Framed? Industrial “espionage” in Hungary may not be as criminal as you think

Discreet and unobserved,
Merpel watches everything ...

While most of the material for this weblog comes from the well-trodden pathways of European Union, British and United States law, the IPKat is ever-vigilant to spot significant and/or interesting developments elsewhere. Rarely do any of the Kats have a chance to reflect on anything Hungarian unless it's on a menu and full of paprika, so it is with great pleasure that they welcome this guest post from young Hungarian IP scholar Adam György, who is currently studying for an LLM in the Munich Intellectual Property Law Center (here). Adam has been telling us all about a real cloak-and-dagger episode, a tasty blend of stolen secrets, airport arrests and the close textual analysis of the criminal provisions that govern intellectual property theft in Hungary. This tale also has an element of mystery in it, since the victim in this case appears to be a generic pharma company complaining about the theft of, among other things, its patents.  This is what Adam writes:

"Industrial 'espionage' in Hungary 

On 6 February, in Case 3.Bf.245/2012, the Budapest Metropolitan Court of Appeals gave final judgment in a leading case on the infringement of industrial property rights, in criminal proceedings brought against three anonymised defendants for industrial espionage.

Hungarian criminal law was modified when the TRIPS agreement was implemented into national law by a new section 329/D into the Criminal Code entitled ”Violation of industrial rights”. Previously the Criminal Code only penalised the unauthorised use or exploitation of an invention protected by patents; the new section now penalised imitating or copying the subject matter of protection.

In 2008 two former employees of a Hungarian undertaking – a producer of generic laboratory medicines – were arrested at Budapest Airport when they were about to leave for a business meeting in Moscow. The Investigating Authorities accused them of downloading their former employer’s documents containing its intellectual property, alleging that they intended to exploit the downloaded patents, formulae and other manufacturing data in Russia to the benefit of their new employer.

The two employees and the manager of the new employer were charged with violation of trade secrets and violation of industrial rights, as well as with causing damage of some 10.8 million Euro to their former employer through their actions.  This sum was calculated by an expert witness whose background was in medicine rather than by an expert in technology or patent law; this calculation was accepted by the Investigating Authorities, being calculated as reflecting the former employer’s loss of profit through the copying of its patents and their being offered to third parties..

The State Prosecution Office considered these allegations to be well founded and, in bringing their prosecution, sought imprisonment and the reimbursement of damages. The first instance court, the Metropolitan Court of Budapest in Decision 9.B.529/2010, sentenced one of the accused to 20 months imprisonment, the other two receiving 14 months. Further, they were jointly ordered to pay the 10.8 million Euro damages.

The accusation of industrial espionage on behalf of the Russians sparked off much media attention and the case received huge coverage in Hungary. The defendants’ lawyers had a hard time defending such a non-conventional criminal case in which the Prosecution Office based its claim on violation of intellectual property rights. The managing attorney-at-law and patent attorney partners of SBGK Patent and Law Offices helped out the defence; they had to assess whether the provisions of the Criminal Code, and the criminal law itself, were a sufficient basis on which to examine the scope of violation of industrial rights, or whether that exercise should be done in conjunction with the civil law provisions governing the protection of intellectual property. As the applicable provision of the Criminal Code referred to the ‘protected value’ (ie. intellectual property) only briefly and contained no specific definition, it could only be regarded as a “frame” provision, in which case further legislation dealing with the protection of intellectual property would have to “fill out the frame” of the provision, this being Act XXXIII of 1995 on the Protection of Inventions by Patents (the Hungarian Patent Act). The actions of the defendants would therefore have to be examined under the relevant rules of the Patent Act dealing with patent infringement.

SBGK’s “frame” argument was fully adopted by the second instance court. In its view, under Section 35 of the Patent Act patent infringement could only be committed by unauthorized use of an invention that was under patent protection. Only conduct which results in the production or realisation of a patented invention could fall under the utilization requirement of patent infringement. The defendants’ actions did not amount to such utilisation because they were arrested at the airport, before any production or commercialisation of the patent had occurred. Section 329/D of the Criminal Code being a 'frame' provision, the criminal court could not establish infringement or violation of industrial rights, even if the defendants’ actions were covered by the wording of the Criminal Code, if under the civil legislation their action did not qualify as patent infringement. Further, the aggrieved party admitted that it was a manufacturer of generic laboratory medicines. Since most of its formulae were not protected by patents, they could only be regarded as trade secrets.

While all this was happening, the defendants’ new employer applied for a declaration of invalidity of patent no. 209211 (diagnostic method and set of reagents for haematological examinations) with the Hungarian Intellectual Property Office (HIPO), claiming that the patent was anticipated by prior art in the US and therefore lacked inventive step.  This application was remitted to HIPO after its first decision was set aside by the Metropolitan Court of Budapest, the court asking HIPO to assess the prior art as a whole when determining lack of inventive step.

Regarding damages, the defendants maintained that they should be assessed on the basis of a licence analogy, as is commonly done in civil litigation for patent infringement. Such damages must be assessed in terms of causation resulting from use of the patent. In this case, since there had been no use, no damage was incurred.

The Metropolitan Court of Appeals agreed with the defence that intellectual property rights are special protected rights which differ from other rights which are protected by criminal law. Accordingly, when evaluating whether conduct gives rise to criminal liability, the specialised legislation must be taken into consideration, like the Patent Act in this case. The second instance court had concluded that the defendants’ conduct did not qualify as a violation of patent rights but only a violation of trade secrets. It therefore commuted the prison sentences to penal fines. The claim for damages by the aggrieved party was rejected in its entirety.

As this case shows, the criminal law enforcement of intellectual property rights must be seen in the light of both civil law and criminal law and that the scope of civil protection of patent rights cannot extend to criminal law. This case also leaves open the question whether the criminal court could or would have sentenced the defendants for violation of industrial rights if utilisation had occurred but the patents on which the charges were based were under examination in a patent invalidation case. If the criminal court does not suspend proceedings until the validity of the patent is determined, one may be convicted on the basis of violation of an industrial right which is subsequently declared invalid". 

If you want to more about this case, SBGK will be delighted to tell you if you email them here.
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