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April 2014

On 28 November 2013, the European Commission (the "Commission") announced a proposal for a Directive on trade secrets and confidential information. Presuming the Directive eventually passes into legislation, the provisions of the Commission's "Proposal for a Directive on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure" (the "Proposed Directive"), will be the first to attempt to harmonise the national trade secret laws of EU member countries. This promises a significant step forward in terms of domestic and cross-border certainty for companies in the life sciences sector, for whom trade secret protection is vital.

In overview, the Proposed Directive currently intends to adopt:

• common definitions of trade secrets and confidential business information and circumstances when the acquisition, use and disclosure of a trade secret is unlawful;
• measures, procedures and remedies that should be made available to the holder of a trade secret in case of unlawful acquisition, use or disclosure of that trade secret; and
• sanctions in case of non-compliance with the measures provided and provisions on monitoring and reporting.

This article examines the above features of the Proposed Directive and how they are intended to apply.

The need for harmonisation

The Proposed Directive has arisen from the Commission's Europe 2020 strategy, in which the Commission has undertaken to create an "Innovation Union". This is intended to:

"Encourage higher levels of investment in R&D by the private sector, through more extensive, including cross-border, collaboration in R&D and technological developments between universities and industry, open innovation and allowing for improved valuation of intellectual property (IP) such that access to venture capital and financing is enhanced for research-oriented and innovative economic agents."

Further to this strategy, surveys and consultations were conducted in 2011/12 by the Commission on the subject of trade secrets, which, amongst other things, it has identified as effectively filling a gap between copyright and patent protection. As a result of this process the Commission has recognised that companies value trade secrets at least as much as other forms of IP. It notes that they are particularly important to small and medium-sized enterprises (SMEs) and start-ups, which often lack the specialised human resources and financial strength to pursue, manage and enforce IP.  Within this context, the Commission is concerned that the exposure of trade secrets to theft, espionage or other misappropriation techniques has and continues to increase¹. According to the Commission, this is accompanied by the increasing risk that stolen trade secrets are used in third party countries to produce goods that are then imported back into the EU, thus competing with the proprietor of the stolen information. The weakness of the EU in the face of these threats is that there is no uniform protection of trade secrets, but instead uneven levels of protection and remedies between the various Member States, placing some at a disadvantage to other countries both within and outside the EU.

The key provisions of the Proposed Directive are as follows:

Common definition of trade secrets and unlawful use

Definitions

The Proposed Directive defines "trade secret" as information that satisfies the following three requirements:

• it is confidential, 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 "circles that normally deal with the kind of information in question";
• it has commercial value because of its confidentiality; and
• reasonable efforts have been made to keep the information confidential by the person lawfully in control of it².

The person lawfully in control of a trade secret is the "trade secret holder", a definition which is intended to include recipients of trade secrets, such as licensees.  An "infringer" is a person or other legal entity which has unlawfully acquired, used or disclosed a trade secret.

Unlawful acquisition

The key element of dealings in trade secrets that the Proposed Directive deems unlawful is the absence of consent of the trade secret holder³. The acts which are unlawful without consent are the acquisition, use and disclosure of trade secrets. With regards to the first of these, the acquisition of a trade secret without the consent of the trade secret holder is unlawful when done intentionally or with gross negligence by the following means⁴:

• unauthorised access to or copying of documents, objects, materials, substances or electronic files, lawfully under the control of the trade secret holder, containing the trade secret or from which the trade secret can be deduced;
• theft, bribery, deception;
• breach or inducement to breach a confidentiality agreement or other duty to maintain secrecy; or
• any other conduct which in the circumstances is considered contrary to honest commercial practices.

Unlawful use or disclosure

The use or disclosure of a trade secret by a party is unlawful when, without the consent of the trade secret holder they have:

• acquired the trade secret unlawfully;
• been in breach of a confidentiality agreement or any other duty to maintain secrecy of the trade secret; or
• been in breach of a contractual duty or any other duty to limit the use of the trade secret.

Use or disclosure of trade secrets by third parties who were not directly involved in the original misappropriation will also be unlawful if that party knew, or should have known under the circumstances, at the time of the unlawful use or disclosure, that the trade secret was obtained from another person who was using or disclosing the trade secret unlawfully.

Infringing goods

As well as acts in relation to the trade secrets themselves, the Proposed Directive also provides for unlawful use of a trade secret by dealings in infringing goods. "Infringing goods" are defined as goods whose design, quality, manufacturing process or marketing benefits significantly from trade secrets unlawfully acquired, used or disclosed. Such unlawful dealings consist of the "conscious and deliberate production, offering or placing on the market of infringing goods, or import, export or storage of infringing goods for those purposes."

Preliminary measures

The possibility of obtaining a preliminary injunction to prevent unlawful activities is provided by the Proposed Directive, as well as preventing the production, offering, placing on the market or use of infringing goods as defined, or the import, export or storing of infringing goods for those purposes. Precautionary seizure of suspected infringing goods⁵ is also envisaged by the Proposed Directive.  In cases where alleged unlawful acquisition, use or disclosure of a trade secret is permitted to continue pending a decision on the merits, courts are to ensure that the trade secret holder is protected by a guarantee of compensation should infringement later be held to have occurred⁶.

Final remedies

Upon a favourable decision on the merits the trade secret holder can obtain an order prohibiting the further use or disclosure of trade secrets and an order prohibiting the making, offering and placing on the market or use of infringing goods⁷. Furthermore, Member States are to ensure that measures including the following are available:

• declarations of infringement;
• recall of infringing goods from the market;
• destruction of infringing goods or, where appropriate, withdrawal from the market; and
• destruction of documents and other materials containing or implementing the trade secret or, where appropriate, their delivery up to the trade secret holder.

A further damages remedy is also available to the trade secrets holder for the unlawful obtaining, use or disclosure of their trade secrets⁸. This will be calculated on the basis of all the relevant factors, which includes any unfair profits obtained as a result of the misuse. Damages may also be calculated on the basis of a hypothetical royalty rate.

A further powerful tool for a successful trade secret holder against a defendant is the possibility of obtaining publicity measures such as the right to publish a decision on the merits against a defendant.

Safeguards and proportionality

Both the preliminary measures and the measures available on a decision of the merits are subject to certain safeguards.

As regards the preliminary measures, Member States are to provide their judicial authorities with the authority to require such evidence that is reasonably available to the applicant, in order to demonstrate that the trade secret exists, that the applicant is the legitimate trade mark holder and that unlawful acts are occurring or are imminent. Demonstrating that a trade secret exists, however, means proving the non-existence of facts. Insofar as courts will execute this possibility, it remains to be seen, whether the Directive will achieve the goal of improving protection of trade-secrets. Evidence in the negative will normally be impossible to provide.

In respect of making decisions about preliminary measures and final remedies, and assessing their proportionality, the Member States are also to ensure that their judicial authorities take account of the following:

• value of the trade secret;
• measures taken to protect the trade secret;
• conduct of the respondent in acquiring, disclosing or using the trade secret;
• impact of  the unlawful disclosure or use of the trade secret
• legitimate interests of the parties and the impact which the granting or rejection of the measures could have on the parties;
• legitimate interests of third parties; and
• public interest and the safeguard of fundamental rights, including freedom of expression and information.

In effect this results in a balance of interest. Some member states, such as Austria, do not apply the principle of balance of interest at this time.

Preservation of Confidentiality of Trade Secrets vs. Party’s Rights

The parties have a right to be heard in court proceedings. The Proposed Directive provides that the judicial authorities may take specific measures necessary to preserve the confidentiality of any trade secret in the course of legal proceedings.⁹ There is, however, a conflicting relationship between a party’s right to be heard, and a fair (also “public”) trial. “Secret trials”, which remove this right from a party, are not consistent with the general principles of Austrian civil procedure law, and likely also not consistent with the European Convention of Human Rights.

If, on the one hand, trade secrets shall also be protected in the course of legal proceedings, and, on the other hand, “secret proceedings” without the right to be heard shall be avoided, practically speaking, the following “filter mechanisms” are possible:

1. The secret is only disclosed to the court, or
2. The secret is disclosed to an authorised expert (who is subject to a corresponding disciplinary law), who discloses this (if need be, only partially) to the court.

In both cases, the question arises to what extent representatives of the parties may participate in and/or receive access to files in the examination of evidence.

Allowing representatives of the parties to take part in the examination of evidence in order to enable useful preparation for further procedural steps under the order not to reveal certain facts to their client, is clearly more in line with the rule of law than allowing purely in-camera proceedings, in which only the court and authorised experts take part.

One must certainly take into consideration that in doing so, it may be difficult for the representatives of the parties to guarantee that their personal knowledge of a trade secret (and the knowledge resulting therefrom) does not negatively influence the opponent -  even if the secrets are not expressly disclosed to their own client, but nevertheless used to the client’s benefit. The current draft proposal does not yet provide for a satisfying solution this problem.

Bad faith

The Proposed Directive provides safeguards against actions being taken against a defendant in bad faith for the purpose of unfairly delaying or restricting their access to the market or for intimidation and harassment.  In cases where such bad faith is found by a court, the Proposed Directive provides that it should be able to impose sanctions on the applicant and/or order the publication of its decision on the bad faith of the action. Neither prejudices the right of the wronged party to claim damages.

Recent compromises and the way ahead

The Proposed Directive has only recently been published and Parliamentary work on it is unlikely to begin until the Autumn, after the European elections. Hence, there is no guarantee that the Directive will come into force in its present shape or even at all. Indeed, there may be controversy ahead. The IP Federation, which represents a number of major innovative UK companies has broadly welcomed the move towards harmonisation subject to some concerns (read the IP Federation press release).  However, a "coalition of advocacy groups and other organisations from the health sector" has, amongst other things, been critical of the breadth of protection that the Proposed Directive will afford trade secrets¹⁰.

In response to comments already received in response to the Proposed Directive, the Council published on 4 March 2014 a presidency compromise proposal which amends the published draft. For instance, the express requirement originally in the Proposed Directive for unlawful acts to be intentional, absent gross negligence, has been removed. This presented claimants with the prospect of a difficult evidential burden when demonstrating the intention of the defendant. Such a requirement is more normally seen in criminal offences and it was unclear why the civil remedies provided by the Proposed Directive would require it. Furthermore, the short two year limitation period initially proposed has been extended to five years.

Chance for improving the protection of trade secrets

The existence of a trade secret requires, just as know-how pursuant to the Technology Transfer Block Exemption Regulation does, inter alia, that the corresponding knowledge is “secret”.

Even in the case of effective enforcement, the use of a trade secret can only be forbidden to the infringer as long as the trade secret/know-how is no longer “secret”. Accordingly, injunctions can only be effective so long as the trade secret cannot also be made accessible through legal means. In the case of technical trade secrets, this usually constitutes the development time.

If the development time is less than the duration of proceedings to enforce injunctive relief, an injunction has no impact. In the case of a shorter duration of proceedings, the practical effect is also generally marginal. Even execution measures of the defence allow the defendant to prove that he gained knowledge of the trade secret “on his own”, for example through valid ”reverse engineering”. The basis for an injunction is therefore eliminated.

A community-wide harmonisation should therefore be taken as an opportunity to create  added value in the interest of the protection of trade secrets. This added valued could for example be that an infringed party is granted a minimum period during which the infringer is in any case forbidden from using the trade secret, perhaps by not allowing the plea of a legal alternative provision for a limited amount of time. Currently, however, the proposed draft does not foresee such a possibility.

Implementation

In whatever form the eventual Directive comes into force, questions will arise about how Member States will implement it into national law. For example, the UK European Scrutiny Committee has already said that the protection of trade secrets under the UK's common and contract law is consistent with the terms of the proposed draft Directive, suggesting that new legislation will not be required at all in the UK (read more on the protection of trade secrets).

However, despite these issues, the concept of a Directive harmonising trade secrets law appears broadly welcome, with benefits for businesses in a variety of ways, including greater certainty of protection. More harmonised laws in Europe should help give businesses more certainty when sharing information under terms of confidence. Furthermore, the international nature of business should benefit, because many life sciences companies operate across national boundaries. Uniform minimum levels of protection in the EU should help them prevent others misusing their trade secrets and confidential information. Harmonisation may also assist in the alleviation of information leaks caused by moving employees, avoiding the disputes that arise when former employees use information they have learnt at their previous workplace. Workers today are highly mobile, so a harmonising trade secrets Directive would appear helpful.

Updated and republished by kind permission of BioScience Law Review

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