Know-how protection in Germany: Trade Secrets Act will have considerable consequences for companies

Published on 16th Apr 2018

9 June 2018 is the deadline for the transposition of EU Directive 2016/943 on the protection of undisclosed know-how and business information (hereinafter the “Directive”). If not implemented, the requirements of the Directive will apply in Germany by way of an interpretation in conformity with the Directive. The German Federal Ministry of Justice is currently under high pressure to draft a corresponding Trade Secrets Act (GeschGehG, hereinafter “TSA”). It is somewhat ironic that a confidential draft of the draft bill was leaked to the press in advance. Regardless of this, the draft bill itself contains no real surprises. One thing is clear: non-compliance with the requirements as of 9 June can - in one way or another - have considerable consequences for companies in Germany.

Regulation of trade secrets protection in an independent act

The following conclusions can be drawn from the leaked draft bill:

With the TSA, there will be a separate act on the protection of trade secrets. According to the reasoning provided for the draft bill, it would have been insufficient to fully incorporate the protection of secrecy into the German Unfair Competition Act (“UWG”), where the issue of trade secrets is currently mainly addressed – and considered neglected - in Sections 17 et seq. This course of action by the legislator finally places a greater value on know-how protection in Germany.

The TSA will unite the civil law provisions of the Directive with the existing German criminal law norms of Sections 17 et seq. UWG. Therefore, Sections 17 et seq. UWG will most likely be repealed without substitution.

It may be assumed that the TSA will not be transposed into German law in time for the expiry of the transposition period. This is largely due to the many steps remaining between the draft bill and the official entry into force. Germany is thus lagging behind some other member states. Denmark and Sweden have already passed laws in relation to this issue.

Reasonableness of protective measures depends on the individual case

The draft bill shows that German lawmakers largely comply with the provisions of the Directive in its transposition. Similar to the Directive, the draft bill first defines the key points of trade secret protection, i.e. the legal definition of a trade secret, the listing of permitted actions, the prohibitions of certain acts, and the exceptions in the event of infringements.

One of the most significant innovations in German law will be the legal definition of a trade secret. Accordingly, three essential conditions must be fulfilled in order for a mere piece of information to be deemed a protected trade secret:

  • The information must be secret;
  • It must have a commercial value due to the secrecy and,
  • It must be subject to reasonable confidentiality measures.

The definition provided by the Directive is already contained in Article 39 of the TRIPS Agreement. With the signing of the TRIPS Agreement in 1994, a minimum standard for aspects of intellectual property was created in the international field. Germany as co-signatory failed to introduce the definition, unlike other countries such as the USA, Japan and Russia.

The burden of proof for the existence of reasonable confidentiality measures lies with the holder of the secret. The question of what may be understood as reasonable protective measures should be decided by the courts on a case-by-case basis in accordance with the (unofficial) justification of the draft bill.

What remains interesting is the referral to a triad of organisational, technical and contractual measures. It will therefore amount to the appropriate implementation of effective confidentiality agreements, technical barriers to entrance and access the information. German judges are at liberty to obtain relevant suggestions for example from Japan, Russia or the USA, which have each developed their own standards for the implementation of Art. 39 TRIPS and the interpretation of "reasonable confidentiality measures".

In some cases, extremely strict requirements are placed on the respective holder of the trade secret. In Russia, for example, a concrete catalogue of measures must be observed in order to qualify information as a trade secret. These include a concrete list of the trade secrets, access restrictions and corresponding list of those entitled to access, and limited use of the secrets by employees. In the USA, on the other hand, the approach is generally more open and the reasonableness of the measures is determined with a view to the circumstances of each individual case.

Prohibitions to act…

The draft TSA contains the same detailed provisions on prohibitions to act and exceptions to violations of the law as the Directive. Reverse engineering is expressly permitted under Section 2 (2) No. 2 of the draft bill, provided it does not violate other laws, such as the German Copyright Act or contractual provisions. Reverse engineering of a product means that construction elements are extracted from an existing system or a mostly industrially manufactured product by examining the structures, states and behaviour patterns. A plan is thereafter created from the finished object once again.

In the future, the prohibition to act under civil law will be based on the fact that the unlawfulness of the action is already justified by negligent misconduct and this may trigger claims for damages. Up to now, intent was one of the requirements. In addition, the scale of fault for further legal consequences of an infringement is changing: According to the Directive, an objective violation of a prohibition to act is sufficient; until now, these consequences were only applicable if it could be shown that the infringer acted with intent or negligence.

The prohibitions to act are followed by the claims for omission, removal and damages, which are also used in other German laws. Compared to the Directive, however, the draft bill also contains two major differences. On the one hand, the right to information - known from other intellectual property laws - was included.

In particular, the holder of a trade secret will have a claim for damages in case of false or non-information. In addition, the owner of a company whose employee has committed an offence should be held liable. He should not be able to easily evade the claims of the owner of the secret.

… and exceptions

The exceptions will also serve as grounds for justifying the criminal provisions of the TSA. The exception for whistleblower has already been sharply criticised in the press. The Directive and the draft bill stipulate that the whistleblower should act with the intention of protecting the general public interest. According to the justification for the draft bill, this must be the dominant but not exclusive motive of the whistleblower.

The draft bill was leaked in advance presumably for the above reason. Politicians and journalists perceive this as an inadmissible restriction, because whistleblowers generally have several motives - and an exception should nevertheless be made even if they (also) consider the personal gains of doing so.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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