District Court Rules on Enforcement of Agreed Penalty Clause in Employment Contract for Violation of the Danish Trade Secrets Act

Background of the Case

The case concerned whether the employee had acted in violation of Section 4(1)(1) of the Danish Trade Secrets Act by unlawfully copying and forwarding the employer's material containing trade secrets to his personal computer, external hard drive, Dropbox, and email address on the evening before his last working day, and whether it entailed an obligation for the employee to pay a contractually agreed penalty, equivalent to three months' salary.

The employee was employed as a Senior Manager and was part of the employer's management group. In spring 2024, he resigned from his position to start his own competing business. Following confirmation of his resignation, the employer sent him an email whereby he was, inter alia, explicitly reminded of his obligations under the Danish Trade Secrets Act and that copying of any company files was strictly prohibited.

Despite the clear terms in his employment contract and the explicit warning, on the evening before his last working day, the employee copied and forwarded extensive material belonging to the employer to his private devices which triggered an alarm in the employer's monitoring system. The transferred files included, among other things, strategy and business plans, pricing information, client and project lists, contracts, internal templates and best practice manuals, calculation models, and client presentations.

Subsequently, the employer claimed payment of the agreed penalty corresponding to three months' salary. The employee disputed the validity of the claim, inter alia, arguing that an agreed penalty clause triggered by a breach of obligations during the term of employment would be in breach of Section 36 of the Danish Contracts Act and specific provisions of the Danish Salaried Employees Act (in Danish: "funktionærloven"). The employee stated that, under general principles of the law of obligations and employment law, the employer is limited to relying on ordinary remedies for breach, including the right to summary dismissal of the employee and to bring a claim for damages.

The District Court's Judgment

The Court found that the copied material contained information that could be characterized as trade secrets and that the employer had taken reasonable measures to maintain their secrecy within the meaning of Section 2(1)(1)(c) of the Trade Secrets Act. Access to the information was restricted to a limited number of employees, employees had been reminded of their obligations both upon entering and upon leaving employment, and the employer's servers monitored suspicious activity, which triggered an alarm in this case.

The Court further held that the mere act of copying the employer's trade secrets without consent constituted a violation of Section 4(1)(1) of the Trade Secrets Act, regardless of the employee's purpose. It was irrelevant whether the employee had used or disclosed the information to third parties.

The Court upheld the agreed penalty clause in the employment contract but reduced the penalty from three months' to two months' salary under Section 36 of the Danish Contracts Act. On the one hand, the Court noted that the employee had initially denied that the copied information constituted trade secrets, which had caused the proceedings to become significantly more extensive. On the other hand, the violation was detected quickly, and the employer did not suffer any documented financial loss. Taking these factors into account, the Court ordered the employee to pay two months' salary with procedural interest, as well as legal costs.

Significance

It is a judgment on a point of principle because it confirms that agreed penalty clauses in employment contracts can be valid and enforceable for violations of, for instance, the Danish Trade Secrets Act, even where the violation occurs during the employment. This provides guidance on an uncertainty that previously arose from the Eastern High Court's ruling of 2004 in case no. B-3599-02, in which the Eastern High Court held that employers were limited to ordinary remedies such as summary dismissal in respect of breaches occurring during employment and a claim for compensation for documented loss. The present judgment suggests that this is not necessarily the case where the agreed penalty not only relates to a breach of the terms of employment but is also a violation of the Danish Trade Secrets Act.

The case illustrates why agreed penalty clauses may be a valuable tool for employers. Despite the scale of the copying, the employer was unable to document any specific financial loss. Without an agreed penalty clause, the employer would have been left with limited options for effective monetary remedy, as proving a specific loss arising from the misuse of trade secrets is often difficult or, in some cases, impossible.