TRADE SECRET THEFTS IN HUNGARY – WHICH COURT PROTECTS EMPLOYERS’ RIGHTS?

09 March 2023

Trade secrets are protected on more levels in Hungary. While the Business Secret Act provides general protection, the Labour Code protects the business secrets of employers in the employment context. Yet this abundance can cause problems when it comes to the question which court is competent to protect employer’s rights in case of theft of trade secrets by an ex-employee. Can an employer file a damage claim against an ex-employee and a competing company as co-defendants in front of the commercial court? Or is it the labour court which is competent to hear the case? A fresh decision of the Hungarian Supreme Court, analysed in this short article, deals with these questions.

1. Facts

The claimant (“Claimant”) a multinational software developer company worked on a specific project, the leader of the project was its employee, the second defendant (“Defendant 2”). The first defendant (“Defendant 1”) being a software developer company as well is the competitor of the Claimant.

In June 2018, the client of Claimant terminated the development contract in relation to the above-mentioned project. In July 2018, an executive employee of Defendant 1 informed Defendant 2 that in the future the project will be run by Defendant 1.

Later, several employees of Claimant took part on presentations where Defendant 2 interpreted for them and where they were also informed about the fact that Defendant 1 will work on the project and about the job opportunities at the Defendant 1.

Soon after, Defendant 2 gave a list to the HR manager of Claimant (who became the HR manager of Defendant 1) and asked him to prepare labour contract templates for Defendant 1 in respect of the listed employees. The HR manager, using the personal and employment related data of the employees – drafted the labour contract templates and sent them to Defendant 2.

In August 2018, twenty-seven (27) employees of Claimant gave notice to Claimant. To retain its employees, Claimant offered more favourable working conditions which was accepted by 7 employees, while the other 20 employees left the company. These employees, including Defendant 2 are currently employed by Defendant 1.

2. Claimant’s claim and defence of the Defendants

In the above context Claimant requested the court to establish the infringement of trade secrets and award damages. As the legal basis of his claim, Claimant indicated the provisions of the Civil Code[i][ii] on trade secrets and the Business Secret Act[iii].

Defendants requested the court to terminate the procedure and refer the Claimant’s action to the competent labour court as in the Defendants’ view, the Claimant’s claim against Defendant 2 is a claim stemming from the former employment relationship between Claimant and Defendant 2.

Regarding the merits of the case, Defendants claimed that Defendant 2 did not unauthorizedly disclose the Claimant’s business secrets or proprietary knowledge to Defendant 1, while Defendant 1 did not obtain and did not use the Claimant’s trade secrets.

3. The first and second instance judgement

The first instance court rejected the Defendants’ motion to refer the case to the labour court. In the court’s view, the Claimant asserted a claim against both Defendants because of the infringement of its rights protected by the Business Secret Act, the basis of its claim against Defendant 2 is the infringement of Claimant’s trade secrets and not a claim stemming from the employment relationship.

Regarding the merits of the case, the first instance court established that the Defendants infringed the trade secrets of the Claimant and, finding the claim for damages to be partially well founded, also found that they were liable for damages.

According to the first instance court the compilation of the list of the specialised employees and their base salary, other elements of their wage, the place and content of their employment and their work schedule constituted a business secret in the sense of the Business Secret Act, as it was not merely raw data, but the aggregation of the data which as a set of elements shall be considered as secret.

The second instance court shared the first instance court’s view that the dispute does not fall within the labour court’s competence given that the Claimant asserted exclusively its rights protected by the Business Secret Act and the subject-matter of the action is not the employment relationship between the Claimant and Defendant 2.

Though, in its judgement, the second instance court completely rejected the Claimant’s claim as the information being the basis of Claimant’s claim does not comply with the concept of trade secret in the sense of the Business Secret Act as it is not exclusively related to the Claimant's economic activity and has no pecuniary value.

4. The decision of the Supreme Court

However, the real surprise came with the decision of the Supreme Court establishing that the case falls within the competence of the labour court and terminating the procedure on this basis.

By analysing the provisions of the Business Secret Act and the Labour Code, the Supreme Court came to the conclusion that the subject-matter of the Business Secret Act shall also be interpreted in the employment relationship, its provisions shall also be applicable in the legal relationship between the employer and the employee. Thus, if the employee infringes the trade secrets of the employer, the provisions of the Business Secret Act cannot be interpreted independently of the relevant provisions of the Labour Code but shall be applied together, including the rules on the liability for damages.

According to the Supreme Court, a contrary interpretation would undermine the provisions of the Labour Code on the protection of business secrets and the related system of sanctions. Namely, in this case employers could invoke the fact that they do not base their claims arising from the infringement of trade secrets on the breach of obligations stemming from the labour contract and the Labour Code, but on the provisions of the Business Secret Act. This would also provide an opportunity for employers to exempt themselves from the special rules of labour litigation, thereby depriving employees of special procedural guarantees.

The Supreme Court highlighted that the provisions of the Civil Procedure Code[iv], disallowing the court to reclassify the legal title of the claim, do not apply in relation to the assessment of the competence of the courts. Thus, it is irrelevant that the Claimant did not indicate the provisions of the Labour Code as the legal basis of his claim.

Based on the Civil Procedure Code[v] in case a claimant asserts more claims at the same time, one of them is a labour dispute, while the other claims are not, the tribunal hearing the labour dispute shall have competence to try the case. Based on the above, the Supreme Court decided that the labour court shall be competent to hear the Claimant’s action.

5. The analysis of the decision

It is clear from the decision of the Supreme Court that when it comes to a trade secret infringement, the claimant as an employer cannot have the liberty to sue its ex-employee solely based on the Business Secret Act, but in this context, the provisions of the Business Secret Act and the Labour Code shall be applied together.

From procedural point of view, this has the consequence that the labour court will be competent to try the case and apparently not only in relation to the (ex-) employee but also in relation to the company to whom the employee disclosed the trade secrets.

The Supreme supported its argumentation with the well-settled case law, claiming that the acting courts applied together the rules of the Labour Code and the Business Secret Act[vi] in more decisions.

In one of the cases[vii], the ex-employee notified the employer’s certain business partners that his employment was terminated, and, in the future, he would work at a competitor who offers a wider range of services.

In the other case[viii] after informing the employer that he received a job offer from a competitor and would like to terminate his employment, the employee downloaded his employer’s client list and client related information. It is common in both cases, that the employers only sued their ex-employees, filed the lawsuits to the labour court and referred specifically to the provisions of the Labour Code.

Unlike the above-mentioned decisions, in the present case, the Claimant sued primarily the company to whom its ex-employee disclosed its trade secrets and did not invoke the provisions of the Labour Code at all.

Thus, the biggest concern in relation to the decision is that, practically, the Supreme Court reclassified the Claimant’s action against its competitor as an employment lawsuit, even though it was based on solely the provisions of the Business Secret Act.

While it is perhaps understandable that the Supreme Court wanted to protect employees against being sued before the general commercial court based on the general procedural rules, it is rather questionable whether it is a good direction to deprive employers from the principle of disposition[ix], their private autonomy and force them to sue their ex-employees on a certain legal basis.

Based on this decision, it seems that employers finding themselves in a similar situation in Hungary have two choices: either sue their ex-employees and their competitors before the labour court, invoking the provisions of the Labour Code or to sue them separately so that the general court can try the case at least against the competitor.