14 Jan 2019 | Unfair Competition

Implementation of the EU Trade Secrets Directive – German Government Draft Published

The EU Trade Secrets Directive must be implemented into national law. Following the much-discussed draft by the Federal Ministry of Justice and Consumer Protection, the legislator has now published the government draft. Although many questions remain unanswered, German companies can now better prepare for the implementation of the EU Trade Secrets Directive.

The EU Trade Secrets Directive must be implemented into national law. After the draft bill of the German Federal Ministry of Justice and Consumer Protection has met with a divided and partly very critical response from industry, academia and legal experts, the legislator has published a revised government draft which at least in regard to some aspects has taken up the criticism. Although many questions remain unanswered, German companies can now better prepare for the implementation of the EU Trade Secrets Directive.

Concept of “reasonable confidentiality measures” still unclear

The German legislator has refrained from further defining the concept of “reasonable confidentiality measures” contained in the Directive. The concept of “reasonable confidentiality measures” is of central importance, since information can only constitute a trade secret if it is the subject of “reasonable confidentiality measures”. Ultimately, the legislator’s decision not to legally define such measures is understandable: the Directive already makes it clear that the circumstances of the individual case must determine which confidentiality measures are reasonable in each case.

This case-by-case assessment has advantages and disadvantages for companies. For trade secrets that have a comparatively low value, only comparatively minor confidentiality measures are required. A disadvantage of the case-by-case evaluation is that in practice it will hardly be possible to determine individual secrecy measures for each (potential) trade secret within a company. In addition, the reasonableness of confidentiality measures will have to take into account not only the value of a trade secret, but also other factors such as the individuality of the trade secret and the effort involved in creating the trade secret.

Consequently, in the explanatory notes of the government draft, the legislator also states that the specific types of confidentiality measures depend on the type of trade secret in question and the specific circumstances of its use. According to the legislator, both physical access restrictions and precautions as well as contractual security mechanisms can be considered. It is not necessary to mark each piece of confidential information separately, but measures can in principle be taken for certain categories of information (see below) or specified by general internal guidelines and instructions or also in employment contracts. In assessing the adequacy of the protective measures, particular consideration may be given to the value of the trade secret and its development costs, the nature of the information, its importance to the enterprise, the size of the enterprise, the confidentiality measures customary in the enterprise and contractual arrangements agreed with employees and business partners.

Categorization of Trade Secrets Recommended

There are two possible solutions for companies to avoid having to determine individual secrecy measures for each trade secret: First, it is possible to apply to all trade secrets those confidentiality measures that are reasonable to the most valuable trade secret. However, this can lead to unnecessary effort and may slow down the work processes with regard to less valuable trade secrets. It therefore seems more advantageous to us, after analysing the existing trade secrets in a company, to develop several categories with regard to the value and need for protection of trade secrets and to develop and establish reasonable confidentiality measures for each category.

Safeguarding of Trade Secrets During Litigation

Of particular interest to companies are also the possibilities provided in the government draft for the protection of trade secrets in court proceedings. In this respect, the government’s draft contains both good and rather disappointing provisions. For example, at the request of a party, the court may classify information as requiring complete or partial secrecy. However, such information nevertheless comes to the knowledge of the other party, its lawyers and, if necessary, witnesses and experts involved in the proceedings. It would be desirable if the legislator were to provide for more effective measures here to achieve the secrecy of information requiring secrecy in the trial.

While the draft bill provided for an administrative fine of only up to EUR 1,000.00, for litigation parties using or disclosing information classified as confidential by the court, the legislator has meanwhile corrected this and provided for a much more appropriate (however in our view still insufficient) fine framework of up to EUR 100,000.00. A negative aspect of the procedural provisions is that the company whose secret know-how was infringed has to sue where the infringer has his place of jurisdiction. According to the government draft, it is unfortunately not possible to bring an action before any court or before a court in whose district the infringing act occurred. This is to the advantage of the infringer and to the disadvantage of the injured party.

On the positive side, there is a provision for a kind of pre-procedure in which the infringed party, whose trade secrets have been obtained or disclosed, can apply for procedural secrecy measures before service of an action on the opposing party in proceedings on the merits. This possibility should in any case be used to ensure the protection of the trade secrets at issue. Strangely enough, the possibility of such prior proceedings is not provided for the infringed party in preliminary injunction proceedings. It is to be hoped that the legislator will change this. Fortunately, the legislator in the Government draft has now extended the infringed party’s right to information including the “path” taken by the trade secret after their unauthorised disclosure.

Conclusion

With the Government draft for the implementation of the Trade Secrets Directive, the legislator has taken up some of the aspects discussed in the context of the publication of the Ministerial Draft and has modified the Ministerial Draft as shown above. Nevertheless, many questions still remain unanswered, so that in many aspects the Government draft is unsatisfactory for trade secret holders. It remains to be seen how the Government draft on the protection of trade secrets will be discussed, especially in German parliament.

As of today, it is expected that this law will come into force in winter / spring 2019.

We will continue to monitor the legislative process. Companies operating in Germany should start now at the latest to develop secrecy concepts and to develop and implement classification systems for trade secrets and the corresponding secrecy measures in order not to lose valuable know-how rights when the law comes into force.