Cloaks and daggers: the new EU Trade Secrets Directive

Written on 2 Jun 2016

What’s happened?

On 27 May 2016, the Council of Europe adopted the legislation governing the new EU Trade Secrets Directive. This is expected to be in force at national level from June 2018. The new law should raise the standard for trade secret protection across the EU as a whole, although there will be uncertainties as to its interpretation when it is first implemented.

In this update we explain the provisions of the new Directive, setting out what it will cover in terms of what a trade secret is, who can own one, what can and cannot be done with a trade secret, and the proceedings and sanctions available to enforce trade secrets.

Following our update on the draft trade Secrets Directive in May 2015, negotiations between the Council of the EU and the European Parliament resulted in a compromise agreement in December 2015 including some slight but politically sensitive changes of emphasis, in particular relating to the rights of employees, whistleblowers, journalists and trade unions.

The highlights

Will the Directive harmonise the law fully across all Member States?

The Directive does not attempt to harmonise protection absolutely, but simply sets the minimum level of protection for trade secrets. Member States remain free to afford trade secrets greater protection under national law than that required under the Directive.

What is a trade secret?

The Directive defines a “trade secret” as information that:

  • is secret, meaning that it is not generally known or readily accessible within the relevant circles;
  • has commercial value because it is secret; and
  • has been subject to reasonable steps, under the circumstances, by the owner to keep it secret.

Thus, the holder of a trade secret does not need to define what the secret actually is, before bringing a claim alleging that it has been breached. However it specifically excludes trivial information and the experience and skill employees have gained in the course of employment – always a very difficult line to draw.

The Directive adopts the concept of reasonable steps from the US Uniform Trade Secrets Act, but gives no guidance as to what might be considered “reasonable under the circumstances”. Other countries, such as Russia and Japan, have opted to stipulate detailed lists of protection measures, but did not adopt the same ones. Similar culturally-inspired divergence between European Member States is likely when the Directive is implemented into national law – almost guaranteeing litigation in due course. Under the English law approach, the steps required will depend on the value of the information and how easy it is to keep that information secret.

Who “owns” the trade secret?

The Directive maintains the current position in all Member States’ laws, that possession of a trade secret is not a property right. Accordingly, it is not possible to “own” a trade secret.

Instead, the Directive refers to the holder of a trade secret being the person who lawfully controls the trade secret. This absence of ownership contrasts with the default position in patent and copyright law, where the rights in work done by an employee automatically belong to the employer. Employers will not automatically be the holder of trade secrets in an innovative but unpatentable idea. It will be important to provide for this in employment contracts.

What will be prohibited?

The Directive makes it unlawful to acquire, use or disclose a trade secret in certain circumstances.

Acquiring a trade secret without the owner’s consent will be considered unlawful when it is obtained:

  • by unauthorised access to documents, electronic files or materials; or
  • under circumstances which are considered “contrary to honest commercial practices”, including in breach of a confidentiality agreement.

There is no guidance as to what honest commercial practices may or may not be. Interestingly, the Directive goes beyond current English and German law in that unlawful use will also include the production, offering or placing on the market of infringing goods, where the person carrying out such
activities knew, or should, under the circumstances, have known that a trade secret was used unlawfully in their design, manufacturing or marketing. This means that the taking of a trade secret in country A and its use to manufacture goods in country B will be grounds for an injunction against sale of the goods in country C once the importer or retailer has been put on notice that the trade secret was breached in their production.

A third party who receives a trade secret will also be an infringer if they knew or should have known that the person passing it to them was not authorised to do so.

However, acquisition, use and disclosure of trade secrets will be lawful where that acquisition, use or disclosure is required or allowed by EU or national law. For instance, rules on whistle-blowing may permit the otherwise-unauthorised disclosure of secrets, if their disclosure serves a public interest related to misconduct, wrongdoing or illegal activity.

The Directive also, controversially, expressly permits the acquisition of trade secrets by reverse engineering, that is the observation, study, disassembly or test of a product or object that has been made available to the public or that is lawfully in the possession of the acquirer, without restriction of the right to reverse engineer.

What other exceptions apply?

Consistent with international norms, the new law on trade secrets will not confer any power to object to a competitor using information which it has independently discovered or created. There are also provisions stipulating that:

  • trade secrets must not interfere in the exercise of the rights of workers’ representatives to information, consultation and participation in accordance with trades union laws;
  • the exercise of the right to freedom of expression is not to be restricted, particularly in relation to investigative journalism; and
  • the Directive should not affect the mobility of employees, for example by limiting employees’ use of information not falling under the trade secret definition or by imposing non-compete clauses in employment contracts. We discuss the specific implications for employers in our update here.

How long will you have to bring claims?

The maximum limitation period to bring proceedings has been increased from the two year period the Commission first proposed, to six years, but no fixed limitation period is set, and the Directive leaves it up to Member States to determine when implementing it into national law:

  • when the limitation period begins to run (for example, from the date of the breach,or the date upon which the trade secret holder becomes aware, or should have become aware of the breach);
  • the duration of the limitation period; and
  • any circumstances under which the limitation period is interrupted or suspended.

Businesses will need to pay close attention to the choices Member States make in implementing this aspect, and be aware of the shortest limitation period which could apply.

Proceedings

One of the key areas of divergence amongst Member States, identified by the Commission, is the ability to enforce confidentiality over trade secrets by bringing proceedings, whilst also preserving that confidentiality throughout the court proceedings themselves.  Under the new Directive, Member States must provide measures which the Court can apply, upon a party’s request, to preserve the confidentiality of the trade secret during proceedings. This will in practice mean it is realistically possible to enforce trade secrecy claims for the first time, in some Member States.

However, the Directive does not contain all of the important tools available under the IP Enforcement Directive, such as measures for obtaining and preserving evidence; a duty on a party to give information; or any imposition of liability on intermediaries such as internet service providers. Nor are there any provisions on recovery of litigation costs from the losing party, unless national procedures or implementations already permit this.

What sanctions can a court impose at the end of proceedings?

Following a finding of an unlawful acquisition, use or disclosure, courts may order the usual remedies:

  • a cessation or prohibition of the use of the trade secret;
  • a prohibition against producing the infringing goods;
  • a recall of infringing goods from the market; and/or
  • destruction of infringing goods or material recording the trade secret.

These measures may be revoked if the trade secret subsequently ceases to be secret.

Alternatively, where the infringer neither knew, nor had reason under the circumstances, to know that the trade secret was obtained from another person unlawfully, courts may order damages to be paid instead of a prohibition, recall or destruction of goods. The court can only do so if alternative measures would cause disproportionate harm to the alleged infringer, and where financial compensation is reasonably satisfactory to the trade secret holder. But both ‘disproportionate’ and ‘reasonably satisfactory’ are broad terms likely to be the subject of divergent interpretations, and so disputes, in due course are likely.  In particular we may see disputes given the divergence between the English and German courts over the circumstances in which an injunction is appropriate under a standards-essential patent.

The next stage

The Directive has been broadly welcomed, and its legislative progress has been rapid compared to other intellectual property measures, such as the reform of trade mark law. However, although it is undoubtedly going to raise the standard for trade secret protection across the EU as a whole, the uncertainties accompanying any new law apply in this case, too; particularly given the latitude Member States have in how they implement it into national law over the next two years. This will be something for businesses to keep a watchful eye on, to ensure that the implementations close so far as possible the gaps in the Directive itself, and so far as possible do so consistently.

Given the centrality of information to such a large proportion of modern commerce and industry, the CJEU is certain to have to step in to clarify several aspects of the Directive in due course.

The final text is here.