The solicitation of employees by competitors is a frequent problem for companies in Germany. Many companies actively pursue a so-called “war for talents” and sometimes unlawful means are used for the purpose of soliciting employees. The loss of key employees can cause severe damage to a company. In many cases, not only expert knowledge but also confidential information and client relationships are lost. The German Federal Labor Court (“Bundesarbeitsgericht” – “BAG”) recently decided on the damage claims of a company which had lost numerous key employees due to unlawful solicitation activities of a competitor (BAG September 26, 2012, 10 AZR 370/10). The decision was eagerly awaited as the plaintiff had claimed a compensation payment of 46 million Euro for the damages caused by the massive solicitation of key employees. The BAG’s decision establishes important principles regarding the solicitation of employees and damage claims of companies who were the target of unlawful solicitation activities.
The Strabag-Bilfinger Case
The origins of the case go back to 2005. A road construction company was experiencing serious economic difficulties. The German Bilfinger Group was interested in acquiring the company. However, Bilfinger’s attempts failed and it was finally acquired by the German multinational construction company Strabag. Nevertheless, Bilfinger managed to solicit several key employees. These employees terminated their employment contracts with the now Strabag-company; however, they had to observe their notice periods and continued working for the Strabag-company. During their notice periods they approached further key employees of the Strabag-company on behalf of Bilfinger in order to solicit them. The target employees were selected by Bilfinger based on the information provided by the already successfully solicited employees. The targeted key employees were systematically approached by their co-workers on behalf of Bilfinger and they were handed out blank Bilfinger employment agreements. At least 50 key employees decided to also join Bilfinger and, after signing the blank employment agreements, terminated their employment contracts with Strabag.
Due to the solicitation activities, the Strabag-company lost highly experienced key-employees and essential trade secrets to Bilfinger. Several house searches carried out by the state prosecutors showed that Bilfinger had obtained calculation plans and other trade secrets which further weakened Strabag’s market position.
Strabag filed claims both against the soliciting ex-employees and Bilfinger before several courts and claimed compensation payments for damages in an amount of 46 million Euro. According to Strabag, due to the loss of the key employees, the company lost 26,737,000 Euro in 2005 and 17,715,000 Euro in 2006. Furthermore, important projects were not assigned to Strabag due to their lack of qualified experts and the order intake dropped by 37 percent. According to a statement made by Strabag’s representatives during the court proceedings, after the loss of the key employees to Bilfinger, “the company went down like a rock”.
The Federal Labor Court’s Decision
The BAG rejected Strabag’s claim for damages and thereby set an important precedent for future cases. Although the court acknowledged that Bilfinger carried out unlawful solicitation activities, Bilfinger was not obliged to compensate Strabag for the losses allegedly caused thereby.
According to the BAG, Bilfinger’s acts were clearly unlawful as the solicitation activities violated the regulations of the Unfair Competition Act (“UWG”). The BAG pointed out that companies which use employees of a competitor before the end of their employment relationship for own solicitation purposes commit an act of unlawful competition in terms of section 3 para. 1 UWG. In particular, the fact that Bilfinger used Strabag employees to provide their co-workers with Bilfinger’s employment offers violated Strabag’s rights protected by the UWG. Furthermore, the BAG confirmed that Bilfinger unlawfully obtained Strabag’s trade secrets. However, even though Bilfinger’s acts were clearly unlawful, the court did not award any compensation payments claimed by Strabag. The court based the rejection of damage claims on a lack of proof. According to the BAG, Strabag had not provided sufficient proof for the connection between Bilfinger’s unlawful solicitation activities and the claimed financial losses. In the opinion of the court, it is likely that the successful solicitation of key employees caused financial damage. However, according to the BAG, further negative influences which were not caused by Bilfinger also contributed to the company’s loss of market share. The court refers for example to the insolvency of the mother company and the general economic downturn in the construction business. Due to the multiple reasons for the financial losses, the court decided that it was unable to determine the amount of damages caused by the Bilfinger’s unlawful activities. Consequently, the BAG rejected all damage claims.
The Consequences of the Decision
The Strabag-Bilfinger-case shows that a competitor’s solicitation activities can cause considerable damage to a company. The loss of expert knowledge to a competitor can seriously endanger the market position of a company. Furthermore, the hiring of key employees by a competitor often also leads to a loss of confidential information. The court decision also shows that even if a court determines that unlawful solicitation activities existed, it is still very difficult for a company to obtain compensation for the damages caused by the competitor’s acts. German law requires that a clear connection between the solicitation and financial damages is established. Otherwise, a competitor can avoid damage claims arguing that the financial losses were caused by other factors, i.e. an economic downturn or simply bad management decisions. Due to the high requirements for successful damage claims, it is highly important for companies to take preventive measures and to react quickly in case of solicitation attempts. In our experience, the following measures can help reduce the risks caused by solicitation activities:
1. Retention Measures
- Companies should identify key employees who could be the target of solicitation attempts. Key employees should receive at least a market level remuneration. A constant review and adjustment of the employee’s benefit package reduces the risk of a successful solicitation.
- Additional retention measures, e.g. retention bonus programs or a stock option plan, are also effective measures. However, retention plans under German law must be drafted carefully due to numerous requirements for valid retention agreements with employees which have been established by the German labor courts.
- Long notice periods for key employees can make solicitation attempts unattractive for competitors.
- Companies should consider concluding post-contractual non-competition agreements with employees of very high importance for the business of the company, e.g. sales responsible with essential client contacts. However, such agreements are only recommendable in exceptional cases as they require that the employer continues to pay at least 50 percent of the prior remuneration during the non-competition period which can last up to two years.
- The standard employment contracts should contain non-solicitation clauses which stipulate that employees must not solicit co-workers on behalf of third parties. It is not clear if German labor law allows post-contractual non-solicitation agreements. Although there are no court rulings dealing with post-contractual non-solicitation clauses, the legal doctrine argues convincingly that such clauses should be valid. Therefore, it is advisable to conclude post-contractual non-solicitation agreements. Non-solicitation clauses should be combined with contractual penalty clauses.
2. Best Practice in Case of Solicitation Activities
- If a company becomes aware of a competitor’s solicitation activities, it must react immediately. A task force should be established in order to reduce the potential damages.
- It is critical to immediately approach key employees who could be a target of solicitation activities. In many cases, individual retention measures can either turn successfully solicited employees or avoid that the competitor successfully hires the key employee. Individual retention measures can be retention payments, the participation in a retention plan, promotions or the adjustment of the benefit package.
- A competitor’s solicitation campaign calls for a determined and clear response. In most cases immediate legal actions both against the competitor and, if applicable, against employees who help the soliciting competitor are the best way to keep the effects of solicitation activities at least within reasonable limits. Employees who assist the competitor should immediately be set free from their working duties in order to avoid a loss of further key employees. Legal claims, e.g. a cease and desist injunction, should be filed against the employee. The company should take the same legal steps against the competitor.
- It is essential to review if the competitor has obtained trade secrets. In such case, legal claims against the competitor and the (solicited) employee who disclosed the trade secrets should be filed. In addition, the disclosure of trade secrets can constitute a criminal offense in terms of section 17 UWG. It is therefore recommendable to file a criminal complaint. In case of criminal proceedings, house searches can be ordered by the law enforcement agencies which can provide important evidence for legal claims against the competitor.