Germany: Drafting Employment Contracts For Security And Confidentiality

Last Updated: 18 July 2018
Article by Martin Greßlin and Martin Römermann
Most Read Contributor in Germany, July 2019

When employers do not want to agree post-contractual non-compete clauses or incur the necessary financial expense of compensation for non-competition, they will try to guarantee know-how protection by extending the confidentiality obligations. The key point to consider in this matter is whether the employment relationship still exists or whether it has already ended. The employee receives remuneration during an existing employment relationship. This includes pay for the employee's loyalty towards the employer. After termination of the employment relationship, the interests are changing. The employee no longer receives any remuneration, while the employer still has an interest in non-disclosure.

In an existing employment relationship, employees are obligated to maintain confidentiality with respect to trade and business secrets even without express agreement. This follows indirectly from the offense under Section 17(1) German Unfair Competition Act, which governs the protection of trade and business secrets. The obligation to maintain confidentiality under the employment contract goes beyond this confidentiality regarding trade and business secrets under the Unfair Competition Act. It also includes such facts which employers designate as confidential on grounds of legitimate operational interest in the individual case or that are recognizable as confidential by their nature. This may be confidentiality regarding personal circumstances or the behavior of other employees. Irrespective of the legal necessity, it is recommended in practice to expressly stipulate such confidentiality obligations. This is an important contribution to creating real awareness among employees of the existence and scope of their non-disclosure obligations. When drafting an appropriate provision, the requirements for transparency and appropriateness of General Terms and Conditions monitoring must be observed; a certain degree of detail will therefore be necessary. The frequently used clauses to maintain secrecy with respect to all business matters (referred to as "all-in clauses") are therefore ineffective. Group companies affiliated with the employer within the meaning of Sections 15 et seqq. German Stock Corporation Act may be included in the confidentiality obligation if there is a justified operational interest in doing so. A classic example are the employees of a holding company, who are bound to secrecy with respect to the subsidiaries.

According to prevailing opinion, employees are obligated to maintain confidentiality regarding trade and business secrets even after termination of the employment relationship without express agreement. The post-contractual duty of confidentiality does not mean, however, that employees would be prohibited from any use whatsoever of trade and business secrets. Rather, trade and business secrets, but also experience gained by employees may be used for their own benefit. Only the dissemination is prohibited. The use of trade and business secrets for personal benefit is permitted if employees use the relevant information from their memory. For example, despite a post-contractual confidentiality obligation, employees may contact the former employer's customers for business purposes. If employees take notes or even make copies of data in electronic or paper form during the employment relationship – for example of customer lists – and then use them, this is considered unauthorized procurement of trade and business secrets, which is even punishable under Section 17(2)(2) Unfair Competition Act.

In addition to the aforementioned post-contractual confidentiality obligation, an agreement – without compensation – is permissible under which individual specifically designated trade and business secrets may not be used by the employees for themselves, either. This is based on the premise that employees' professional careers do not usually fail because they cannot use a certain trade or business secret themselves. It is difficult to distinguish between a post-contractual confidentiality obligation (without compensation) and a post-contractual non-compete obligation (that is subject to compensation). If the post-contractual obligation of confidentiality results in the employee being prohibited from exploiting the knowledge acquired within the scope of the previous employment relationship as a whole, a post-contractual non-compete clause (in this case, an ineffective clause) is given. In addition, prohibition of the use of a very specific trade secret may also constitute a post-contractual non-compete obligation. For example, a post-contractual obligation of confidentiality that includes a prohibition to use customer names and addresses may represent a post-contractual non-compete clause for sales employees. The prohibition of using customer data may be tantamount to the prohibition of all activities in the sales area. Appropriate post-contractual confidentiality obligations are therefore only effective and binding if they simultaneously meet the requirements for post-contractual non-compete obligations, in particular the mandatory compensation for non-compete clauses.

In an existing employment relationship, the breach of the duty of confidentiality constitutes a breach of contractual obligations. The breach of the duty of confidentiality may therefore constitute grounds for an extraordinary termination in accordance with Section 626(1) German Civil Code. In addition to the sanction under labor law, employees may be liable to prosecution for betraying trade and business secrets (Section 17 Unfair Competition Act). It should be noted that the act constitutes what is referred to as a demand for prosecution offense (cf. Section 17(5) Unfair Competition Act). Without such a demand, the offense will only be prosecuted if there is a special public interest given. In addition, employers may demand that employees refrain from future violations. In fact, this only makes sense if trade and business secrets or other confidential facts continue to be used. Especially for one-off infringements, claims for damages are more likely to be used. Employers may, at their discretion, claim the losses incurred, the profits obtained by the employees or, in the event of the violation of technical secrets, damages by way of license analogy. Employers are advised to include liquidated damages clauses for breach of confidentiality. This makes the proof of concrete damage unnecessary and enables the assertion of a "minimum compensation for damages" in the matter. The assertion of further claims of the employer (e.g., omission) remains possible if the liquidated damages are appropriately structured.

Employees are seldom aware of the existence or scope of the duty of confidentiality. In the interests of effective know-how protection, appropriate training of employees is a good way of raising their awareness. If training is limited to imparting the legal basis for know-how protection, it is subject to the co-determination right of the works council as a training measure in accordance with Section 98(6) German Works Constitution Act. If the employees are not only informed about the legal situation, but also receive instructions to comply with labor law requirements, to observe guidelines of the employer and to implement them at the workplace, this constitutes information within the meaning of Section 81(1) Works Constitution Act, which according to prevailing opinion is not subject to co-determination.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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