In a decision dated 30 April 2014, but published only recently, the German Federal Court of Justice ("FCJ") struck down an agreement between two companies not to "poach" each others’ employees as violating the German Commercial Code (Handelsgesetzbuch, "HGB"). However, the FCJ also clarified under what circumstances companies can lawfully enter into no-poaching agreements, at least under German commercial law.
Following the investigation and enforcement actions brought by the U.S. Department of Justice against various no-poaching agreements between U.S. high tech companies, the legality of such agreements has received considerable attention on both sides of the Atlantic. So far the debate has focused exclusively on the compatibility of such agreements with US or European antitrust law. The FCJ’s decision now serves as a reminder that no-poaching agreements can not only be invalid under antitrust law, but at least in Germany also under regular commercial law.
In August 2005, two companies, which until 2004 belonged to the same group of companies and which were both active in the commercial vehicle business, concluded a joint distribution agreement. The agreement contained a clause pursuant to which the parties undertook not directly or indirectly to poach each others’ employees for the duration of the agreement and for three years following the termination of the agreement. In case of breach of this obligation, the agreement provided for a contractual penalty of two annual salaries of the employee in question.
The agreement was terminated with effect as of December 2006. In 2009, two sales employees quit their jobs at one of the companies to start working for the other company. On the basis of the no-poaching clause, the former employer brought a lawsuit against the new employer for payment of a contractual penalty of more than EUR 380,000 (approximately USD 485,000). While the district court dismissed the action, the court of appeals reversed and ordered the defendant to pay the contractual penalty.
The FCJ reversed the court of appeals’ decision and dismissed the complaint, holding the no-poaching agreement to be invalid for violation of Section 75f HGB. Section 75f HGB provides that an agreement between two companies not to hire a sales agent employed by the other company is not binding. However, it is generally recognized by the German courts that this provision is not limited to sales agents, but rather prohibits agreements not to hire any employees of another company.
The FCJ clarified that this provision also does not only cover agreements not to hire employees, but also agreements, such as the one at issue here, not actively to poach each others’ employees.
The FCJ recognized that there may be certain situations in which companies could lawfully agree not to poach each others’ employees, in particular if the no-poaching agreement is only an ancillary provision necessary to take adequate account of a special relationship of trust between the parties or of a special need for protection of one of the parties. The FCJ went on to explain that the latter requirement could be met in particular in case of:
- a due diligence prior to the acquisition of (parts of) a company
- a spin-off of parts of companies or of certain group companies
- a distribution agreement between independent companies.
The FCJ found that the no-poaching agreement at issue was necessary to protect both parties, given that details of each party’s workforce was known to the other party following the joint distribution. The court nonetheless dismissed the complaint because the poaching took place in the third year after the termination of the cooperation agreement and thus, said the FCJ, after the maximum period for which a no-poaching obligation could be agreed. Drawing a parallel to the fact that under German law a post-contractual non-compete obligation for commercial agents or professionals (such as a lawyer leaving a law partnership) can only be agreed for a maximum of two years, the FCJ held that no-poaching agreements could in general also only continue for two years after the termination of the underlying agreement. The FCJ indicated that a longer time period may be possible in exceptional cases.
The FCJ’s decision emphasizes that no-poaching agreements can be invalid in Germany regardless of whether or not these agreements are compatible with antitrust law. Under the FCJ’s decision, no-poaching agreements that are not ancillary to due diligence, a spin-off, or a distribution agreement or that provide for a post contractual no-poaching obligation of more than two years therefore risk being invalid for violation of commercial law. While the FCJ’s decision did not address the compatibility of no-poaching agreements with German or European antitrust law, any clauses that meet the test established by the FCJ for compatibility with commercial law could be found to be compatible with antitrust law under the concept of "ancillary restraints."
The FCJ decision is available in German.