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Possible effect of draft EU Trade Secrets Directive in Slovakia: Two steps forward, one step back

By the intended adoption of the proposed Trade Secrets Directive, the European Commission aims to enhance the protection of undisclosed know-how and business information against their unlawful acquisition, use and disclosure.

May 2014

While the harmonisation of this field of law is a commendable task, the more the existing national legislation differs from the content of the directive, the more significant changes are to be expected in the member states.

close-up eyeIn Slovakia, the current statutory regulation of trade secrets is rather scanty and does not adequately reflect the changing market conditions. Slovakian regulation works on the basis that a trade secret is an asset which attaches to a particular business and cannot be commercially exploited in a flexible manner. For example, it cannot be easily licensed. The relevant sections of the Slovakian Commercial Code that deal with trade secrets have remained intact since their adoption in 1991. As a result of this legislative hiatus, particular problems exist, for example, with respect to protection of startup ideas and know-how, especially those that cannot be directly associated with an already established business. In practice, it is very common that early stage startups are formed by a small group of individuals who work on a particular innovative project, and, with their (often) limited financial resources, they try to keep their costs and overheads as low as possible. Therefore, establishment of a limited liability company comes only at a later stage of the project development. However, prior to the incorporation of the company, they do not fall within the ambit of the current wording of the Commercial Code and trade secret protection is not guaranteed. This is one of the most acute problems of a very formalistic approach of the current Slovakian legislation.

Implementation of the draft Trade Secrets Directive into Slovakian law would have great potential for updating this field of law and bringing it in line with current international trends. There is a considerable number of differences between the current Slovakian regulation of trade secrets and this European proposal. For instance, when defining a trade secret, the draft Trade Secrets Directive requires that: (i.) the secret is not generally known or readily accessible, (ii.) has commercial value and (iii.) reasonable steps have been taken to keep it secret. In contrast, the Slovakian Commercial Code contains another condition, namely that a trade secret may only be information of a commercial, manufacturing or technical nature and must be related to the business enterprise. Hence, adjustment of the Slovakian definition of trade secrets would be necessary to make it wider. So far, there have been only very few court judgments dealing with trade secrets published in Slovakia, and thus a considerable level of legal uncertainty exists with respect to the issue of what may or may not be classified as a trade secret.

Moreover, in Slovakia a trade secret holder is currently identified only indirectly through ownership of the business enterprise to which the trade secret pertains. Such a legislative approach does not permit licensees to defend trade secrets and restricts the level of protection available to innovative ideas. This limitation would need to be removed in order to meet the requirements of the draft Trade Secrets Directive.

hand-drawn chart increasingFurther, new provisions in Slovakian law of trade secrets would include a possibility to set the level of damages claimed by the applicant as the amount of royalties of fees which would have been due if the infringer had requested authorisation to use the trade secret in question. At the moment, this method for calculation of the amount of damages is available only in cases of a breach of "pure" intellectual property rights such as trade marks, copyright or patents. Claims arising from infringement of trade secrets or unfair competition conduct have not been included this category. Similarly, the Slovakian judicial authorities do not have competence to order that infringing goods shall be delivered up to charitable organisations.

Notwithstanding the fact that a majority of the provisions of the draft Trade Secrets Directive are well-reasoned and indeed capable of becoming one further deliverable on the commitment of creating a single European market for intellectual properly, there are two features of the draft directive that could become considerable setbacks for some Member States. Namely, the draft Trade Secrets Directive sets the limitation period for bringing an action arising out of infringement of trade secrets on the scale from one year to not more than two years. Even if we considered the longest permitted limitation period of two years, in practice it may still be too short, and could lead to legal actions being prematurely filed with courts – as a "safety" measure – to avoid expiration of limitation period. In Slovakia, a four year limitation period currently applies to claims arising from infringement of trade secrets. Due to the requirement of the draft Trade Secrets Directive, this limitation period would need to be shortened to two years.

We are, however, much more concerned with the fact that the draft Trade Secrets Directive requires that unlawful acts occur "intentionally or with gross negligence". In Slovakia infringements of trade secrets are governed by the concept of strict liability, and no subjective element is assessed by judicial authorities during trials. With the implementation of the draft Trade Secrets Directive, this standard would need to be abandoned, which could significantly lower the level of protection, prolong the court proceedings and reduce the effectiveness of the proposed draft. Assessment of the subjective elements of alleged infringement of trade secrets, i.e. whether unlawful acts of acquisition, use or disclosure of trade secrets were indeed carried out "intentionally or with gross negligence", may turn out to be the focal point of the court proceedings and significantly hamper the chances of winning the applicant's case. Eventually, it could dissuade trade secret holders from pursuing their claims against alleged infringers, especially when the burden of proof does not automatically shift to the defendant.

commentsIn response to comments received in response to the Proposed Directive, on 4 March 2014, the European Council published a presidency compromise proposal which amends the published draft. In particular, the express requirement for unlawful acts to be intentional, absent gross negligence, has been removed. Furthermore, the proposal suggests increasing the short two year limitation period to five years. It remains to be seen whether these amendments will be taken on board.

Based on the European Commission's draft, it is safe to say that the European harmonisation of rights related to trade secrets will lead to a substantial revision of the Slovakian Commercial Code. However, the overall effect of the new legislation will undoubtedly depend also on the exact wording the Trade Secrets Directive that will be eventually adopted by the EU. In this respect, the competent bodies of the EU should ensure that the changes that will be required from the Member States are not steps backwards.

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Ján Lazur

Jan explores the possible effects of the directive in Slovakia.

"In Slovakia a trade secret holder is currently identified only indirectly through ownership of the business enterprise to which the trade secret pertains."