The Act is intended to implement the so-called Know-How Directive of 08 June 2016[2]. The EU directive had become necessary because the protection of confidential information depended on very dissimilar provisions in individual Member States – i.e. a “regulatory patchwork”, which was not in accord with the great economic importance of protecting confidential information. According to a study, more than 70% of all companies consider the protection of trade secrets important or very important – apart from the protection of intellectual property. Accordingly, in about 40% of all companies, trade secrets are never shared with third parties for strategic reasons[3]. Nevertheless, the annual losses suffered by German companies due to industrial espionage, sabotage and data theft amount to about EUR 50 billion[4].
First, after specification of the scope in Sec. 1, Sec. 2 defines the key terms. According to this section, a “trade secret” means information that
Reasonable measures to ensure secrecy
Therefore, to enjoy the protection of the Act, it will be necessary to take reasonable steps to ensure secrecy in the future. This constitutes a considerable deviation from the current legal practice in Germany. Until now, the courts in Germany recognised the existence of a trade secret if the owner of the secret (e.g. the entrepreneur) had an interest in secrecy and an intention of maintaining secrecy. In the future, the mere intention to maintain secrecy will no longer be sufficient. Entrepreneurs must also take actual measures to ensure secrecy and if they fail to do so, the courts will no longer recognise the existence of a trade secret worthy of protection.
The new draft legislation refers to “reasonable steps under the circumstances to keep information secret”. In other words, not all potential trade secrets need to be accorded equally strong protection. Rather, this depends on the respective “importance” of the trade secret to the operation of the business. For minor secrets, it may be sufficient to establish clear responsibilities within the company or to protect files with passwords.
Currently, many legal essays are published on which steps should be taken to ensure secrecy. However, the most important thing is to make a start. The most sophisticated plan does not help if it is not implemented, and even small measures still constitute “steps to ensure secrecy”.
It is best to start by collecting the company’s secrets that are worthy of protection, i.e. by identifying, evaluating and categorising potentially relevant trade secrets and/or know-how. Then, depending on relevance, various measures can be taken – also at short notice and those that are easy to implement. It may make sense to store documents containing business and trade secrets in central places that not everyone has access to (e.g. a lockable file cabinet or an office with a fixed door knob rather than a door handle). Other possible measures include the organisation of work processes, i.e. limiting access to certain documents to certain personnel. For electronic documents, enhancements to IT security are important and can already consist of simple steps, such as password protection for sensitive data or up-to-date virus protection.
Entering into confidentiality agreements or non-disclosure agreements is important both internally (with respect to employees) and externally (in supply chains and in customer relations). In addition, training sessions for employees should be on the agenda to raise staff awareness of the need to protect trade secrets.
The measures implemented must be documented, monitored and safeguarded through compliance measures so that the steps taken to ensure secrecy can later be argued before a court. Additional recommended measures and an overview of the complex risks to the German economy following an inadequate protection of trade secrets are provided, for example, by the Initiative Wirtschaftsschutz[5] (Economic Protection Initiative), which is co-sponsored by the Federation of German Industry and the German Chamber of Commerce and Industry.
The general permissibility of reverse engineering is another important change in the legal situation in Germany. Sec. 3 of the draft legislation defines what will be permitted in the future. Under this section, a trade secret may be acquired by “observing, studying, disassembling or testing a product or object that has been made available to the public or that is in the lawful possession of the person doing the observing, studying, disassembling or testing, if this person is under no obligation that restricts the acquisition of the trade secret”. In addition, a trade secret may be acquired, used or disclosed if this is permitted by law, based on a law or by way of a legal transaction.
Whereas, reverse engineering, as defined in the above citation, has generally been inadmissible in Germany thus far, reverse engineering will now in principle be legally permissible. This will even be true if the cost of reverse engineering is high. However, the permissibility of reverse engineering can be excluded by contract. Therefore, companies that are concerned about reverse engineering must ensure that their contracts with suppliers, customers and research and development partners preclude reverse engineering, including a retroactive exclusion for products already delivered.
Sec. 4 of the draft legislation contains a list of various prohibited actions. According to that section, a trade secret may not be acquired through unauthorised access to, appropriation of or copying of documents, objects (etc.) or electronic files lawfully under the control of the trade secret owner and containing the trade secret, or by any other conduct which, under the circumstances, is considered contrary to honest market practice. Anyone who has acquired a trade secret through such conduct may not use nor disclose it. The same applies to anyone who is in breach of a duty to limit the use or disclosure of the trade secret. Paragraph 3 of the norm contains a provision regarding the use or disclosure of trade secrets by third parties, and Sec. 5 contains justifications for the acquisition, use or disclosure of trade secrets.
Secs. 6 – 14 of the draft legislation lay down the claims of the owner of a trade secret against an infringer. Sec. 6 entitles the trade secret holder to claim for removal and injunctive relief, while Sec. 7 contains provisions for the destruction, surrender, or recall of infringing products and their removal and withdrawal from the market. Sec. 8 codifies a right to information and contains provisions regarding damages for breaching the infringer’s duty to provide information.
The aforementioned claims are subject to the requirement of proportionality under Sec. 9 of the draft Trade Secrets Act. This means that claims are excluded if the value of the trade secret is low or the trade secret holder took inadequate steps to ensure secrecy. Therefore, it is in the interest of the trade secret holder to ensure taking reasonable steps to keep such information secret.
Under Sec. 10 of the draft Trade Secrets Act, an infringer who acts intentionally or negligently is liable to the owner of the trade secret for damages, which, according to Paragraph 2 of the norm are based on the three customary methods to calculate damages under intellectual property law. In addition, monetary compensation can be demanded for any non-material damages suffered.
Sec. 11 enables an infringer, who has acted neither intentionally nor negligently, to pay a cash settlement to the owner of the trade secret to avert claims under Secs. 6 or 7, if the infringer would suffer a disproportionately large burden through satisfying such claims and the cash settlement appears reasonable. This provision should only apply in cases in which rights were infringed inadvertently, or there would be an undue destruction of economic value or an undue impediment to competition and innovation, and this constitutes a counter-weight to Secs. 6 and 7 – which generally do not require fault as a prerequisite.
If the infringement of rights is committed by an employee or representative of a company, the owner of the trade secret also has claims against the owner of the company under Secs. 6 – 8, as stipulated in Sec. 12 of the draft legislation. This provision conforms to the provisions of Secs. 8 (2) of the Act Against Unfair Competition (UWG), 44 of the Design Act (DesignG) and 14 (7) of the Trademark Act (MarkenG). The liability of the company owner is secondary to claims against the infringer. Therefore, if the infringer pays a monetary settlement under Sec. 11 of the draft legislation, claims cannot be asserted against the company owner.
Sec. 14 contains an additional corrective measure in the form of a general prohibition on abuse conforming to Sec. 8 (4) UWG. Secs. 15 – 22 contain procedural provisions, and Sec. 23 contains a criminal provision regarding the infringement of trade secrets. When the Trade Secrets Act takes effect, Secs. 17 – 19 UWG, which have thus far governed the protection of trade secrets, will be repealed. Until then, Secs. 17 – 19 UWG must be interpreted in conformity with the Directive.
[1] https://www.bmjv.de/SharedDocs/Gesetzgebungsverfahren/DE/GeschGehG.html.
[2] Directive (EU) 2016/943 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure. Available at https://eur-lex.europa.eu/legal-content/DE/TXT/PDF/?uri=CELEX:32016L0943&from=DE.
[3] Study on Trade Secrets and Confidential Business Information in the Internal Market, 4/2013 (MARKT/2011/128D), available at http://ec.europa.eu/internal_market/iprenforcement/docs/trade-secrets/130711_final-study_en.pdf.
[4] https://www.focus.de/finanzen/news/unternehmen/mittelstand-besonders-gefaehrdet-wirtschaftsspionage-kostet-industrie-50-milliarden_aid_1083974.html.
[5] https://www.wirtschaftsschutz.info/DE/Home/home_node.html.
