The new EU Trade Secrets Directive aims to harmonise the protection of trade secrets across all EU Member States. The reform seeks to give businesses greater confidence in sharing trade secrets across multiple Member States by ensuring a minimum level of protection. In turn, it is hoped, this will foster cross-border research collaboration, production cooperation, outsourcing and investment. Whilst the introduction of a minimum standard of trade secret protection is welcome, there is much scope for differing implementations and interpretations of the Directive across Member States, which could undermine the overall harmonisation.
The Directive has now been formally adopted by both the European Parliament and the European Council (as of 27 May 2016). Member States will have two years from its publication in the Official Journal of the EU, which is expected in the next couple of weeks, to incorporate the Directive into domestic law.
Trade Secrets and the Motivation for Reform
A trade secret is in essence any confidential information that has commercial value or gives a business a competitive edge. Trade secrets cover a wide range of subjects and can be as varied as a manufacturing process, a list of customers or the recipe of a fragrance. The law of trade secrets can protect information that cannot be protected by true intellectual property rights, such as patents or copyright. In addition, relying on the protection of trade secrets can have a number of advantages over other methods of protection, as there are no costly registration requirements for trade secrets and there is no limit to the duration of protection (provided the information remains secret).
The legal regimes of EU Member States vary greatly in their protection of trade secrets. For example, there is no common definition of what a trade secret is between Member States and some do not define the concept at all. Similarly, the relief available to trade secret holders also differs among Member States. Furthermore, the law relating to trade secrets has a variety of sources from Member State to Member State (deriving variously from employment legislation, unfair competition legislation, IP legislation and common law confidentiality). The Directive will set a minimum standard for the protection of trade secrets. Any Member State may choose to legislate for stronger protection, subject to safeguards in certain specific areas (such as in relation to whistleblowing).
The Key Provisions of the Directive
The Directive defines a “trade secret” as information which:
- is secret in that it is not “generally known among, or readily accessible to, persons within the circles that normally deal with this kind of information”;
- has commercial value because it is secret; and
- has been subject to reasonable steps, under the circumstances, by the controlling party to keep it secret.
This definition (which derives from Article 39 of the TRIPS Agreement) leaves much room for interpretation. For example, it is not fully clear how easily accessible information needs to be in order that it is “readily accessible” or how widely known it can be without being “generally known”. Some assistance is provided by the recitals to the Directive, which explain that the definition is intended to cover information where there is both a legitimate interest in keeping the information confidential and a legitimate expectation that such confidentiality will be preserved.
It will be of interest to see how Member States’ legislators and, in turn, courts, interpret this definition and it may be necessary for the Court of Justice of the EU to consider the definition in order to iron out inconsistencies between Member States and to provide a higher degree of certainty to trade secret holders.
Under the Directive, a trade secret will have been unlawfully acquired where the information was obtained through unauthorised access, copying, theft, bribery, deception or any other method which is contrary to honest commercial practices. Acquisition of a trade secret will be lawful, however, where the information is obtained through independent discovery, reverse engineering of publicly available products, discovery pursuant to a license, observation of the item in public use or on public display, or from published literature.
Use or disclosure of a trade secret will be unlawful where the trade secret was originally acquired unlawfully or where the use or disclosure breaches a duty of confidentiality (whether contractual or non-contractual) or an obligation to limit use of the trade secret.
The Directive also prohibits use or disclosure of a trade secret by a person who knew, or should have known, that the trade secret was obtained from someone using it or disclosing it unlawfully. This is a concept echoed in other jurisdictions with trade secret protection. However, the Directive goes a significant step further than jurisdictions such as the US and allows liability for producing, offering, or placing on the market “infringing goods”, if the defendant knew or should have known that the trade secret was used unlawfully. So the Directive enables an action against persons further down the supply chain, even if they have no knowledge of the confidential information itself. Where a breach is discovered it will be important to notify third parties that sell tainted goods of the breach as this could trigger liability if they continue to do so.
The Directive has several important carve-outs. For example, the acquisition of trade secrets is not barred if the conduct is “in conformity with honest commercial practices” or involves the “use of . . . experience and skills honestly acquired in the normal course of employment.” These concepts are not defined, so it seems likely that the Court of Justice of the EU will be called upon to interpret them. The Directive also protects whistleblowers who disclose trade secrets to reveal misconduct, wrongdoing or illegal activity for the purpose of protecting the general public interest. This protection is extended regardless of whether the trade secret disclosure is in confidence.
The Directive does not include criminal sanctions but provides for a variety of civil remedies. The remedies provided for in the Directive are injunctions, damages, seizure of infringing goods, destruction of infringing goods and publicity measures. Any remedies must be applied proportionately and be fair and equitable.
The Directive sets out that damages should be appropriate to the actual prejudice suffered and reflects the IP Enforcement Directive. Importantly, damages for infringement are not purely to compensate for loss, but may include additional damages taking into account unfair profits made by the infringer and in certain circumstances “moral prejudice”.
One way in which the proposed Trade Secrets Directive differs from the IP Enforcement Directive is that the Trade Secrets Directive does not expressly allow Member States to make an account of the infringer’s profits available as a remedy. It seems likely that UK courts will retain the ability to award an account of profits as an alternative to compensatory damages, and other Member States may adopt a similar approach and treat trade secrets in line with IP rights covered by the IP Enforcement Directive.
The Directive provides sanctions in respect of infringing goods. Where goods’ design, characteristics, functioning, manufacturing or marketing has significantly benefitted from the use of a trade secret, the Directive states that seizure or injunctions may be imposed against the production, marketing, sale, storage, import or export, as well as the recall and destruction of all documents, objects or data embodying the trade secret.
Court measures to protect trade secrets from disclosure as a result of the litigation
One concern that trade secret holders may have is that the process of enforcing their rights may itself cause public disclosure of the relevant trade secret. To address this issue, the Directive includes measures to ensure that trade secrets are not disclosed during the course of litigation. The parties to the litigation and any other person participating will be prohibited from using or disclosing any trade secret they have become aware of because of the proceedings. Courts will also be given the ability to restrict access to documents, hearings and transcripts of them and to make non-confidential versions of decisions available. English courts are already accustomed to adopting measures to preserve confidentiality such as through the use of ‘confidentiality clubs’ and hearings in private in appropriate circumstances.
The Directive would put confidentiality protection during litigation on a statutory footing, providing comfort to businesses operating in the EU that should litigation concerning the trade secret become necessary, that trade secret would be protected during the course of the litigation in any of the Member States. This issue should no longer be a significant factor in forum selection.
The recitals to the Directive suggest that the Directive will enable businesses to more efficiently allocate capital by reducing the need for disproportionate expenditure on protective measures to safeguard trade secrets. However, for information to constitute a trade secret, the holder of that information is required to take reasonable steps to protect its secrecy. In addition, whilst the Directive provides for a variety of useful remedies, in many cases these will not fully compensate the trade secret holder for the loss of competitive edge that the trade secret may have provided. It will therefore remain important to put in place robust practical measures and confidentiality provisions to protect valuable trade secrets.
It will be interesting to see how the Directive will be implemented by each Member State and whether they will give trade secret holders parallel rights to those currently in existence or replace existing laws. This will be of particular note in the UK, where there is extensive case law governing the protection of confidential information which could be superseded for confidential information that falls within the statutory definition of a trade secret.
The Directive only sets minimum requirements and any Member State may choose to legislate for stronger protection. There remains scope for non-uniformity and imbalance between Member States depending on how Member States choose to implement the Directive. This may create a situation similar to the position in the US, where there was an attempt to provide a uniform law through the Uniform Trade Secrets Act which was modified to different degrees by different states, thus providing a uniform structure with some deviation and imbalance in the detail. Perhaps then, as with the proposal of a federal trade secrets law in the US, in the future we may see proposals in the EU for a Regulation on trade secrets (which will not need to be separately transposed into national law) as opposed to a Directive. In the meantime, it will likely fall to the Court of Justice of the EU to increase certainty and uniformity in this area.