Top Five Things American Lawyers Should Know about Trade Secrets in Europe

Until 2016, the protection of trade secrets varied widely among the member states of the European Union (EU). The lack of a uniform definition of trade secrets within the EU has led member states to apply different eligibility standards for information to qualify as trade secrets. In addition, the actions available in cases of trade secret violations, as well as the related prerequisites, differed from one member state to another. This made it exceedingly difficult for the trade secret holder to enforce protection of its trade secrets across the internal market. Moreover, the overall level of protection of trade secrets in the EU was found to be quite low compared with that of major trading partners such as the United States. To promote cross-border cooperation and innovation and to improve the legal position of businesses, harmonized protection of trade secrets at the European level became urgent.

With the objective of enhancing and harmonizing the level of protection granted against the unlawful acquisition, use, and disclosure of trade secrets throughout the EU, the Trade Secrets Directive (EU) 2016/943 of the European Parliament and the Council came into force on July 5, 2016, with June 9, 2018, as the due date for its implementation by member states. The directive seeks minimum harmonization, allowing member states to provide more far-reaching protection against the unlawful acquisition, use, or disclosure of trade secrets than that required by the directive.

The Trade Secrets Directive provides a uniform definition of a “trade secret” and establishes a sufficient and comparable level of redress for EU companies across the internal market in case of trade secret misappropriation or theft, while at the same time providing sufficient safeguards to prevent misuse. The directive also raised the legal recognition of trade secrets to that of other intellectual property rights. Furthermore, the directive defines what constitutes lawful and unlawful acquisition, use, and disclosure, and clarifies the civil enforcement measures available to trade secret holders. Finally, safeguards have been introduced to preserve the confidentiality of trade secrets during legal proceedings.

Best Ways to Protect Trade Secrets in Europe

Requirements for Protection

Trade secrets can cover a wide range of information, such as commercial information (e.g., a client database, a concept, a strategy, business methods, contracts, cost, and price information), technical or technology information (e.g., designs, manufacturing processes, research data, prototypes, not patentable or not patented inventions, formulas, and recipes), and know-how. Unlike patents, a trade secret does not need to be novel. In addition, no application or registration is required for the protection of trade secrets, contrary to trademarks or patents. Hence, trade secrets can be protected free of charge and for an unlimited period (as long as the information is kept confidential).

According to the uniform definition of the Trade Secrets Directive, for information to be protected as a trade secret throughout the EU, it must meet the following three conditions:

• It 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 easily accessible to persons within the circles that normally deal with the kind of information in question.
  
  The touchstone for secrecy is the “interested circle”; in other words, persons who might do something with the trade secret and whose knowledge of the information in question could affect its commercial value. Consequently, information can be secret even if it is known to a select group of persons (for example, within the company), as long as this group does not intend to undermine the trade secret holder’s interests.
• It has commercial value because it is secret.
  
  Information has commercial value when its unlawful acquisition, use, or disclosure may harm the interests of its holder by undermining that person’s scientific and technical potential, business or commercial interests, strategic positions, or competitiveness.
• It has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.
  
  This last condition puts an extra burden on companies to take reasonable measures to protect their trade secrets. If they are unable to show that such steps have been taken, the information may lose its trade secret status.

Reasonable Measures to Keep Information Secret

Unfortunately, the directive does not explicitly define what “reasonable measures” a company must take. Generally, this requires the trade secret holder to undertake to keep the information secret to the best of its ability.

Below are three measures companies should consider to demonstrate that they have taken reasonable steps to protect the secrecy of confidential information from both internal thieves (e.g., employees) and external threats (e.g., business partners or hackers):

• Confidentiality agreements with employees and business partners (and anyone who has access to trade secrets or with whom information is shared). These agreements may contain confidentiality, nondisclosure, noncompetition, or non-solicitation clauses. To be valid and effective, it is crucial that such agreements or clauses (i) clearly define what information is to be kept confidential, (ii) clearly define what the receiving party may and may not do with the confidential information, (iii) require the return of such confidential information upon the employee’s termination or resignation, (iv) limit the duration (e.g., five years after the end of the agreement), and (v) provide for an appropriate sanction for violation.
• Written policies governing employee conduct. Companies can establish clear rules for marking and keeping confidential information, such as explicitly labeling trade-secret documents as “confidential,”, “restricted,” or “distribution limited”; providing written instructions to employees regarding copying and sharing confidential information inside and outside the company; enforcing an employee badge policy to restrict access to specific areas and a password policy to protect files on computers; and providing training for employees so they know what is expected of them when handling confidential information during and after their employment.
• Limit and monitor access to trade secrets. Companies may identify persons (employees or third parties) who have access to the confidential information on a “need to know” basis. Physical and electronic access can be restricted; for example, by keeping confidential information in safe or secured archives, digital protection by securing information technology systems with encryption or other security systems, monitoring access through visitor badges, surveillance, and employee activity monitoring.

Whether the measures taken are reasonable ultimately depends on the value of the trade secrets and on the size and industry sector of the company. It is important to note that the directive does not require the trade secret holder to successfully keep the confidential information secret; rather, it requires the trade secret holder to demonstrate that it has taken reasonable steps to protect its trade secrets against theft or misappropriation.

Trade Secrets and Intellectual Property Rights

The level of protection of trade secrets is not as high as that of other intellectual property rights (IPRs), given that protection depends on the confidential status of a trade secret. Once a trade secret is made public, it loses its secret status and thus its protection. In general, trade secret protection confers on holders the right to employ measures, procedures, and remedies to prevent the information lawfully within their control from being disclosed, acquired, or used by third parties without their consent. However, the holder of a trade secret does not have a monopoly on the secret information.

Unlike IPRs, a trade secret does not provide protection through an exclusive right; independent discovery of the same know-how and reverse engineering remain possible and lawful. This means that a competitor can buy a product, examine its composition, and extract the secret knowledge contained in the product. Such an act is not a violation of trade secret protection. The trade secret itself—namely, the information that is the subject of the trade secret—is not protected. Employees may also use information that is not a trade secret, as well as use experiences and skills honestly acquired in the normal course of their employment. If an employee working as a programmer reads company-owned programs and saves the source code, this would not constitute an unlawful act.

Consequently, trade secrets are legally protected only in instances where someone (e.g., an employee or business partner) has obtained the confidential information by illegitimate means, including through industrial or commercial espionage, theft, breach of contract, hacking, or bribery.

Objective Liability of the Infringer and Third-Party Acquirer

The European regulator provides for objective liability where the conduct of the infringer or third-party acquirer is unlawful regardless of the existence of fault.

Liability of the Infringer

First, the trade secret holder can take action against the infringer in case of an unlawful acquisition where

• another party gains access to the documents related to secret information without the holder’s permission, copies it for personal use, or gives it to someone else; or
• the acquisition is carried out by any other conduct that, under the circumstances, is considered contrary to honest commercial practices.

An example is when an employee, during his notice period, downloads the company’s client database and forwards it to his personal email address.

The use or disclosure of a trade secret is also considered unlawful when carried out by a person who

• has acquired the trade secret unlawfully (e.g., by theft, bribery, or fraud);
• is in breach of a confidentiality agreement (or similar obligation); or
• is in breach of a duty not to disclose the trade secret.

Liability of the Third-Party Acquirer

Second, the holder can take action not only against the person who committed the unlawful act but also against the third-party acquirer who later uses that secret information where, at the time of the acquisition, use, or disclosure, the third-party acquirer knew or should have known under the circumstances that the trade secret was obtained directly or indirectly from another third party who was using or disclosing the trade secret unlawfully. An example is when an employee downloads the company’s client database and passes it on to a competitor. That competitor must know or should have known that the employee obtained this secret information without the permission of the holder of the trade secrets.

Unlike in the United States, in Europe one does not have to be actually aware that information is a trade secret to be held liable, nor is an active wrongful act by the third-party acquirer required. Therefore, companies that operate within Europe must be diligent with the information they receive and use whenever it is considered secret because they could be liable for infringement even when acting in good faith.

Exceptions to the Protection of Trade Secrets

The protection of trade secrets is not absolute. The directive contains several exceptions in which the acquisition, use, and disclosure of secret information is permitted, such as when it is necessary to exercise the right of freedom of speech and information (protection of journalistic sources), to reveal misconduct or illegal activity, or to protect the public interest (e.g., whistleblowing).

How to React in Case of a Trade Secret Violation

The directive provides trade secret holders with a number of provisional and corrective measures to be used against trade secret infringers. The objective of those measures is to limit the damage caused by the misappropriation of a trade secret. In addition, the trade secret holder may also be entitled to monetary compensation (i.e., damages) based on loss of profit or unjust enrichment.

Remedies Available to Trade Secret Holders

The rights and remedies available to trade secret holders in the event of violation include provisional measures (interim relief) and corrective measures (final relief), which can be applied by a judge at various stages of court proceedings, such as the following:

• cessation or prohibition of use or disclosure of a trade secret;
• prohibition of producing, offering, placing in the market, or using infringing goods;
• adoption of appropriate corrective measures, such as recall or destruction of the infringing goods;
• seizure of infringing goods;
• publication of the judicial decision; and
• award of damages.

These measures, except for compensation of damages, are expressly subject to a proportionality test. The measures can also be imposed under a penalty payment.

The directive does not cover criminal sanctions because the European Parliament does not have jurisdiction over criminal matters. Hence, the laws of the EU member states remain fragmented on this point.

Trade Secret Defenses

Being accused of misappropriation or theft of trade secrets can result in monetary loss, reputational damage, and damage to the company’s goodwill. Therefore, the company should immediately conduct an internal investigation to ensure that its employees do not misuse confidential information. If trade secrets have been misappropriated, one should seek ways to resolve the dispute amicably and remove the illegal trade secrets from the company or (if one wishes to continue using them) license them from the trade secret holder.

Defenses also include that there is no misappropriation or theft because

• the trade secret is an independent discovery or creation;
• the trade secret is the result of reverse engineering, i.e., by observation, examination, disassembly, or testing of a product or object, which requires that the product or object analyzed was lawfully obtained and that the person who introduced the information is not under a contractual obligation to keep it secret;
• the trade secret was already in the public domain; or
• the trade secret holder did not take reasonable measures to keep the information secret.

Safeguards to Preserve Confidentiality in Proceedings

Prior to the enforcement of the directive, trade secret holders were discouraged from initiating legal proceedings as they risked losing the confidentiality of their trade secrets. The judicial law of most EU countries is characterized by the principles of public hearing, right of contradiction, communication of documents, and rights of defense. These principles imply that all parties have access to the documents and hearings of judicial proceedings. However, they are at odds with the protection and confidentiality of trade secrets. To reconcile these rights with the right to the protection of trade secrets, a number of specific measures were introduced to protect the confidentiality of any (alleged) trade secrets used or mentioned during legal proceedings:

• restrict access to hearings, when alleged trade secrets may be disclosed, and restrict the corresponding record or transcript of those hearings to a limited number of persons;
• create a “confidentiality club”—i.e., a limited number of persons who will have access to all or some of the documents containing alleged trade secrets; and
• make available to any other person a nonconfidential version of any judicial decision in which the passages containing trade secrets have been removed or redacted.