The draft Trade Secrets Directive

Background

It is crucial that businesses are able to protect their confidential know-how to remain competitive in the increasingly competitive global economy. Vital know-how may, deliberately or otherwise, not be protected through registration of intellectual property rights such as patents, trademarks or registered designs.  Unlike US law, business methods are not patentable under the European Patent Convention, so businesses are left in a position where these are protected, if at all, only by national laws on trade secrets, and by restricting access to the information.  And although copyright may stop copying, it does not stop anyone using information if they can do so without copying. 

At present there is a great divergence in the protection of
trade secrets across the EU. Some countries have specific laws on the issue,
but many do not. Many Member States do not even define trade secrets, or do not
specify how and when they should be protected. Very few Member States have mandatory
rules in place to safeguard trade secrets during litigation.

It is no surprise, then, that businesses find it difficult to
understand and access the systems of other Member States. When they become
victims of misappropriation of confidential know-how, they are often reluctant
to bring civil court proceedings, as they are not sure the confidentiality of
their trade secrets will be preserved in the litigation process, let alone upheld
by the courts. A public consultation carried out by the European commission in
2011 concluded, inevitably, that the current fragmented system has a negative
effect on cross-border cooperation.

To ensure a minimum standard and effectiveness of protection
for trade secrets in all EU Member States, in December 2013 the European
Commission proposed a draft Directive to harmonise the law on trade secrets
(the Directive). In May last year the European Council proposed amendments to
the draft[1] and
the various sub-committees of the European Parliament have been working through
it over the past year. The final draft is expected to be produced this summer,
with a target for consideration and possible approval by the Parliament in
September this year. Member States will then have up to 2 years to implement it
into national law.

The current draft Directive:
Some highlights

Will the Directive
harmonise the law fully across all Member States?

The Council of the European Union has suggested the
Directive should set the minimum level of protection for trade secrets
(so-called “minimum harmonisation”). 
If this approach is adopted, Member States will be free to afford trade
secrets greater protection under national law than that under the Directive.

What is a trade
secret?

The draft Directive defines a “trade secret” as
information that:

• is secret, meaning that it is not generally known or readily accessible within the relevant circles;
• has commercial value because it is secret; and
• has been subject to reasonable steps, under the circumstances, by the owner to keep it secret.

The current draft Directive does not contain any guidance as
to what might be considered “reasonable under the circumstances”.  This is likely to be the subject of
litigation, but the steps required will depend on the value of the information
and how easy it is to keep that information secret.

What will be prohibited?

The draft Directive makes it unlawful to acquire, use or
disclose a trade secret in certain circumstances.

Acquiring a trade secret without the owner’s consent will be
considered unlawful when it is obtained:

• by unauthorised access to documents, electronic files or materials; or
• under circumstances which are considered “contrary to honest commercial practices”, including  in breach of a confidentiality agreement.

Unlawful use will also include the production, offering or
placing on the market of infringing goods, where the person carrying out such
activities knew, or should, under the circumstances, have known that a trade
secret was used unlawfully in their design, manufacturing or marketing.

A third party who receives a trade secret will also be an
infringer if they knew or should have known that the person passing it to them
was not authorised to do so. 

However, acquisition, use and disclosure of trade secrets will
be lawful where that acquisition, use or disclosure is required or allowed by EU
or national law.  For instance, rules on
whistle-blowing may permit the otherwise-unauthorised disclosure of
secrets. 

The draft Directive also, controversially, expressly permits
the acquisition of trade secrets by observation, study, disassembly or test of
a product or object that has been made available to the public or that it is
lawfully in the possession of the acquirer, without restriction of the right to
reverse engineer.

Are the protections
open to abuse?

Member States will be obliged to apply the Directive in a
manner that is proportionate. Where proceedings are brought abusively by a
trade secret holder and are “manifestly unfounded”, national courts
are obliged to take measures which may include a penalty payment to the
defendant, imposing sanctions on the claimant or ordering the dissemination of
the information concerning the court’s judgment.  

There is no guidance as to what may constitute manifestly
unfounded proceedings. In many cases the alleged infringer will consider
themselves entitled to do what they have done and so any claim against them to
be unfounded.  This is likely to be the
subject of national court and ultimately CJEU decisions.

How long will you have
to bring claims?

The maximum limitation period to bring proceedings has been
increased from the two year period the Commission first proposed, to six years.
 However, the draft Directive does not
provide a mandatory limitation period but leaves it up to Member States to determine:

• when the limitation period begins to run (for example, from the date of the breach, or the date upon which the trade secret holder becomes aware, or should have become aware of the breach?);
• the duration of the limitation period; and
• the circumstances under which the limitation period is interrupted or suspended.

This very broad discretion, if it remains in the final
Directive, will undo a lot of the value of the harmonisation.  Businesses will need to be aware of the
shortest limitation period which could apply, and manage differences in the
impact of interruptions or suspensions of it under different regimes.

Will confidentiality
be preserved during proceedings?

One of the key areas of divergence amongst Member States,
identified by the Commission, is the ability to enforce confidentiality over
trade secrets by bringing proceedings, whilst also preserving that
confidentiality throughout the court proceedings themselves.  This is addressed in the draft Directive.
Member States must provide measures which the Court can apply, upon a party’s
request, to preserve the confidentiality of the trade secret during proceedings.
 

Such measures, including confidentiality clubs, restricting
access to relevant documents on the Court file and making available a
non-confidential version of any judicial decision, are already common in
England & Wales and some other Member States. The harmonisation of those
protections across other Member States will be welcomed.

What interim remedies
will be available?

The draft Directive provides for interim protection if there
is proper evidence that a trade secret exists, that the applicant is the owner,
the trade secret has been obtained unlawfully and it is being used or disclosed
or that use or disclosure is imminent. This may include an order for cessation
of the disclosure, prohibitions involving the infringing goods and/or seizure
of the infringing goods.

As an alternative where infringement is continuing, national
courts may ask the defendant for security to compensate the holder of the trade
secret, if successful at trial. However, there are no provisions to penalise continued
infringements.

What sanctions can a
court impose at the end of proceedings?

Under the draft Directive, following a finding of an
unlawful acquisition, use or disclosure, courts may order:

• a cessation or prohibition of the use of the trade secret;
• a prohibition to produce the infringing goods;
• a recall of the goods from the market; and/or
• destruction of infringing goods or material recording the trade secret.

These measures may be revoked if the trade secret subsequently
ceases to be a trade secret.

Alternatively, where the infringer neither knew, nor had
reason under the circumstances, to know that the trade secret was obtained from
another person unlawfully, courts may order damages to be paid, if alternative
measures would cause disproportionate harm and pecuniary compensation is
reasonably satisfactory.  Both
‘disproportionate’ and ‘reasonably satisfactory’ are broad terms likely to be
the subject of divergent interpretations, and so disputes, in due course.

How will courts assess
the level of damages?

Courts will be able to award damages for lost profits,
unfair profits, moral prejudice, or as a lump sum calculated on the basis of royalties
or fees due from the infringer if they had requested authorisation for use of
the trade secret.  These remedies mirror those
in the Intellectual Property Enforcement Directive 2004/48/EC (the Enforcement
Directive).

Courts may however restrict liability for damages of employees
towards employers for use of the trade secret when they act without intent.

What about the costs
of litigation?

There are no provisions in the Directive as to recovery of
costs. Therefore this will be left to national courts.

Not the complete
answer

While the Directive will go some way at least to harmonising
national laws for the protection of trade secrets, the current draft at least
leaves a number of questions unanswered:

What does
“unlawful” mean?

The question of when the acquisition of information is to be
considered contrary to “honest commercial practices”, and therefore
unlawful, is likely to be the subject of litigation.  Where this is decided differently by
different national courts, this will result in varied levels of protection
across the EU. In Member States that have a law of unfair competition (which
the UK does not), this is likely to influence the national interpretation of
“honest commercial practices”.  Ultimately, clarification is likely to come
through the CJEU.

The concept of unlawfulness is complicated further by the
global market.  For instance, consider
the situation where an employee leaves an EU employer and emigrates to another
part of the world – Latin America, say. 
Once there, she discloses trade secrets about her former employer’s
products and her new employer uses these to develop a competing product.  An enterprising EU importer then seeks to
bring those goods into the EU through Spain or Portugal. What can the former
employer do to prevent this? 

If the employee’s disclosure was lawful under the laws of
the Member State of import, then the importer can probably rely on that to
resist any EU action for an injunction or Customs seizure.  But if the disclosure was lawful under the
laws of the Latin American country where it took place, but would have been
unlawful under the laws of the Member State of import, it is less clear what
the outcome of an EU action would be.

Who “owns”
the trade secret?

The draft Directive maintains the position current in all Member
States’ laws, that a trade secret is not a property right.  Accordingly, it is not possible to
“own” a trade secret. 

Instead, the Directive refers to the holder of a trade
secret, being the person who lawfully controls the trade secret. This absence
of ownership contrasts with the default position in patent and copyright law, where
the rights in work done by an employee automatically belong to the
employer.  Employers will not automatically
be the holder of trade secrets in an innovative idea. It will be important that
this is provided for in employment contracts.

What about the
Enforcement Directive?

The draft Directive states that where there is any overlap
with the Enforcement Directive, the Directive (i.e. the Trade Secrets
Directive) takes precedence.  This is
consistent with the Enforcement directive, which contains no mention of trade
secrets. 

How do I ensure that
any evidence is preserved?

One provision notably lacking from the current draft
Directive is any requirement for Member States to provide a means of preserving
evidence pending the start of proceedings. 
Many Member States do have such measures – the English Search Order or
the Belgian, French and Italian saisi(e)
– but it must surely be one of the most important foundations of an action to
prevent misuse of information, to be able to obtain evidence of what is being
done in the first place. 

Where does an
employee’s skill and knowledge end and confidential information start?

In the case of ex-employees using confidential information, a
difficult issue frequently arises as to where the boundary lies between the
employee’s general skill and knowledge, including enhancements gained in the
course of a particular employment, and information that is specifically
confidential to a particular employer.

The draft Directive does not attempt to provide clarity on
this boundary, leaving it to national courts to decide. So while the objective
of the Directive is harmonisation, protection across the EU is likely to vary
in this respect, as political and public policy approaches to freedom of
employees versus employer protection differ from country to country.

On the right track

The draft Directive has been broadly welcomed, and its
legislative progress has been rapid compared to other measures, such as the
reform of trade mark law, also under consideration by the EU.  Clearly, the current disparity of laws is a
major weakness in protecting value in a knowledge-based economy, so any degree
of harmonisation must be a good thing.  

However, the absence of a harmonised limitation period will
result in a complex strategic analysis for any business looking to enforce its
rights. And the lack of guidance on some crucial provisions and absence of the
complete tool-kit of measures for enforcement mean that there is still room for
considerable improvement in the Directive’s final revision stage. 

[1] http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/intm/142780.pdf