The new German Trade Secrets Act in a nutshell – an overview of the new legal system

On 26 April 2019, the German Trade Secrets Act (Geschäftsgeheimnisschutzgesetz, GeschGehG) entered into force in Germany. This act implements the European Union Directive (EU) 2016/943 and establishes and implements common European standards for the protection of trade secrets in Germany.

The German Trade Secrets Act (the "Trade Secrets Act") provides for a new civil law foundation for the protection of business and trade secrets. Owners of trade secrets are now awarded statutory remedies, which resemble those of the conventional IP rights, i.e. injunctive relief, delivery up and destruction of infringing goods or, where appropriate, their withdrawal from the market, as well as the right to information. Section 23 of the Trade Secrets Act also stipulates a penal provision, so that the infringement of trade secrets is subject to criminal penalties.

The Trade Secrets Act further introduces new procedural rules for trade secret infringement proceedings which facilitate bringing a trade secret infringement action while safeguarding the trade secret holder’s legal interests in keeping the trade secret confidential.

Trade secret – core term

The core term of the Trade Secrets Act is “trade secret”, which is defined in section 2 no. 1 of the Trade Secrets Act as any information,

a) that is not, in the precise configuration and assembly of its components, generally known or readily accessible to persons within the circles that normally deal with this kind of information so that the information therefore has commercial value and

b) that the lawful owner has taken reasonable steps, under the circumstances, to keep secret and

c) for which there is a legitimate interest in keeping confidential.

These three requirements must be met in order for information to be considered a trade secret and be subject to the protection of Trade Secrets Act. Trade secrets can include technical know-how as well as other business secrets, such as customer and supplier lists, business figures, prices, etc. However, the protection does not extend to the practical experience of employees. Former employees cannot be prevented from using and thus disclosing such information; yet, contractual non-compete clauses can provide protection for a limited period of time under certain – strict – conditions.

Perhaps the most important requirement for protection under the Trade Secrets Act is that the owner of the information in question has taken reasonable steps under the circumstances to keep the information secret. What steps are considered reasonable has to be determined on a case-by-case basis. The steps must be reasonable under the respective circumstances. A decisive factor could, for example, be how important the information is for the company. For instance, construction plans for the company’s most important product must be better protected than a customer list for a mass-produced article. The size of the company in question and its capabilities with respect to implementing measures to protect trade secrets should – at least according to the explanatory memorandum for the Trade Secrets Act – play a role in evaluating whether the steps taken are considered reasonable and therefore sufficient to award the information protection as a trade secret under the Trade Secrets Act. As a result, it is not only possible, but also necessary to implement a graded system of protection. This requires the identification of the information which is to be protected as a trade secret, as well as the classification of these trade secrets depending on their importance to the company, the type of use of the trade secret and the risk that it will be unintentionally disclosed to third parties, so that adequate technical and legal protective measures can be arranged.

Permitted and prohibited acts and exceptions thereof

The Trade Secrets Act contains a non-exhaustive list of possible actions that can result in the legitimate obtaining of a trade secret. Naturally, independent parallel or in-house development or creation is permitted. An important change with respect to the legal situation prior to the Trade Secrets Act is that reverse engineering is now generally allowed, when the holder of the trade secret placed the product in question on the market, thus making it available to the public, or when it is lawfully owned by the person who is performing the reverse engineering, provided that no restrictions, such as through a relevant contractual provision, have been placed on such a lawful owner.

Further, the Trade Secrets Act makes it clear that trade secrets may not be obtained, disclosed or used against the will of the trade secret holder or in violation of a contractual obligation. This includes acts such as unauthorized copying of documents, articles or materials. Those who receive trade secrets from third parties may not use or disclose these secrets, if it is evident that the third party obtained the trade secret without authorisation.

These prohibitions, however, do not apply when, for example, they impede the freedom of expression, the work of the press or the detection of criminal offences. Accordingly, the protection of trade secrets is subsidiary to the ordre public.

Rights of trade secret holders in case of infringement

The Trade Secrets Act provides trade secret holders with comprehensive and wide-reaching possibilities to prohibit the distribution of infringing products and claim compensation for damages suffered as a result of the infringement of a trade secret. Therefore, the Trade Secrets Act deliberately defines “infringing goods” very broadly. Section 2 para. 3 of the Trade Secrets Act establishes that such infringing goods are those for which the conception, features, functioning, production process or marketing is based, to a considerable extent, on a trade secret, which has been unlawfully obtained, used or disclosed.

To prevent future infringements, the trade secret holder is entitled to injunctive relief against infringers, in accordance with the rights, which apply to other intellectual property rights such as patents, trademarks, or copyrights.

Further, the trade secret holder has a right to request the destruction or return of documents or objects, which contain the trade secret, and to the recall, removal and withdrawal from the market and the destruction of infringing goods. In order to enable trade secret holders to expose infringements, the Trade Secrets Act grants trade secret holders a comprehensive right to information from infringers.

For culpable infringements, the Trade Secrets Act grants trade secret holders a right to claim damages from infringers. To calculate how much should be paid in damages, the injured trade secret holder may choose between three methods of calculation and select the one that is most favourable to him. These methods include compensation for lost profits of the trade secret holder, damages based on a fictitious, reasonable license fee, or claiming the profits of the infringer.

Protection of trade secrets during infringement proceedings

Before the Trade Secrets Act came into force, bringing an action before the courts for the infringement of a trade secret brought with it the risk that the trade secret would have to be disclosed in order to win the case. The Trade Secrets Act addresses these concerns and provides for a number of protective measures available to trade secret holders in trade secret infringement proceedings.

In trade secret infringement proceedings, either party can file a request that the court treat certain information as confidential. The party applying for this treatment must credibly demonstrate that the information in question is a trade secret. If the court recognizes a trade secret, it will instruct the parties, their lawyers, witnesses and experts to treat this information as confidential. In addition, this information may not be used or disclosed outside of the court proceedings. Fines of up to EUR 100,000 can be imposed for failure to comply with these requirements. Further, it is possible to limit access to documents and oral hearings to a set number of trustworthy persons from both parties. Third parties will only be able to access redacted documents.

Conclusion

The Trade Secrets Act upgrades the protection of trade secrets, bringing it into line with the special German laws that provide for the protection of intellectual property rights, such as patents, trademarks and copyrights, especially with respect to the rights of trade secret holders against infringers. As a result, trade secret holders now have comprehensive statutory rights under the Trade Secrets Act, allowing them to take action against infringers and recover any damages suffered.

In order to qualify for protection under the Trade Secrets Act, the trade secret holder must carefully handle any information, which contains trade secrets. It is advisable to implement a graded protection scheme, which is tailored to the individual circumstances, and to seek to secure trade secrets against third party use or disclosure through the adoption of detailed confidentiality and use restriction agreements, which have been adapted to the case in question.

The new rules on the protection of trade secrets during infringement proceedings serve to assure trade secret holders that taking legal action against an infringer will not lead to the loss of the trade secret through its disclosure to the infringer and the public.

Christian Hess
(Lawyer, LL.M., Licensed Specialist for IP law)