Bird & Bird & The New German Trade Secrets Act - 'no pain, no gain'

Introduction

On 21 March 2019 the German parliament adopted a new national regime on trade secret protection (see also our previous newsflash on the adoption (https://www.twobirds.com/en/news/articles/2019/germany/new-german-trade-secrets-act-adopted). 

The new German Trade Secrets Act (GTSA) implements Directive (EU) 2016/943 (TSD) on the protection of undisclosed know-how and business information. The Directive protects against the unlawful acquisition, use and disclosure of trade secrets and aims at creating a level playing field of trade secret protection throughout the European Union, granting a consistent minimum standard of protection. 

The German parliament agreed upon the final draft of the GTSA almost one year after the final deadline for the actual implementation of the TSD. Many disputes on the scope of protection regarding journalists, whistleblowers and employees delayed the GTSA. To get a quick overview of the implementation of the European Trade Secrets Directive in other European member states please visit our Trade Secrets Directive Tracker under https://www.twobirds.com/en/in-focus/trade-secrets/trade-secrets-directive-tracker.

Analysis

Whilst the new act expands the current legal framework for the protection of trade secrets, in particular in relation to litigation, it also imposes extensive preventive measures on companies, which are required for protection under the GTSA.

So far, the protection of trade secrets had solely fragmentarily been regulated under German law. Protection was only granted in the three different areas of torts, unfair competition and criminal law, each area only coping with its respective specific requirements and scope lacking a comprehensive arch. The existing rules did not fully comply with the provisions of the TSD, so that a more far-reaching implementation was necessary in order to comply with European requirements.

Central to the GTSA is its legal definition of the term “trade secret”: according to this definition the qualification of any information as “trade secret” does no more solely depend on the owner’s subjective intention or an objective need for secrecy, but is additionally determined by objective means of trade secret protection. Under the previous rules, the qualification as a trade secret was granted solely based on whether the information was actually secret (prior to any disclosure), regardless of intent and any factual protection of the information. By contrast, now the owner of a trade secret has to apply “appropriate” measures to ensure non-disclosure of trade secrets and – in case of any dispute – prove that such measures have been in place in order to claim protection under the GTSA. 

This new approach will present many challenges to almost every company in terms of internal organization, technical protection and legal prevention. The new Act does not contain any transitional provisions. In principle the new increased requirements also apply to already existing trade secrets. Companies will have to thoroughly revise their portfolio of existing and future contracts in, among others, licence, non-disclosure and employment agreements. Any weaknesses found need to be addressed with commercially reasonable legal measures (e.g. obligations in regard to the secrets), each fitting to the value and nature of the respective trade secrets as well as to the specific circumstances of their use. Thus, both contracts in relation to employees and third parties are affected by these changes in law. In addition, accompanying organizational and technical means of protection are and will become increasingly important since they serve as a safety net for the inevitable weaknesses of contractual provisions. As the level of legal protection altogether will depend on the owner’s ability to prove that such systems have been in place, questions such as trade secret assessment, internal risk management, and post-infringement digital forensics will further gain in importance.

The new Act also lists permitted and unlawful conduct and practices, i.e. with regards to acquisition, use and disclosure of trade secrets. Particularly significant is the rule on so-called “reverse engineering” of a lawfully acquired product, which, contrary to what has previously been ruled by the courts, is now considered lawful in principle, except when otherwise contractually agreed. This shift in approach is based on the assumption that the new provisions should not create any exclusive rights due to information being protected as trade secret, except when otherwise contractually agreed. As a consequence, this forces the owner of a trade secret to create contractual obligations especially in relation to third parties. In case such protective measures were not taken, reverse engineering will only be legally limited by provisions under other intellectual property regimes and law of unfair competition, both of which do not grant the same level of legal protection as the GTSA. 

Moreover, the act codifies the means of redress in case of an infringement, e.g. the cessation of or the prohibition of the use or disclosure of the trade secret, recall of the infringing goods from the market, destruction of the infringing goods, damages, pecuniary compensation, but also claims to information. Such claims shall be limited if their fulfilment was disproportionate in individual cases. The judge is conferred discretion to weigh up the interests of the parties, e.g. the market value of the trade secret and the measures of secrecy protection on one hand and the efforts required by the infringer for the redress on the other.

Finally, since the qualification of information as a trade secret mainly depends on its non-disclosure, the GTSA establishes specific requirements aimed at protecting the confidentiality of the litigated trade secret in the course of legal proceedings. The GTSA provides for an authorization to transfer jurisdiction to certain specialized courts in cases of trade secret infringement, the possibility to classify the court proceeding as confidential upon request of one of the parties, and a potential restriction of the number of persons entitled to have access to evidence and/or hearings. Such protection remains in force after the legal proceedings have ended. The latter will raise major questions how such post-litigation secrecy will affect gathering, provision and recognition of evidence for future and related subsequent proceedings.

As can be seen from the above, the new GTSA contains a wide range of new provisions which mainly promotes the responsibility of the owner of a trade secret and focusses on preventive measures. It remains to be seen what standards will be applied by courts with regard to the “appropriateness” of confidentiality measures required to safeguard the protection as trade secret under the GTSA. However, compliance with these requirements will give trade secret owners not only general access to protection under the new law, but will also enhance the traceability of trade secrets violations and thereby improve chances to successful enforcement of trade secrets before the courts.