18 Jun 2015   |   News

Trade secrets bill could be a missed opportunity for small companies

Awards of legal costs and ways of improving enforcement are overlooked in a new bill passed in the European Parliament. While SMEs will not be able to afford litigation, large companies will find it easier to keep more information secret

The European Parliament Legal Affairs Committee passed a draft bill on Tuesday that will tighten up rules protecting trade secrets.

The directive aims to buttress and harmonise defences against unlawful acquisition of information that is commercially valuable and secret but not covered by a patent.

The bill was sold by the European Commission as a boost for small businesses, with one in every five fall victim to illegal misappropriations of sensitive information, it estimates.

But there is doubt as to whether the new provisions offer an appealing enough carrot for companies to defend their ideas in front of a judge, or whether they can access the evidence needed to make a case.

Even if a company suspects a trade secret has been stolen, it still might baulk at the thought of litigating, with cost being a major deterrent. The directive lacks a clause which says the victor in a dispute may claim legal costs from the losing party.

“I’m convinced the European Commission overlooked the compensation case,” said Jan-Diederik Lindemans, a partner at the law firm Crowell & Moring LLP.

In Belgium, if a judge finds in favour of a company in a trade secret suit, the company is entitled to a base compensation of €1,230. “You won’t find counsel that will even initiate procedures for this money, let alone take them all the way to the courtroom door,” Lindemans said.

In the Netherlands, companies can recover legal costs in patent infringement cases, but not in trade secret suits. Meanwhile in countries including Bulgaria, Cyprus, Estonia, Finland, Luxemburg and Malta, there is nothing in the statute books to allow for “infringed goods” to be returned to the company that developed it, or for them to be destroyed.

In addition, it is not clear whether the new bill will make it any easier for companies to prove infringement. 

Typically, it is very hard for companies to prove in court that competitors are using their knowledge, says Lindemans. For this reason, a clause on right to access of evidence pre-trial would have been an important feature for the owner of a potentially misappropriated trade secret.

Nevertheless, the bill does make some encouraging noises, Lindemans says.

Companies have to confront a big problem when they go to court, in that sittings are open to anyone, meaning competitors can sit in the gallery. Currently, only Germany, the UK and Hungary, have procedural measures to prevent disclosure of trade secrets.

The new bill makes provision for secrecy, although the question remains whether in practice courts will be able or willing to implement such measures, adds Lindemans.

The directive also extends the period a company can bring a trade secrets claim, from two to six years. 

For these reasons, the new proposal is largely welcomed by lawyers. “Before you had to be a geek like me to fully understand all the laws that can relate to trade secrets,” said Lindemans.

Trade secrets are especially important for start-ups which lack the cash to pursue, manage and enforce IP. The EU defines trade secrets as techniques, such as manufacturing processes and chemical compounds, or commercial information like client lists, marketing data and recipes.

The holder of a trade secret has no exclusive rights. Rivals are free to develop and use the same or similar techniques, but are not allowed to cheat, steal or deceive in order to obtain confidential information developed by others.

The Parliament now has a mandate for negotiating a final text with its co-legislator, the Council, which represents European governments.

The bill on trade secrets has been in the pipeline since November 2013, when the Commission published its proposal.

Industry malpractice

For some, the legal language on trade secrets in the bill is too close to the interests of big companies.   

Anaïs Berthier, a lawyer with pressure group ClientEarth said, "The proposed law is likely to encourage industry malpractice through keeping more information confidential. It is a threat to our right to know what's in the products we use every day, and must be changed to protect people and the environment."

Health Action International cautioned that pharmaceutical companies may use the bill as justification to withhold the release of clinical trial data.

“The Commission wrongly believes that enhanced trade secret protection is the magic bullet to keep Europe in the innovation game,” said Tessel Mellema, a policy officer with the association. “But fully open research projects, like the Human Genome Project, demonstrate the benefits of open research and innovation. Giving companies another way to shroud the results of pharmaceutical research in secrecy seems more likely to delay innovation.”

Trade secrets

There are only a handful of people who know what goes into Nutella jars and Coke cans. The serial entrepreneur Elon Musk shies away from patenting technologies developed at his SpaceX rocket company out of fear that foreign space agencies would swipe them. Biotech companies involved in genome sequencing may patent some interventions but also keep some secret.

The Commission says, “the exposure of valuable undisclosed know-how and information (trade secrets) to theft, espionage or other misappropriation techniques has and continues to increase” as a result of globalisation, outsourcing, longer supply chains, increased use of ICT.

Trade-secret thefts typically involve insiders. These are employees or contractors who abscond with sensitive information, which they might download via flash drive, mobile phone or email.

Most EU member states cater for the protection of trade secrets in law. However, in Germany, Denmark or Spain there is no explicit definition of a trade secret.

Countries including the UK, Belgium, the Netherlands and France have no specific provisions for trade secrets in civil law. Protection against misappropriation often depends on interpretation of case histories.

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