The future Trade Secrets Directive in Europe : more rights for companies, or more trouble?

13 October 2015

Bruno Vandermeulen, Domien Op de Beeck


The protection of trade secrets has received increased interest in Europe over the past two years because of legislative developments pushed forward by the European Commission that have now been endorsed (and fine-tuned) by the European Parliament.

Industry players in Europe already have significant legal arsenal at their disposal for the protection of their technology inter alia using patent law, and this arsenal is expected to be expanded in the near future.

owever, there are concerns that insufficient measures are available to protect companies from industrial espionage or leaks of their technology by former employees, contractors or other third parties.

In the past few years, trade secrets have become a "hot" legal topic. This happened for two reasons: 

firstly because their recognition is believed to help increase European innovation, allowing Europe to compete more effectively with other jurisdictions that are purported to have more robust protection of trade secrets (such as the United States); and secondly, because their enforcement should alleviate the increasing problem of technology theft within European companies.

The proposed directive which is currently being prepared  (the "Directive") states that it does not seek to create a new intellectual property right. Instead, it aims to harmonise levels of existing protection for various types of trade secrets across member states. This is a positive development. Europe needs to put an end to the fragmented patchwork of specific national laws. This situation has been impairing cross-border R&D since trade secrets do not have the same levels of protection throughout the EU. Large parts of European industries are left with insufficient legal protection and devoid of means to adequately react to dishonest misappropriations. They are in fact even exposed to avoidable risks in many countries.

However, as explained below, many features of this legislation could have far-reaching effects on industry if implemented unreservedly or without due consideration to ensure that competition between companies and personal freedom of workers and independent contractors is not restricted. This might come about firstly because the definition of "trade secrets" is not limited to secret technical information but includes everything with commercial value; and secondly because the scope of protection offered could even extend further than that of traditional patent rights. 

The new legislation could at the very least encourage companies to introduce procedures when they hire or fire staff. But it could also generate a climate of suspicion and increase the likelihood of "hair-trigger" litigation when companies hire former highly-trained employees of competitors. 

Why a new Directive?

Against the backdrop of an increasingly digitalised society where discontent employees can, much more easily than in the past, disclose their employer's confidential information through the web and where companies' business secrets are much more vulnerable because of cyber criminality or the volatility of employees, the 2013 European Commission's Study on Trade Secrets and Confidential Business Information in the Internal Market  advocated for a legislative initiative on EU-wide protection of trade secrets, something that was generally perceived as lacking in the EU. Trade secrecy has been a type of protection often relied on for innovations but, disappointingly, this is only reflected by an uneven patchwork of legislation in most Member States.

So the Commission proposed a new directive in order to help with the "smooth functioning" of the Internal Market for information and know-how given the aforementioned developments. It is of the opinion that it should act because the national patchwork of legislation prevents companies from entering into technology-rich projects that cannot be protected by the "traditional" intellectual property rights and in this way raises barriers to trade. The purpose of the Directive is to remove these barriers by imposing minimum levels of protection and harmonizing relevant legal terminology.

Broad(er) definition of a "trade secret"

Current national laws of the member states provide for a variety of definitions for what is sometimes commonly called a "trade secret". The term can have a "technical" component in some cases and a "commercial" component in other. Trade secrets can cover secret technical information for the manufacture of a certain product or the application of a certain process - something often referred to as "know-how".

The Commission's Technology Transfer Block Exemption Regulation (TTBER) contains a useful definition of "know-how", and this since its very first version of 1988. Article 1.1(i) of the TTBER  defines "know-how" as a package of practical information, resulting from experience and testing, which is: 

  1. secret, that is to say, not generally known or easily accessible, 
  2. substantial, that is to say, significant and useful for the production of the contract products, and 
  3. identified, that is to say, described in a sufficiently comprehensive manner so as to make it possible to verify that it fulfils the criteria of secrecy and substantiality.

The latter requirement of "identification" is certainly fulfilled when the know-how is available in written form. However, that may not always be possible - for example when it consists of practical knowledge held by a company's employees. In addition, commercial secrets can also exist. These could consist of client lists, prices for a new product, or even details about the places where the products will be launched for example. Some of that information can remain valuable for decades (think of secret recipes) while others might retain their value for a few weeks or even days.

From the title of the proposed Directive ("Directive on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure") it was clear that the Commission aimed at covering all these forms of information. The intent of the Commission to also protect commercial information follows from Recitals 1 and 8 of its proposal. However, its definition of "trade secret" in Article 2 only references "information".

During its review of the proposed Directive, and specifically during its plenary sitting of 22 June 2015, the European Parliament inserted guarantees in Article 1 allowing certain stakeholders to side-step the fact that the new rules could allow the trade secret holder to refuse disclosure of certain information to authorities, or to stifle the freedom of the press and media, or could keep employees from using experience and skills honestly acquired in the normal course of their previous employment.

The European Parliament also adopted two changes to the Commission's proposal regarding the definition of a "trade secret" contained in Article 2(1). Firstly, it was broadened by adding "know-how and business information" following the opinion of the Committee on legal affairs  and the committee on the international market and consumer protection . Secondly, it introduced a new paragraph under Article 2(1) to protect "experience and skills honestly acquired by employees in the normal course of their employment" which shall be addressed later in this article.

With the addition of "know-how and business" information the Directive envisions, even more than before, that not only technical information should be included in its scope but indeed also commercial information.

This goes far beyond the definition of "know-how" as "practical information resulting from experience and testing" contained in the TTBER. While the former definition could also include commercial data, the latter is limited to technical information.

In the European Union however, the concept of "trade secrets" has not always been confined to technical information. In the Commission's notice No 139/2004 "business secrets" include technical as well as financial information ranging from methods to assess costs to distributor lists. In Belgium, for instance, both the legislation  and the case law offer protection for commercial information as "trade secrets".

The TTBER's requirement that "know-how" must be identified urged many developers to document their know-how in written form one way or another. It is remarkable that neither the Commission's proposal, nor the European Parliament while making its amendments, suggested a requirement to substantiate a trade secret in a certain - preferably written - form. This will make verifying the existence of a trade secret - and even more so, proving its usurpation - very difficult in practice. This risks making the new tool totally unworkable or prone to abuse.

The definition of a "trade secret" under the Directive will therefore harmonize the scope of what is protected under this concept in Member States and it will include more than technical information. However it is still questionable whether an identical level of protection will arise in every Member State since there might be a certain leeway with the interpretation of what is required for "reasonable steps under the circumstances, (…), to keep it secret".

Another important feature of this definition is that the secret nature of the alleged trade secret must be assessed from the point of view of "persons within the circles that normally deal with the kind of information in question". This is a very different standard than the one imposed by patent law where any public disclosure of an invention, regardless of whom it is made to, can lead to a loss of novelty and therefore to protection being refused. It may well be that for persons who are specialized in a particular field or commercial sector, some information from other sectors might not mean much. What could be a trade secret for a person in one circle could be generally known for another, more experienced and/or specialized circle. Although the proposed criterion for determining the secret nature of the alleged trade secret might seem objective, there can be huge differences in perception or opinions in a field. These could in turn increase the risk for self-proclaimed trade secrets that could, in certain cases, be nothing more than unawareness about the trade. This 'subjective' characteristic of a trade secret is precisely why it never obtained the status of an intellectual property right in Europe.

A new intellectual property right?

Although certain recitals of the proposed Directive emphasize that it has no intention to create a new exclusive right over know-how or information which is protected as a trade secret, certain provisions in the Directive go much further than simply creating a uniform level of protection for trade secrets.

One of the major limitations in the current legislation about know-how and trade secret protection is that it can only be enforced against the person who misappropriated the know-how or the trade secret: it was considered that the misappropriation itself is unlawful by virtue of labour law, criminal law or unfair trade practices, applying only to the person who was entrusted with the trade secret or had access to it.

Therefore, as a general rule, the action could not be directed against any third parties who made use of the allegedly misappropriated know-how or trade secrets and who may have benefitted much more from it than the original perpetrator. Exceptions could be made for third parties if it could be shown that they had induced a person to violate his secrecy obligations. However, this puts a high burden of proof on a claimant, requiring at the very least that the trade secret is protected by a solid confidentiality agreement concluded between its owner and the person(s) who have access to it. This makes the protection of trade secrets very difficult.

Intellectual property rights have the major advantage that they can be enforced against anyone ("erga omnes" protection) and an act of infringement does not generally speaking require bad faith or any knowledge about the existence of the right. Although sometimes misunderstood, the term "property" is used to stress that the existence of intellectual property rights is not a matter of contractual agreement, but a matter of law that can be opposed and enforced against everyone.

Although both Recital 10 and Article 1 of the proposed Directive stress that independent discovery of the same know-how and information by a competitor should remain possible and that the Directive's principal purpose is to "tackle dishonest commercial practices", there remain concerns that this Directive may in fact create rights that reach as far as "true" intellectual property rights, since trade secrets can, under the Directive, be opposed "erga omnes". This follows from certain rights given to the owner of a trade secret that are described in Articles 9 and 11 of the proposed Directive. 

In particular:

  1. the right (also on a provisional and precautionary basis) to order the cessation of the use or disclosure of the trade secret; and
  2. the right to seek the prohibition (also on a provisional and precautionary basis) to produce, offer, place on the market or use infringing goods, export or store infringing goods for such purposes.

The most innovative characteristic of the proposed Directive is indeed that a trade secret can be enforced against any third party who uses the trade secret or who is likely to disseminate it further, instead of (only) against the person(s) who unlawfully acquired it from its owner and then disseminated it. This is a major step forward in protection, but it also increases the status of a trade secret to something that is very much comparable with an intellectual property right.

The most audacious and probably also the most problematic development is the definition of "infringing goods" as "goods whose conception, characteristics, functioning, manufacturing process or marketing significantly benefits from trade secrets unlawfully acquired, used or disclosed" and in the right for the holder of the trade secret to oppose the use of those goods.

There are two very important considerations to make in this respect.

In the first place, the definition of "infringing goods" could lead to unusual circumstances such as, in certain cases, offering much broader protection than the most novel and inventive patent could offer today. It should be reminded that patents can either protect products, or processes, and in some cases products which are directly obtained via a patented process. But a patent does not offer protection to products that are made directly (nor indirectly) with another patented product: if a certain product is patented, the law only prohibits the sale and/or the use thereof. Except for some specific biotechnology inventions, the rights on a patented product cannot "reach through" another product. The European patent courts have developed strict conditions for determining when a product has been obtained directly via a patented process. In none of the relevant case law was the "conception" of the obtained product a useful criterion.

This is because a "concept" is not patentable: only specific inventions that are novel, inventive and suitable for industrial application can be patented.

The conditions for "marketing" a product should not be relevant when determining whether a product was illegally obtained or not. Within the current definition, an otherwise unprotectable or legitimately purchased product could be seen as an infringing product simply because it was put on the market using sales techniques - allegedly - protected by a third party's trade secret. Suppose that a warehouse chain secretly plans a discount action for certain of its staple products such as milk and fruit and the plan leaks and is maliciously copied by a competing warehouse chain stocking the same products. Should these products then qualify as "infringing products" along with all the negative consequences that could follow?

The definition of "infringing product" is too broad: the trade secret could even cover a secretly developed trade dress for an otherwise unprotectable product. This could bypass the need for protecting it via trademark or design registration. If products become infringing only because their pricing model, marketing method or place-of-sale are covered by an - alleged - trade secret, this could lead to several situations of abuse. Not in the least because, after all, a trade secret is a self-proclaimed right that is not put under scrutiny by any authority before it can be asserted in a court.

One could wonder why trade secret protection should be extended to "goods" in the first place. Goods are typically available in the market, can be inspected by everyone and may be reverse-engineered unless they are protected by a patent or a non-disclosure agreement. That is the primary incentive for patent protection: a patent offers publicity of the invention in exchange for a temporary monopoly. For trade secrets, no such "trade off" is proposed.

As such, against this background, references to "characteristics" "functioning" and "manufacturing process" can be helpful, but the criteria of "conception" and "marketing" are not, and may lead to abuses. It is observed that the terms "conception" "characteristics" and "functioning" were added to the definition of a trade secret in Article 3 of the proposed Directive by the European Parliament, but it is not clear how these new terms better define or limit the scope of a trade secret. It may have been the Parliament's trade-off after inserting in that same article an employee-friendly statement that will be discussed further below.

The second - but more positive - consideration is that an activity or product does not become unlawful merely because at one time in its production chain or chain of sale a misappropriation of a trade secret took place. The unlawfulness of the activity should be permanently present at each step in the commercial chain to be actionable as a violation of trade secret law. Therefore, unlawful acquisition or use of a trade secret cannot affect future activities or products that are conducted in good faith by market operators.

Nevertheless, a certain awareness of when a trade secret may have been violated is required from industry players.

That was made clear by the European Parliament in its reading of the draft Directive in the spring of this year, when it added the following to Article 3(5) of the proposed draft language: "in cases where the person engaging in such activity was, or depending on the circumstances, should have been, aware of the fact that such unlawful use had been made of the trade secret". This addition should be applauded as it avoids trade secrets becoming semi-intellectual property rights.

And to end this chapter about the definition of a trade secret with an even more positive note, it is observed that this Directive nowhere makes a reference to the Directive of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights (the "IP Enforcement Directive"). This makes clear that trade secrets cannot benefit from the far-reaching procedural tools to enforce intellectual property rights, such as ex parte discovery actions ("saisies"). The self-declared nature of a trade secret is indeed insufficient to allow its holder to proceed with an unannounced inspection at the premises of his competitor, and the ex parte nature of the proceedings does not allow the court to verify the existence of the alleged trade secret sufficiently. Other means of enforcing trade secrets and gathering evidence are available.

What about mobility and other employee rights?

Another concern that was raised when the Directive was originally presented was its risk for restricting the movement of highly qualified workers such as engineers between companies, particularly between competitors. It is relatively easy to delimit a company's IP rights from those of its employees because of the formalities required to obtain and designate them - something which helps to avoid uncertainty. Inventors of patented inventions must be named in the application, and assignments must be drawn up well in advance with the relevant employees. Copyrights can be determined on the basis of publications mentioning the author. Trademark rights can only be acquired and maintained by those who effectively use the trademark. For software, European-driven law even provides for a mandatory assignment of software rights to the employer. A well-drafted employment agreement can also reinforce the position of the employer, or at the very least avoid the need for legal discussions after employment commences.

It will be far less easy to do so with trade secrets, especially in light of the broad definition which they benefit from under the current form of the proposal, as described above.

To overcome concerns that were raised by certain organisations and practitioners after the publication of the Directive's original proposal, the European Parliament amended the definition of a "trade secret" to add that "Experience and skills honestly acquired by employees in the normal course of their employment shall not be considered a trade secret".

And while the disclosure in Article 3(3) should no longer be "intentional or with gross negligence" (hereby lowering the bar for legal action substantially) the Parliament added in that same article the guarantee that it will "not provide any ground to trade secret holders to limit the use of experience and skills honestly acquired by employees in the normal course of their employment or add any restriction for employees to occupy a new position, to those provided for in their employment contract, in compliance with relevant Union and national law".

These clarifications are welcome, but they will not dispense employers and their HR departments from developing hiring and firing procedures in which the line must be drawn between, on one hand, the IP rights and trade secrets of the employer and, on the other hand, the "experience and skills honestly acquired by employees in the normal course of their employment".

Better protection for all parties during trade secret litigation

When the Commission conducted its survey on the level of trade secret protection in Europe, one distressing finding was that in practice the fear of disclosing trade secrets during court actions constituted a barrier in itself preventing trade secret holders from effectively enforcing their rights against third parties. Merely filing an action, defending a case in open court or having a public judgment issued which describes the trade secret could extinguish the secrecy and with that the very basis for the trade secret protection.

To many it may have come as a surprise that quite a few Member States do not currently have means to sufficiently safeguard trade secrets in the course of court proceedings. This is especially surprising because such protection is generally seen as being part of the fundamental right to a fair trial and hearing, a principle anchored in many Member States' constitution. In Europe it is derived from Article 6 ECHR and Article 47(2) of the Charter of Fundamental Rights of the EU. Article 42 of the TRIPS Treaty, under the heading "Fair and Equitable Procedures", explicitly requires the procedure to provide means to identify and protect confidential information.

Obviously, the effectiveness of the measures and remedies to trade secrets protection depends on their concrete enforcement during court procedures. Parties must be able to produce evidence to support their case without having to disclose a trade secret, and therefore losing the protection offered. As such, the Commission saw it as its duty to provide for measures, procedures and remedies to be used in case of trade secret claims, ensuring that confidentiality of the alleged trade secret is maintained throughout the course of legal proceedings (cf. Recital 14 of the proposed Directive). However, there is possibly a conflict between this right and other fundamental rights, including the parties’ right to a fair and public trial.

To that end, Article 8 of the proposed Directive sets forth specific principles and procedural rules for the preservation of trade secrets in the course of legal proceedings, seemingly drawing on relevant experience from EU competition law.

As such, the principle put forward is that any party that participates in the trade secret proceedings, or has had access to documents containing trade secrets, must be bound by an obligation of confidentiality and non-use during and after the end of the proceedings (Article 8(1) of the proposed Directive).

The proposed Directive suggests in Article 8(2), by way of a minimum measure of protection, the ability to restrict access to the evidence itself as well as to the court hearing, to a limited group of individuals only.

Apart from the court and possible experts and witnesses, this "confidentiality club" would comprise the parties' lawyers and also at least one of the parties' representatives. The latter modification, introduced in the latest version of the proposed Directive, seems logical, as lawyers should be able to meaningfully discuss the available evidence with their client (and vice versa). Further to that, the proposed Directive suggests making allowances for two versions of the judgment, a confidential version and a non-confidential one in which confidential parts are removed or redacted. This list of measures is not meant to be exhaustive and alternative precautions might be considered by national courts.

The grant of specific trade secret protection measures is, however, not the default approach. Nor is the obligation to confidentiality and non-use of trade secrets learned in the course of the proceedings. Member States may allow courts to grant such measures ex officio or at least on a duly reasoned application by a party. The court is required to assess the proportionality of the measure at all times, taking into account rights to an effective remedy and to a fair trial, legitimate interests involved and any potential harm to the parties and, possibly, to third parties. In the words of the Council, "the new wording strikes the balance between the protection of trade secrets and the right of the parties to a fair trial". This test, which is essentially one of proportionality and balancing of interests, should not pose too many problems as it is in line with how national courts should be used to responding to a conflict between fundamental rights.  The bigger question is: how will courts in jurisdictions less accustomed to a confidentiality system carry out in practice the specific measures suggested in the proposed Directive?

Should companies now be pleased or worried?

The future Directive will certainly be applauded by industry players who have a long-standing culture of developing and protecting their "know-how" in the technical sense of the term. The new tools will only confirm and strengthen their ability to protect their know-how and justify policies and procedures already in place.

The Directive will also drive Member States to implement better procedural tools in their court systems to protect trade secrets. This might be the single most important achievement of this Directive.

The amendments made by the European Parliament have assuaged concerns raised by trade unions, social partners and government authorities that trade secrets should not serve as an excuse for not complying with disclosure obligations, nor as a means to exercise exclusive control over knowledge, information and skills acquired by employees.

But will this Directive effectively improve Europe's competitive position, increase innovation or protect it from being unlawfully copied? That is less certain for the following two reasons.

The first reason is that with the proposed broad definition of "trade secrets", some industry players could try to claim rights in information and data that can be hardly considered a trade secret and use this as an excuse to conduct sham litigation against competitors, and employers of former employees in particular.

Since "trade secrets" are essentially self-declared by their owner, i.e. without any objective external authority who can verify the secret and the nature of its value, only the courts will be able to determine their existence after litigation. This litigation will be costly and complex because of the specific guarantees offered to the owner of the alleged trade secret against the risk of unlawful dissemination. Whereas these guarantees are certainly welcome and even necessary for valuable trade secrets, they will cause many "fake" trade secrets to be unveiled only after complex and costly litigation.

The second reason is that although the Directive calls for more innovation, collaborative research and dissemination of knowledge within the Internal Market, the conditions for granting protection to trade secrets do not contain a requirement that the trade secret is developed or used in the internal market. It is therefore possible that trade secrets may be used by industry players from outside Europe to threaten or stifle the activities and products of their competitors in Europe without needing to invest in patent protection.

Last but not least, it is remarkable that the European Parliament has extended the statutory limitation for legal actions brought on the basis of trade secrets to three years, when the Commission itself had proposed one year and a maximum of two. This longer term, coupled with the subjective start date (i.e. the date at which the owner of the trade secret became aware or had reason to become aware of the violation of his rights) means that trade secret owners can wait for a long period of time before they need to decide whether to undertake action. In addition, alleged infringers (e.g. employers) can be subject to threats for proceedings for a lengthy period of time. This goes against the essence of a trade secret and the interests of its owner: surely a trade secret is best protected by immediate action following its unlawful dissemination. By way of comparison: in a member state like Belgium, the statute of limitation in labour law matters is only one year, and in France two years.

What should companies do to prepare themselves?

If the Directive is enacted Member States will have to implement it within two years. During that period, companies will need to develop tools and internal procedures to identify their trade secrets, possible ways for their misappropriation and dissemination, and their relevance in time. Apart from the usual internal measures for safeguarding their trade secrets, employers will need to make sure that leaving employees cannot argue that actual trade secrets are nothing more than their own experience and skills. Such an exercise is complex and requires a more detailed understanding of each employee's scope of work than is currently required for intellectual property rights.

Certainly, this will initially cause extra costs and efforts from companies and their employees alike. It will generate discussions about the existence and relevance of certain alleged trade secrets, and even cause more litigation. But taken from a long term perspective, this legislation can also contribute to more awareness with all the concerned market players that trade secrets are important and can enhance competitiveness. They can also help to valorise the contribution of certain employees and assist them to put themselves more efficiently on the market place.

This is why this future legislation, if implemented with the required care so that sham litigation can be avoided, can become a positive development.

"Published  in PharmaNetwork Issue no. 29 of October 2015"