Importance of trade secrets (for start-ups)

Intellectual properties, such as brands, technologies, creative works, marketing concepts or know-how, belong to the most important assets of every enterprise. This is particularly true for start-ups, considering that a start-up is typically based on a (valuable) idea or business concept, which the founders intend to commercialize.

While such idea or concept is, of course, intellectual property, a mere idea is not protected by intellectual property rights (“IPRs”). Thus, at first, the start-up will have to rely on the protection of the idea or concept as a trade secret. This was also emphasized by the European Commission when pointing to the fact that „every IPR starts with a secret“, whereby the Commission added: "Writers do not disclose the plot they are working on (a future copyright), car makers do not circulate the first sketches of a new model (a future design), companies do not reveal the preliminary results of their technological experiments (a future patent), companies hold on to the information relating to the launch of a new branded product (a future trademark), etc".

While certain ideas or concepts may later be protected by registered or unregistered IPR’s, other information is rather kept secret because,

  • there is no adequate IPR available (e.g. for protection of customer data, delivery conditions etc),
  • the protection (e.g. by patents) is too expensive or
  • the protection as a trade secret has simply advantages (e.g. if reverse engineering is not possible, the inventor of a new technology or a certain formula may decide to keep it secret rather thanseeking patent protection, which requires (unwanted) publication and to enjoy unlimited protection).

New Directive strengthens protection

Being aware of the importance of confidential know-how and business information (commonly referred to as "trade secrets"), the EU has recognized that the protection in the member states is inconsistent and often insufficient. Thus, with the Directive (EU) 2016/943, a modern – and for the first-time EU-wide harmonized – regime for the protection of trade secrets was established. The Member States will have to transpose the directive into their national laws by 8 June 2018.

While the directive does not only contain a definition of trade secrets (which is new in Austria; see below), it also determines the scope of protection of the owner, who may prevent any unlawful acquisition, use or disclosure of a trade secret. Under certain conditions, the production, offering or placing on the market of infringing goods including import, export or storage, will be considered unlawful and may thus be prevented just as well. The directive requests the Member States to provide a wide range of claims in case of infringements, including a claim for injunctive relief, which may be secured by an interim injunction.

However, it is important to note that under the directive, no exclusive rights in trade secrets are granted. Thus, competitors are free to independently acquire the knowledge protected by the trade secret, whereby also reverse engineering is permitted. Exclusive rights may only be obtained via IPR’s.

New: Obligatory protection measures

The harmonized legal definition of protectable "trade secrets" is one of the core elements of this directive: "Trade secret" is defined as information which meets all of the following three requirements:

  • Secrecy: The information must be secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among, or readily accessible to persons within the circles that normally deal with the kind of information in question.
  • Commercial value: The information must have commercial value because it is secret.
  • Protection measures: The information must have been subject to reasonable steps taken by the person lawfully in control of the information to keep it secret under the circumstances.

While the first two requirements are rather obvious and not really surprising, the last requirement is new from an Austrian perspective as the owner of a trade secret will actively have to prove that he had taken reasonable steps to keep the information secret. Against this background, start-ups and other companies are well advised to already now identify their valuable know-how and business information and to implement protection measures. It may take some time until sufficient guidance from the courts is available, including a clarification whether there are any "absolute prerequisites" in this respect. In the meantime an initial "tool box" of such technical, organizational and contractual measures may include:

  • Installing a secrecy policy;  
  • Appointing a person responsible for the secrecy regime;  
  • Monitoring compliance with the secrecy policy;  
  • Limiting the information to the necessary information and the number of people who receive such information to those who (really) need to know it (in-house staff as well as external contractors),

o   knowing their identity,

o   informing them about the secrecy requirement and

o  binding them by a (contractual) non-disclosure obligation (NDA's);

  • Storing documentation separately and securely (both paper and digital data by using locks/password/encryption).

Advantages and Requirements

The new directive will undoubtedly strengthen the position of start-ups owning trade-secrets by increasing legal certainty (in particular with respect to cross-border cooperation or trade) and facilitating the enforcement of rights throughout Europe. Against this background, also the monetary value and the marketability of trade secrets will be increased. However, on the other hand the directive requests companies to take care about their trade secrets and to implement sufficient protection measures – this should be started now and not only in June 2018, when it may already be too late.