Trade secrets: EU adopts Trade Secrets Directive

May 24, 2016 by

Trade secrets: European Parliament adopts Trade Secrets Directive

In today’s economy, information and know-how (representing the result of R&D, creativity and innovation) are key drivers for maintaining competitive advantage.

Confidential business plans, market research, business strategies, customer and supplier lists, source codes, and research processes are all examples of trade secrets. In fact any commercial know-how that is not publicly known and treated by its owner as confidential information can be a trade secret.

Conventional intellectual property rights are sometimes inadequate in protecting certain trade secretscommercial or technical information despite their commercial value.

Trade secrets protection plays an important role in the software development industry but also in any other industry that relies heavily on research and development.

The benefit of a trade secret is that it protects a software program’s underlying ideas, logic, documentation, and structure. In that sense the trade secret protection goes further than, say, copyright protection which really only protects a particular expression of an idea.

Technically, trade secrets are not protected as a typical intellectual property right (IPRs). IPRs tend to protect the results rather than the process of creative or inventive efforts. IPRs have also a limited scope of application.

Economists agree that companies, irrespective of their size, value trade secrets at least as much as all other forms of IP. Trade secrets are particularly important to small and medium-sized enterprises (SMEs) and start-ups as these often lack specialised human resources and financial strength to pursue, manage, enforce and defend IPRs.

The unauthorised disclosure of trade secrets can result in both civil and criminal law liability.

European Trade Secret Directive

The strength of the national trade secret protection laws varies across Europe. In order to boost innovation across Europe, the EU has been working on a Directive to streamline trade secret protection across all EU member states.

The Council of the European Union has formally adopted the Trade Secrets Directive (2016/244/EU) against their unlawful use and disclosure. The Directive will have important consequences for all industries that rely heavily on trade secrets to protect their commercially valuable information (e.g. financial services, manufacturing, information technology and food and beverage industry).

The directive introduces a common definition of trade secrets and rules on the unlawful acquisition, disclosure and use of trade secrets. It sets out the measures, procedures and remedies that should be made available for civil law redress, including injunctions and the precautionary seizure of infringing goods. Rules on the preservation of trade secrets during litigation are also included.

The directive provides a common framework for minimum standards that member states must provide for the protection of trade secrets and provides much needed harmonisation of the disparate laws on trade secrets across the EU, which businesses will generally welcome. The substance of the directive is broadly reflected in UK law and therefore its implementation is unlikely to result to significant changes in practice.

The Directive sets minimum standards for the protection of trade secrets but EU Member states are free to provide more extensive protection (see, for instance, Germany and the UK).

The Directive lays down rules on the misappropriation, disclosure, and use of trade secrets. It sets out the procedures and remedies that trade secret holders have against unlawful use of a trade secret, including interim injunctions and precautionary seizure of infringing goods.

The proposal introduces an Europe-wide definition of “trade secret”. Information will be considered a trade secret if it:

  • is secret – in the sense that it is not 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; and
  • has been subject to reasonable steps to keep it secret by the person lawfully in control of the information.

This definition closely mirrors Article 39(2) of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) of the World Trade Organization (WTO).

The Directive will enter into force 20 days after it has been published in the Official Journal. Member states then have two years to implement the Trade Secrets Directive.

Intellectual Property Rights and Trade Secrets

Unlike intellectual property right, trade secret protection can theoretically last forever. The duration of the protection depends on the right holder’s diligence in keeping the information confidential. Trade secrets do not protect against someone else independently developing the same idea, reverse engineering or accidental disclosure of the information.

Trade secrets do not have to be registered to acquire formal protection. Secrecy and inherent commercial value is all that is needed for the protection to arise.

However, enforcing a trade secret can be tricky involving inevitably costly injunctions and equitable relief if the trade secret has been stolen. It can be costly and cumbersome to maintain the secrecy of the information across different countries that afford different level of protection to trade secrets.

Criminal sanctions for stealing trade secrets

Criminal law plays an important role in the protection of trade secrets.

New Zealand

The theft of trade secrets is a crime under s230 of New Zealand’s Crimes Act 1961

Australia

Australian criminal law does not impose any sanctions for the unauthorised disclosure of trade secrets currently exists. However, as a signatory to the TPPA, Australia will be required to impose criminal penalties for misappropriating trade secrets in order to obtain a commercial advantage or financial gain.

Germany

Section 17 of the Fair Trading Act (UWG) imposes criminal sanction on industrial or commercial espionage and the unauthorised use or disclosure of a trade secrets.