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Maximum Admissible Duration of a Customer Protection Clause

A post-contractual non-competition clause in the form of a customer protection clause, agreed as part of a share purchase and the resignation from a management position, is usually effective for no longer than two years.

Background

A two-person limited liability company (Gesellschaft mit beschränkter Haftung – “GmbH”) operating in the field of staffing and recruitment had divided the business areas between the two managing partners. On the departure from the GmbH of one of the managing partners, a customer protection clause with a contractual penalty was agreed upon. According to this clause, the departing manager was to keep the customers he had recruited. The GmbH and the remaining sole manager undertook neither to contact nor solicit certain customers for a period of five years. Shortly before the end of this five-year period, an employee of the GmbH contacted potential customers that fell under the non-competition clause and offered them services in the area of supply of temporary workers. Subsequently, the former partner claimed payment of the contractual penalty from the GmbH. In the appeal hearing before the Higher Regional Court in Hamburg (Oberlandesgericht – “OLG”), the GmbH was ordered to make the payment as per the petition, whereafter the GmbH sought a judicial review of the decision.

The judgment of the BGH dated 20.01.2015, case reference: II ZR 369/13

The Federal Court of Justice (Bundesgerichtshof – “BGH”) dismissed the action. With regard to the constitutionally protected freedom to practise a profession (“Berufsausübungsfreiheit”) (Art. 12 GG of the German Constitution (Grundgesetz – “GG”)), any post-contractual non-competition clauses are in general only permissible if and to the extent they are necessary to protect one contractual party from unfair exploitation of the results of his work by the other contractual party. The necessary degree must be reasonable in terms of territory, time and content. The economic activity of the party subject to the non-competition clause should not be rendered unduly difficult. According to the BGH, it is irrelevant whether the parties are freelancers or run a business, as both cases are covered by the protective scope of the freedom to practice a profession. This constitutional protection is afforded to a personally managed GmbH in the same way as it is afforded to natural persons (Art. 19, para. 3 GG).

Since the non-competition obligation no longer existed at the time of the act in question, the payment of the penalty could not be ordered. According to the BGH, the 5-year period of the agreed non-solicitation clause was excessive and exceeded the required degree. The associated breach of common decency resulted in the annulment of the agreement (section 138 of the German Civil Code (Bundesgesetzbuch – “BGB”)). The BGH made it clear that the required time period is usually no longer than two years. According to the BGH, the former managing partner had a legitimate interest in a non-competition clause vis-à-vis the GmbH for a period of two years only. Relationships of the GmbH with former customers would not exceed this time period. An exception could only have been considered if special features of the market justified an exemption or if there were a legitimate interest in a longer non-competition clause. However, this did not apply in the present case. In similar cases, a period of two years has been considered sufficient to afford protection of the interests of the parties in question (freelancer firm; non-solicitation of employees).

Comment

The Federal Court of Justice thus confirmed the previous case-law, stating that agreements restricting competition must be limited in time and only in exceptional cases can apply for longer than two years. In addition, the present case is unusual. Usually the remaining partners or the company itself is protected and not the departing party. In the present case the departing partner could take his customers with him, backed up by the customer protection clause. However, the assessment of the maximum allowable time period is independent of which party is afforded protection by the non-competition clause. Moreover, it is the concern of the parties and must be decided on a case-to-case basis to determine who has earned the results of the work and who can thus impose a non-competition clause on the other party.

In general, the maximum duration of any non-competition clause is two years. If the non-competition clause does not exceed the permissible limits in terms of territory and content, the duration is reduced, i.e. the courts will reduce an unacceptably long time to a period that is only just permissible.

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