Can you keep a (trade) secret?

Since 2012, one of the burning topics worldwide has been the protection of trade secrets. With new proposals to update current legislation coming from all major markets, it is only logical for the EU to jump on the bandwagon and acknowledge that the current fragmented legislation is not up to standards.

 

Currently, it seems only as a Member State has specific legislation concerning trade secrets, along with pending proposals in France and Romania. Other countries only have very limited provisions in their laws, whether in their criminal codes, civil codes, labor laws or other legislation.

 

This is all about to change, as the new EU Trade Secrets Directive  was adopted on May 27, 2016, with a 2-year time frame to implement the changes.

 

General information about trade secrets

 

Trade secrets are confidential information, generally unknown to the public and of commercial value to the company. They can be formulas, processes, designs and patterns, methods etc., and valued for a very short time, or on a longer basis. The main benefit for a company from the secrecy is the leverage they get on their competitors. Therefore, trade secrets are of outmost value for many companies.

 

The European Commission has stated: “Businesses, irrespective of their size, value trade secrets as much as patents and other forms of intellectual property right and use confidentiality as a business competitiveness and research innovation management tool.”

 

Trade secrets are important both to small businesses and large conglomerates. Not all secretive material can be otherwise protected. If the secret does not fulfill the strictly-given criteria for intellectual property protection, it would be open to breaches of secrecy. Even if there is a possibility of IP protection, the process can be quite expensive and lengthy, so smaller businesses might willingly opt for trade secrecy. A large firm usually has the means for legal protection, but might prefer not to disclose the secret for other reasons. Oddly enough, a survey has shown that larger firms find trade secrets more valuable than smaller companies.

 

The protection of trade secrets is important to companies for two reasons, predominantly for economic purposes. Firstly, the companies invest their resources in innovation, and expect to reap the benefits. If a secret leaks and their competitors find out about it, they would start production of the same good or service, making the initial investments unprofitable. Innovation would subsequently come to a stall. The second reason to protect trade secrets is that misappropriation is very costly to the company.

 

There is another side of the story, where innovation might actually be blocked by trade secrets. It is with subsequent innovations, where one firm “piggy-backs” on another´s invention, making it better, implementing their new ideas on an old product. Trade secrets make this genuinely harder or impossible, because the second firm will have to start from scratch.

 

The problem in the European Union is that there is no EU-wide legislation tackling these issues. Given trade secrets´ cross-border nature, the lack of uniformity and the multitude of national approaches have led to inconsistencies in their protection and a high number of misappropriations.

 

Relationship between trade secrets and other IP rights

 

Often compared to patents, trade secrets can present an alternative way to protect inventions. If the invention lacks requirements to be registered as a patent, secrets are the only route to protection. The lack of obligation to disclose the secrets of their product is just another thing that makes them so alluring to inventors. There is also no need for formal registration, which makes the process easier and less expensive. Besides, in some industries the market moves so fast and innovations are so frequent, registration becomes an obstruction. The thoroughness of searches makes the registration process too slow to follow the speed of development.  Another attractive characteristic is trade secrets´ longevity. It is not time-limited and there is no need of costly periodic renewals. Unfortunately, this longevity is a very fragile turf. A secret might last for centuries, but it could also last for a day. A patent, as a registered right, gives, in general, greater legal certainty. It may last only for a certain period of time, but you claim the right of ownership. Also, keeping a secret is not without its costs. The constant investigations and investments into keeping information secret also have their price.

 

TRIPS Agreement

 

It is not true to say trade secrets underlie no legal protection. There is a provision in the TRIPS Agreement (Agreement on Trade-Related Aspects of Intellectual Property Rights)  defining and acknowledging trade secrets. Created under the wing of World Trade Organization (WTO) and signed in 1994, it creates a framework for all the EU Member States, along with Switzerland, Japan and the USA. The applicable article of the law reveals the following wording:

 

Article 39.

 

2. Natural and legal persons shall have the possibility of preventing information 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 (10) so long as such information:

 

(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.

 

This is the fundamental pillar of trade secrets´ protection in the world. The signatory states are allowed to impose a stricter regime, but this is the limit beneath which they can not go. Considering TRIPS was obligatory to be implemented in all the EU Member States, why is there still the need to create EU legislation? The problem is that it was left to each state to choose the way to implement the agreement. Of course, the success of the results varied from country to country and the final outcome is not satisfactory.

 

For example: Sweden has trade secrets legislation. Italy, Portugal and France all rely on their Intellectual Property Codes, but Italy does and Portugal does not consider trade secrets as an IP right. And in France the provision is only applicable for manufacturing secrets. Further, the Netherlands and Luxembourg find tort law applicable, and Austria, Germany, Poland and Spain implement trade secrets in their competition laws. Adding to the confusion, most countries have a provision on trade secrets in both their labor law and criminal codes. And finally, in common law countries trade secrets are not regulated by statutory law at all, but by contractual obligations.

 

Additional reasons for further regulation

 

As mentioned, Member States are currently regulating trade secrets through a variety of laws, like criminal, civil, tort, competition, contract or labor law. There is no uniform approach to safe-keeping of secrets. This presents itself as an impediment to international trade and hinders possible investors. The Commission´s survey  from June 2013 has shown a very big difference in the number of protective measures the companies themselves implement. In Germany, 40% of companies invest in some sort of self-protecting measure, while in Italy this number is as low as 8%. The discrepancies go as far as the definition of trade secrets (or, some countries, lack thereof). Also, in some countries misappropriations are treated as breaches of contractual obligations, and in some, contracts are irrelevant. All this means that an investor should modify the secret information and/or his approach for every Member State he wants to do business in.

 

Currently, the legal remedies vary. Although most Member States do, a few countries do not recognize trade secrets as a criminal offence. Also, alternative methods could come in handy, like “regular” theft or unauthorized access.Sometimes, misappropriation is considered as an offence, and not as a crime. In some countries, competition law could be applied, but the point of a dominant position in the market is still quite subjective and does not add to legal certainty.

 

Another huge problem the companies are facing is the lack of protection during litigation. Most countries have no means of protecting trade secrets from leaking during trial, which somewhat defies the purpose of the procedure.

 

Commission´s Study on Trade Secrets and Confidential Business Information in the Internal Market

 

In 2013, the Commission ordered a study on internal market, including a target group of different companies, with a focus and small and medium enterprises. The results have shown that 75% of the businesses find trade secrets very important. 20% have actually suffered from misappropriation, and that number doubles when asked if the number of leakages is on a rise. The results have shown almost all industry sectors are exposed to this behavior, but especially the manufacturing and business sector and trade-related businesses. The chemical and pharmaceutical sector showed a special kind of vulnerability, as they are highly subjectable to industrial espionage and information leakages from subjects on multiple levels (employees, regulatory service, third parties). Also, their number of misappropriations is on the biggest rise. 

 

The most worrying numbers do not come from the number of misconducts, but, the number of judicial interventions. Only 40% of attacked companies sought judicial protection, mostly because of the difficulties collecting evidence, litigation costs and worry for their reputation.

 

When asked if there was a need for EU legislation on trade secrets, the result was predominantly “Yes”. Most businesses answered they wanted the new legislation to clarify what trade secrets are and why they should be protected and to define rules on criminal sanctions and fines for the responsible person. Also, to ensure confidentiality during legal proceedings and unify rules on calculating damages. Further, they wanted the Directive to uniform contractual non-compete and confidentiality clauses and national court orders to stop the use of illegally obtained trade secrets and import of products made abusing trade secrets.

 

Examples from other countries

 

It is useful to take a look at the possible paths to protection other countries have taken. Namely, we are talking about the USA, Japan and Switzerland. All with different approaches, overlapping in some aspects, differing in the other, these market leaders make a good learning tool for the European Union.

 

The thing they all have in common is the existence of “corporate criminal liability”. It is a term meaning that the company is liable for the offences committed by its employees.  Also, they treat negligence similarly. If there was no intent to commit a crime, the perpetrator will not face criminal charges.

 

1. USA

 

Considering trade secrets as the “fourth IP right”, along with copyright, patents and trademarks, and with a specific law concerning trade secrets, the USA is one step ahead of the EU. The Uniform Trade Secrets Act (UTSA) is adopted in almost all States (47, plus Puerto Rico, District of Columbia and the Virgin Islands).

 

The UTSA defines trade secrets and explains the types of possible misappropriations. It states the three elements for a trade secret: the information must qualify for protection, it must be generally unknown and intended to be protected. The trade secret holder must prove the information was wrongfully acquired, and that he has implemented reasonable measures for their protection. Unfortunately, the term “reasonable measures” is not defined by the Act, but the US Patent and Trademark Office says it means measures like informing employees of the trade secret policy and signing confidentiality agreements, keeping the information on a need-to-know basis, physically restricting access to data, non-disclosure agreements with third parties, etc.

 

The scope of protection is limited by the perpetrator´s knowledge of his criminal activities. If he is in good faith and stops his unlawful conduct immediately, he can3not be persecuted.

 

Even the problem of licensing trade secrets has been tackled. They call this the ”black box dilemma”. The potential licensee does not want to buy something still unseen, while the trade secret owner is at risk of losing both secrecy and remuneration. The solution is signing non-disclosure, confidential disclosure or pre-negotiation agreements.
 

Although unlawful disclosure of trade secrets is generally considered a tort, when done by a foreign government, trade secrets misappropriation falls under the Economic Espionage Act, and is considered a federal crime.

 

Due to a specific governmental system, criminal sanctions have been left for the federal states to regulate. Texas and California have taken the matter the furthest, adopting special criminal statutes regulating the matter. The most usual remedies are temporary restraining orders, injunctions to cease infringement and damages.

 

USA has found a solution to protect the secretive nature of the information in a way most unusual for a common law procedure. Usually, in the pre-trial stage you are obliged to full disclosure of evidence, but here, you are allowed to ask the judge to limit the exposure of evidence with a protective order. Also, you can ask for the restriction of public access to the courtroom, and after the trial has finished, you can ask for a sealing order.

 

A growing number of litigation has been noticed in the recent years, especially on the federate level. Most cases were brought by computer programming industry, followed by insurance companies, brokers and electronic components producers. The cases indicate that very little misappropriators were actually third parties. Over 50% of perpetrators are either employees or former employees, disclosing internal business information, client lists or technical information and know-how.

 

In 2015 a new bill was introduced to the Congress, and it is likely it is going to be adopted. It would bring supremacy over state laws. The main aim of the bill is reaching uniformity in state laws and pushing the cases towards federal courts, in order to reach a higher level of professionalism and efficiency in dealing with interstate and international cases. The main change the bill introduces is that a private right of action that can be brought to federal courts. What looks of the final product, as well as its effects, is yet to be seen.

 

Although UTSA is considered renewal-ready and not keeping up with exceeding digitalization, it is still an example of (relatively) successful option of trade secrets´ protection.

 

On 11 May 2016, a new bill was signed by the president, called Defend Trade Secrets Act (DTSA). It is considered to be the continuation of the Espionage Act of 1996 and Forbes Magazine named it the biggest development in IP in America in years. Now, private companies can bring their cases to the federal court. Secondly, whistleblowers are granted immunity in certain cases, and this clause has to be added to all non-disclosure agreements.

 

2. JAPAN

 

Both Japan and Switzerland do not have special laws for trade secrets. But, they do have specialized articles in their competition laws. Japan´s Unfair Competition Prevention Act (UCPA, adopted in 1991, amended to include trade secrets in 2003) defines the term trade secrets and explains the possible misconducts and their consequences. Nevertheless, with its budding manufacture and high-tech sectors, Japan is a playground for misappropriators. According to the Japanese Ministry of Economy, Trade and Industry (METI), approximately 40% of large companies or 15% of all companies in Japan have experienced information leakages. Therefore, there is an initiative by the government to amend the existing act with a focus on protecting technical information and successfully combating the increasingly sophisticated methods of attacks.

 

A trade secret- according to the UCPA- encompasses three requirements very similar to the TRIPS definition: it has to be kept secret, to be useful for business and not publicly known. The disputable term among these is “to be kept secret”. Usually it is observed if the access to information really was restricted and if it was easily recognizable that the information is supposed to stay secret.

 

During litigation, it is allowed to exclude the other party from a part of the proceedings in order to keep the secrets safe. Also, the other party can be excluded from evidence examination.

 

Legislation-wise, the Japanese courts do not rely solely on UCPA, criminal sanctions are also be found in the Criminal Code, but it is rarely used.

 

What can be noticed about Japan is the lack of an interim measure. You can obtain damages, restraint measures or the so-called “necessary measures to restore business credibility”, but only in the course of main proceedings.

 

3. SWITZERLAND

 

Opposing USA and Japan, Switzerland does not have a strict definition or a law concerning trade secrets. The protection is built on their Competition law, Criminal Code, case law and Art. 39.2 of the TRIPS Agreement. Trade secrets are not recognized as an IP right. What additionally weakens protection is the lack of uniform terminology. A judge treats trade secrets differently depending on the legal basis he uses.

 

Rather uniquely, the misappropriator in Switzerland is liable whether he was in good or bad faith. If he was in good faith, he will not be held criminally liable, but there will be a trial in front of the Civil Court.

 

4. SWEDEN

 

Being the only Member State with existing legislation for protection of Trade Secrets, it is interesting to see if and how will the new Directive will affect their current laws. The Act on the Protection of Trade Secrets was adopted in 1990.

 

According to the Act, a trade secret is information (in any form), concerning the business or industrial relations, which the owner wants to keep secret, and whose dissemination would cause damage to the owner in regards to his competition. The Act deals with both trade espionage and tampering with secrets. The predicted remedies are damages, fines and confiscation of products, combined with the remedies foreseen by the Swedish Criminal Code.

 

Comparing the two documents, it does not seem like there will be any problems with consolidating national and supranational legislation. They seem to be compatible and, it looks as though not much will change in Sweden.

 

EU Directive on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure

 

The EU Directive goals are improving the conditions of innovative business activity, protecting current investments and enticing new ones, reducing fragmentation and promoting research and development. The Commission agreed that reaching these goals on a supranational level would cut the efforts in half in comparison to reaching the national goals first, and then trying to extend to meet the Union level.

 

They isolated two main problems: the subpar incentives for cross-border innovation, due to the lack of legal protection, and reduced competitiveness due to a fragmented legal protection within the EU.

 

The Commission deems that the most suitable way of reaching their goal would be establishing the illegality of acts of misappropriation of trade secrets and harmonizing national civil remedies for such acts, as well as for rules on preserving confidentiality during and after legal proceedings.

 

Special acknowledgement should be given to the fact that there is now a clear definition of a trade secret. According to the Commission, a trade secret is information which:

 

1. 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;
2. has commercial value because it is secret;
3. has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

 

Also, the Directive clearly defines which acts are considered unlawful, whether it is an act of obtaining or just using the trade secret. Equally important, it defines which ways of acquisition and obtainment of the information are exempt and legal. It should be noted that one of the exemptions is whistleblowing, as the Directive says in Art.4.2.(b): “…no entitlement to the application for the measures, procedures and remedies… for revealing a misconduct,  wrongdoing or illegal activity, provided that the respondent acted for the purpose of protecting the general public interest”.

 

The statute of limitation has been defined. It is within one to two years from becoming aware of the misconduct.

 

It has been left to the Member States to secure the information form leaking during and after the procedure, but the minimum they have to do is to restrict the access to confidential documents and hearings. The interesting part is that the Courts can even restrict the access of the parties, and limit it to their legal representatives, who are obliged to secrecy. Also, the other party can be restricted from accessing the evidence which constitute a business secret. The evidence will still be available to their legal representatives and expert witnesses.

 

The Directive predicts implementation of minimally three interim measures: cessation of usage and disclosure of the trade secret, prohibition of production or selling the infringing goods and seizing the already produced goods. To get an interim measure, further evidence of the applicant´s rights and of the alleged infringement should be provided.

 

The burden of proof is on the applicant. He has to prove that the trade secret exists and is owned by the applicant and its unlawful acquisition, usage or disclosure, whether existing or imminent.

 

The predicted remedies are the cessation or prohibition of use or disclosure of trade secret, a ban on production or selling of infringing products, adopting corrective measures, such as a declaration of infringement, abandoning future production or sales of infringing products, removal of the infringing quality from the product, destruction of such goods or another document or object containing the trade secret. This does not mean the exclusion of damages and publication of judicial decision. Although the decision will be made public, the secrecy of the information must be fully protected. These are set to be the minimum, but, the Member State can expand the given measures.

 

The implementation of the Directive

 

There are three key aspects concerning implementation: the timing of implementation, the technical challenges and compliance issues. The Member States have two years to implement all the changes into their national systems, which, according to the Commission, should not be that difficult due to implementation of the TRIPS provisions. A lot of weight is put on the judges´ shoulders, as they are considered to be responsible for the correct application of the Directive once it is implemented.

 

The aftermath and the outlook

 

Firstly, trade secrets are still not considered as nor will be leveled with IP rights. There is no exclusivity of ownership granted as with IP rights. If you discover the secret in a lawful way (for example, reverse engineering), the secret holder can not do anything about it.

You are even allowed to sell it to the holder´s competitors. Especially if your buyer is in good faith, then all the parties may be acting lawfully. In this case, the secret holder would be entitled to compensation, but, not to an injunction.

 

Secondly, even with the Directive, there is still the need for non-compete agreements. Once the employee leaves the firm, there is nothing in the Directive to prevent him from using his knowledge obtained in the former firm.

 

Thirdly, regarding enforcement, the Enforcement Directive for IP Rights is broader. This might be problematic, as the secret know-how often accompanies other IP rights. Therefore, two regimes will have to be applied.

 

Fourthly, the Directive will not impede with the freedom of speech. It is one of the exemptions. In fact, some think this provision could be interpreted too broadly and misused. On the other side, the Directive does not allow hiding necessary information either. If the company was obliged to disclose information of public interest, this cannot be considered a trade secret.

 

One of the great benefits of the Directive is that the States are obliged to implement measures to stop information leakage during court trials. Given that the situation before was quite worrisome, and only Hungary, Germany and the United Kingdom had taken measures to secure the information, this provision might have a great impact.

 

It is definite that the new Directive brings a lot to the table regarding legal certainty. Although there are some areas that might prove to be disputable, just the existence of legislation for the uniform protection of trade secrets is a step in the right direction.