No Trade Secret Protection Through Catch-all Clause in Employment Contract

German High Court Frustrates Redress against Rogue Ex-Employees 

A recent decision by the Federal Labour Court (BAG) is likely to cause headaches for employers in Germany, as it renders a common clause designed to prevent the misuse of trade secrets in employment contracts unenforceable. Employers who have used such provisions must now revise them or enter into separate non-disclosure agreements to effectively and swiftly protect their trade secrets. The Federal Labour Court is the highest court in the country for disputes between employers and employees. (Bundesarbeitsgericht, Judgment dated 17 October 2024 – 8 AZR 172/23)

In the case, an employee sent electronic files containing proprietary technical data to a competitor of their employer just prior to the termination of their employment. Upon learning of this breach, the employer sued the employee for misappropriation of trade secrets, seeking a permanent injunction.

The claim was primarily based on a catch-all clause preventing the employee from disclosing any trade secrets or information disclosed to him during his employment. The clause also prohibited any disclosures after termination of employment.

However, the court took issue with the complete and open-ended prohibition of disclosing any information obtained by the employee during his employment, arguing that this would prevent him from applying any know-how or expertise gained during his employment after its termination. This would result in an inability to apply any knowledge gained after employment, so enforcing the clause would unduly interfere with the employee's ability to find new employment. German courts routinely rule that employees may freely use know-how gained during employment, even if it is confidential.

To succeed with the suit, the employer would have had to argue all the statutory requirements of the German Act on Trade Secrets, including demonstrating that sufficient measures had been taken to protect the trade secret in question. In order to demonstrate this, the employer would have had to disclose and explain in detail the measures it had taken to protect its trade secrets. This can be burdensome for many employers, who may be reluctant to make these arguments in open court.

Employers can, of course, introduce more nuanced provisions in employment contracts to strike a better balance between their legitimate interests and those of their employees, particularly after termination. However, drafting such provisions is difficult and leaves the employer with considerable risks. It is often easier and more effective to ask an employee to sign a specific non-disclosure agreement (NDA) when they gain access to areas where confidentiality is of particular concern.