Safeguarding secrets - a German employment law perspective

March 2014

In the framework of contractual relationships that involve continued obligations, the issue of confidentiality typically combines conflicting interests. Against this background, it is inevitable that the parties of an employment relationship might get involved in a legal dispute regarding business and trade secrets, particularly following the termination of the employment relationship. The employer is interested in protecting trade and business secrets to a maximum extent. Contrary to this, the employee is interested in making use of the whole knowledge he has gained during the employment relationship for his future professional development. Even in an ongoing employment relationship, the conflicting interests of the parties regarding the confidentiality of certain business information may collide.

This article explains how to handle issues of trade and business secret protection from an employment law perspective in Germany.

Introduction

It is common sense that information, circumstances and/or processes are qualified as trade or business secrets if

they are related to a particular business enterprise;
they are known only to a limited group of people (and are therefore not public);
they are kept confidential for the purpose of economic interest; and
the business enterprise has an apparent and legitimate interest in keeping the information confidential.

computer chip In German terminology, technical circumstances and processes (e.g. computer and control programs) are to be qualified as 'trade secrets', while commercial circumstances and processes (e.g. customer lists, marketing concepts and business strategies) are to be qualified as 'business secrets'. However, as there are no statutory differences between trade and business secrets, both groups are collectively referred to as trade secrets in this article.

Regarding the protection of trade secrets during the employment relationship and following its termination, completely different 'rules of play' apply (see the following two sections of this article).

The protection of trade secrets during the employment relationship

In an ongoing employment relationship that is governed by German law, trade secrets are protected by several statutory provisions (see Statutory protection of trade secrets). However, no dedicated trade secret statute exists in Germany, and remarkable gaps in confidentiality protection remain. Thus, any employer is well advised to make use of effective contractual agreements in order to ensure that trade secrets are optimally protected for the duration of the employment relationship (see Protection of trade secrets in employment contracts).

Statutory protection of trade secrets

The statutory protection of trade secrets is based on numerous criminal and civil law provisions:

The focus of Section 17 (1) of the Act Against Unfair Competition lies in the punishment of the unauthorized disclosure of trade secrets by employees during the course of the employment relationship for the purpose of competition, personal gain, for the benefit of third parties of with the intent of causing damage to the employer as the owner of the business. Violations of Section 17 (1) of the Act Against Unfair Competition might result in punishments such as imprisonment of up to three years, or, alternatively, fines.
Section 203 of the German Criminal Code provides that whoever unlawfully discloses another person's trade secrets which were confided to or otherwise made known to him in his capacity as a professional, shall be subject to imprisonment of up to one year, or, alternatively, fines.
Certain groups of employees are subject to specific civil law regulations regarding trade secret protection. This involves e.g. works council members, data protection officers, trainees and persons of confidence for disabled employees.
Pursuant to Section 242 of the German Civil Code, employees are generally obliged to keep their employer's trade secrets confidential under the principle of good-faith performance.
Finally, the protection of trade secrets is often directly linked with non-compete scenarios. According to Section 60 (1) of the German Commercial Code, which applies to all kinds of employment relationships, no employee is allowed to act as a competitor to his employer for the duration of the employment relationship.

handcuffs Violations of the statutory confidentiality obligations might not only result in numerous criminal and civil law sanctions against an employee. At the same time, such behaviour is highly likely to have a severe negative impact on the employment relationship itself. An employee who unduly reveals the employer's trade secrets might face the immediate termination of his employment relationship for good cause, or, alternatively an ordinary termination (i.e. termination with notice). Further to this, the employer is in the position to obtain an interim injunction against the employee with regard to any competitive behaviour for the duration of the employment relationship. Finally, the employer has the right to claim compensation of any damages the employee has caused by his behaviour.

Protection of trade secrets in employment contracts

The preceding description of the statutory provisions concerning the protection of trade secrets in Germany might easily lead to the conclusion that an employer's trade secrets are extensively protected against any disclosure and/or misuse committed by an employee for the duration of the employment relationship. As a matter of fact, cases which clearly reveal that an employee has intentionally disclosed or misused trade secrets do merely exist; violations of Section 17 (1) of the Act Against Unfair Competition or Section 203 of the German Criminal Code are rarely persuaded.

Against this background, it is advisable to set up specific rules regarding the protection of trade secrets, and to include such rules into the employment contract. Any clause must comply with the balance between the employer's interest in an extensive protection of his business and the employee's interest in making use of his professional knowledge. Consequently, the use of a rather global wording that refers to the confidentiality of each and every - even publicly known – piece of business information would lead to the invalidity of the clause. Instead, the following rules of thumb apply:

The more it can be said that a legitimate protection interest exists on the side of the employer, the more likely it is that a contractual confidentiality protection clause is to be regarded as effective. If and to which extent such a legitimate interest might exist is always a question of the individual case.
A further essential element of a valid contractual agreement regarding confidentiality is the transparency requirement: The contract should not only refer to 'trade and business secrets' in general, but explicitly point out the most sensitive information that are subject to absolute confidentiality. An employee can only cope with the confidentiality obligations contained in his employment contract if he is able to clearly understand the scope and content of the respective clause. It is the employer's task to make clear which trade secrets shall be kept confidential in each single case.

In this context, a valid contractual agreement should provide answers to the following questions:

What are the employer's trade secrets?
Are trade secrets of third companies involved (e.g. affiliates of the employer)?
How shall a situation be handled in which it is unclear whether or not the respective information is confidential by the employee?
What are the consequences of the disclosure/misuse of trade secrets? Do contractual penalties exist?

To create an effective confidentiality clause that involves all these aspects and, at the same time, does not lead to an unjustified limitation of the employee's interests, a thorough case-by-case assessment as well as professional legal support is required.

The protection of trade secrets following the termination of employment

Following the termination of an employment relationship, the protection of trade secrets is even a higher challenge than before. This fact does not result from the negligence of German legislation, but from the German legal system's clear vote in favour of the principle of free competition. In other words: Following the termination of the employment relationship, an employee is basically allowed to compete with his previous employer and, in this regard, make use of the knowledge that he has gained during his previous employment.

Against this background, trade secrets are merely protected by law for the period following the termination of employment (see Post-contractual protection of trade secrets in employment contracts). In order to increase the level of protection, it must be considered whether it is essential to strengthen confidentiality and knowhow protection by way of special agreements between employer and employee that create a binding effect even though employment has terminated (see Post-contractual protection of trade secrets in employment contracts).

Post-contractual protection of trade secrets in statutory law

Once the employment relationship has come to an end, Sec. 17 (1) of the Act Against Unfair Competition does not apply any more. The misuse of trade secrets by former employees can only be subject to industrial espionage - i.e. the commercialisation of trade secrets - pursuant to Section 17 (2) of the Act Against Unfair Competition and Section 203 of the German Criminal Code. Again, the crucial factor is the question whether industrial espionage intentionally committed by an employee can be proved in practice. Most of the cases lack such evidence, given that the employee has left the employer's organization, deleted any suspicious e-mail correspondence and erased any further traces of his misuse.

In this way, it becomes apparent, that it is advisable to agree a clean and explicit post-contractual confidentiality clause with an employee, who may be provided with important trade secrets by the company during employment to raise the post-contractual trade secret protection (see also the next section).

Post-contractual protection of trade secrets in employment contracts

Against the background of the low level of protection of trade secrets following the termination of employment, it must be considered whether it is essential to create a binding contractual confidentiality agreement which remains effective despite the termination. The first and most important step is to explicitly state in the employment contract that trade secrets which are to be kept confidential for the duration of the employment have to be kept secret by the employee following a termination. Further to this, it is possible to agree on contractual penalties which are proportionate with view to the former employee's remuneration. Again, the key to a valid post-contractual confidentiality agreement is the clear and transparent identification of the issues which have to be kept confidential. It is not practical to just refer to 'trade secrets' without making use of the possibility to fill this general term with life.

Finally, the safeguarding of an employer's trade secrets must not lead to the fact that, following the termination of employment, the employee is unable to work in his professional area for another employer due to extensive post-contractual confidentiality obligations. This would not result in mere confidentiality, but in the employee's post-contractual obligation not to compete. It is possible under German law to agree on such non-compete obligations in the framework of Section 74 of the German Commercial Code. The provisions contained therein are very strict from an employer's perspective. Any diverging non-compete clause which is to the detriment of the employee would lead to the fact that the whole clause would be ineffective or even null and void, and the employee would be in the position to freely go ahead with his professional career with immediate effect.

This is basically how to create a valid post-contractual non-compete clause under German law:

The non-compete obligation must be agreed in writing.
Only legitimate interests of the employer can be protected. Consequently, the non-compete obligation must be reduced

to the business of the employer in which the employee was actively involved; and
to the geographical area in or for which the employee has worked.

The non-compete obligation can only be validly agreed for a period of up to two years following the termination of the employment relationship.
For the duration of the non-compete obligation, the employer is obliged to effect payment of a compensation in the amount of 50% of the employee's total salary to the employee.

agreement In practice, it often requires legal assistance to draw a distinct line in the grey area between post-contractual confidentiality obligations (valid without a compensation payment) and post-contractual non-compete obligations (only valid under the above preconditions). Further to this, it has to be assessed on a case by case basis, and with special regard to the position of the employee and the degree of knowledge he has gained during his employment, whether the employee can cause such immense damage to the employer's business that it is justified to agree on a post-contractual non-compete obligation against payment of the compensation. However, the additional financial exposure resulting from a post-contractual non-compete clause can be worth with view to employees in key positions. The considerations to be undertaken by the employer prior to the decision whether or not the employee is a 'candidate' for a post-contractual non-compete clause are as follows:

Is the employee likely to have access to material trade secrets of the employer during the employment relationship?

If not, there is no need to put a big effort into contractual agreements related to confidentiality and/or non-competition.
If so: Is the legitimate interest of the employer covered by a mere contractual and post-contractual confidentiality agreement, or is it necessary to agree on a post-contractual non-compete obligation?

In case a valid post-contractual obligation not to compete has been agreed, the breach of such obligation by the employee would lead to the right of the employer

to obtain an interim injunction against the employee with view to any forbidden competitive behaviour during the non-compete period;
to refuse payment of the compensation with immediate effect;
to claim reimbursement of any damages caused by the violation of the non-compete obligation; and
to refer to any valid contractual penalty contained in the non-compete clause.

The level of protection provided by a valid post-contractual non-compete clause enables the employer to effectively safeguard his trade secrets for the duration of the non-compete period. In crucial situations, e.g. when key employees leave, a clever and diligent agreement can be live-saving for a whole business model.

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