Handle with care

The protection of trade secrets—exciting new developments coming at the EU level
By Dr. Stefan Dittmer

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What is a “trade secret”? Why protect it, and why does the EU care? How does trade secrets protection affect competition and innovation, and does it restrict workers’ mobility? This article will try to present answers to these questions and draw attention to a legislative initiative bringing the protection of trade secrets to a new level.

What is a trade secret?

The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) defines trade secrets as information which is secret in the sense that (a) it is not generally known or readily accessible to persons normally dealing with the kind of information (b) has commercial value because it is secret and (c) has been subject to reasonable steps by the person lawfully in control of the information to keep it secret (Article 39 Sec. 2 TRIPS).

Why protect trade secrets?

Trade secrets are enormously relevant. Just like patents, they are often the foundation of a company’s commercial success. Unlike patents, their lifespan is theoretically unlimited, but unlike registered intellectual property rights, they are extremely vulnerable. They are not an intellectual property right, although some question this, and their commercial value will diminish when they become commonly known. Innovative companies, in particular SMEs, rely heavily on trade secrets and often prefer trade secrets protection over the option of applying for the patent registration of an invention. Additionally, for those who will eventually rely on patent protection, trade secrets are often a pre-stage of an invention on its way to becoming patentable. And trade secrets need not be technical. The effectiveness of a marketing campaign may depend on maintaining the secrecy of its concept. “Undisclosed business information” may properly describe this variety of undisclosed information. But why deal in legislation with protecting trade secrets when protection can be obtained by keeping information secret and by imposing a secrecy obligation on third parties to whom secret information shall be disclosed? A simple but correct answer is that statutory protection of trade secrets will lower the costs of keeping information secret. More importantly, the transfer of knowhow will be facilitated, and competition and innovation will be fostered.

Why does the EU care?

National legislators have recognized these mechanisms and given attention to the legal protection of trade secrets. But they have done so in very different ways, even across Member States of the EU. The resulting patchwork of legal protection, including inconsistencies in legal concepts and instruments for the enforcement of trade secrets, contrasting sharply with the widespread use and commercial relevance of trade secrets, has led to uncertainty among businesses and created obstacles to cross-border transactions and knowhow transfer involving trade secrets. This is why, in November 2013, as a part of the “Europe 2020 Flagship Initiative Innovation Union”, the Commission presented a proposal for a “DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure” (http://eur-lex.europa.eu/legal-content/ EN/ALL/?uri=CELEX:52013PC0813) (the “Directive”). Meanwhile, the legislative process is progressing, but some issues remain to be resolved and the wording of the Directive has yet to be finalized.

The content of the Directive

Let’s take a look at a few key elements of the Directive and put them in context with the current situation familiar to the German reader.

Definition of the term “trade secret”

The title of the Directive summarizes undisclosed know-how and business information under the term “trade secrets”, explaining why the definition and subsequent provisions of the draft Directive only use the term “trade secrets”. Consistent with the definition of “undisclosed information” pursuant to Article 39 of the TRIPS Agreement, Article 2 of the Directive defines “trade secrets” as information that (a) is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question (b) has commercial value because it is secret and (c) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret. Not fully consistent with that, and in the absence of any statutory definition under German law, the German courts require (a) the intention of the person lawfully in control of the information to keep it secret and (b) that such intention rest upon a sufficient commercial interest of that person. In practice, however, the courts routinely assume this intention and do not undertake any balancing of conflicting interests of the parties concerned in the context of examining whether an information qualifies as a trade secret. Hence, the practical effect of these extra requirements will be minimal. Other, less obvious, differences in the respective definitions will not have any material effects either.

Infringing activities

More fundamental are the differences between Article 3 of the Directive, prohibiting the unlawful acquisition, use and disclosure of trade secrets, and the prerequisites whereby, pursuant to German law, an infringement can be prohibited. While German law offers the trade secret holder a claim for injunction against infringing activities irrespective of intent or negligence on the part of the infringer, the concept of the Directive requires intent, gross negligence or negligence as constitutive elements of the unlawfulness of the acquisition, use or disclosure of a trade secret. This has encountered harsh criticism from the German Association for the Protection of Intellectual Property (GRUR e.V.; http://www.grur.org/uploads/ tx_gstatement/2014-03-19_GRUR_Stellungnahme_ zum_Know-how-Schutz. pdf), and may yet be modified in the further course of the legislative process. Where the Directive defines “infringing goods” as “goods whose design, quality, manufacturing process or marketing significantly benefits from trade secrets unlawfully acquired, used or disclosed” (Article 2 no. 4 of the Directive), it is unclear how an infringement can be derived from the marketing of a product whose design, quality or manufacturing process have not benefited from trade secrets unlawfully acquired, used or disclosed. Most likely, the purpose of that part of the definition is to indicate that, when the design, quality or manufacturing process of a product benefits from trade secrets unlawfully acquired, used or disclosed, the marketing of such product shall be deemed unlawful, too. More critically, the Directive does not sufficiently clarify that trade secrets can relate not only to physical goods but also to services, and that measures against the unlawful acquisition, use or disclosure of a trade secret must also be available in relation to services.

Exceptions to infringing activities

The exceptions to the protection of trade secrets are another subject matter wherein the Directive materially differs from the familiar German approach. In addition to activities widely accepted as lawful means of the acquisition of a trade secret, the Directive expressly allows reverse engineering, provided the product or object concerned has been made available to the public or is otherwise lawfully in the possession of the acquirer of the information (Article 4 Sec. 1 lit b of the Directive). In contrast to that, legal doctrine and case law in Germany to date regarded reverse engineering as unlawful unless the technical information embodied in an object can be considered to have become obvious as a result of the object being made available to the public. The U.S. and many other EU countries have been following the approach of the Directive for a long time. Inevitably, Germany will have to adopt that position. Further, the Directive stipulates that the legal remedies provided for in the Directive against the acquisition, use or disclosure of a trade secret shall not be available, inter alia, if someone, by acquiring, using or disclosing a trade secret, (a) makes legitimate use of the right to freedom of expression and information (b) reveals misconduct, wrongdoing or illegal activity on the part of the trade secret holder, provided that the acquisition, use or disclosure of the trade secret was necessary for such revelation and that the revealing party acted in the public interest (“whistleblowing”) or (c) acted for the purpose of protecting a legitimate interest (Article 4 Sec. 2 of the Directive). While, quite clearly, these exceptions are not meant to provide blanket excuses for the infringement of trade secrets by simple reference to a fundamental right of the infringer, they have raised concerns and attracted significant attention in discussions and statements accompanying the legislation (for the statement of GRUR e.V. see http://www.grur.org/uploads/tx_ gstatement/2014-03-19_GRUR_Stellungnahme_ zum_Know-how-Schutz. pdf). The objective of these discussions is to ensure that the Directive clarifies that for such an exception to apply the interests of the person acquiring, using or disclosing a trade secret must outweigh those of the trade secret holder.

Limitation period

The Directive proposes that civil redress may be sought “within at least one year but not more than two years after the date on which the applicant became aware, or had reason to become aware, of the last fact giving rise to the action” (Article 7 of the Directive). The wisdom of introducing a limitation period applicable specifically to trade secrets and differing from periods applicable to intellectual property rights is debatable; the proposed length of the period appears to be quite short because the applicant may need more time from the first suspicion of an infringement to collect evidence sufficiently substantive to justify bringing an action for infringement. For example, by the time the results of criminal investigations against the alleged infringer allow an applicant to verify the validity of a suspicion of an infringement, the limitation period may have expired. The words “reason to become aware of the last fact giving rise to the action” do not reliably ensure that the limitation period not start prematurely.

Measures and remedies

Among the measures stipulated by the Directive, such as the cessation or prohibition of the use or disclosure of a trade secret, the prohibition to produce, offer, place on the market, use, import, export or store infringing goods for those purposes, and the seizure of suspected infringing goods (Article 9 Sec. 1 and Article 11 Sec. 1 of the Directive), the prohibition of transit is not included. Regarding the ongoing discussion on the proposed revisions to the Community Trademark Regulation and the Trademark Directive advocating effective instruments against the transit of trademark infringing goods, it would be worthwhile to consider providing for a similar instrument in the context of the Directive.

Procedures

Most notably, and within the context of the obligation of the Member States to ensure the availability of civil redress against the unlawful acquisition, use and disclosure of trade secrets, the Directive stipulates that Member States take measures to preserve the confidentiality of trade secrets in the course of legal proceedings (Article 8 of the Directive). This subject matter is of highest relevance because, for the uncertainty over whether the applicable rules of civil procedure provide sufficient safeguards against the disclosure of confidential information to the adverse party and to the public, trade secret holders suspicious of an infringement of a secret by a third party have been prevented from seeking civil redress. Uncertainties arise where the claimant must identify and disclose the trade secret for the purpose of supporting the claim against the alleged infringer, and where the alleged infringer (often a competitor), for reasons of “fair trial” principles, must be given access to that confidential information. Conversely, an effective defense may require the defendant to disclose and make accessible to the other party information falling under the definition of trade secrets. With certain limitations, the disclosure of trade secrets to the public in the course of a civil action can be prevented by a court order excluding the public from oral hearings of the matter. More fundamental shortcomings of the current procedural regime arise from the fact that, in many cases, the trade secret is the very subject matter of the dispute, and that the contradictory discussion of that subject matter, at least in principle, must not be restricted. Enforcing that principle, however, would mean that, by suing the alleged infringer, the trade secret holder would disclose and thereby lose the secret with certainty, or otherwise risk losing the action. Among the measures most frequently proposed in the interest of maintaining the secrecy of information is an “in camera” procedure wherein the secret information is disclosed to the court, but not to the adverse party. Interpretations of the term “in camera” differ in that some advocate that the parties’ counsel shall have access to the confidential information while others want to exclude counsel from that information, too. Allowing counsel to access the adverse party’s confidential information would require setting up an information barrier between counsel and party that, in turn, may create conflicts with counsel’s duties under the attorneyclient relationship. To avoid such conflicts, another variation of the “in camera” concept is to appoint an independent expert, such as a certified accountant, made subject to defined rights of disclosure and confidentialiy obligations. Apart from the significant degree of limitation such measures would impose on fundamental procedural rights of the adverse party, neither of these measures could prevent the ultimate (and unrestricted) disclosure of the secret to the other party in the form of the operative provisions of a judgement in favor of the plaintiff. The Directive proposes to tackle these issues with a combination of measures. For example, the courts shall be authorized to restrict access to documents of the parties or of third parties containing trade secrets, or to restrict access to hearings when trade secrets may be disclosed and to records or transcripts of such hearings (Article 8 Sec. 2 of the Directive). The restriction of access may apply to the parties, resulting in the fact that the hearings would take place, and a trade secret that has hitherto had restricted access would then be disclosed in the presence of the parties’ counsel or authorized experts. To retain the confidential character of a trade secret in spite of its disclosure in the course of legal proceedings, the Directive stipulates that the parties, the parties’ counsel, court officials, witnesses and any other person participating in the legal proceedings or having access to documents forming part of those proceedings be prohibited from using or disclosing any trade secret they become aware of (Article 8 Sec. 1 of the Directive). Further, only a non-confidential version of a judgement wherein the portions containing trade secrets have been removed shall be made availble to the public. Details of these measures are still under discussion but, once properly implemented by the Member States, the proposals of the Directive will significantly facilitate the enforcement of trade secrets and thereby render the trade secret an even more useful instrument for the protection of intellectual property.

Does trade secrets protection restrict fundamental freedoms, competition or workers’ mobility?

Critics of better trade secret protection across the EU have raised concerns that it would hamper the mobility of workers in innovative industries, hinder competition or even restrict basic freedoms such as the freedoms of speech or expression. The short discussion of key elements of the Directive above has shown that the Directive is seeking to balance the protection of trade secrets and fundamental rights of free speech or expression. And an increased and more consistent level of trade secret protection is much more widely seen as a prerequisite for, rather than an obstacle to, easier know-how transfer, more competition and innovation. The concerns over workers’ mobility arise from the fact that workers in knowledgebased industries are often holders of trade secrets, and that restrictions to their ability to carry their knowledge along to a new employer could be a barrier to their mobility affecting not only fundamental individual rights relating to the choice of occupation, but also competition for qualified personnel— a driver for growth and innovation. Nevertheless, the concerns again appear to be overstated. In Germany, employees must maintain the confidentiality of their inventions beyond the end of their employment, unless the employer has released an invention. And employees are prohibited from taking documents or files with them when they leave the company. On the other hand, they are in principle entitled to apply their knowledge and experience to the benefit of a new employer and to contact customers of the previous one, unless they have taken lists with customer names and details along with them. Restrictions will apply where the confidential information, though memorized by the employee, is similar to an invention or recipe (such as the Coca-Cola formula), or easily distinguishable from the employee’s qualifications and know-how. More criteria will apply, depending on the circumstances of the individual case, but certainly for the purpose of striking a fair balance between the interest of a company in maintaining the secrecy of confidential information and the interest of an employee to take advantage elsewhere of the knowhow and experience acquired during the term of his or her employment.

Conclusion

Subject to the results of ongoing discussions in the legislative process, the Directive, if properly implemented by the Member States, will take trade secrets protection to a new level. It will facilitate cross-border know-how transfer within the EU, foster innovation and competition, and additionally, measures to preserve the confidentiality of trade secrets in the course of legal proceedings will allow trade secret holders to enforce trade secrets more effectively.

stefan.dittmer@dlapiper.com