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March 28, 2014 Articles

E Pluribus Unum: The Homogenization of Trade-Secret Law in the European Union

The proposed directive seeks to bring the EU's law in line with that of the rest of the world's leading economies

By David J. Gluck

In the midst of the greatest economic downturn in the history of the European Union (EU), the European Commission proposed a 10-year strategy for the advancement of the EU economy. As part of this strategy, the commission sought "to improve the framework conditions for businesses to innovate through the optimization of Intellectual Property within the 28 Member States." See Executive Summary of the Impact Assessment, Nov. 28, 2013 (last visited Feb. 3, 2014). In furtherance of its economic-development strategy, the European Commission issued a proposed directive to the European Parliament and the council on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use, and disclosure. Proposal for a Directive of the European Parliament and of the Council on the Protection of Undisclosed Know-How and Business Information (Trade Secrets) Against Their Unlawful Acquisition, Use and Disclosure, COM(2013) 813 final (Nov. 28, 2013).

The stated goal of the directive is to protect investments in the knowledge base by reducing costly fragmentation and providing better protection for EU businesses' trade secrets. Id. at2. The commission identified the irregular definitions, rights, enforcement, and remedies across EU member states as significant barriers to cross-border research and development. Id. By replacing the varying unilateral approaches to regulating and enforcing trade-secret protection presently in place in the EU, the commission seeks to reduce the disparity between EU member states' research-and-development (R&D) investments while combatting the rise in espionage and theft from Asian countries. Id. at 3.

Prior to proposing consolidated and comprehensive trade-secret law reform, the European Commission first sought to understand the "legal and economic structure of trade secrets protection in the European Union" and compare its findings with the advanced economies of Switzerland, the United States, and Japan. See Study on Trade Secrets and Confidential Business Information in the Internal Market 1, April 2013 , [hereinafter EU Study] (last visited February 3, 2014).

Perhaps unsurprisingly, given the patchwork of countries and cultures that constitute today's European Union member states, the protections afforded trade secrets by member states are substantially diverse and varying. Id. at 3–7. Although the 1994 TRIPS Agreement [Trade-Related Aspects of Intellectual Property Rights] sought to reduce barriers to international trade by providing adequate standards for intellectual-property rights and enforcement, it has largely been ineffective in achieving the uniformity of protection and enforcement intended. Id. at 3–5. Namely, the TRIPS agreement failed to produce significant uniformity because the agreement either has not been fully adopted or has been adopted with differing specifications by World Trade Organization members. Id. at 3–4.

To further aid its analysis, the commission surveyed numerous European businesses across industry sectors and business dimensions. Based on the results of its investigation, the commission identified three problems with the current legislative framework: the fragmented approach toward trade-secret enforcement and protection, the resulting irregular enforcement and protection of trade secrets as a result of this fragmented approach, and the desire of European businesses for a more harmonized and certain standard. Id. at 151–53.

The first problem posed by the current fragmented approach to trade-secret protection is the general approach that most member states take in regulating trade secrets. Specifically, of the 28 member states in the European Union, only Sweden has ad hoc legislation on trade secrets. Id. at 4. All other member states utilize different pieces of civil and criminal legislation to protect trade secrets. Id. For instance, while Austria, Germany, Poland, and Spain rely on unfair competition law, Italy, France, and Portugal have provisions in their respective Codes of Industrial Property. Id. at 4–5. Also, although most member states include specific provisions on trade secrets in their national labor laws, only 10 of the member states that have specific legislation designed to protect trade secrets define what constitutes a trade secret. Id. at 4. Causing further confusion, even within member states that define trade secrets, some do so over several different pieces of legislation with often differing and opaque terms. Id. at 4–5.

The second problem posed by the lack of uniform trade-secret legislation is the variation in the enforcement of trade-secret violations. Generally, a successful civil action for trade-secret violation must show evidence of (i) a protectable secret; (ii) infringement; and (iii) unlawful misappropriation. Id. at 5. However, different member states often impose additional requirements on the parties to an action for misappropriation depending on the specific civil action pursued. Id. These requirements can vary from demanding evidence of an actionable contract, where the action is based on breach of contract, to allowing the plaintiff to proceed against any third party for misappropriation, even if the alleged trade secret was obtained in good faith. Id.

The third complication in protecting trade secrets under the current legislative framework is the lack of privacy before, during, and after the legal proceedings. Because plaintiffs are required to substantiate their claim by disclosing the infringed trade secret in a public court proceeding, they are often hesitant to bring actions in countries where private proceedings are not allowed.  Id. at 6. Currently, courts may exclude the public from a hearing only as a result of security, public order, or decency concerns. Id. Only Hungary, Germany, and the United Kingdom have in place specific procedural measures to prevent the disclosure of trade secrets in the course of civil proceedings. Id. at 7.

To further understand the role and significance of trade secrets to European companies, the commission administered a performance survey of representative trade associations and businesses across the EU. The intent of the survey was to determine whether the lack of legislation specific to trade secrets at the EU level—combined with the varying and uncertain definition of what constitutes a trade secret, what remedies are available to enforce trade-secret violations, and the lack of privacy in proceedings—posed a significant barrier to innovation and competitiveness in the EU. See Baker & McKenzie, Study on Trade Secrets and Confidential Business Information in the Internal Market 10–15 (Mar. 14, 2013)(last visited Feb. 3, 2014). The survey sought feedback regarding the use of trade secrets and the protections afforded thereto from large, medium, and small enterprises in a wide range of business sectors. Id. EU Study at 116–120. The commission received 537 responses to the survey (id. at 121), of which 75 percent ranked trade secrets as "strategically important to their company's growth, competitiveness, and innovative performance" (id. at 135).

According to the commission's survey, trade secrets related to commercial bids and contracts were most valuable, followed by customer or supplier lists, and then financial information and business planning. Id. at 16. While 60 percent of respondents indicated that they regularly or occasionally share trade secrets with third parties, businesses that chose not to share trade secrets with third parties did so largely due to concerns over losing confidentiality of information for strategic reasons. Id. at 138.

Further, the results of the study indicated that the majority of companies shared trade secrets with third parties, although certain sectors of industry did so with greater frequency than others. Id. Despite the majority of businesses sharing trade secrets, the majority of respondents also indicated that they perceive the risk of misappropriation increased over the past 10 years.  Id. at 140. This perception is particularly strong in the chemical and pharmaceutical sectors. Id.

Further, approximately one in five respondents has suffered at least one attempt at misappropriation, resulting in loss of sales, costs for internal investigations, increased expenditures for protection, and costs related to litigation. Id. at 141–42.However, of the 140 companies that reported attempts at or acts of misappropriation, only 57 sought remedies in EU courts. Id. at 143. Those that chose not to seek a legal remedy cited the difficulty in collecting evidence and litigation costs as two of the greatest barriers to pursuing legal action. Id. at 145.

The final survey questions sought to identify whether businesses favored national legislation on trade secrets to provide effective and equivalent protections across the EU. An overwhelming majority of respondents indicated support for the EU legislative proposal (id. at 146), citing deterrence (49 percent of positive responses) and greater legal certainty (43 percent) as the two greatest benefits of national legislation (id. at 148), compared with approximately 25 percent of respondents who see national legislation as a tool for trade-secret holders to try to raise market barriers through abusive or intimidating litigation (id.).Not only did the majority of businesses regard national legislation as necessary to clarify what trade secrets could be protected; these businesses indicated that common rules would be a benefit by defining "acts of misappropriation" (45 percent) (id. at 133); imposing criminal sanctions (35.6 percent) (id. at 14); ensuring confidentiality of trade secrets throughout litigation (35.2 percent); providing a more uniform calculation of damages (34.6 percent); and allowing for national injunctions across the whole EU (32.4 percent).

Comparing the desires of businesses with the current legislative framework available to protect trade secrets, the commission identified two main problems resulting from national divergences in trade-secret law that provided inadequate protection and enforcement as compared with other first-world economies. See Proposal for a Directive, supra, at 5. First, there is limited incentive for cross-border innovation activities due to the increased risk of trade-secret misappropriation in member states with less comprehensive protections. Second, there is a reduced competitive advantage for trade-secret owners as a result of the fragmented legal protections within the EU.

To improve the competitive advantages European businesses gain from trade secrets, and to more thoroughly protect the development and exploitation of innovation within the EU from misappropriation, the EU Commission proposed "the convergence of national civil law remedies against the misappropriation of trade secrets and rules of preservation of confidentiality of trade secrets during and after legal proceedings." Id. at 6. The harmonization of civil-law remedies would enable European businesses to defend their trade-secrets rights more effectively throughout the EU. Further, the requirement of confidentiality during legal proceedings would make businesses more likely to seek legal remedy against misappropriation. Id. Additionally, the increased legal certainty created by the convergence of laws not only would result in the increased value of trade secrets through the reduction in misappropriation, but further benefit would be gained through cross-border collaboration and increased private sector R&D investment within the EU. Id.

Under the authority of Article 114 of the Treaty on the Functioning of the European Union (TFEU), OJ C 155, Sept. 5, 2008, the EU may adopt rules to harmonize national legislation "whenever necessary for the smooth functioning of the Internal Market." Proposal for a Directive, supra, at 6. The proposed laws proffered by the EU Commission for the harmonization of legislation regarding trade secrets accomplishes this stated purpose by providing a comparable level of redress for trade-secret misappropriation and encouraging cross-border activity that depends on the uniform confidentiality of trade secrets across member states. Id. Not only does the uniformity of trade-secret protection incentivize cross-border activity, trade, and R&D cooperation, but it further stifles the spread of infringing goods across the market.

The commission's proposal attempts to harmonize this legislative framework in four chapters. Chapter I defines the subject matter of the proposal. Id. at 17. Article 1 applies the directive to the "unlawful acquisition, disclosure, and use of trade secrets." Article 2 defines "trade secret" as (i) information not generally known or readily accessible (confidentiality); (ii) having commercial value as a result of its confidentiality; and (iii) which the trade-secret holder has taken reasonable steps under the circumstances to keep secret. Further, Article 2 defines "trade-secret holder" as any natural or legal person lawfully controlling a trade secret, to ensure licensees as well as the trade secret owner can defend the trade secret; "infringer" as any person who has unlawfully acquired, used, or disclosed trade secrets; and "infringing goods" as goods significantly benefiting from unlawfully acquired, used, or disclosed trade secrets, incorporating a proportionality assessment. Id. The definitions of "undisclosed information" and "trade-secret holder" follow the definitions in the TRIPS Agreement. Id. at 7.

Chapter II pertains to the circumstances under which the acquisition, use, and disclosure of trade secrets is unlawful (Article 3) or lawful (Article 4). Id. at 17–19. Article 3 ensures that where the acquisition, use, or disclosure of a trade secret is unlawful, member states are entitled to the measures and remedies proposed in the directive. The key measure for unlawfulness is that the information is acquired without the consent of the trade-secret holder. Further, Article 3 defines the use or disclosure of a trade secret by a third party as unlawful only where the party knew, or should have known under the circumstances, that the trade secret was unlawfully disclosed or acquired by a prior party. Article 4 expressly states that independent discovery or creation and reverse engineering are lawful acquisitions of trade secrets. Id. at 18.

Chapter III provides the measures, procedures, and remedies to which trade-secret holders are entitled to redress misappropriation. Section I defines the general principles applicable to the civil enforcement of misappropriation actions. Id. at 19–21. These principles ensure that the remedies available are fair and equitable (Article 5), as well as proportionate. Further, to prevent the abuse of litigation and the creation of barriers to legitimate trade (Article 6), sanctions are available where the judiciary determines that the initiator of legal proceedings did so "in bad faith with the purpose of unfairly delaying or restricting the respondent's access to the market." Id. at 19. Article 7 sets the statute of limitation for initiating actions as no more than two years after the applicant became or had reason to become aware of the misappropriation. Lastly, Article 8 ensures that the confidentiality of trade secrets is preserved in the course of legal proceedings, unless the proceedings determine that the information alleged to be a trade secret doesn't meet the requirements of Article 2.

Section 2 of Chapter III provides for interlocutory injunctions and the precautionary seizure of infringing goods (Article 9), taking into account the equity and proportionality of these measures depending on the value of the trade secret, the measures taken to protect the trade secret, how the trade secret was acquired, and the impact on both parties and the public good. Id. at 21. Article 10 allows for the revocation of these interim measures if legal proceedings are not initiated within the longer of 20 working or 31 calendar days. Id. at 21–22.

Section 3 of Chapter III provides for injunctions and other corrective measures after a finding of unlawful misappropriation (Article 11). Id. at 22–23. These remedies prohibit the further use or disclosure of the trade secret and prohibit the production, offer for sale, and use of the infringing goods. Further, these corrective measures require the infringer to destroy the infringing goods and destroy or return to the trade-secret holder the unlawfully obtained information. Article 12 provides safeguards and alternative measures based on the proportionality and interests of the parties. Id. at 23–24. The damages that may be awarded to the trade-secret holder following a finding of misappropriation are memorialized in Article 13. Id. at 24. Similar to the types of damages available in intellectual-property infringement, Article 13 allows for the consideration of lost profits, profits made by the infringer, and damages commensurate with the actual and moral prejudice suffered, or damages may be set as a lump sum based on the royalties that would have been paid had the infringer requested to use the trade secret.

Chapter IV provides for sanctions in Article 15, applicable to the parties, their legal representatives, or "any other person who fails or refuses to comply with any measure adopted pursuant to Articles 8, 9, and 11." Id. at 25. This directive will be evaluated by committees at the three-, four-, and eight-year marks after the transposition period to determine its effects and to discover any litigation trends that may have developed as a result.

The proposed directive seeks to address trends in globalization and the increasing threat of misappropriation, and to better protect the service sector, which accounts for 70 percent of the EU's gross domestic product. Executive Summary of the Impact Assessment, supra, at 2. Particularly with regard to small and medium enterprises (SMEs), trade secrets represent a crucial competitive advantage, due to SMEs' general lack of the financial strength and resources necessary to initiate, pursue, manage, enforce, and defend more classical intellectual-property rights. Id. at 4. The proposed directive accomplishes these goals by providing adequate and comparable legal protection; access to an appropriate level of redress for misappropriation; preserving the confidentiality of trade secrets prior to, during, and after litigation; and more effectively acting as a deterrent to those that may seek to misappropriate and exploit unlawfully obtained trade secrets within the internal market. Id. at 6–7.

By improving the protection afforded to trade secrets, the EU is hoping to foster increased cross-border trade and R&D funding, and to assist businesses in smaller member states that would otherwise be unable to participate in the larger internal markets. Id. at 7. Further, by providing a consistent and certain level of legal protection to trade secrets, this directive would not only provide redress within the EU but would also enable businesses from member states to seek damages when knowledge stolen within the EU is used to produce goods that are later imported back into the EU. Id. at 6–7. Providing stronger protection against misappropriation and increased expectations of damages rectifies the immediate misappropriation as well as encourages cross-border activities and incentivizes increased R&D spending. This provides a direct benefit to EU businesses, the economy, and consumers as a whole.

In addition to the benefits this directive will have for EU businesses, it will also bring the EU into full alignment with the TRIPS Agreement. See Memo on Protection Against the Unlawful Acquisition of Undisclosed Know-how and Business Information (Trade Secrets) – Frequently Asked Questions, Nov. 28, 2013, at 4, (last visited Feb. 3, 2014). Further, it largely aligns the civil law regarding trade secrets within the EU with those of the United States and Japan. Id. By harmonizing the national civil law of the member states and bringing the EU legal framework in line with that of the world's economic leaders, this directive could encourage third countries to establish similar legislation to the benefit of EU businesses operating therein. Although the EU has decided not to harmonize the criminal sanctions at a national level at this stage, by requiring regular analysis and study of the effects of the new legislation, the EU is prepared to address any further necessary implementation to further protect trade secrets against misappropriation in the internal market and abroad.

In sum, after taking into consideration the current state of trade-secret protection in all 28 member states and the desires of a variety of EU businesses, the European Commission's proposal will bring trade-secret law in line with the rest of the world's leading economies. By consolidating the civil legal framework to create a national legislative regime, the EU is providing businesses with increased incentive to invest in R&D by providing consistent and more comprehensive trade-secret protection throughout the EU. Although the directive does not impose the type of criminal sanctions commonly found in the United States, the EU is well positioned to implement further legislation after having time to evaluate its initial approach. This legislation, if adopted in its current state, could lead to future homogenization of laws within the EU, to the benefit of all EU members. For now, the commission's proposed directive will be submitted to the Council of Ministers and the European Parliament for adoption under the ordinary legislative procedure.

Keywords: litigation, intellectual property, trade secrets, trade-secret law, trade-secret protection, European Union, European Commission, directive, TRIPS Agreement, member states, internal market, economy, IP infringement, misappropriation, legislation, trade secret study

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