Non-binding prohibition to compete in the absence of determination of the level of compensation

If a post-contractual prohibition to compete leaves the level of compensation to the discretion of the employer without agreeing the minimum level, the prohibition to compete is not binding on the employee.

The BAG was required to decide on the obligation of the defendant to pay compensation for a period of restriction. The claimant worked for the defendant as export sales employee. The contract of employment included a ruling under which the employee was to be forbidden from working for a competitor company for a period of two years. The defendant undertook to pay compensation for the duration of the prohibition to compete; this compensation was left to his discretion. The ruling did not make reference to the statutory rulings on post-contractual prohibitions to compete (Sections 74 et seq. HGB (German Commercial Code)).

The defendant terminated the employment relationship ordinarily, upon which the claimant declared that he would comply with the contractual prohibition to compete and expected payment of compensation for the period of restriction, at least in the statutory amount. The defendant refused payment stating that the prohibition to compete was null and void.

No nullity of the prohibition to compete

The Federal Labour Court - like the previous instances – awarded the claimant the requested compensation in the statutory amount. The contractual prohibition to compete was not null and void; rather, it was only non-binding for the employee. If the employee decided to comply with the prohibition to compete, the employer had to pay the compensation for the period of restriction. In the opinion of the BAG, the prohibition to compete is not null and void on the grounds of non-specification of the level of compensation. In the case to be decided, the ruling on compensation was not completely missing, a fact that would indisputably lead to the nullity of the prohibition to compete (established case law, most recently BAG, judgment dated 28.6.2006 – 10 AZR 407/05, marginal note 11).

Rather, the parties had agreed that the claimant should receive compensation and merely left the level of this to the discretion of the defendant. Based on the interpretation of the ruling, it was therefore clear that the claimant would receive compensation – at a level still to be determined. The determination on the basis of reasonably exercised discretion (Section 315 BGB) does not also entitle the defendant to set the compensation for a period of restriction to “zero”.

In the opinion of the BAG, nullity likewise does not result from the absence of the written form, as the parties had laid down the essential content of the prohibition to compete in a document signed by both parties in their own handwriting. According to the BAG, the level of the compensation for a period of restriction is not material. The only thing that needs to be set out in writing is that compensation is to be paid at all. The parties had satisfied this requirement.

Non-binding nature of the prohibition to compete

Nevertheless, the BAG considered that the agreed prohibition to compete was not binding on the claimant. Under Section 74 Subsection 2 HGB, a prohibition to compete is non-binding if it provides for excessively low compensation for a period of restriction. If the prohibition to compete is non-binding, the employee can decide whether he considers himself bound by it or not. If an employee complies with the prohibition to compete, he can also claim compensation for any period of restriction.

Equal treatment of excessively low compensation and discretionary compensation

The BAG is of the opinion that, if an employee cannot recognize from the agreed ruling whether he has been assured compensation for a period of restriction in the amount prescribed by law, this is equivalent to the agreement of excessively low compensation. Uncertainty of this nature is given here, as the ruling makes no reference to either the statutory regulations or to a specific level.

Level of compensation for periods of restriction

Under Section 315 Subsection 1, 2 BGB, Section 74 Subsection 2 HGB, the compensation payment left to the discretion of the defendant should have been set at 50% of the contractually conform benefits last received. Neither of the parties was able to put forward sufficient reasons for deviation from this statutorily prescribed standard.

Summary

The non-determination of the level of the compensation for periods of restriction does not result in the nullity of the prohibition to compete. Rather, it is left to the employee to decide whether he/she wishes to comply with the prohibition to compete. In case of doubt, the compensation then payable will be based on the statutory rulings of Sections 74 et seq. HGB.