A group of lawyers from Linklaters offices across Europe look at the proposals for Europe-wide protection of trade secrets, and the implications for the IT sector. The authors are Daniel Pauly (Frankfurt), Pieter Van Den Broecke and Tom de Coster (Brussels), Ewa Kurowska-Tober (Warsaw), Pauline Debré (Paris) and Peter Church (London).
At the end of 2013, the European Commission proposed a new Directive to harmonise the protection of trade secrets. The Directive contains a number of familiar concepts and broadly follows the provisions in the TRIPS Agreement relating to the protection of undisclosed information. We consider why these changes are being proposed and the implications for the IT sector.
Why is reform needed?
Almost all businesses rely on trade secrets, as much as they rely on other forms of intellectual property. Trade secrets can be particularly important to small and medium-sized enterprises which lack the specialist resources to obtain and manage registered intellectual property rights. The protection of those trade secrets is also an important part of the European Commission's 2020 strategy to promote research and development investment and make Europe a more rewarding place for innovation.
However, the Commission considers that investment, particularly cross-border investment, is held back by the current diversity and fragmentation in the protection of trade secrets across Europe. Some Member States have specific legislation whereas others rely on general unfair competition or tort law. Some provide very limited protection, such as Malta which primarily relies on contract law. A summary of the position in some key European jurisdictions is set out at the end of this piece.
How will the proposed regime operate?
The proposals broadly follow the provisions in Article 39 of the TRIPS Agreement. The Directive will protect against the unlawful acquisition, use or disclosure of trade secrets, being information that:
· is secret, in that it is not generally known among or readily accessible to relevant persons in the field;
· has commercial value because it is secret; and
· has been subject to reasonable steps to keep it secret.
The acquisition of a trade secret will be unlawful in a range of circumstances including where it is the result of breach of a confidentiality agreement or other practice 'contrary to honest commercial practices'. Equally, the Directive sets out a number of situations in which acquisition will be lawful. Some of these are relatively familiar, such as independent discovery or reverse engineering. However, the Directive also expressly allows acquisition of trade secrets in conformity with 'honest commercial practices' or, more unusually, as a result of workers' rights to information and consultation.
The Directive also contains a number of general exemptions and permits the acquisition, use or disclosure of a trade secret:
· for making legitimate use of the right to freedom of expression and information;
· where necessary to reveal misconduct, wrongdoing or illegal activity;
· to fulfil a non-contractual obligation; or
· for the 'purpose of protecting a legitimate interest'.
Finally, the Directive includes a minimum set of measures and remedies for trade secret owners. This includes the availability of interim measures, preservation of confidentiality during legal proceedings, injunctions and damages. However, a limitation period will apply and all claims must be brought within 12-24 months (depending on the national implementation of the Directive).
How will these rights interact with confidentiality agreements?
It appears that the new rights under the Directive are intended to co-exist with contractual confidentiality provisions. For example, the recitals expressly state the Directive will not affect the laws of contract.
Confidentiality agreements are likely to continue to be important because they can be used to impose more tightly-defined obligations (for example, avoiding difficult questions about what is an 'honest commercial practice') and provide a parallel action for breach of contract. This could offer a longer limitation period for bringing claims than the 12-24 month period under the Directive.
Moreover, while a confidentiality agreement will not provide a direct contractual right against a third party who subsequently obtains the information, it may well assist with the enforcement of the trade secret owner's rights against that third party. For example, the Directive expressly states that acquisition or use of a trade secret is automatically unlawful if it results from the breach of a confidentiality agreement or similar duty. In other words, the confidentiality agreement may well help define the statutory protection for the relevant trade secret.
What is an 'honest commercial practice'?
The acquisition of a trade secret will be lawful if it is in accordance with 'honest commercial practice'. This concept originates from the TRIPS Agreement and, while the answer may be self-evident in many cases, it is easy to envisage more borderline situations.
The courts will have limited guidance in interpreting this term. While it is defined in a footnote in the TRIPS Agreement, the footnote actually does little to clarify its meaning. It states: 'For the purpose of this provision, "a manner contrary to honest commercial practices' shall mean at least practices such as breach of contract, breach of confidence and inducement to breach, and includes the acquisition of undisclosed information by third parties who knew, or were grossly negligent in failing to know, that such practices were involved in the acquisition". Moreover, it will be some time before any cases on its meaning come before the CJEU and, even if they do, it may be difficult for the CJEU to make a definitive ruling on what is a very much a question of fact. Finally, the concept of an 'honest commercial practice' will be new to a number of Member States, so their courts will not be able to rely on historic practice.
What steps should you take to protect confidential information?
The Directive protects a trade secret only if it is subject to reasonable steps to keep it secret by the person lawfully in control of the information. This concept also originates from the TRIPS Agreement, but will be new in some Member States.
Businesses that rely on trade secrets may want to review the measures they use to protect that information - for example, confidentiality agreements with employees and counterparts, protective markings and information security measures. They may also want to document these measures should they be challenged on this point.
What about other confidential information?
The Directive applies only to a limited class of confidential information, i.e. information that has 'commercial value'. Confidentiality laws are drawn more widely in some Member States to protect not only commercial information but also other types of confidential information, including personal information.
Accordingly, the implementation of the law will raise difficult questions in some cases. Should it just cover trade secrets, thus creating a two-tier regime for confidential information? Or is this an opportunity to 'sweep up' other types of confidential information and protect them under a single statutory framework?
Implications for the IT sector and next steps
The proposed Directive does not radically change the protection of trade secrets across the European Union but should help to harmonise their protection, which may well help to foster cross-border investment and innovation. Unfortunately, these changes will not remove the need for confidentiality agreements and it is likely those in the information technology sector will continue to have the joy of negotiating these arrangements as a pre-requisite to the exchange of valuable confidential information.
The Commission's proposals will now be forwarded on to the Council and Parliament for consideration. If the proposals are adopted, Member States will have two years to implement the Directive into national law.
The Commission's proposals are available here.
Current Trade Secret Protection
The proposed Directive would make minor changes in Belgium. There is no single Act for the protection of trade secrets. Trade secret owners can instead rely on general tort and unfair competition law as well as specific provisions in employment and criminal law.
The misappropriation, use and disclosure of trade secrets can lead to civil liability under Belgian tort law (Article 1382 of the Belgian Civil Code). It can also be a breach of unfair competition law (Article 95 of the Act of 6 April 2010 on Market Practices and Consumer Protection).
Employees and former employees may not disclose any trade secrets belonging to their (former) employer and more generally any secret in respect of a personal or confidential matter of which the employee became aware in the framework of his professional activity (Article 17,3° of the Act of 3 July 1978 on employment agreements). It is possible to file a complaint for disclosure in bad faith of specific technical know-how (so-called 'manufacturing secrets') by employees or former employees of a manufacturer (Article 309 of the Belgian Criminal Code).
Trade secret violations can lead to civil and criminal remedies including interim measures, compensatory damages, criminal fines and prison sentences. Although the court can take into account any profits made by the infringing party, there exists no separate measure of recovery of profits. Permanent injunctions to prevent further misuse are not easily granted, as most of the courts are reluctant to grant the holder of a trade secret a broader protection (unlimited in time) than most IP right holders (limited in time). In addition, it is not possible to launch a cease-and-desist procedure for breach of contract only. An ex parte search and seizure procedure is not available for holders of a trade secret either. Finally, the preservation of trade secrets during court procedures is not certain.
The proposed Directive would make a significant change in England in form and, to a lesser extent, substance. There is currently no statutory protection of trade secrets. Trade secrets are instead protected by contract and the laws of equity.
Protection under the laws of equity applies to confidential information generally, rather than being limited to trade secrets. It protects information where: (i) it has the necessary quality of confidence; (ii) it was imparted in circumstances importing an obligation of confidence; and (iii) there is unauthorised use of the information to the detriment of the confider.
Employees are obliged to keep confidential information secret during their employment as a part of their general duty of good faith to their employer. After employment, the employee is only generally prevented from using high-grade confidential information. However, it is possible to place additional post-termination restrictions on the employee's use of confidential information by contract.
Breach of confidence gives rise to a range of civil remedies including injunctions to prevent further misuse, compensatory damages and an account of profits. There are no criminal sanctions.
The proposed Directive will introduce some minor changes in France and create a single set of rules that will help unify the current legislation on trade secrets. One major change is the limitation period of two years, which is shorter than the current limit of five years.
Currently, trade secrets are subject to a patchwork of legislation with the main provisions being found in the Civil code and the Labour code, as well as in the Intellectual Property code.
There is no single definition of trade secrets under French law, as various terms coexist such as 'know how' and 'manufacturing trade secret'. Case law has defined the concept of know-how to be similar to the definition in the proposed Directive.
In practice, trade secrets are mainly protected by tort and contract law. The general provisions of the Civil code provide a remedy in tort for a range of abuses including poaching, company disruption and abuse of pre-contractual discussions. Contract law is also widely relied upon and organisations will normally include confidentiality clauses in their employment contracts and sign confidentiality agreements with counterparties.
A wide range of remedies are available under French law in case of trade secret violation, including injunctions, return and destruction or seizure of infringing goods, as well as damages. Criminal sanctions may also be imposed, including under French labour law.
Finally, a trade secrets bill was proposed in early 2012. This bill contains similar provisions to the TRIPS Agreement and introduces a new offence of violation of 'economic information' punishable by up to three years' imprisonment and a maximum fine of EUR 375,000. This bill was approved by the Assemblée Nationale but is currently stuck in the Senate.
The proposed Directive would lead to some helpful clarifications in German law, but will not make major changes. In particular, the law would need to more clearly define: (i) when trade secrets can be used; and (ii) how trade secrets are to be treated in legal proceedings.
The protection of trade secrets is addressed in various areas of German law. The most important statutory provisions are included in the German Act against Unfair Competition and require employees and third parties to treat trade secrets confidentially. In addition, the protection of trade secrets is often covered in contracts, including employment contracts.
Pursuant to German case law, a trade secret is any information: (i) in connection with the company; (ii) which is not public and known only to a limited number of persons; (iii) in relation to which the owner of the company has an economic interest to keep such information a secret; and (iv) which is kept a secret by the company owner.
According to the German Unfair Competition Law, employees are prohibited from disclosing trade or business secrets learned during the term of the employment to any third party: (i) to compete with the company; (ii) to promote their own interests; (iii) to promote the interest of a third party; or (iv) with the intention of harming the company. After termination of the employment relationship, employees may use any (non-deliberately) memorised information if their personal interest in using such information outweighs the interest of the company in keeping such information a secret.
The unauthorised disclosure of trade secrets may trigger civil law liability, including the obligation to compensate for damages, as well as criminal liability.
The proposed Directive would not make any major changes in Poland, as it is similar to the current protection for trade secrets provided under article 11 of the Act on Counteracting Unfair Competition of 16 April 1993.
Under the Act, a trade secret includes technical, technological, commercial or organisational information having a commercial value, not revealed to the public, in relation to which the business entity took necessary steps to maintain its confidentiality.
Employees are obliged to take care of their respective place of work, including protecting and maintaining the confidentiality of any information significant to the employer (art. 100, para 2 of the Labour Code). Moreover, arts. 101 and 102 of the Labour Code include non-competition provisions which inter alia impose non-compete provisions post-termination for employees who have access to particularly important information.
Remedies available against trade secret violations have both civil and punitive character, including injunctions to prevent further misuse, compensatory damages and an account of profits. Criminal remedies are also available in certain cases.
Daniel Pauly is a partner in the Frankfurt office of Linklaters LLP. Pieter Van Den Broecke is a partner, and Tom de Coster is an associate, in the Brussels office of Linklaters LLP. Ewa Kurowska-Tober is head of Linklaters' IP practice in Warsaw. Pauline Debré is a counsel in the Paris office of Linklaters LLP. Peter Church is an associate in the London office of Linklaters LLP.