Germany: The New Protection Of Trade And Business Secrets

Last Updated: 1 April 2019
Article by Constantin Rehaag

Finally, German parliament is about to vote on the draft Act on the Protection of Business Secrets (Gesetz zum Schutz von Geschäftsgeheimnissen). Find out more about the lengthy genesis and the provisions of this important piece of legislation that is about to change the protection and enforcement of trade and business secrets in Germany fundamentally:

In the past, the protection of trade and industrial secrets has not received the same attention from legislators as patents or trademarks. However, these secrets - such as the composition of products, manufacturing processes, quotations, terms, technical specifications, proposed business acquisitions, algorithms, encryptions or processes in business establishments (the list of examples could be continued almost endlessly) - must receive wide-ranging protection because of two main reasons. On the one hand, such knowledge may not be eligible for protection as a patent, trademark, design or copyright. On the other hand, there may be situations, in which the owner of such knowledge deliberately waives protection, e.g. as a patent, as this would also include publication. Nevertheless, even in such cases, the owner of these secrets will have an economic interest in them, which highlights the urgency to protect these secrets even more.

The fact that business and trade secrets have so far been neglected, or at least in part, may be partly due to the fact that the legal situation in Germany has not been perceived as “fundamentally unsatisfactory”. The design of central provisions as criminal law provisions was unusual, and the protection of secrets in legal proceedings was difficult to ensure. Nevertheless, the definition of a business and trade secret (in practice, there was no distinction between the terms) was considered sufficiently broad to provide the necessary protection.

Business secrets have been, and are to date considered as those facts, that, according to the recognizable will of the business owner, are to be kept secret and are only known to a limited group of persons and thus, not publicly known, and for which the business owner, therefore, has a legitimate interest in secrecy since the discovery of the facts would be capable of inflicting economic damage on the person holding the secrets.

In the future, the EU Directive 2016/943, the so-called “EU Trade Secret Directive” or “Know-how Directive”, shall ensure a sufficient and equivalent level of legal protection within the internal market and will prevent the unlawful acquisition of trade secrets. Although Article 39 (2) of the TRIPS-Agreement has been in force since 1995 and establishes a minimum standard for the protection of trade secrets, there are still significant differences between the domestic laws of the EU member states regarding the protection of trade secrets against their unlawful acquisition, use or disclosure by third parties. Moreover, there is no standard solution for dealing with products based on the unlawful use of trade secrets.

The current practice of member states in dealing with trade secrets is to be harmonized by the new Directive: Clear definitions of terms such as "trade secret", "trade secret holder", "infringer" and "infringing product" have been formulated. In addition, harmonized protection and compensation provisions should be adopted for all EU member states. In particular, this should set incentives for cross-border innovation and reduce the threat to the competitiveness of the owners of the secrets. In contrast, competitors obtain the opportunity to find out the protected trade secrets through their own discoveries or as part of reverse engineering. Protection of the secret in judicial proceedings is to be granted.

Another novelty is that in the future – given that the protection of trade secrets is ensured - important judgements that are typically dissuasive shall be published.

Content of Directive 2016/943, adopted on June 8, 2016

The first chapter (Art. 1 - Art. 2) describes the subject matter of the Directive, followed by the now uniformly defined terms "trade secret", "trade secret holder", "infringer" and "infringing products".

The most important definition is the "trade secret", which consists of three parts:

  1.  It must be confidential information;
  2.  Confidentiality should also make this information commercially valuable; and
  3. The owner must undertake reasonable steps to keep it secret.

A case-by-case analysis determines what is reasonable. The definition of "trade secret" is based on the definition of "undisclosed information" under the TRIPS Agreement.

The second chapter (Art. 3 - Art. 4) lays down standards that determine the circumstances under which the acquisition, use and disclosure of a trade secret are unlawful, and the holders of trade secrets are entitled to undertake appropriate measures and avail legal remedies on the basis of the Directive. The absence of consent by the holder of the trade secret is the decisive criterion for illegality. The acquisition, use or disclosure of a trade secret by a third party, even though it wasn’t lawfully acquired or disclosed, is unlawful if the third party could have known or recognized it.

The third chapter (Art. 5 - Art. 14) lays down measures, procedures and remedies to be made available to holders of the trade secret in the event of the unlawful acquisition or misuse or disclosure of a trade secret by a third party. For example, Art. 11 of the “Know-How Directive” contains a prohibition on the use or disclosure of trade secrets, a prohibition on the production, offering, marketing or use of infringing products (or the importation or storage of the products for the purposes listed) as well as remedial measures. By contrast, Art. 13 of the “Know-How Directive” grants the injured party compensation for the damage caused by the unlawful use of the secret. All relevant factors are taken into account, including the unfair profit made by the defendant. One way to calculate a claim is, for example, on a hypothetical licence fee, similar to what is possible in the case of intellectual property infringements.

Furthermore, the Directive requires the judicial authorities of each EU member state to take precautions to protect the confidentiality of trade secrets disclosed in litigation in court. Although no specific measures are listed, certain conditions must be met. There must be a total or partial restriction on access to documents provided by the parties or third parties, as well as a restriction of access to hearings and records of the hearing. In addition, an order may be passed for the parties or third parties to create a non-confidential version of the documents containing trade secrets. The confidentiality measures must at least apply during the legal dispute, and in the event of a request for public access to the documents, the measures must continue after the end of the dispute, provided that the information in question still constitutes trade secrets.

Finally, Chapter 4 (Art. 15 - Art. 20) provides for the imposition of sanctions in the event of failure to comply with the measures listed in Chapter 3, and it also sets out provisions for monitoring and reporting. This will ensure the effective application of the Directive and the achievement of the objectives pursued.

Criminal sanctions are not mentioned and have been deliberately excluded from the harmonization process.

Need for implementation in view of current legislation?

A comparison of the current German legal situation and the minimum prerequisites stipulated by the Directive reveals that here in Germany, too, there is considerable need for implementation.

For example, the legal definition of "trade secret” that is missing so far in Germany must be introduced. The term of business secret used in Directive has a narrower definition than under the German jurisprudence at present. The existence of a "trade secret" presupposes a commercial value. This aims at excluding trivial information, even if it was kept secret and is thus subject to trade secret protection to date. The current understanding, which is prevailing in Germany, is unlikely to be upheld, even though the Directive itself does not prohibit further protection under national law. On the contrary, further protection should only be possible if this does not contradict the interests of other parties or the public.

The most important difference to the current legal situation is the need under the Directive for the holder of the trade secret to ensure reasonable steps for maintaining secrecy and, which is very relevant from a practical point of view, to document those steps in a manner providing judicial evidence of the secret nature. To date, the jurisprudence only required a recognizable subjective will to maintain secrecy, which manifests itself in objective circumstances. In addition, there were no exaggerated requirements for the recognition of the will to maintain secrecy. In that regard, this led to a presumption of the will to maintain secrecy and to the party infringing a secret having to prove the lack of will to maintain secrecy. Due to the fact that, compared to German case law, the Directive now contains a somewhat narrower definition of the term trade secret it must be expected that in the future the case law will change in that regard as well, and German law will be interpreted more strictly in view of compliance with the Directive.

Therefore, in the future it will be of significant importance for companies to take their trade secrets seriously and to take reasonable precautions, depending on the relevance of the secret to their own business. Otherwise, it may become more difficult for the company in the future to enforce one’s claims before German courts successfully.

Articles 3 and 4 of the Directive introduce another new aspect by differentiating between lawful and unlawful acquisition, use or disclosure of a trade secret. The so-called reverse engineering is expressly referred to as a variant of lawful acquisition, provided that this is done on an item that is publicly available or is in the legitimate possession of the recipient and is not subject to any contractual restriction on the exploitation of the trade secret. The legality of reverse engineering was very controversial under German law. It was mostly rejected.

Lawful and unlawful acquisition are distinguished only by way of a general clause, namely based on what is compatible or incompatible with a serious business practice under the given circumstances. These clauses will have to be complemented and concretized by the national courts. The German jurisprudence is likely to refer to the offending acts characterized hitherto in Section 17 (1) and (2) UWG (Unfair Competition Act) as legally standardized examples of unlawful acquisition.

As a further objective, the Directive seeks to promote balancing the interests between the holder of the trade secret and third parties, e.g. competitors. For this reason, trade secrets do not receive the protection of an absolute right as it applies to other industrial property rights. In practice, interests of public concern should be balanced. Thus, the disclosure of the secret in the context of freedom of expression is declared lawful in Article 5.

First government draft for implementation of the Directive in Germany

On July 18, 2018, the Federal Government adopted a draft of the "Law for adopting the Directive (EU) 2016/943 on the Protection of Trade Secrets against Illegal Acquisition, Use and Disclosure" (hereinafter the Draft Law). The Draft Law is essentially based on the first draft bill for the adoption of the Directive in German law published in April 2018 by the Federal Ministry of Justice and Consumer Protection (hereinafter referred to as the Draft Bill). In addition to amendments to the UWG, the StPO (Code of Criminal Procedure) and the GKG (Court Fees Act), the subject of the Draft Law is, above all, the introduction of a new "Law for the Protection of Business Secrets" (Gesetz zum Schutz von Geschäftsgeheimnissen, hereafter GeschGehG).

The comparison of the draft of the GeschGehG with the Directive shows that the German implementation adheres closely to the Directive, at least according to the Draft Law, which cannot yet be considered final. Even if the GeschGehG partially restructures and rewords the individual provisions of the Directive very generously, only a minor part of it does not originate directly from the Directive or represent an imperative consequence of its implementation.

The Draft Law provides for the complete removal of the protection of trade secrets from the UWG, where it has hitherto been regulated only incompletely in the form of criminal provisions. Sections 17-19 UWG are completely deleted (Art. 5 of the Draft Law). However, the justification attached to the Draft Law as well as individual wording contained in the Draft Law leave no doubt that protection of trade secrets continues to be considered part of unfair competition law. As a typical market behavior rule within the meaning of Section 3a UWG, the protection of trade secrets will continue to be enforceable by means of unfair competition law.

The proximity to unfair competition law also shows in the reason given for the exclusive jurisdiction of the regional courts (section 15 (1) GeschGehG). Due to authorization in Section 15 (3) GeschGehG of the state governments to concentrate confidentiality disputes in one or more regional courts (also across federal states), it is to be assumed that in the future the same regional courts (and chambers) will have to deal with protection of trade secrecy, as this is the case to date for UWG-related matters.

This is to be welcomed insofar as the courts will have an important role to play in developing the law and in interpreting new legal concepts, which need to be brought to life. Indeed, the Draft Law defines the trade secret in Art. 2 (1) GeschGehG - actually as specified by the Directive - as information which has an economic value due to its secrecy and is the subject matter of the circumstantially appropriate measures to maintain secrecy by its rightful owner. In particular, the new factual element of "circumstantially appropriate measures to maintain secrecy" proves to be particularly crucial, since the adequacy of the secrecy measure depends on the importance of the information, and the absence of appropriate measures for maintaining secrecy of the concerned information directly deprives it of its secret character. In other words: What is not protected well enough is no secret in the sense of the GeschGehG. Today, no one knows what an appropriate secrecy measure for e.g. particularly important information is. It will take time for the courts to develop case law that provides legal certainty. It seems advisable that secrets are recorded and, if applicable, embodied, and then categorized according to their importance, i.e. their economic value for the company, and then assigned specific levels of protection. The protective measures, which need to be applied to these levels of protection, are then to be documented as well, just like their actual application to the relevant secret in the work routine. Further, one should apply protective measures of organizational nature (who has access to which information?), technical nature (which technical measures control access to which information?) and legal nature (provisions in employment contracts, R&D agreements, cooperation agreements, etc.). This would be a way for the holder of the trade secret to prove the secret nature of the information and enforce the secret.

This path is certainly only an ideal model and for modern forms of in-house cooperation, especially in the field of research, will require significantly more refined concepts, so that protection as a trade secret is granted.

All this will require considerable monetary efforts for one or the other company, even if the Federal Government downplays the related expenses in the "Costs of Compliance" section on page 2 of the Draft Law:

“Some compliance efforts may be incurred due to the fact that some of the micro-entities shall have to take circumstantially appropriate measures to protect trade secrets so that their information falls within the scope of the law. Large and medium-sized enterprises already protect their trade secrets, for example through access control or contractually specified confidentiality obligations in order to prevent the information in question from becoming publicly known. In that regard, one-time conversion costs of EUR 6,440,000 are to be expected.”

The Federal Government’s analysis, if one may call it that, may not quite reflect the reality as experience, and many court cases (under the old law) show that even larger companies sometimes treat protection of trade secrets in a neglectful way. In any case, in our understanding, e.g. particularly confidentiality agreements alone might not always be considered a sufficient reasonable measure for protecting a trade secret of prime importance. The quantification of the necessary conversion costs at only €6,440,000 is unlikely to be realistic, as is often the case in draft laws. To come to this conclusion, it suffices to consider the number of SMEs in Germany, which was approx. 3.45 million according to the Institute for SME Research in 2017.

From the point of view of the right holders, the provision of local competence of the courts probably is a step back. For instance, Section 15 (2) GeschGehG provides for an exclusive venue for claims against opponents based in Germany at the place of general jurisdiction of the defendant (i.e. its registered office or domicile). Even if the infringing act occurs nationwide, for example by publishing a trade secret online, the nationwide venue is no longer available, contrary to the previous state according to Section14 (2) UWG .

Another new aspect in the German law is the protection of whistleblowers, which is already enshrined in the Directive, according to which they do not act unlawfully if they disclose a trade secret predominantly with the intention of protecting the general public interest, cf. Section 5 (2) GeschGehG. Here, too, much work will be required from the courts until the handling of this justification is reasonably mastered. It is to be welcomed that the legislator - unlike planned at an earlier stage - did not work with exclusions from the elements constituting an infringement or with negative elements constituting an infringement.

What’s also new?

The protection of the secret in civil proceedings is new as well. In confidentiality disputes, the court of the main action may, at the request of a party, classify information in dispute in whole or in part as requiring secrecy, if it can be a trade secret. The parties, their solicitors, witnesses, experts, other representatives and any other person, involved in or having access to any documents relating to such proceedings shall then treat confidential information as such and may not use or disclose it outside legal proceedings, unless they have become aware of such information outside the proceedings. This also applies after the end of the proceedings, if it was a secret. With these regulations, the Draft Law attends to a longstanding criticism of civil disputes regarding the violation of trade and trade secrets. A way is shown how the holder can pursue its rights and at the same time reduce the collateral damage from disclosure of the secret in the proceedings. The previous Draft Bill already contained a similar provision. However, the punitive measures that could be imposed because of an infringement of the obligation to maintain confidentiality (fine of up to €1,000 or administrative custody up to one week) were so insignificant that they gave reason to question the provision’s effectiveness. The massive criticism received regarding the amount of the fine was to be expected, considering the importance of trade secrets not only for individual companies, but also for the economy as such. Therefore, it might have seemed obvious here to work rather with the sanctions of up to €250,000 or corresponding administrative custody we already know from Section 890 ZPO (Code of Civil Procedure) for the enforcement of a court injunctions. The Federal Government has apparently taken this legitimate criticism to take care of at least partially, and in Section 17 GeschGehG at least it raised the amount of the regulatory fee to up to €100,000 and the administrative custody up to six months. It remains the case that an even more generous framework for the imposition of punitive measures would have allowed better consideration of the need of businesses and the economy to protect particularly valuable trade secrets.

However, the draft law does not provide for any changes to the guidelines for criminal proceedings and the fine procedure (RiStBV), so that the draft law does not restrict the enforcement of secrecy protection for injured persons by means of criminal proceedings - a practically extremely relevant instrument for prosecuting violations of secrecy and for law enforcement - as things stand at present, as long as the conditions for the protection of secrecy have been created by the owner.

On March 13, 2019, some last minute changes to the government’s draft have been recommended: information will only qualify as a secret if the owner has a valid interest in its protection, the rights of employee representation are further strengthened, whistleblowers are not only justified but are free to disclose secrets for the benefit of the public interest and aiding and abetting the disclosure of secrets will be justified if done by journalists and those close to the press.

The final debate and the vote are scheduled for the evening of March 21, 2019

In any case, companies should be working to adopt the new law as of now, since a changeover may take some time, depending on the nature and volume of trade secrets.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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