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Coming to the EU soon: Trade Secrets Directive

January 14th, 2016 by IPKM blog

A delicate balance of interests in effectively defending trade secrets across Europe

The European Commission drafted in November 2013 a proposal for a Trade Secrets Directive[1]. In accordance with ordinary EU legislative procedure this proposal was sent to the European Parliament and the Council. On 15 December 2015[2] it was announced that negotiators of the co-legislators had agreed on the text of the Directive as a package-deal. The priorities of the European Parliament, such as the safeguarding of freedom of expression and information (concerning journalists and whistle-blowers) and employees’ mobility have all been adopted in the agreed text. The plenary sitting date of the first reading of the European Parliament is tentatively set on 8 March 2016. It is thus expected that the agreed text will then or soon thereafter become EU law that needs to be adopted by Member States in their laws, regulations and administrative provisions within 24 months after the date of adoption of the Directive. Click here for agreed text.

The compromise has led to the creation of a layered structure of the Directive: first the principles are set out that are then elaborated in specific provisions dealing with trade secrets. The Directive does not affect the exercise of the right to freedom of expression and information or Union and national laws pertaining to obtaining or disclosing information; neither shall it be used to restrict employees’ mobility. These principles determine the (un)lawfulness of an appropriation of a trade secret[3] and when unlawful, the exceptions to application of the directive. Protection under the Directive is for instance to be dismissed when a whistleblower reveals a misconduct, wrong doing or illegal activity[4].

The definition of trade secrets closely adheres to that of article 39 TRIPS[5]. Trade Secrets are not intellectual property rights, such as patent or design rights are, but they are considered to be part of the realm of intellectual capital (property) [6] that needs to be protected against misappropriation. There is a correlation with the Enforcement Directive (2004/48) that has a broad scope[7]. The Directive is to take precedence over the Enforcement Directive[8] as lex specialis where the scope of the directives overlap. The author believes that the enforcement measures, procedures and remedies[9] under the Directive are thus to be regarded specific to the intricate nature of trade secrets[10]. In line with the layered structure, issues not addressed by the Directive, are then to be dealt with by the Enforcement Directive as lex generalis.

The Directive cannot be used to restrict employees’ mobility[11]. Employees may, in the exercise of such mobility, use information that is not considered to be a trade secret and may use the experience and skills that they honestly acquired in the normal course of their employment. The structure of employee mobility as principle and not as a substantive component of the definition of trade secrets and the (un-) lawful acquisition, use and disclosure thereof will support the development of homogenous case law regarding the definition of trade secrets throughout the Union. The Directive does not specify the skills and experience of the employee. Arguably, they can be considered trivial[12]. Experience and skills that cannot be considered trivial and comprise specific and valuable know-how of the trade secret holder may thus fall within the scope of the Directive.

What is to be considered unlawful acquisition, use and disclosure of trade secrets, is determined on the basis of objective factors[13]. Subjective criteria, such as intention and knowledge are not relevant in this regard. They become relevant in the determination of damages[14]. Knowledge also becomes relevant in the case of third parties that are passive recipients of trade secrets[15] or that carry out activities in respect of infringing goods[16], i.e. goods of which the production, design or marketing significantly benefit from trade secrets unlawfully acquired, used or disclosed. One should be aware that the third party acting in good faith may change colour so that the use or disclosure by this party becomes unlawful[17], for instance when legal notice was served by the trade secret holder.

The confidentiality of trade secrets during legal proceedings is preserved[18]. This is a.o. achieved by imposing obligations of non-disclosure and non-use of identified confidential information under forfeiture of penalties to all parties participating in the legal proceeding[19].

The competent court may order measures (including provisional and precautionary) of injunction and seizure of infringing activities and products[20]. In the proceeding based on the merits of the case, the court may also order the adoption of corrective measures[21] relating to infringing goods and/or the destruction of or delivery of everything containing the trade secrets[22] or may order alternative measures[23].

The Trade Secrets Directive does not regulate the discovery and preservation of evidence and the right of information that are covered by sections 2 and 3 of the Enforcement Directive. The author argues that it follows from the layered structure of the Directive that relevant national enforcement laws are to be amended to include trade secrets. The Directive could have been more explicit in this regard for purposes of legal certainty.

The Trade Secrets Directive provides a well-balanced instrument for the protection of trade secrets across Europe by minimum standards. Member States may thus provide for more far-reaching protection as long as they comply with a number of specified articles of the Directive[24].

If any critical comments were to be made about the Directive, it would be the issue of the burden of proof in judicial proceedings based on the merits of the case. In practice, it may still be too difficult to prove by the applicant that the trade secret has been unlawfully acquired, used or disclosed by the respondent. Considering that the proceedings may involve a lot of time and money, SME’s may in the end not initiate the proceeding out of fear not being able to proof the case. Lowering the burden of proof by introducing a rebuttable presumption when the applicant has been able to provide evidence that may reasonably be considered available, would have provided the applicant a more effective weapon in defending trade secrets.

Having said that, the omission of the rebuttable presumption (or any shift of burden of proof) in the Directive does provide an opportunity for the individual Member State to distinguish itself from other Member States. Hopefully, The Netherlands will seize this opportunity to give an extra boost to its image as the preferred international hub in the field of cross-border R&D and innovation. “But shhh..Holland..let us keep this a secret.”

By Sil Hu

 

 

 

 

[1] Directive on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure

[2] In May 2014 the Council adopted a general approach and in June 2015 the Legal Affairs Committee of the European Parliament adopted the draft report on the Proposal. The draft report included amendments ensuring a proper balance of all interests involved. Informal discussions between the European Parliament and the Council has led to a package-deal agreement. If the European Parliament were to adopt the agreed text as its position at first reading, then the Council would approve the European Parliament’s position and the act would then be adopted in the wording that corresponds to the European Parliament’s position. This development is in line with the trend of recent years towards agreements at first reading.

[3] Article 2a of Chapter II on Lawful acquisition, use and disclosure of trade secrets: independent discovery/creation, re-engineering, honest commercial practice and the application of Union or national laws are considered lawful.

[4] Article 4 on Exceptions, application under Directive shall also be dismissed when right to freedom of expression and information is exercised, when the unlawful act was carried out and necessary in accordance with Union or national law or was carried out for the purpose of protecting a legitimate interest recognised by Union or national law.

[5] Article 2(1) of the agreed text of the Directive reads as follows: ‘trade secret’ means information which meets all of the following requirements:

  1. a) 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;
  2. b) has commercial value because it is secret;
  3. c) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

[6] Recital 1. It is debateable whether information and/or know-how can be regarded a good that can be owned and transferred. An interesting article on this matter according to Dutch law is: Knowhow: aandachtspunten in de contractspraktijk en de rol van art. 39 TRIPS (that can be translated to: Know-how: key points for contracts and the role of art. 39 TRIPS), mr. M. Schut, MvV 2010, nr 2, p. 15-20. Whether it is or is not; trade secrets comprise information and know-how that complement, supplement or replace intellectual property rights, which also need to be protected in order to safeguard and enhance (cross-border) R&D and innovation.

[7] Recital 2 of Enforcement Directive refers to the same intellectual property as is addressed by recital 1 of the proposed Trade Secrets Directive. Recital 13 of the Enforcement Directive: “It is necessary to define the scope of this Directive as widely as possible in order to encompass all the intellectual property rights covered by Community provisions in this field and/or by the national law of the Member State concerned.”

[8] Recital 28.

[9] As being dealt with in chapter III, articles 5 through 14.

[10] Other mechanisms that deal with the intricate nature of trade secrets are article 6 that deals with proportionality (re enforcement) and abuse of litigation and article 8(3): the discretion of competent courts to preserve the interests of fair trial (confidentiality during legal proceedings).

[11] Article 1(2a) of Chapter 1 on Subject matter and scope.

[12] Recital 8a addresses the importance of a homogenous definition of a trade secret. Such definition should cover business information, technological information and know-how where there is both a legitimate interest in keeping confidential and a legitimate expectation in the preservation of such confidentiality. Such information and know-how may have actual or potential commercial value. This is especially the case when unauthorised acquisition, use or disclosure is likely to harm the interests of the trade secret holder in that it undermines his or her scientific and technical potential, business or financial interests, strategic position or ability to compete. “Such definition excludes trivial information and the experience and skills gained by employees in the normal course of their employment nor to information which is generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question.”

[13] Trade secrets are unlawfully acquired by means of unauthorized access to, appropriation or copy of anything containing trade secrets or from which trade secrets can be deduced. Also, any other conduct which, under the circumstances, is considered contrary to honest commercial practices, shall be considered unlawful acquisition. Use or disclosure of a trade secret is unlawful when acquired unlawfully or carried out without consent of the trade secret holder in breach of contract or duty (non-disclosure and limited use). Article 3.

[14] The liability to pay damages is linked to the knowledge of infringer of infringing activities. In case of the employee acting without intent the Member States may limit the liability for damages. Article 13(1).

[15] Article 3(4).

[16] Article 3(5).

[17] Recital 18. In order to prevent disproportional harm from injunctions and corrective measures, the third party that acted in good faith at time of use or disclosure may request pecuniary compensation instead; article 12(3).

[18] Article 8.

[19] Article 8(1) jo. article 15. The Directive also prescribes measures restricting access to documents containing (alleged) trade secrets and hearings where trade secrets may be disclosed to a limited number of persons. Copies of judicial decisions for other people than the restricted group of people shall not contain the passages containing trade secrets. Article 8(2).

[20] In case of provisional and precautionary measures the courts may require the trade secret holder to provide evidence that may reasonably be considered available in order to satisfy themselves with a sufficient degree of certainty that a trade secret exits, that the applicant is the trade secret holder and that the trade secret has been acquired, used or disclosed unlawfully, or that this is imminent; article 10(1).

[21] Corrective measures include recall, removal of infringing quality, destruction or removal from market; article 11(2).

[22] Article 11(1)(ca).

[23] See ftnte 17 infra.

[24] Article 1, minimum compliance aims to protect interests of others; e.g. trade secrets do not have exclusive rights such as patent rights (independent creation, reverse engineering is allowed) and the right to freedom of expression and the public interest of whistle-blowers.

One thought on “Coming to the EU soon: Trade Secrets Directive

  1. Pingback: Protecting businesses’ trade secrets [Plenary podcast] | European Parliamentary Research Service Blog

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