A new Directive in the European Union is set to assist franchisors and franchisees who own confidential business information (such as trade secrets and know-how). The proposal will be welcomed by business, given the laws to protect and enforce trade secrets across the EU are at present fragmented and diversified. A significant proportion of the valuable intellectual property of many franchise systems comprises trade secrets – and they are particularly vulnerable to theft.

In May 2014, the Competitiveness Council agreed a general approach on the European Commission's proposal for a "Directive on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure" (draft directive). In January 2014, the Commission had adopted the draft directive in a measure designed to harmonise the law on trade secrets across the EU.

The draft directive introduces a common definition for a "trade secret" which can be protected from unlawful exploitation. This is information meeting all three of the following criteria:

  • "secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known or readily accessible to persons that normally deal with the kind of information in question";
  • "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".

The draft directive also provides new measures and remedies for an owner of a trade secret to obtain redress (such as by injunctions and seizure of any goods which unlawfully benefit from the trade secret), although it is proposed to impose a two-year limitation period in which to bring claims for unlawful use or disclosure or "any other conduct which, under the circumstances, is considered contrary to honest commercial practices". The Competiveness Council however recommended this limit be extended to up to six years.

Protection of confidential business information, trade secrets and know-how is notoriously difficult.  Enforcement processes in many cases do not achieve a satisfactory result for the wronged party. The draft directive helpfully proposes a regime for the award of damages for any prejudice suffered by the trade secret holder as a consequence of the unlawful acquisition, use or disclosure of the trade secret.  Factors for a court to take into account when making an award include the unfair profits obtained by the infringer and the "moral prejudice" caused to the trade secret holder. The draft directive also proposes that damages can be calculated on the basis of hypothetical royalties.

The draft directive has not yet been considered by the European Parliament, which is to decide its adoption under its ordinary legislative process. Following adoption, the Directive is likely to be implemented into national legislation throughout the EU over the next four years.