The new German Trade Secrets Act provides improved protection for trade secrets but also places new obligations on businesses to safeguard the confidentiality of their proprietary information, including through the use of employment law. This article sets out details of the new provisions for employers.
By: Julia Wittig
Firm: Kliemt.HR Lawyers
Know-how is the currency of the knowledge-based economy and creates competitive advantages for companies. The new Trade Secrets Act provides better protection for know-how. Following approval of the law by the Federal Council on 12 April 2019, a number of changes will take place in know-how protection: businesses must take action in the future to protect their trade secrets. The new law requires that ‘appropriate confidentiality measures’ be taken to ensure that know-how worthy of protection actually enjoys the protection provided by law. In this article we have summarised the requirements the new law places on employers.
With some delay (the transposition deadline for the underlying EU Directive 2016/943 expired last year on 9 June 2018) the Law on the Protection of Trade Secrets was passed by the Bundestag on 21 March 2019 and approved by the Bundesrat on 12 April 2019. As a result, the protection of trade secrets, which has so far only been regulated by law in isolated cases (mainly in §§17-19 of the German Act Against Unfair Competition, the UWG) and the concept of secrets, which has been shaped by court law, will be summarised and specified in a special law.
Under the new Law on the Protection of Trade Secrets, companies can proceed as they could previously against the unauthorised acquisition, use or disclosure of trade secrets and serious violations continue to be punishable by criminal law. Newly introduced, however, are individual claims enshrined in the law, as well as special procedural regulations that ensure confidentiality in court proceedings. The concept of a trade secret has also been legally defined for the first time and changed compared to the previous legal situation. The new definition contains a criterion which has not existed in German law up to now: a requirement for ‘appropriate confidentiality measures’ to be taken by the holder of the secret. Companies must now take action to ensure that their know-how worth protecting benefits from the protection of the new law. Employers have several options to comply with this requirement and should in particular make use of labour law provisions to ensure that their trade secrets are actually protected as far as possible.
What is a trade secret?
Typically, trade secrets will include manufacturing processes, customer and supplier lists, cost information, business strategies, company data, market analyses, prototypes, formulas and recipes. However, not every manufacturing process or of other type of information in this list that is designated or deemed to be confidential within the company necessarily falls under the new concept of a trade secret.
According to the new definition in Section 2 (1) No. 1 of the Law on the Protection of Trade Secrets, a trade secret is information that fulfils all the following criteria:
- It is not generally known or readily accessible, either in its entirety or in its precise arrangement and composition, to the persons in the circles who normally deal with this type of information.
- Because it is secret, it has economic value.
- The information shall be subject to appropriate confidentiality measures by the lawful holder under the circumstances.
- There is a legitimate interest in secrecy.
With the introduction of the ‘appropriate confidentiality measures’ criterion, companies must now proactively protect trade secrets. Only then will the protection provided by law take effect and give the owner of the secret rights of defence, such as the right to prevent the secret being used or disseminated and/or a claim for damages. According to the previous legal situation, a subjective desire to maintain secrecy was sufficient instead of taking the (objective) secrecy measures that will be required in the future. To have a legal claim, it was sometimes even sufficient if this desire for secrecy could be assumed simply as a result of the nature of the fact to be kept secret. This change in the concept of a secret is unanimously understood as a tightening of the requirements for the protection of secrets. This is also backed up by the Federal Government explanatory memorandum.
What action needs to be taken now?
Companies can now take various measures to protect their trade secrets. Technical, organisational and contractual protection of know-how is an option. The types of confidentiality measures that should be taken depend on the nature of the trade secret in question and the specific use to which it is put. The explanatory memorandum that accompanies the Law on the Protection of Trade Secrets refers in particular to contractual security mechanisms.
Employment law options
Contractual security mechanisms can be implemented in several ways under labour law. A confidentiality obligation can be added to the employment contract or, if one is already included, the effectiveness of the language used should be checked. Often confidentiality clauses are very general in nature and cover all conceivable business matters. These so-called ‘catch-all’ clauses are, however, ineffective according to case law and should be replaced.
It can also make sense to conclude non-disclosure agreements with the company's know-how providers. Admittedly, there is a fundamental obligation to secrecy within an existing employment relationship. However, a separate contractual agreement may raise awareness of the existence and scope of this obligation. In addition, for the period after termination of the employment relationship, a non-disclosure obligation may also prevent the use of specifically designated trade secrets by the employee personally. Without a contractual arrangement, the employee could at least use these trade secrets for his or her own benefit. Care should be taken not to exceed the legally acceptable threshold for a non-disclosure obligation.If too widely drafted (for example, if the employee is prohibited from using any trade secrets after termination of the employment relationship), the confidentiality obligation may become ineffective. It may also be considered by the court to be a post-contractual non-compete obligation. This can also be a meaningful way to protect know-how, but in order to be binding it must be given in exchange for compensation (something not habitually foreseen in a non-disclosure agreement), as well as respecting the further limits imposed by Sections 74 et seq. of the HGB (German Commercial Code).
Employers should take advantage of the introduction of the Law on the Protection of Trade Secrets to subject their know-how protection and in particular their contractual safeguards to a critical review and, if necessary, introduce further confidentiality measures.