Non-Compete Clause and Penalty Clause

Conceptual Framework: What is a Non-Compete Clause? What is the Purpose of a Penalty Clause?

A non- compete clause is an agreement between two parties , during the term of office or, more often, after the termination of a contract , to refrain from engaging in competing activities or enticing the other party's customers/employees for a specified period, location, and subject matter, in order to protect the legitimate interests of the other party . In business relationships, Articles 444–447 of the Turkish Code of Obligations; in agency relationships, Articles 123–125 of the Turkish Commercial Code; and in company management/partnership, Articles 396 (members of the board of directors of a joint-stock company) and 613 (managers of a limited liability company) of the Turkish Commercial Code serve as fundamental references. A non-compete clause is not an absolute prohibition ; the principle of proportionality and the possibility of its narrowing/reduction by the judge are the backbone of the system.

A penalty clause is a contractual provision that predetermines a monetary penalty if the debtor fails to perform their obligation at all or properly (Turkish Code of Obligations, Articles 179 and subsequent articles). Since it is often difficult to concretely prove the amount of damage in cases of non-compete clause breaches, penalty clauses provide a deterrent by specifying the "cost" of the breach in advance . However, according to Article 182 of the Turkish Code of Obligations, excessively high penalty clauses can be reduced by the judge ; furthermore, in employment contracts, compliance with criteria such as a two-year upper limit and reasonableness in terms of geography and subject matter is mandatory.

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Legislative Map: Which Provisions Provide Guidance?

• Turkish Code of Obligations, Articles 444–447: Non-compete clause in employment contracts. Requirements include: written form, the employee's ability to cause significant harm (customer base, production secrets, confidential information), subject, location, and duration limitations, a maximum of two years (extendable under exceptional circumstances), the judge's power to reduce/shorten the contract, and for compensation and penalties in case of breach .

• Turkish Code of Obligations, Articles 179–182: Definition of penalty clause, relationship between performance and penalty, reduction of excessive penalty , debtor's fault, etc. (In employment relationships, the power to reduce the penalty, especially under Article 182, is frequently invoked in practice.)

• Turkish Commercial Code Articles 54-55: General provisions on unfair competition and examples of such actions. Even in the absence of a non-compete clause, the unlawful acquisition/use of trade secrets, misleading enticement of the customer base, and conduct contrary to the principle of loyalty may constitute unfair competition.

• Turkish Commercial Code Article 396: Members of the board of directors of a joint-stock company from competing with the company without the permission of the general assembly; otherwise, they may be liable for compensation and the company may be entitled to profits.

• Turkish Commercial Code Article 613: Parallel regulation regarding the non-compete clause for directors of limited companies.

• Turkish Commercial Code Articles 123–125: in agency agreements after the contract. It must be in written form, limited to a specific region/customer base/subject matter, and for a maximum of two years; in practice, it is also reasonable compensation will be provided for the agent.

• Turkish Competition Law and Vertical Agreements Regulation (current version) : Group exemption thresholds with regard to exclusivity, non-compete, and customer/territorial restrictions ; competition law risks.

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Non-Compete Clauses in Employment Contracts: Validity Conditions, Limitations, and Application

1) Written Form and Legitimate Interest

According to Article 444 of the Turkish Code of Obligations, a non-compete clause must be in writing . Verbal commitments or vague provisions referring to internal workplace regulations raise validity issues . Furthermore, the prohibition must be based on the existence of a legitimate/protective interest of the employer : the employee must have access to the customer portfolio and trade secrets as part of their duties , and must have the capacity to cause significant harm to the employer by using this information . Broad prohibitions regarding employees performing simple, routine tasks or those without access to confidential information become questionable.

2) The Subject – Place – Duration Triad and Moderation

The non-compete clause must be clear and reasonable in terms of subject matter , location , and duration . The employer's sector/sub-sector, product/service group, geographical reach, and competitive pressure are taken into account. General and unlimited statements (e.g., "prohibits all competitive activities in Turkey/worldwide") are considered excessively broad in Supreme Court practice and may be narrowed or deemed invalid by the judge . Regarding duration, the Turkish Code of Obligations generally prescribes a maximum of two years ; in exceptional cases (senior management, critical know-how), a longer period may be reduced to a reasonable extent by the judge .

3) Salary Level, Reason for Termination, and Balance Test

The Supreme Court, when regulating non-compete clauses, seeks a balance between the employee's economic future and the employer's interests . Factors such as the employee's wage level , job security , the nature of the work , and how the contract was terminated (whether the employer terminated it for just cause or the employee resigned wrongfully) are important in assessing suitability and reduction of the clause. For example, in cases of wrongful termination by the employer , expecting the employee to comply with a post-contract non-compete clause may often be considered unfair ; courts may consider shortening the duration of the clause or reducing the penalty clause

4) Consequences of the Breach: Compensation, Penalties, and Provisional Measures

If an employee violates the non-compete clause, the employer can claim compensation for the resulting damages (loss of profit, portfolio erosion, loss of value of confidential information). Since proving damages is difficult, penalty clauses play a key role here: if a violation has occurred, the agreed-upon amount can be demanded without further proof of damages (Turkish Code of Obligations system). However, excessive penalties can be reduced by the judge ; in the Supreme Court's practice, it is important that the penalty clause is established in reasonable proportion to the employee's gross salary , structured according to the number of violations , and that separate and reasonable amounts are attached to subordinate obligations such as non-solicitation . If the violation continues , a preliminary injunction can be requested under Article 389 of the Turkish Code of Civil Procedure to temporarily suspend the activity violating the non-compete clause , remove advertisements/announcements from publication , and request the return of data/documents ; the court can often grant such an injunction against a security deposit

5) Evidence Strategy: Digital Traces, Witnesses, and Business Records

Typical evidence in non-compete clause violations includes email traffic, employee phone/IT logs, WhatsApp messages, CRM records, customer switching statistics, invoice/delivery note chains, LinkedIn updates, printouts related to web advertising, domain/trademark applications , and witness testimonies. Digital evidence lawfully ; otherwise, the prohibition against obtaining illegally obtained evidence applies. If there is a breach of confidentiality, the unfair competition provisions of the Turkish Commercial Code and, if necessary, criminal law aspects may also come into play.

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Penalty Clauses (Turkish Code of Obligations, Articles 179–182): Types, Reduction, and Balance in Application

1) Function and Types of Penalty Clauses

• Penalty for performance: This is paid when the debtor fails to perform their obligation properly; the creditor performance plus penalty or penalty alone within the framework of the Turkish Code of Obligations (depending on the contractual structure).

• Termination penalty: The party acquires the right to terminate the contract by paying a fee.

• Late payment penalty: This applies if the specified time period is not met.

In cases of non-compete clause violations, a penalty structure is often preferred , either " a specific amount for each violation " or " a periodic penalty for violations occurring each month/week ." Setting a total upper limit is beneficial in terms of proportionality and managing the risk of reduction

2) The Criterion of Excessiveness and the Judge's Power to Reduce Sentences (Turkish Code of Obligations, Article 182)

Courts assess penalty clauses based on criteria such as the severity of the breach , economic balance , the financial strength of the parties , the employee's income level and position , the remaining duration of the contract , and geographical/scope limitations . Amounts deemed excessive may be reduced . In practice, one-time penalties exceeding several times the gross monthly wage , or high penalties tied to unreasonable geographical/scope limitations, are frequently reduced . Therefore, it is important to establish a tiered system for penalty clauses , with reasonable upper limits , that reflects the actual impact of the breach .

3) The Problem of Defects, Damages, and Cumulative Demand

A penalty clause generally lightens the burden of proof for damages; if there is a breach, a penalty is demanded. However, in some scenarios, both performance and penalty cannot be demanded simultaneously; the contract text is decisive in this regard. Furthermore, if the debtor at fault (e.g., a prohibition imposed after an unfair termination by the employer) or for justifiable reasons, the full penalty may not be demanded. In most scenarios, excess damages instead of a penalty clause + excess damages , of reduction .

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Non-Compete Clauses in Company Law: Directors and Partners

1) Members of the Board of Directors of a Joint Stock Company (Turkish Commercial Code, Article 396)

A board member may not, without the permission of the general assembly , engage in business activities within the company's scope of operations, either on their own behalf or on behalf of others , nor may they become a partner with unlimited liability in another company operating in the same field . Otherwise , liability for any resulting damages and the transfer of any benefits to the company will be considered. In practice, service/appointment contracts signed with members also include non-compete and penalty clauses; these clauses can also be extended as post-contract non-compete agreements after the term of office , but proportionality in terms of duration, location, and subject matter is still required.

2) Directors of Limited Liability Companies (Turkish Commercial Code, Article 613)

Similar non-compete clauses exist for directors of limited liability companies. Unless explicitly permitted by the company's articles of association or general assembly resolutions , directors cannot compete with the company. Violation may result in compensation and the transfer of profits to the company . Penalty clauses and injunctive relief mechanisms in director contracts are among the most effective protection mechanisms in practice.

3) Competition and Non-Solicitation in Share/Business Transfers

In share purchase agreements (SPA) and asset purchase agreements (APA), it is common for the transferring partner/founder to include non-compete clauses for 3-5 years and prohibit the poaching of customers and employees . The competition law aspect is crucial here: if market share thresholds and group exemption conditions are exceeded, the post-contract may pose risks under non- competition law . Therefore, geographical , product/service , and duration limits should be designed with exemption conditions in mind.

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Non-Compete Clauses in Agency and Distribution: Turkish Commercial Code Articles 123–125 and Vertical Agreements

Agency agreements must include a written non-compete clause in accordance with Articles 123-125 of the Turkish Commercial Code ; it must be clearly limited in terms of region, customer base, and subject matter ; and it must not exceed a maximum of two years . In practice, providing reasonable compensation to the agent reduces disputes over fairness and validity. In distributorship and franchise relationships, compliance with the current rules of the "vertical agreements" regime is necessary: ​​the distinction between primary and secondary obligations , post-sales restrictions , customer and territory sharing , passive sales prohibition, and the maximum duration of the non-compete obligation are subject to competition law scrutiny. Penalty clauses included in the contract must also be proportionate and compatible with exemption conditions .

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Unfair Competition Aspect (Turkish Commercial Code Articles 54-55): Protection Even Without a Contract

Even without a non-compete clause, conduct that violates rules of commercial ethics and honesty constitutes unfair competition . Actions such as luring customers/employees , deceptive advertising , unauthorized use of confidential information and production secrets , and statements damaging reputation provide grounds for claims for injunction, determination, material and moral damages , and restitution of unjust enrichment under Articles 54-55 of the Turkish Commercial Code . Thus, even in cases where there is no contractual non-compete clause or it is deemed invalid, general unfair competition provisions serve as a safety net.

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Key Principles of Supreme Court Practice: Proportionality, Two-Year Limit, and Reduction of Sentences

Supreme Court rulings consistently follow this pattern:

1. The two-year upper limit (after the employment contract) should generally not be exceeded; in cases where it is exceeded, the judge will narrow it.

2. the geographical and subject boundaries are vague/too broad (e.g., all of Turkey, “all kinds of activities”), the provision narrowed or invalid .

3. If the penalty clause is excessive, it is reduced in accordance with Article 182 of the Turkish Code of Obligations . Graduated amounts that are proportionate to the gross salary and reflect the tangible impact are preferred.

4. Situations such as unfair dismissal by the employer or limited access of the employee to confidential information may result in a fair outcome for the employee in the assessment of prohibitions and penalties .

5. Non-solicitation (not enticing customers or employees) has a better chance of being valid when regulated as a separate obligation with a narrower and more reasonable duration .

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Precautionary Measures and Evidence Gathering: Rapid Protection Mechanisms

The time factor is decisive in violations of non-compete clauses . In accordance with Articles 389 and subsequent articles of the Code of Civil Procedure, a preliminary injunction is requested from the court :

• The activity in question should be temporarily suspended.

• Removal of advertisements/listings ,

• customer lists and documents ,

• internal company data (laptop, phone, email) by taking images ,

It may be requested. A security deposit may be required as a precautionary measure . If the suspicion of a breach is strong, the urgent identification of server/log records and physical documents through evidentiary collection will determine the fate of any future compensation lawsuit.

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The Personal Data Protection Law (KVKK) and Trade Secrets: The Intersection of Non-Compete Clauses with Data and Secret Protection

Non-compete clauses are often based on elements of personal data and trade secrets, such as customer data, pricing, R&D notes , and algorithmic performance .

• Under the Turkish Personal Data Protection Law (KVKK) , the right of a departing employee to retrieve their own personal data differs from the company's obligation to protect customer personal data . The legal grounds for retrieving personal data and the policies for its destruction must be clearly defined.

• Access rights , confidentiality agreements (NDAs) , logging , and exit procedures (device return, account closure, separation of personal copies of non-secret information) for trade secret information should be planned in advance

• Confidentiality breaches can have consequences in terms of both unfair competition and criminal law (e.g., breach of trust, theft-like acts, cybercrimes).

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Tax and Stamp Duty Implications: Penalty Payments

Penalty payments can have different tax consequences depending on their nature :

• a VAT perspective, the general approach is "pure compensation" payments not related to services rendered ; however, the contractual structure and accounting practices are important factors.

• Stamp duty may be levied at a rate of one per thousand on contracts containing penalty clauses

• In employment relationships, wage-like arrangements and compensation-type arrangements withholding tax and other obligations; consistency of text should be ensured with the financial advisor.

International Dimension: Law Enforcement, Jurisdiction and Arbitration

In cross-border teams and multinational groups, choice of law and jurisdiction clauses are critically important. For work performed in Turkey, Turkish law generally applies; however, in contracts such as share transfers, licensing, and distributorships , foreign law and arbitration options (ICC, ISTAC, LCIA) may be considered. Public order and competition law norms can set limits regardless of the chosen law. Data transfer (KVKK/GDPR) and the international sharing of trade secrets should also be addressed in the contract.

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Example of a “Non-Solicitation” Clause

The Employee/Party agrees that, for a period of 12 (twelve) months from the termination of this contract , they will not entice , directly or indirectly through third parties , customers that the Employer has served in the last 24 months or individuals and organizations on its active candidate/customer list , engage in direct marketing , refer employees for employment , or transfer them to another employer . A penalty of [X times the gross monthly wage] will be applied for each breach ; in case of continued breach, an additional penalty of [Y] will be incurred for each month; the total cannot exceed the upper limit of [Z] . The Employer may claim the excess amount of the proven damages; the right to request a preliminary injunction is reserved.

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New Challenges of Non-Compete Clauses in the Digital Age

• Remote work and BYOD: Without data control, confidentiality management protocols , and exit destruction procedures on off-site devices, non -compete clauses are weakened

• LinkedIn and social media: “New job” announcements can be indirect evidence of client and team poaching allegations ; the contract should refer to social media codes of conduct

• AI and code/process leaks: Policies for uploading company content to LLM/AI tools must be clear; otherwise, the loss of confidentiality and violation of competition law become irreversible

• Cloud-based CRM: On-departure access termination and data parsing must be completed within hours; delays may result in the migration of the customer portfolio

Conclusion: It provides measured, concrete, and applicable provisions

When properly structured, non-compete clauses and penalty clauses serve as effective insurance for a company's customer base, know-how, and market position . The key to success lies in proportionality , concretization , tiered and proportionate penalty clauses , clear evidence and injunctive relief mechanisms , and compliance with competition and corporate law . By revising your contracts according to these principles, you can create a deterrent yet equitable protective shield that will stand firm in court in the event of a dispute and will not be subject to reduction

In today's market, characterized by high workforce mobility and where data and customer networks are central to company value, designing, implementing, and updating non-compete and penalty clauses is not a luxury; it is a strategic necessity for sustainable competitiveness .