UK: Definition and protection of trade secrets and undisclosed know-how to be harmonised across Europe

 To counteract a growing problem of trade secret theft and provide a clear and uniform level of protection across the EU, the Commission has approved a proposal for a Directive "on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure".

25% of European companies are reported to have experienced at least one case of information theft in 2013 (compared to 18% in 2012).

Described by the Commission as "one further deliverable on the commitment of creating a single market for intellectual property", the new measures are expected to be in place within 4 years.

Summary

The proposed Directive lays down rules on protection against the unlawful acquisition, disclosure and use of trade secrets. A "trade secret" is defined as information which meets each of the following criteria:

• It is "secret" – 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 this kind of information
• It has commercial value because it is secret
• It has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

This definition mirrors the definition of "undisclosed information" which WTO member states are obliged to protect under the TRIPS Agreement.

The Commission contemplates the new Directive covering, broadly, 2 types of information:

• technical (manufacturing processes, recipies, chemical compounds, etc.)
• commercial (lists of customers, results of marketing studies, product launch data, etc).

The proposed Directive also provides for remedies including damages and for consistancy in the protection of trade secrets revealed as part of legal proceedings. Despite considering criminal sanctions at an earlier stage, none have been included in the draft.

Currently, trade secrets are protected in the UK under common law, with recent decisions, such as the Supreme Court's in May 2013 in Vestergaard v Bestnet, advancing the law on a case-by-case basis. The new proposals would effectively place into statute, a very similar position to that currently applicable under UK common law, although the new provisions would apply alongside the current UK law. It is however hard to see how decisions applying such a new Directive in the UK and those of Courts of other EU states, would not in time lead to a re-interpretation of the UK common law position.

Background

Trade secrets are, as the Commission reports: "a key complementary instrument" to traditional IPRs. Restrictions on the use of trade secrets can be justified "in order to promote an economically efficient and competitive process" when these trade secrets have been obtained from the holder "against its will through dishonest means". The Commission recognises the risk that stolen trade secrets could be used to produce infringing goods which subsequently compete within the EU with those of the victim of the misappropriation. The current protection for trade secrets varies hugely across the EU states with some lacking significant protection, something that makes cross-border R&D and a unified approach to trade secrets in any Europe-wide organisation difficult to achieve as well as "undermining the capacity of European companies to respond to dishonest attacks on their know-how".

The proposal is part of the optimisation of IP infrastructure in Europe and comprehensive IP strategy adopted by the Commission in May 2011 (A Single Market for Intellectual Property Rights Boosting creativity and innovation to provide economic growth, high quality jobs and first class products and services in Europe - COM(2011)287) which included an undertaking to examine the protection of trade secrets.

Across Europe, trade secrets are currently protected in a variety of ways: many countries have specific civil law provisions but a significant number have no statutory provision, although protection is afforded through common law, as in the UK, and via general provisions prohibiting unfair competition or via tort, contract, employment or criminal law. The remedies and compensation available also vary across the EU, as does protection of trade secrets and confidential information within litigation. The proposals seek a unified approach to all these aspects. The Commission held a public consultation on the protection of business and research know-how (launched December 2012) and published a further study on the role of trade secrets in April last year.

The proposed Directive will now go to the Council of Ministers and the European Parliament for debate and adoption.

The Proposed Directive

If the proposals are adopted in their current form then:

• Acquisition of a trade secret will be unlawful whether carried out intentionally or with gross negligence, by unauthorised access to or copying of any documents or materials lawfully under the control of the trade secret holder containing the secrets or from which they could be deduced, or obtaining such by theft, bribery, deception, breach or inducement to breach confidentiality agreements or other duties of secrecy or by any other conduct considered in the circumstances contrary to honest commercial practices.
• Use or disclosure of trade secrets will be unlawful if they were acquired unlawfully or if use or disclosure is in breach of a confidentiality agreement or any other duty of secrecy or is in breach of a contractual or any other duty to limit the use of the trade secret.
• Use or disclosure of the secret will also be unlawful if the person disclosing the secret knew or should have known under the circumstances that the trade secret was obtained from another person who was using or disclosing the trade secret unlawfully.
• Further, the conscious or deliberate production, putting on the market or import, export or storage of infringing goods (those whose design, quality, manufacturing process or marketing significantly benefits from trade secrets unlawfully acquired, used or disclosed) shall also be an unlawful use of a trade secret.

There are provisions governing what will be lawful acquisition, use and disclosure of trade secrets including: independent discovery; observation/study of a product made available to the public (lawfully in possession of the acquirer); exercise of the right of workers' representatives to information and consultation in accordance with national law or practices, or other honest commercial practices.

Member States are required to ensure that there will be no entitlement to remedies or procedures or measures where: legitimate use is being made of the right to freedom of expression and information; the acquisition of the secret was for the purpose of revealing an applicant's misconduct (as long as this was necessary for such a revelation and the respondent acted in the public interest); the secret was disclosed by workers' representative as part of a legitimate exercise in representing workers; and for the purpose of fulfilling non-contractual obligations or for the purpose of protecting a "legitimate interest".

Measures, procedures and remedies are required to be fair and equitable, effective and dissuasive and not unnecessarily complicated. Their application must be proportionate, and avoid the creation of barriers to trade in the internal market. Member States must also guard against their abuse. Competent judicial authorities must determine the claims and be entitled to impose sanctions and order dissemination of information on their decisions.

Member States must set a limitation period for trade secrets theft actions of a minimum of 1 year and a maximum of 2 years.

The Commission was concerned about consistency on the preservation of confidentiality of trade secrets in the course of legal proceedings. There is provision to compel those involved in a case not to disclose or use any secrets revealed in proceedings (as long as the claimed secrets amount to trade secrets and these do not become generally known subsequently). The specific measure the court may use (on the application of a party to the proceedings) shall at least include: restricting access to any document containing trade secrets; restricting access to hearings (which can include the parties themselves); and making non-confidential versions of the judicial decision available by removal of passages containing trade secrets.

Interim and precautionary measures set out in the proposal are:

• cessation or prohibition of the use or disclosure of the trade secret on an interim basis;
• prohibition to produce, offer, place on the market or use infringing goods or to import, export or store infringing goods for those purposes;
• seizure or delivery of the suspected infringing goods (infringing trade secrets – as above) including imported goods, so as to prevent their entry into, or circulation within, the market.

Undertakings intended to ensure the compensation of the trade secret holder may be given to alleviate the interim or precautionary measures.

Permanent injunctions and corrective measures can be ordered following a hearing of the full merits of the case as per the interim measures but including a declaration of infringement, recall/withdrawal of the goods from the market, "depriving infringing goods of their infringing quality", destruction of the infringing goods or of all or part of any document or material (electronic or otherwise) containing or implementing the trade secret and their delivery-up. There is provision for pecuniary compensation in place of injunction or other measures to be allowed in certain circumstances where the person acquiring the trade secret did so in good faith and the measures would cause that person disproportionate harm and pecuniary compensation appears reasonably satisfactory.

Damages are to be paid "commensurate to the actual prejudice suffered", can take into account lost profits and unfair profits but can be taken to be a lump sum equivalent to royalties or fees that would have been due.

Sanctions for non-compliance should be effective, proportionate and dissuasive and include the possibility to impose recurring penalty payments.

The Commission took the decision not to include criminal sanctions in the current proposals.

Current UK position

In summary, the current position in the UK, with respect to trade secrets is as follows:

To qualify as a trade secret, the information must have the "necessary quality of confidence" about it – sometimes this is obvious – a secret formula for the key ingredient to a wildly success product for example – sometimes less so (the fact that information was encrypted did not make it confidential if the encrypted version was made available to the public (Mars v Teknowledge (2000)).

Thus calling something "confidential" will not be sufficient if you do not treat it as such; there must be confidential circumstances creating an obligation to keep something confidential. The test in Coco v Clark (1969) involves considering what a reasonable man would have inferred from the circumstances as to whether information was being given to him in confidence.

Most recently in Vestergaard v Bestnet (2013) the Supreme Court held that an ex-employee assisting others who had misused confidential information, but without access to the information whilst in employment and without any circumstances from which she should have inferred mis-use, could not have a term implied into her employment contract that she would not give such assistance. There are interesting comparisons here with patent infringement, where secondary infringers can be liable for providing the means to infringe a patent given knowledge if materials supplied can be used to infringe and were intended to be used to do so.

In an employment context, some information cannot be counted as confidential (such as information about the business or industry in which employees were or are employed) if it is also available to the public in general or on request, as well as information representing common business practices). Other information is seen as confidential during the course of employment but not once the employee has left, unless contractual restrictions apply post-termination. This includes information about the structure of the employer's business and general business methods and ways of doing things which fall within the emloyee's skill and knowledge. The employee should not be deprived of this knowledge which he "carries in his head" to another job once his employment has terminated. Attempts to restrict the use of such information can risk being found to be an unlawful restraint of trade i.e. restraint of the ex-employee's ability to practise the trade he has learned while in the original employer's employ, his "acquired skill and knowledge". The third category is genuine trade secrets which remain confidential after the termination of an employment contract. These basic categorisations arise from the Faccenda Chicken v Fowler case (1986) but have led to much litigation subsequently over where the division lies in a particular employment and information context. It is not clear that the proposed Directive will assist in this regard.