As the European Commission approves a proposal for a Directive on the protection of trade secrets, Maureen Kelly outlines what constitutes a trade secret and the effect of the proposed Directive. She also provides some practical tips for improving protection for your trade secrets.

What is the problem?

There is evidence that trade secret theft is a growing problem for EU businesses.1 Are you one of the 25% of European companies that reported experiencing trade secret theft in 2013 (compared with 18% in 2012)? Commentators have variously attributed the increase in trade secret theft to the ease with which large amounts of data can be moved digitally, globalisation, outsourcing, and longer supply chains.

The EU Commission Vice-President explained: “Protecting trade secrets is particularly important for the EU’s smaller, less established firms. They employ trade secrecy more intensively than larger companies – in part because of the cost of patenting and protection against infringement. The loss of a trade secret and disclosure of a key invention to competitors means a catastrophic drop in value and future performance for an SME. With this legislation, the Commission will protect EU businesses’ livelihood and the trade secrets that form a vital part of it.”

What is a trade secret?

Trade secrets may be known by a variety of names: “confidential information”, “undisclosed information”, “know-how”, and “proprietary data”. The underlying principle is the same: it is information that you keep confidential within your organisation or within a network you work in.

Under the current law of England and Wales, to be protected as a trade secret, it must have the “necessary quality of confidence about it”. This quality of confidence can arise from the circumstances in which it is disclosed that make the confidentiality obvious – for example, when the human resources records of a company are made available to a new human resources director. Alternatively, it can arise through the making of a contractual confidentiality agreement – for example, with a research institute so that you can discuss potential research collaboration.

Trade secrets are often divided broadly into two categories. The first category is technical and includes manufacturing processes, recipes, and chemical compounds. The second is commercial information such as lists of customers, results of marketing studies, and financial information about products and services.

There is nothing to stop someone else independently generating the same or similar information to your trade secrets. The law on trade secrets is to dissuade others from taking, using, or disclosing your trade secrets.

What is the purpose of the proposed Directive?

Protection for trade secrets currently varies widely across the European Union. Few countries define trade secrets or specify when they should be protected. Injunctions to stop breach are not always available and methods of calculating damages are often inadequate. These shortcomings are compounded by the fact that many countries do not have rules to safeguard trade secrets during litigation, thus deterring victims from seeking legal redress.

The key provisions of the proposed Directive are a common definition of “trade secret”; a common remedy in the event trade secrets are unlawfully acquired, used, or disclosed; and minimum standards of protection for trade secrets during the litigation process so that going to court no longer exacerbates the breach.

What changes will the Directive make and when?

The common law2 currently protects trade secrets in England and Wales along lines very similar to those in the proposed Directive. However, one notable exception is that the Directive proposes that countries set a limit for claimants to bring claims in relation to trade secrets of between one and two years. This is much shorter than the current six years which applies in England and Wales.

The main change we can expect once the Directive takes effect is that the protection currently enjoyed for trade secrets in England and Wales will be available across the EU. It is to be hoped that this will create an environment in which businesses and researchers are more willing to create, share, and licence information across the EU with increased confidence that trade secrets will be protected. It should also increase the perceived value of trade secrets within the EU in the eyes of those wishing to acquire trade secrets, not least as the rights under the Directive can be enforced by licensees as well as holders of trade secrets.

The Directive is likely to come into effect within four years, depending upon how quickly the EU and national legislatures work.

Is there anything I can do to protect my trade secrets?

There are some practical steps you can take to protect your trade secrets.

Have a template confidentiality agreement (also known as a non-disclosure agreement) so that you can enter into binding written agreements with parties outside your organisation to which you wish to disclose trade secrets (e.g. potential funders, customers, and research collaborators). It is worth having the template agreement tailored to your organisation’s specific requirements. If you enter into a number of these agreements, also consider having your legal adviser provide you with a crib sheet setting out frequently contested points and how to deal with them.

My experience, however, is that the greatest risk to your trade secrets lies not with external parties but within the organisation itself. Ensure that your employment contracts and staff handbook set out clearly what you consider to be the trade secrets of your organisation, and ensure that there are obligations on your employees to protect those trade secrets (as well as other information with a confidential element) both during and after their employment. Back this up with training for staff reinforcing these points both at the start of their employment and periodically afterwards; some staff members will never read their employment contract, much less the handbook. Consider also reminding employees of these obligations when they resign as this is the period when breaches are most likely to occur. It is worth taking legal advice on this as there are often difficulties in identifying the dividing line between trade secrets and other information that has a confidential element. The courts are more likely to find that the latter has become part of the employee’s skill and knowledge which he or she should be able to practise once the employment with you has terminated and more likely to act to prevent misuse of trade secrets.

1 Study on trade secrets and confidential business information in the internal market, April 2013; Kroll, 2013/2014 Global Fraud Report.

2 Law developed through the judgments of the courts of England and Wales. With thanks to my colleague Louise Grendon (Employment) for her assistance with this article.

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This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.