German draft bill on the implementation of the EU Trade Secrets Directive

Summary

The European Union is finally making significant progress in implementing the first pan-EU trade secrets protection rules. The EU’s largest country, Germany, has published its long-awaited draft bill setting out how it proposes to implement trade secrets protection.

The EU directive on trade secrets protection was agreed to in 2016 in the same month as the United States adopted its Defend Trade Secrets Act. EU Member States have had two years from adoption to implement the Trade Secrets Directive (TSD) into their national laws. While the TSD generally provides for uniform protection, Member States can implement higher standards, so all eyes have been on the German government to see how it will approach the task of conversion of the TSD rules and principles into national law.

Current Developments

After a prior version of the German draft bill on the implementation of the TSD was leaked, the German Federal Ministry of Justice and Consumer Protection (Bundesministerium für Justiz und Verbraucherschutz ‘BMJV’), on April 19, 2018, published its draft bill (Referentenentwurf) of the proposed German act on the implementation of Directive (EU) 2016/943 for the protection of trade secrets against unlawful acquisition, use, and disclosure (Gesetz zum Schutz von Geschäftsgeheimnissen, GeschGehG).  

While other Member States of the EU (e.g., Denmark and Sweden) have already incorporated the TSD into their national laws, and the UK (despite Brexit) is currently analysing feedback on its Consultation on draft regulations concerning trade secrets, Germany was rather slow in providing specific information on a potential transposition of the TSD into German law.  In view of the limited remaining time for the implementation (due June 9, 2018), the publication of the German draft bill is overdue and should be provided to companies and trade secrets holders, which will need to adjust their businesses and implement or adjust their trade secrets protection strategies in order to benefit from the TSD.

In summary, the German draft bill widely implements the TSD “one-to-one” without making much use of the Member States’ discretionary leeway that the TSD permitted. The most important consequences for companies and other trade secrets holders relate to:

(1)   the new, more objective definition of trade secrets, requiring “reasonable steps” to keep them secret;

(2)   new requirements to prevent reverse-engineering (to the extent legally possible);

(3)   potential restrictions on injunctive relief; and

(4)   the enhanced protection of trade secrets during litigation.

The draft bill is subject to ongoing public consultation, and it is likely that further changes will be made to accommodate all of the stakeholders’ requests.  We will keep you updated on developments.

1.       Reasonable steps to protect trade secrets

Under both the TSD and the draft bill, trade secrets holders must take “reasonable steps” to keep their information secret.  Previously, German law adopted a rather subjective view and placed emphasis on the will of the holder of trade secrets to keep the information secret, and on whether such will was apparent from the 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 Referentenentwurf pointed out, “reasonable steps” are an objective criterion.  In this regard, trade secrets holders seeking to litigate their trade secrets bear the burden of proof.  Reasonable steps include (i) physical, (ii) organisational, and (iii) contractual measures.  The BMJV noted that the reasonableness may depend on factors such as the value of the trade secrets to be protected, the underlying R&D costs, thier importance for the trade secret holder, comparable measures implemented in the company, the way of marking the information as confidential, and existing agreements with employees and business partners of the company.  

2.       Reverse-engineering

Under the heading “Permitted Use,” the Referentenentwurf states that reverse-engineering is a permitted means for obtaining trade secrets.  Despite its two subcategories, the German draft bill seems to be a one-to-one implementation of the respective provision of the TSD.  Similar to the TSD, the German draft bill refers to contractual possibilities to protect products against reverse-engineering.  To the extent legally possible, companies are advised to start reviewing their existing agreements (including, e.g., cooperation, R&D, and know-how agreements), and to amend them if necessary.  

3.       Restriction of injunctive relief

The claim for injunctive relief provided in the Referentenentwurf is subject to a proportionality test.  In certain cases, pecuniary compensation shall suffice as a remedy.  This represents a doctrinal change, as previously an injunction was the default remedy.  It remains to be seen how German courts will make use of these provisions, and whether this means a deviation from the German system of a default injunction as a result of trade secrets misappropriation, with little to no wiggle room for the infringer.  

4.       Protection of trade secrets during litigation

The Referentenentwurf provides important improvements for trade secrets holders seeking to litigate misappropriation of their trade secrets in Germany.  Herein lies the true value of the draft bill.  Currently, German procedural law provides little to no protection to ensure the secrecy of information in legal proceedings.  For trade secrets, the saying often was: “Lose the trade secret, or lose the trial.”

Now, most importantly, parties to the litigation, as well as legal representatives, witnesses, experts, and other persons participating in the trade secrets litigations, are legally obliged to keep information secret which has been classified by the competent court as a trade secret.  This secrecy obligation continues even after the end of the litigation.  Violation of this obligation can trigger a fine in the amount of €1,000.  Following heavy criticism, it is likely that the fine will be increased significantly during the legislative process.

The draft bill provides for a certain procedure that can be initiated by a plaintiff in parallel to filing a complaint for trade secrets misappropriation.  When filing a complaint, a plaintiff may provide a redacted copy of the complaint, together with a motion requesting service of the redacted complaint only.  To benefit from the trade secrets protection, a trade secrets holder has only to provide credible evidence (Glaubhaftmachung), something which can be provided in the form of an affidavit under German law.  

A competent court will then decide on the request per a court order (Beschluss), which can be rendered without a prior hearing in order to not jeopardise the secrecy of the (alleged) trade secrets.  If the request of the plaintiff is successful, the defendant can attack the court order, together with the judgment, following the trial (on the appeal level) only.  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 the reasons and request further information from the plaintiff as to why the alleged trade secrets should be protected.  In the case of a subsequent rejection by the court, the trade secrets holder can file an immediate appeal (sofortige Beschwerde).  We understand that this procedure can be repeated with every court brief filed during litigation if there are new trade secrets that need to be protected as well.  While protective measures may be requested by the trade secrets holder, the competent court is free to decide about additional appropriate measures ex officio at its own discretion.  Such measures include, e.g., the exclusion of the public from oral hearings and further restrictions on file inspection requests.

While this procedure is certainly a major plus for trade secrets holders, there is one restriction stemming from the TSD which Germany had to, and did, implement in the draft bill.  At least one natural person and one legal or other representative of the defendant in the trade secrets litigation must have access to both the unredacted documents and the oral hearings.  This exception constitutes a certain factual risk for the trade secrets holder, since the disclosure of a trade secret to the (alleged) infringer – often a competitor – may lead to further disclosure inside the infringer’s company and ultimately lead to the competitive advantage of the infringer.  

When deciding about a protective measure, German courts have to consider the principle of proportionality and strike a fair balance between the infringer’s right to a fair trial and effective judicial protection, on the one hand, and the trade secrets holder’s interest in keeping its trade secrets. on the other hand.  Since due process of law is an important principle under German law, we expect that the exact scope of the procedure will be further specified by future case law.  In this respect, the draft bill states that trade secrets chambers (Geschäftsgeheimniskammern) of the regional courts (Landgerichte) shall have exclusive jurisdiction over trade secrets disputes (Geschäftsgeheimnisstreitsachen).  The draft bill provides for the possibility to transfer judicial power from one state to another.  It remains to be seen whether German states will make use of this possibility.  The concentration of know-how regarding a specific type of litigation is already known from IP litigation (e.g., patent disputes are mainly litigated in Düsseldorf, Mannheim, and Munich), and could further improve trade secrets litigation in Germany.