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Non-compete agreements in German Corporate Law
As is the case in the rest of the world, the purpose of a non-compete clause in Germany is to prevent an employee from taking the knowledge or contacts they have made in a certain role or industry and using them to either join another competing firm or to start their own enterprise in direct competition to their former employers. The wording of the clauses will vary from case to case but, generally, they will define the scope of what the employer considers to be the competition, the details of the remuneration, and the penalties involved, should the employee breach the agreement.
The governing laws surrounding non-compete clauses will, of course, vary from country to country but here in Germany, there are several basic tenants which will apply to most, if not all, agreements. These tenants are as follows:
- An agreement must be confirmed in writing, with both parties providing their consent utilizing a signed document. This agreement should provide as much detail as is possible or necessary.
- The agreement shall not last for a period longer than 24 months, with the agreement taking effect as soon as their employment agreement has been dissolved or ended.
- The employee shall be entitled to 50% of their gross pay (usually calculated from the employee’s average recent salary) for the above period, inclusive of additions such as bonuses or commissions. This payment is referred to in German as the Karenzentschädigung.
Non-compete agreements play an important role in German Corporate Law. This is particularly true regarding CEOs, directors, officers, board members, commercial agents, and partners in a German joint-stock company (Aktiengesellschaft – AG), a German cooperative (Genossenschaft – eG), a German limited liability company (GmbH), or a German partnership (KG, OHG, PartG, PartGmbB, GbR). On the one hand, the CEO, directors, and board members are bound to contractual agreements, the articles of association, by-laws, their duties of loyalty, and German statutory Corporate Law – and breach of these provisions can have legal consequences. On the other hand, there is statutory Competition Law that might be the basis for legal measures.
Non-compete and competition clauses in ongoing official and contractual relationships in Germany
Under German Corporate Law, it can be distinguished between competition disputes in an ongoing relationship and post-contractual competition disputes. In an ongoing business relationship, a competition dispute will typically raise the question of the removal of the CEO, director, officer, or board member. Besides, claims for damages and cease and desist orders might be enforced under German Corporate Law in the event of a violation of competition regulations.
Post-contractual non-competition agreements under German Corporate Law
Even more relevant under German Corporate Law, however, are post-contractual non-competition agreements, which are often carried out as customer protection or client protection agreements. Surprisingly, most of the non-compete agreements used in practice are not binding by the standards of German Corporate Law. The German Courts seek to find a fair balance between the legitimate interests of the company to protect specific expertise and customer relationships on the one hand and the freedom of occupation of the retired CEO, director, officer, board member, commercial agent, or partner on the other. Depending on the concrete type of contract the business has to pay at least 50 % of the last remuneration owed to the CEO, director, officer, or commercial agent to make a non-compete agreement binding under German Corporate Law.
Enforcement and defense litigation regarding non-compete agreements under German Corporate Law
In practice, many businesses combine the different approaches and proceed on the basis of both, Contractual and Corporate Law as well as Unfair Competition Law against the violation of competition rights. Depending on the specific interests involved a cease and desist order or damages are typically sought. Another advantage of such concerted action is often to force the other side to spend time and money defending a claim – this usually reduces the profitability of a competitive action significantly. On the contrary, the aim of the CEO, director, officer, commercial agent, or partner is typically to either prove that a non-compete is not binding or to claim allowance payments.
Can I get out of my non-compete clause?
The million-dollar question, sometimes even higher, and difficult with a simple yes or no. As ever, any decision made by the courts will depend on the individual circumstance of the case. Generally, the option to break a non-compete covenant with an employer will revolve around the scope or agreement and whether the agreement limits the future working opportunities of the employee.
Regarding the scope of the agreement, there are a couple of important aspects to take into consideration. The first is that there must be a legitimate business interest for the employer for the non-compete to be valid. According to a Federal Labor Court judgment (BAG of 07.07.2015, case no.: 10 AZR 260/14), the mere restriction of trade is not considered a good enough reason to enforce a non-compete clause, the employee must have specific “insider information” or very specific specialist knowledge regarding the company they are leaving in order to justify its implementation.
Additionally, to quote an earlier judgment (BAG of 21.04.2010, case no.: 10 AZR 288/09 – margin no.16) regarding the same topic “There must be a connection between the content and scope of the prohibition and the employee’s previous function or activity”. Essentially, the employer would be required to make and prove a connection between the knowledge of the employee and the possible detrimental effect on their business.
The idea that an employer must have legitimate and specific reasons for enforcing a non-compete clause is further highlighted in relation to the German Commerce Code. Should the employer insist on a broadly worded and unspecific non-compete agreement, it could be seen as simply attempting to remove this employee from the talent pool, therefore limiting their future employment opportunities. Once again, a non-compete agreement should be there to protect a business’ interest relating to specific knowledge and practices and not to simply remove the possibility of an employee working in the same industry again for a 24-month period.
You may, of course, be reading the above and be thinking ‘This is quite subjective’ and you would be correct. As mentioned previously, the validity of a non-compete clause will depend pretty much entirely on the circumstances. An expert opinion on your specific scenario is a must and we at ZELLER & SEYFERT would love to the ones to provide it.
I feel like my non-compete clause is invalid. What are my options?
Should you feel that the non-compete is no longer valid, is restricting you unnecessarily in the job market, or has simply run its course, there are a few options open to you.
The first is to contact the employer to get their views. It could be that they actually agree with you and are willing to rescind the agreement. At this stage, another agreement would be drawn up, signed by both parties, and consigned to history. Should the employer refuse this request, it would be highly advisable to seek an expert opinion, to see exactly what options are available to you.
