Keeping your trade secrets a secret in Europe

Introduction

In our knowledge economy, competitive edge arises from holding valuable proprietary information: the ability to protect our trade secrets is more important than it ever was.

Conventional intellectual property rights cannot adequately protect certain commercial or technical information –technical know-how, business plans, a corporate strategy, pricing information – despite the commercial value of this information to the business.

These assets can easily be copied, transferred and disseminated digitally. Today’s commerce is crossborder, providing opportunities for knowledge transfer on a colossal scale. Manufacturers base their factories overseas to reduce costs; international collaborative arrangements are no longer the preserve of multinationals; employees change jobs frequently and are more mobile. It is small wonder that disputes surrounding proprietary information are occurring more often.

The proposed EU Trade Secrets Directive – likely to come into force in 2015 – will not harmonise trade secrets law. The good news, however, is that it will set up a minimum standard for trade secret protection across the EU, introducing more certainty than currently exists.

Defining a “trade secret”

The Directive introduces a definition of a trade secret – article 2(1).

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

This reflects the wording of article 39(2) of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (known as the TRIPS Agreement). It is also similar to the definition in the US Uniform Trade Secrets Act.

There are two areas which are likely to require further interpretive guidance from the Court of Justice of the European Union (CJEU).

Understanding “commercial value”

The first concerns the meaning of ‘commercial value’. This will probably depend on a number of factors (the nature of the business and its commercial landscape, for instance) rather than on a particular figure or range of figures in terms of value or a percentage.

The preamble to the Directive states that information has commercial value where its unauthorised ‘acquisition, use or disclosure is likely to harm the interests of the person lawfully controlling it, in that it undermines his or her scientific and technical potential, business or financial interests, strategic positions or ability to compete’.

Interpreting “reasonable steps”

The second area concerns the interpretation of ‘reasonable steps’. Generally, the more control there has been over access to and use of the information – labelling documents, limiting distribution, restricting access physically or technically, strict contractual provisions and monitoring thereof – the higher the likelihood of that information being protected by law.

There is always going to be a trade-off for companies: the greater the level of protection, the more cumbersome it is to do business using that information. If the information is valuable, however, companies are likely to find the inconvenience worthwhile.

UK perspective

There is no definition of a trade secret in the UK, the law relating to confidential information having developed through case law. Information is eligible for protection if it has the ‘necessary quality of confidence about it’ – Coco v AN Clark [1968] FSR 415. As a result, there is much room for debate.

In practice, if it can be shown that the information brings commercial or technical advantage to the company, and that the company has taken commensurate steps to protect it, the court will more readily recognize it as confidential information liable for protection.

In the UK, therefore, we are unlikely to see much change as a result of the definition in the Directive.

Infringing acts; and infringing goods

The Directive stipulates that “infringing conduct” refers to the unlawful acquisition, disclosure or use of a trade secret – article 3(1).

It sets out what is considered “unlawful”, which is, generally speaking, where the conduct can be regarded as being contrary to honest commercial practices, or if the recipient knew (or should have known) that the information was directly or indirectly derived from an unlawful act.

This clearly adds to the benefit of having a Non-Disclosure Agreement or similar in place, as to breach it is likely to be contrary to honest commercial practices.

However, and crucially, there is no “choice of law” provision, so liability could depend on which law applies. It is assumed that the law to be applied would be either the one chosen by the parties (if they are in a contractual relationship) or the law of the place in which the act in question occurred, or both. This could (and often would) involve jurisdictions outside the EU.

Helpfully, the Directive is explicit about when an acquisition of information may be regarded as “lawful” – article 4.

This includes acquisition through independent discovery and creation and the disassembly or test of a product or object made available to the public. There is also a catch-all provision for acts which conform to honest commercial practices.

It is silent, however, on the level of control employers can impose on employees, and acceptable employment contract provisions. As most trade secret cases relate to alleged misuse by former employees, this omission will add a layer of complication in litigation.

Dealing in infringing goods

Dealing in “infringing goods” – goods whose “design, quality, manufacturing process or marketing significantly benefits from trade secrets unlawfully acquired, disclosed or used” – is also an infringing act, where a party knew or should have known that a trade secret was unlawfully used.

This could be a powerful provision for innovative manufacturers of goods. How powerful will depend on the level of “significant benefit” required to fall within the provision.

If the goods qualify as “infringing goods”, an action may be brought against downstream players who have no knowledge of any confidential information, once they have been put on notice. Any potential defendant can rely on the usual defences, such as whether the information in question is in fact a trade secret or whether there has been an unlawful act, in addition to the question of whether the goods “significantly benefit” from the trade secret in question.

UK perspective

The position is similar in the UK where primary unlawful acts are concerned.

A claimant must show that confidential information was imparted in circumstances importing an obligation of confidence: that is to say that, under the circumstances, “any reasonable man standing in the shoes of the recipient of the information would have realised that upon reasonable grounds the information was being given to him in confidence” (Coco v AN Clark). It is likely that this “reasonable man” test will produce the same result as the (objective) “honest practice” test stipulated in the proposed Directive.

The “infringing goods” provision should deliver enhanced protection to manufacturers of goods, at least where the UK is concerned. As the Supreme Court decision in Vestergaard v Bestnet [2013] UKSC 31 demonstrated, breach of confidence is difficult to establish against a party without knowledge of the trade secret itself.

Following implementation of the Directive, innovators may be able to rely on rights in trade secrets to take action against any dealers in “infringing goods”, for example importers of copycat products from outside the EU, and downstream distributors – setting aside the issue of choice of law as highlighted above.

Preservation of confidentiality during legal proceedings

There is no point in providing for the protection of trade secrets without a suitable legal procedure and the Directive therefore provides for the preservation of confidentiality during legal proceedings – article 8. This is clearly paramount, as otherwise litigating for breach of confidence could defeat the purpose where information has been leaked to a limited number of people.

Not the default position

The Directive does not give complete comfort. The preserving of confidentiality during legal proceedings is subject to a “duly reasoned” application and is not the default position.

We will need to see what changes will be made in jurisdictions which are not used to hearing proceedings in secret, what kind of threshold they will set and logistically, how proceedings will be run.

UK perspective

The UK is already used to adopting provisions to preserve confidentiality through the use of confidentiality clubs (which restrict access to and use of disclosed documents) and hearings “in camera”, and so may, at least in the short term, remain a favoured jurisdiction of claimants where there is a choice of forum.

Remedies

The remedies under the proposed Directive are similar to those in the IP Enforcement Directive.

The courts will be able to grant injunctions of appropriate duration, restraining use and disclosure of confidential information and the dealing of infringing goods.

We do not yet know whether this type of injunction will be Europe-wide, suffice it to say that the courts are more likely to order a Europe-wide injunction where the defendant is domiciled in the jurisdiction of the proceedings, and where the defendant has a Europewide infringing business.

Other remedies include damages and accounts of profits. As an option, Member States can choose to restrict liability for employees where they acted without intent.

Provisional measures for an injunction against use of the information and infringing goods, seizure and delivery are all provided for, although the Directive is silent on other interim measures such as search orders, freezing orders and pre-action disclosure. Since it does, however, provide for a minimum standard, Member States should be able to continue making these orders as well, if they consider it appropriate.

Looking to the future

The European Commission regards the absence of a uniform approach to the protection of trade secrets within the EU as a route to the ‘fragmentation of the internal market’ and a weakening of the ‘overall deterrent effect of the rules’.

The Commission’s proposal for an EU Trade Secrets Directive together with the Council Opinion suggesting a ‘general approach’ will at the very least set a minimum benchmark for trade secret law across the EU, and that has to be good news.

It will be up to Member States to take steps to comply with its provisions, although the law in the UK already provides adequate protection so is unlikely to change a great deal. In addition, some provisions of the proposed Directive will be subject to interpretation by the CJEU.

It is going to take some time, therefore, before we can know how all these factors will play out. Until then, Member States are likely to continue to work to different standards, with some affording little or no protection, but we may eventually see courts of different Member States considering case law of other jurisdictions, resulting in a more harmonised system.