Keeping secrets in Europe: the new Trade Secrets Directive will offer a new uniform approach for employers

Written on 10 May 2016

In an age where the value of a company’s intangible assets will almost inevitably exceed those of its tangible assets, the protection of confidential information – and in particular trade secrets – is a priority. Indeed, for employers which are technologically innovative, the unauthorised use or disclosure of trade secrets can have significant consequences for business competiveness – and particularly for those businesses which lack the specialist resources to obtain and manage registered intellectual property rights.

Mobile employees and technology heighten the risks of misappropriation

With advances in technology and employee mobility on the increase, the risk of misappropriation of trade secrets by ‘insiders’ is heightened.

It is not surprising that the concept of ‘trade secrets’ in the employment context is frequently litigated.  However, as much of the case law turns on the facts, the question of what is and what is not a trade secret often remains unclear.  Employers operating internationally also face the additional challenge of navigating the various legislative frameworks of the jurisdictions in which they work.  Within the EU, the approaches of the Member States can vary quite dramatically.

A new European approach

The new EU Trade Secrets Directive (the Directive), approved by the European Parliament in May 2016, seeks to address these discrepancies. The key features of the Directive for employers are set out below.

Definition of ‘trade secret’

The Directive introduces a definition of a trade secret. Information will be considered a trade secret if 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 this kind of information;
  • has commercial value because it is secret; and
  • has been subject to reasonable steps (under the circumstances) to keep it secret by the person lawfully in control of the information.

While this definition should make it easier for employers to protect their trade secrets, the employer must be able to demonstrate that it has taken reasonable steps to protect the secret in the first instance.

Experience and skills not protected

The Directive makes it clear that it does not intend to limit employees’ use of:

  • information that is not a trade secret; or
  • experience and skills honestly acquired in the normal course of their employment“. 

This leaves some ambiguity over what an employee can and cannot take with them when then leave to take another job. In particular, it is easy to see scope for disagreement as to the meaning of the term “honestly acquired“. Requests for clarification from the Court of Justice of the European Union in the future are likely. 

Restrictive covenants remain a matter for national law

The recitals to the Directive state that it will not restrict the possibility of concluding non-competition agreements between employers and employees. Post-termination restrictive covenants and their enforceability will remain a matter for national law.  Interestingly, the UK government has recently issued a call for evidence on the impact of non-compete provisions – see our article on that here.

A carve out for whistleblowers?

Following the Panama Papers revelations, concerns have been raised about the potential for the Directive to threaten the work of journalists, their sources and whistle-blowers.

However, the Directive seeks to address this by including a specific exception for whistle-blowers. It provides that it will not be unlawful for an individual
acting for the purpose of protecting the “general public interest” to acquire, use or disclose a trade secret in order to reveal “misconduct, wrongdoing or illegal activity“.

The question of what is in “the general public interest” will depend on the individual’s views and, in contrast with the position in the UK in respect of protected disclosures under section 43B of the Employment Rights Act 1996, the Directive does not impose a condition that the whistle-blower’s belief that they are acting in the public interest is also reasonable. Again, these questions are likely to fall to the courts for clarification, but will cause employers concerns regarding the security of their information.

The Directive seems to limit protections to where there is proven wrongdoing or misconduct, rather than a belief of wrongdoing, although employers should be cautious about relying on this as, given the parameters of the UK’s existing whistleblowing protection, it is likely that the test of wrongdoing will include a subjective element in the UK.

Article 5(a) of the Directive provides a similar exemption for journalists, clarifying that the acquisition, use or disclosure of a trade secret for the purpose of “exercising the right to freedom of expression and information as set out in the Charter [of Fundamental Rights of the European Union” will not be unlawful.

Whilst this may go some way to alleviating journalist’s concerns, the broad wording of this exemption means that many others may seek to rely on it – including employees, and so this is another area likely to give rise to litigation.

Remedies and enforcement

An important provision of the Directive is that Member States are required to ensure the availability of civil redress against unlawful use of trade secrets. In the past, several Member States only provided criminal remedies, with the correspondingly higher burden of proof.  In particular, owners of trade secrets must be entitled to apply for remedies including damages and interim and final injunctions. The Directive also contains provisions ensuring that trade secrets will be preserved during the course of and after legal proceedings – and states that relevant enforcement hearings may take place in private, a key requirement since otherwise bringing a court action to prevent unauthorised disclosure could itself result in the wider publication of the secret in question.

These provisions taken together will make it much easier for employers with operations in several Member States to protect their secrets
effectively.

Limitation periods

The Directive specifies a limitation period of six years, with Member States being given responsibility for determining when that period begins, ends (subject to the six year maximum) and is interrupted or suspended.  In particular, this leaves scope for wide variation if some Member States opt to start the six year period running when the trade secret is unlawfully taken and others start it running only when the fact that the trade secret has been taken comes to light.

When will the Directive bite?

Once the Directive has been published in the Official Journal, which is expected in the next few weeks, Member States will have two years in which to implement the provisions of the Directive into national law. The UK government has previously indicated that some changes to national legislation will be required as a result of the Directive, including to the Limitation Act 1980 and the Civil Procedure Rules.

Once the Directive is in force, the courts of Member States will also be obliged to interpret their existing law of confidential information in line with its provisions. In the UK, this will be particularly interesting as the current law on confidentiality is mainly derived from the law of equity, and not from statute. Existing case law will, as a result, need to be treated with some caution.

What should employers do to prepare?

Given the importance of trade secrets, employers should look to take steps now to prepare for the new trade secrets regime:

  • develop internal systems and procedures to identify trade secrets (in line with the new definition in the Directive) and ways in which trade secrets could be disseminated or misappropriated;
  • create and communicate policies that sufficiently demonstrate that reasonable effort was made by the business to protect secrets;
  • review existing measures used to protect information across the business’s EU operations – for example confidentiality and non-disclosure agreements with employees, labelling of secret information, restrictions on access, monitoring and IT security measures.  In respect of key technical secrets it may be worth considering appointing a trade secrecy officer whose role includes making sure that the policies and physical security measures are actually complied with; and
  • review and record employees’ roles and their scope of work so that steps can be taken to ensure that the line between specific trade secrets and general ‘experience and skills’ can be clearly identified.

Is this good news for employers?

Some of the work to be undertaken in preparation for the Directive coming into force may be complex and costly and require a more detailed understanding of employees’ roles and the risks posed. There is also a likelihood of greater litigation concerning the existence or misappropriation of trade secrets.

However, the EU anticipates that any costs incurred in undertaking these steps will be offset by the competitive advantages that businesses will enjoy in the long-term.  The tools provided by the Directive should strengthen ability of businesses to protect their valuable know-how, and to justify policies and procedures already in place.