether
limiting the extent of the obligation not to make use of the information that
he obtained in the framework of his employment, is reasonable and
proportional. As to this it is
acceptable to me that this information is, under the circumstances, confidential
information, entitled to protection in the framework of the “legitimate
interests” of the employer. But is the
scope of the protection proportional and reasonable? This question is not simple in the
least. It is sufficient for me to note,
without making a determination on the matter, that there is room for the
argument that the scope of this obligation under the circumstances is not
reasonable and is not proportional. We
are dealing with the field of computers, this is a dynamic arena. The scientific developments in this area are
many. Within a matter of months the
reality changes unrecognizably. Against
this background there is room for the argument that a period of eighteen months
is too long. Indeed, I would be ready to
examine whether in this evolving arena – in which not taking advantage of
expertise for such a long period of time may do significant damage to work
capacity– a stricter approach is not necessary.
However, as said, this is not to be determined in this appeal and I will
leave it as open for future discussion.
In conclusion, we allow the
respondent’s appeal and cancel the award of damages to the appellant for the
contract with RAFAEL. We deny the
appellants’ appeal and the appeal of respondent no. 2. So too, we deny the respondent’s appeal in
all that relates to software and hardware. Under the circumstances, the
appellants shall pay the respondent’s costs in the sum of
Justice T. Or
I agree.
Justice E. Rivlin
I agree.
Decided as per the judgment of
President Barak.
27 Av 5760
August 28, 2000