- BAG on the Effectiveness of a Post-Contractual Restraint on Competition
- March 11, 2016
- Law Firm: GRP Rainer LLP - Cologne Office
- According to a judgment of the Bundesarbeitsgericht (German Federal Labour Court), even a mere interest-free loan for a competing company has the potential to violate a post-contractual restraint on competition (Az.: 10 AZR 260/14).
GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London conclude: Employment law stipulates that employers and employees can agree to a restraint on competition in the employment contract. This was the case in the legal dispute that came before the Bundesarbeitsgericht (BAG).
The parties had agreed, inter alia, that the employee was not allowed for a period of two years after termination of the employment relationship to directly or indirectly work for, acquire an interest in or play a part in the foundation of a company that was in competition with the employer. While the employment relationship was still ongoing, the employee had supported the development of a rival firm by providing it with an interest-free loan of more than 75,000 euros among other things. When the employer became aware of this, it dismissed the employee. The latter’s action for wrongful dismissal was unsuccessful.
The former employee subsequently sued for payment of compensation for the two-year period of non-competition. He justified this by stating that he had adhered to the post-contractual restraint on competition. He went on to say that while he had provided a loan and not called it in, he was not a shareholder of the firm and only involved as an investor. His former employer took a different view, arguing that he had violated the restraint on competition and was still the beneficial owner of the firm. The employer claimed that he had led and had a lasting influence on the fate of the competitor in this capacity.
The BAG dismissed the claim for payment of compensation for the period of non-competition. It held that the plaintiff had violated the post-contractual restraint on competition by leaving the loan with the rival firm. The Court went on to state that while the employer had failed to invalidate the non-competition agreement by means of a written declaration within one month of termination, the agreement provided that leaving the loan after the employment relationship had come to an end constituted a prohibited interest in a competing company. The Court said that because the employee had not called in the loan, he had continued to give the firm economic support.
Notwithstanding this, employers need to be careful when preparing a non-competition clause to ensure that it is binding. Lawyers who are competent in the field of employment law can advise on drafting employment contracts.