A post-contractual non-competition clause with a managing director of a limited liability company can be effective even without a promise of compensation for non-competition

The Federal Court of Justice has confirmed that the managing director of a limited liability company (GmbH) with whom a post-contractual non-competition clause is agreed does not have to be guaranteed and later paid compensation. If compensation is nevertheless promised, the contracting parties are free to agree on the amount and can also effectively agree to retroactively cancel the promised compensation in the event that the managing director breaches the non-competition clause.

Facts of the case

The judgment of the Federal Court of Justice dated April 23, 2024 (II ZR 99/22) is based on the following facts: A former managing director (who is the defendant in the court proceedings) of a GmbH asserts claims against the GmbH (which is the plaintiff in the court proceedings) in the form of a counterclaim for payment of compensation for non-competition for the entire period of 24 months.

For compliance with the post-contractual non-competition clause, compensation in the amount of 50% of the last monthly salary received was provided for. According to the contractual provision, a breach of the non-competition clause should lead to the entire compensation ex tunc being forfeited, with the consequence that any parts of the compensation already paid must also be repaid. The agreements on the post-contractual non-competition clause were not general terms and conditions within the meaning of Section 307 of the German Civil Code (BGB).

In the commercial register, the defendant GmbH lists the operation of spa and rehabilitation clinics, residential and nursing homes for the elderly and assisted living as its corporate purpose.

On June 17, 2013, 12.5 months after the managing director was dismissed from the GmbH, he took up a position as managing director at a management consulting company whose clients include companies in the healthcare and social economy (such as clinics, hospitals and rehabilitation facilities) as well as the elderly care and senior citizens' economy.

The GmbH did not pay the managing director any compensation for the entire 24-month period. The GmbH considered the commencement of the new activity on June 17, 2013 to be a breach of the non-competition clause.

The managing director, on the other hand, assumed that he had complied with the post-contractual non-competition clause and filed a counterclaim for payment of the entire compensation for non-competition in the amount of EUR 92,004.

The Berlin Regional Court dismissed the managing director's counterclaim in total. However, the Court of Appeal upheld it for the first 12.5 months with an amount of EUR 47,918.75.

Reasons for the decision

The Federal Court of Justice (BGH) had allowed the GmbH's appeal on points of law insofar as it had been ordered by the Court of Appeal to pay compensation.

The GmbH's appeal was also successful. In its decision, the BGH reinstated the judgment of the court of first instance, which had dismissed the managing director's counterclaim in full and for the entire 24 months.

The BGH outlined its established case law, according to which post-contractual non-competition covenants are only justified and not immoral under Section 138 BGB with regard to the constitutionally protected freedom to exercise a profession if and to the extent that they are necessary to protect a contractual partner from the disloyal exploitation of the success of his work by the other contractual partner. Post-contractual non-competition clauses are only effective if they do not exceed what is necessary in terms of territory, subject matter and time.

The Court of Appeal's finding that the post-contractual non-competition clause was effective according to these principles was not challenged in the appeal proceedings. The BGH only stated that if this had been ineffective, the managing director would therefore have no basis for a claim for compensation for non-competition.

The BGH then cited its previous case law and stated as a principle that the managing director of a GmbH with whom a post-contractual non-competition clause is agreed does not have to be promised and later paid compensation. If compensation were nevertheless agreed, the contracting parties could freely agree on its amount and thus also effectively agree that the promised compensation for non-competition would lapse retroactively in the event that the managing director breached the non-competition clause.

The BGH only very briefly stated that the Court of Appeal's assessment that the commencement of the new activity constituted a breach of the post-contractual non-competition clause was free of legal error.

The agreed retroactive elimination of the compensation was also not inequitable from the point of view of an "income replacement benefit" cited by the managing director, because the parties had already agreed that the GmbH could have waived the post-contractual non-competition clause.

According to the BGH, the Court of Appeal's finding that only the retroactive discontinuation of the compensation for non-competition was invalid, which is why the GmbH was also partially sentenced for the period of 12.5 months, is an inadmissible reduction in scope. Only a non-competition clause that exceeds the time limits can be reduced to the still acceptable time limit by way of a reduction that preserves the validity of the clause.

Notes for practical use

The decision has no impact on post-contractual non-compete clauses with employees, as the BGH has consistently held that the mandatory labor law provisions of Sections 74 et seq. of the German Commercial Code (HGB), which are mandatory for employees, do not apply to managing directors of a GmbH.

The BGH (unfortunately) did not have to decide the dispute taking into account the law on general terms and conditions because the Court of Appeal as the lower court had not established that the provisions on the non-competition clause were general terms and conditions. It therefore remains to be seen whether the BGH would have assessed the dispute or clauses differently if they had been general terms and conditions.

Although the clause on the post-contractual non-competition clause largely restricted the managing director and the prevailing opinion in the literature still assumes that compensation for non-competition must be provided for in order for an agreement with a managing director to be effective, the BGH briefly quoted and confirmed its previous case law in its ruling. It does not address the many dissenting opinions - a clarification of this would have been desirable.

Up to now, companies have tended to agree post-contractual non-compete clauses that provide for compensation, possibly to be on the safe side in the event of a dispute, possibly also for reasons of acceptance. In practice, it may be worth considering proposing a post-contractual non-compete clause without compensation to a managing director as a first step. Whether managing directors will agree to this, however, is a completely different question. In any case, managing directors who are presented with a contract without compensation for non-competition will have to consider carefully whether to sign it. Pending further clarification, it will be difficult for them to take the position that the provision is already invalid due to the lack of a decision.

The decision also shows that the exact scope of a post-contractual non-competition clause must be carefully formulated, as a reduction to preserve the validity of the agreement, as is partly provided for by law in the case of employment relationships, is only permissible within narrow limits in the case of managing directors.