GRP Rainer Rechtsanwälte – Report on post-contractual non-compete clauses
03 Jul 2019
Companies usually agree to post-contractual non-compete clauses with their managing directors. These need to be balanced to ensure they don’t end up null and void in their entirety.
Companies are better positioned to protect their legitimate interests when business and managing director go their separate ways if the company agreed to a post-contractual non-compete clause with the executive officer. These clauses typically stipulate that following his or her departure from the company, the managing director will not work for or on behalf of competitors or establish his or herself by any other means as a competitor to their former employer. In return, the managing director normally receives compensation for committing not to compete.
We at the commercial law firm GRP Rainer Rechtsanwälte note that it is important for post-contractual non-compete clauses to be balanced, otherwise the agreement could be null and void in its entirety. The departing managing director’s interest in pursuing work is equally as valid as the company’s right to protect its interests, which is why a post-contractual non-compete agreement must not unduly restrict the managing director’s freedom to choose his or her occupation. This is clear from an indicative ruling of the Oberlandesgericht (OLG) München, the Higher Regional Court of Munich, from August 2, 2018 (Az.: 7 U 2107/18).
The OLG München held that post-contractual non-compete clauses are deemed to be null and void if they do not serve the legitimate interests of the company and unfairly restrict the time, location and subject of the managing director’s professional practice. The value of any compensation for the period of non-competition was said to be irrelevant. In the case in question, a GmbH had agreed to a post-contractual non-compete clause with its managing director. This prohibited the latter from performing any kind of activity for a rival business for a period of one year.
The OLG München ruled that this agreement went too far, noting that it prohibited the managing director from performing any form of activity for a rival business. This meant, for instance, that he could not even work as a caretaker. The Court concluded that this rendered the non-compete agreement null and void as a whole and not merely in part.
When concluding post-contractual non-compete clauses, it is vital to ensure they are proportionate and not too broad in scope. Lawyers with experience in company law can offer advice.