The Pros and (Scary) Cons of the New EU Trade Secret Directive, Part 2 (Guest Blog Post)

By Guest Blogger Sharon K. Sandeen

Part One of this post gave an overview of the new EU Trade Secret Directive (the “TS Directive”) that will be effective shortly (on the twentieth day after it is published in the Official Journal of the EU) and discussed some of the its positive features. The focus of this post is on what I see as potential problems with its third party liability rules.

The third party liability rules of trade secret law (not to be confused with the third party doctrine of trade secret law) refers to the circumstances under which a person or company that was not involved in the initial misappropriation of trade secrets may nonetheless be held liable for such misappropriation. The classic example is when a former employee of the trade secret owner discloses the trade secrets to his new employer. Under the Uniform Trade Secrets Act (the UTSA), the new employer may be held liable for trade secret misappropriation if it “knew or has reason to know” of the alleged misappropriation at the time of its acquisition, disclosure or use of such trade secrets. Similarly, Article 4.4 of the TS Directive provides that: “The acquisition, use or disclosure of a trade secret [is] unlawful whenever a person, at the time of the acquisition, use or disclosure, knew or ought, under the circumstances, to have known that the trade secret had been obtained directly or indirectly from [a misappropriator].”

When trying to establish third liability, the critical issue is: What did the third party know and when did it know it? Often, a third party may not have the requisite knowledge when it first acquires the trade secrets, but an obligation not to disclose or use those secrets can be imposed by giving notice after the initial acquisition. However, under the UTSA, trade secrets that are acquired by accident or mistake can only be the subject of a misappropriation claim if the trade secrets were acquired “before a material change in position.” UTSA § 1(2)(c) (1985). No similar limitation exists in the TS Directive.

Making matters worse for (otherwise innocent) third parties are two provisions of the TS Directive that broaden the potential liability of both first and third parties. First is a provision (Article 3.1(b)) which, while clearly intended to limit the defense of reverse engineering, recognizes the possibility of legally binding duties to “limit the acquisition of the trade secrets.” Of course, wrongful acquisition of trade secrets is already prohibited by the TS Directive, so this provision seems to enable trade secret owners to contractually define what constitutes wrongful acquisition, much like the Computer Fraud and Abuse Act problematically allows Internet service providers to define what constitutes “without authorization or exceeding authorized access.” Thus, one could imagine a scenario where a business decides to engage in expensive reverse engineering activities only to find out later that one of the involved employees was subject to a contractual duty of a former employer not to engage in reverse engineering activities.

The second troublesome provision of the TS Directive (Article 4.5) is a new “wrong,” not specified in the UTSA, which provides that “the production, offering or placing on the market of infringing goods, or importation, export or storage of infringing goods for those purposes” is unlawful, provided that “the person carrying out such activities knew, or ought, under the circumstances, to have known that the trade secret was used unlawfully.” Article 2.4 of the TS Directive states that infringing goods “means goods the design, characteristics, functioning, production process or marketing of which significantly benefits from trade secrets unlawfully acquired, used or disclosed.” Taken together, these provisions mean that third parties who are otherwise innocent sellers or importers of goods, but that “significantly benefited” from misappropriated trade secrets, may be held liable for trade secret misappropriation once they are notified of the misappropriation with respect to acts occurring after such notice.

Ameliorating the foregoing concerns somewhat, but not totally insulating otherwise innocent third parties from potential liability for trade secret misappropriation simply for offering for sale or selling goods that benefited from such trade secrets, are the provisions of the TS Directive that allow for alternative remedies in certain cases. Article 13.3 authorizes “pecuniary compensation” instead of injunctive relief under specified conditions. Article 14.2, which authorizes an award of damages, does not appear to apply to the wrongdoing specified in Article 4.5. A problem, however, is that the Article 13.3 limitation only applies to third parties that neither “knew or ought, under the circumstances, to have known” of the misappropriation, a fact that can be disproved by simply putting the third party on notice.

The scary part of the TS Directive is that it sets up a scenario that is similar to the problem of retailers being sued for patent infringement by patent trolls, but without the availability of a written description of the alleged trade secrets or a tradition under trade secret law of holding otherwise innocent sellers of infringing goods liable for trade secret misappropriation. It also creates the very real possibility that otherwise innocent third parties will be held liable for acts which are far less egregious than those of the original misappropriator.