European Union: European Council Approves Trade Secrets Directive

Last Updated: 4 July 2016
Article by Paul England

On 27 May, the European Council approved the text of the Directive of the European Parliament and of the Council on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure (the "Trade Secrets Directive"). This followed a vote to adopt the legislation by the European Parliament on 14 April 2016. It now remains for the Member States to implement the Directive into their national laws.

Please read on for an overview of the key features of the Trade Secrets Directive.

Background

The Trade Secrets Directive arises from the Commission's Europe 2020 strategy, in which the Commission undertook to create an "Innovation Union" to:

"Encourage higher levels of investment in R&D by the private sector, through more extensive, including cross-border, collaboration in R&D and technological developments between universities and industry, open innovation and allowing for improved valuation of intellectual property (IP) such that access to venture capital and financing is enhanced for research-oriented and innovative economic agents."

Further to surveys and consultations on the subject of trade secrets, the Commission recognised that companies value trade secrets at least as much as other forms of intellectual property and that they are particularly important to small and medium-sized enterprises (SMEs) and start-ups, which often lack the specialised human resources and financial strength to pursue, manage and enforce intellectual property. In particular, the Commission expressed concern that the exposure of trade secrets to theft, espionage or other misappropriation techniques is on the increase. In the findings of the Commission, this is accompanied by an increasing risk that stolen trade secrets are used in third party countries to produce goods that are then imported back into the EU, thus competing unfairly with the proprietor of the stolen information.

The weakness of the EU in the face of these threats lies in the lack of uniform laws for the protection of trade secrets and the uneven levels of protection and remedies between various Member States, placing some countries at a disadvantage to others. The Trade Secrets Directive is therefore intended to bring about the harmonisation of trade secrets protection across the EU and result in domestic and cross-border certainty for companies in the life sciences and technology sectors, amongst others, for whom trade secrets protection is frequently vital.

In particular, the Trade Secrets Directive aims to achieve uniformity by adopting:

  • a common definition of 'trade secrets' and of the circumstances in which the acquisition, use and disclosure of a trade secret is unlawful;
  • measures, procedures and remedies that should be made available to the holder of a trade secret in the event of its unlawful acquisition, use or disclosure; and
  • sanctions in the event of non-compliance with the measures provided and provisions on monitoring and reporting.

Common definitions of trade secrets and unlawful acquisition and use

'Trade secret'

The Trade Secrets Directive defines 'trade secret' as information that satisfies the following three requirements:

  • it is secret, in the sense that it is not, "as a body or in the precise configuration and assembly of its components", generally known among or readily accessible to "persons within the circles that normally deal with the kind of information in question";
  • it has commercial value because of its confidentiality; and
  • reasonable steps under the circumstances have been made to keep the information secret by the person lawfully in control of it.1

The person lawfully in control of a trade secret is the 'trade secret holder', a definition intended to include recipients of trade secrets, such as licensees. An 'infringer' is a person or other legal entity who has unlawfully acquired, used or disclosed a trade secret.

Unlawful acquisition, use and disclosure of trade secrets

The key element of dealings in trade secrets that the Trade Secrets Directive deems unlawful is the absence of the consent of the trade secret holder2. Acts that are unlawful without consent are the acquisition, use and disclosure of trade secrets.

Unlawful acquisition

The acquisition of a trade secret without the consent of the trade secret holder is unlawful when done by the following means:

  • unauthorised access to, appropriation of, or copy of any documents, objects, materials, substances or electronic files that are lawfully under the control of the trade secret holder and containing the trade secret or information from which the trade secret can be deduced; or
  • any other conduct which in the circumstances is considered contrary to honest commercial practices.

It was previously proposed that the directive should stipulate that the holder of a trade secret should have the burden of proving that the trade secret was unlawfully acquired, but this has been abandoned in the agreed text.

Unlawful use or disclosure

The use or disclosure of a trade secret by a party is unlawful where, without the consent of the trade secret holder, that party has:

  • acquired the trade secret unlawfully;
  • breached a confidentiality agreement or any other duty to maintain secrecy of the trade secret; or
  • breached a contractual duty or any other duty to limit the use of the trade secret.

Indirect unlawful acquisition, use or disclosure

Acquisition, use or disclosure of trade secrets by a third party who was not directly involved in the original misappropriation will also be unlawful if, at the time of the unlawful use or disclosure, that party knew, or should have known under the circumstances, that the trade secret was obtained from another person who was using or disclosing the trade secret unlawfully.

Employees

Concern has been expressed that the protection of trade secrets should not impede the mobility of employees. To that end, the Trade Secrets Directive now clarifies that nothing in the Directive should be understood to offer any grounds for restricting the mobility of employees. In particular, the Trade Secrets Directive cannot be used to:

  • limit employees' use of information not constituting a trade secret;
  • limit employees' use of the experience and skills they have honestly acquired in the normal course of their employment; and
  • impose any additional restrictions on employees in their employment contracts other than in accordance with Union or national law.

Furthermore, liability for damage caused to employers for acts of unlawful acquisition, use or disclosure of their trade secrets by employees can be limited by Member States in circumstances where the latter have acted without intent.3

Infringing goods

In addition to unlawful acts committed in relation to the trade secrets themselves, the Trade Secrets Directive makes provision as to the unlawful use of a trade secret through dealings in infringing goods. 'Infringing goods' are defined as goods whose design, characteristics, functioning, manufacturing process or marketing significantly benefits from trade secrets unlawfully acquired, used or disclosed. Such unlawful dealings consist of the "production, offering or placing on the market of infringing goods, or import, export or storage of infringing goods for those purposes."

Preliminary measures

The Trade Secrets Directive makes it possible to obtain:

  • a preliminary injunction to stop or prohibit the use or disclosure of the trade secret;
  • a preliminary injunction to prohibit the production, offering, placing on the market or use of 'infringing goods' as defined;
  • a preliminary injunction to prohibit the import, export and storage of infringing goods for those purposes. ; or
  • an order to seize or deliver up the suspected infringing goods, including imported goods, to prevent their entry into circulation within the market.

In cases where alleged unlawful acquisition, use or disclosure of a trade secret is permitted to continue pending a decision on the merits, courts are required to ensure that the trade secret holder is protected by a guarantee of compensation should the alleged infringement later be held to have occurred.4

Final remedies

Upon a favourable decision on the merits, the trade secret holder can obtain an order prohibiting the further use or disclosure of trade secrets and an order prohibiting the making, offering and placing on the market or use of infringing goods5. Furthermore, EU Member States will be required to ensure that powers to make the following orders (among others) are made available to their state courts:

  • recall of infringing goods from the market;
  • destruction of infringing goods or, where appropriate, withdrawal from the market; and
  • destruction of documents and other materials containing or implementing the trade secret or, where appropriate, their delivery up to the trade secret holder.

A further remedy of damages will also be made available to the trade secrets holder for the unlawful obtaining, use or disclosure of its trade secrets6. This will be calculated on the basis of all the relevant factors, including any unfair profits obtained as a result of the misuse. Damages may also be calculated on the basis of a hypothetical royalty rate.

A further powerful tool for a successful trade secret holder against a defendant will be the possibility of obtaining publicity measures, such as the right to publish a decision on the merits against a defendant.7

Safeguards and proportionality

Both preliminary measures and those available pursuant to a decision on the merits will be subject to certain safeguards.

With regard to preliminary measures, Member States will be obliged to provide their judicial authorities with the authority to require the production of such evidence as is reasonably available to the applicant in order to demonstrate at the preliminary stage that:

  • the trade secret exists;
  • the applicant is the legitimate trade secret holder; and
  • unlawful acts with respect to the trade secret have occurred, are occurring or are imminent.8

With regard to the powers available to the courts, it remains to be seen whether the Trade Secrets Directive will achieve the goal of improving protection of trade secrets.

Preservation of confidentiality of trade secrets v party rights

The parties have a right to be heard in court proceedings. The Trade Secrets Directive provides for judicial authorities to take specific measures necessary to preserve the confidentiality of any trade secret in the course of legal proceedings9. The previous draft of the Trade Secrets Directive provided for a situation where parties could present evidence that is material to the outcome of the litigation without disclosing it to the other party, although the judicial authority could authorise disclosure to the legal representatives of the other party10. Taking into account the dangers of such 'secret' proceedings, the final text of the Trade Secrets Directive has been changed to now provide that the measures that Member States must make available to competent judicial authorities must at least include the possibility to restrict access to documents and hearings containing trade secrets, or alleged trade secrets, to a limited number of persons. There is, however, a condition that that limited number of persons must include, at least, one natural person from each party and the respective lawyers or other representatives of those parties to the proceedings.

Bad faith

The Trade Secrets Directive provides safeguards against actions being taken against a defendant that are manifestly unfounded and the applicant is found to have initiated the proceedings abusively or in bad faith. Member States must ensure that in those circumstances courts may apply appropriate measures. Such measures may include awarding damages, imposing sanctions or ordering the publishing of the decision on the bad faith of the action.11

Limitation period

The two year limitation period initially proposed was to be extended to five years, but the limitation periods applicable have now been left to the Member States to determine, subject to a maximum limitation period of six years.12

Must unlawful acts be intentional?

The express requirement originally contained in the earlier proposed text of the Directive for unlawful acts to be intentional in the absence of gross negligence has been removed. The only requirement of intent that has been maintained is that an act is also unlawful where a person knew or should have known that the trade secret was obtained from another person who was committing an unlawful act. This is a change from the earlier draft of the Directive, which presented claimants with the difficult evidential burden of demonstrating the intention of the defendant.

Implementation

How Member States implement the Trade Secrets Directive is likely to raise new debates. The Council has stated that implementation of the directive should not prevent Member States from legislating more far-reaching provisions for the protection of trade secrets in the absence of specific provisions of the directive13. Some Member States may consider that the provisions of the Trade Secrets Directive are already satisfied by existing laws, with the result that little if any extra legislation is needed. Expect these issues to be discussed in the months to come.

Despite these issues, however, the concept of a directive harmonising trade secrets law appears broadly welcome and will confer benefits on businesses in a variety of ways, including greater certainty of protection. More harmonised laws in Europe should help give businesses greater certainty when sharing information under terms of confidence. Furthermore, the international nature of the life sciences business should benefit from such measures, as many companies in that sector operate across national boundaries. Uniform minimum levels of protection in the EU should help them to prevent others from misusing their trade secrets and confidential information. Harmonisation may also assist in the alleviation of information leaks and the resulting disputes caused where former employees use information they have learnt at their previous workplace. Because today's workers are highly mobile, the harmonising Trade Secrets Directive would appear helpful.

Agreed text of the Directive

Footnotes

1. Chapter I, article 2.

2. Chapter II, article 4.

3. Chapter III, Section 2, article 14, paragraph 1.

4. Article 11.

5. Chapter III, Section 3, article 12.

6. Article 14.

7. Article 15.

8. Chapter III, Section 2, article 13.

9. Article 9(2).

10. Article 9(2), Draft of 28 November 2013.

11. Article 7.

12. Article 8.

13. Article 1.

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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