The European Commission has adopted a proposal for a Directive on the protection of trade secrets.

What is a trade secret?

Trade secrets (i.e. the know-how of a company which is not publicly available) are an important and invaluable intangible asset for a company to own. For example, the source code of computer software is often kept secret, even though the object code is released when the software is supplied to customers. This may allow the software company to keep a competitive edge over its rivals.

Surveys of intellectual property right owners regularly show that trade secrets are regarded by them as the most important protection for their innovations. Enforcement of rights in trade secrets is therefore of crucial commercial importance.

European position - Background    

The European approach to the protection of trade secrets is currently fragmented. The law, procedure, and remedies available vary from country to country, and indeed some countries do not protect trade secrets at all. This may lead to the situation whereby you are unable to sue a party misusing your trade secrets in another EU country; even if this misuse would be protected against in the country you are domiciled. Here are some examples of the variation across the EU:

  • in France “manufacturing secrets”, but not other types of trade secret, are protected by specific legislation, whereas in England all confidential information whether it be commercial or personal, is protected by the law of confidentiality;
  • in some countries action can be taken against third parties who acquire the information (from, for example, an ex-employee), while in others that is not possible;
  • in some countries it is not possible to obtain an injunction to prevent the unlawful use or disclosure of trade secrets;
  • in Belgium, if the owner takes court proceedings, the confidential information has to be set out in the court documents, which are publicly available.

The lack of uniformity in the EU poses problems of storing, copying and transferring data for those wishing to protect their valuable know-how. Furthermore, these problems have been exacerbated by the changing face of business - lengthening international supply chains and an increase in the use of business partners (whether it be by joining forces with other businesses, or licensing goods or services).     

The US position

Companies are afforded far greater protection in the US, under three different layers of law:

  • at the federal level there is the Economic Espionage Act which carries criminal penalties, with a  maximum prison sentence of 10 years and a $5m fine;
  • again at the federal level, the US International Trade Commission can block the goods entering the US; and
  • the Uniform Trade Secrets Act, which has been adopted as state law by virtually all US states, creates civil liability for obtaining, using or disclosing trade secrets. This means that the majority of the US states have the same provisions relating to trade secrets.

Various other legislative initiatives are under consideration in Congress and state legislatures to further toughen their already stringent regime.

Current developments/present position

The European Commission has concluded that enterprise was being harmed by the difficulty and cost of protecting innovation. The Commission therefore attempted to counter this by creating the initiative “Innovation Union”, one of the strings in the bow of the EU’s  “Europe 2020” growth strategy.

The aim of the initiative is to develop the laws of the EU, and the Commission has cited the following objectives:

“To enhance innovation and growth within the internal market by facilitating cross-border cooperation between innovative companies; and

To protect trade secrets/confidential business information from misappropriation and misuse by third parties.”

The Commission commissioned two reports on the protection for trade secrets which presently exists in member states. Very quickly following consultations on the results, the Commission has now adopted a proposal for a Directive on the protection of trade secrets.

The Directive defines trade secrets by reference to three requirements:

  • the information must be confidential;
  • it should have commercial value because of that confidentiality; and
  • the owner has made reasonable efforts to keep it confidential.

The Directive sets out the circumstances in which the acquisition, use and disclosure of that confidential information will be unlawful. The key element is the lack of consent of the owner of that information. The reference to acquisition, as well as use and disclosure, of trade secrets reflects the US position.

The Directive provides for remedies which are to be available from courts across all EU member states in respect of unlawful acts in relation to trade secrets. These include:

  • damages, to compensate the owner for the loss which it has suffered. Damages are to be assessed by reference to all relevant factors, including the profits made by the misuse of the trade secrets and what a notional royalty for their lawful use would have been;
  • injunctions, both interim while the dispute is proceeding and permanent if unlawful misuse is established;
  • seizure of goods made by use of the trade secrets and the destruction of those goods if unlawful misuse is established.

The Directive also provides for the confidentiality of the information to be maintained during litigation, and afterwards insofar as court documents are available to the public.

The list of remedies reflects those previously prescribed by the Enforcement Directive, which sought to harmonise the remedies available in member states for infringement of “classic” IP rights such as patents and trade marks. The implementation of that directive has not been entirely successful, with the result that there are still disparities between member states in remedies for that infringement. It therefore remains to be seen how effective the harmonisation of remedies in relation to trade secrets will be.

So What?

The proposed Directive must go through the EU legislative process, so its adoption and final form are not certain. If adopted, it is likely to amount to a significant improvement in protection for valuable commercial information.

In its present form, the proposed EU regime on trade secrets is broadly similar in effect to the present English law. Its effect could therefore be to extend across the EU, protection which may be familiar to businesses based in, or which use in their contracts the law of, countries with a common law tradition.