Munich Higher Regional Court: A managing director may assert the invalidity of the non-competition clause before commencing the intended competitive activity by way of an interim injunction (Decision from 02.08.2018)

by Atty. Dr. Christian Zeller

As a general rule, a managing director may not compete with the company with which they are employed for the duration of their employment. Such prohibition of competition exists even without an express agreement. This is because the duty of loyalty under company law already requires the managing director to abstain from business activities in the company's sphere of activity to a large extent during their term of office. It makes sense to specify in detail the activities that are still permissible for the managing director in the employment contract in order to create clarity for both sides.

On the other hand, the legal situation regarding so-called post-contractual non-competition clauses for managing directors is very complex. These non-competition clauses cover any competitive activities after the termination of the employment contract or after the termination of the managing director's position. In principle, the managing director can only be subject to a non-competition clause for the period after his employment with a company if the protection against the competition is contractually regulated. Pursuant to § 74a of the Commercial Code, the non-competition clause is binding insofar as it only serves to protect a legitimate business interest of the principal. Thus, if the GmbH (limited liability company) wants to protect itself from competition from its then former managing director in the post-contractual area, it must contractually agree this with them. In this context, the non-competition clause for third-party managing directors (i.e. managing directors who do not hold shares in the GmbH) can result from the employment contract. In its case law, the Munich Higher Regional Court stated the following on this subject:

A post-contractual non-competition clause prohibiting an external managing director from working for potential competing companies "in any way" is invalid for lack of interests of the company worthy of protection.

The managing director may assert the invalidity of the non-competition clause before commencing the intended competitive activity by way of an interim injunction.

In the case to be decided, the managing director of a GmbH wanted to become the managing director of a competitor company directly following his position at that time, namely as of 01.08.2018. The GmbH, which produced and distributed, among other things, high-quality branded spectacle lenses and branded spectacle frames, had agreed with the managing director on 05.02.2016 on a post-contractual prohibition of competition with the following scope:

“The managing director undertakes not to work for a competitor of the company, either in an independent or dependent position or in any other way (including assuming a position on a board or similar), for a period of one year after the termination of the employment contract”

According to the case law of the Federal Supreme Court, the provisions of post-contractual non-competition clauses, to the detriment of the employee, do not apply to bodies of shareholders and thus also not apply to any leading shareholders or bodies of a public limited company. This also applies in the case of so-called "outside directors", who often have a de facto employee-like status. In the BGH ruling cited above, the managing director of the GmbH was acting as a third-party managing director.

In the present decision, the OLG Munich confirmed that the managing director was allowed to work in the competing company. An all-encompassing prohibition - the prohibition to work "in any way" - was too broad and void according to § 138 BGB. The limit of the form of a post-contractual non-competition clause for GmbH managing directors was also within the limits of § 138 BGB. According to the case law of the Federal Supreme Court, the post-contractual non-competition clause for managing directors of a GmbH was to be considered immoral and thus void if it did not serve the legitimate interests of the GmbH. The interests of the GmbH had to be specifically reflected in the scope of the prohibition. In line with the case law of the BGH, the Munich Higher Regional Court assumes the overall nullity of a too far-reaching "prohibition". In the case of a far-reaching prohibition of competition, all activities in the competing company would cease to exist. Even those that had no relation to the previous activity and were therefore not covered by the GmbH's legitimate interests. In the present case, such a prohibition would even mean that the former managing director would not even be allowed to work as a caretaker.

 

What is the scope of post-contractual non-competition clauses?

According to case law, a post-contractual non-competition clause must be limited to what is necessary in order not to disproportionately restrict the managing director's economic freedom of action. Above all, the company must be able to demonstrate a legitimate interest, for example, the protection of customer and business relationships. In addition, a post-contractual non-competition clause must be limited in terms of object, territory, and time.

The prohibition is only not immoral if it does not exceed the necessary measure in terms of object, territory, and time. This is to be examined in two stages (based on § 74a (1) HGB): The prohibition must

  1. serve a legitimate business interest of the company. If this is the case, then it must
  2. not unreasonably impede the managing director's economic activity in terms of object, territory, and time of professional practice.

If the prohibition is too broad, it is void if a duration of more than two years has been agreed upon.

 

According to prevailing opinion, post-contractual non-competition clauses cannot be agreed arbitrarily. They are to be limited in two respects: On the one hand, the professional freedom of the affected managing directors pursuant to Art. 12 GG should not be restricted. On the other hand, non-competition clauses should not lead to an unreasonable restriction of competition (§ 1 GWB) on the market concerned.

Starting from this, a balancing of interests must be carried out between the legitimate interest of the company in protecting its business operations, its trade and business secrets, and its know-how and the legitimate interest of the then former managing director in shaping their professional future and securing their livelihood.

With regard to the scope of the non-competition clause, a distinction is usually made in practice between general non-competition clauses, including participation clauses, competitor clauses, employee non-solicitation clauses, customer protection clauses, and know-how protection clauses.

 

What can both sides take away from this decision?

There are many post-contractual non-competition clauses that do not meet the requirements of the courts. In this case, the managing director can take action against the post-contractual non-competition clause with good prospects of success.

Every company is advised to determine for itself in advance and then clarify with the managing director which activity restrictions are to apply after they leave the company. This applies regardless of whether or not the managing director is also a shareholder in the company. However, the decision of the OLG Munich urges caution and care: The subject matter of the prohibition

 

At ZELLER & SEYFERT, German Attorney at Law Dr. Christian Zeller  is in charge of the Employment & Labour Law department. He is focused on German Employment Litigation and will handle your dispute with tenacity and full commitment.Attorney Dr. Zeller will provide you and your business courtroom representation before all German Employment Courts, Higher Labour Courts, and the Federal Labour Court. Dr Zeller is an expert on employment law in Germany and has contested and won many cases in this area. He would welcome the chance to fight your corner.

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