Catch-all clauses invalid = a major threat for the company's know-how

Review of confidentiality clauses in employment contracts strongly recommended

#Trade Secrets, #Trade Secrets Directive (EU) 2016/943, #Art. 2 (1), #Reasonable measures for protecting trade secrets

The German Act on the Protection of Trade Secrets (GeschGehG) has now been in force for more than three years - and still poses major challenges for many companies.

Anyone wishing to invoke trade secret protection must inter alia be able to demonstrate and prove that the relating information fulfills the requirements, which have been harmonized by the respective definition in Art. 2 (1) of the Trade Secrets Directive. This includes that the information is protected by objective and reasonable confidentiality measures. In its transposition, this aspect of the definition has become part of Sec. 2 No. 1 GeschGehG, almost literally implementing the wording of the Directive (“which is the subject of confidentiality measures appropriate under the circumstances by its rightful holder”).

The scope of the measures the holder of a trade secret must have taken has been subject of a few of cases in Germany providing quite abstract learnings. The law does not require "perfect”, but only “reasonable” protection as the Higher Regional Court of Dusseldorf had already pointed out on 11.03.2021 (GRUR-RS 2021, 17483). As a rule, the more important the trade secret is and the higher the risks are, the greater the efforts must be to protect the trade secret. More specific and practical findings could be gained from a more recent case:

(Valid) confidentiality clauses in employment contracts are part of the indispensable "basic protection”. In the vast majority of cases, employees are the “exit door” for trade secrets, especially in conflict and separation situations or when preparing for self-employment. Without a valid confidentiality clause in their employment contracts, it will be difficult for companies to legally prevent an outflow of their know-how by their employees.

Recently, so-called "catch-all clauses", i.e. clauses that oblige the employee to keep all information obtained in connection with the employment relationship confidential without restriction and also after termination of employment without any time limitation, have repeatedly been the subject of court decisions.

We had already pointed out in the past that the use of such clauses must be considered very critical. This assessment is again confirmed by a recent decision of the Local Labor Court Aachen (ArbG Aachen). In its ruling of January 13, 2022 (ArbG Aachen, 13.01.2022, BeckRS 2022, 1697), the court found that such a “catch-all-clause” does not constitute a reasonable confidentiality measure within the meaning of Section 2 No. 1 lit. b) GeschGehG and dismissed the employer's action for misappropriation of his trade secrets.

This ruling once again highlights how important it is to check the wording of "old” confidentiality clauses and adapt employment agreements and or NDA’s respectively if needed. Otherwise there is a high risk that the company's know-how gets irretrievably lost!

Facts of the case

While still working for his now former employer, an employee had sent several e-mails with attached documents to the shareholders of a potential competitor of the employer. The employer deemed this  a breach of the confidentiality clause in the employment contract and of Sections 4, 6 GeschGehG. As a result, he applied for a preliminary injunction before the Aachen Regional Court (LG Aachen). The court granted the preliminary injunction but then had to refer the entire case to the Local Labor Court Aachen due to a specific competence of labor courts for labor centric matters. Such Labor Court reversed the order and denied the motion for a preliminary injunction. The plaintiff's appeal to the Higher Labor Court Cologne (LAG Köln) was dismissed as the appellate judges considered the confidentiality clause in the employment contract to be too broad and therefore invalid. Despite of the loss in the interim proceedings, the plaintiff launched an action in main proceedings with the Local Labor Court Aachen, which was also dismissed.

Reasoning of the Labor Court

As plaintiff, the employer had the burden of proof that the relevant information was subject to "reasonable confidentiality measures". In its decision, the Local Labor Court Aachen held that the employer’s claim for injunctive relief pursuant to Section 6 Sentence 1 GeschGehG had to be dismissed because the employer did not prove that the information in dispute qualified as trade secrets. Among other things, the employer failed to prove that the relevant information was subject to reasonable confidentiality measures.

In this context the Labor Court held: "The confidentiality measures taken by the owner of the trade secret must be reasonable. The specific confidentiality measures depend on the nature of the trade secret in detail and on the specific circumstances of its use. In assessing the reasonability of the confidentiality measures, particular account may be taken of the value of the trade secret and its development costs, the nature of the information, its importance for the company, the size of the company, the customary confidentiality measures in the company, the way in which the information is marked and the contractual agreements with employees and business partners (cf. Higher Regional Court of Stuttgart 19.11.2020 - 2 U 575/19, marginal no. 169; Higher Labor Court Baden-Württemberg 18.08.2021 - 4 SaGa 1/21, marginal no. 33; Higher Regional Court of Hamm 15.09.2020 - I-4 U 177/19, marginal no. 162 f.; Higher Labor Court Düsseldorf 03.06.2020 - 12 SaGa 4/20, marginal no. 81; BT-Drucksache 19/4724, p. 24 f.). "

According to the judges, the confidentiality clause in the employment contract could not qualify as a reasonable confidentiality measure as it went far beyond the legitimate interest of the employer: It did not sufficiently take into account the special situation of the employee who, in exercising his occupational freedom protected by fundamental rights (Art. 12 Basic Law for the Federal Republic of Germany), had to be able to change employers while continuing to use his personal expertise. In particular for the period after the end of the employment relationship, a catch-all clause contains an excessive contractual obligation, the judges held; as a result, the court found that the clause must be considered contrary to public policy pursuant to Section 138 (1) German Civil Code and, hence, invalid.

Catch of the week:

The decision discussed above once again emphasizes the importance that objective and reasonable confidentiality measures have to be taken to protect one’s trade secrets. If that’s not the case, the trade secrets will not be protected by law!

Legal protection under the GeschGehG basically requires the trade secret owner to implement a know-how protection concept (and be able to demonstrate and prove the existence of such concept) and also continuously review and adapt it. It is important to note that the specific measures to be taken must reflect the importance and particularities of the specific trade secret to be protected.

Depending on the need for protection, more or less far-reaching technical (e.g., secure passwords, encryption of communications, clear marking of information requiring confidentiality), organizational (e.g., introduction of a strict "need-to-know" principle, access restrictions, installation of alarm systems, firewalls, prohibition of the use of private storage media; implementation of a compliance system) as well as contractual measures (e.g., confidentiality agreements with employees and contractual partners; general guidelines and instructions) have to be implemented to protect the relevant trade secrets.

The review and revision of the existing confidentiality clauses is a key step in this context. Trade secrets and other confidential information should be sufficiently specified in the employment contract or NDA enabling the employees to understand which information they need to keep confidential. Without such review and, if needed, revision, there is a high risk that the company’s trade secrets are weakly (if at all) protected leading to liability risks for the company and the company’s management. However, this risk can be controlled through the implementation of reasonable compliance measures governing the use and protection of the company’s trade secrets.