New Trade Secrets Proposal

Laws in EU countries need to be harmonised to prevent the theft and misuse of confidential business information in order to guarantee the competitiveness of knowledge-based European businesses, according to a proposal for a Directive presented by the Commission on 28 November.

National laws in EU Member States currently treat the misappropriation of trade secrets in different ways. The new rules proposed by the Commission would harmonise this area by introducing common definitions, procedures and remedies. According to the Commission, the current fragmented framework creates mistrust that negatively affects cross-border cooperation between business and research partners across the EU thus impeding innovation and growth in the EU single market.

The Commission’s proposal defines trade secrets as any sensitive business information that is kept confidential in order to ensure the competitive advantage of its holder. This confidential information includes formulae, business processes, recipes or marketing concepts developed during the process of research and creation, at a stage too early to receive protection by ordinary intellectual property rights (IPRs) such as trademarks, copyrights or patents. Unlike IPRs, which are exclusive to their holder, trade secrets may be used by competitors, unless the confidential information has been obtained by illegitimate means such as theft or bribery.

The proposal is accompanied by an Implementation Plan in which the Commission envisages the potential challenges deriving from the transposition and implementation of the Directive.

This proposal follows the adoption of a broader intellectual property strategy for the single market in May 2011, with a view to setting out an appropriate framework for investment in creation and innovation. The 2011 strategy is part of the Innovation Union pillar in the framework of Europe 2020 Strategy which aims to create an “innovation-friendly” business environment where investments in knowledge and innovation are properly rewarded.

Scope and Definitions

The proposal would apply in cases of the unlawful acquisition, disclosure and use of trade secrets. In accordance with the definition contained in the TRIPS Agreement (agreement on Trade Related Aspects of Intellectual Property Rights), Article 2 defines “trade secret” as information characterised by 3 elements:

1) Secrecy: the information is confidential when it is not “generally known or readily accessible to persons within the circles that normally deal with the kind of information in question”;

2) Commercial value: the information has a commercial value because of its secrecy;

3) Caution: the trade secret holder must have made reasonable efforts in order to keep the information secret. “Trade secret holder” is defined with reference to the lawful control of the commercial information, which means that protection is provided not only to the original owner but also to the following holders, such as licensees.

Pursuant to Article 3 the measures provided for by the proposal apply when the acquisition, use and disclosure of confidential information is “unlawful”, meaning acquisition without the consent of the trade secret holder, notably through:
• Unauthorized access or copy of the confidential documents or materials under the control of the trade secret holder;
• Theft;
• Bribery;
• Deception;
• Breach of a confidentiality agreement;
• Dishonest commercial practices.
The same provision specifies that the use and disclosure of confidential information by a third party not directly involved in the initial unlawful action is also unlawful if the third party knew or should have known that the information was obtained illegally.

On the contrary, the acquisition, use and disclosure of trade secrets are lawful under Article 4 in cases of independent discovery or creation, observation or test of a product made available to the public or reverse engineering.

Procedure

As far as the procedure for applying under the proposal is concerned, Chapter III requires Member States in general terms to:
• Ensure that national civil enforcement instruments against misappropriation of trade secrets will be effective, equitable, and not unnecessarily complicated or expensive (Article 5);
• Guarantee that the competent judicial authorities will apply the proposed provisions in a way to prevent the abuse of litigation, which is when the application has been initiated in bad faith with the purpose of intentionally harming the defendant’s access to the market (Article 6);
• Foresee a limitation period for bringing claims under the proposal: Article 7 of the proposal states that actions may be brought within at least one year but no more than two years after the date when the applicant became aware of the last circumstance giving rise to the action;
• Provide judicial authorities the power to take measures aimed at keeping the information confidential during the legal proceedings (Article 8). This must include: restricting access to documents submitted by the parties or third parties; restricting access to hearings and hearing records; and preparing non-confidential versions of submissions and judicial decisions by removing the section referring to the trade secret.

Interim Relief, Redress and Damages

The proposal also contains provisions on temporary and definitive remedies through which victims of the misappropriation of trade secrets can obtain redress.

Interim measures can be ordered by the competent judicial authorities at the request of the trade secret holder, such as interlocutory injunctions or precautionary seizure of infringing goods (Article 9). However, Article 10 requires Member States to ensure equity and proportionality when granting or rejecting the application of provisional measures, taking into account for instance the value of the information, the measures taken to protect it, the behaviour of the respondent in acquiring the secret, the impact of the misappropriation and the impact of the potential application of the interim measure on the parties.

Where the final decision finds that the acquisition of confidential information is unlawful, the judicial authority can order definitive measures at the request of the applicant. Article 11 includes such as measures 
• the prohibition of use or disclosure of the trade secret; 
• the prohibition to make, offer, place on the market or use infringing goods or; 
• corrective measures including: orders to destroy or deliver to the original trade secret holder all the information he or she holds concerning the unlawfully acquired, used or disclosed trade secret; and recalling, withdrawing or destroying the infringing goods from the market.

In the same way as Article 10, Article 12 establishes safeguards to ensure equity and proportionality of the measures adopted.

The damages suffered by the trade secret holder as a result of the misappropriation would be compensated in accordance with Article 13. When calculating damages, the judicial authority should be required to take into account several factors, including: 
• negative economic consequences suffered by the applicant, 
• unfair profits obtained by the defendant and the 
• moral prejudice caused to the trade secret holder. 
• The damages may also be calculated as a lump sum on the basis of royalties which would have been due if the infringer had requested authorisation to use the trade secret in question.
Another possible remedy available to judicial authorities would be the publication of the judgement at the request of the applicant and at the expense of the respondent, provided that the trade secret is not disclosed and the measure is proportionate (Article 14).

In order to ensure an effective application of the Directive and the fulfilment of the pursued objectives, Chapter IV foresees the application of sanctions on Member States in case of non-compliance with the measures provided for in Articles 8-11.

Next Steps

The Commission's proposal on the protection against misappropriation of trade secrets will be transmitted to the Council of Ministers and the European Parliament for adoption under the ordinary legislative procedure.

As far as transposition is concerned, the Commission identifies two challenges:

First, ensuring a timely transposition into national law as soon as the proposal is adopted through the network of national correspondents and the monitoring of the transposition process.

Secondly, ensuring a harmonised transposition of the Directive into national law. In this respect, multilateral and bilateral transposition workshops with Member States should be organized starting 2 months after the adoption of the proposal and continuing throughout the transposition period. Within or outside these meetings potential support actions include spreading of national best practices and focus on problems/difficulties emerged during the preparation of the national measures. During the 12 months following the end of the transposition period the Commission would carry out conformity assessment to check whether national transposition has been completed and is in conformity with the Directive.

Once the transposition is carried out, the remaining challenge would be the smooth application of the Directive by national judicial authorities. The Implementation Plan foresees several support actions:

As soon as the proposal is adopted, information meetings with the relevant judicial authorities and with stakeholders (business associations, lawyers) would be held in order to explain the Directive's rules and discuss any emerging difficulty and issues arising from the practical application of the rules. These meetings should also aim to promote mutual learning and exchange of best practices respectively among judicial authorities and stakeholders groups.

After the end of the transposition period, regular implementation meetings with national correspondents to discuss issues arising from the practical implementation of the rules would be held.

Six months before the end of the transposition period, a working group, possibly organised within the European Observatory on Infringements of Intellectual Property (EOIIPR) Rights and with the participation of Member States and stakeholders, would define and collect the data for the future monitoring of the new rules and any subsequent evaluation.

Reporting on litigation trends by the EOIIPR, intermediate application report and evaluation of the policy by the Commission should be made available 3, 4 and 8 years, respectively, after the end of the transposition period.