I. BGH decision

The claimant was a limited liability company that operated spa and rehabilitation clinics, retirement and nursing homes and assisted living. The defendant was its former managing director. A two-year post-contractual non-competition clause had been agreed in his employment contract. In return, he was to receive compensation of 50% of his last monthly salary. In the event of a breach of the non-competition clause, it was stipulated that the managing director would have to repay this compensation. One year after leaving the company, the defendant was appointed managing director of a management consultancy firm whose clients include companies in the elderly care and senior citizens’ sector. The BGH ruled that this constituted a breach of the non-competition clause. The defendant was not entitled to payment of the compensation for non-competition, as this had ceased to apply retroactively. As the amount of the compensation for non-competition can be freely agreed, a repayment provision also does not violate the prohibition of excessiveness.

II. Necessity of a post-contractual non-competition clause

As the GmbH managing director’s duty of loyalty to the company, with the exception of the duty of confidentiality, ends upon termination of his employment, the company can only be protected from the disloyal exploitation of the successes of its work by the managing director by means of a post-contractual non-competition clause. The non-competition clause must be explicitly agreed, as the provisions of Sections 74 et seq. HGB do not apply either directly or accordingly, as the managing director has a stronger position than a commercial agent. If the former managing director violates an agreed non-competition clause, the company can claim injunctive relief and damages.

III. Effectiveness of a post-contractual non-competition clause

Post-contractual non-competition covenants are only permissible if they serve to protect a legitimate interest of the company and do not unreasonably impede the professional practice and economic activity of the managing director in terms of place, time and object.
The non-competition clause is measured against the standard of immorality from § 138 BGB (German Civil Code) and the professional freedom protected by Art. 12 GG (German Basic Law) using the values expressed in §§ 74 et seq. HGB (German Commercial Code).

1. Prerequisite 1: Legitimate interest

First of all, the company must have a legitimate interest in the post-contractual non-competition clause. If this is not the case, the corresponding agreement is void pursuant to § 138 BGB. A legitimate interest may lie, for example, in the protection of existing business relationships between customers and suppliers. However, it must not be limited to blocking the managing director from the competition. The decisive point in time for the assessment of the legitimate interest is the departure of the managing director.

2. Scope of the non-competition clause

Furthermore, the professional advancement of the managing director must not be made too difficult in terms of space, time or subject matter.
The non-competition clause must be limited in time. A duration of more than 2 years will only be justified in very rare cases. However, a two-year non-competition clause can also be ineffective if the managing director has already been released from his duties for a longer period before the employment contract ends and was also bound by the non-competition clause during this release.
The limits of the non-competition clause depend on the activity of the company. The Higher Regional Court of Munich (2 August 2018, NZA-RR 2019, 82) ruled that a post-contractual non-competition clause that covers all self-employed, employed or other activities is generally too broad. This would also include a job as a janitor, which, however, has no connection to the former managing director’s job. For this reason, activities that have no influence on business decisions should be excluded from the non-competition clause as part of a so-called “janitor clause”. The non-competition clause may only be extended to the activities of subsidiaries if the managing director had access to their information during his position on the board.
A geographically unlimited non-competition clause is also invalid. In this case, , it also depends on the activity of the company; if it only operates regionally, the non-competition clause can only apply regionally; if it operates throughout Germany or internationally, the non-competition clause can be extended further.
The dimensions of the non-competition clause should not be viewed in isolation. For example, the length of the non-compete clause can be offset by a stronger local and temporal focus.

3. Compensation for waiting periods

There is no requirement of compensation if the non-competition clause is purely a client or customer protection clause. In all other cases, however, compensation for non-competition is required, as this would otherwise make it unreasonably difficult for the managing director to exercise his profession. The compensation must be explicitly agreed. The amount of the compensation should be based on 50% of the average total earnings in the past. The further the amount falls below the 50% threshold, the more likely it is that the non-competition clause will be invalid. However, it is permissible to exclude variable remuneration in whole or in part from the basis of calculation, even if this means that it falls below the 50% threshold.
Other earnings must be offset against the compensation for non-competition, everything else must be explicitly agreed. Capital gains and shareholdings as well as pensions earned before leaving the company are not taken into account.

IV. Legal consequences of violations of the legal requirements

If a non-competition clause is agreed for a period of more than 2 years, this results in a reduction that preserves the validity of the agreement, i.e. the non-competition clause is still valid for 2 years. This is not the case if the limits are exceeded in terms of territory or subject matter; the non-competition clause remains invalid. A lack of or inadequate compensation for non-competition also leads to the non-competition clause being null and void, so as not to give companies an incentive to agree the most far-reaching non-competition clauses possible without risk. The managing director also does not have the option of adhering to the non-competition clause and claiming the insufficient compensation.

V. Waiver and contractual penalty

The authorization of the company to waive the non-competition clause and not to pay the compensation for non-competition must be explicitly regulated. The company should no longer be able to waive the non-competition clause if the managing director has already agreed to it. It is therefore generally assumed that the minimum period for declaring the waiver corresponds to the notice period.
It is possible to agree a contractual penalty for breaches of the non-competition clause. This also makes sense, as it is regularly difficult to calculate damages in the event of breaches of the non-competition clause. In the case of third-party managing directors and shareholder managing directors without a blocking minority, this provision falls under the control of general terms and conditions. In accordance with § 307 para. 1 BGB, the amount of the contractual penalty must not lead to unreasonable disadvantages. The contractual penalty is not reduced in order to preserve the validity of the agreement. In order to comply with the transparency requirement, multiple infringements and continuous infringements must be precisely defined and differentiated from one another.

VI. Indirect non-competition clause

Constructions in which the managing director is free to decide whether to accept employment, but must accept financial disadvantages in return, can quickly lead to circumvention of the non-competition provisions. They should therefore be treated with caution. However, it is permitted to reduce the severance payment if the managing director accepts a position at a competitor company.

VII. End of the non-competition clause

The non-competition clause does not cease to apply if the managing director retires. A release from the non-competition clause is possible in the event of termination without notice by the managing director or termination without notice by the company. The party whose conduct in breach of contract has led to the termination of the employment relationship without notice is prohibited in good faith from holding the other party to a non-competition clause.