The Impact of the EU Trade Secrets Directive on financial institutions

Know-how and information are the currency of our knowledge economy and form valuable assets which need protection. Recourse to conventional intellectual property rights, such as copyright, design right and patents, is not always available for certain technical and business information, such as customer lists, trading algorithms, financial investment strategies, business plans, etc.
With many financial institutions trading across the Single Market, having an effective and as far as possible uniform regime for the protection of trade secrets in place in the European Union (EU) is therefore desirable.

Currently, trade secrets are provided varying levels of protection across the EU.  The extent of protection is determined by the laws of each Member State. This is all set to change. In November 2013, with a Proposal for a Directive of the European Parliament and of the Council on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure (the Directive) the European Commission embarked on a journey to seek to establish a minimum level of trade secrets protection across the EU.

The Directive was not without controversy and it was not until the end of 2015 that agreement was reached. It was essential that the minimum standard should not be too low, so as to ensure that trade secret owners were given adequate levels of protection and appropriate remedies, but at the same time certain fundamental rights such as freedom of information and freedom of expression had to be protected. Striking the right balance, as well as providing a whistleblowing defence and protecting employees’ rights, required some substantive negotiations.

The text of the Directive was finally approved by the European Parliament on 14 April 2016 and the Directive was subsequently adopted by the European Council on 27 May 2016. The Directive has now been published in the Official Journal and will shortly come into force. Member States will have until 9 June 2018 to assess their existing regime and to implement any legislation to comply with the Directive.

The impact of the Directive on individual Member States will depend on the current regime in place. The Directive seeks to provide a minimum level of protection across the EU.  Member States may provide more far-reaching protection, as long as it does not conflict with certain safeguards set out in the Directive.

A definition of trade secret

The Directive will, for the first time, provide a uniform definition of ‘trade secret’ across Member States. Article 2(1) of the Directive provides:
“(1) ‘trade secret’ means information which meets all of the following requirements:

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

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

A definition should provide banks with a guideline as to what can and cannot be protected. However, what amounts to “commercial value” or what are “reasonable steps” for information to fall within the definition of trade secrets may not always be entirely clear to banks or indeed national courts. As with any piece of EU legislation, should an issue on interpretation arise in a national court,  that court should make a request for a preliminary ruling to the Court of Justice of the European Union (CJEU). It may therefore be some time before judicial guidance is provided leaving, until then, the scope of the Directive, at least at its perimeter, somewhat unclear.

Accordingly, banks should continue to follow the practices of entering into non-disclosure agreements and providing for confidentiality provisions in agreements such as employment contracts.

Employees’ skill and knowledge

The Directive recognises that difficult issues can arise in respect of employees. Where an employee has been employed for a prolonged period of time, the lines between what is the employee’s own skill and knowledge and what is a trade secret belonging to the company can become blurred. The Directive recognises that there is a tension between the two and emphasises in Article 1(3) that trade secrets are protected but experience and skills honestly acquired in the normal course of employment are not. Whether information has been “honestly acquired and in the normal course of employment” is again potentially contentious.

Lawful and unlawful acquisition, use and disclosure of trade secrets

Articles 3 and 4 of the Directive set out what amounts to a lawful and what amounts to an unlawful acquisition, use and disclosure of trade secrets.

Lawful acquisition, for example, arises when the trade secret is obtained by (i) independent discovery or creation or (ii) observation, study, disassembly or testing of a product or object (made available to the public), as well as a catch-all provision which provides that an acquisition is lawful if it is obtained by any other practice which, under the circumstances, is in conformity with honest commercial practices.

The Directive provides for a fairly broad cause of action where the trade secret has been acquired, used or disclosed unlawfully. For example, in addition to an acquisition of a trade secret being unlawful where there has been “unauthorised access to, appropriation of, or copying of any 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”, an acquisition of a trade secret is also considered unlawful if there has been “any other conduct which, under the circumstances, is considered contrary to honest commercial practices”.

Use and disclosure is primarily considered unlawful if doing so would be in breach of contract or a confidentiality agreement. Again, national courts may seek guidance from the CJEU as to what “honest commercial practices” means.

Remedies such as interim and final injunctions and seizure orders are all provided for under the Directive.

Infringing goods

The Directive also creates the new concept of ‘infringing goods’. To qualify as infringing goods, the goods themselves do not need to disclose the trade secret, it is sufficient for example that the goods’ design, characteristics, functioning, production process or marketing significantly benefit from the trade secret (that has been unlawfully acquired, used or disclosed).
Banks can bring an action against persons dealing in infringing goods.  Even if those persons do not know that an unlawful use of a trade secret was made, it is sufficient to show that they ought to have known under the circumstances. This could be a valuable weapon in stopping third parties from benefitting from a parties’ valuable trade secrets. However, consideration should be had to the lesser mental state where the defendant ought to have known that it was dealing in infringing goods. A case where the defendant ought to have known but did not actually know that it was dealing in infringing goods will inevitably require disclosure of the trade secret to the defendant, which may not always be desirable. Whether a potential claimant would want to bring an action under this provision will therefore depend on the circumstances and a weighing up of the pros of receiving redress against the cons of disclosure of the trade secret.

Maintaining confidentiality at court

A final key feature of the Directive is that it provides for the preservation of confidentiality during court proceedings, helping to avoid the concern that the very case that is brought to protect trade secrets will in itself result in their disclosure. The English Courts for example are already used to hearings taking place at least in part in private to preserve the confidentiality of information. Such procedures are currently not available in all Member States, which will have to adapt to deal with the new provision.

The legal landscape after Brexit is still unclear and will remain so for a while. Given the timescale for exit of the UK from the EU, the UK will probably still be a member of the EU before the two year deadline to comply with the Directive has expired.

In any event, the UK’s existing law of trade secrets, which resides in the common law regime of breach of confidence, is in many respects stronger than the protection set out in the Directive and current levels of protection provided in other Member States. If UK lawmakers decide to implement the Directive, notwithstanding a pending Brexit, they may conclude that the UK’s existing trade secrets regime already goes beyond the minimum standard set out in the Directive and may simply choose to adopt the definition of ‘trade secret’ and the concept of infringing goods.

It will be interesting to see to what extent national trade secret laws will continue to provide an additional layer of protection for businesses. Member States’ existing regimes are unlikely to be replaced. This would be welcome in particular where information may not meet the threshold of the definition of trade secret as provided in the Directive.

In the meantime, banks should review their internal procedures to ensure that adequate policies are in place for dealing in commercially sensitive and valuable information. After all, a trade secret is only protected for as long as it is kept secret. Only time will tell whether the scope of the legislation is sufficient to afford adequate protection to businesses in their respective jurisdictions.