Trade Secrets – A Unified European Regime?

21 October 2013. Published by David Cran, Partner and Louise Morgan, Senior Associate

Earlier this year, a study was prepared for the European Commission relating to the treatment of Trade Secrets and Confidential Business Information within the internal market.

The conclusion was that harmonisation of laws dealing with confidential information across the EU would provide benefits in terms of costs savings and greater cooperation and sharing of trade secrets.

But not everyone agrees.  At a recent conference in London in October 20131, the study was criticised as not providing sufficient evidence or support from businesses to reach its conclusions, and doubts were expressed as to whether harmonisation would simplify matters, or whether it would in fact introduce greater uncertainty and multiple references to the Court of Justice of the European (CJEU) on the new laws.

The EC Study

The study2 investigates the legal and economic structure of trade secret protection in the EU and explains the importance of trade secrets to businesses across all sectors: trade secrets can be embodied in contrasting information such as diagrams, figures, methods of production, and customer lists, and so are relevant to a broad cross-section of business types.

Trade secrets are particularly important to small and medium sized businesses; as well as businesses which use fast-paced models, which choose to protect their information by keeping it secret rather than (if appropriate) applying for (perhaps more expensive) patents.

There is no uniform legal regime for the protection of trade secrets within the EU.  Rather, each European country currently legislates in its own way.  In England for instance, trade secrets are protected as a form of confidential information through the common law of confidence; and by contract law.  Other countries use competition law; industrial property legislation; labour laws; or tort law to protect trade secrets.

The Study observes that "…from the right-holders' perspective, the uncertain and uneven legal regime makes trade secrets management and enforcement on an EU scale opaque and costly to handle."3

Where the causes of action for the misuse of a trade secret vary from state to state, so too do the elements required to prove misappropriation.  For instance, if an action must be brought using tort law, then there is a need to link the damage suffered to the action of misuse; if the action is brought using unfair competition law, then the infringer must have the intention of competing with the owner; or if a claim is brought in contract, then an underlying contractual right must be in place to begin with.  Such cross-border discrepancies can cause confusion and increase costs for companies trying to protect their trade secrets across Europe.

Problems can also arise in relation to numerous other aspects of trade secret protection.  For example, only some countries have the ability to keep proceedings, and therefore the trade secret, private during enforcement proceedings, thus making only some jurisdictions desirable for enforcement if a claimant wants its trade secret to remain confidential.  There is also an inconsistent approach as to whether trade secrets are seen as intellectual property rights, with the IP Enforcement Directive (which harmonises the approach to remedies for IP infringement in the EU) only being triggered in those jurisdictions where they are considered to be an IP right.

The inconsistent approach taken by different EU countries can impact on business decisions such as where to locate research and development centres, and where to explore partnerships or share information. The result is that European companies can face significant hidden costs and, according to where they are based, experience different opportunities to invest in innovation and enjoy the return on their investment, according to different levels of protection available for their trade secrets.

The EC study states that "The analysis has revealed the lack of a uniform definition and scope of protection of trade secrets through the EU.  In most of the countries, protection is not specific and provisions dealing with trade secrets are scattered over completely different fields of law.  According to the contributing countries' opinion, such a fragmentation of legislation might entail a risk of inconsistent interpretation of what is protectable as trade secret and consequently, make trade secrets enforcement difficult and costly to handle."4

As a result, the overall recommendation of the study is that the European would benefit from a harmonisation of European law dealing with the treatment and protection of trade secrets and confidential business information.

One size fits all?

Although an alignment of the law in different countries may be desirable in certain respects (not least to make enforcement of trade secrets more "user-friendly" between different countries), caution should be exercised in trying to impose a "one size fits all" approach.

Each country-specific system of protection necessarily fits in with each country's wider legal system, creating bespoke protection in each case.  Removing one piece of the jigsaw may have  implications for other related and interconnected areas, and would therefore require careful consideration and planning if harmonisation were to take effect.

English law practitioners may be particularly reticent to adopt European-wide legislation in this area, bearing in mind the evolutionary nature of the law of breach of confidence (and trade secret protection) through the English courts.

For instance, the general common law of breach of confidence has been used in England to formulate and evolve not only laws relating to trade secrets, but also those relating to the right to privacy, which is traditionally not protected by a stand-alone cause of action in England.

The area of trade secret protection itself is also continually developing in the UK through case law.  Take for example the recent case of Vestergaard v Bestnet5, in which the Supreme Court confirmed that a former employee who unwittingly used the trade secrets of her former employer was not liable for breach of confidence.

That decision reminds us that in England, a classic case of breach of confidence involves confidential information being misused in some way, by a recipient of that information who knows, or ought to have appreciated, that the information was confidential.  This provides a check and balance between the competing interests of protecting intellectual property rights and promoting competition.

Having independent country-specific breach of confidence laws allows for this flexibility (particularly in common law countries) to develop a nuanced approach to the broad area of confidential information (also including trade secrets and the right to privacy).  Practitioners may be reluctant to move away from the case law which has developed, particularly in an area such as trade secrets, where both the subject matter to be protected, and the businesses seeking to enforce their rights, are so varied and are continuing to evolve.

Conclusion

Whilst effective protection of confidential information is necessary, and improvements can be made in many EU jurisdictions, it is with some trepidation that we should consider the harmonisation of approach across the EU. 

More evidence is needed to support the claims that harmonisation will deliver the economic benefits the European Commission claims.  Even then, the experience of harmonising other areas of intellectual property laws across the EU suggests that there would be uncertainty (at the very least in the short term) and the CJEU would be busy dealing with a number of references as national courts grapple with applying the new rules to often complex situations.

1.  The 2013 Chartered Institute of Patent Attorneys (CIPA) Congress.
2.  Study on Trade Secrets and Confidential Business Information in the Internal Market, prepared for the European Commission, April 2013, Contract number: MARKT/2011/128/D
3.  ibid; page 4
4.  Ibid; page27
5.  Vestergaard Frandsen A/S (now called MVF 3 ApS) and others (Appellants) v Bestnet Europe Limited and others (Respondents) [2013] UKSC 31