Trade Secrets in the Spotlight Again: the EU Directive

May 2016 was a banner month for trade secret protection around the world. On May 11, 2016, President Obama signed the Defend Trade Secrets Act of 2016 (“DTSA”) into US law, creating a new Federal cause of action for misappropriation of trade secrets. And on May 26, 2016, the European Council formally adopted the “Directive on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure” (“the EU Directive” or “the Directive”), requiring the EU member states to provide certain minimum protections for trade secrets.

The near-simultaneous codification of trade secret-related standards on both sides of the Atlantic reflects the increased importance of trade secrets in global economies. A driving force behind the reform in both the US and the EU was a desire to harmonize laws protecting trade secrets. In the US, trade secrets were (and still are) protected under state laws and an assortment of related federal laws, such as the Economic Espionage Act (“EEA”) and the Computer Fraud and Abuse Act (“CFAA”). However, the variations between state laws have made it difficult for trade secret owners to chase misappropriators across state laws and to collect evidence from third parties located out-of-state or overseas. The existing federal laws did not provide much more help, relegating aggrieved trade secret owners to seeking criminal sanctions under the EEA or twisting their civil claims into the ill-fitting paradigm of the CFAA.

Prior to the implementation of the EU Directive, the national laws of EU member states provided varying levels of protection for trade secrets – with some countries having specific trade secret laws and others providing a patchwork of protection under unfair competition, tort, or contract laws. This made enforcement across the EU difficult for trade secret owners, owing to the variations in what qualified for trade secret protection and what amounted to an improper acquisition, use, or disclosure of trade secrets. Cross-jurisdictional enforcement was also complicated by the lack of uniformity in the remedies available for such misappropriation, misuse, or improper disclosure. According to the European Council, the differing laws had led to a “weakening of the overall deterrent effect of the relevant rules” and “Union-wide innovation-related inefficiencies.”^[1]

While the goal of US and EU reforms was to harmonize national laws, the result has been a standardization of trade secret protection across the Atlantic.

The EU Directive

The European Commission first introduced a harmonizing trade secret directive in November 2013. After much debate, the EU Directive was adopted in May 2016 and entered into force on July 5, 2016. The EU member states now have two years to implement the Directive as national law. Wholly new laws will be required in some countries, whereas for others, existing statutes may be modified to conform to the Directive. As noted, while the EU Directive sets a minimum standard of protection, individual member states are free to implement higher standards in their national laws.^[2]

Trade Secret Definition

The EU Directive defines a trade secret as information that (i) “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;” (ii) “has commercial value because it is secret;” and (iii) “has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.”^[3]

The requirement that a trade secret have “commercial value” is narrower than the existing definition of confidential information in some member states. Moreover, the “reasonable steps … to keep it secret” requirement will be new for some member states. That provision may be the subject of early interpretation by the Court of Justice of the European Union (“CJEU”), and will presumably vary based on the trade secret’s value to the trade secret owner and others, the threats faced by the trade secret owner, and the costs of protecting the trade secret from those threats.

Lawful and Unlawful Acts

The EU Directive sets forth categories of lawful and unlawful acts with respect to trade secrets.

The acquisition of a trade secret is unlawful when accomplished by (a) unauthorized access to, appropriation of, or copying of any items containing the trade secret that are lawfully under the trade secret holder’s control; or (b) any other conduct considered contrary to honest commercial practices.^[4] Acquisition of a trade secret is also unlawful when the person acquiring the trade secret knew or should have known that the trade secret was being acquired from someone who had obtained or was disclosing the trade secret unlawfully.^[5] The use or disclosure of a trade secret is unlawful when carried out by a person who (a) acquired the trade secret unlawfully; or (b) is in breach of a confidentiality agreement or any other duty not to disclose or to limit the use of the trade secret.^[6] Use or disclosure of a trade secret is also unlawful when the person using or disclosing the trade secret knew or should have known that the trade secret was obtained from someone who had obtained or had disclosed the trade secret unlawfully.^[7] In addition, the production, offering, or placing on the market of infringing goods is unlawful, as is the importation, export, or storage of infringing goods for those purposes, if the person carrying out such activities knew or should have known that the trade secret was being used unlawfully.^[8]

Activities that otherwise could be deemed to be unlawful acquisition, use, or disclosure of trade secrets are exempted if the activities were carried out (a) exercising the right to freedom of expression and information; (b) to reveal misconduct, wrongdoing, or illegal activity “for the purpose of protecting the general public interest;” (c) by workers to their representatives as necessary for representation of the workers in accordance with EU or national law; or (d) “for the purpose of protecting a legitimate interest recognized by the Union or national law.”^[9] Those acts deemed lawful include acquisition of a trade secret by (a) independent discovery or creation; (b) reverse engineering (unless contractually prohibited); (c) exercise of workers’ rights; or (d) any other practice which conforms with honest commercial practices.^[10] In addition, the acquisition, use, or disclosure of a trade secret shall be considered lawful to the extent that such acquisition, use, or disclosure is required or allowed by EU or national law.^[11]

Of note, the EU Directive does not define the term “for the purpose of protecting the general public interest,” so it will be up to the member states and/or the CJEU to provide guidance on the contours of this whistleblower exception. Similarly, the EU Directive does not define “honest commercial practices,” meaning that the CJEU will likely be called upon to provide guidance on the boundaries of such practices.

There is further protection for employees under the Directive to protect employee mobility within the market. The Directive specifically states that its provisions shall not “offer any ground for restricting the mobility of employees.”^[12] Furthermore, the Directive states that its provisions shall not restrict an employee’s use of “experience and skills honestly acquired in the normal course of employment.”^[13] This is another phrase that was left undefined in the Directive, meaning the CJEU will undoubtedly be asked to interpret it in due time.

Limitation Period

Under the EU Directive, the statute of limitations for actions for unlawful acquisition, use, or disclosure of trade secrets is a maximum of six years.^[14] However, member states can shorten the limitations period, determine when the time period begins, and establish circumstances under which the period can be interrupted or suspended.^[15]

Protection of Trade Secrets during Litigation

Currently, many member states do not provide for adequate confidentiality protections when a trade secret owner initiates litigation for misappropriation of its trade secrets, thereby reducing the attractiveness of litigation to remedy such unlawful actions. The EU Directive fixes these shortcomings by providing measures to preserve the confidentiality of trade secrets “which the competent judicial authorities have, in response to a duly reasoned application by an interested party, identified as confidential.”^[16]

The protective measures provided in the Directive include, at least, (a) the option to restrict access to documents containing and hearings concerning the trade secrets to “a limited number of persons,” including at least one natural person from each party; and (b) a prohibition on the use or disclosure of any confidential trade secret learned of as a result of an individual’s participation in a legal proceeding relating to the trade secret.^[17] These individuals are subject to a confidentiality obligation that survives termination of the litigation.^[18]

In addition, the EU Directive provides that portions of any judicial decision containing trade secrets be removed or redacted prior to being made available to anyone other than the limited number of persons with access to the confidential trade secrets.^[19]

Remedies

The EU Directive provides for a broad range of civil remedies, but no criminal sanctions. Member states remain free to impose criminal sanctions and civil remedies beyond those provided in the Directive.

Under the Directive, courts can impose provisional and precautionary remedies including injunctions and seizure or delivery up of suspected infringing goods, or alternatively require the lodging of guarantees by the alleged infringer to avoid such measures.^[20]

Following a judicial finding of misappropriation, the EU Directive allows the court to award damages and also impose an injunction, impose corrective measures with respect to the infringing goods (including recall, “depriving the infringing goods of their infringing quality,” and destruction or withdrawal of the goods from the market), and/or require destruction or delivery up of documents or things containing or embodying the trade secret.^[21] Damages should be appropriate for the actual prejudice suffered as a result of the infringement, and should be determined after considering appropriate factors such as the negative economic consequences, including lost profits, that the trade secret owner suffered and any unfair profits made by the infringer.^[22] In some cases, it will also be appropriate to consider non-economic factors such as the moral prejudice caused to the trade secret holder as a result of the infringement.^[23] Alternatively, damages may be set as a lump sum that is, at a minimum, the amount of royalties or fees that would have been due if the infringer had been granted authorization to use the trade secret.^[24] The Directive does not address enhancement of damages for intentional infringement, but it does allow member states to limit an employee’s liability for damages to its employer where the employee is found to have acted without intent.^[25]

As an alternative to these injunctive and corrective remedies, a court can award pecuniary compensation if requested to do so by the infringing party, provided that the infringer can demonstrate that (a) it neither knew nor should have known that the trade secret was obtained from another person who was using or disclosing it unlawfully; (b) execution of the other measures would cause the infringer disproportionate harm; and (c) pecuniary compensation appears to be reasonably satisfactory.^[26] If pecuniary compensation is ordered as an alternative to an injunction, it will be limited to the amount for a royalty that would have been payable had the infringer been granted authorization to use the trade secret.^[27]

Relationship to the DTSA

As the EU Directive adopted standards that draw EU law more in line with U.S. law, the DTSA adopted standards that are more in line with EU law. The specifics of the DTSA have been addressed in Snippets,^[28] Snippets Alerts,^[29] and MBHB webinars,^[30] but there are at least four important ways in which it is more like EU law than previous state trade secret laws.

First, the DTSA standardizes US trade secret law far more than was existent before. The vast majority – but not all – of the states have adopted the Uniform Trade Secrets Act (“UTSA”). However, the UTSA has not been adopted in some critical commercial venues (including New York and Massachusetts). Moreover, the adoptions of the UTSA have not all been uniform. Accordingly, just as the EU Directive is intended to provide greater certainty of trade secret law throughout the EU, the DTSA provides greater uniformity of trade secret law in the U.S.

Second, the DTSA includes an ex parte seizure provision, similar to the provisional measures of the EU Directive, that is based on the Anton Pillar case. An Anton Pillar order, named for the U.K. case in which such an order was first entered, allows for a seizure of the fruits of misappropriation early in a case, before severe damages can be incurred. While the DTSA’s provision has very specific limitations and requirements for the entry of an ex parte seizure order that are not present in the EU Directive,^[31] the purposes and basic outlines of the two provisions are similar.

Third, the DTSA does not include “inevitable disclosure” as a cognizable basis for a claim of trade secret misappropriation. Unlike the jurisprudence of several states, but like the EU Directive, the DTSA does not allow a trade secret owner to proceed based on a theory that an individual will inevitably disclose trade secrets if put in a parallel office for a competitor. Here, the underlying theories of the DTSA and the EU Directive are different: the DTSA refuses to assume disclosure as a basis for a claim of misappropriation, while the Directive views the issue as one of workers’ rights. Nonetheless, the result is the same and both require actual proof of misappropriation.

Fourth, the DTSA incorporates whistleblower protections not found in the UTSA, but recognized as important in the EU Directive. Both the DTSA and EU Directive allow for the disclosure of trade secrets to governmental entities for the public good without any threat of liability for trade secret misappropriation.^[32] Indeed, the DTSA insulates whistleblowers from liability under any federal or state trade secret law for disclosure of trade secrets either to a governmental authority or in a court pleading filed under seal. Thus, both the DTSA and EU Directive recognize the importance of workers’ rights and disclosure for the public good as important counterbalances to trade secret owners’ rights.

However, there are some critical distinctions between the DTSA and the EU Directive. The definition of a trade secret is broader under the DTSA than under the EU Directive, as it includes information that has potential economic value (not just actual economic value), lessening the quantum of proof that an owner must present. As discussed above (and in more detail in earlier Snippets articles and webinars), the ex parte seizure provisions of the DTSA have far more specific requirements and structure than the Directive’s broad requirements for provisional remedies. In addition, there are far more prohibitions on enforcement of trade secrets rights under the EU Directive (such as public interest or workers’ rights exclusions) than under the DTSA. Unlike the six-year statute of limitations under the EU Directive, the DTSA has a three-year limitations period (although the Directive allows member states to shorten the limitations period). Finally, the DTSA permits enhanced damages for willful and malicious misappropriation, whereas the EU Directive has no such provision.

Conclusion

The EU Directive and DTSA were independently powerful steps towards the harmonization of trade secret law. Together, they show that the law of trade secrets is being increasingly – and quickly – harmonized. The Directive is a critical step in bringing the EU in line with US trade secret law, which will help comfort commercial entities in marketing goods and services in the EU.

© 2016 McDonnell Boehnen Hulbert & Berghoff LLP

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