Post-contractual non-compete covenants – Protection from home-grown competition in Germany

Many companies use post-contractual non-compete covenants to protect their business interests. To negotiate such provisions with key employees who have special skills or know-how is a very effective way to reduce the risk of unwanted brain drain to competitors. The transfer of such key employees to a competitor can result in considerable economic losses for start-ups, but also for well-established companies. In times of shortage of skilled labor, many companies therefore try to retain their specialists on a long-term basis with generous employment conditions. In addition, companies often aim to reduce the risk of employees using personal skills and know-how for the benefit of competitors immediately after the end of their employment with the company.

However, due to constantly changing case law, drafting of post-contractual non-compete covenants can be tricky in many jurisdictions. A German Higher Regional Court recently expressed its view that a clause which comprehensively prohibits a director from acting on behalf of a competitor, is invalid (OLG München, 2.8.2018 – 7 U 2107/18). However, this risk can be reduced by a sound contract design. In Germany, any post-contractual non-compete obligation with employees runs the risk that it cannot be enforced if it does not meet the following conditions:

• It must be in writing and a document signed by the employer containing the agreed provisions must be handed over to the employee.

• The employer must undertake to pay a compensation which, for each year of the non-competition obligation, amounts to at least half of the total remuneration last received by the employee.

• The non-compete obligation must be limited insofar as it does not protect a legitimate business interest of the employer and cannot extend 2 years following the termination of the employment relationship.

• In addition, the geographical scope must be limited to the company’s field of activity.

Post-contractual non-compete covenants with employees, managing directors or board members implemented in the respective employment or service contracts are not the only way to protect the company. In addition, a post-contractual non-compete covenant with a shareholder-managing director can also be part of a company purchase agreement or a shareholder agreement. In some jurisdictions, there is more scope for restrictive covenants in purchase agreements than in employment contracts. While in Germany post-contractual non-compete covenants in employment contracts must comply with the strict legal requirements of §§ 74 et seqq. HGB (German Commercial Code), a post-contractual non-compete obligation under corporate law has considerably more leeway for contract design. In particular, no compensation is required and the duration of a post-contractual non-compete obligation may be up to five years rather than two years.