The EU Trade Secrets Directive is close to becoming a reality. In a previous edition of In context we already reported on this. A new version of the Directive agreed by the European Parliament and the European Council is now available. This version is expected to be finalised soon. Once adopted, Member States will need to implement the provisions of the Directive within two years.
As the agreed text may be finalised in the coming months, now is the time for companies to rethink their trade secrets strategy. This includes having appropriate policies and contractual arrangements in place, and also raising awareness and support within your company. Moreover, companies should anticipate potential third party claims based on the Directive.
Some highlights of the new version of the Directive – getting your company ready
Previously, the European Commission, European Council and European Parliament each had their own preferred version of the Directive. After a recent trilogue there is now a new joint version which only needs formal approval by the European Council and European Parliament. Below we highlight the main elements of the new version that companies should be aware of.
The Directive provides minimum harmonisation, which means that Member States will be able to provide wider protection than the Directive requires. It remains to be seen how Member States will decide to implement the Directive.
What constitutes a trade secret?
Similar to article 39(2) of TRIPS, the Directive defines a trade secret as information which:
- is secret: that is, not generally known or accessible;
- has commercial value, whether actual or potential; and
- has been subject to reasonable steps, under the circumstances, to keep it secret.
The types of information which may qualify for trade secret protection are not limited by the Directive. In fact, the recitals make clear that its scope also “extends beyond technological knowledge to commercial data such as information on customers and suppliers, business plans or market research and strategies”. This means that a company’s trade secret policy is not only relevant in relation to technical trade secrets, but also in relation to confidential commercial information.
Getting ready for this Directive means that your company – if it has not done so already – will need to put reasonable steps in place, as required by the specific circumstances (for example, taking into account the type of company) to protect the information considered a trade secret. These steps do not only entail policies and appropriate clauses in agreements. To be effective they also entail raising awareness and convincing “trade secret developing groups” within the company – such as R&D and sales – to act in accordance with the trade secrets policy.
Worker mobility and employment agreements
One of the key objectives of the European Parliament was to guarantee workers’ professional mobility. In contrast to both the original proposal of the Commission and the Council draft, the draft Directive now states that an employee can freely use the following types of information:
- information that does not constitute a trade secret; and
- information that is part of the experience and skills gained by the employee in the normal course of their employment.
In practice, it will be challenging to distinguish between “a company’s trade secret” on the one hand and “information acquired by the employee in the normal course of their employment” on the other. This distinction is not only relevant to a company’s own employees, but also to future employees that switch from a competitor to the company, as well as to employees leaving the company for a competitor or to start their own business.
The Directive stresses that it will not offer any grounds for imposing any additional restrictions on employees in their employment agreements, other than in accordance with any union membership or national law. However, the Directive clarifies that it is “(not) intended to affect the possibility of concluding non-competition agreements between employers and employees, in accordance with the applicable law”.
Thus, it is important that the legal and HR department of a company align the way the company deals with employees and trade secrets, making sure that appropriate and valid non-compete and confidentiality obligations are in place for all employees involved in trade secrets.
Infringement of trade secrets and remedies
In terms of the Directive, any acquisition of a trade secret carried out by unauthorised access, copying or appropriation, or any other conduct considered contrary to honest commercial practices will constitute infringement of a trade secret. Use or disclosure of a trade secret by a person who unlawfully acquired that trade secret will also constitute infringement, as will the use or disclosure of a trade secret in breach of a contractual obligation.
The Directive provides a range of new and robust remedies to enforce trade secret rights. When a trade secret is infringed, an injunction against further use or disclosure can be obtained. A damage award is also part of the arsenal of remedies available.
An infringer who knew or should have known that he or she was engaging in unlawful acquisition, disclosure or use of a trade secret, may be ordered to pay the trade secret holder damages appropriate to the actual prejudice suffered as a result of the infringement. The Directive’s aim is to ensure that an injured trade secret holder will be adequately compensated for the prejudice suffered as a result of the infringer’s wrongful conduct.
The Directive also provides remedies with respect to goods whose design, characteristics, functioning, manufacturing process or marketing significantly benefits from the use of a trade secret. These remedies include seizure and injunctions against the production, marketing, sale, storage, import or export of these goods, as well as the recall and destruction of all documents, objects or data embodying the trade secret. Put differently: trade secrets within the meaning of the Directive gain, for practical purposes, the status of a quasi IP right.
Secondary infringement – anticipating third party claims
The acquisition, use or disclosure of a trade secret is also unlawful whenever a person knew or should have known that the trade secret was directly or indirectly obtained from someone else that unlawfully obtained it. The same applies to the production, marketing, import, export or storage of infringing goods. This means that the scope of protection under the Directive also covers secondary infringement. It explicitly encompasses protection against abuse by third parties, including passive recipients of trade secrets, even if they initially acted in good faith. In this respect, it is important to keep in mind that there might be third party claims in the future on the basis of this Directive. It is advisable to take this into account when developing your company’s trade secret strategy.
Limited exceptions for infringement of trade secrets
The acquisition of trade secrets is considered lawful – and may thus not constitute infringement of a trade secret – when obtained by:
- independent discovery;
- reverse engineering;
- exercise of the right of workers or their representatives; and
- any practice which, under the circumstances, is in conformity with honest commercial practices.
With respect to reverse engineering, the recitals of the Directive provide a helpful insight. The Directive states that it does not create any exclusive right on the know-how or information protected as trade secrets, thereby distinguishing this from patent protection. That said, the Directive does mention that it is possible to contractually limit reverse engineering by parties with whom your company shares its trade secrets, such as licensees or suppliers. The draft text states that “reverse engineering of a lawfully acquired product is a lawful means of acquiring information except when otherwise agreed by contract. The freedom of entering into such contractual arrangements may however be limited by law.” It may be worthwhile to review whether a company’s agreements include a provision limiting reverse engineering. Furthermore, it is advisable to review if these provisions are allowed by national law in the main jurisdictions a company is active in.
In addition to the methods to obtain a trade secret which are considered lawful as listed above, the Directive also lists certain ‘exceptions’ to its scope. The application in respect of measures, procedures and remedies provided for in the Directive is to be dismissed in the following cases:
- exercising the right to freedom of expression and information;
- whistleblowing for the purpose of protecting the public interest;
- legitimate disclosure by workers to their representatives; and
- protecting a legitimate interest recognised by union or national law.
There seems to have been little consideration for the abuse of these exceptions by third parties.
We now have to await the formal agreement of the Directive and subsequent implementation by Member States. To benefit from these new rules, companies are advised to devise or continue to devise a trade secret strategy and implement the appropriate measures.