Protection against unlawful acquisition of undisclosed know-how and business information (trade secrets)

28 November 2013
by eub2 -- last modified 28 November 2013

The European Commission has today proposed new rules on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure. The draft directive introduces a common definition of trade secrets, as well as means through which victims of trade secret misappropriation can obtain redress. It will make it easier for national courts to deal with the misappropriation of confidential business information, to remove the trade secret infringing products from the market and make it easier for victims to receive damages for illegal actions.

What is undisclosed know-how and business information? What are trade secrets?

In the course of their activities, companies, researchers, inventors and creators develop information which is commercially valuable and which is treated as confidential in order for them to have a competitive advantage. Such information is helping them to exploit first mover advantages (in marketing, first-mover advantage or FMA is the advantage gained by the initial ("first-moving") significant occupant of a market segment).

The information can be of a technical (manufacturing process, software) or commercial nature (customer or client list). It can be strategic long-term (recipe or chemical compound) or more short-lived (results of a marketing study, name, price and launch date of a new product, price offered in a bidding procedure, etc.).

Are trade secrets important? For whom?

Every company, large or small, and across all sectors uses trade secrets to gain competitive advantage in the global economy. Trade secrets are important to all industry sectors, including services.

SMEs and start-ups rely on secrecy more intensively than large companies, as they do not have sufficient resources to seek, obtain and manage a portfolio of patents, police the market and enter into disputes and litigation over patent infringement.

So, in some cases, companies and inventors with limited financial means may trade on the basis of secrets that are a less expensive means to appropriate and manage the results of their innovation efforts albeit less safe as a means of protection.

What are the effects of misappropriation of trade secrets?

Whenever trade secrets are misappropriated (e.g. stolen or misused) by a third party, the trade secret owner will suffer losses while the dishonest third party will be free-riding. This also harms society: theft of know-how jeopardises future investment in R&D and innovation and undermines trust in knowledge-sharing and technology transfer. As business risk increases, there are fewer incentives to innovate.

Why is there a need to harmonise national laws in this area?

Competitiveness is increasingly dependent on know-how and innovation. In a recent survey, 75% of the companies stated that trade secrets are important for competitiveness and innovative performance.

However, European companies are increasingly exposed to misappropriation of trade secrets. One in five European companies has been the victim of trade secret misappropriation, or attempts at misappropriation, at least once in the past 10 years. Two in five European companies find that the risk of trade secret misappropriation has increased during the same period.

This is due to several factors, such as fierce global competition, increased use of information and communications technology (ICT), recourse to external consultants, offshoring and outsourcing.

The ability of companies from different Member States to build trusted networks for collaborative research or to enter into know-how transfer agreements is impaired by the fragmentation of national laws on the protection of trade secrets as they feature substantial differences, important gaps and shortcomings. The current situation does not favour the innovation performance of the European Union.

At present there is no EU framework for trade secrets.

There is a patchwork of different national rules but these are often outdated, opaque and have important gaps. Protection throughout the EU is uneven, not inter-operable, giving rise to uncertainty, as well as to unnecessary costs and barriers to cross-border innovation activities and know-how transfer.

National laws on redress against misappropriation of trade secrets differ significantly across the EU. Recent studies have demonstrated that

• For 82% of the companies, this means higher business risk in Member States with weaker protection.
• For 59% of companies, this discourages cross-border R&D
• 40% of EU companies refrain from sharing trade secrets because of the risks involved
• Only 40% of those having suffered from trade secret misappropriation have sought legal remedies in the EU
• At least 70% of European companies, both big and small, and across all sectors, are favourable to EU legislation on misappropriation of trade secrets.

Are trade secrets an intellectual property right?

No. The holder of a trade secret does not have an exclusive right over its creation. He cannot prevent competitors from copying and using the same solutions – reverse engineering (the process of discovering the technological principles of a device, object, or system through analysis of its structure, function, and operation) is entirely lawful.

Trade secrets are only legally protected in instances where someone has obtained the confidential information by illegitimate means (e.g. through spying, theft or bribery).

What is the relationship between trade secrets and intellectual property rights (IPRs)?

Trade secrets are complementary to IPRs. They are heavily used in the creative process leading to innovation and the creation of IP rights. For example, before an invention is patented, the inventor treats it as a secret because if it becomes general knowledge the invention loses the necessary requirement of novelty. Therefore, trade secrets are at the origin of patents (new inventions), copyright (a new novel or a song), trademarks (a new branded product), and designs (a design of a new car model).

Trade secrets are also used in relation to commercially valuable information for which there is no IPR protection, but for which investment and/or research are nevertheless required and which are important to innovation (a new business idea, recipe for a perfume, or recipe for a food product).

Should inventors use patents instead, thus disclosing their invention to the public?

Usually companies use secrecy when the information in question cannot be protected by patents or other IPRs. Incremental improvements on patented inventions, new business ideas and models, the results of marketing studies, recipes for foodstuffs or fragrances, and know-how relating to manufacturing processes do not concern an invention and are not artistic works or designs, and therefore cannot be protected through patents, copyrights, design rights or any other IP right. Competitors are free to, and often do, strive to find the same, similar or even better solutions. The only advantage of the trade secret holder is the first move advantage – everyone else can catch up.

Moreover, trade secrets do not imply total secrecy; they are often shared among trusted partners, for example for the purpose of collaborative research, or through licensing agreements. Many patent licensing agreements include transfer of trade secrets relating to the invention in question.

Is it right to encourage secrecy? Should knowledge not be shared?

The initiative is not about protecting trade secrets themselves, nor is secrecy encouraged. Inventors, research institutions and companies have the choice of using confidentiality or not to best serve their legitimate interests and goals.

The initiative provides defences against dishonest parties who use illegitimate means to get hold of the results of innovators' efforts and investment.

The initiative will have positive effects on knowledge-sharing by making know-how transfer, licensing agreements and collaborative research between partners more secure.

The aim is to optimise dissemination and productive use of knowledge within the Single Market and help improve EU's innovation performance.

Which Member States already have rules? Which do not?

Austria, Bulgaria, the Czech Republic, Estonia, Germany, Finland, Greece, Hungary, Italy, Latvia, Lithuania, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden have legislation on misappropriation of trade secrets, although some of them fail to define what trade secrets are (examples: Germany, Finland, Greece, Denmark, Spain).

In Belgium, France, Ireland, Luxembourg, Malta, the Netherlands and the UK there are no specific provisions on trade secrets in civil law. The protection of trade secrets against misappropriation depends on judicial interpretation of general provisions on extra-contractual liability or on traditional common law. In Cyprus, trade secrets are only protected by contract. In France misappropriation of certain types of trade secrets (namely, manufacturing secrets) are criminally punished if committed by employees.

How does this initiative fit in with the broader 2011 IPR strategy?

The 2011 strategy is aimed at releasing the potential of European inventors and creators and empowering them to turn ideas into high quality jobs and economic growth. The strategy seeks to achieve such goals through the creation of an appropriate "enabling framework" that incentivises investment by rewarding creation, stimulates innovation in an environment of undistorted competition and facilitates the distribution of knowledge.

Trade secrets are another form of appropriation of intangible assets which is highly complementary to IPRs, the difference being that in the former case no exclusivity of rights is granted. Legal protection against misappropriation of trade secrets improves the conditions for businesses and researchers to discover, develop, share and use information and knowledge. It is therefore crucial for innovation performance.

The proposal that has been adopted today is another building block of the "enabling framework" that the strategy undertook to set up in order to achieve its goals.

How are trade secrets protected in the rest of the world?

In principle, the 159 countries that are members of the World Trade Organisation are bound by the TRIPS Agreement (The Agreement on Trade Related Aspects of Intellectual Property Rights). According to this agreement, natural and legal persons shall have the possibility of preventing trade secrets lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices. However, the level of protection varies from country to country: Japan and the US are considered to have better levels of protection than other third countries.

The proposal adopted today is in full alignment with the TRIPS Agreement obligations. It will largely align the protection of trade secrets within the EU with that of Japan and the US as far as civil (not criminal) law is concerned.

Additionally, harmonised EU rules could, over time, contribute to influencing third countries to establish similar legislation thereby raising the global level of protection of trade secrets against misappropriation within the spirit of the TRIPS Agreement. This would benefit EU companies operating in third countries and which rely on trade secrets.

How will our EU system compare to the US trade protection system? Will it be part of the Transatlantic Trade and Investment Partnership (TTIP) or have any impact on the negotiations?

We propose to harmonise the national civil law of the Member States around three main blocks: (1) definition of trade secrets and misappropriation of trade secrets, (2) a set of civil remedies that trade secret holders can seek, whenever they suffer from trade secret misappropriation; and (3) a set of measures that courts may use in order to avoid leakage or disclosure of trade secrets that have been submitted to the court in the course of civil litigation on trade secrets misappropriation.

In the US, state civil laws are partially harmonised already through the Uniform Trade Secrets Act that has been enacted in 47 States. The US has criminal sanctions at Federal level through the Economic Espionage Act. The EU has decided not to harmonise criminal sanctions at this stage.

Trade secrets will be discussed in the TTIP negotiations, and has a heightened level of relevance with the recent allegations of economic espionage carried out by the national Security Agency (NSA). One goal could be to make sure that the two legal regimes are inter-operative facilitating recognition and enforcement of judgements on either side of the Atlantic. The EU and the US also have a common interest in pursuing protection of trade secrets against misappropriation in third countries.