The Pros and (Scary) Cons of the New EU Trade Secret Directive, Part 1 (Guest Blog Post)

By Guest Blogger Sharon K. Sandeen

Several years ago, I noticed something remarkable. After years (decades really) of being ignored, trade secret law was finally getting the attention it deserved, and on both sides of the Atlantic. First came the “Report on Trade Secrets for the European Commission” in 2011, followed in 2013, by the Obama Administration’s “Strategy for Mitigating the Theft of U.S. Trade Secrets” and the European Commission “Study on Trade Secrets and Confidential Information in the Internal Market.” Then, in 2013, trade secret legislation was introduced in both the U.S. Congress and the EU Parliament. While the U.S. legislation (now known as the Defend Trade Secret Act of 2016 or the DTSA) is still waiting Obama’s signature, the big news on April 14, 2016 was the adoption by the EU Parliament of the “EU Directive for the Protection of trade secrets against their unlawful acquisition, use and disclosure” (the TS Directive), which is modeled after the Uniform Trade Secrets Act (the UTSA). (This analysis focuses on the provisional edition of the Trade Secret Directive, P8_TA-PROV (2016)).

As it turns out, the foregoing events were not coincidental, but are part of a concerted effort by a coalition of U.S. and European companies, led by highly paid lobbyists, to increase trade secret protection throughout the world. While I have been a vocal critic of the DTSA (principally because I do not believe that the U.S. needs a complicated and duplicative new federal law when it already has a robust and largely uniform set of state laws for the protection of trade secrets), I am all for balanced efforts to improve the protection of legitimate trade secrets in the U.S. and abroad. In fact, my co-author (Elizabeth Rowe) and I recently published a book, Trade Secrecy and International Transactions, to help businesses and their lawyers do a just that. However, make no mistake about it; both the TS Directive and the DTSA will change trade secret law as we know it, and not in ways that will always benefit U.S. and EU businesses.

As with any legislation, there are both pros and cons to the TS Directive and, on balance, I believe it is a positive development for the same reason that the 1979 adoption of the UTSA was an important development in the U.S. Once EU countries modify their existing laws to conform to the dictates of the TS Directive (they are required to do so within 24 months after the Directive is effective, which is on the twentieth day following its publication in the Official Journal of the EU), all EU countries will be guided by the same basic principles of trade secret law that exist in the U.S. Of course, the key will be in how those principles are applied in each country, but trade secret owners can be relatively certain that information that meets the three requirements of trade secrecy (secrecy, commercial value, and reasonable steps to maintain secrecy) can be protected through resort to judicial authorities with the power to grant injunctive relief and sanctions.

While some groups in the EU opposed the TS Directive, including those who expressed concern about how it might curtail whistleblowing activity, as I have written elsewhere, when properly applied, U.S. trade secret principles actually serve to limit the scope and nature of trade secret rights. (See Sharon K. Sandeen, The Limits of Trade Secret Law: The Story of Article 39 of TRIPS and the Limited Scope of Trade Secret Protection in the United States, in The Law and Theory of Trade Secrecy, A Handbook of Contemporary Research, Edward Elgar  2011 (Rochelle C. Dreyfuss and Katherine J. Strandburg, eds.)). In fact, the central purpose of the UTSA was to limit (and in many cases, eliminate) claims for the alleged misappropriation of business information not worthy of the trade secret label. Thus, while trade secrets must be protected, other confidential business information is not protected by trade secret law. But the TS Directive goes further than the UTSA in limiting the scope of trade secret rights and remedies. Many of these limitation can be found somewhere in U.S. law (either in well-established case law or the commentary to the UTSA), but the TS Directive spells them out explicitly. These limitations include:

1. Repeated statements that trade secret law should not be applied in a manner that hinders employee mobility and should be applied consistently with existing laws concerning restrictions on competition;
2. Explicit recognition of the right of public officials to collect trade secrets and allow or require the disclosure of relevant trade secrets to the public;
3. A listing of information that cannot be protected as a trade secret, including trivial information and the experience and skills gained by employees in the normal course of their employment;
4. A listing of types of behaviors that do not constitute misappropriation, including independent development and reverse engineering;
5. A statement that the protection of trade secrets shall not extend to whistleblowing activity;
6. Recognition that trade secret law should not be used to restrict freedom of expression or the rights or the media to engage in investigative journalism and to protect journalistic sources;
7. Remedies in the event that trade secret claims are pursued abusively.

Businesses owners may wonder why I like limitations on the scope of trade secret protection when I also support efforts to improve trade secret protection throughout the world. The answer is simple: Business owners like trade secrets when they own them, but dislike them when they are being wrongly asserted against them. That is why we need balance in trade secret law and policy.

Much of the information that businesses use and collect on a daily basis, particularly information that is generally known or readily ascertainable, should be free for others to use. As many businesses know from first-hand experience, if protected information (including ideas and inventions) is defined too broadly, businesses may find themselves embroiled in disruptive and costly litigation concerning the alleged theft of information. From a broader societal point of view, information that does not meet the definition of a trade secret and is not otherwise protected by a patent is needed to generate new ideas and inventions and to operate businesses effectively and efficiently. Thus, it is not good policy to tie up information too much, particularly when there is a public interest in information.

Unfortunately, although the TS Directive is remarkable for the explicit limitations that it places on the scope of trade secret rights and remedies, language is included in the Directive that threatens to shut-down the operations of unsuspecting (and innocent) businesses, much like patent litigation is used by non-practicing entities in the U.S. To understand how requires consideration of three seemingly unrelated provisions of the Directive: one concerning potential third party liability (that is, liability that is imposed on individuals or companies when they are not the initial misappropriators of the alleged trade secrets); one concerning the potential for companies to “contract around” some of the limitations on the scope of trade secret protection; and the last concerning a remedy that allows for the seizing or destruction of “infringing goods” which “significantly benefits from trade secrets unlawfully acquired, used or disclosed.”

As I will detail in Part Two, the principal problem with the TS Directive is that it does not limit potential third party liability to people and companies that are far removed from the initial misappropriation or that have “changed their position” before acquiring the requisite knowledge. Thus, it is possible that goods can be seized or destroyed and services shut down once an otherwise innocent business is informed that such goods and services are tainted with the trade secrets of another.