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Courts will shape the extent trade secrets can be protected, says expert

Out-Law Analysis | 09 Jun 2016 | 11:43 am | 4 min. read

FOCUS: Courts in Europe are likely to be called on to shape the extent to which businesses can protect their trade secrets under new EU legislation.

Last week a new EU Trade Secrets Directive was finalised which will, for the first time in EU law, give businesses specific protections against the unlawful acquisition, use and disclosure of their trade secrets. The Directive was a major talking point during a panel discussion I chaired recently at the international annual conference of the Licensing Executive Society in Beijing and is to be discussed in detail at the forthcoming Academy of European Law (ERA) conference in Brussels on 16 June.

The new trade secrets regime will bring the EU in line with the US where laws protecting against the misappropriation of businesses' trade secrets have been in place since the late 1970s.

The Directive will deliver greater harmonisation to what is currently a patchwork of existing national legislation across the EU that offer very different protections to businesses against trade secrets infringers. In many cases legislation does not apply specifically to trade secrets or only offers very limited protections. This has meant businesses have been reluctant to take legal action against those who exploit their trade secrets unfairly.

Although the scope of protections trade secrets holders will enjoy under the Directive is defined under the Directive, it will be subject to implementation under national laws. The scope of protections is something that is likely to be tested before national courts in the EU, as well as the Court of Justice of the EU (CJEU).

Together the courts will offer clearer guidance to businesses on what qualifies as a trade secret and the extent to which rival companies can reverse engineer them for their own purposes.

What is a trade secret?

According to the new Directive a trade secret is information that is secret, has commercial value because it is secret and has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

Information is only considered secret if it is "not … generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question".

At the moment there is a patchwork of existing national legislation across the EU that offers very different protections to businesses against trade secrets infringements. In many cases legislation does not apply specifically to trade secrets or only offers very limited protections. This has meant businesses have been reluctant to take legal action against others that exploit their trade secrets unfairly in many cases.

The introduction of a new Directive, and national implementing legislation, will create a fresh framework for trade secrets protection the detail of which will need to be fleshed out through litigation in the courts.

For example, the courts could create binding case law on when information can be said to be secret or possess sufficient commercial value to be classed as a trade secret. They might also explain in more practical terms what 'reasonable steps' companies would need to take to preserve the secrecy of information for it to merit protection as a trade secret.

Reverse engineering and other lawful means of obtaining trade secrets

While the Directive sets out specific rules that protect businesses against the unlawful acquisition, use and disclosure of their trade secrets, including in respect of second-hand sharing of that information, the legislation does provide scope for reverse engineering.

The Directive specifically states, in a non-binding recital, that "reverse engineering of a lawfully acquired product should be considered as a lawful means of acquiring information, except when otherwise contractually agreed". It said contractual bars on reverse engineering can, though, be restricted by national law.

Binding provisions in the Directive state that the acquisition of a trade secret through observation, study, disassembly or testing of a product or object will be considered lawful where the product or object is publically available or in the lawful possession of the acquirer and where that acquirer is not bound by any legal duty to limit acquisition of the trade secret.

In addition, acquisition of a trade secret would be considered lawful where it is obtained through independent discovery or creation.

However, the amount of evidence that companies will need to provide to demonstrate legitimate reverse engineering of trade secrets, and defend themselves against claims of infringement, is currently unclear.

Courts are likely to be asked to clarify this issue and could set out guidance, in the form of binding case law, to shape how businesses can go about uncovering trade secrets in a way which avoids infringement and complies with the Directive.

There are other means by which trade secrets will be considered to be lawfully acquired under the Directive. Acquiring a trade secret through any honest commercial practice will be considered lawful, whilst employees will also be said to lawfully acquire trade secrets when exercising their right to information and consultation.

The Directive's recitals refer to the fact that unfair competition laws in some countries will protect creators and innovators against "practices such as parasitic copying or slavish imitations that free-ride on their reputation and innovation efforts" regardless of whether reverse engineering has occurred legitimately under the trade secrets regime.

Businesses will largely welcome greater harmonisation of trade secrets laws in the EU and the legal certainty that it should provide, while others consider that the Directive may restrict the general freedom of information and limit the ability of whistleblowers to reveal information of public interest protected by a trade secret. Companies will want to monitor how the Directive is implemented into the national laws of the 28 different EU countries over the next two years. Yet it is likely that the scope of protections and defences available to alleged infringers will be established through the various litigations that can be expected to follow the introduction of the new rules.

Emmanuel Gougé is an expert in trade secrets and intellectual property law at Pinsent Masons, the law firm behind Out-Law.com. Gougé is speaking at the ERA's conference event on the adoption of the new Trade Secrets Directive in Brussels on 16 June.