On 28 November 2013, the European Commission published a proposed directive for the protection of undisclosed know-how and business information (trade secrets) (the “Directive”). The Directive seeks to harmonise the national laws of the EU member states in relation to trade secrets, which currently vary significantly.

Under the proposed directive, trade secrets are defined as (i) information that is secret; (ii) that has commercial value because it is secret; and (iii) that has been subject to reasonable steps, by the person in control of the information, to keep it secret.

Trade secrets are particularly relevant in the context of the employer/employee relationship. Indeed, one of the most common circumstances in which trade secrets are unlawfully misappropriated is when such secrets are taken, divulged and/or used by current or former employees.

Businesses increasingly operate in multiple jurisdictions across Europe and it is surprising that, to date, the law on trade secrets has not been harmonised. This makes it difficult for employers to enforce their rights in multiple jurisdictions and can create problems when employees transfer to a jurisdiction where there is less protection afforded to trade secrets. The uncertainty over the approaches adopted in different jurisdictions restricts cross-border know-how transfers and could negatively impact on innovation and economic growth.

Employers can often protect such rights through other intellectual property rights, particularly copyright and database rights. Furthermore, the strongest protection for trade secrets is often contractual protection via the employee’s contract for employment. Nonetheless, the European Commission recognises that trade secrets are particularly important for small- and medium-sized enterprises which often lack the resources for extensive creation, management and enforcement of IP portfolios. Trade secrets are therefore considered to supplement and complement protection provided by IP rights.

The issue of protecting trade secrets has become increasingly high profile. A study carried out in July last year found that out of 537 respondents, around one in five suffered at least one attempt at misappropriation within EU countries over the last ten years and nearly two in five felt that the risk had increased during the same period.

The Directive

In brief, the key provisions of the Directive are as follows:

  • A definition for trade secrets. Currently, there is no uniform definition of trade secret across the EU and each jurisdiction has different criteria which must be met before something is considered a trade secret. The Directive defines a trade secret as shown above.
  • Unlawful acquisition. The Directive provides that member states shall provide measures and remedies to prevent or obtain redress for the unlawful acquisition and use of trade secrets. Remedies available shall include injunctions (including interim injunctions), delivery up / destruction and compensatory damages (discussed further below).
  • Limitation period. The Directive introduces a limitation period of two years after the date on which the claimant became aware, or had reason to become aware, of the last fact giving rise to the action.
  • Preservation of trade secrets in the course of legal proceedings. Many rights-holders are reluctant to sue infringers due to a lack of protection available for the confidential information during court proceedings in some jurisdictions. The Directive seeks to address this issue by requiring that member states provide their judicial authorities with mechanisms to preserve the confidentiality of the trade secrets disclosed to the court during the proceedings.
  • Damages. The Commission noted that the calculation of damages varies between the member states and is in some cases not adequate for trade secret cases. Additionally, alternative methods for calculating damages, such as hypothetical royalty payments or licence fees, were also not available in all member states. The Directive requires that the judicial authority shall take into account all appropriate factors when assessing damages, including negative economic consequences as well as moral prejudice caused to the trade secret holder. They may also set damages as a lump sum on the basis of hypothetical royalties or fees which would have been due had the infringer requested to use the information lawfully.
  • Publicity measures. The Directive affords the claimant the option to request appropriate measures for the publication and dissemination of a court’s decision in trade secrets cases. 

Impact on national laws

CMS frequently advises clients in this area. For this report, in addition to the UK, we have obtained comments from colleagues in Germany, Italy, Poland and the Netherlands on the likely impact of the Directive.

Impact in the UK

The UK legal system already provides much of what the Directive seeks to introduce. However, unlike most member states, there is no specific legislation in relation to trade secrets in the UK. Instead, such rights are protected by the common law of confidence and often also by contract law.

The case law on trade secrets in a UK employment context is already extensive. The test for establishing whether information is a trade secret has essentially focussed on the nature of the employment, the nature of the information itself, whether the employer impressed the confidentiality of the information on the employee and whether the information can be easily isolated from other information which the employee is free to use or discuss. The definition in the Directive is different and seemingly narrower than the concept of trade secrets currently used in the UK. While, under the existing common law, information must have the “necessary quality of confidence”, the test does not specifically require the information to have “commercial value because it is secret”. The courts will need to interpret this. Similarly, there will initially be some uncertainty over what is meant by “reasonable steps” to keep the information confidential.

The remedies available under English law already include damages and injunctions (both interim and final). The usual financial remedy for unlawful use of confidential information is an award of damages (see Vestergaard Frandsen A/S v Bestnet [2009] EWHC 1456 (Ch) and see Flogas Britain Limited v Calor Gas Limited [2013] EWHC 3060 (Ch) for a recent example).  However, the Directive may increase the amount of damages available, as currently damages are only awarded if the claimant is able to demonstrate that he has suffered some loss. The Directive states that when setting the damages, the judicial authorities shall take into account "all appropriate factors" which can include "elements other than economic factors" such as "moral prejudice caused to the trade secret holder". This accords with the Enforcement Directive.

The limitation period set out in the proposed directive is substantially different from the English common law position. Currently any claims for breach of confidence or breach of contract must be brought within six years of the date of the breach. The Directive would introduce a limitation period of two years after the date on which the claimant became aware, or had reason to become aware, of the last fact giving rise to the action. Rights holders would therefore need to act more promptly in relation to any breaches. The practical impact of this may be limited. Businesses normally seek to deal with breaches of confidence quickly, often seeking an interim injunction.

The European Commission also recognised the UK as one of the few member states which provides adequate protection for secret information during litigation. Risk areas include the availability of disclosure (discovery) orders to obtain and/or preserve evidence, and the requirement for full disclosure when making an application without notice. If parties (or non-parties) wish to preserve the confidentiality of information, they can apply to the court to ensure that any information revealed during this process remains confidential. 

The manner in which the UK will implement this Directive, of course, remains to be seen. However, once enacted, employers would be advised to use the new legislation as an opportunity to further educate UK employees as to the importance of trade secrets.

Wider EU perspective

In jurisdictions such as Italy and Poland, the Directive is likely to have a limited impact on national law but may act to strengthen the substantive protection for trade secrets already in place in these jurisdictions.
 
In Italy, for example, the Intellectual Property Code already contains a statutory definition of “trade secret” which accords with the definition in the Directive. In addition, the Italian courts are willing to offer a wide range of remedies including injunctions, delivery up/destruction and damages and, hence, many of the provisions of the Directive are already covered.

In Poland, the most significant change would be the change in the limitation period for claims under the Directive, compared to the period currently provided for claims for unfair competition, which is three years.

In Germany, while the changes brought by the Directive may not be substantial, the Directive will formalise the current case law of the German courts and will define the term “trade secret” for the first time.

The Directive also will potentially expand the remedies currently available under German law. In particular, it affirms the claimant’s right to demand that products resulting from a trade secret infringement be recalled, destroyed or confiscated. In Germany, it is also currently comparatively difficult to obtain an interim injunction for a trade secret infringement. The Directive may increase the willingness of courts to grant such injunctions in future.

The changes will have a potentially more profound impact in the Netherlands. Dutch law does not currently contain any specific statutory rules on trade secrets (other than a few specific labour and criminal law provisions that are limited in scope).

Under Dutch law, special remedies available for intellectual property rights infringements, such as ex parte injunctions and full reimbursement of legal costs, are currently not available to claimants bringing an action under trade secrets law. Furthermore, although it is currently possible to obtain a permanent or temporary injunction to restrain the disclosure and use of trade secrets, in practice the Dutch Courts are generally reluctant to award such injunctions.

Also, whilst it is currently possible to collect damages as a result of moral prejudice caused to the claimant under Dutch law, in trade secret cases such elements are very rarely taken into account by the Dutch Courts. As such, the quite extensive provision on damages in the Directive may lead to new and more substantive claims for damages in trade secret cases in the Netherlands.

Conclusion

The impact of the Directive will vary across Europe. To the extent that this Directive serves to harmonise the law on trade secrets in the EU and serves to increase the rights and remedies of trade secret owners, then this Directive is to be welcomed.

Nonetheless, the Directive does contain some notable omissions, for example provisions relating to “search and seizure” orders which would have been of assistance to right holders.

The Directive must now go through the standard legislative process and may well be subject to revisions during this period. At present the anticipated date for adoption of the Directive is the end of 2014, with member states being required to have implemented the Directive within two years of it being adopted.