By Dr. Burkhardt Führmeyer, LL.M., and Dr. Fabian Klein
Facebook stole trade secrets worth $4 billion from Zenimax!
At least, that’s the base of a claim filed by Zenimax, the software company behind blockbuster games like Fallout and Doom, against Oculus VR, the virtual reality pioneer company now owned by Facebook. Zenimax claims that one of its key employees took trade secrets with him to Oculus when leaving Zenimax, and that this knowledge helped Oculus arrive to where it is right now.
As this example shows, protection of trade secrets is not just a nice-to-have for companies: It is a must-have, and it is no less vital than protection employing patents, design rights or trademarks. Still, in many countries the legal protection of trade secrets is far less advanced than “proper” IP rights. And more often than not, companies allocate a similarly smaller amount of attention to know-how protection.
The Situation in Germany is no exception to this. Despite statistics demonstrating the amount of money companies lose each year due to trade-secret misappropriation, the legal options companies can take to protect trade secrets are far less advanced compared with protection by IP rights. It is not even entirely clear what legal status trade secrets possess. Even more, trade-secret owners face various difficulties when trying to defend their trade secrets in court.
In a world where almost no company solely acts in a single national market, but one in which goods, services, information – and, yes, employees – easily cross borders, international harmonization is becoming a bigger and bigger factor as well.
The EU took a big step forward toward creating more harmonized trade-secret protection on July 5, 2016, when it adopted Directive (EU) 2016/943 on the protection of undisclosed know-how and business information (Trade Secrets Directive). Whether the EU will also grant more effective legal protection will largely depend on how member states will implement the directive, which must be carried out by June 9, 2018.
Companies should, however, consider certain key issues already now:
Uniform definition of a trade secret
German law has no legal definition of a trade secret. Case law has established the understanding that a trade secret is a business-related fact that is not obvious and only known to a limited group of people. A trade secret also constitutes a secret for which the business operator has a legitimate commercial interest in keeping secret.
The Trade Secret Directive provides a harmonized definition of a trade secret. This will certainly help to create a level playing field for companies across the member states. It will also not necessarily decrease the material scope of information eligible for classification as a trade secret, since the Trade Secret Directive only stipulates a minimum standard.
With regard to its content, the definition provided by the Trade Secrets Directive does not deviate too far from the definition created under German case law. Under both definitions, a trade secret must be information that is not generally known. Different from the current system in Germany, however, the Trade Secret Directive further requires that this information be subject to “reasonable steps … to keep it secret.” This means that according to the current legal standard, it is sufficient for the trade-secret owner to have a legitimate interest in maintaining the secrecy of the trade secret and that he or she has somehow manifested this intention. Under the Trade Secret Directive, this will no longer be sufficient. Instead, the trade-secret owner will have to implement a trade-secret protection program in advance.
These “reasonable steps” are not only relevant for qualifying certain information as trade secrets: They will also influence the scope of protection the trade secret may enjoy. The Trade Secret Directive stipulates that courts will, inter alia, have to consider the protection measures a company had implemented when deciding on granting protection.
The necessary consequence for companies is obvious: They have to start preparing now to implement and maintain a protection program. If a company does not take adequate steps to protect their trade secrets, those secrets will risk becoming unenforceable starting the first day the Trade Secret Directive goes into effect.
Confidentiality agreements with employees
One protective measure a company should implement concerns nondisclosure agreements and confidentiality provisions. These are often used in contracts with suppliers, customers and employees. The Trade Secrets Directive could, however, have an impact on such confidentiality agreements – particularly with regard to one of the biggest threats to trade secret disclosure: employees.
While the Trade Secret Directive states that contractual confidentiality provisions constitute a possible protection step and explicitly considers the use of trade secrets as unlawful where a person is in breach of a confidentiality agreement, the directive foresees special protection for employees. In particular, the directive states that limiting employees’ use of experience and skills they honestly acquired in the normal course of employment shall not be justified, and that imposing additional restrictions on employees other than those imposed in accordance with union or national laws shall not be deemed permissible either.
If taken literally, this could be understood to mean that confidentiality provisions in employment agreements are no longer allowed since German law itself does not impose such restrictions on employees. While it can be argued that during employment the duty of confidentiality (which originated from the employee’s duty to exercise loyalty toward his or her employer as established under case law by the German courts) qualifies as such a restriction “imposed” in accordance with domestic law, the situation becomes even more tenuous upon termination of employment. No statutory law stipulates duty of confidentiality for such cases. Furthermore, the courts are reluctant to impose this, requiring an assessment of all circumstances and interests involved in each individual case.
This hardly reflects the intent of the Trade Secret Directive. In addition to the Trade Secret Directive naming the use of confidentiality agreements as an example of taking a protective step, the recitals go on to explicitly reserve the possibility for agreeing on non-compete provisions with employees. This means that following implementation, nondisclosure and non-compete agreements should also remain permissible to the extent they currently are under national law.
And yet, it is foreseeable that these provisions will fuel arguments made by ex-employees that an existing contractual duty of confidentiality is void or that a statutory duty of confidentiality would not apply once employment has been terminated.
For this reason, reviewing the confidentiality provisions applicable to employees should be one of the top priorities when a company checks – or improves – its protection program for trade secrets.
Enforcement in court proceedings
The criticism has often been levied that current German law contains no special mechanisms to protect trade secrets in court proceedings. Lying at the heart of this criticism is, in particular, the plaintiff’s duty to identify the trade secret in a manner that enables enforcement of a decision. It has even been said that enforcing trade secrets in court would lead to the trade-secret owner losing both the trade secret and the trial, since he or she would be forced to reveal the secret and thereby make it public.
The protection of trade secrets in court proceedings was one of the main goals of the Trade Secret Directive when it began to be considered in 2013, but not much of this enthusiasm has survived.
Member states will be obliged to implement protection measures for civil procedures. These protection measures must include prohibiting trial participants from using the trade secret and limiting access to court hearings or to documents produced or submitted during the trial. However, the Trade Secret Directive also explicitly demands that at least one person from each party be granted access to such documents and hearings.
Particularly for Germany, this could mean a change in the practical handling of proceedings in those cases where the
“Düsseldorfer Verfahren” is applied, a special combination of procedural mechanisms that allowed for the applicant him- or herself to be barred from reviewing the outcome of inspection measures, but, more importantly, giving the person a chance to enforce an inspection claim in the first place. Whether the Düsseldorfer Verfahren will survive the Trade Secret Directive remains to be seen.
Since the Trade Secret Directive allows some discretion for member states to apply a higher level of protection, it can only be hoped that German lawmakers are bold enough to see the necessary implementation as a chance to introduce a thorough and balanced plan for protecting trade secrets in court proceedings.
Despite all opinions to the contrary, the Trade Secret Directive will most likely not lead to a lower level of protection for trade secrets. Rather, the directive can be expected to shift the boundaries to some degree without worsening protection altogether.
Much will also depend on how member states implement the directive, especially in terms of whether or not they will use the opportunity to implement tougher protection for trade secrets that reflects their importance to the business.
Irrespective of this, one thing is already clear to companies: More than ever, efficient protection of know-how will rely on companies implementing protection measures themselves. The Trade Secret Directive might therefore have the effect of strengthening the actual protection of trade secrets by setting higher hurdles for their legal protection.