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The Enforceability of Non-Solicitation Obligations

In its judgment of 30 April 2014 (case no.: I ZR 245/12), the German Federal Supreme Court (Bundesgerichtshof; “BGH”) decided the question of the extent, to which non-solicitation obligations are enforceable. Pursuant to this decision, the imposition of non-solicitation obligations is only permissible in exceptional cases, and if they do not exceed a duration of two years.

Businesses often agree not to solicit each other's employees. The most notable examples of such arrangements can be found in the context of distribution agreements and agreements concluded in the run-up to due diligence investigations relating to corporate acquisitions. The non-solicitation obligations are usually tied to a contractual penalty. The legal classification of non-solicitation obligations has, however, long been controversial.

In the present matter, the parties had concluded a cooperation agreement for purposes of a joint distribution arrangement, each agreeing that it would not solicit any employees of the other party during the term of the agreement and for a period of three years thereafter. In the case of a violation of the non-solicitation obligation, a contractual penalty would bite. According to the court’s findings, the defendant had solicited two employees of the plaintiff in the third year following the termination of the cooperation agreement. The plaintiff consequently brought an action for payment of the agreed contractual penalty against the defendant.

The BGH dismissed the action, stating that even a mere non-solicitation obligation constitutes a so-called “inhibiting agreement” (Sperrabrede) within the meaning of section 75f of the German Commercial Code (Handelsgesetzbuch; HGB). This provision stipulates that an action cannot be brought on the basis of an agreement pursuant to which a business undertakes not to employ any employees of another business. The application of this provision to non-solicitation obligations is the subject of some debate. The BGH stated that there may be exceptional scenarios in which a non-solicitation obligation may be permissible and thus enforceable, e.g. in cases in which a special relationship of trust exists between the contractual parties, or where one of the parties is in need of particular protection, and the non-solicitation obligation constitutes merely an incidental obligation (Nebenbestimmung) to the actual agreement. However, given that the non-solicitation obligation in the present matter applied for a period of more than two years after the end of the co-operation between the parties, it was impermissible. In principal, only a duration of up to two years is permissible.

The judgment of the BGH clarifies that not only a prohibition to hire, but also the "more moderate" prohibition to actively recruit employees is not enforceable before the courts. At the same time, the BGH has stated with remarkable clarity the circumstances under which exceptions to this rule apply, and non-solicitation obligations are, in fact, enforceable. To this end, the BGH created case scenarios and mentioned concrete examples. Thus, a non-solicitation obligation to cease and desist, which is subject to a contractual penalty, is permissible where the conduct of the soliciting party is anti-competitive. In addition, an agreement containing a non-solicitation obligation that is merely incidental to the true purpose of the agreement is enforceable. In this regard, the BGH mentions, on the one hand, the specific example of a distribution agreement concluded between independent businesses. On the other hand, it refers to a scenario frequently occurring in practice, namely that of the conduct of a due diligence investigation relating to a corporate acquisition, in the context of which the potential purchaser obtains information relating to employees of the seller and the seller itself. In this case, the BGH thus acknowledged the seller’s legitimate interest in preventing the potential purchaser from soliciting employees if the purchase does not take place.

According to the BGH, the duration of a non-solicitation period may not exceed two years after the end of a co-operation. The BGH left open the question whether a longer timeframe might be permissible in certain cases. The BGH also did not have to decide whether, in the case of a period in excess of two years, the entire non-solicitation obligation would be invalid, or whether this would only result in it being unenforceable after a period of two years.

For drafting purposes, the decision of the BGH requires a careful examination on a case-by-case basis of whether one of the aforestated exceptions is applicable. In any case, the duration of a non-solicitation obligation should be limited in time, which limitation is generally in the interest of both parties.

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