European Union: New EU Trade Secrets Directive Approved By Parliament: The Secret Is Out

Last Updated: 17 May 2016
Article by Babette Märzheuser-Wood, Robyn Chatwood and Danielle De Leeuw

On 14 April 2016 the European Parliament finally approved the new European Union Trade Secrets Directive which will create a minimum legal benchmark to protect secret and valuable business information — also known as "trade secrets". 

The new Directive introduces a standard definition for "trade secret" and sets out what constitutes lawful and unlawful use of it.  European Member States will now have two years to implement legislation in line with the new Directive.

Some commentators have hailed the initiative as good for business, as it will reduce uncertainty and provide for a common set of rules for prosecuting infringers.  Others have heralded the new Directive as a tool which will squash freedom of speech and suppress whistleblowing activities.

There is considerable ambiguity in the new Directive and there are some exceptions to its application. Additionally it is uncertain whether the new Directive will change the current well-understood position for protection of confidential information under English law.  We discuss the issues below. 

Background 

The EU Trade Secrets Directive was adopted by the European Parliament on 14 April 2016. It is a framework legal solution to create a minimum level of protection and benchmark for all EU Member States in an attempt to streamline and harmonise the protection of trade secrets and innovative ideas within the European Union.

The concept of trade secrets is one of the most litigated in the United Kingdom, but also one of the least regulated. The piecemeal development of the law in this area has led to much uncertainty as to what exactly is and is not a trade secret and how it can be adequately protected. 

While many trade secret owners will welcome clarity in this area, there has been some criticism of the new Directive as being a direct threat to the work of journalists and their sources, whistleblowers, employees' freedom of expression and a person's right to access public interest information. This is an area where criticism of the new Directive has been strongest since details of the draft were released at the end of 2015.

What are trade secrets?

Businesses such as franchisors and retailers (who often have forms of intellectual property which are difficult to protect under the current laws, such as know-how and confidential information) will welcome a standard definition of what is and what is not a trade secret. The new Directive clarifies that in order to fall within protections afforded by it, the information must be "(a) a secret in the sense that it is not generally known among or readily accessible to persons within the circles that would normally deal with the kind of information in question; (b) has commercial value because it is a secret; and (c) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it a secret.".

While the definition attempts to make it easier to distinguish and protect trade secrets, it is now clear that businesses must ensure that they are able to demonstrate that they have taken proper care and active steps to protect the information from unlawful use and disclosure. 

What behaviour is considered unlawful?

The key requirement for use, disclosure or access to trade secrets is that consent must be obtained from the trade secret holder. Unlawful conduct will depend on whether a person knew or should have known or was on notice that use or disclosure of the trade secret was unlawful. This increases the importance of having strong non-disclosure and confidentiality arrangements in place when contracting.

The new Directive also provides for minimum rules for protection and preservation of trade secrets during litigation. Restricted access to documents containing trade secrets, and to hearings and public transcripts of such when trade secrets may be disclosed, should provide some comfort to a business dealing with sensitive information which it would otherwise be hesitant to bring into the public realm. 

What impact will the new Trade Secrets Directive have on whistleblowing?

The new Directive contains exceptions that in essence create a "whistleblower defence" to trade secret misappropriation claims. This permits disclosure of trade secrets when exercising the right to freedom of expression and information, acting for the protection of the general public interest and/or protecting a legitimate interest recognised by EU or national law. 

This leaves considerable ambiguity as to when disclosure will be considered to fall within these exceptions, particularly as the objective test does not require any element of reasonableness. A business should, however, take comfort that this protection seems to be limited to requiring proof of wrongdoing or misconduct rather than simply belief or conjecture. It is, however, questionable as to whether this absolute test will survive translation into UK legislation. 

Next steps

Notwithstanding the outcome of the Brexit vote in the UK on 23 June 2016, there are a number of things a business can begin to do to ensure it is in a position to take full advantage of the protections afforded by the new Directive.  It remains to be seen how the new Directive will change much of the current well-understood position for protection of confidential information under English law.  Will the legislation implementing the Directive deal only with trade secrets or also with other forms of confidential information? 

The first step entails clearly identifying what are the valuable trade secrets which are currently owned and creating policies and procedure that are robust enough to be considered "reasonable steps" to protect them. This could include:

  • reviewing policies and procedures for protecting sensitive information, including IT security and BYO devices;
  • ensuring adequate training to all employees regarding protection of confidential information;
  • revising existing employment agreements to expressly deal with trade secret protection;
  • reviewing employee exit processes to ensure that all confidential information is returned at the end of employment; and
  • in light of the potential defence for whistleblowers, employers should ensure that they comply with all retaliation laws and management are appropriately trained on best practice to reduce the risk of whistleblower retaliation claims.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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