Non-Solicitation Clause

What is a non-solicitation clause?

Non-solicitation clause (German: Abwerbeverbot or Abwerbeklausel) is a contract clause that prohibits a party, for a certain period, from deliberately poaching a company's employees or customers. Unlike a non-compete, it does not prohibit the competing activity itself, only targeted access to personnel and customer relationships. The party bound may therefore be active in the same market but may not approach the workforce or customers of the protected company in order to win them over.

Non-solicitation clauses bind sellers in the company purchase agreement and founders in the shareholders' agreement. They also appear in employment, cooperation and service contracts and in the confidentiality agreement (NDA) that prospective buyers sign at the start of a sale process. Because the value of technology companies lies largely in the team and in customer relationships, they often weigh as heavily in transactions as the non-compete.

Scope of a non-solicitation clause

Employees

The employee non-solicitation clause prohibits approaching employees of the protected company in order to induce them to move. A no-hire clause goes further and also prohibits hiring people who apply on their own initiative. The clause determines who is protected: all employees, only managers and key persons, or only persons who worked at the company on a reference date.

Customers

The customer non-solicitation clause prohibits approaching customers in order to induce them to end or reduce their business relationship. If the clause prohibits any business relationship with these customers, even if they make contact on their own, it is a customer protection clause. It works like a limited non-compete. It is customary to define the customer group by a period, for example all customers with revenue in the 12 or 24 months before the reference date.

Active approaches and general job advertisements

As a rule, only targeted approaches initiated by the party bound are prohibited. General job advertisements, posts on social networks and unsolicited applications are usually expressly excluded. Where the line runs between general advertising and a targeted approach is determined by the wording; vague wording is the most common cause of disputes.

Legal framework for non-solicitation clauses in Germany

Poaching without a contractual restriction

Poaching employees and customers is in principle permissible and part of competition. It becomes unfair within the meaning of the German Act against Unfair Competition (Gesetz gegen den unlauteren Wettbewerb, UWG) only in special circumstances. Examples are inducing employees to breach their contract, the use of misleading or disparaging means and conduct aimed specifically at obstructing a competitor (Section 4 no. 4 UWG). The consequences are civil: injunction and damages. Anyone who uses customer lists or other trade secrets in doing so may in addition breach the German Trade Secrets Act (Geschäftsgeheimnisgesetz).

Non-solicitation clauses between companies

If one employer undertakes towards another not to hire its employees, or to do so only under conditions, this agreement cannot be enforced in court under Section 75f of the German Commercial Code (Handelsgesetzbuch, HGB). Either side can withdraw from it. Case law also applies this rule to pure non-solicitation clauses between companies. They are enforceable only within narrow limits. The ban must be an ancillary agreement to another contract, that is, a supplementary rule, for example in a company purchase or in a close collaboration with insight into the other party's personnel. It must serve a special need for protection and be limited in time. Case law regularly does not recognise a restriction of more than two years after the end of the collaboration.

Employees, managing directors and sellers

A post-contractual customer protection clause with an employee is a non-compete and is binding only with non-compete compensation (non-compete agreement). Whether a pure employee non-solicitation clause for former employees takes effect without compensation has not been conclusively settled. For sellers in a company purchase, competition law assesses non-solicitation clauses by the same standards as the non-compete (non-compete clause). A further rule applies to pre-formulated contracts, legally standard terms and conditions: an unreasonably broad clause is not reduced to the permissible extent but falls away. Only a part that can be separated out as self-contained in wording and substance remains; the courts then simply strike out the invalid part (the so-called blue pencil test). Employment contracts are as a rule such pre-formulated contracts.

Non-solicitation clause in a sale process and a funding round

In an auction process, prospective buyers gain insight into the organisation chart, salaries and customer lists, and often access to key people. The NDA therefore regularly contains a non-solicitation clause for the employees a bidder gets to know in the process, often for 1 to 2 years. For the release of sensitive personnel data in the data room, a further tiering applies, determining which information is disclosed only in late process phases and only to a narrow circle.

In the company purchase agreement, the sellers' non-solicitation clause protects the team and the customer base that the acquirer pays for. Due diligence, the review of the company before the purchase, asks the reverse question. It examines whether the target company itself has entered into non-solicitation or no-hire undertakings towards customers or partners that restrict its recruiting after the acquisition. In the shareholders' agreement of a funding round, non-solicitation clauses bind the founders for the period after leaving.

Practical example: non-solicitation clause on the sale of a digital agency

The founder of a digital agency with around 60 employees sells her shares to a strategic acquirer. The purchase agreement contains a non-solicitation clause for 24 months from closing. Protected are all employees who were employed on the closing day and all customers with whom the agency generated revenue in the 12 months before. Excluded are general job advertisements and employees whose employment the acquirer itself terminated. A contractual penalty of EUR 25,000 is agreed for each person and each customer approached in breach of the ban.

• Permissible: After 15 months, she founds a consultancy outside the protected service area. A former project manager applies to a public job advertisement; the hire falls within the exception.
• Permissible: A designer whom the acquirer dismissed after closing is hired; this too is excluded.
• Breach: The founder writes to two existing customers of the agency and offers them services that the agency provides. The acquirer can demand an injunction and a contractual penalty of 2 × 25,000 = EUR 50,000 without having to quantify a loss. It can additionally claim higher damages if it proves them.

The example shows why the exceptions are what make the clause workable. The acquirer is protected against the targeted approach of team and customers, the founder remains professionally mobile, and in the event of a breach the legal consequence is fixed in advance.

Distinction: non-solicitation, non-compete and no-hire

• Non-compete: prohibits the competing activity as a whole and is therefore subject to stricter limits, for employees together with non-compete compensation.
• No-hire clause: prohibits any hiring of protected employees, even without a prior approach. It interferes more strongly with employees' freedom of occupation and is subject directly to Section 75f HGB.
• Confidentiality agreement: protects information. A non-solicitation clause is often part of it but regulates a different subject.

Common mistakes

• Undefined group of persons. Wording such as "all persons who have ever worked for the company" can hardly be enforced and endangers the clause as a whole.
• No exception for general job advertisements. Without one, it is unclear whether even a public advertisement is a breach.
• Customer definition without a time reference. Without a reference date and period, it remains open whether former or merely potential customers are also protected.
• Term over two years without special justification. Between companies, a longer restriction after the end of the collaboration is as a rule not recognised.
• Customer protection with employees without compensation. A post-contractual customer protection clause without non-compete compensation is not binding on the employee.

Frequently asked questions

Is poaching employees permitted in Germany?

In principle yes. It becomes unfair only in special circumstances, for example inducing a breach of contract or conduct aimed specifically at obstructing a competitor. A contract can additionally restrict poaching.

What is the difference between a non-solicitation clause and a non-compete clause?

The non-compete clause prohibits competition itself, the non-solicitation clause only the targeted poaching of employees and customers. Someone bound by a non-solicitation clause may work in the same market or found a company. Because it interferes less with freedom of occupation, it can often be agreed even where a non-compete would go too far.

Are non-solicitation clauses between companies enforceable?

Only within narrow limits. Under Section 75f HGB, such agreements cannot in principle be enforced in court. Case law recognises exceptions where the ban, as an ancillary agreement to another contract, serves a special need for protection and is limited in time.

Does a public job advertisement breach a non-solicitation clause?

As a rule not. Most clauses expressly exclude general job advertisements because they are not directed specifically at protected persons. If there is no such exception, the interpretation of the wording decides.

How is a non-solicitation clause worded?

The clause determines the group of protected persons, the prohibited act, the term, the exceptions and the legal consequence of a breach. A typical core reads: "The seller shall not, for 24 months from the closing date, deliberately approach employees of the company, either itself or through third parties, in order to induce them to move. General job advertisements remain permissible."

How long does a non-solicitation clause last in a company purchase?

Usually for the same period as the sellers' non-compete, with 1 to 3 years from closing being widespread. The competition law maximum limits for the non-compete apply accordingly.

The Roemer Capital view

In sale processes, Roemer Capital determines with the client which groups of persons and customer relationships need protection before bidders gain insight into the organisation chart and customer lists. The non-solicitation clause is then anchored in the confidentiality agreement already; the company's law firm takes over the wording. In parallel, Roemer Capital plans in which process phase which personnel information is disclosed.

In the purchase agreement, Roemer Capital makes sure that the non-solicitation clause, the non-compete and the founders' planned activity after closing fit together. A narrowly drawn, clearly defined scope of protection is more reliable for both sides than a comprehensive wording whose validity is uncertain.