Retroactive cancellation of a confidentiality agreement: is that legally possible?

Employers often agree a post-contractual non-competition clause with their employees or managing directors. The Federal Court of Justice has now ruled that a clause which provides for the retrospective loss of the compensation paid for this in the event of a breach of the prohibition can be effective.

Background of the non-competition clause and the compensation for non-competition

Employers and principals often agree a post-contractual non-competition clause with their employees or managing directors. This means that the employee or managing director is not allowed to take up any competing activity for a certain period of time after the termination of their contractual relationship. In return for this prohibition, they receive compensation amounting to 50 per cent of their last remuneration.

The current case

In the case in question, the defendant was a managing director at the plaintiff and was subject to a two-year non-competition clause after leaving the company. A compensation payment amounting to 50 per cent of his last monthly remuneration was provided for as compensation for this prohibition. The parties had also agreed that if this non-competition clause were violated, the compensation payment would lapse – and with retroactive effect!

The inevitable happened: after leaving the company, the managing director violated the agreed non-competition clause. As part of a counterclaim, he asserted a claim against the company for payment of compensation for non-competition in the amount of around €92,000 plus interest. The district court dismissed his claim, while the court of appeal awarded him around €48,000.

The ruling of the Federal Court of Justice

The Federal Court of Justice ultimately reinstated the judgment of the Regional Court and thus dismissed the claim for payment of the compensation for non-competition. In its judgment, the Federal Court ruled, among other things, that the clause in the contract was valid and that the compensation for non-competition had (subsequently) ceased to apply because the managing director had violated the non-competition clause. The clause also did not place an unreasonable burden on the managing director. The managing director was free to unilaterally waive the post-contractual non-competition clause (and the payment of compensation for non-competition) in order to engage in competitive activity.

Conclusion

The Federal Court of Justice has clarified that a clause which provides for the retroactive forfeiture of the compensation for non-competition in the event of a breach of a post-contractual non-competition clause is legally permissible. For managing directors and other employees with a non-competition clause, this means that a breach of the non-competition clause can result in the loss of the compensation for non-competition.