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The Trade Secrets Directive

  • United Kingdom
  • Chemicals

22-02-2017

With so much political and media focus upon Brexit, employers in the chemicals sector might be forgiven for assuming many legal developments of the EU will not now take effect in the UK. However, until the exit process is well underway, the impact of future EU law is by no means certain. Furthermore, a number of significant changes are due in force in the next couple of years -whilst the UK is still an EU member and bound by EU terms.

We reported previously upon one such development coming into effect in May next year, in the form of the EU General Data Protection Regulations (e-briefing). As we outline below, another development for which UK chemicals businesses and their staff will need to prepare in the coming months is a new EU directive aimed at protecting know-how and trade secrets.

Key changes include:

  • a common definition of a “trade secret”;
  • greater emphasis on employers taking steps to secure their information;
  • identifying “unlawful misuse” of trade secrets;
  • added protection against infringing goods;
  • extensive remedies for breach;
  • a potential defence for disclosures by whistleblowers.

When in force?

Final wording of the Trade Secrets Directive was approved on 5 July 2016 and must be implemented in the national laws of EU Member States by June 2018.

The UK will still be negotiating its exit from the EU in 2018 so will still be a Member State. It is unclear at this stage what (if any) legal changes the UK Government will propose to existing UK law concerning the protection of information, to bring statutory effect to what is already relatively robust case law provision within the requirements of the Directive. It may of course opt to do nothing in light of Brexit since the legal differences between existing UK law and the Directive are not huge and, in any event, risk of EU enforcement action will be short term. However, to do so would also leave employers with business interests in the UK and EU having to deal with differing legal standards.

Why a new directive?

For most employers, information about certain aspects of the business, such as their products, way of doing things or client lists, would be considered essential to their competitiveness, if not survival. However, at present, there is no consistency of approach to the protection of such commercially sensitive information and know-how across the EU. The laws, procedures and remedies vary from country to country, with some Member States providing no protection.

What this can mean in practice is that organisations based in countries where their trade secrets are protected, can find themselves unable to prevent their misuse in a different jurisdiction, whether because of differing interpretations or lack of comparable legal provision. Review by the European Commission concluded that enterprise was being harmed by the legal discrepancies within the EU. It therefore commissioned two reports into this issue which spawned a proposal for the Directive soon afterwards. The Directive aims to ensure there is a sufficient and consistent level of civil redress for the protection of trade secrets across all Member States.

The critical question: what are ‘trade secrets’?

In order to fall within the protection of the Directive, the information must be a ‘trade secret’ as defined under Article 2(1):

  • it must be secret (in the sense that it is not, as a whole or in its component parts, generally known or readily accessible to persons within the circles normally dealing with that kind of information);
  • it should have commercial value because it is secret; and
  • the owner must have made reasonable efforts to keep it secret.
  • “experience and skills gained by employees in the normal course of their employment”, are expressly excluded from the definition.

The definition is reminiscent of but slightly broader than the accepted understanding of a trade secret under UK employment law, as developed as a common law principle and still identified largely by criteria established in the 1987 case of Faccenda Chicken v Fowler. In that case, the court concluded that only information which, if disclosed to a competitor, would cause real or significant harm to the owner, is capable of being a trade secret. Even then (in the absence of enforceable contractual terms), the law only offers protection where the nature of employment involves a higher than usual degree of confidentiality, the employer has impressed on the employee the need for confidentiality and the trade secret in question can be easily identified by the employee from other, non-confidential information.

It is noteworthy that, if UK law is not brought into line, the subtle differences in language between the Directive and existing UK law could trip up unwary UK employers in terms of what they treat as trade secrets in their EU operations (or those of competitors) or the steps they take to protect confidentiality. For example, the meanings of “harm” and “commercial value” might be of similar effect in some scenarios but, as defining terms of a trade secret per se, are quite different. The need for proactive safeguarding of information by employers in order to benefit from legal protection is also new.

How will trade secrets be protected?

The Directive requires Member States to put in place the specified measures, procedures and remedies to prevent or provide redress for the unlawful “acquisition, use and disclosure of a trade secret”. It also sets out the circumstances in which these various unlawful acts might arise, from deliberate theft to situations where an individual knew or ought to have known that the party from whom they acquired the information had obtained it unlawfully. Negligent, not necessarily dishonest, conduct is included amongst potential misdemeanours.

In all cases, the key element is lack of consent on the part of the owner of the information. The Directive also makes clear that there is a presumption of unlawfulness where the acquisition, use or disclosure is in breach of a confidentiality agreement or contractual term.

Importantly also, it is not only direct use or disclosure of trade secrets themselves that is covered by the Directive. Dealing in infringing goods, where a party knows or ought to know the goods benefit significantly from unlawfully acquired trade secrets, will also be considered unlawful and may result in penalties affecting a number of parties in the supply chain.

Remedies

Ultimately, the effectiveness of the Directive will rely upon the tangible remedies it provides. The Directive includes various remedies for the courts in respect of unlawful acts in breach of its terms. These include:

  • damages, to compensate the owner for prejudice  suffered (the amount to be assessed by reference to all relevant factors, including the profits and benefits derived from the misuse of the trade secrets);
  • injunctive relief to cease all further activity, whether during a dispute or on a permanent basis if unlawful misuse is established;
  • seizure of goods made by use of the trade secrets and the destruction of those goods if unlawful misuse is established.

In an employment context, where breaches will most frequently occur by individual employees, the Directive permits Member States to limit liability for damages where the employee acts without intent. Were the UK Government to adopt such a provision, it will be interesting to see if they also offer wording which assists employers in establishing such intent.

The Directive also provides for the confidentiality of the information to be maintained during litigation, and afterwards insofar as court documents are available to the public.

The whistleblowing defence

Against a backdrop of concern that the Directive might inhibit genuine whistleblowers from making disclosures, for fear of penalty or detriment, the Directive endeavours to address this by providing a defence to potentially unlawful actions where a trade secret is acquired, used or disclosed:

  •  “for exercising the right to freedom of expression and information set out in the Charter of Fundamental Rights of the European Union, including respect for freedom and pluralism of the media”; or
  •  "…for revealing a misconduct, wrongdoing or illegal activity, provided that the respondent acted for the purpose of protecting the general public interest".

These respective clauses are potentially very broad and therefore provide little clarity as to when they might be relied upon. How they are interpreted going forwards remains to be seen. With regard to the second provision, however, here too there are strong comparisons with existing UK whistleblowing law in the form of the Public Interest Disclosure Act 1998, although they lack comparable restriction upon to whom disclosures must be made. It would appear the Directive also perpetuates rather than resolves uncertainty surrounding the meaning of “in the public interest”, an issue with which the UK courts are currently grappling.  Just how the ultimate interpretation of the UK courts might sit with wording of the Directive will require clarification, particularly since each allows for a subjective approach to the whistleblowers’ reasons for disclosure and belief in a public interest element.

Comment

Despite significant similarities between the wording of the Directive and existing UK law in this area, there are also notable differences (in many cases quite subtle ones) which have the potential to catch out employers operating across both jurisdictions.

How far  UK employment law is in fact out of kilter with the requirements of the Directive will depend upon how the wording of the Directive is interpreted by the European Court in due course. However, if UK law is not brought into line, employers will also need to be alert to the differences. For example, unlike UK law, the Directive defines a trade secret according to the efforts of employers to actively secure their information, beyond labelling it as such. This suggests employers will need to be far more proactive –and demonstrably so - in their communications and processes.

One clear means of protection endorsed by the Directive is the use of confidentiality agreements or clear contractual terms. Such a step would appear to be highly advisable for any employers concerned about protecting their vital know-how and ensuring clarity of communication in this regard. 

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