Update on the Implementation of the EU Trade Secrets Directive into German Law

05/15/2018
Client Alert

Summary

The EU Trade Secrets Directive, officially titled “Directive (EU) 2016/943 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure” (the “TSD”), is a legal instrument by the European Union (EU) that is intended to harmonize the currently fragmented laws regarding trade secrets across the EU Member States. While the TSD does not have direct legal effect, each of the Member States are required to transpose the TSD into its respective national laws by June 9, 2018.  Germany has recently published its first draft bill on a new trade secrets act, which is now subject to public consultation and anticipated to be passed in the fall.  The German draft bill aims at implementing the TSD at the so-called “minimum harmonization” level and does make much use of the right of the Member States to go beyond such minimum provided by the TSD.

In a previous client alert, we outlined the content of the TSD (and the Defend Trade Secrets Act of the US) and the likely implications for trade secret holders with an international footprint (see “Harmonization of Trade Secrets in Europe and New US Trade Secrets Law Gets the Green Light—What Do These Changes Mean for Companies in Germany, the UK and the US?”).

In the following, we will outline the key aspects of the draft bill with a particular focus on regulations beyond the mandatory provisions of the TSD as well as deviations from current provisions under German law, and discuss potential implications of the draft bill for companies operating in Germany.  In a nutshell, the draft bill:

  • Brings the definition of trade secrets to an international standard by switching from the fairly subjective approach that is currently in effect to a more objective approach, which will require trade secrets holders to implement reasonable measures to protect their trade secrets, akin to the concept known under TRIPS (The Agreement on Trade-Related Aspects of Intellectual Property Rights);
  • Does away with existing restrictions by codifying commonly accepted permitted uses of trade secrets, e.g., in the context of reverse engineering or whistleblowing;
  • Fundamentally improves the rights of trade secrets holders in litigation by introducing more practical measures to ensure secrecy of certain information in litigation, hopefully helping to overcome Germany’s reputation as a “lose the trial or lose the trade secret” jurisdiction; and
  • On the remedy side, adds clarity on certain civil remedies like the right to request destruction and recall of infringing products, but, on the other hand, provides for exceptions that may pave the way for the grant of compulsory licenses in certain scenarios; misappropriation of trade secrets remains a criminal offence under German law, however.

1. Introduction

While some Member States, e.g., Denmark and Sweden, have already changed their laws in accordance with the TSD, the German Federal Ministry of Justice and Consumer Protection (Bundesministerium für Justiz und Verbraucherschutz, BMJV) has long remained silent on the status of implementation of the TSD into German law.  However, at the beginning of April 2018, an internal pre-version of the ministerial draft (Referentenentwurf) was leaked.  Shortly thereafter, on April 19, 2018, the BMJV published the official draft (with only slight variations to the leaked draft) of the German Act on the Protection of Trade Secrets (Gesetz zum Schutz von Geschäftsgeheimnissen) (the “Draft”).

Instead of amending the already existing German laws that currently (partially) address trade secret protection in Germany (e.g., the German Act against Unfair Competition (UWG), the German Civil Code of Procedure (ZPO), and the Courts Constitution Act (GVG)), the Draft follows a uniform approach by establishing a new separate Act. 

2. Definition of a Trade Secret

An important change is the more objective definition of trade secrets compared to the current approach.  Similar to the TSD, under the Draft, a “trade secret” is defined as any information that: (i) is secret in the sense that it is not generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question; (ii) has commercial value because it is secret; and (iii) has been subject to reasonable steps by the person lawfully in control of the information to keep it secret.  The Draft, however, departed from the three-prong test under the TSD, which is already known from the TRIPS Agreement, by merging the first two requirements.  It remains to be seen whether this will have a material consequence, and whether the final bill will correct this potential misunderstanding.  

The real change lies in the last requirement of the definition, i.e., reasonable steps to protect trade secrets.  Previously, German law adopted a rather subjective view and placed emphasis on the will of the holder of a trade secret to keep the information secret, and on whether such will was apparent from circumstances.  Now, companies holding trade secrets will have to implement reasonable steps in order to benefit from the new rights provided for trade secrets holders.  As the authors of the Draft point out, “reasonable steps” is an objective criterion.  The holder of a trade secret (or a purported trade secret) bears the burden of proof in showing it has taken such reasonable steps.

Reasonable steps include (i) physical, (ii) organizational, and (iii) contractual measures.  Whether the steps taken are reasonable ultimately depends on the individual trade secret.  The BMJV noted several factors that must be considered when evaluating reasonableness, including the value of the trade secret to be protected, the underlying R&D costs, its importance to the holder of the trade secret, and the way of marking the information as confidential, as well as existing agreements with employees and business partners of the holder. It remains to be seen how strictly the German courts will interpret the “reasonable steps” requirement, however, it should be clear that “reasonable steps” are not to be understood as “perfectly protected” as this would render the legal protection obsolete.

In any event, with the fundamental shift from to a more objective definition of trade secrets, companies and other trade secrets holders are strongly advised to review and adapt their strategy for protecting trade secrets accordingly in order to benefit from the improved statutory protection of trade secrets.  This includes:

  • Reviewing and identify all relevant information with a need for protection
  • Categorizing such information as “high,” “medium,” and “low” (or similar concepts)
  • Determining and documenting protective measures for each level, for instance:
    • Limited access
    • Encryption
    • Marking of documents
    • Training for staff
    • Revising confidentiality clauses with employees and external partners
    • Policing agreements (e.g., making use of audit rights or rights to request return of documents and other materials)

3. Lawful Acts, Unlawful Acts, and Exceptions

In accordance with the TSD, the Draft distinguishes between lawful and unlawful acts as well as exceptions for unlawful acts.

a. Unlawful Acts

Similar to the TSD, the Draft states that the acquisition of a trade secret is considered unlawful when carried out by (i) unauthorized access to, appropriation of, or copying of any documents, objects, materials, substances, or electronic files, lawfully under the control of the trade secret holder, containing the trade secret, or from which the trade secret can be deduced; or (ii) any other conduct which, under the circumstances, is considered contrary to honest commercial practices.  The use or disclosure of a trade secret is considered unlawful under the Draft when carried out by a person who (i) has acquired the trade secret unlawfully, (ii) is in breach of a confidentiality agreement (or similar obligation) limiting the use of the trade secret, or (iii) is in breach of a (contractual) duty not to disclose the trade secret.  Furthermore, the Draft states that the acquisition, use or disclosure of a trade secret is considered unlawful whenever a person, at the time of the acquisition, use or disclosure, knew or ought to have known under the circumstances that the trade secret had been obtained directly or indirectly from another person who was using or disclosing the trade secret unlawfully.

b. Lawful Acts

The acquisition, use, or disclosure of a trade secret is considered lawful to the extent that such acquisition, use, or disclosure is allowed by law or contract.  With regard to a lawful acquisition, the Draft provides the following examples: (i) independent discovery or creation, (ii) reverse engineering, and (iii) exercise of the right of workers or workers’ representatives to information, consultation, and participation.  Two highlights:

(i) Independent Discovery or Creation

In the event of independent discovery of technical know-how, the discoverer is not only able to use or disclose the information without infringing any of the trade secret holder’s rights, but may even apply for and obtain a patent for the potential invention, provided that the general conditions for patentability are met.  By definition, trade secrets cannot be considered published state of the art precluding the criterion of novelty.  However, with regard to the development of a protection strategy, a trade secret holder may consider that German patent law at least provides a right of prior use.  Thus, if a holder decides not to file a patent application in order not to disclose its technical know-how, such holder bears the risk that such trade secret may not be protected in the event that a third party obtains a patent of an independent discovery or creation by such third party. However, such holder would not be exposed to claims of patent infringement for continuing to use its technical know-how if the right of prior use can be proven.

(ii) Reverse Engineering

While, according to current German case-law, reverse engineering may be considered unlawful if it requires a significant investment in workforce or technology to reverse engineer a product, the Draft, in accordance with the TSD, states that reverse engineering is a permitted means for obtaining trade secrets when the following two requirements are met: the product or object (i) has been made available to the public, or (ii) is lawfully in the possession of a party who is free from any legally valid duty of confidentiality.  Thus, as long as the product or object has not been made publicly available, it remains possible to contractually prohibit reverse engineering to the extent permitted by law.  Directive 2009/24/EC on the legal protection of computer programs as well as the German Copyright Act, in the contrary, limits contractual restrictions on reverse engineering to the extent decompiling is concerned.  

Accordingly, business owners and other trade secrets holders should carefully review their existing contracts (including templates) and consider any amendments that might be necessary.

c. Exceptions

The most important exception (Ausnahme) from trade secret protection under the Draft is whistleblowing.  Whistleblowers revealing misconduct, wrongdoing, or illegal activity can seek protection under the Draft, provided that they acted for the purpose of protecting the general public interest when disclosing trade secrets (Section 4).  The scope of that exception, however, is not yet clear.  

First, it remains vague under which circumstances the requirement of the term “public interest” is met, and it is unclear if acting in the “public interest” must be the sole motivation of the employee.  This lack of clarity leads to high legal uncertainty for employees who are subject to severe consequences if their acts are found not to be covered by the exception.  Such consequences range from disciplinary sanctions by the employer to criminal charges.

Second, the Draft states whistleblowing to be lawful in principle without specifying whether such whistleblower must first make efforts to resolve the issue internally or otherwise follow internal guidelines.  A whistleblowing system without internal reporting procedures is likely to create practical challenges for both companies and whistleblowers, as there is no “sanity check” of the allegation.

In Germany, current employment law requires the whistleblower to inform and consult with his/her employer prior to reporting alleged misconduct to external persons such as public authorities.  This two-step system, which is also found in some other Member States, is aimed at protecting both companies and whistleblowers by acknowledging the importance of internal information as well as the employee’s professional future.  Consequently, most German companies have set up anonymous internal reporting systems as part of their employment policies.  

Just recently, on April 23, 2018, the European Commission published its Proposal for a Directive on the protection of persons reporting on breaches of Union law, COM(2018) 218 final (hereinafter the “Whistleblower Directive”). This is an early-stage project of the European Commission, and it is unclear if and in what form such a directive will be enacted.  However, according to the Whistleblower Directive, private legal entities with 50 or more employees or an annual turnover of EUR 10 million or more as well as legal entities operating in the financial services are obliged to establish internal channels and procedures for reporting and follow-up of reports.  This internal reporting procedure is followed by an external reporting procedure.

Regardless of the above, it remains to be seen whether German lawmakers will reconsider their approach in the current Draft and implement a more detailed and gauged approach to whistleblowing into the final bill.

4. Rights and Remedies

The rights and remedies that will be available to trade secrets holders are listed together in a separate part of the Draft (Sections 5 to 13).  These include remedies that are typically available to owners of intellectual property rights (“IPR”), i.e., (i) injunctive relief, (ii) destruction of any document, object, material, substance, or electronic file containing or embodying the trade secret, or, where appropriate, the delivery of these items to the trade secrets owner, (iii) recall of the infringing products, or permanent removal of the infringing products from the distribution channels, (iv) destruction of the infringing products, or withdrawal of the infringing products from the market, (v) information rights as to the extent of the infringement, and (vi) compensation of damages.  As required under the TSD, all rights provided in the Draft, except for compensation of damages, are explicitly subject to a proportionality test.

Furthermore, under certain conditions, the Draft provides the trade secrets holder the option to bring claims (except for damages) against a company as a joint tortfeasor where an employee or agent of such company misappropriated the trade secret.

Lastly, the Draft – in line with current German law – provides for certain criminal sanctions for misappropriation of trade secrets (Section 22 – which will replace Sections 17 to 19 of the UWG and explicitly refers to more general criminal sanctions that may be applicable in cases of misappropriation of trade secrets under German law (e.g., Section 202a German Criminal Code)).  Criminal sanctions are not addressed in the TSD as the European Parliament lacks jurisdiction to address matters of criminal law.  Hence, the laws of the Member States will remain fragmented here.

A few highlights regarding the proposed remedies:

a. Right to Information

The right to information as proposed by the Draft will generally strengthen a trade secret holder’s position, but still falls short of the expectations in some respects.  

Under the Draft, trade secrets holders may demand disclosure of information from the infringer about the origin and distribution channels of infringing products, i.e., about (i) names and addresses of manufacturers, suppliers, previous owners, and customers and (ii) quantity and prices of these products.  In addition, a trade secret holder may claim damages if the infringer fails, either intentionally or through gross negligence, to accurately provide such information.  

In light of the fact that the TSD requires the Member States to provide for measures necessary to ensure adequate protection of trade secrets under civil law, it has been heavily criticized that the Draft focuses on infringing products only and does not establish a right to information regarding the “original source” through which the trade secret was acquired in the first place.  Moreover, in contrast to similar provisions in German trademark and copyright law, the Draft does not provide for any right to information against third parties that may help the owner to enforce a trade secret.  It remains to be seen if the ongoing public consultation will prompt the BMJV to reconsider their position.

b. Damages

Similar to current German intellectual property law, the Draft provides that calculation of damages can be based on the following three established methods: (i) infringer’s profit, (ii) reasonable royalties (fictive license fee), and (iii) lost profits of the trade secret holder. While infringer’s profit and reasonable royalties are explicitly mentioned in the operational part of the Draft (Section 9 para. 2), lost profits are only acknowledged by the BMJV in the introduction of the Draft as valid means to specify damages.  One can only speculate if the rather limited importance of the ‘lost profits’ methodology (due to the difficulty of proving lost profits) was the reason why the BMJV did not bother to explicitly mention this third calculation method in the Draft.  Nonetheless, we believe it should still be method a plaintiff can rely on, if of strategic advantage in a given case.

c. Pecuniary Compensation Instead of an Injunction

One novelty in the Draft is the option to avoid an injunction and further corrective measures by paying a pecuniary compensation.  In order for this provision to apply: (1) the infringer must not have acted intentionally or negligently, and (2) in light of all facts, an injunction would be disproportionate, i.e., the injunction must be disproportionally harmful to the infringer and the pecuniary compensation must be reasonably satisfactory to the injured party. 

In Germany, where injunctions are the “default remedy” – even in cases where no culpability can be found, this new option, essentially establishing a right to a compulsory license, represents a significant doctrinal change.  However, it remains unclear how broadly German courts will apply this provision. At first glance, the scope appears narrow as the bar to negligence is relatively low under German law.  Accordingly, the provision may be limited to cases in which a trade secrets was acquired, used or disclosed unlawfully and without fault through one’s own actions, e.g., by unknowingly breaching a contractual obligation.

d. Company Owner’s Liability for Employees and Agents

The Draft also empowers the trade secret holder to direct claims (except for damages) against the owner of a company in the event that the infringement was committed by such company’s employees or agents and is closely related to the duties (of such employees or agents) to be performed on behalf of the company.  The provision is intended to prevent a company owner evading liability because such owner was not personally involved in the act and therefore did not have knowledge that the trade secret had been obtained from a third party who was using or disclosing the trade secret unlawfully.  This concept has not been imposed by the TSD.  A similar provision already exists in the UWG.

e. Border Measures

Even though the rights and remedies available to trade secret holders under the TDR and the Draft are similar to those of holders of IPR, such as copyrights, trademarks, or patents, trade secrets are, in fact, not technically considered IPR under EU instruments regulating the protection of IPR, such as the EU Enforcement Directive (Directive 2004/48/EC on the enforcement of intellectual property rights) or the EU Customs Enforcement Regulation (Regulation (EU) No. 608/2013 concerning customs enforcement of intellectual property rights).  Consequently, trade secrets do not benefit from the mechanisms that the EU Customs Enforcement Regulation provides in regard to border measures.  Since the Draft does not provide for any specific rules on measures for trade secrets that would permit involvement of customs to block products that infringe trade secrets from entering the German market either, this remedy remains foreclosed for rights holders in Germany.

5. Protection of Trade Secrets during Litigation

The Draft provides also important improvements for trade secrets holders seeking to litigate misappropriation of their trade secrets in Germany. Currently, German procedural law provides little-to-no safeguard to ensure the secrecy of information in legal proceedings.  It is therefore often stated that in Germany, you either “lose the trial or lose the trade secret.”  The Draft, while not perfect, is much friendlier to holders of trade secrets in this regard, and these changes may be the most valuable changes in the Draft.

a. Procedure to Obtain a Confidentiality Order

Under the Draft, when filing a complaint, a plaintiff may now provide a redacted copy of the complaint to the court, together with a motion requesting service of the redacted complaint to the defendant only. For such motion to be granted, a trade secret holder must provide credible evidence (Glaubhaftmachung) as to the quality of the redacted information as a trade secret – something which can be provided in the form of an affidavit under German law.  The court will then decide on the request per court order (Beschluss), which can be rendered without hearing the defendant in order not to jeopardize the secrecy of the purported trade secrets. 

If the motion is granted, the defendant can challenge such order only in connection  with a challenge to a final judgment issued by the court, i.e., following the trial. This is to make sure that there is no delay in the litigation.  If, however, the court does not intend to grant the plaintiff’s motion to protect its trade secrets, the court will provide the plaintiff with its reasons and request further information from the plaintiff as to why the purported trade secret should be protected.  In the case of a final dismissal of the motion by the court, the trade secret holder can file an immediate appeal (Sofortige Beschwerde). 

We understand that the procedure to obtain a confidentiality order can be repeated at any stage of the litigation if there are any (substantial) new trade secrets that need to be protected as well.  This includes any trade secrets of the defendant that are introduced into the proceedings as a defense.  While the foregoing addresses protective measures that may be requested by the litigants, the court is also free to decide additional appropriate measures in its sole discretion.  Such measures include the exclusion of the public from oral hearings and further restrictions on file inspection requests.

b. Restrictions on Access and Disclosure

(i) General Restricted Access

After the purported trade secrets have been classified as confidential, the court may, at the request of a party, restrict access to (i) documents and/or (ii) the oral hearing and minutes thereto. Such classification by the court creates a legal obligation on the part of the litigants (including their legal representatives, witnesses, experts, and all other persons who have access to this information) to keep such information confidential and to not use or disclose such information outside of the legal proceedings (Section 15 of the Draft).  In addition, third parties will only have access to a version of the written court decision in which the statements containing trade secrets have been deleted or redacted (Section 18 of the Draft).

Such provisions are new under German law.  Currently, a court does have the right to restrict access to certain documents or limit the circle of persons being authorized to access documents, and a court may only exclude the public if (i) the trade secret in question is important to the litigants, and (ii) there are no other overriding legitimate interests justifying a public discussion of the trade secret (e.g., if the national security is involved in Section 174 para. 3 of the German Courts Constitution (GVG)).

ii. Limited Mandatory Access and Disclosure

The Draft does, however, provide one exception to the general restriction on access, in that at least one natural person of each party and one legal or other representative of each party have the right be granted full access to all unredacted documents and hearings.  This provision has already been heavily criticized as it requires a trade secret holder to disclose the trade secret in any litigation involving misappropriation, which potentially undermines the effectiveness of the other protective provisions.

Regardless of the confidentiality obligations, this exception potentially creates a significant risk for the trade secret holder, since the disclosure of a trade secret to the (alleged) infringer – often a competitor – increases the risk of further disclosure inside the infringer’s company and may ultimately lead to the loss of a competitive advantage by the disclosing party.

(iii) Penalties for Violation of Confidentiality Obligations

The risk associated with the mandated disclosure discussed above is potentially made greater by the fact that the penalties for violation of the confidentiality obligation consist only of a fine amounting to €1,000 or detention of up to one week.  As a court is likely to be reluctant to jail purported violators prior to the final decision of the case, the financial penalties are effectively the primary protection against the disclosure of trade secrets.  However, this provision has been harshly criticized as unlikely to be effective in light of the extremely low penalty amounts and is therefore expected to be increased significantly during the legislative process.

Even so, it is an open question whether such protection will be sufficient in practice, as any disclosure of a trade secret will significantly and irreversibly harm the holder’s legal position.  As with the current “lose the trial or lose the trade secret” problem facing trade secret holders, litigants will only be encouraged to defend their right in court if they have certainty they will not be doing harm to their rights in the process.

c. Jurisdiction

The Draft states that specialized civil chambers of the regional courts (Landgerichte) located at the infringer’s domicile shall have exclusive jurisdiction over trade secret disputes (Geschäftsgeheimnisstreitsachen).  This is a very welcome provision as it will help establish a knowledgeable and efficient court system that helps plaintiffs to enforce their rights.  In addition, the Draft provides for the option to transfer judicial power from one state to another, though time will tell whether German states make use of this option.  This would enable the establishment of a few “hot spots” to litigate trade secrets in Germany, as currently known in patent litigation where the most prominent courts are in Düsseldorf, Mannheim, Munich, and Hamburg.

It also remains to be seen whether these specialized chambers will be similarly as fast as some patent chambers in Germany.  A first-instance judgment in patent cases without the specific amount of damages requires approximately 10 to 14 months.  Initially, we would expect trade secret cases to be litigated in approximately two years, though we would hope that this could be shortened to not more than one year once a body of case law has developed around the new procedures.

As to the local forum, trade secrets cases shall be litigated in the court district where the alleged infringer has its general place of jurisdiction.  If there is no such general place of jurisdiction in Germany, the competent forum shall be in the place where the trade secret misappropriation occurred (jurisdiction for tort).  This seems to be a disadvantage for trade secrets holders, at least when there is no domestic entity of the alleged infringer.

d. No Specific Framework for Pre-Litigation Evidence Collection

Trade secrets do not constitute IP rights under the EU Enforcement Directive (see above) and as such do not benefit from the mechanisms regarding pre-litigation evidence collection provided thereunder.  Further, both the TSD and the Draft fail to provide any specific framework for pre-litigation evidence collection.  However, trade secret holders in Germany can continue to rely on the so-called “Düsseldorf procedure (Düsseldorfer Verfahren)”, a case law driven procedure under which plaintiffs can ask a court to appoint an expert to inspect allegedly infringing behavior at the alleged infringer’s premises.  The results of such inspection are then subject to an approval procedure guided by the court during which the alleged infringer has the opportunity to comment on specific interests of confidentiality.  After all of the infringer’s concerns have been heard, the Court will decide whether or not the expert’s opinion will be disclosed to the trade secret holder.

6. Other Confidentiality Obligations

The Draft (other than the leaked version) provides for a lex specialis provision with respect to other provisions of public administrative law.  According to the Draft, these other provisions shall prevail over the provisions of the Draft. This clarifies that the Draft is only applicable in the private sector (subject to civil law), excluding any public/private relationships (subject to public administrative law) and vis-à-vis any public officials (civil servants).

However, the Draft does not clarify its relation to other, perhaps more specific provisions governing the acquisition, use, and disclosure of trade secrets that may exist in German law, in particular laws addressing the exchange of information with labor unions in cases where a company is in financial distress.  In this regard, the provisions of Draft and other applicable laws will likely need to be reconciled, which will presumably be done over time by the courts.

7. Timeline

The deadline for the implementation of the TSD into national laws (June 9, 2018) is approaching quickly, and it is unlikely that the Draft will be adopted prior to this deadline.  Since the Draft has to be discussed and passed by both the German Parliament (Bundestag) and the Federal Council (Bundesrat), the final draft act will likely not be available prior to late fall 2018.  Although this delay will constitute a violation of Germany’s legal obligation as an EU Member State, it seems very unlikely that the European Commission will initiate a formal infringement procedure under TFEU (The Treaty on the Functioning of the European Union) considering the fact that the Draft has already been made available and will be adopted in the relative near future.  In the meantime, the existing statutory provisions (Sections 17 et seq. UWG) and case law of German courts will continue to apply until the final draft act is enacted.  While formal transposition into German law is pending, it is highly likely that, from June 9, 2018 onwards, German courts will interpret current German laws in the light of the TSD.

We will keep you updated about future developments regarding the implementation of the TSD in Germany.

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