Concerns about trade secret theft have been increasing in both the United States and Europe in recent years. Traditionally, American law disfavored trade secret protection vis à vis patenting on the basis that publication of inventions was good for the economy. Trade secret protection was largely a matter for state law and, although not pre-empted by the federal patent law, was seen as generally providing weaker protection. However, changes in patent law effected by the America Invents Act in 2012 included provisions that reduced the commercial risks that a business would run by trying to keep inventions as trade secrets rather than patenting them. In Europe, there was little consideration of trade secret protection at the European (EU) level and national laws dealt with the question in many different ways until a “Report on Trade Secrets for the European Commission” was published in 2011.
This is about to change. The Defend Trade Secrets Act of 2016 was signed into law by President Obama on 11 May 2016. 16 days later, the European Council adopted a directive on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure, which will need to be implemented in all of the EU Member States by national legislation within the next two years.
The American Defend Trade Secrets Act has four main features:
- creation of a civil right of action in federal district courts for those who have suffered misappropriation of a trade secret related to a product or service used in or intended for use in interstate or foreign commerce;
- creation of a new right of civil seizure whereby in extraordinary circumstances a court may grant an ex parte application providing for seizure of property necessary to prevent the propagation or dissemination of a trade secret;
- increasing the maximum fine under the Economic Espionage Act from USD 5 million to the greater of USD 5 million and three times the value of the stolen trade secret; and
- providing some protection for whistle blowers.
The EU Directive sets out minimum standards for protection of trade secrets but, subject to certain requirements, member countries of the EU can provide for more far-reaching protection against the unlawful acquisition, use or disclosure of trade secrets than that required by the Directive. Principle features of the Directive include requirements that countries that are part of the EU:
- ensure that trade secret holders can seek relief to prevent, or obtain redress for, the unlawful acquisition, use or disclosure of their trade secret.
- provide for the measures, procedures and remedies necessary to ensure the availability of civil redress against the unlawful acquisition, use and disclosure of trade secrets that are: (a) to be fair and equitable; (b) not to be unnecessarily complicated or costly, or entail unreasonable time-limits or unwarranted delays; and (c) to be effective and dissuasive.
- ensure that the competent judicial authorities may order any of the following provisional and precautionary measures against the alleged infringer: (a) the cessation or, as the case may be, the prohibition of the use or disclosure of the trade secret on a provisional basis; (b) the prohibition of the production, offering, placing on the market or use of infringing goods, or the importation, export or storage of infringing goods for those purposes; (c) the seizure or delivery up of the suspected infringing goods, including imported goods, so as to prevent their entry into, or circulation in, the market or as an alternative make the continuation of the alleged unlawful use of a trade secret subject to the lodging of guarantees intended to ensure the compensation of the trade secret holder. Disclosure of a trade secret in return for the lodging of guarantees shall not be allowed.
Comparison between the Defend Trade Secrets Act and the EU Directive
Both the US and the EU are parties of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which provides minimum standards of protection for patents, copyrights, trademarks, and trade secrets. Although, the TRIPS Agreement does not use the words “trade secrets,” it does provide that in order to “ensure effective protection against unfair competition,” signatories to the Agreement must protect individuals and corporations, who own or control “undisclosed information” from unauthorized disclosure, acquisition, or use “without their consent in a manner contrary to honest commercial practices.”
Consistent with the wording of TRIPS, both the Defend Trade Secrets Act and the EU Directive include analogous “basic” provisions on trade secrets, including what constitutes a trade secret and how a violation occurs. On the other hand, the US and the EU law differ on some aspects of trade secrets protection, as will be discussed below.
The Defend Trade Secrets Act and the EU Directive provide a:
- Similar definition of trade secrets: despite the different wording used, the Defend Trade Secrets Act and the EU Directive share the same scope. Both jurisdictions, indeed, protect the information which the owner has taken reasonable steps to keep secret and which derives an economic value from the fact that it is confidential.
- Similar lawful conducts: both the Defend Trade Secrets Act and the EU Directive consider an acquisition of trade secrets lawful, when the trade secret is obtained by any of the following means: reverse engineering, independent derivation, as well as “other lawful means of acquisition” (according to the Defend Trade Secrets Act), or “other honest commercial practices” (according to the EU Directive).
- Similar provision of confidentiality during legal proceedings for trade secrets misappropriation: the EU Directive provides for specific measures to protect trade secrets during litigation, including restricting access to documents and to hearings. In this regard, to preserve confidentiality, an applicant must first supply a “duly reasoned” application as to why certain information should be kept confidential. Similarly, the Defend Trade Secrets Act states that the court may not authorize or direct the disclosure of any information the owner asserts to be a trade secret “unless the court allows the owner the opportunity to file a submission under seal that describes the interest of the owner in keeping the information confidential.”
- Similar provisions regarding the mobility of employee: both the Defend Trade Secrets Act and the EU Directive reinforce the importance of employee mobility. In this regard, the EU Directive expressly states that their provision should not be understood to offer any ground for restricting the mobility of employees.
- Partially similar remedies: the EU Directive and the Defend Trade Secrets Act provide injunctive relief, corrective measures, and damages as remedies in case of trade secrets violations. However, the Defend Trade Secrets Act includes a specific provision for ex parte seizures of trade secret information. According to the new provision, a court may “issue an order providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret.” This seizure remedy can be used only in “extraordinary circumstances,” and its application is based on an affidavit or a verified complaint. The EU directive leaves such issues to national law.
The Defend Trade Secrets Act and the EU Directive show some dissimilarities regarding the:
- Limitation period: The Defend Trade Secrets Act provides a limitation period of three years from the date the owner “knew, or should have known” of the trade secrets’ misappropriation, while such period lasts no more than six years under the EU Directive. However, at the EU level, Member States can determine when the period begins and under what circumstances it may be interrupted or suspended.
- Whistleblower protections: The Defend Trade Secrets Act provides “immunity” from liability for disclosing a trade secret only when the disclosure is confidential and made to the government or in a court filing (under seal), but does require employers to notify employees of this immunity notice of this immunity in any contract or agreement with an employee entered into or updated after the law comes into force that governs the use of a trade secret or other confidential information. Failure to do so may limit the employer’s ability to obtain exemplary damages or attorney fees in a federal trade secrets action against an employee to whom notice was not provided. By the contrast, the EU Directive provides broader protections for whistleblowers, in that it provides an exception whenever the respondent acted for the purpose of protecting the general public interest and trade secret protection is specifically subject to the exercise of the right to freedom of expression and information including respect for the freedom and pluralism of the media.
- Possibility of increased damage awards: The Defend Trade Secrets Act provides that if the trade secret is “willfully and maliciously misappropriated”, exemplary damages are due in an amount which should not exceed two times the amount of the damages awarded. To the contrary, punitive damage are absent at the EU level.
- Jurisdiction over extraterritorial conduct: The Defend Trade Secrets Act provides courts with broad jurisdiction over conduct occurring outside the United States. Such provision is absent at the EU level. However, EU Member States may broaden the protection.
- Criminal liability: United States law provides potential criminal liability for wrongful acquisition, use, or disclosure, whereas the Directive is silent on this aspect. However, EU Member States may provide for more far-reaching protection against the unlawful acquisition, use or disclosure of trade secrets, than that required by the Directive.
- Downstream use of a misappropriated trade secret: The question of the possible remedy against a party selling or using a product that has been produced by a stolen trade secret is not entirely clear under the Defend Trade Secrets Act. The definition of “misappropriation” of a trade secret includes “use” of the secret as well as the initial acquisition of it and it remains to be seen how the courts will interpret this. Under prior state law, similar language has been held to include not only embodiment of the secret in a product but also acceleration of a product’s development, solicitation of sales and other activities that unjustly enrich another party or cause economic detriment to the trade secret owner. Under the EU Directive, “the production, offering or placing on the market of infringing goods, or the importation, export or storage of infringing goods for those purposes, shall also be considered an unlawful use of a trade secret where the person carrying out such activities knew, or ought, under the circumstances, to have known that: (a) the trade secret was used unlawfully; (b) the trade secret was acquired unlawfully; (c) the person bound by a confidentiality agreement or any other duty not to disclose the trade secret breached such obligation; or (d) the person bound by a contractual or any other duty to limit the use of the trade secret breached such obligation.” The “ought to have known” provision in the EU directive has provoked some concerns that this provision could be used against innocent sellers of goods who will be put in the position of having to prove that they did not know of the trade secret theft and that there was no reason as to why they “ought to have known.”
Although the main similarities and differences on trade secrets’ protection seem already delineated, an actual evaluation of the US and the EU protection of this field of intellectual property will be possible only when the EU Member States will have enacted their own laws to comply with the Directive. EU Member States may indeed implement higher standards of trade secrets protection, than those currently provided by the Directive. This may inevitably lead to some discrepancies in the law applicable in the different Member States, as well as in law provided at the EU and US level.
The original version of this article was first published in Offshore Investment Magazine.
The author wishes to thank Vera Collavo for her contributions to the research and editing of this article.