Employment contracts or termination agreements typically include a clause protecting trade secrets. However, if the provisions are too broad, the prohibition is invalid due to a violation of Section 138 of the German Civil Code (BGB), as the Higher Regional Court of Koblenz has once again emphasized in a recent decision. This has far-reaching implications for the handling of trade secrets and the assessment of infringing acts under Sections 4 et seq. of the Trade Secrets Act (GeschGehG).
As early as 1998, the Federal Labor Court ruled in its judgment of May 19, 1998, Case No. 9 AZR 394/97, that all-encompassing confidentiality agreements in employment contracts are invalid. This case law, which has remained unchanged since then, has thus far had a significant impact primarily in labor law and its intersection with unfair competition law. With the introduction of the GeschGehG, this case law now takes on new significance.
Labor Court Case Law
In the underlying case, the former employer sued its former employee for injunctive relief, disclosure, and damages due to a breach of a contractually agreed confidentiality obligation regarding all business transactions of which the employee had become aware. The employee had utilized the knowledge he acquired during the employment relationship for his post-employment activities in the same market.
The Federal Labor Court (BAG) ruled that the confidentiality agreement was invalid because, in its specific form, it constituted an impermissible post-employment non-compete clause. The agreement – prohibiting the employee, for an indefinite period after the termination of the employment relationship, from using as practical experience any business transactions of which he had become aware (a so-called “all-clause”) – without providing for a waiting-period indemnity, exceeded the statutory limits set forth in §§ 74 et seq. of the German Commercial Code (HGB) for a non-compete clause lasting a maximum of two years.
This assessment still applies today, regardless of whether the confidentiality clause is incorporated into the employment contract through an individual agreement or by way of general terms and conditions. According to the ruling of the Federal Court of Justice (BGH) dated December 3, 2015, Case No.: VII ZR 100/15, such confidentiality or non-competition clauses violate the transparency requirement under Section 307(1), sentence 2, of the German Civil Code (BGB) if their scope is not sufficiently clear to the affected party. In accordance with general principles, no reduction intended to preserve the validity of the clause—based on the limits set forth in §§ 74 et seq. of the German Commercial Code (HGB)—is applied to protect an employee confronted with an unclear standard term.
Case Law on Fair Trading
The case law described above is consistent with the Federal Court of Justice’s (BGH) decision-making practice under fair trading law. In its judgment of January 14, 1999, Case No. I ZR 2/97, the BGH also, in principle, protects employees’ post-contractual right to compete with their former employer.
If business knowledge previously acquired from the employer is used in this context, this is unproblematic under unfair competition law as long as there is no contractual non-compete clause and the knowledge is acquired and used in a fair manner. This is particularly the case when the knowledge is used “from memory.” The assessment is different, however, when it comes to utilizing previously created records of trade secrets.
Implications for the Assessment under the GeschGehG
The validity of a confidentiality agreement is of central importance for the enforcement of claims under the Trade Secrets Act (GeschGehG). This is because the disclosure and unauthorized use of a trade secret constitute separate grounds for infringement under Section 4(2)(2) and (3) of the GeschGehG. A prerequisite is that the perpetrator violates an obligation intended to prevent them from using or disclosing the trade secret.
Of particular relevance here are contractual confidentiality obligations arising from the employment contract or the termination agreement. Of course, such clauses are also permissible under the Trade Secrets Act. The key point is that the provisions must be valid and, in particular, that no “catch-all clause” is used. A clause that is too broadly drafted is invalid and does not give rise to any claims by the former employer, as the Higher Regional Court of Koblenz has now clarified once again (judgment of July 21, 2021, Case No. 9 U 1382/13). If, on the other hand, the former employee violates a validly agreed confidentiality obligation, the former employer is entitled to claims under Section 4 (2)(2) and (3) of the Trade Secrets Protection Act (GeschGehG) (provided, of course, that the other conditions for protection are met).
The employer may therefore have a significant interest in specifically defining in the employment contract or termination agreement which trade secrets an employee is prohibited from using and for what period of time. In this context, it may also be advisable to pay a compensation for the period of non-competition to ensure protection for at least two years. A confidentiality obligation extending beyond this is generally only considered with regard to specifically described details that the employee does not need for his or her future professional activities.
Without a valid confidentiality obligation, the employer must prove that the employee obtained a trade secret by accessing documents that he or she was not permitted to use or was no longer permitted to use. According to the case law of the Federal Court of Justice (BGH) regarding Section 17 UWG (old version), an employee who, after the termination of his employment relationship, accesses documents that he was authorized to use during the employment relationship is acting without authorization within the meaning of § 17(2)(2) UWG (old version). (Judgment of Feb. 26, 2009, Case No. I ZR 28/06 – Insurance Agent).
This interpretation is likely to remain valid even after the GeschGehG takes effect and can in any case be subsumed under the catch-all provision of Section 4(1)(2) GeschGehG (Higher Regional Court of Koblenz, judgment of July 21, 2021, Case No. 9 U 1382/13). However, it is sometimes difficult to provide proof of this.
Conclusion
When drafting confidentiality obligations, less is sometimes more – prohibitions that are too broad are invalid. And at the very latest before initiating proceedings under the GeschGehG, the validity of one’s own confidentiality provisions should be reviewed.