Are “Trade Secrets” Changing Across the EU?

At the end of 2013, the European Commission proposed a new directive for trade secrets in the EU. A directive is a legal act of the European Union, which requires member states to achieve a particular result but does not instruct member states how to achieve the result. The aim of the proposed directive is to provide harmony between member states on the definition of a trade secret and how action can be taken against parties unfairly using another party’s trade secrets. However, the directive does not propose any criminal sanctions against infringing parties; this will be left for member states to determine.

For the directive to come into effect, the European Parliament and the Council of the European Union both have to approve it. In May 2014, the Council gave its opinion and proposed amendments. In early 2015, the Committee for Legal Affairs (JURI), on behalf of the European Parliament, proposed its own amendments to the original directive, and voted in favour of this amended directive on the 16 June 2015. A date will soon be set by JURI and the Council for debating and voting upon the directive in the European Parliament.

But what are trade secrets, how do they differ to registered rights, what are the proposed changes to the law and how will this affect business?

What are trade secrets?

Trade secrets are confidential information which is generally not known or easily discoverable by others, and may include inventions, ideas or compilations of data that are used by a business to make itself more successful. Examples of these include processes, formulas, designs, sales methods, advertising strategies, lists of clients and consumer profiles. Trade secrets are generally useful where the information could not be easily derived or copied from.

Trade secrets can provide protection at minimal expense for both patentable and non-patentable material.

As trade secrets are not a form of exclusive monopoly right, they have significant disadvantages compared to patents. In particular, a trade secret does not enable the owner to prevent anyone from:

• inventing the same product or process independently; or

• studying something that the owner has made publically available in order to figure out information relating to the trade secret (reverse engineering).

What protection do trade secrets currently provide?

If a company has had their trade secrets unfairly used by another party, the protection provided to that company currently varies across the EU. This is due to the different legal systems and laws implemented in the EU member states. For example in Germany, trade secrets are protected under criminal law. In England, there is no legal definition of “trade secrets”, but a trade secret might fall under the protection of the more general ‘confidential information’ provided for in English common law. Also, a trade secret might be protected in England with a contract that explicitly defines which information is to be kept secret.

The differences between the laws of member states make it complex for companies to try to take action against one infringer in multiple EU jurisdictions. In particular, common differences between different jurisdictions include:

• the definition of a “trade secret”;

• legal procedures;

• burdens of proof and corresponding evidence requirements; and

• how the unfair use of the trade secret is resolved.

What changes are proposed by the European Commission?

The directive proposed by the European Commission defines a general definition of “trade secret”, and provides common methods of resolving unfair use of a trade secret which may include orders for prohibition of use, seizure, destruction or delivery up of goods which infringe trade secrets. Article 3 of the directive defines unfair use of a trade secret as a person who has “unlawfully acquired, used or disclosed a trade secret”.

The directive also clarifies that reverse engineering and independent innovation is allowed by competitors, given that trade secrets are not a form of exclusive property right, such as patents.

The draft directive proposed by the European Commission can be viewed here.

What does the Council and JURI think of the changes?

Both the Council and JURI do not agree on the Commission’s definition of “unlawful” in the definition of an infringer provided above. The Commission defined that use of a trade secret was “unlawful” only if there was “intention” or “gross negligence” by the accused infringer. The Council proposes that member states should be allowed more freedom in interpreting the definition of “unlawful” and proposed to remove the terms “intention” and “gross negligence”. JURI also proposed to remove these terms, stating that it would be difficult to provide evidence under these terms in a court.

The Council has also proposed to amend Article 13 so that EU member states should have the power to establish their own rules which favour employees in cases where they may be liable for damages due to unlawful acquisition, use or disclosure of a trade secret. JURI also proposed changes to the directive to favour employees. JURI amended the directive so that it does not affect information, knowledge, experience and skills acquired by employees in the normal course of their employment. This amendment was made so that the directive does not create restrictions for employees seeking to change jobs. However restrictions from their employment contract will still apply.

The Council and JURI proposed a different time period for taking legal action relating to trade secret violation than the Commission. The Commission proposed that action can be taken against a party after one year, but not more than two years after the date on which an owner of a trade secret became aware (or should have been aware) of the fact that the trade secret has been unfairly used. The Council proposed that member states should also be free to determine the minimum period from which an owner of a trade secret can appeal against an infringer and how long after this date the owner can appeal, provided the total period does not exceed six years. JURI however proposed to change the directive so that there isn’t a minimum period before taking action, but a deadline of three years after the owner became aware (or should have been aware) of the fact that a trade secret was being unfairly used.

JURI also amended the wording of the directive to differentiate trade secrets from intellectual property rights such as patents, designs or trade marks, so that it does not refer to them as “formal” intellectual property rights. During the review of the directive, it was alleged that the word “formal” to describe patents, designs, etc. implies that trade secrets are a form of intellectual property right. JURI clarified that intellectual property rights grant exclusive monopolisation, which does not apply to trade secrets which can be used by a competitor if found out by reverse engineering or independent innovation.

The draft directive proposed by the Council can be viewed here.

The draft directive proposed by JURI can be viewed here.

Next Steps

JURI has approved the start of informal talks with the Council to set a date for a session where all the MEPs, the European Commission and the Council of the European Union will debate and vote upon the directive. The European Parliament and the Council of the European Union will have to both agree on the directive for it to be passed.

To read more about the proposed EU trade secrets directive, please follow this link to the European Commission’s website on trade secrets and confidential business information.

If you have any questions about trade secrets and the interplay between patents and trade secrets, please don’t hesitate to get in touch with your usual contact at Swindell & Pearson or email [email protected]. Joe is a member of our Hi-tech team and is based at our head office in Derby.