New directive must provide stronger protection of trade secrets in the European Union (Part I)

On 15 June 2016 Directive (EU) 2016/943 of the European Parliament and of the Council of 8 June 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure (hereinafter: "the directive") was published.

The objective of the directive is to establish a sufficient and comparable level of redress for EU companies across the internal market in case of trade secret misappropriation while at the same time providing sufficient safeguards to prevent abusive behaviour.

In this regard, trade information, client lists, market research, business processes, etc. comes to mind. Once made public, its value will be lost.

We already discussed the subject matter and scope of the initial proposed directive dated 28 November 2013 in an other article on our website that you can read by clicking here.

The directive tends to a minimum harmonisation enabling Member States to maintain more stringent regulatory standards than those prescribed by EU standards, provided that these are compatible with the Treaty.

The EU Member States must transpose the provisions of this directive into their national law by 9 June 2018.

This new directive will be discussed in two parts. Part I elaborates on the key points of subject matter and scope. Part II will provide an overview of the procedural aspects that the directive provides for a trade secret holder.

A. Background

Innovative companies are increasingly exposed to dishonest practices aimed to misappropriating trade secrets.

These include theft, unauthorised copying, economic espionage or the breach of confidentiality requirements by another party such as an employee, a trade union, a competitor, a journalist, a third person (whether or not in good faith), whether from within or from outside of the EU.

Recent developments, such as globalisation, increased outsourcing, longer supply chains and the increased use of information and communication technology contributes to increasing the risk of those practices.

To date, significant differences still exist in the EU Member States with regard to important legal remedies for trade secrets.

Most Member States, including Belgium, use a patchwork of legal protection through labour law, contract law, tort law, competition law, and specific legislation on databases, privacy law, intellectual property law and criminal law.

B. Key points

1. Principle

The new directive with its introduction of a uniform definition of "trade secret" enables the trade secret holder to act against the unlawful acquisition, use or disclosure of its trade secret.

It is an additional tool, whether as a complement or as an alternative to existing intellectual property rights. In contrast to, for example, trademark law, however, it is not intended to create exclusive rights to the owner.

2. Uniform definition of "trade secret"

After transposition the following definition of “trade secret” is applicable throughout the entire EU.

"Trade secret" means information which meets all of the following  requirements: 

a) 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; 

b) it has commercial value because it is secret; and 

c) it has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.  
(own emphasis)

They result from the combination of different types of technical and commercial information. Technical secrets may include drawings and designs, prototypes, manufacturing processes, not patentable or not patented inventions, know-how, formulae or recipes, genetic materials and fragrances, wheras commercial secrets may consist of consumer and supplier lists, business methods and strategies, and cost and price information. 

In practice it must be verified whether all of the requirements are fulfilled.

2.1 First requirement: information is secret

The information may not be "generally known", so it is possible that information that is only known in a select group of people can be treated as secret.

Trivial information is not covered by the definition of a trade secret. The directive clarifies that it is constructed to cover know-how, business information and technological information where there is both (i) a legitimate interest in keeping them confidential and (ii) a legitimate expectation that such confidentiality will be preserved.

Not all information that - strictly speaking - falls under the heading of "secret” shall be considered a trade secret.
Indeed, the directive provides for safeguards for the legitimate use of information (see point 3) and exceptions (see point 5).

The protection of trade secrets also applies for the provision of services.

Second requirement: information has commercial value because it is secret

2.2 In practice this is broadly interpreted. The directive provides a number of examples.

A trade secret should be considered to have commercial value when its unlawful acquisition, use or disclosure is likely to harm the interests of the person lawfully controlling it, in that it undermines that person’s scientific and technical potential; business or financial interests; strategic positions or ability to compete.

2.3 Third requirement: reasonable steps to keep information secret

The directive gives no explanation as to what "reasonable measures" means so in practice this third requirement undoubtedly will give rise to legal uncertainty.

It should not be interpreted as imposing "super-reasonable” measures that lie on the trade secret holder, however it should be taken seriously. Legally speaking it should be determined as an obligation to perform to the best of one’s abilities: a commitment as trade secret holder to undertake at the best of its ability as a “prudent man” placed in the same circumstances technical and contractual measures.

An important parameter is the proactive assessment of the behaviour of the trade secret holder. Just as in trademark law there’s an obligation for actual use of registered brands, under penalty of extinction, it must also for trade secrets be determined whether the "victim" of an infringer took reasonable affirmative measures to safeguard it’s trade secret.

Such reasonable measures might include:

  • Stipulating in writing a trade-secret policy;
  • Informing employees of the trade-secret policy;
  • Having employees sign non-disclosure obligations (non-disclosure agreements (NDA's)) in (labour) agreements;
  • Stipulating a non-compete agreement;
  • Restricting access to trade-secrets to authorised personnel on a strict need-to-know basis;
  • Restricting public accessibility and escorting visitors;
  • Providing physical and digital (!) locking gates and cabinets to sites that house trade secrets;
  • Explicitly labelling trade-secret documents as “trade secret” and “confidential”;
  • Proactive screening of speeches, publications, online marketing of employees/clients with regard to information about the company;
  • Conducting exit interviews with departing employees.

In practice it is likely depending from one company to another company, that start-ups or small and medium-sized enterprises are expected to have a different degree of reasonableness than a multinational company.

However, at this time we do not have guidelines yet. By 9 June 2021 the European Union Intellectual Property Office (EUIPO) shall prepare an initial report.

We emphasize the obligation for trade secret holders to keep trade secrets "secret", hence the obligation to "stay informed" with risks associated with the use of trade secrets via the internet, taking into account a fast evolving information and communication technology.

3. Lawful acts

In order to promote innovation and competition independent discovery or know-how remains possible.

Reverse engineering through observation, study, and disassembly or testing of a product or object that is lawfully acquired is considered lawful except when contractually agreed otherwise. However, these contractual arrangements may be limited by law.

Employees may use information that is not a trade secret, as well as their use of experiences and skills honestly acquired in the normal course of their employment.  The directive also imposes no restriction on the right of the social partners to conclude collective agreements.

Finally, any other practice that, under the circumstances, is in conformity with honest commercial practices shall be regarded as legitimate.

4. Unlawful acts

The new directive will provide trade secret holders with the right for civil redress before the national court against the unlawful acquisition, use and disclosure of their trade secrets.

Shall be considered unlawful:

  • The acquisition of a trade secret without the consent of the trade secret holder whenever carried out by:
    • Unauthorised access to; appropriating of, or copying of any information, containing the trade secret or from which the trade secret can be deduced;
    • Any other conduct which, under the circumstances is considered contrary to honest commercial practices.
  • The use or disclosure of a trade secret without the consent of the trade secret holder, carried out by a person who is found to meet any of the following conditions:
    • He has acquired the trade secret in an unlawful manner;
    • He makes a breach of a confidentiality agreement or any other duty not to disclose;
    • He makes a breach of a contractual or any other duty to limit the use of the trade secret.
  • The acquisition, use or disclosure of a trade secret or producing, offering, placing on the market, importation, export or storage of infringing goods for those purposes, when a person knew or ought, under the circumstances, to have known, that the trade secret was obtained directly or indirectly from another person who was using or disclosing the trade secret unlawfully  (requirement of good faith)

5. Exceptions: whistleblowers and investigative journalism

On the one hand companies need to obtain legal certainty on cross-border knowledge exchange and the climate in which trade secrets are dealt with across the EU. On the other hand, this should not restrict whistleblowing activity. Therefore, the protection of trade secrets should not extend to cases that disclose relevant misconduct, wrongdoing or illegal activities.

This issue also arose during debates in the European Parliament in April 2016 where reference was made to the recent sensational files such as LuxLeaks, Dieselgate and the Panama Papers and the risk of repercussions for the position of whistleblowers, investigative journalism and trade unions with the slogan that "immoral activities after all are not always tantamount to illegal".  

However, the new directive expressly provides exceptions and safeguards to the protection of trade secrets. In particular in a case where the respondent had every reason to believe in good faith that his or her conduct satisfied criteria such as the public interest, consumer protection, public health, environmental protection, mobility of workers and primarily the exercise of the right to freedom of expression and information, in particular with regard to protection of journalistic sources and whistleblowers.

C. Conclusion

We welcome the introduction of a uniform definition of "trade secret" which provides more consistency and clarity in the EU and hence will improve legal certainty for companies operating within the EU.

In this way companies have an additional tool, whether as a complement or as an alternative to existing intellectual property rights, to enjoy protection where previously no clear legal framework was available at the European level.

However, despite the fact that the directive emphasises that trade secrets are not exclusive rights - independent discovery of the same know-how and reverse engineering remain possible and lawful – we also need to identify possible (negative) side effects.

There is a real chance of a chilling effect where companies or other interested parties out of fear of a potential claim for trade secrets violation are less likely or deterred to share certain information with adverse consequences for innovation and competition.

Although trade secrets are not intellectual property rights, the terminology used in the directive tends to intellectual property rights- ish due to use of terms such as "infringer" and "infringing goods" and the fact that the European Union Intellectual Property Office  (EUIPO) is appointed to evaluate the current directive.

Finally, the chosen legal instrument is a directive, so the provisions must be transposed into national law in all EU Member States. This means that each vague concept – e.g. the third condition of "reasonable measures" from the definition of trade secret - can be interpreted differently by each national court in all Member States so that it is not unrealistic that the unified definition will be subject to the interpretation of the European Court of Justice.

In any event it is appropriate for companies to anticipate along with their counsel on the framework of the current directive, by screening the intangible assets in the company with regard to intellectual property and access to trade secrets.

Part 2 elaborates on the procedural aspects that the directive provides for a trade secret holder.

You can consult the directive (EU) 2016/943 by clicking here.