European Commission publishes draft directive for the protection of trade secrets

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

Background

On 28 November 2013 the European Commission proposed a draft directive for the protection of trade secrets.

The proposal follows the European Commission's comprehensive "Study on Trade Secrets and Confidential Business Information in the Internal Market" which, along with a previous study, survey and interactive public consultation, emphasised: (i) the importance of trade secrets for small and mid-sized enterprises and start-ups; and (ii) the fragmented and persified nature of existing trade secrets law in the EU.

The Draft Directive

The draft directive seeks to align national legislation and introduces a common definition of trade secrets as information which:

• "is secret in the sense that it is not…generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;
• has commercial value because it is secret; and
• has been subject to reasonable steps under the circumstances…to keep it secret."

Specifically, the draft directive:

1. establishes interim and precautionary measures and remedies, making it easier for national courts to remove potentially trade secret infringing products from the market;
2. makes it easier for claimants to seek compensation, by setting out the level of damages claimants can expect and a list of factors courts might take into account;
3. introduces specific measures to preserve the confidentiality of trade secrets used or referred to during litigation (e.g. restricted access to hearings and documents and making available non-confidential versions of judicial decisions);
4. gives courts the right to publish information concerning a decision of infringement; and
5. introduces sanctions for non-compliance (e.g. recurring penalty payments).

Importance and What Happens Next

This step towards harmonisation is a welcome one. Media, communications and technology are innovating at a rapid rate and frequently operating across multiple jurisdictions. Globalisation and increasing reliance on technology, mobile workforces, consultants, offshoring and outsourcing mean that the need for certain and consistent protection of trade secrets should not be underestimated.

The proposed Directive will now be transmitted to the Council of Ministers and the European Parliament for adoption. If approved, it could be in force by the end of 2014. We will continue to report on developments.

How does this differ from the current law in England and Wales?

The UK doesn't currently have legislation which specifically protects trade secrets. Instead, actions can be brought under the common law tort of breach of confidence.

Unlike the draft directive, breach of confidence does not define "trade secrets". Instead, subject to certain limited specific exclusions, all types of information are capable of being protected so long as the claimant establishes that:

1. the information has the necessary quality of confidence (i.e. it is not generally known, grossly immoral or trivial);
2. the defendant owes the claimant a duty to keep the information confidential; and
3. the defendant used the information in a way that breached that duty.

There are many similarities between the protection offered by the draft directive and the law of breach of confidence. However the draft directive is a step forward, in that it provides certainty of protection across the EU and clarity where this has sometimes been lacking in the common law.

For example, the English courts have taken perging approaches as to whether damages, rather than an account of profits, can be awarded for breach of a non-contractual obligation of confidentiality. There has also been confusion as to whether the measure of damages should be tortious (i.e. reflecting the loss suffered by the claimant) or assessed, for example, by reference to the market value of the information. In contrast, the draft directive states that damages will be available so long as the infringer knew or ought to have known that he was engaging in the unlawful acquisition, disclosure or use of trade secret and must be "commensurate to the actual prejudice suffered".

Claimants will, however, have significantly less time in which to bring a claim under the proposed directive, which imposes a two year limitation period, as opposed to the 6 year limited period available under the current English law.

Most significantly, the draft directive provides that goods created using a trade secret in breach of confidence (but which don't themselves disclose the secret) are classified as infringing. The sale of such infringing goods can be stopped under the draft directive. Previously, English law struggled to effect this without some other attributable breach of confidence taking place. The draft directive therefore more closely maps trade secret law in the USA than has previously been the case in the UK.

How does this differ from the current law in Belgium? (Matthias Vierstraete).

Belgium does not have legislation which specifically defines trade secrets. Despite the lack of a statutory definition of "trade secrets" it follows from case law that a distinction must be made between "manufacturing secrets", "trade secrets" and "confidential information". The proposed Directive does not make such distinction. Without entering into details, manufacturing secretsmust be (i) of a merely technical nature; (ii) the property of the employer; (iii) relatively new and not obvious; and (iv) secret. The concept oftrade secretsis very broad and could encompass both manufacturing and actualtradesecrets (relating to commercial information) and is generally understood as (i) any knowledge belonging to a company; (b) that is not well known; and (c) grants that company a competitive advantage.Confidential informationis even more broad and refers to any information that is confidential.

There are no specific laws on trade secrets. However, different legal provisions can be used in order to secure protection:

• Article 309 of the Criminal Codesanctions employees and former employees for disclosing manufacturing secrets;
• Article 17,3° of the Act of 3 July 1978 on Employment Contracts requires employees to refrain from disclosing trade secrets, manufacturing secrets or secrets relating to personal or confidential matters that has come to his knowledge in the performance of his duties; and
• Based on Article 1382 of the Civil Code and Article 95 of the Act of 6 April 2010 on Unfair Market Practices and Consumer Protectionone can obtain damages based on the general principle of "tortuous behavior" and in some cases combined with the general catch-all clause which prohibits undertakings to cause prejudice to the professional interests of another undertaking.

The major advantage of the proposed directive, is that it provides a comprehensive set of rules protecting trade secrets. In addition the provisions about calculating the damages will bring more clarity and less room for discussion. Also guidance for judges on how to preserve the confidentiality of trade secrets disclosed in court is much welcomed.

However, some concerns exist. A major concern is the lack of provisions about how trade secret holders could obtain evidence of misuse of their trade secrets. It is for example not foreseen for trade secret holders to oblige third parties to provide information and / or documents. Intellectual property owners can rely on the Intellectual Property Rights Enforcement Directive (2004/48/EC) in order to gather evidence. Owners of trade secrets could obviously not rely hereon as the draft trade secret directive does not create a new intellectual property right. As long as it is not clear how trade secret holders can obtain evidence of misappropriation of their trade secret, it could be questioned what the directive will actually lead to in practice.

Moreover, it is not yet clear, how this proposal relates to the Unified Patent Courts. Patent litigation will often deal about trade secrets and know-how related to the patent in question. As things stand now European Patent litigation will be the exclusive jurisdiction of the Unified Patent Courts and trade secret litigation will be dealt with by national courts, even though both will be closely linked to each other. The current version of the proposal directive does not deal with this issue.

How does this differ from the current law in France? Clara Steinitz Clara Steinitz; Alya Bloum)

Background: Under French law, there is no provision specifically designed for the protection of trade secrets, save for the disclosure of a manufacture secret by employees or directors of a company ('secret de fabrication').

Outside of these circumstances, actions for misappropriation of trade secrets (qualified as technical or commercial know-how in France) are brought under the tort of unfair competition based on the Article 1382 of the French Civil Code. Criminal provisions relating to e.g. theft and breach of trust may also be relied upon if the conditions set for these offences are met.

A draft bill setting up a specific protection of trade secrets has been discussed in France, but the legislative process is not finalised yet. The Draft Directive is now likely to take over. It gathers the main rules on trade secret in one single document and as such, is likely to enhance legal certainty for trade secret holders who currently have to refer to provisions scattered in various sources. The Draft Directive may also comfort Courts in granting some already available remedies that they are currently disinclined to order and help harmonizing local Courts' case law and practices.

Confidentiality during legal proceedings: Article 8 provides that participants to legal proceedings relating to the unlawful acquisition, use or disclosure of a trade secret "shall not be permitted to use or disclose any trade secret or alleged trade secret of which they have become aware in the course of the said proceedings".

The Draft Directive also provides that Courts may take specific measures to preserve the confidentiality of trade secret e.g. restrict access to documents produced (in whole or in part), restrict access to hearings, order expert operations, etc.

French Courts are already taking similar measures, on a case-by-case basis. The new provision will have the merit of streamlining the situation. Yet it only covers "legal proceedings relating to the unlawful acquisition, use or disclosure of a trade secret". Its scope should be widened to embrace other proceedings likely to involve disclosure of trade secrets.

Limitation period: In France, the limitation period applied to actions based on unfair competition is 5 years whereas actions based on trade secret breach provided for in the Draft Directive shall be brought in 2 years (Article 7). In both cases, the starting point is the date on which the trade secret holder became aware or had reason to become aware of the fact giving rise to the action.

Accordingly, the time period during which a trade secret holder is entitled to initiate proceedings would be significantly reduced if the Draft Directive is adopted in its current version.

Interim measures, remedies and damages: French judges may order the same measures as those provided for in Articles 9 and 11 of the Draft Directive, on the basis of general procedural provisions . The adoption of specific provisions is nonetheless likely to facilitate the granting of such reliefs in case of (alleged) trade secret infringement. In particular, courts would be less reluctant to order seizure or destruction of (alleged) infringing goods.

With respect to damages, if value of the trade secret, lost profits or moral prejudice, may already be taken into account, the directions given by the proposed text (Article 13) are a positive step towards streamlining of the decisions rendered.

How does this differ from the current law in Germany? (Friederike Manz)

According to current German law, trade secrets are protected in a number of statutory provisions, most of them being part of the Act on Unfair Competition, some defining the trade secret infringing acts as crimes others being of merely civil law character.

The protection of trade secrets in those provisions is neither comprehensive nor consistent. Some provisions protect trade secrets only against disclosure of employees of a company, others provide protection only if the trade secret is documented. And due to their criminal character, most of the provisions require an intentional act on the side of the infringer.

The trade secret directive will in several ways considerably improve the protection of trade secrets in Germany.

The term "trade secret", although not identical to that of the draft trade secret directive is very similar. According to settled case-law in order to be protected as trade secret information needs to meet the following requirements:

• it needs to relate to a business;
• it may only be known to a manageable group of people;
• the owner of the information needs to have a manifested will to keep the information secret or it must be self-evident that the information is to be kept secret;
• the secrecy of the information needs to provide to its owner a competitive advantage, which does not have to have an pecuniary advantage.

However, under the directive trade secrets are more consistently protected against acts of unlawful acquisition, use and disclosure.

Furthermore, the directive provides for procedural measures and remedies not available under German law. These are:

• Under German law, there is no possibility of the courts to restrict the parties' access to hearings to preserve the confidentiality of trade secrets and to order them to be carried out only in the presence of the legal representatives of the parties and authorised experts subject to confidentiality obligations. Rather, the owner of a trade secret often has to decide whether he wants to lose the process or the trade secret.
• Furthermore, there is no such remedy for trade secret infringement as the recall or destruction of "infringing goods" under the directive. "Infringing goods" are defined by the directive in a specific way as goods whose design, quality, manufacturing process or marketing benefitted from trade secrets unlawfully acquired, used or disclosed. Under German law such mere benefitting would most probably not suffice as long as the trade secret was not disclosed by the goods.

And finally, since the limitation period for claims brought under the Act on Unfair Competition is only 6 month from the date on which the claimant knew or could reasonably have known of the infringing act, the limitation period of 2 years provided for in the draft directive on trade secrets will give claimants a lot more time to bring a claim.

How does this differ from the current law in Spain (Ramón Seoane)

Spain relies on the Unfair Competition Act ("LCD") to protect trade secrets. Furthermore, secret violation is also punishable under the Criminal Code that establishes penalties of imprisonment (up to 5 years) and monetary fines. Trade secrets are also indirectly protected by the rules that set the obligations of employees and directors.

As LCD does not provide for a definition of trade secrets, civil courts are currently referring to the definition supplied by article 39.2 of the Agreement on Trade Related Aspects of Intellectual Property Rights.

With few exceptions (the destruction of the infringing goods/materials is not expressively contemplated) in general terms, LCD grants the declaratory and injunctive reliefs (cessation, prohibition, withdrawal) as included in the draft directive. Interim and precautionary measures are not present in the LCD but may be sought on the basis of the provisions of the Spanish Civil Procedures Rules. Search order proceedings aimed at preparing the claim are also available as per the LCD.

Damages may also be claimed under LCD which, contrary to the draft directive, fails to establish the basis for their calculation. Damages will only be awarded in the event of negligence or wilful misconduct. Besides, claimants will normally bear the burden to show the prejudices suffered as consequence of the violation of the trade secrets. Damages will ordinarily include damnum emergens and lucrum cessans. Moral damages are applied very restrictively.

As for the limitation period, LCD allows for the institution of proceedings within one year since they could be brought and the claimant knew the identity of the infringer. In any event, proceedings cannot be initiated later than 3 years from the termination of the infringing conduct.