This article was originally published on the Kluwer Patent Blog in February 2016.

A technology driven company whether large, medium or small and at every stage of its life cycle or development will need to consider the question of whether to patent or not to patent. Often a business chooses to refrain from filing a patent application at a particular point in time and instead relies on the law of confidential information and trade secrets as a form of protection.

Whilst trade secrets are the most intangible of intangible assets, they are nonetheless valuable business assets that play an important role in fostering innovation and in creating a competitive edge. Not surprisingly, there is significant commercial value in protecting trade secrets. Many innovative companies are increasingly relying on trade secrets to give them a competitive advantage but the legal landscape in Europe is not that easy to navigate.

So are trade secrets an alternative to patent protection – should the question that you ask be: to patent or not to patent? should you rely on trade secrets and confidential information instead of patents?

The position in the UK

The UK has one of the most well developed regimes for the protection of confidential information including trade secrets. What is loosely termed “The Law of Confidential Information” has developed over many years through a combination of the common law, equitable rights and contract law.

The law of confidential information requires the information to:

  • have the necessary quality of confidence;
  • be disclosed in circumstances importing an obligation of confidence; and
  • be used without permission to the detriment of the party communicating it.

We have to rely on case law to determine whether something has the necessary quality of confidence in that: "it must not be something which is public property and public knowledge"(1). Whether an obligation of confidence arises is subjective and one needs consider whether "a reasonable man standing in the shoes of the recipient of the information would have realised that upon reasonable grounds the information was being given to him in confidence"(2).

"An action in breach of confidence is based ultimately on conscience"(3) and in order for the conscience of the recipient to be affected, he/she must have agreed or must have known that the information was confidential. Thus a person who receives confidential information in circumstances where he/she does not appreciate that it is confidential is unlikely to be liable for misuse of confidential information, unless he/she is found to have "blind-eye knowledge". Nonetheless, if that person becomes aware that the information is, in fact, confidential he/she will become liable from that moment.

The courts in the UK are already sympathetic to the importance of maintaining alleged confidential information out of the public domain and there are arrangements that one can put in place without too much difficulty (as long as, of course, there is justification for it) to preserve confidentiality such as:

  • confidentiality clubs
  • private closed hearings
  • redacting confidential information from published judgments.

This is not the case in all EU member states which is a key reason why cases concerning confidential information are not litigated in many other EU Member States.

Trade secrets in the EU

There is an inconsistent view in EU Member States as to:

  • whether trade secrets are IP rights; and
  • whether the Enforcement Directive(4) applies to trade secrets, as IP rights are not defined in this Directive.

All EU Member States are signatories to TRIPS(5) and Article 39 sets out minimum levels of protection by which persons can prevent information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices (e.g. breach of contract, breach of confidence and inducement to breach), so long as such information is:

  • secret;
  • has commercial value because it is secret; and
  • has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

Despite some level of harmonisation through TRIPS, individual EU countries have a significant degree of autonomy as to what is protected and how it may be enforced, such that the legal regimes vary enormously across the EU and businesses often find it difficult to understand and access the systems of other Member States. As a consequence, enforcing trade secrets across the EU can be expensive and difficult to coordinate. These differences are illustrated below:

Click here to view table.

 Time for EU harmonisation? - The draft Trade Secrets Directive

Following a European Commission public consultation conducted between 2012 and 2013 and open to all interested parties and stakeholders, the Commission submitted an initial proposal for a draft Trade Secrets Directive(6) on 28 November 2013. On 26 May 2014 the Council adopted a General Approach, granting a mandate to the Presidency to start negotiations with the European Parliament, which commenced on 15 September 2015. On 15 December 2015, the Luxembourg presidency reached a provisional agreement on the draft Trade Secrets Directive with representatives of the European Parliament. This agreement was confirmed by the Committee of Permanent Representatives of the Council on 18 December 2015 and endorsed by the European Parliament's Legal Affairs Committee on 28 January 2016.

The draft Directive now needs to be formally approved by the European Parliament and the first reading is likely to take place in April 2016. If approved at the first reading without further amendment, Member States would then have two years to implement the Directive(7).

The draft Directive is intended to harmonise the definition of trade secrets across the EU and defines what constitutes lawful and unlawful acquisition of trade secrets under the Directive. It includes a range of remedies for trade secret misappropriation and requires Member States to put in place measures to preserve the confidentiality of a trade secret during court proceedings including, as a minimum, through setting up confidentiality clubs.

There are significant questions as to the extent to which the various laws that currently protect trade secrets and confidential information in the EU will be harmonised including:

  1. It is currently unclear whether the UK "law of confidential information" will run in parallel with the rights conferred under the draft Trade Secrets Directive or whether the UK courts may give precedence to EU law thereby narrowing the protection currently afforded in England.

Thus, for example, the definition of trade secrets under the Directive mirrors the definition of TRIPS and requires reasonable steps to have been taken by the person lawfully in control of the information to keep the information secret. Under the English law of confidential information, there is a focus on assessing the confidential quality of the information rather than the steps that have been taken to keep the information secret, and this difference could result in the narrowing of the definition of what might be considered a trade secret.

If the UK and other Member States apply the draft Directive in parallel to other existing rights that protect trade secrets and confidential information, it is inevitable that this will lead to increased legal complexity.

  1. The draft Directive provides significant discretion to Member States as to what remedies to apply under the Directive so long as such remedies are fair and equitable, not unnecessarily complicated or costly, are effective and dissuasive and in line with the principle of proportionality.
  2. The draft Directive also requires Member States to provide a clear limitation period for bringing claims pursuant to the Directive but such period can vary between different Member States and the circumstances in which the period may be interrupted or suspended can also vary.   There is also uncertainty as to the interpretation of certain terms under the draft Directive. A trade secret holder is currently defined as a "person lawfully controlling a trade secret" but there is no guidance as to what is required for someone to "control" a trade secret.

Infringing goods are currently defined as "goods whose design, characteristics, functioning, manufacturing process or marketing significantly benefits from trade secrets unlawfully acquired, used or disclosed". What is meant by "significantly benefits" is likely to be the subject of extensive submissions and evidence from both claimants and defendants and eventual preliminary references to the CJEU.

Furthermore, although whistleblowers are protected under the Directive provided that they act for the purpose of protecting the general public interest, the breadth of the protection is unclear. Will they be able to disclose any information relating to a misconduct, wrongdoing or illegal activity or should such disclosures be limited to the minimum amount of information required to establish such activity?

Nevertheless, whilst the draft Directive may not simplify trade secret protection across the EU by providing a fully harmonized approach, it is still a significant step forward as it should enable trade secrets to be effectively enforced in countries where legal remedies and measures for preserving the confidential status of the information during court proceedings are currently absent.

To patent or rely on confidential information, is that the question?

The table below illustrates the differences between patents and trade secrets:

Click here to view table.

Whether a business should seek patent protection or rely on keeping the information confidential will depend on a series of commercial, legal and scientific factors.

Some typical considerations are highlighted in the table below:

Click here to view table.

In recent years there has been a noticeable shift in people's attitude to trade secrets. Businesses in fast moving industries whose products have short life-cycles to be replaced by new generation products are relying increasingly on trade secrets. Business angels and venture capitalists are also becoming more sophisticated and comfortable in financing companies whose core IP might be protected, at least to some extent, by trade secrets.

Nonetheless, the IP management strategy should not necessarily involve a decision to "patent or not to patent". Patents and trade secrets need not be mutually exclusive strategies; the strategy can be much more subtle. So, for example, businesses whose products may be software-based and where patent protection may prove tricky may rely on trade secrets to protect their core algorithms and engage the patent system for the more functional components of their technology. Trade secrets can be used to effectively protect what is not patentable, what cannot be reversed engineered or what is difficult to develop by independent discovery. Care needs to be taken, however, to prevent 'leakage' of the information, by developing clear trade secret policies and implementing appropriate physical and digital security measures to protect trade secrets.

At early stages of innovation, before a technology is sufficiently developed to be patentable, trade secrets and patent law are complementary – i.e. the technology needs to be maintained confidential to enable a patent application to be made or for the right to commence an action for breach of confidence. Once the innovation is suitably developed to be patentable, patents and trade secrets may well become alternative forms of protection. A business, however, may decide to be selective as to what it discloses in its patent application and what it may keep as valuable confidential information. If there is subsequently an incremental improvement to an invention, trade secrets may again play an important role until, and if, the business decides to file another patent application.

So, rather than being considered an alternative to patents or other IP rights, trade secrets should be considered as both complementing and supplementing other IP rights depending on the status of development of an innovation and on the financial and commercial position of a business. Indeed, the best results are achieved by the strategic combination of protection through both patents and trade secrets.