19 December 2013

For Your Eyes Only: Trade Secrets in Europe

The misappropriation of undisclosed know-how and business information is a very serious problem for companies in the EU and the Commission wants to do something about it.
For Your Eyes Only: Trade Secrets in Europe
One day, you discover that on the EU market a product appears with exactly the same specifications as your own. Your company spent years and a lot of money fine tuning its production process, only to find that the blueprints were stolen and the production process was copied to the last detail. Or at a trade fair, a prototype that an SME finally developed with great effort is snatched and a few months later, products are imported into the EU based upon this SME’s R&D. Or your office gets broken into, your laptop containing the marketing plan for next year disappears, and you observe that all your customers receive samples of a competitor.
 
In times of increasing (industrial) espionage, the Commission proposal is a very timely initiative. Harmonising the disparate rules across the European Union will help companies and notably SMEs to protect themselves against dishonest practices, by ensuring sufficient and comparable levels of redress across the EU.
 
The quality of the proposal published on 28 November 2013 reflects the strategic importance of trade secrets for businesses, which are the most common form of protection they use and often cover the most valuable assets they possess. But the road until this proposal is adopted and transposed into national law of the 28 EU Members States is still very long and full of obstacles.
 
WHY IS THIS ISSUE IMPORTANT? 
Keeping secrets is a legitimate tool for businesses of all sizes and this practice dates back farther than we can all remember. While specific harvesting techniques of silkworm thread enabled regions of China to blossom in the silk trade, Roman glass blowers passed on their know-how on insulated glazing by word of mouth from masters to apprentices: until the industrial ages, innovative craftsmen kept their ‘tricks of the trade’ within very close circles.
 
Today confidentiality is no less important and is a means for companies to protect innovation efforts. Preliminary results of technological experiments, the assembling of products in a manufacturing process, sketches of new car models, strategic commercial information about customer needs and preferences etc. are carefully kept confidential. They represent very valuable information considering the human and financial resources invested.
 
It seems profoundly unfair that a company that did not invest in the research nor developed the incremental innovation, can steal the trade secrets and bring products based on that theft to the market, without any effective legal remedy being available to the original innovator. Without the misappropriated information, infringing competitors would not be able to develop these products or services with their particular characteristics or properties. The absence of effective remedies to address the misappropriation of trade secrets discourages companies to innovate.
 
This is all the more important when you consider that trade secrets can comprise up to 80% of the value of a company’s information portfolio1. The theft of a trade secret can be just as damaging for a company as the infringement of its patents or trademarks. 75% of the respondents to the 2013 Baker & McKenzie survey ranked trade secrets as strategically important to business growth, competitiveness and innovative performance. Yet in the last 5 years, 20% have actually suffered at least one attempted theft within the EU 28 member states2. The absence of EU-wide legislation to protect against such misappropriations only encourages crooks.  
This situation is particularly problematic for SMEs whose innovations are often incremental in nature. SMEs and start-ups need to protect their know-how against misappropriation in order to attract capital, long before they can apply for patents.
 
The European Commission proposal on the protection against the unlawful acquisition, use and disclosure of confidential business information will send a strong signal to third countries. Since most of the threats originate from countries outside Europe, setting up a single, clear and coherent EU-wide legal regime will already act as a strong disincentive for misappropriation attempts. This would also give the EU the credibility and the leverage it needs in order to convince trade partners to recognise and protect trade secrets.
 
The EU already lags behind the likes of the US, Japan or Switzerland on the protection of trade secrets. If the EU wants to keep attracting foreign direct investment and help build an ‘Innovation Union’, it needs to remedy the competitiveness and innovation deficits of European companies stemming from the misappropriation of trade secrets.
 
 
WHAT HAS BEEN PUT FORWARDThe European Commission published a very strong proposal, which would seek to harmonise the rules across the EU Member States. The impact assessment and the two independent studies carried out for the Commission3, demonstrate that the very distinct approaches to trade secrets across the EU, the lack of protection in some member states or the ineffective legal procedures in others disrupts the smooth functioning of the single market.
 
The current patchwork of legislation in Europe hinders the free movement of ideas, knowledge and technology – it has a ‘chilling effect’ on the cooperation between companies across borders. Who would share secrets knowing that they will be unprotected? Providing uniform and effective protection across Member States though will encourage technology transfer, collaborative research and cross-border innovation activities by providing a safe environment in which to disseminate information. Businesses would become less hesitant to collaborate and share information knowing that in case of a contractual break-up, partners could not legally exploit the R&D work carried out by the other party.
 
The Commission text sets common definitions for undisclosed information, misuse and disclosure following the TRIPS Agreement. It contains rules on the preservation of the confidentiality of trade secrets during and afterlitigation, in order not to jeopardise the effectiveness of the measures and remedies. The absence of such a provision would act as a strong deterrent for seeking redress.
 
The proposal also covers the convergence of national civil law remedies against the misappropriation of trade secrets including interlocutory injunctions, precautionary seizure of infringing goods or the awarding of damages for the prejudice suffered. Corrective measures are listed such as the destruction of the trade secret by the infringer, or the obligation to return all relevant information to the ‘trade secret holder’. Sanctions including the possibility of recurring penalty payments will be applicable should any of the above measures not be complied with. The proposal though logically stops short of a convergence of national criminal laws, which are outside the EU’s competence.
 
The text clarifies that an EU-wide protection against trade secret theft will not restrict competition nor will it facilitate monopolistic practices. Unlike patents, trade secrets do not confer exclusivity: the discovery of a trade secret by a competitor through honest business practices is perfectly legitimate. As such, everyone can try to make cola and nothing prevents a fizzy drinks producer from developing the same formula. Protecting trade secrets in fact encourages innovation and the competition to develop similar or alternative solutions.
 
WHAT’S NEXTThe Commission text now has to go through the ordinary legislative procedure with input from both the Council of Ministers and the European Parliament, who need to agree on the same text for it to become law. No doubt, national ministries and members of the European Parliament will need a lot of information on the importance of trade secret protection. It should be made very clear that trade secret theft is a key internal market and competitiveness issue.
 
The Council can start its deliberations on the proposal immediately, but it is unlikely that the Parliament will tackle the topic before the elections in May 2014. A different political configuration of the assembly, with an expected increase of anti-EU voices, will no doubt raise challenges for those who favour a thriving internal market, with rules that encourage innovation and investment across European borders. It is in the interest of European economic growth and job creation in a knowledge and innovation-based economy that victims of trade secret theft can rely on proper legal remedies in the future.
 
By Thomas Tindemans (thomas.tindemans@hkstrategies.com) and David Hughes (david.hughes@hkstrategies.com), Hill+Knowlton Strategies Brussels
 
(1) The case for enhanced protection of trade secrets in the Trans-Pacific Partnership Agreement, US Chamber of Commerce 2013.
(2) Study on Trade Secrets and Confidential Business Information in the Internal Market, Baker McKenzie, April 2013.
(3) Study on Trade Secrets and Parasitic Copying, Hogan-Lovells 2010; andStudy on Trade Secrets and Confidential Business Information in the Internal Market, Baker McKenzie, April 2013.
 

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