Psst, top secret!

Recent controversy around Huawei has fostered the belief that aggressive foreign governments, personified in the Chinese industrial spy, are the prime culprits when trade secrets are siphoned from Western companies. “But this is a misconception,” reports Daniel Hoppe, partner at Preu Bohlig & Partner. “Most cases of know-how theft involve a dispute between the injured companies and former employees.”

In its current draft law on the implementation of the EU Trade Secrets Directive 2016/943, the German Federal Government assumes that around 20 such cases will be brought before German courts. According to Hoppe, this number is hugely understated. His firm alone is currently working on around 20 cases.

Nobody knows the exact number because many companies choose to conduct proceedings before private arbitration courts, so as to prevent the leak in the company from becoming public. In state courts, such cases end up in criminal and IP divisions, but also sometimes in employment courts.

However, lawyers across Europe believe more and more trade secrets are being stolen. Tjibbe Douma, who recently moved from De Brauw Blackstone Westbroek to Dentons, confirms that the number of cases of misappropriation of trade secrets is growing and the Netherlands is likely to see a rise in trade secret litigation.

Hamburg-based Preu Bohlig partner Daniel Hoppe

Licence to print 

A complex case about an alleged theft of trade secrets which Hoppe is currently handling has recently hit the headlines. German newspapers report that König & Bauer Metallprint has accused a competitor founded by former employees of industrial espionage on a grand scale.

The Stuttgart-based company is a subsidiary of König & Bauer, the world’s oldest manufacturer of printing presses. A former employee is said to have stolen secret production plans and set up the company Hebenstreit Metal Decorating in Pleidelsheim, 16 kilometres away. Other König & Bauer employees followed him, and more secret documents allegedly found their way from Stuttgart to Pleidelsheim.

The case has all the hallmarks of a crime novel. Secret investigators were called in and the public prosecutor’s office has been investigating since 2013. Several criminal and civil proceedings are underway at the regional courts of Heilbronn and Stuttgart, as well as the Higher Regional Court Dresden.

Hebenstreit Metal Decorating retrofits and maintains old printing presses. König & Bauer claims the components used for this are based on the stolen construction plans.

The Pleidelsheim-based company and persons accused vehemently deny the allegations. Hebenstreit Metal Decorating refers to an expert opinion resulting from a visit ordered by the Regional Court Stuttgart, in which an expert was unable to prove that trade secrets were violated. This opinion is only provisional, however, as a ruling has not yet been given. The dispute has dragged on for six years, and still there is no end in sight.

Failing the grade

The applicable German legal standard for the dispute is Sections 17 and 18 of the Act Against Unfair Competition. These should have become invalid by 9 June 2018, when the Trade Secrets Directive came into force. Unlike countries such as France, Italy, the Netherlands and Poland, Germany has failed to properly implement the directive. Even the Brexit-stricken United Kingdom introduced it in time for the cut-off date.

Implementation of Trade Secrets Directive across the EU. Since publication, Spain has also announced that the Trade Secret Directive will come into force on 13 March 2019.

In Germany, it was supposed to be in place by last December. But the German Bundestag is still discussing the Federal Government’s bill (19/4724). Experts now claim the parliamentary debate will be concluded at the end of February. But that is by no means certain.

The law is still stuck at the stage of the House legal committee. The main bone of contention is the regulations on whistleblower protection, which above all have journalist and employee associations up in arms.

The law awards privileged status to whistleblowers when they uncover unlawful or other misconduct by which trade secrets are obtained. But only if it is in the general public interest.

The regulations, which were laboriously negotiated at European level, were adopted one-to-one by the German legislators. Employee organisations, however, lambaste the regulations as “muzzles for employees.”

The German Confederation of Trade Unions (DGB) does not believe that the guidelines have been implemented far enough and claims they are a threat to elementary employee interests, such as free communication and professional mobility. The DGB also fears abusive secrecy practices in companies and therefore calls for existing labour law regulations to take precedence.

Journalists fear that freedom of information will be restricted and that journalists may be prosecuted for exploiting trade secrets. The Federal Ministry of Justice, on the other hand, which is in charge of the project, refers on its website to stronger protection and greater legal certainty for journalists than before.

However, many legal experts have seen little scope in the legislation which meets these demands.

Frankfurt-based Reed Smith partner, Anette Gärtner

Right direction

Despite the criticism of whistleblower protection, some German lawyers praised the first draft bill in the summer as a far-reaching turning point for know-how protection in Germany. Reed Smith partner in Frankfurt, Anette Gärtner, said at the time that classing trade-secret protection as something more akin to a property right takes account of its economic significance.

“The injured party can now directly take the civil-law route without the detour via a public prosecutor’s office,” says the Düsseldorf patent litigator Anton Horn of Heuking Kühn Lüer Wojtek, praising an important advantage in the new legislation.

Elsewhere in Europe, too, the directive has largely been met with approval. From London to Berlin, experts see Europe-wide harmonisation as progress, above all because there is now a reliable framework similar to that in the US.

The US introduced the Defend Trade Secrets Act in 2016. China also used the revision of antitrust law in 2018 to regulate the issue anew. And Korea is also striving to improve protection of trade secrets.

The impetus for these legislative efforts is increased pressure from business. According to a study by Germany’s digital association Bitkom, German companies suffer an annual loss of €50 billion from the theft of trade secrets and data. “In some industries, companies are considering very carefully whether to patent innovations and thus disclose them – or whether they prefer to keep them a trade secret,” says Anette Gärtner.

This is often the case when the result is not a new product but a significant improvement in the production process. Even companies whose products are based on particular formulations weigh very carefully when choosing between know-how protection and a patent.

Higher demands

In future, trade secrets in Europe will include information that is neither known nor accessible in its entirety nor in detail within the professional community. They must be of economic value to businesses and in addition companies must make reasonable efforts to keep them confidential.

Owners of know-how will be able to sue infringers and their products for injunctive relief, damages and information. They can achieve the surrender, destruction and recall of products on the market. As a result, the rights of owners of know-how are just as extensive as those who own trademarks and patents. However, because a trade secret can theoretically be valid forever and is not limited in time like a patent, the legislation excludes the claims in individual cases if they are disproportionate, for example with regard to the value of the secret or the conduct of the infringer.

But with the definition of trade secret, the EU Directive and German law also impose obligations on the holders. For example, they must take and document confidentiality measures. Courts will have to follow this up in future. It is very likely that defendants will then doubt whether the plaintiff’s confidentiality measures were sufficient. This could distract from clarifying the actual question of whether know-how has been stolen or infringed.

State courts upgraded

Experts across Europe agree that companies need a strategy to protect their trade secrets (>What to do?). “Many companies have already considered a trade secret policy in light of the new US and EU legislation, but what is needed is an actual worldwide trade secret strategy to prevent trade secret issues and allow enforcement against infringing goods. Many companies still need to put their heads together,” says Douma. “Those who have business in the US and have therefore already had to adapt to the existing US practice are at an advantage.”

Tjibbe Douma is partner at Dentons in Amsterdam ©Mark Prins Fotografie

The new legal situation will lead to more litigation throughout Europe. In Germany, for example, the Federal Government estimates an “increase of 80 cases per year.” However, considering that the present estimate of 20 proceedings was far too low, this is probably also an understatement.

In addition, Germany will upgrade its public courts in competition with private arbitration tribunals by offering the possibility of protecting trade secrets from the public or access by the opposing party.

At the request of one of the parties, the court may classify information as confidential. The parties must then keep this information confidential and may not use or disclose it. Gärtner sees this as the introduction of the so-called confidentiality club in Germany based on the British model.

Moreover, German law is fostering more specialisation in the public courts. In the future, only regional courts will be responsible for trade secret matters. The government wants to authorise the federal states to set up special chambers for know-how protection at individual regional courts. This should also make the public courts more attractive.

Many lawyers would also like to see know-how protection cases assigned to existing patent chambers with technical know-how, such as the regional courts of Düsseldorf, Hamburg, Mannheim and Munich.

Selling secrets?

Currently, proceedings often take place at the district courts. In Cologne, for example, a case where China stands accused of industrial espionage is being tried this summer. The Cologne-based chemical company Lanxess is taking action against two former employees. The two German-Chinese citizens are said to have stolen important trade secrets for the manufacture of a new product and sold them in China.

The news agency Reuters reported that the Cologne public prosecutor’s office brought charges against the two former employees in June 2018. Proceedings will now begin in Cologne’s district court on 26 June and 3 August. Previously, the Regional Employment Court in Düsseldorf had already ordered a former Lanxess employee to pay damages. But it looks like this case will drag on.

Protracted proceedings are repeatedly seen as a major problem for the effective protection of trade secrets. “On the one hand, this is partly because the courts lack specialisation as there isn’t the concentration of jurisdiction that there is in, for example, patent infringement cases,” says expert Daniel Hoppe. “On the other hand, criminal investigations are often very protracted, as the prosecution authorities have limited resources,” explains Hoppe. But eliminating these is probably not desirable either. “Because in order to get to the crucial information at all, we’ll have to keep working hand in hand with prosecutors.”