Effectiveness of non-binding preliminary contracts – post-contractual non-compete agreements

Preliminary contracts for the conclusion of a post-contractual non-compete agreement that have been entered into in a formally effective manner may be legally effective. As a consequence, compensation for non-competition is not due if the reserved right has not been exercised.

Federal Labor Court, December 19, 2018 – 10 AZR 130/18

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The parties’ dispute concerned the right to receive compensation for non-competition. The employee’s employment contract contained the following clause:

“At the company’s request, the employee acknowledges to agree a non-competition clause for the period after termination of the employment up to a maximum of two years (but also for a shorter period), which corresponds to Annex 1 to this contract. The request may be made as long as the employment contract has not been terminated by either party.”

The parties agreed that the competition clause contained in the Annex complied with statutory requirements. The two parties signed both the employment contract and the Annex. The company then terminated the employment in a legally effective manner, which led the employee to claim payment of compensation for non-competition.

The Federal Labor Court agreed with the decisions of the lower courts, which had dismissed the complaint. The Federal Labor Court also held that the parties had not concluded an effective post-contractual non-competition clause, but had merely agreed on a preliminary contract relating thereto. This preliminary contract was effective.

In the opinion of all instances, the agreement was to be interpreted as a preliminary contract on the basis of its clear wording alone. Wording according to which employees agree to conclude a non-competition clause at the company’s request for the period after termination of the employment could only be understood to mean that a preliminary contract was to be established and that a non-competition clause after the conclusion of the agreement was not yet to be concluded itself. Nor does the fact that both parties signed the Annex and the employment contract speak against its qualification as a preliminary contract. Rather, such a preliminary contract was subject to the written form itself due to the formal requirement for post-contractual non-compete clauses.

In addition, the instances unanimously concluded that the preliminary contract did not constitute an unreasonable obstacle to professional advancement and that the employee therefore had no right of choice. On the basis of the principle that preliminary contracts aimed at a post-contractual non-compete period are generally permissible on the basis of contractual freedom, the Federal Labor Court listed various constellations according to which unreasonable obstacles to professional advancement could be presumed and the employee would then be entitled to a right of choice with respect to the binding nature of the post-contractual prohibition of competition. Such obstacles would exist if employers could request a post-contractual non-compete period even after a notice of termination had been given. This was not the case here, as the company was only able to request the conclusion of a non-compete agreement until a notice of termination had been given. Thus the extreme time limit was observed up to which the right from the preliminary contract to establish a post-contractual non-compete period could be reserved at most.

Consequences for practice:

The above-mentioned design frequently appears in business practice; it was not conclusively clear, however, to what extent these constructions would stand up to legal review. It is therefore welcome that the Federal Labor Court has ensured a certain degree of legal certainty in this respect. The decision extends the scope of action of companies with regard to safeguarding their know-how. With legally-compliant design and taking into account mutual interests, companies may keep it open, in view of this decision, how forcefully they want to protect themselves against possible competition. In the future, companies may therefore consider whether there is a need for increased protection with respect to an employee whom they wish to dismiss, with the consequence that the reserved rights must be exercised.