Trade Secrets in Employment Relationships in Germany

Carsten Domke LL.M.

CMS Hasche Sigle

Trade Secrets in Employment Relationships in Germany I. Introduction The strategic market position and the competitiveness, of a company hinges on its individual strengths and weakness in the areas of research and development, production and marketing, distribution, finance and controlling. For this reason, companies have a vested interest in protecting achievements in these areas as economically valuable intellectual property against unauthorized exploitation by third parties. Investments in capital and manpower should be worthwhile and not be affected by unauthorized exploitation. Especially under the conditions of constantly intensifying competition, company employees come into more and more contact with trade secrets in the course of their work. If enforcement of intellectual property rights is ruled out or no patent registration is applied for, protection of trade secrets gains special importance, also with regard to employment law. The following presentation will deal with employees' confidentiality duties and legal consequences when such duties are breached. II. Trade Secrets Trade secrets1 are defined as any and all facts, circumstances and processes relating to a company that are not common knowledge, but are only available to a limited group of people, and with regard to which a legal entity has a legitimate interest in non-disclosure. These include, for example, construction drawings, recipes, manufacturing processes, calculation documents, contracts and customer lists. The term "common knowledge" is broadly interpreted by the courts. A fact is already common knowledge if it can be discovered by an interested party without special difficulties and efforts. Protection of secrets thus comes to an end, for example, when facts are published in a professional journal or become the subject matter of a patent. The Regional Labor Court of Rhineland-Palatinate defines trade secrets as technicalities in the broadest sense: turnover, profits and losses, internal books, customer lists, supply sources, conditions, market strategies, documentation on creditworthiness, calculation documents, patent applications and other development and research projects that may have a decisive impact on the financial circumstances of a business.2

1

See German Federal Constitutional Court decision of 14 March 2006- 1 BvR 2087/03=BVerfGE 115, 2005-259. 2 LAG Rheinland-Pfalz decision of 22 February 2008- 6 SA 626/07. L:\JOBS\42179 ABA LEL\42179_Book vol 1\WIP files\Papers\125_Domke.doc

1

Carsten Domke LL.M.

CMS Hasche Sigle

III. Protection of Trade Secrets A company can protect its confidential information by way of intellectual property rights, such as patents or copyrights, by way of general non-disclosure clauses in employment contracts, or by way of separate agreements. As a rule, employees are obligated to hold trade secrets in confidence and not to disclose them to third parties. With regard to time, however, a distinction must be made between non-disclosure obligations during a term of employment and pre- or post-contractual obligations. 1. Non-Disclosure Obligation During Employment: An employee's duty to hold trade secrets in confidence arises from the employment contract itself. Based on their contractual duty to show consideration for the business interests of their employers, employees are obligated to keep trade secrets, even without any special provision. This also arises as a result of the principle of good faith. Special agreements concerning the protection of secrets are often also included in written employment contracts. When such confidentiality agreements exceed the statutory scope by leading to an excessive contractual obligation for employees without this being justifiable owing to special company interests, they are invalid pursuant to §134 and §138 of the German Civil Code (BGB) (statutory prohibition, in violation of moral principles) (see IV. Requirements for Confidentiality Clauses in Employment Agreements). An employee's immanent contractual obligation to show consideration for the employer's interests is not limited to trade secrets, but includes all processes and facts with which the employee becomes acquainted in connection with his or her position in the business establishment and which it is in the employer's interest to keep secret. 2. Non-Disclosure Obligation Prior to Employment: Confidentiality obligations, so-called "pre-contractual confidentiality duties", can already be established in the course of hiring negotiations. During negotiations concerning an employment contract, however, there is only a limited confidentiality duty, and evidence must be presented showing that the future party to the contract has culpably breached it. 3. Non-Disclosure Obligation After the End of Employment: Especially after the end of employment, there are confidentiality obligations for employees. According to case law of the Federal Labor Court, employees are obligated to hold trade secrets in confidence after termination of their employment even without any special agreement to that effect solely on the basis of general fiduciary obligations having retroactive effect or on the basis of secondary obligations arising from the employment relationship.3 The Federal Labor Court deems such conduct to be in 3

BAG decision of 16 August 1990, NZA 1991, 141.

L:\JOBS\42179 ABA LEL\42179_Book vol 1\WIP files\Papers\125_Domke.doc

2

Carsten Domke LL.M.

CMS Hasche Sigle

breach of trust under §1 of the German Unfair Competition Act (Gesetz gegen den unlauteren Wettbewerb, UWG) and §823 and §826 of the Civil Code (concerning tortious acts and intentional unethical damage).4 It is possible to agree on a more extensive confidentiality obligation for a specified period following the end of employment already in employment contracts or by way of a separate post-contractual protection of secrets. Court Ruling In a decision rendered on 27 April 2006, the German Federal Court of Justice (BGH) dealt with misappropriation of a customer list and use of it after the end of employment. The employee had obtained the list of customer data in the course of his employment. The Federal Court of Justice ruled that, although it is true that employees may make use of knowledge acquired during their term of employment without restrictions later as long as they are not under obligation not to compete with their former employers, this right concerns only information that employees retain in their memories. The right to make use of acquired knowledge after termination of employment, even to the detriment of the former employer, does not, however, apply to information to which a former employee has access only because he is able to draw on written documents from his term of employment. Such information, for example, in private, written records or in the form of a file saved on a private notebook, are deemed trade secrets and are thus protected.5

4. Other Special Non-Disclosure Obligations There are other confidentiality obligations that apply to works council members6 and to trainees7. No special rules apply to managing directors because of their positions as members of the board. The principles that apply to employees apply to them; however, the special relationship of trust is to be taken into account. IV. Requirements for Non-Disclosure Clauses in Employment Agreements The parties to employment agreements may validly stipulate that an employee may not use or share specified trade secrets of which he gains knowledge as a result of his work either while still employed or after termination of employment. Confidentiality clauses may be declaratory or substantiate law in terms of the scope of their subject matter with the consequence that they do not have independent substance and are merely descriptive of the protection of secrets that is already

4

BAG decision of 15 June 1993, NZA 94, 502. BGH decision of 27 April 2006 – I ZR 126/03. 6 under §79 and §99(1), third sentence, of the German Works Constitution Act (Betriebsverfassungsgesetz, BetrVG) 7 under §9 No. 6 of the Federal Academic Training and Assistance Act (Bundesausbildungsgesetz, BBiG) 5


3

Carsten Domke LL.M.

provided under statutory law. agreements are stringent.

CMS Hasche Sigle

However, the requirements for more extensive

"All-encompassing confidentiality clauses" subject all business events of which an employee becomes aware while employed to the duty of confidentiality and thus exceed statutory confidentiality obligations, particularly those contained in §17 and §18 of the Unfair Competition Act. The employees are thus not allowed to make professional use of the knowledge they have acquired in the sector. Such a provision is thus to be treated like a non-compete clause within the meaning of §74 ff. of the German Commercial Code (Handelsgesetzbuch, HGB), with the consequence that it will be binding only if a compensation payment for the employee in question was agreed upon at the same time. According to case law of the Federal Labor Court, such confidentiality clauses without a stipulation of compensation are invalid owing to their intensity.8 When trade secrets are less important, the term of the post-contractual confidentiality duty should also be reduced. For trade secrets of extreme importance, this term can exceed two years in exceptional cases. According to §310(4), second sentence, of the Civil Code, an invalid contractual clause that is significantly detrimental to an employee cannot be reduced to preserve its validity. "Restricted confidentiality clauses" are allowed as long as they restrict the trade secrets in terms of subject matter to those that are of particular importance for the company, so that the company has a legitimate interest in keeping them secret. If this is done, it is generally assumed that the company's interest in confidentiality outweighs the employee's interest in professional advancement.9 The explosive nature of a trade secret is thus determinative for the assumption of a legitimate interest in secrecy. Trade secrets should be specified precisely. With regard to the temporal scope of confidentiality clauses in employment contracts, it must be considered whether and to what extent the employee has to rely on use of acquired knowledge for professional advancement. When weighing the conflicting interests, the extent to which the employee was involved in the creation of the secret is relevant, because otherwise the employee's use of professional knowledge based on experience might be impermissibly restricted. In any case, if an employee's interest in freedom of occupation outweighs the company's interest in secrecy, it is impermissible to permanently forbid him to make use of a secret. If the company-specific issues cannot affect the employee's freedom of occupation, the Federal Labor Court considers the boundary for a post-contractual non-compete clause to be overstepped, and a confidentiality obligation can be validly agreed upon only by way of post-contractual non-compete clause with compensation and for a maximum term of two years. The maximum term will also be assumed if an employee is forbidden to make any use whatsoever of professional knowledge based on experience. 8 9

BAG decision of 16 March 1982, 3 AZR 83, 79. Gaul, NZA 1988, 230; Kunz, DB 1993, 2482; Mes, GRUR 1979, 583.


4

Carsten Domke LL.M.

CMS Hasche Sigle

Example of a Confidentiality Clause in an Employment Agreement: "For the duration of his/her employment, the Employee undertakes to hold in confidence all business and trade secrets and business events of which he/she becomes aware during the term of this Agreement. This confidentiality obligation shall continue to apply after the termination of employment with regard to the following business and trade secrets: […] This confidentiality obligation shall not extend to such knowledge that is generally accessible or to knowledge the disclosure of which is clearly not detrimental to the company. In the case of doubt, the Employee shall be obligated to obtain a directive from management on whether a specific fact is to be held in confidence."10 V. Protection of Trade Secrets Under Criminal Law Trade secrets that are targets of industrial espionage are protected under criminal law, primarily by §17 of the Unfair Competition Act and §266 of the German Criminal Code (Strafgesetzbuch, StGB) and further by §18 and §19 of the Unfair Competition Act, and also by §202a, §203 and §204 of the Criminal Code. The key statute in practice is §17 of the Unfair Competition Act. Under subsection 1 of this statute, a betrayal of trade secrets by a person employed by the affected company during the term of employment carries a penalty. The offender can thus only be an employee of the company. Section 17 of the Unfair Competition Act reads as follows: "(1) A prison sentence not exceeding three years of a fine shall be imposed on any employee, workman or apprentice of a business enterprise who during the term of his employment, without authorization, communicates to a third party a trade or industrial secret that has been confided to him or made available to him by virtue of his employment, if he does so for purposes of competition, for personal gain, for the benefit of a third party or with the intention of damaging the proprietor of the business. (2) The same punishment shall be imposed on anyone who, for purposes of competition, for personal gain, for the benefit of a third party or with the intention of damaging the proprietor of the business, 1. obtains or secures a trade or industrial secret without authorization through a. the use of technical means, b. the creation of an embodied reproduction of the secret, or c. the removal of an item in which the secret is embodied, or

10

Arbeitsrechtliches Formular- und Verfahrungshandbuch, 9th ed. 2998, §2 Arbeitsverträge für Angestellte, Margin No. 25.


5

Carsten Domke LL.M.

CMS Hasche Sigle

2. uses or communicates to anyone without authorization a trade or industrial secret which he has acquired or otherwise obtained or secured without authorization through a communication as described in subsection 1 or through an act of his own or of another person under paragraph 1. (3) The attempt shall be punishable. (4) In particularly serious cases, a prison sentence not exceeding five years or a fine shall be imposed. A particularly serious case shall be generally deemed to exist if the perpetrator 1. acts commercially, 2. knows at the time of communication that the secret is to be used in a foreign country, or 3. if he himself makes use of it in a foreign country as described in subsection (2), paragraph 2. (5) The offense shall be prosecuted only upon application unless the prosecuting authority deems official intervention necessary owing to particular public interest in prosecution. (6) Section 5, No. 7 of the Criminal Code shall apply analogously.

Simple acquisition of knowledge, alone, goes unpunished. Long-term retention of secrets by way of memory goes unpunished as well. Section 17(2) No. 2 of the Unfair Competition Act provides sanctions for trading in secrets. In the interest of a comprehensive protection of trade secrets, the elements of offense under §17 of the Unfair Competition Act are supplemented by the provisions contained in §18 and §19 of the Unfair Competition Act. Section 18 of the Unfair Competition Act protects the knowledge of a company set out in models or instructions of a technical nature against abuse of trust in business relationships. This does not have to refer to trade secrets in the narrower sense. Section 18 of the Unfair Competition Act serves, in particular, to protect technical knowledge that is made available to other companies within the framework of knowhow agreements or subsequently failed contract negotiations. Section 19 of the Unfair Competition Act provides criminal law protection for industrial secrets already prior to their violation in that the attempt to induce another to violate §17 or §18 or the offer to commit such violation can result in a penalty. If the prerequisites of §17 of the Unfair Competition Act are met, the elements of betrayal of confidence by abusing rights under §266(1), second alternative, of the Criminal Code are often also met if the offender had a duty to safeguard the assets of L:\JOBS\42179 ABA LEL\42179_Book vol 1\WIP files\Papers\125_Domke.doc

6

Carsten Domke LL.M.

CMS Hasche Sigle

the damaged company. This is always true with regard to members of the board and executive employees, as well as all employees who have a say in events in the company. What is necessary is that such a person has a fundamental duty of care with regard to the financial interests of the company. An employee is always in breach of his duty to safeguard assets if he communicates an industrial secret that has been confided in him or makes use of it for himself or for others. According to §202a of the Criminal Code (data espionage), it is also a criminal offense for a person to obtain data for himself or another, without authorization, that was specially protected against unauthorized access and that was stored in such a way that it was not directly perceivable or was being transmitted. This can include secret trade and business data. The penalty can be imprisonment not exceeding three years or a fine. Under §203 and §204 of the Criminal Code (violation of private secrets), trade secrets are expressly included in the protected secrets confided in specified professionals, such as officeholders. They are protected there against disclosure and exploitation even without the subjective prerequisites set out in §17 of the Unfair Competition Act being met. An offender faces imprisonment not exceeding one year under §203 of the Criminal Code and not exceeding two years under §204 of the Criminal Code or a fine. If one of the provisions of criminal law has been violated, sanctions imposed during employment can be based on such violation. VI. Punitive Provisions Under Labor Law, Corporate Law and Commercial Law There are explicit provisions under commercial law, particularly corporate law, for the protection of trade secrets, such as §90 of the Commercial Code, according to which commercial agents may not exploit trade secrets confided in them, §79 and §120 of the German Works Constitution Act, according to which members and substitute members of works councils may not exploit trade secrets of which they gain knowledge through their membership, or §404 of the German Stock Corporation Act (Aktiengesetz), according to which members of management boards or supervisory boards may not disclose trade secrets to third parties. The different provisions all have a uniform structure. The elements of the offenses include the acts of revealing secrets that offenders gained knowledge of as officeholders of a company and exploiting them without authorization. Revealing a secret means any communication of it to a third party. The attempt to do so is not a criminal offense. The penalty is imprisonment not exceeding one year or a fine. Aggravated offenses are cases in which an offender acts in return for payment or with the intent of enriching himself or others or of harming another party (§404(1), second sentence, of the Stock Corporation Act, §333 of the Commercial Code, §120(3), first sentence of the Works Constitution Act. However, these provisions have not gained any particular importance in practice to date because their restriction to a group of offenders, the necessity of filing charges L:\JOBS\42179 ABA LEL\42179_Book vol 1\WIP files\Papers\125_Domke.doc

7

Carsten Domke LL.M.

CMS Hasche Sigle

and the low penalties always cause §17 of the Unfair Competition Act to be applied in important cases. VII. Labor Law Consequences and Damages When employees breach their confidentiality obligations, there are consequences under labor law, and not only under criminal law. What labor law instruments come into consideration for an employer depends on whether the violation was committed prior to the commencement of employment, during employment or in the postcontractual area. 1. Prior to Commencement of Employment In the pre-contractual area, a company can assert damage claims based on a breach of pre-contractual protective duties under §311(2) and §241(2) of the Civil Code. Because it is often difficult to calculate the amount of damage done, the courts have developed the principles of triple damage calculation according to which the damaged party has a right to choose whether to calculate the actual damage, to be paid a reasonable license fee or to be awarded the net profits of the offender. The calculation of actual damage corresponds to the system of the general law on compensation. The company must provide proof of the actual loss incurred. The damage then includes the actual incurred asset reduction and the increase of assets that did not take place. Alternatively, the company can demand payment of a reasonable license fee. The amount is then calculated on the basis of what a reasonable licensor would have charged and a reasonable licensee would have paid if a license agreement had been concluded if both parties had been familiar with the circumstances of the case at the time of the decision.11 Courts have awarded license fees between 1 percent and 12.5 percent. The calculation of damage is done objectively, regardless of whether the employer has in fact lost profits, and if so, in what amount. The company may also demand the net profit gained by the offender; it is implied that the company would have gained the same profit that the offender did. In this case, the company must prove that the offense in all probability caused the company to incur a loss and the offender to gain a profit. 2. During Employment In the event of breaches of confidentiality obligations during employment, employers may dismiss such employees without notice for good cause, in addition to filing claims for damages in accordance with the above-mentioned principles, because communication of trade secrets, as well as the suspicion12 that secrets have been

11

BGHZ 44, 372, 380 f., BGHZ 77, 16, 27. BAG decision of 26 September 1990, 2 AZR 602/89; decision of 17 August 2001, Landesarbeitsgericht Köln, 11(7) Sa 484/00.

12


8

Carsten Domke LL.M.

CMS Hasche Sigle

betrayed, constitutes good cause for termination without notice under §626(1) of the Civil Code. 13. Court Ruling The decision of the Regional Labor Court of Berlin rendered on 10 July 2003 dealt with a case in which an employee had copied a considerable number of files belonging to her employer. These files were projects lists including names of customers, names of project leaders, descriptions of projects, offer prices and general company data. The court held the opinion that the employee's act constituted an intentional betrayal of trade secrets that gave the employer the right to dismiss her for good cause and without giving her prior warning.14 Employers are also entitled to an injunction against future offenses pursuant to §8(1) of the Unfair Competition Act in conjunction with §3 of the Unfair Competition Act if employees have committed acts of unfair competition. If there was no competitive purpose, the employer is entitled to an injunction in any case based on tortious acts pursuant to §823(1) and §1004 of the Civil Code. In urgent cases, an action can be filed for a preliminary injunction. In preparation for actions for damages and injunctions, companies are also entitled, under §242 of the Civil Code (good faith), to demand information from offenders if they lack information to assert their claims, for example, for the calculation of lost profits, on the amount of profits gained that was made possible by using the trade secret. 3. After the End of Employment If employees breach their post-contractual confidentiality obligations after the end of their employment, their former employers may assert compensation claims in accordance with the above-mentioned principles. VIII. Conclusion This shows that in Germany applicable law, primarily §17 of the Unfair Competition Act and §2667 of the Criminal Code, contains statutes providing comprehensive protection for trade secrets. In addition, companies can impose obligations on their employees by way of contractual clauses to hold trade secrets in confidence if they restrict such clauses in employment agreements to specified trade secrets. Otherwise, the boundary for a prohibition on competition without compensation and limited in terms of time to a maximum of two years would be overstepped, with the result that employers would be obligated to compensate their employees.

13

Decision of 12 November 2004, Landesarbeitsgericht Rheinland-Pfalz, 8 Sa 460/04; decision of 15 June 1967, Landesarbeitsgericht München, 1 Sa 648/67. 14 LAG Berlin decision of 10 July 2003 – 16 Sa 545/03. L:\JOBS\42179 ABA LEL\42179_Book vol 1\WIP files\Papers\125_Domke.doc

9

Carsten Domke LL.M.

CMS Hasche Sigle

Employers may dismiss employees without notice for good cause if they commit a material breach of their confidentiality obligations. Case law of the Federal Court of Justice concerning a triple damage calculation makes it easier for a damaged company to calculate the damage it has incurred. In practice, preventive measures continue to be of decisive importance, and they should be implemented through a calculation of the need for protection in individual areas, a risk assessment and a comprehensive information and security policy.


10