Explanatory Memorandum to COM(2013)813 - Protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure - Main contents
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| dossier | COM(2013)813 - Protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and ... |
|---|---|
| source | COM(2013)813  |
| date | 28-11-2013 |
Europe is strong on science and innovation and it has the potential to become a global leader. Striving for science quality is not just the aim of researchers, but provides important public and private returns. Nevertheless, overall research and development (R& D) within the EU is not sufficiently driven by businesses when compared to some major trading partners, in particular the US and Japan. Sub-optimal business investment in R&D adversely impacts on the introduction of new products, processes, services and known-how.
It is therefore desirable to improve the conditions for innovative business activity. As part of its wider Europe 2020 strategy, the Commission has undertaken to create an Innovation Union, protecting investments in the knowledge base, reducing costly fragmentation, and making Europe a more rewarding place for innovation. An environment conducive to innovation should in particular encourage higher levels of investment in R&D by the private sector, through more extensive, including cross-border, collaboration in R&D and technological developments between universities and industry, open innovation and allowing for improved valuation of intellectual property (IP) such that access to venture capital and financing is enhanced for research-oriented and innovative economic agents. Attaining such goals exclusively on a national level is not sufficient and would lead to inefficient duplication of effort in the Union.
The drastically reduced transaction costs in the digital economy have led to new forms of cooperation with open science and open innovation, often leading to new business models for using co-created knowledge. Nevertheless, intellectual property rights (IPRs) are an essential part of an innovation policy. IPRs provide innovators and creators with means of appropriation of the outputs of their efforts, which are intangible in nature, thus providing the necessary incentives for investment in new solutions, inventions and know-how. IPRs tend to protect the results of creative or inventive efforts, but they have a limited scope of application.
During the process of research and creation significant information is compiled and developed, progressively building knowledge of a substantial economic value that often does not qualify for IPR protection, but which is equally important for innovation and for the competitiveness of businesses in general. When securing such assets and attracting financing and investment requires IP to be kept secret, companies, laboratories, universities, as well as the individual inventors and creators, use the most relied upon and long-standing form of appropriation over valuable information: confidentiality.
As research builds on prior work, sharing of knowledge and new findings represent important leverage for further innovation. Depending on the business model of the innovator there are cases when confidentiality may be the requisite basis upon which IP can be nurtured in order for it to be exploited into innovation and increased competitiveness. Every IPR starts with a secret. Writers do not disclose the plot they are working on (a future copyright), car makers do not circulate the first sketches of a new model (a future design), companies do not reveal the preliminary results of their technological experiments (a future patent), companies hold on to the information relating to the launch of a new branded product (a future trade mark), etc.
In legal terminology, information that is kept confidential in order to preserve competitive gains is referred to as “trade secrets”, “undisclosed information”, “business confidential information” or “secret know-how”. Business and academia sometimes use other name tags for it such as “proprietary know-how” or “proprietary technology”.
Trade secrets are also just as important in protecting non-technological innovation. The services sectors, representing some 70% of EU GDP, are very dynamic, and that dynamism depends on innovative knowledge creation. However, the services sector does not rely as much as manufacturing industry on technological process and product innovation (as protected by patents). Confidentiality in this key part of the EU economy is used to build and exploit so-called 'soft' innovation for competitiveness, covering the use and application of a diversified range of strategic commercial information, which extends beyond technological knowledge, such as information on customers and suppliers, business processes, business plans, market research, etc.
Economists agree that companies, irrespective of their size, value trade secrets at least as much as all other forms of IP. Trade secrets are particularly important to small and medium-sized enterprises (SMEs) and start-ups as these often lack specialised human resources and financial strength to pursue, manage, enforce and defend IPRs.
Although not protected as a classical IPR, trade secrets are nevertheless a key complementary instrument for the required appropriation of intellectual assets that are the drivers of the knowledge economy of the 21st century. The holder of a trade secret does not have exclusive rights over the information covered by the trade secret. However, in order to promote an economically efficient and competitive process, restrictions to the use of a the trade secret are justified in cases where the relevant know-how or information has been obtained from the trade secret holder against its will by a third party through dishonest means. The assessment of whether and to what extent such restrictions are necessary is subject, on a case-by-case basis, to judicial control.
This means that competitors are free, and should be encouraged, to develop and use the same, similar or alternative solutions, thus competing in innovation, but are not allowed to cheat, steal or deceive in order to obtain confidential information developed by others.
While the development and management of knowledge and information have become ever more central to the performance of the EU economy, the exposure of valuable undisclosed know-how and information (trade secrets) to theft, espionage or other misappropriation techniques has and continues to increase (globalisation, outsourcing, longer supply chains, increased use of ICT, etc.). The risk also increases that stolen trade secrets are used in third countries to produce infringing goods which subsequently compete within the EU with those of the victim of the misappropriation. However, the current diversity and fragmentation of the legal framework on the protection of trade secrets against their unlawful acquisition, use or disclosure is impairing cross-border R&D and the circulation of innovative knowledge by undermining the capacity of European companies to respond to dishonest attacks on their know-how.
Optimisation of the IP infrastructure is one important pillar of the Innovation Union and, in that context, the Commission adopted in May 2011 a comprehensive IP strategy, undertaking to examine the protection of trade secrets[1]. This proposal is one further deliverable on the commitment of creating a single market for intellectual property.
Contents
- RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND IMPACT ASSESSMENTS
- LEGAL ELEMENTS OF THE PROPOSAL
- BUDGETARY IMPLICATION
- 2.1. Public Consultation
- 2.2. Impact Assessment
- 5. EXPLANATION OF THE PROPOSAL
- 5.1. General provisions
- 5.2. Measures, procedures and remedies
- 5.3. Sanctions, reporting and final provisions
This initiative is based on an evaluation of the importance of trade secrets for innovation and for the competitiveness of companies, the extent to which they are used, their role, and relationship with IPRs, in the generation and economic exploitation of knowledge and intangibles assets, and the relevant legal framework. These assessments were carried out with the help of two external studies and with extensive consultations of stakeholders.
A first study (published in January 2012) provides a comparative law assessment of the protection against misappropriation of trade secrets in the different EU Member States. A second study, published in May 2013, assessed the economic foundations of trade secrets and protection against their misappropriation and further analysed the legal protection of trade secrets throughout the EU. It confirmed the fragmented and diversified nature of the existing protection against misappropriation of trade secrets throughout the Union, considering it to be, in general opaque and imposing unnecessary costs and risks. The study considered that an efficient system to secure the results of R&D is a precondition for businesses to innovate and that the flexibility offered by efficient reliance on trade secrets fits well with the way in which innovation takes place in today's business environment. It concluded that harmonisation of trade secret law in the EU would improve conditions for firms to develop, exchange and use innovative knowledge.
The views of stakeholders were collected in 3 steps. First, civil society, industry, academia and public authorities discussed this issue in a conference organised by the Commission that took place in June 2012.
Second, a survey on trade secret use, associated risks and legal protection was subsequently launched, in the context of the 2nd study, in November 2012. The survey was directed to a representative sample of businesses across the EU, including SMEs which accounted for 60% of the sample. A total of 537 responses to the survey were received. Overall, 75% of respondents ranked trade secrets as strategically important to their company’s growth, competitiveness and innovative performance. The survey revealed that over the last 10 years, about one in five respondents had suffered at least one attempt at misappropriation within the EU, whereas nearly two in five respondents stated that the risk of trade secret misappropriation had increased during the same period. Two in three of the respondents indicated support for an EU legislative proposal.
Third, from 11 December 2012 until 8 March 2013 the services of the Commission carried out an open public consultation, focusing on the possible policy options and their impacts. 386 replies were received, mostly from individual citizens (primarily from one Member State) and businesses. 202 respondents found that the legal protection against the misappropriation of trade secrets should be addressed by the EU. However, the views expressed by the two main groups of respondents (citizens and companies) were polarised. Three in four citizens regard trade secrets as having low importance for R&D and find existing legal protection of trade secrets excessive and 75% do not see a need for an EU action. Responding companies, on the other hand, consider trade secrets as highly important for R&D and for their competitiveness. A significant majority regard existing protection as weak, in particular at the cross-border level, and see differences between national legal frameworks as having negative impacts such as higher business risk in the Member States with weaker protection, less incentive to undertake cross-border R&D and increased expenditure in preventive measures to protect information.
The impact assessment showed the national divergences in the protection of trade secrets: few Member States' laws either define trade secrets or specify when they should be protected; cease and desist orders against infringers are not available in all cases; traditional rules on the calculation of damages are often inadequate for trade secret misappropriation cases and alternative methods (e.g. amount of royalties that would have been due under a licence agreement) are not available in all Member States; and criminal rules do not address trade secret theft in all Member States. In addition, many Member States do not have rules aimed at safeguarding trade secrets during litigation, thus deterring victims of trade secret misappropriation from seeking redress in court.
Two main problems resulted:
· Sub-optimal incentives for cross-border innovation activities. When trade secrets are under a risk of misappropriation with ineffective legal protection, incentives to undertake innovation activities (including at cross-border scale) are affected because of (i) the lower expected value of innovation relying on trade secrets and the higher costs for protecting it; and (ii) the higher business risk when sharing trade secrets. For instance, 40% of EU companies would refrain from sharing trade secrets with other parties because of fear of losing the confidentiality of the information through misuse or release without their authorisation. This inhibits innovation and in particular collaborative research and open innovation which requires sharing of valuable information by multiple business and research partners.
· Trade secret-based competitive advantages are at risk (reduced competitiveness): the fragmented legal protection within the EU does not guarantee a comparable scope of protection and level of redress within the Internal Market, thus putting trade-secret based competitive advantages, whether innovation-related or not, at risk and undermining trade secret owners’ competitiveness. For instance, the European chemical industry, which strongly relies on process innovation secured by trade secrets, estimates that misappropriation of a trade secret could often entail a turnover reduction of up to 30%.
The objective of the initiative is to ensure that the competitiveness of European businesses and research bodies which is based on undisclosed know-how and business information (trade secrets) is adequately protected and improve the conditions/framework for the development and exploitation of innovation and for knowledge transfer within the Internal Market. Specifically, it aims at improving the effectiveness of the legal protection of trade secrets against misappropriation throughout the Internal Market.
The following possible options for resolving the problem were considered:
– Status quo.
– Provide information on and raise awareness of the national measures, procedures and remedies available against trade secret misappropriation.
– Convergence of national civil law as regards the unlawfulness of acts of misappropriation of trade secrets (but rules on remedies and preservation on confidentiality of trade secrets during legal proceedings to be decided at national level).
– Convergence of national civil law remedies against the misappropriation of trade secrets and rules on preservation of confidentiality of trade secrets during and after legal proceedings (in addition to option 3).
– Convergence of national criminal law in addition to civil law convergence (option 4), including rules on minimum criminal penalties.
The impact assessment concluded that options 4 would be proportionate and would best serve to achieve the objectives pursued.
In terms of impacts, the convergence of civil law remedies would allow innovative businesses to defend their rightful trade secrets more effectively across the EU. Also, if trade secrets’ owners could rely on confidentiality during proceedings, they would be more inclined to seek legal protection against potential damages through misappropriation of trade secrets. Increased legal certainty and convergence of laws would contribute to increasing the value of innovations companies try to protect as trade secrets, as the risk of misappropriation would be reduced. Positive impacts on the functioning of the Internal Market result as companies, in particular SMEs, and researchers will be able to make better use of their innovative ideas by cooperating with the best partners across the EU, thus helping to increase private sector investment in R&D within the Internal Market. At the same time, competition should not be restricted as no exclusive rights are being granted and any competitor is free to independently acquire the knowledge protected by the trade secret (including by reverse engineering). Similarly, the hiring and mobility of highly skilled labour (those who have access to trade secrets) within the Internal Market should not be negatively impacted. This should have, over time, positive effects on the competitiveness and growth of the EU economy. This initiative does not negatively affect fundamental rights. In particular, the initiative will promote the right to property and the right to conduct a business. In terms of access to documents in judicial proceedings safeguards have been put in place in order to safeguard the right of defence. The initiative also contains safeguards to ensure that the right to freedom of expression and information is guaranteed.
This initiative is consistent with international obligations (i.e. the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS Agreement)). Major trading partners have similar legislation on this issue.
Article 114 of the Treaty of the Functioning of the European Union (TFEU) provides for the adoption of EU rules harmonising national legislation, whenever necessary for the smooth functioning of the Internal Market. The objective of the proposal is to establish a sufficient and comparable level of redress across the Internal Market in case of trade secret misappropriation (while providing sufficient safeguards to prevent abusive behaviour). The existing national rules offer an uneven level of protection across the EU of trade secrets against misappropriation, which jeopardises the smooth functioning of the Internal Market for information and know-how. Indeed, in order to fulfil all its potential as an economic asset, valuable information (such as manufacturing processes, new substances and materials, non-patented technology, business solutions) must be transferable, in confidence, as it may have different uses for different players in different geographic regions, thus generating income for creators and allowing for an efficient allocation of resources. The scattered legal framework also reduces the incentives to undertake any innovative-related cross-border activity which would depend on the use of information protected as a trade secret, such as establishment in a different Member States for the purposes of manufacturing or marketing goods/services based on trade secrets, supplying goods/services to a company in other Member State or outsourcing the manufacturing to another company in a Member State. In those situations, if the trade secret is misappropriated in another country with lower level of protection, infringing goods may spread across the market. Existing national rules thus render cross-border network R&D and innovation less attractive and more difficult. They also create a higher business risk in Member States with lower levels of protection, with adverse effects on the whole of the EU economy as, on the one hand, incentives to cross-border trade diminish, and on the other hand, “infringing goods” originating from those Member States (or imported through them) may spread across the Internal Market. The proposal should facilitate cross-border R&D cooperation: a clear, sound and levelled protection of trade secrets against misappropriation promotes cross-border sharing and transfer of confidential business information and know-how by diminishing perceived risks and transactions costs associated with multiple legislation handling. It should also improve incentives to cross-border trade, thanks to the reduction of unfair competition from free-riders in the cross-border market space.
In terms of subsidiarity, the problems identified in the impact assessment are driven by the diversity and inconsistency of the existing regulatory framework that does not ensure a level playing field for EU companies with adverse consequences for their competitiveness and that of the EU as a whole. Achieving greater consistency in redress measures across Member States is central to addressing those problems. Yet such consistency cannot be achieved by action taken solely on the Member State level: experience in this field shows that even when Member States are coordinated to a certain extent, e.g. by the TRIPS Agreement, a sufficient degree of substantive harmonisation of national rules is not achieved. Hence, the necessary scale and effects of the proposed action are at EU level.
The proposal has no impact on the European Union budget. All actions proposed to be taken up by the Commission in this proposal are consistent and compatible with the new Multiannual Financial Framework 2014-2020.
Chapter I defines the subject matter (Article 1): the Directive applies to unlawful acquisition, disclosure and use of trade secrets and the measures, procedures and remedies that should be made available for the purpose of civil law redress.
Also in Chapter I, Article 2 defines key concepts. The definition of ‘trade secret’ contains three elements: (i) the information must be confidential; (ii) it should have commercial value because of its confidentiality; and (iii) the trade secret holder should have made reasonable efforts to keep it confidential. This definition follows the definition of ‘undisclosed information’ in the TRIPS Agreement.
The definition of ‘trade secret holder’ incorporates, also following the TRIPS Agreement, the concept of lawfulness of control of the trade secret as a key element. It therefore ensures that not only the original owner of the trade secret but also licensees can defend the trade secret.
The definition of ‘infringing good’ integrates a proportionality assessment. The goods which are designed, manufactured or marketed carrying out an unlawful conduct must benefit to a significant degree from the trade secret in question to be considered as infringing goods. The test should be used when considering any measures directly affecting goods manufactured or put in the market by an infringer.
Chapter II sets the circumstances under which the acquisition, use and disclosure of a trade secret is unlawful (Article 3), thus entitling the trade secret holder to seek the application of the measures and remedies foreseen in the Directive. The key element for those acts to be unlawful is the absence of consent of the trade secret holder. Article 3 also determines that the use of a trade secret by a third party not directly involved in the original unlawful acquisition, use or disclosure is also unlawful, whenever that third party was aware, should have been aware, or was given notice, of the original unlawful act. Article 4 expressly clarifies that independent discovery and reverse engineering are legitimate means of acquiring information.
Chapter III establishes the measures, procedures and remedies that should be made available to the holder of a trade secret in case of unlawful acquisition, use or disclosure of that trade secret by a third party.
Section 1 sets the general principles applicable to the civil enforcement instruments in order to prevent and repress acts of trade secret misappropriation, notably effectiveness, fairness and proportionality (Article 5) and safeguards to prevent abusive litigation (Article 6). Article 7 establishes a period of limitation. Article 8 requires that Member States provide judicial authorities with mechanisms to preserve the confidentiality of trade secrets disclosed in court for the purpose of litigation. The possible measures must include: restricting access to documents submitted by the parties or third parties, in whole or in part; restricting access to hearings and hearing records; ordering the parties or third parties to prepare non-confidential versions of documents containing trade secrets and also preparing non-confidential versions of judicial decisions. These measures should be applied in a proportionate manner so that the rights of the parties to a fair hearing are not undermined. The confidentiality measures must apply during litigation, but also after litigation in case of requests of public access to documents for as long as the information in question remains a trade secret.
Section 2 provides for provisional and precautionary measures in the form of interlocutory injunctions or precautionary seizure of infringing goods (Article 9). It also establishes safeguards to ensure the equity and proportionality of those provisional and precautionary measures (Article 10).
Section 3 provides for measures that may be ordered with the decision of the merits of the case. Article 11 provides for the prohibition of use or disclosure of the trade secret, the prohibition to make, offer, place on the market or use infringing goods (or import or store infringing goods for those purposes) and corrective measures. The corrective measures request, inter alia, the infringer to destroy or deliver to the original trade secret holder all the information he or she holds with regard to the unlawfully acquired, used or disclosed trade secret. Article 12 establishes safeguards to ensure equity and proportionality of the measures provided for in Article 11.
The awarding of damages for the prejudice suffered by the trade secret holder as a consequence of the unlawful acquisition, use or disclosure of his/her trade secret is enshrined in Article 13, which calls for the taking into consideration of all the relevant factors, including the unfair profits obtained by the defendant. The possibility of calculating the damages on the basis of hypothetical royalties is also made available, in line of what is foreseen in the case of infringements of intellectual property rights.
Article 14 empowers the competent judicial authorities to adopt publicity measures at the request of the plaintiff, including the publication of the decision on the merits of the case – provided that the trade secret is not disclosed and after considering the proportionality of the measure.
The Directive does not integrate rules on the cross-border enforcement of judicial decisions as general EU rules on this matter apply, allowing the enforcement in all Member States of a court judgment prohibiting the imports into the EU of infringing goods.
In order to ensure an effective application of the Directive and the fulfilment of the pursued objectives, Chapter IV foresees the application of sanctions in case of non-compliance with the measures provided for in Chapter III and comprises provisions on monitoring and reporting.
The Commission considers that, in line with the joint declarations concerning explanatory documents[2], there are not sufficient arguments to formally request explanatory documents from Member States to explain the relationship between the content of the Directive and the corresponding parts of national transposition instruments. From a technical perspective, the Directive is not particularly complex, contains only a limited number of legal obligations that require transposition into national law and deals with a well delimited issue that has already been regulated at national level as regards the neighbouring area of IPRs. Therefore, the transposition at national level is not expected to be complicated and this should ease the monitoring of such transposition.