Retroactive cancellation of non-competition compensation in the event of infringement of a non-compete clause

Read the German version here.

A post-contractual non-competition clause agreed with the managing director of a limited liability company (GmbH), which provides for the retroactive cancellation of compensation for non-competition in the event of a violation of the non-compete agreement, is valid. The managing director is not unfairly disadvantaged by this. This was determined by the Federal Court of Justice (Court) in its ruling of 23 April 2024 (case no. II ZR 99/22).

Facts of the case

According to the employment contract, the defending and counterclaiming managing director was subject to a post-contractual non-competition clause of two years. The payment of a monthly compensation for the duration of the non-competition clause was stipulated as compensation for compliance with the post-contractual non-competition clause. The parties also agreed that a breach of the non-competition clause would lead to the retroactive cancellation of the compensation for non-competition.

On 31 May 2012, the defendant was dismissed as managing director of the plaintiff. On 17 June 2013, the defendant took up a position as managing director at a competitor of the plaintiff. He claimed payment of the outstanding compensation from the plaintiff.

Decision of the Court

In the view of the Court, the retroactive cancellation of the waiting allowance was effectively agreed as it did not place an unfair burden on the defendant.

The Court based its decision on its established case law, according to which there is no obligation to grant the managing director compensation for non-competition if a post-contractual non-competition clause is agreed with a managing director. If such compensation is nevertheless promised, the parties are free to agree its amount. This freedom of negotiation also includes determining the retroactive cancellation in the event of a breach of the non-competition clause.

The Court also held that there was no imbalance between the parties due to the unilateral sanction of the managing director, as it was unclear which conceivable breach of duty by the plaintiff should be sanctioned in the interest of equal treatment.

The Court also rejected the defendant’s view that the compensation constituted an income replacement for him, which could not reasonably be withdrawn retroactively. Rather, the plaintiff was already entitled to unilaterally waive the non-competition clause, which precluded an income replacement.

Finally, the plaintiff was not prevented from invoking the retroactive cancellation of the compensation for non-competition under the principles of good faith. If at all, in the event of a serious and final refusal to pay the compensation, it could be considered that the defendant had been ‘challenged’ by the plaintiff to take up a competitive activity.

Practical note

The decision expands the scope of the employer’s leeway when agreeing post-contractual non-competition clauses in employment contracts with managing directors.

The principles of this decision are not likely to be transferable to employees. Here, the contractual freedom of the parties is restricted by special statutory provisions. The compensation for waiting periods is therefore not freely negotiable, but rather legally binding.