A wind of change on EU and US trade secrets. Will the reform increase innovation and competitiveness?

Trade secrets are probably the oldest and the most common form of intellectual protection. The reason seems obvious. Can you imagine a manufacturer that reveals his/her know-how to competitors? If the original producer discloses important business information, he/she facilitates competitor activities and may loose the market lead and all economic advantages linked to the trade secret. Companies’ interest in protecting trade secrets has nowadays increased due to the expansion of cyber espionage[1] and trade secret misappropriation from employees and competitors.[2] Under these circumstances, business has lobbied for legal mechanisms that can assure a better protection in the EU and US. The EU started to consider harmonization of existing national laws in November 2013 with the 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. The US, on the other hand, introduced a proposal for uniform rules on trade secrets in July 2015. See HR 3326 and S. 1890. General information on these reforms can be found on the official page of the European Commission and on a detailed post on Latest Updates on Federal Trade Secrets Legislation. Here we can point at the commonalities between the EU and US reforms. Both the EU and US proposals aim to provide uniform standards for trade secret misappropriation and remedies against misappropriation, including injunctive relief and monetary damages.

One might think that these proposals are good news for business. Uniform standards of protection safeguard companies trade secrets across borders, facilitate their operations, and consequently encourage innovation and investment. If one believes that legal certainty equals more safe investments, then we should look at the formulation of legal provisions. Are they clear and precise enough to guarantee a smooth functioning of the market? Professors in the US have highlighted several drawbacks in the announced bill. A first letter of opposition to the bill claims that it could contribute to anticompetitive behaviors, increase of accidental disclosure of trade secrets, negative impact on access to information, collaboration among businesses and mobility of labor. A second letter argues that the wrong is defined differently, the ex parte civil seizure remedy may block legitimate competition, the motion for “encryption” should be better clarified, employee mobility is not protected, trade secrets are not considered as intellectual property rights, the difference between trade secrets and misappropriation is not clear, and trade secret misappropriation does not always result in harm. Although other voices emphasize the benefits of the US proposal, the concerns raised by the professors cannot go unnoticed for the sake of innovation and competition.
What about the EU proposal? Although the Commission aims at reducing legal uncertainties in order to spur innovation in the single market and the proposal has the merit of defining “trade secrets” and harmonizing the scope of protection, we think that the lack of clarity in some provisions in the proposal may increase litigation and thus, hinder innovation. We point at some of these provisions below.
Art. 2 Definitions
For the purposes of this Directive, the following definitions shall apply:
  1. ‘trade secret’ means information which meets all of the following requirements:
           (a)….
           (b) has commercial value because it is secret;
The formulation of letter (b) is ambiguous. It seems like the commercial value of the trade secret depends on the fact that it is kept secret. What happens when the secret is revealed? Does it loose its commercial value? The value might be reduced for the secret holder but this does not mean that the commercial value disappears with the disclosure of the secret. Think of the competitors, for example. They could use the trade secret to enter the market.
        (c) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.
What are reasonable steps under the circumstances? What if a controversy on this point ends up in court? If we think that judicial practices differ between EU countries and within the same country, how will legal certainty across the Union be guaranteed?
Art. 3 Unlawful acquisition, use and disclosure of trade secrets
          4. The use or disclosure of a trade secret shall also be considered unlawful whenever a person, at the time of use or disclosure, knew or should, under the circumstances, have known that the trade secret was obtained from another person who was using or disclosing the trade secret unlawfully within the meaning of the paragraph 3.
This provision is certainly important to take account of situations that the law cannot predict, but it seems to confer too much discretion on defining such situations. The terms “should, under the circumstances” are of particular concern as they involve normative judgement. Depending on the interests at stake, the interpretation may find the behavior lawful or unlawful.
We should also draw readers’ attention to the fact that contrary to regulations, directives are not immediately enforceable as law. They leave some room for Member States to achieve a particular result. But the recommendations laid down in the draft directive could be improved in order to achieve its results more effectively. We invite our NIPL fellows to discuss with us further ambiguous provisions and remember that trade secret disclosure is not always bad for innovation and competition.
[1] See, for example, APT1 Exposing One of China‘s Cyber Espionage Units. Available at http://intelreport.mandiant.com/. Accessed 4 February 2016.
[2] EU recitals, http://www.tradesecretslaw.com/latest-update-on-federal-trade-secret-legislation/ citing scholarly articles such as A Statistical Analysis of Trade Secret Litigation in State Courts, 46 Gonzaga Law Review 57 (February 2011); Four Reasons to Enact a Federal Trade Secrets Act, 19 Fordham Intellectual Property, Media & Entertainment Law Journal 769 (April 2009).

 

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