Trade Secrets

New US & EU protection

Wouter Pors

Page 2© Bird & Bird LLP 2015

The international standard

• Article 39 paragraph 2 TRIPs Agreement

• Information lawfully within their control which

• is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question

• has commercial value because it is secret

• has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret

• Obligation to provide means for

• preventing information from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices

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Why trade secrets?

• Know how not suitable for patent protection

• Business methods

• Formats (TV formats business, finance)

• Save costs of patent protection

• Only works if know how cannot be reverse engineered

• Gielen: otherwise it is in the public domain anyway

• Owner wants to avoid mandatory publication

• Again: you have to be able to keep it a secret

• However: you don’t contribute to innovation, others cannot develop further; no contribution to the art

• This makes recognition as intellectual property problematic

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Are trade secrets intellectual property rights?

• Advantages of IPR’s

• Under civil law, an IPR is an absolute right

• Protection is granted as such, without need for a contract

• The mere use of the subject of the IPR is an infringement

• Intent or damage to honest commercial practice irrelevant

• Easily transferable

• Disadvantages of IPR’s

• IPR creates a monopoly

• In this case: unlimited in time

• Limits competition and free movement of goods + services

• In this case: unpublished content!

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Trade secret law in the US

• Uniform Trade Secrets Act

• Model for State Law, not an enforceable law

• Follows TRIPs definition

• Not implemented: New York, North Carolina, Massachusetts

• Economic Espionage Act of 1996

• Enforced by the FBI

• Theft of Trade Secret Clarification Act 2012

• Foreign and Economic Espionage Penalty Enhancement Act of 2012

• Independent State law

• North Carolina

• State Common Law

• New York

• Uniform Federal Common Law in the ITC

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US – proposed new federal law• The Defend Trade Secrets Act of 2015 (DTSA)

• Status: Senate Judiciary Committee Hearing 2-12-2015

• Covers interstate and foreign commerce (use & intended use)

• Provides for civil action in district court

• Misappropriation

• Acquisition by improper means, disclosure or use

• Improper means include theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means

• Disclosure or use: without express or implied consent

• Knew or had reason to know of improper acquisition or of circumstances giving rise to a duty to maintain secrecy

• Exceptions

• Reverse engineering

• Independent derivation

• …. Nothing more!

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DTSA focuses on enforcement

• Main tool for enforcement: ex parte seizure

• To prevent propagation or dissemination

• Requirements

• Risk of evading standard order

• Immediate & irreparable injury

• Harm to the applicant outweighs harm to the defendant & third parties

• Applicant likely to succeed in proof of infringement (subsidiarity?)

• Existence of trade secret

• Misappropriation or conspiracy to misappropriate

• Defendant has possession of the trade secret

• Narrowest seizure necessary (proportionality)

• Order to restrict access for applicant

• Court takes custody of seized materials

• Court hearing within 7 days – unless parties agree on extension

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DTSA – Further procedural rules

• Motion for encryption of electronic materials

• Order to post a security

• Seizure hearing

• Facts supporting the order need to be still in place

• Defendant may move court to dissolve or modify the order

• Court may modify time limits for discovery

• Action for damages for wrongful / excessive seizure

• Civil action on the merits

• Injunction – should not limit new employment

• Future use upon payment of a reasonable royalty (if injunction improper)

• Award of damages (equal to royalty’s; triple damages in case of wilful)

• In case of bad faith: reasonable attorney’s fees

• Statute of limitations: 5 years after reasonable time of discovery

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Alternative basis for protection

• Tort

• Violation of duty of care

• Confidentiality should be obvious to defendant

• Contract

• General contract

• Non-disclosure agreement

• Non-circumvention agreement

• Employment contract

• Collective bargaining agreement (“cao”)

• Criminal law

• Specific professions (lawyers, patent attorneys)

• Employees in general

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Examples of Dutch tort cases

• Supreme Court 31-1-1919, NJ 1919/161, Cohen v Lindenbaum

• Competitor pays employee to provide him with information

• No violation of statutory provisions

• First tort based on violation of duty of care

• District Court Breda 11-4-1986, KG 1986/214,

De Vries Robbé v Opstalan

• Use of know how obtained during negotiations not allowed

• Court of Appeal The Hague 16-1-1992, IER 1992/53, Pipe Liners v Wavin

• U-liner pipe lining technology disclosed, not patented

• One company has violated confidentiality obligation

• Other group companies would commit a tort when using the information

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Examples of Dutch tort cases

• District Court Amsterdam 14-11-2012, LJN BY8226, Firesense v Sensetek

• Former employees violated their duty of care by consistently using secret information to approach former employer’s clients

• New company has benefited, which is a tort too

• [Knowingly, since new company was established by these employees]

• However, many tort actions have failed

• Basically, competition and use of available information is allowed

• Proof of actual confidentiality versus public availability

• Proof of sufficient protective measures

• Which acts actually constitute a violation of a duty of care?

• Information as used differs from privileged source

• Hogan Lovells: The simple use of trade secrets by third parties is allowed provided improper methods have not been used to acquire the secrets.

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Contractual protection

• General contracts

• Information which has been marked as confidential or

• The receiver has due cause to assume confidentiality

• But better: be specific

• Send and sign off on regular updates

• From time to time: do a “design freeze”

• Submit data carrier (USB/ hard drive) with notary

• At first contact: simple agreement that does not deter investors and possible partners

• Later on: elaborate on obligations

• Novate with retroactive effect for initial situation

• Provide for (in)ability to use info after termination

• Include audit provisions

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Trade secrets and employees

• Basis for confidentiality

• Employment contract

• Collective bargaining agreement ("cao")

• Issues

• Guarantee employee confidentiality to opposite party

• Disclosure to employees on need to know basis

• Employer can impose confidentiality (HR 14-1-1935, NJ 1935/430)

• Article 7:678 Civil Code: immediate termination

• Disclosure of details regarding the company which should be treated as confidential

• As such no ground for claim against disclosure itself

• But: obligation to act as "good employee" (article 7:611 Civil Code)

• Courts have extended this to an obligation of confidentiality

• Especially if former employees set up a company of their own

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European framework

• Enforcement Directive 2004/48/EC, 29 April 2004

• Consideration 4

• At international level, all Member States, as well as the Community itself as regards matters within its competence, are bound by the TRIPs Agreement

• Article 1

• This Directive concerns the measures, procedures and remedies necessary to ensure the enforcement of intellectual property rights

• For the purposes of this Directive, the term "intellectual property rights" includes industrial property rights

• Protection already existed in Europe for “traditional” IPR’s

• Question

• Is a trade secret an intellectual property right?

• New: proposal for Trade Secrets Directive

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New development at EU level

• Proposal for a Trade Secrets Directive

• Reasons:

• Obligation under Article 39 TRIPs

• Differences between Member States distort internal market

• Competitive disadvantage versus USA (and China?)

• History:

• 2011: Hogan Lovells study

• 2013: Baker & McKenzie study

• 28 November 2013: Commission proposal

• 12 February 2014: Legal experts meeting

• 19 May 2014: Council proposal

• 20 January 2015: Committee on Legal Affairs Hearing

• 22 June 2015: European Parliament Legal Affairs draft

• 8 March 2016: EP Plenary Session

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Trade Secrets Directive - scope

• Trade secret: any valuable confidential information

• TRIPs definition (EP: know-how & business information)

• Secret information

• Commercial value because it is secret

• Reasonable steps to keep it secret

• Scope of protection

• Acquisition, use or disclosure

• New type of infringement

• Condition: no consent

• Contrary to honest commercial practices (optional condition)

• Use: knew or should have known it was obtained unlawfully

• Infringing goods: benefit from trade secret infringement

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Trade Secrets Directive - limitations

• No infringement

• Independent discovery or creation

• Observation, study, disassembly or test (reverse engineering)

• For cooperation: agreement may block reverse engineering

• To the extent required by Union or national law (court order)

• Transparency obligations of the Union and Member States (Wob)

• Legitimate use of right to freedom of expression and information

• Other info honestly acquired by employees during employment

• But: non-compete clause in labour contract possible

• Whistleblowing (limitation?)

• Exercising necessary workers representation (limitation?)

• Any other practice in conformity with honest commercial practices

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Trade Secrets Directive - enforcement

• Enforcement Directive does not apply

• Minimum harmonization: option for national implementation

• Proposed by Council, not in EP proposal

• Issue in action in combination with patent infringement

• Specific system

• Interim injunctions

• Seizure & delivery up of suspected infringing goods

• Permanent injunctions

• Recall & destruction of infringing goods

• If in good faith & disproportionate: pecuniary compensation

• Damages

• Limitation period: max 6 years (EP: 3 years)

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Trade Secrets Directive - litigation

• Effective litigation

• Additional national tools

• Evidence seizure

• Dawn raids

• Risk of disclosure in litigation

• Provisions to prevent disclosure (27 – 29 Rv)

• Redacted version of judgments

• Restrict access to court documents and hearings, but:

• Access provided to lawyers (and other IP advisors)

• Access for at least one person from each party

• Balance effective remedy, fair trial, legitimate interests of parties

• Relation to Article 6 European Convention on Human Rights

• AIPPI initiative for legal privilege treaty

Thank you

wouter.pors@twobirds.com

+31 653 293896

www.twobirds.com

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