Internal Market, Industry, Entrepreneurship and SMEs

Frequently asked questions: Protection against the unlawful acquisition of undisclosed know-how and business information (trade secrets)

Frequently asked questions: Protection against the unlawful acquisition of undisclosed know-how and business information (trade secrets)

Companies across Europe, in particular small and medium-sized enterprises (SMEs), have been asking for coherent legal protection within the EU against the unlawful acquisition of undisclosed know-how and business information (generally referred to as 'trade secrets').

European companies are suffering from industrial espionage and similar unfair practices which put their competitiveness and jobs at risk. The current fragmented system, where EU countries have substantial differences between their national laws or have no specific laws on the issue, does not stimulate innovation and investment in research and development (R&D).

That is why, on 28 November 2013, the European Commission proposed a clear set of rules to facilitate access to comparable civil action across the EU in the case of trade secret misappropriation. The rules are applicable when the appropriation, use or disclosure of trade secrets is done without the consent of the trade secret holder and through the use of dishonest means, breach of law or breach of contract, for example, by hacking, theft of documents or bribery.

What are trade secrets and why are they important?

In the course of their activities, companies big or small, researchers, inventors and creators develop information which is commercially valuable and which is treated as confidential in order for them to have a competitive advantage. Such information helps them to exploit first mover advantages (in marketing, first-mover advantage is the advantage gained by the initial (first-moving) significant occupant of a market segment).

The information can be of a technical (for example, a manufacturing process or software) or commercial (for example, a customer or client list) nature. It can be strategic, long-term knowledge (for example, a recipe or chemical compound), or more short-lived (for example, the results of a marketing study, the name, price and launch date of a new product, or the price offered in a bidding procedure).

Trade secrets are important to all industry sectors, including services. SMEs and start-ups rely on secrecy more intensively than large companies, as they do not have sufficient resources to seek, obtain and manage a portfolio of patents, police the market and enter into disputes and litigation over patent infringement. In some cases, companies and inventors with limited financial means may trade on the basis of secrets that are a less expensive means to appropriate and manage the results of their innovation efforts, albeit less safe as a means of protection.

What are the effects of the misappropriation of trade secrets?

Whenever trade secrets are misappropriated (e.g. stolen or misused) by a third party, the trade secret owner will suffer losses while the dishonest third party will be free-riding. This will disproportionally hit SMEs who normally have less resources to absorb the loss of a trade secret. This also harms society: theft of know-how jeopardises future investment in R&D and innovation and undermines trust in knowledge-sharing and technology transfer. As business risk increases, there are fewer incentives to innovate.

Why is there a need to harmonise national laws in this area?

Competitiveness is increasingly dependent on know-how and innovation. In a survey (1 MB) carried out in 2013, 75% of the companies stated that trade secrets are important for competitiveness and innovative performance.

However, European companies are increasingly exposed to misappropriation of trade secrets. One in five European companies has been the victim of trade secret misappropriation, or attempts at misappropriation, at least once in the past 10 years. Two in five European companies find that the risk of trade secret misappropriation has increased during the same period.

This is due to several factors, such as fierce global competition, increased use of information and communications technology (ICT), recourse to external consultants, offshoring and outsourcing. The ability of companies from different EU countries to build trusted networks for collaborative research or to enter into know-how transfer agreements is impaired by the current fragmentated system of national laws on the protection of trade secrets. The different national rules are often outdated and have important gaps and shortcomings.

Protection throughout the EU is uneven and not inter-operable, giving rise to uncertainty.

Recent studies have demonstrated that:

  • for 82% of the companies, this means higher business risk in EU countries with weaker protection
  • for 59% of companies, this discourages cross-border R&D
  • 40% of EU companies refrain from sharing trade secrets because of the risks involved
  • only 40% of those having suffered from trade secret misappropriation have sought legal remedies in the EU
  • at least 70% of European companies, both big and small, and across all sectors, are favourable to EU legislation on misappropriation of trade secrets.

Are trade secrets an intellectual property right?

No. The holder of a trade secret does not have an exclusive right over its creation. He cannot prevent competitors from copying and using the same solutions – reverse engineering (the process of discovering the technological principles of a device, object or system through analysis of its structure, function and operation) is entirely lawful. Trade secrets are only legally protected in instances where someone has obtained the confidential information by illegitimate means (e.g. through spying, theft or bribery).

What is the relationship between trade secrets and intellectual property rights (IPRs)?

Trade secrets are complementary to IPRs. They are heavily used in the creative process leading to innovation and the creation of IP rights. For example, before an invention is patented, the inventor treats it as a secret because if it becomes general knowledge the invention loses the necessary requirement of novelty. Therefore, trade secrets are at the origin of patents (new inventions), copyright (a new novel or a song), trademarks (a new branded product), and designs (a design of a new car model).

Trade secrets are also used in relation to commercially valuable information for which there is no IPR protection, but for which investment and/or research are nevertheless required and which are important to innovation (a new business idea, recipe for a perfume, or recipe for a food product).

Trade secrets are another form of appropriation of intangible assets which is highly complementary to IPRs, the difference being that in the former case no exclusivity of rights is granted. Legal protection against misappropriation of trade secrets improves the conditions for businesses and researchers to discover, develop, share and use information and knowledge. It is therefore crucial for innovation performance. The proposal is another building block of the 'enabling framework' that the 2011 IPR strategy undertook to set up in order to achieve its goals.

Should inventors use patents instead, thus disclosing their invention to the public?

Usually companies use secrecy when the information in question cannot be protected by patents or other IPRs. Incremental improvements on patented inventions, new business ideas and models, the results of marketing studies, recipes for foodstuffs or fragrances, and know-how relating to manufacturing processes do not concern an invention and are not artistic works or designs, and therefore cannot be protected through patents, copyrights, design rights or any other IP right. Competitors are free to, and often do, strive to find the same, similar or even better solutions. The only advantage of the trade secret holder is the first move advantage – everyone else can catch up.

Moreover, trade secrets do not imply total secrecy; they are often shared among trusted partners, for example for the purpose of collaborative research, or through licensing agreements. Many patent licensing agreements include transfer of trade secrets relating to the invention in question. Many SMEs benefit from those schemes.

What about the freedom of expression and right to information?

The initiative is not about protecting trade secrets themselves, nor is secrecy encouraged. It does not interfere with existing rules that require business operators to disclose information to the public or to public authorities for reasons of public interest such as consumer safety, health and environmental issues.

The proposal includes express safeguards in order to ensure the respect for freedom of expression, right to information and whistle-blowers. These activities are not criminalised, and they are safeguarded in a clear and express manner, in accordance with Article 11 of the EU Charter of Fundamental Rights.

Can someone be prosecuted under criminal law because of the proposed directive?

No. Criminal law is out of the scope of the draft directive, so nobody can be prosecuted under criminal law because of it. The proposed directive deals only with civil law remedies in cases of misappropriations of trade secrets that are limited to dishonest practices, such as theft, hacking, unauthorised access to the information or breach of contract. In addition, the proposal does not call for sanctions.

Does the draft directive interfere with labour law and workers councils?

The Commission’s proposal does not undermine the functioning of workers' councils. The proposal has no impact on labour law, in particular on the rights of workers to information, representation and co-decision in accordance with national practices and law.

The proposed directive does not impose on employees any obligations of confidentiality, nor does it modify in any manner existing rules on confidentiality duties.

Which EU countries already have rules? Which do not?

Austria, Bulgaria, the Czech Republic, Estonia, Germany, Finland, Greece, Hungary, Italy, Latvia, Lithuania, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden have legislation on the misappropriation of trade secrets, although some of them fail to define what trade secrets are (for example, Germany, Finland, Greece, Denmark and Spain).

In Belgium, France, Ireland, Luxembourg, Malta, the Netherlands and the UK there are no specific provisions on trade secrets in civil law. The protection of trade secrets against misappropriation depends on judicial interpretation of the general provisions on extra-contractual liability or on traditional common law. In Cyprus, trade secrets are only protected by contract. In France misappropriation of certain types of trade secrets (namely, manufacturing secrets) are criminally punished if committed by employees.

How are trade secrets protected in the rest of the world?

In principle, the 159 countries that are members of the World Trade Organization are bound by the TRIPS Agreement (The Agreement on Trade Related Aspects of Intellectual Property Rights) which includes a definition of trade secrets. According to this agreement, natural and legal persons shall have the possibility of preventing trade secrets lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices.

The proposal is in full alignment with the TRIPS Agreement.

Additionally, harmonised EU rules could, over time, contribute to influencing third countries to establish similar legislation thereby raising the global level of protection of trade secrets against misappropriation within the spirit of the TRIPS Agreement. This would benefit EU companies operating in third countries.

Were stakeholders consulted when the trade secrets proposal was being prepared?

Yes. The Commission organised a public consultation open to all interested parties and stakeholders between December 2012 and March 2013. An online questionnaire was available in all official languages of the EU. The Commission received 386 responses, coming from almost every EU country.

The consultation showed that 73 % of the SMEs that replied were of the opinion that legal protection against misappropriation of trade secrets should be addressed at EU level. For 67% of SMEs trade secrets have a strong positive impact on their innovative and competitive performance. About 40 % of the respondents were other than industry-related stakeholders. All the contributions to the public consultation and the summary of contributions are available:

Prior to the public consultation, in June 2012 the Commission organised a public conference, open to all interested.

Is there a link between trade secrets and the Transatlantic Trade and Investment Partnership (TTIP) negotiations?

The proposed directive is not linked to the TTIP. However, there is shared interest among EU and US stakeholders in this area. The Commission has presented a draft proposal for a Directive. In the US there are also several legislative initiatives in place to harmonise the civil law rules on trade secrets since there is still no federal law in this field. Priority must be given to the domestic legislative process.