Introduction and general issues
The food and drinks sector is becoming increasingly technology driven. Novel and functional foods are carefully engineered, often at molecular level. Packaging and dispensing systems may make the difference in competition. Developing such innovations requires considerable investments, which deserve and need protection. For that purpose, it is necessary to be able to claim these results as intellectual property. Probably the best protection is by means of patents, which give the owner an exclusive right to exploit the invention. In fact the first patents in history were granted in the Roman Empire for food recipes. But patents are expensive, they provide protection for a maximum term of 20 years only and they require publication of the invention. The food and drinks sector has always relied to a large extent on keeping the tricks of the trade confidential.
However, confidentiality is not without issues. Although the WTO Agreement on Trade Related Intellectual Property Rights (TRIPs) has proclaimed that trade secrets are intellectual property rights, that does not mean that they are always well-protected throughout the world. An employee who has been taught the tricks of the trade can take that information with him when he leaves and eventually it might end up with a competitor. Without a proper legal framework, it is very hard to take actions against such unfair competition.
For Europe, a big move towards proper protection is now being developed. The European Commission published a proposal for a Trade Secrets Directive on 28 November 2013. This has the potential to bring protection to the same level as in the US, where the Uniform Trade Secrets Act has been around for quite a while. It was also necessary because so far most Member States have not taken sufficient steps to implement Article 39 TRIPs, which requires a minimum level of trade secret protection.
The initial proposal had many faults, but has since been improved considerably by a compromise on amendments that will be presented to the Council by the end of May 2014. The proposed Directive is quite comprehensive and a large part of it aims at full harmonization, not a minimum level of harmonization. On the enforcement side, much of the Directive is minimum harmonization, so member states can take further steps when implementing the Directive.
The title of the Directive says that it is “on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure”. The terms “know-how and business information” are used in the explanatory memorandum and in some of the recitals, but not in the provisions of the Directive. The term generally used in the provisions is “trade secret”, which is intended to have the same meaning as “undisclosed information” in Article 39 TRIPs. The title is intended to make it clear that these trade secrets include know-how and business information, but the term is not intended to limit the scope of the Directive. Basically, any confidential information with an economic value will be protected.
The urgency of the project is clearly demonstrated by the impact assessment, according to which “40% of EU companies would refrain from sharing trade secrets with other parties because of fear of losing the confidentiality of the information through misuse or release without their authorisation”. This negatively affects innovation. Besides, the divergence in protection throughout Europe and to a certain extent the current lack of protection, means that valuation of trade secrets is very difficult. In some cases this leads to filing patent applications before the technology at hand is completely developed, just to be able to raise funds for further research and development. This may result in patents that do not fully protect the relevant technology. The Commission also found that the lack in uniform protection undermines competitiveness. Also, due to the lack of protection, knowledge is shared less.
At the same time, the Commission felt that no exclusive rights should be granted, meaning that anyone remains free to acquire the knowledge that is protected by the trade secret, including through reverse engineering. In addition, hiring of highly skilled labour should also not be negatively impacted, where it is obvious that these people will take their knowledge and skills with them when moving from one company to another. Normally, IP rights are exclusive rights. TRIPs does not make any difference between various categories of intellectual property rights; they are all treated in the same way in Article 1 section 2. That was a highly debated political compromise within WTO, but it is the law now. This raises the question whether the proposal really is in conformity with TRIPs.
Recital 27 provides that the Directive should not affect the application of competition law rules, in particular Articles 101 and 102 of the Treaty on the Functioning of the European Union ("TFEU") and that the measures provided for in this Directive should not be used to restrict competition unduly in a manner contrary to that Treaty. The Court of Justice has already developed a careful approach towards intellectual property rights, striking a balance between the protection of intellectual property and free competition. According to that case law, the scope of intellectual property rights is not to be extended beyond their specific subject of protection. The same apparently applies to trade secrets, which of course is no surprise.
Article 2 contains the definition of trade secrets and of some other crucial terms. The definition of trade secrets is identical to that in Article 39 TRIPs. All other elements of Article 39(2) TRIPs can also be found here. The definition of “trade secret holder” implies that only someone who legitimately holds a trade secret qualifies, but on the other hand includes licensees, meaning that they can take action themselves. That is not always the case for other intellectual property rights, certainly not for non-exclusive licensees.
Infringement of a trade secret is any unlawful acquisition, use or disclosure of the trade secret. According to the Explanatory Memorandum the key element for those acts to be unlawful simply is the absence of consent of the trade secret holder. The acquisition of a trade secret is considered to be unlawful if it is contrary to honest commercial practices. Subsequent use or disclosure is also unlawful, if it is done by a person who has acquired the trade secret unlawfully, is in breach of a confidentiality agreement or any other duty to not disclose the trade secret or is in breach of a contractual or any other duty to limit the use of the trade secret. Initially there was a requirement of intent or gross negligence, but fortunately this has now been dropped. Under Article 3(4) subsequent use or disclosure is also unlawful if the subsequent user knew or should, under the circumstances, have known that the prior use or disclosure was unlawful. If that third party initially acted in good faith but obtains knowledge of the infringement later on, an injunction might cause disproportionate harm according to recital 18 and damages would be the preferred remedy, which is developed further in Article 12(3). Of course, in that case the question arises what would be the ground for awarding damages. Thus it seems that the Directive carries the risk that trade secret protection might be lost by selling trade secrets to innocent third parties. In that case, trade secrets would in practice enjoy far less protection than other intellectual property rights.
The exceptions to protection are also fully harmonized. Of course, there is no infringement in case of independent development. Article 4(1)(b) makes it clear that reverse engineering is allowed, which apparently was an issue in some countries. Article 4(2)(a) provides for a general exception for making legitimate use of the right to freedom of expression and information. As such this is fine, but in practice it should be applied rather limited; there should at least be a public interest atstake, otherwise it could be abused to distort competition. However, public interest is mentioned in subsection (b), but not in subsection (a), but it might be included in the requirement that such use is legitimate.
Article 4(2)(c) is somewhat alarming. There is no infringement in acquisition, use or even disclosure if the trade secret was disclosed by workers to their representatives as part of the legitimate exercise of their representative functions. I can understand that, if the representative uses the trade secret in the course of a legitimate exercise of his representative functions, this would not be an infringement. However, even in doing so, he should maintain the secrecy, so disclosure should still constitute an infringement. Of course, there may be a case where such disclosure would really be necessary in the performance of such representative functions, but that would fall within the exception of Article 4(2)(b) – which includes legitimate “whistle-blowing” – and should also be limited to such situations. This is yet another example that trade secrets are treated as some second rate right; nobody ever needed or even thought of a provision that a patent cannot be infringed by a workers’ representative. Article 4(2)(e) adds legitimate interests as exceptions, in so far as provided by law.
The Trade Secrets Directive according to recital 28 will take priority over the Enforcement Directive and will have its own, more limited enforcement system. This is a political compromise that cannot be changed anymore at the European level. Some tools for collecting evidence that are available under the Enforcement Directive for other intellectual property rights are lacking in the Trade Secrets Directive. That is all the more problematic, since trade secrets are not exclusive rights, so the fact that identical information is used is not sufficient for finding infringement; there must be some kind of illegal disclosure, acquisition or use and that always requires additional evidence, especially in respect of the way in which the alleged infringer has acquired his information. Article 41 section 1 TRIPs provides that “Members shall ensure that enforcement procedures as specified in this Part are available under their law so as to permit effective action against any act of infringement of intellectual property rights”, but it is not clear from this provision whether the same procedures should be available for all types of intellectual property rights. Nevertheless, since the difference in available tools makes the enforcement of trade secret protection considerably less effective, the Directive might not be in compliance with TRIPs. This may also lead to awkward situations, because very often in one action both a patent and the accompanying know how are at stake, in which case two different enforcement regimes will apply within that single action. Fortunately, the articles providing the tools for enforcement are only a minimum harmonization, so Member States may take this a step further in their implementation and extend the scope of the implementation of the Enforcement Directive to trade secrets. This is currently being debated in a number of member states.
The chapter on enforcement starts with provisions that any measure should be proportionate, not create barriers to legitimate trade and provide safeguards against abuse. Who could disagree, but on the other hand, why do we need this in the text of the Directive? It seems that the concept of abuse is not harmonized, but it is safe to assume that any EU member state has options to redress abuse of legal remedies. The Trade Mark Directive and the Design Right Directive do not contain provisions on the possible abuse of those rights and Directive 2001/29/EC on the harmonisation of certain aspects of copyright and related rights in the information society only mentions a possible abuse of right in its recitals. Again, the TRIPs Agreement does not support such a suspicious approach of trade secrets.
Article 8 contains provisions aimed at preserving the confidentiality of trade secrets in litigation. This is a novelty for many member states. This includes setting up a so-called confidentiality club, in which case the court restricts access to documents to selected officials of the parties and their lawyers. It should not be possible to limit this further and only give access to outside lawyers.
Article 10 provides that a claimant, when applying for interim measures, can be ordered to provide further evidence of his rights and of the alleged infringement. That is fair enough; it would seem that any judge in the EU can apply such conditions when an application for an interim injunction is filed and refuse the injunction if these are not met. On the other hand, the fact that this is included so explicitly in the Directive makes it even more conspicuous that the other side of the coin is missing; the court is not entitled, at least not under the Directive, to require the defendant to produce available evidence or even to allow the claimant to seize such evidence at the defendant’s premises, as provided for in Article 6 and 7 of the Enforcement Directive. Again, this is wrong and may render the protection of trade secrets in Europe insufficient.
Article 11 deals with final remedies. Section 3 includes the possibility of donating infringing goods to charity. Recital 17 says that “corrective measures should not necessarily entail the destruction of the goods when other viable options are present, such as depriving the good of its infringing quality or the disposal of the goods outside the market, for example, by means of donations to by charitable organisations”. The term outside the market – as opposed to the internal market – is probably meant to mean outside the course of trade, not outside Europe, since if a good is infringing in Europe, it should be infringing in any country that is a party to the TRIPs agreement.
An issue not dealt with by the Directive is the unlawful acquisition and use of a trade secret that could have been uncovered by legitimate reverse engineering. In a 2012 judgment a Dutch court held that in such a situation a temporary injunction could be imposed that would compensate for the illegal advantage in entering the market at an earlier stage by stealing the trade secret instead of revere engineering the technology. The Trade Secrets Directive is sufficiently flexible to allow for such solutions; a limitation of the duration of an injunction is even explicitly mentioned in Article 12(1).
Article 12(2) provides that injunctions should be terminated once the trade secret has entered the public domain, which seems logical. However, this should have been limited to the situation where the trade secret has lawfully entered the public domain. Now it already applies if this cannot be attributed to the defendant, but that is too broad, because then it also applies if the trade secret became publicly available through a third party infringement, which should of course not serve to acquit the first infringer.
The Directive does not aim to introduce punitive damages, but does allow for reclaiming the costs of identification and research in addition to the actual damage to the business of the trade secret holder. Article 13 mentions various methods of calculation of damages, including the amount of royalties or fees which would have been due if the infringer had requested authorisation to use the trade secret in question. The latter may be not as easy as the Commission might think. Many trade secret owners are not willing to licence their trade secrets at all and of course they are not obliged to do so. In such a case it would not be possible to determine an amount of royalties.
The proposal for the Trade Secret Directive certainly is a big step forward towards effective protection. It contains a lot of useful tools and provides a comprehensive, though not perfect, delimitation of the scope of trade secrets. At the same time it is an imperfect proposal with a fundamental flaw. It denies trade secrets their full protection as intellectual property rights as required by TRIPs. The choice not to have trade secrets covered by the Enforcement Directive means that different sets of tools apply and essential tools for collecting evidence are missing.