The draft act on the implementation of the Trade Secrets Directive was officially released 19 April 2018 by the German Federal Ministry of Justice and Consumer Protection. Somewhat ironically, it had already been leaked in early April.
In all likelihood the implementation act will not passed and come into force before autumn 2018 and is expected to undergo some changes (even though the directive needs to be implemented until 8 June 2018).
Despite its preliminary character, it is worth taking a closer look. Our key take-aways are below.
- The German legislator has decided to implement the Trade Secrets Directive in a standalone act rather than updating and complementing the existing trade secret provisions in the Federal Act against Unfair Competition (Gesetz gegen den unlauteren Wettbewerb or UWG). This should be applauded: a standalone law against the unlawful acquisition, use and disclosure of trade secrets simplifies the implementation of the directive, and will provide more clarity and legal certainty for owners and users of trade secrets.
- The draft largely follows the Trade Secret Directive’s structure, terminology and content – with some adaptations to terminology. In line with the directive, it provides: a definition of trade secrets; a description of lawful actions (in particular reverse engineering) and unlawful actions (in particular use and disclosure in breach of a confidentiality obligation); measures to ensure confidentiality in court proceedings; and a set of remedies, such as injunctions, damages, recall of infringing products and publication of judgment.
- As regards the definition of what is regarded a trade secret, the draft stays close to the language used in the directive, which means that the only information worthy of protection is ‘secret’ (ie not generally known and readily accessible among the relevant public), derives commercial value from its secrecy and is subject to “reasonable steps to keep the information secret”.
Many commentators have been unsure whether the German legislator would follow the directive on this point, as it means stricter requirements for trade secret owners: until now, German courts considered it sufficient that the trade secret owner had the intention to keep the information in question secret, and such intention was, in most cases, being presumed without much scrutiny.
With the draft clarifying that businesses must prove that they have taken “reasonable steps to keep the information secret”, it is clear that businesses will need to take action to ensure that their valuable confidential business information and know-how is sufficiently protected. The explanatory remarks to the draft clarify that the standard for such “reasonable steps” varies on a case-by-case basis and will be affected by factors such as the value of the secret for the business, its development costs, and such steps may include physical access restrictions as well as contractual safeguards and the customary policies to protect trade secrets in the company.
Businesses are thus well advised to check and, if necessary, adapt their internal – organisational, technical and contractual – processes and mechanisms for the protection of confidential information.
- Regarding the exceptions – mainly for the benefit of employees and their representatives, free speech (primarily investigative journalists) and whistle-blowers – the draft largely mirrors the directive. This is also true in respect of the exception for whistle-blowers, who are privileged only if they acted “in the public interest”. The draft has been criticised in the media for not providing sufficient protection for whistle-blowers, but in fact this provision does not deviate from the directive.
- The draft provides for the possibility to determine the amount of damages as a lump sum on the basis of a “license analogy”, ie (at a minimum) on the amount of royalties or fees which would have been due had the infringer requested authorisation to use the trade secret in question. Another basis for computing the damages is the profit the infringer made through the unlawful behaviour.
- In line with the directive, the draft provides for a general confidentiality obligation applying to all persons involved in litigation on trade secrets. However, the fine imposed for a violation of this obligation is only up to €1,000 – without doubt not an effective deterrent as envisaged by the directive (in particular compared to the considerable fines introduced by the GDPR for violations of data protection rights).
- Even though not included in the directive, the draft contains a claim to information, granting the plaintiff to request information on the origin and distribution channels of infringing products. This has been criticised as being too narrow, as it does not include a request on information about how the trade secret has been acquired. This critique is sound: in many cases, no infringing products are distributed, and in any case it is critical for the trade secret owner to investigate how the trade secret theft occurred.
- While the draft allows German regional governments to pool expertise by concentrating judicial competencies, as a general rule trade secret owners must – as the exclusive venue for trade secret disputes – sue at the place of the defendant’s registered office or, in case of natural persons, their place of residence.
- The existing provisions on trade secret protection (sections 17 to 19 UWG) will, according to the draft, be abolished in their entirety. As these provisions provide also sanctions under criminal law, the draft incorporates new criminal law sanctions tailored to the directive and its implementation. This is important, as criminal proceedings are often used by trade secret owners to obtain (eg through dawn raids and seizure orders) evidence that is typically in the hands of the defendant.
In summary, the draft provides for a solid basis for the implementation of the Trade Secrets Directive.
Even though the directive allows member states to enact more far-reaching protection for trade secret holders, the German legislator seems to have little appetite for doing so. As it can be expected that a number of changes will still be made during the consultation phase over the summer, it will be of particular interest whether the German legislator will also address issues not covered by the directive, such as the burden of proof, which generally lies with the trade secret owner and often makes asserting a trade secret claim difficult – the trade secret owner is typically not in a position to provide sufficient evidence on how the trade secret has been misappropriated.