Proposals have recently been put forward by the European Commission to reform European law on trade secrets by harmonising protection across all EU member states. The proposals are in the form of a draft directive which has three main aims:
- To establish a common definition of trade secrets and what constitutes misappropriation.
- To provide civil remedies to holders of trade secrets.
- To introduce court measures to prevent disclosure of trade secrets during litigation.
What are trade secrets and why is reform needed?
A trade secret is essentially any confidential information that has commercial value or gives a business a competitive edge. Trade secrets encompass a wide range of subjects and can be as varied as a manufacturing process, a list of customers or the recipe of a fragrance.
There are several motivations for reform. First, the legal regimes of EU member states vary greatly in their protection of trade secrets. There is no common definition of what a trade secret is between member states and some do not define the concept at all. The relief available to trade secret holders differs so that it is not always possible to, for example, obtain an injunction or require destruction of information. In the UK, for example, trade secrets are protected through the law of confidence or contract.
The second motivation is the increasing risk to business of theft of confidential information. The European Commission reports that 25% of companies reported theft of information in 2013, an increase from 18% of companies in 2012.
Finally, there is the unusual nature of trade secrets. They are not like other intellectual property rights as they do not give owners the exclusive right to use them. Generally, they can be discovered or developed by third parties and protection is only available where they have been misappropriated illegitimately. They are also particularly important to smaller businesses that do not have suitable resources to invest substantially in other sorts of intellectual property right.
How does the proposed regime work?
Common definition of trade secrets and misappropriation
The proposed definition of a trade secret is information that is
- secret in the sense that it is not generally known or readily accessible to persons that normally deal with the kind of information;
- has commercial value because it is secret; and
- has been subject to reasonable steps by the person lawfully in control of it to keep it secret.
The holder of the trade secret will be the person who lawfully controls it, which will give protection to both owners and licensees.
The proposals set out a number of situations which will enable the trade secret holder to seek remedies against unlawful acquisition, use or disclosure. The key factor is that the act was without consent of the holder. The situations include acquiring a trade secret by unauthorised access or copying, theft, bribery, deception or in breach of a confidentiality agreement. There is also a catch-all so that an acquisition by any other conduct which is contrary to honest commercial practices will be prohibited. The proposals also prohibit use or disclosure of a trade secret where a person knew, or should have known, that the trade secret was obtained from someone using it or disclosing it unlawfully.
The remedies proposed in the draft directive are injunctions, seizure of infringing goods, destruction of infringing goods, compensatory damages and publicity measures. Any remedies will have to be applied proportionately and be fair and equitable.
The proposals also require member states to provide a limitation period for bringing a trade secrets claim of between one and two years.
Measures have been proposed to ensure that litigation concerning trade secrets does not result in disclosure of them. 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.
How do the proposals compare to protection in other countries?
There is currently a minimum level of protection in countries that are members of the World Trade Organisation through the TRIPS Agreement (Agreement on Trade Related Aspects of Intellectual Property Rights). The Agreement’s minimum standard for all member countries is that trade secret holders be able to prevent information being disclosed to, acquired by, or used by others without consent in a manner contrary to honest commercial practices. These are concepts now reflected in the proposed directive.
It is thought that the countries with the highest levels of protection of trade secrets are the US and Japan. In the US, the law on trade secrets is implemented in the majority of states through the Uniform Trade Secrets Act. The EU proposals to a large extent follow the principles of this Act however there are some notable differences. First, monetary damages under the Act are more wide-ranging than under the EU proposals. The US Act allows exemplary damages to be awarded, which can be up to twice the usual award. No such extraordinary damages are available under the EU proposals, where the basic principle is that damages should be commensurate to actual loss suffered. Second, the Act, unusually for the US, allows attorney’s fees to be recovered by the winning party if there is a bad faith element to the defendant’s misappropriation of the trade secret or the plaintiff’s claim of misappropriation. This is not a specific feature of the EU proposals, however, in the UK the general principle that the losing party in litigation pays the winning party’s costs would apply. Third, the US Act provides for a limitation period of three years in which an action can be brought, compared to a maximum of two years under the EU proposals.
Despite the differences noted above, the European Commission considers that the EU proposals will align EU trade secret protection with the US and Japan in terms of civil law (as the EU proposals do not address criminal liability). The European Commission has also stated that it has a goal of facilitating recognition and enforcement of trade secrets judgments between the EU and the US.
The European Commission’s proposals on trade secrets follow on from their 2011 report “A single market for intellectual property rights” and contribute to the aim of creating a more effective enforcement strategy for intellectual property rights within the EU and in conjunction with countries outside of the EU. The proposals will particularly benefit businesses that operate worldwide by providing some certainty in relation to their rights and enforcement of them and will provide comfort to businesses based in jurisdictions with traditionally higher levels of trade secret protection, such as the US, in relation to their current or proposed EU activities.
It will also be interesting to see how the proposals 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.
The proposals will follow the ordinary legislative procedure and now be reviewed by the Council of Ministers and the European Parliament. As each member state will need to implement the directive once it is adopted, the proposals will not come into effect for several years. There is also a possibility that the reforms will become less of a priority following the European Parliament elections in May 2014 and the end of the current European Commission’s term of office in October 2014.
For further information from the European Commission including the full text of the proposed directive please click here.