19 January 2016

New EU-wide trade secret regime imminent

Many businesses rely on trade secrets and confidential information to compete in the market and to drive innovation. In the UK, trade secrets and confidential information are protected through a combination of common law and contractual provisions. Some Member States have legislation in place to protect trade secrets (including in some countries, criminal sanctions). The result is a patchwork of protection (and remedies) against trade secrets abuse: Member States diverge on key issues such as what constitutes a trade secret/confidential information worthy of protection and what remedies are available for their misuse. Given the significant investment by businesses across Europe, the fragmented protection regime has led to concerns of a non-level playing field which impacts adversely on the functioning of the internal market. In response to these concerns, the Commission proposed in 2013 a draft Trade Secrets Directive to harmonise protection across the EU. Following extensive trilogue discussions between the European Parliament, Council and Commission, a provisional agreement was announced on 15 December 2015. 

The European Parliament is scheduled to vote on the draft Directive on 8 March 2016. Once it is approved by both the Parliament and Council, it will be published in the EU Official Journal and will come into force 20 days later. Member States will then have two years to incorporate the provisions into their national laws (i.e. this should take place by a date in 2018). 

In the meantime, businesses should get ready to use the Directive to their advantage, and in particular consider how it can complement their existing methods of protection of their valuable information, alongside contractual protections and IP rights. 

In the employment context, the picture is perhaps less rosy. There is scope for the draft Directive to complicate - or even erode – the existing robust regime in the UK for employer protection of confidential information. Until details of the UK implementing legislation are circulated, it is too soon to change employment contracts or practices but employers would be well advised to keep a close watching brief and to start planning ahead for risk mitigation strategies. These could include locking down access to and transfer of sensitive data (good practice, in any event) and perhaps planning for indirect methods of protection such as remuneration structures to strengthen alignment of employees’ interest with that of their employer or deter bad behaviour through good leaver/bad leaver provisions that penalise breach. 

A flexible approach, but with minimum standards

The draft Directive largely adopts a minimum harmonisation approach, giving Member States freedom to give higher protection to trade secrets, provided that certain mandatory criteria are met. In some contexts, notably whistleblowing and employee mobility, the operation of these minimum standards for any “gold-plated” additional protections could potentially force a reduction to the level of protections that UK employers can currently require from staff. At the very least, they may throw long-established and relatively settled legal principles into question, providing increased scope for employees and others to challenge the enforceability of contractual protections. 

Protection of a wide range of know-how and confidential information 

The Directive’s definition of a trade secret is very broad and extends beyond technical know-how to valuable commercial information within a business such as customer data, business information, marketing plans etc. 

Specifically, a ‘trade secret’ is information which is:

  1. secret i.e. it is not generally known or readily accessible to persons within the circles that normally deal with the kind of information in question;
  2. has commercial value because it is secret (a point of divergence from the UK common law definition); and
  3. has been subject to reasonable steps to keep it secret. 

There will doubtless be arguments of interpretation in the future as to whether particular information has a ‘commercial value’ and what constitutes ‘reasonable steps’ to keep confidential information secret. However, businesses should be reviewing their existing security and protection measures both internally and also with their business partners and supply chains across Europe, to ensure that appropriate, and importantly, documented, protections are in place to demonstrate ‘reasonable steps’ have been taken to keep their information secret. 

When is acquisition, use and disclosure unlawful?

A trade secret will be unlawfully acquired where it is accessed, appropriated or copied without authorisation from the trade secret holder, or by any other conduct which is considered contrary to honest practices (further guidance will be needed as to conduct that may be considered contrary to honest practices). Unlawful use or disclosure meanwhile will occur where that use or disclosure follows unlawful acquisition, or breach of a confidentiality agreement (or of any other contractual or other duty not to disclose, or limiting the use of, the trade secret). 

Importantly, the draft Directive also provides protection against a wide range of dealings in ‘infringing goods’ i.e. goods “whose design, characteristics, functioning, manufacturing process or marketing significantly benefits” from the unlawful acquisition, use or disclosure of trade secrets. This is a potentially very important provision for rights owners and will complement other forms of IP protection. 

When is acquisition, use or disclosure lawful?

The draft Directive lists a number of lawful means of acquiring, using or disclosing trade secrets including independent discovery and reverse engineering of lawfully acquired products (subject to any contractual provision). Concern has been expressed about the lack of any sanction against reverse engineering and the recitals to the Directive recognise that this is a concern in many industries, given the increasing ease with which products can be reverse-engineered once on the market. The draft Directive merely suggests that the Commission should carefully examine whether there is a need to reform or harmonise unfair competition law in this context and it will be interesting to see whether there is any action taken in this regard. 

The draft Directive also provides for important exceptions relating to freedom of expression (including respect for media pluralism and freedom) and whistle blowing, and also deals with the issue of employee mobility (issues that have been the subject of significant debate). 

Employee mobility 

The draft Directive spells out that it shall not offer any ground for limiting employees’ use of the experience and skills honestly acquired in the normal course of their employment. It is implicit (although not spelled out) that this applies even if the knowledge underpinning the experience and skills gained may otherwise constitute a trade secret. If so, this is potentially a reduction to the confidentiality protections currently available under English law. While our existing domestic law does recognise the need for employees to be able to use their acquired skills and experience, it is also accepted that the use of confidential information may be restricted after employment by appropriately drafted contractual provisions. As such, the issue under domestic law is largely about where the line of classification between confidential information v non-protectable information, should be drawn. The approach under the draft Directive appears to be different; once the experience and skills argument is engaged, issues of confidentiality become irrelevant. Although it is also possible to read the draft Directive in a way that makes it consistent with our domestic law, the fact that other interpretations are also possible means that there will inevitably be scope for creative legal argument and references to the CJEU to clarify the position. 

The draft Directive does also confirm that it is not intended to affect the possibility for non-compete agreements under domestic law. However, many non-compete provisions rely on the need to protect confidential information to justify enforceability. As such, the potential reduction in confidentiality protection under the draft Directive may have a knock-on effect in this area too. 

Whistle blowing

At first blush, the draft Directive’s absolute exemption for whistleblowing activity appears uncontentious given that the UK already has whistleblower protections under the Employment Rights Act 1996 (“ERA”). However, closer scrutiny reveals that the exception under the draft Directive is significantly wider than the current domestic legislation in a number of key respects. In particular, the whistleblower protection under the draft Directive: 

  • does not appear to be limited to workers and employees like the ERA, but is generally available;
  • applies to any "acquisition, use or disclosure" of the trade secret, whereas the ERA generally only protects disclosures to the employer and not to third parties, unless additional stringent obligations are met;
  • appears to constitute a defence to all legal protection otherwise applicable to the information in question. By contrast, the ERA only renders offending contractual restrictions void;
  • focusses wholly on the disclosing party’s subjective intention whereas the ERA provisions involve a mixed subjective/objective test (e.g. the worker must reasonably believe that a legal breach has occurred or is likely to occur.

Some commentators have taken comfort from the requirement under the draft Directive that to be protected the respondent must have been acting in the "general public interest". However, note that recent case law under the ERA suggests this is a low threshold, satisfied for example by disclosures showing breaches of bonus arrangements of a private employer.

Remedies & procedures

The draft Directive provides that Member States should provide proportionate, fair and effective procedures and remedies, which avoid the creation of barriers to legitimate trade. 

Specifically, Member States should provide for: injunctions (including on an interim basis), corrective measures (e.g. recall, destruction or delivery up of infringing goods) and damages (based on the actual prejudice suffered and taking into account all relevant factors including lost profits, unfair profits made by the infringer and moral prejudice). Damages may also be set as a lump sum royalty (i.e. on the user basis – the royalty the infringer would have paid if it had requested to use the trade secret). Member States may provide that damages payments by employees are limited where they acted 'without intent'. 

In terms of procedure, the Directive provides for the preservation of confidentiality of trade secrets in the course of legal proceedings. This is welcome as the prospect of a trade secret being disclosed in litigation will often discourage a party from bringing a claim to enforce its rights. 

The limitation period for a claim should be no greater than 6 years.

Next steps

Assuming the Directive is approved by both the Parliament and Council, it will be published in the EU Official Journal and will come into force 20 days after that date. Member States will then need to review and adapt their existing laws in order to implement the Directive's provisions.

Trade secret protection looks to be a key focus on both sides of the Atlantic in 2016. Aside from the forthcoming Directive harmonising EU law, the Defend Trade Secrets Act 2015 is under consideration in the US. This proposes a federal trade secrets law; civil trade secret laws currently vary from state to state i.e. the same fragmentation concern arises as in the EU.

Data Central

Have you checked out our new Data Hub? Data Central contains a range of resources to help our clients minimise the legal, regulatory and commercial risks this data-driven environment presents and ensure that its full value is being realised.

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