A recent study carried out for the European Commission indicated that companies consider a wide range of secret information to be extremely valuable, including information relating to commercial bids and business planning, R&D, product and process technology, recipes and marketing. At the same time, the danger of leaks is perceived to be increasing, with risks coming from industrial espionage, former employees, competitors and suppliers. The new Trade Secrets Directive, adopted by the European Parliament on 14 April 2016, will tighten up laws protecting trade secrets across Europe and provide better measures for enforcement.
A minimum level of protection for trade secrets
Legal protection for trade secrets varies considerably between European Member States. The aim of the Trade Secrets Directive is both to improve the level of protection and to make it more consistent, so that companies that operate in more than one European country are not faced with different regimes in different countries. To this end, the Directive partially harmonises trade secrets law, requiring all Member States to provide a minimum level of protection. Individual Member States may, however, provide more far-reaching protection if they wish, as long as safeguards relating, for example, to freedom of expression, whistle-blowing and employee rights are maintained. This should enable Member States such as the UK, where trade secrets protection is already at a high level, to maintain this position. The current expectation is that implementation of the Directive will not require major changes to the English law of confidence, though some changes will be necessary.
The Directive establishes common European rules on what constitutes misuse of trade secrets, and provides, among other things, for the preservation of confidentiality during court proceedings and for the availability of effective remedies. It is expected to be adopted by the Council this month and to come into force shortly afterwards. Member States will then have two years in which to implement it.
Trade secrets qualifying for protection under the Directive
The Directive only applies to material which “has commercial value because it is secret”. Purely private information may continue to be protected under national laws of confidence and privacy, but the Directive does not apply unless this also has commercial value.
In order to qualify for protection material must be 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”. This wording does not require absolute secrecy. However, the Directive provides that “reasonable steps” must have been taken to keep the information secret. So it will be important – as is already the case under the English law of confidence – for companies to be able to demonstrate that material has been subject to restrictions on disclosure. This may include marking documents and files as confidential, clean desk policies and restricting access to information within the company both physically and electronically.
Broad provisions on infringement
Any natural or legal person who has acquired, used or disclosed a trade secret unlawfully will infringe. As one would expect, this may include situations where confidential documents and other physical or digital materials are accessed, copied, used or disclosed without consent as well as where information is used or disclosed in breach of a confidentiality agreement or other duty of confidence. There is currently considerable divergence between Member States about when (if at all) an action will lie against third parties who have obtained the information from an infringer. Under the Directive such third parties will infringe if they knew, or ought under the circumstances to have known, that that person was infringing.
The Directive also introduces a new concept of “infringing goods”; these are goods, the design, characteristics, functioning, production process or marketing of which significantly benefits from the use of unauthorised trade secrets. Producing or dealing in such goods will infringe if the person doing so knew or ought to have known that the trade secret was being used unlawfully. This is a very broadly drafted provision, and it remains to be seen how it will operate in practice, particularly in relation to marketing information.
More effective remedies
The remedies available in respect of infringement of rights in confidential information also vary considerably across Europe. In some countries the only remedies are injunctions and damages; sometimes no cease and desist orders are available against third parties who are not competitors; and national rules differ as to whether trade secret holders may seek the destruction of goods or the return and destruction of materials containing the trade secret. Among other things, the Directive requires Member States to provide for interim injunctions and the precautionary seizure of suspected infringing goods at the interim stage and, at the final stage, for final injunctions, the recall, destruction or withdrawal of infringing goods and the destruction or delivery up to the trade secret holder of documents and other materials containing or implementing the trade secret.
The Recitals to the Directive explain that national rules of Member States on the calculation of damages do not always take account of the intangible nature of trade secrets, which makes it difficult to demonstrate the actual profits lost or the unjust enrichment of the infringer where no market value can be established for the information in question. The Directive firms up the position on the calculation of damages, which should make it easier to obtain proper compensation. It specifically provides for all appropriate factors to be taken into account, including lost profits and any unfair profits made by the infringer as well as non-economic factors such as moral prejudice. Damages may also be calculated on the basis of a royalty rate.
Preserving confidentiality in court
The risk that confidentiality will be compromised during legal proceedings is a major disincentive to enforcing trade secrets in court. The study referred to above found that “the main factor hindering enforcement of trade secrets in court derives from the lack of adequate measures to avoid trade secrets leakage in legal proceedings”. Only Hungary, Germany and the UK were found to have in place effective procedural measures to prevent disclosure in the course of civil proceedings. The fact that the Directive addresses this issue is, therefore, a major step forward in terms of protecting confidential information in Europe. It provides that courts must be able to order specific measures to preserve confidentiality and that these measures must include the ability to restrict access to a small number of people, a provision reminiscent of the “confidentiality clubs” which are familiar in the English courts. However, the wording of the Directive could suggest that such clubs cannot be restricted to lawyers only, which could represent an unfortunate lack of flexibility in some cases.
Exceptions and safeguards – a major area of controversy
The extent of the exceptions and safeguards included in the Directive has been a major area of controversy. The fear is that laws on trade secrets could be used to stifle fundamental rights and impede the ability of employees to move jobs where they know confidential information. The Directive includes, among other things, express wording protecting freedom of expression and respect for the freedom and pluralism of the media; whistle-blowers who reveal “misconduct, wrongdoing or illegal activity”, will not infringe where they act for the “purpose of protecting the general public interest”. The Directive also contains a number of references to maintaining employee rights and the mobility of workers, emphasising, for example, that nothing in the Directive shall provide grounds for limiting employees’ use of “experience and skills honestly acquired in the normal course of their employment”. All these provisions protect important rights. The wording has, however, been subject to much negotiation between the Commission, Parliament and Council, and the result sometimes lacks precision. For example, whereas an earlier draft of the Directive provided that information revealed by a whistle-blower must be “necessary” to expose wrongdoing, this limitation has now been removed. Similarly, it may be unclear in some cases whether an employee’s “experience” might include sensitive confidential information that merits protection. These are areas in which a balance needs to be struck, but the provisions of the Directive are not detailed enough to do this job. So far as English law is concerned we would argue that the English law of confidence does already address this balance. However, these provisions in the Directive will eventually fall to be interpreted by the Court of Justice of the European Communities (CJEU) at the European level rather than by the English courts, and this introduces an additional element of uncertainty.
What should companies do now?
Many would say that the only way to protect a secret is not to tell anyone. This may not be practical in a commercial context, but simple measures such as restricting the number of people to whom the information is accessible and marking documents and files confidential are both a practical way to protect secrets and also important in demonstrating to the court that the information is genuinely confidential and so merits protection under the law of confidence/trade secrets.
In practice the law of contract is the most usual – and generally the most effective – way of protecting confidential information. This is not affected by the Directive. As a rule contracts are much easier to enforce than general obligations of confidence, so taking direct contractual confidentiality undertakings wherever possible is still the best way forward.
So far as employees are concerned this may be the time to review restrictive covenants and confidentiality obligations in key employment contracts to ensure that these are both enforceable and provide as much protection as possible in a situation where the employee moves job.
If you have any questions about the Trade Secrets Directive or about the law of confidence or employment law generally, please contact Tom Lingard or Kerry Garcia or your usual contact at Stevens & Bolton.