Summary and implications
The raw materials of the 21st Century economy are information, knowledge, and inventiveness. Businesses value trade secrets as much as patents and other forms of intellectual property. They use confidentiality to protect a wide range of know-how and business information, both to complement and as an alternative to intellectual property rights. Many businesses elect to use trade secret law as their primary means of protection; prosecuting a patent inevitably publicizes key information and concepts, and can be expensive, and trade secrets can have a significantly longer lifetime if properly safeguarded (the Listerine antiseptic formula dates from 1879, and the Coca-Cola recipe from 1891).
In mid-2016, important new civil trade secrets laws were promulgated on both sides of the Atlantic. The United States enacted the Defend Trade Secrets Act (“USTSA”) on May 11, and on June 6 the EU formally approved the Trade Secrets Directive (“EUTSD”), which Member States must adopt before June 9, 2018.
- The USTSA and the EUTSD are both harmonising statutes that introduce a uniform approach in their respective territories. Before enactment, trade secrets in the U.S. were governed by state (not federal) law alone, and in the EU there were major differences between the laws of the 28 Member States. Businesses will now benefit from being able to develop internal procedures and base commercial decisions on uniform overarching laws on both sides of the Atlantic.
- While there are granular differences, the two regimes’ definitions of trade secrets are broadly similar, which will benefit businesses when developing their policies.
- It is imperative that businesses understand the two regimes’ combined impact so they can devise consistent policies for controlling the secrecy of their confidential information, and for regulating its misuse.
This two-part series highlights the evolving realm of trade secrets law, where the U.S. and the EU legislators have made recent strides in crafting newfound legislative regimes. This first part gives an overview of the two approaches to protecting trade secrets. The second part will consider in more detail the now highly important question of the steps businesses should take to ensure that their secrets have been subject to reasonable steps and measures to keep them secret, failing which they will lose their protection.
Background
In April 2016, after years of unsuccessful attempts, Congress near-unanimously approved, and President Obama signed into law, the USTSA. This is a US federal law entitling trade secret owners to sue in federal court for actual or threatened misappropriation of their trade secrets. It establishes a federal civil cause of action for such misappropriation “… if the trade secret is related to any product or service used in, or intended for use in, interstate or foreign commerce”; 18 U.S.C. §1835(b)(1).
Before enactment of the USTSA in May 2016, civil trade secret misappropriation was regulated solely by state law, predominantly variations of the Uniform Law Commission’s Uniform Trade Secrets Act. These state trade secret laws are not pre-empted by the USTSA and therefore remain in full effect; 18 U.S.C. §1836(f). However, the USTSA’s advent gives trade secret owners the choice of using federal law to prevent misappropriation, which is especially useful where interstate or foreign commerce is at issue.
The USTSA provides federal private rights of action and unique federal remedies to victims of trade secret misappropriation, provided the trade secrets relate to products or services used, or intended to be used, in interstate or foreign commerce. Previously, trade secrets were regulated exclusively at the state level. Like the EUTSD, the USTSA is designed to create greater uniformity in trade secret law across its respective jurisdiction, through a uniform body of federal trade secret law and a national standard for establishing liability for trade secret theft.
The EUTSD standardizes national laws in EU Member States against the unlawful acquisition, disclosure, and use of trade secrets, harmonizes the definition of trade secrets, and defines the relevant forms of misappropriation. The policy intent behind the EUTSD is to encourage European cross-border investment, competition, and innovation, and to eliminate legal inconsistencies which might otherwise make cross-border enforcement more difficult.
Before the EUTSD’s introduction there was a divergence of approach under EU Member States’ national laws. Some had specific trade secrets statutes, whereas others relied on a variety of unfair competition law, contract, or general law of tort. Businesses were therefore faced with different degrees of trade secrets protection, depending on the EU Member State in question – something plainly unacceptable for businesses trying to devise sophisticated strategies for their trade secrets protection and use. The EUTSD therefore brings legal clarity and a level playing field to businesses across Europe.
As a harmonizing measure, the EUTSD sets a minimum threshold level of protection Member States must adopt by the June 9, 2018 mandatory implementation date (and if not properly implemented, the doctrine of direct effect will give the EUTSD direct legal force in any delinquent countries). The EUTSD permits Member States to implement and retain higher levels of protection if they wish, but imposes minimum standards for the protection, enforcement and remedies for misuse of trade secrets across the EU.
Evaluation of “trade secrets”
Although they use different language, the U.S. and the EU definitions of trade secrets are broadly identical (see box below). Both regimes protect information that is not generally known, has commercial value, and is properly guarded by the trade secret owner as a secret. This commonality of regime is a significant benefit to businesses in developing corporate policies, and enforcement and competition strategies.
The USTSA’s definition of “trade secret”, like that of the EUTSD, protects almost all types of confidential commercial information, provided that information is kept secret, the information derives economic value from not being generally known or readily ascertainable, and the owner of the information has taken reasonable steps to maintain its secrecy.
The EUTSD’s definition of “trade secret” is any information that (i) 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; (ii) has commercial value because it is secret; and (iii) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret. From a UK perspective, this closely mirrors the existing definition for confidential information under UK law established in Faccenda Chicken Limited v. Fowler [1987] Ch 117.
However, there are differences between the two regimes at the granular level. In both instances these will need to be worked out through the case law, especially things like the meaning of “reasonable steps” in Article 2(1)(c) EUTSD. This is inevitably a fact-specific exercise. What will amount to “reasonable steps” is likely to vary depending on the nature and value of the trade secret, the cost and extent of the measures the owner has to implement (there is a significant difference in scale between a written secret recipe kept in a vault, for example, and a secret implemented in a factory production line), and the potential security challenges that secret faces.
These differences between regimes are primarily ones of emphasis, rather than representing a policy divergence between the two.
- Composite information
Article 2(1)(a) EUTSD provides that information is secret if it is not, “as a body or in the precise configuration and assembly of its components, generally known” or “readily accessible” to the relevant public of “persons within the circles that normally deal with the kind of information in question.” This is express recognition that composite information can still be protected as a trade secret, even though aspects of it may be known or can easily be deduced. However, this will only be the case provided the precise configuration and assembly of the information is not already known, or cannot be easily deduced.
The U.S. position is slightly different. It looks to the information’s overall secrecy as a whole, so if certain elements are known, that will not necessarily mean that a secret combination or assembly of bits of information loses its trade secret protection.
- “Proper means”
The USTSA provides that information can be a trade secret provided it is not readily ascertainable by another person through proper means. Guidance for the meaning of “proper means” lies in the express acts that are not “improper means” under 18 U.S.C. §1839 (6)(B), including “reverse engineering, independent derivation, or any other lawful means of acquisition.”
The EUTSD has no equivalent definitional language, but Article 3(1) expressly recognizes that a trade secret is lawfully acquired when it is obtained by independent discovery or creation, or by “observation, study, disassembly or testing of a product or object that has been made available to the public or that is lawfully in the possession of the acquirer of the information who is free from any legally valid duty to limit the acquisition of the trade secret.”
- “Mosaicked secrets”
In reality, many businesses’ trade secrets are composites of information, some new and undisclosed, and some already known in some respects or in other fields.
Article 2(1)(a) EUTSD expressly provides that information can still be a trade secret if “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.”
While the EUTSD gives statutory recognition and protection to such mosaics of information, there is no equivalent protection under the USTSA. This is left to the U.S. common law. As with the English and Irish common law positions, the U.S. will generally recognize the secrecy of unique mosaics of information, even though some components or concepts may be generally known. The U.S. courts will consider the overall secrecy of the trade secret as a whole.
The EU and the U.S. positions are therefore sufficiently similar that it is unlikely in practice that businesses will be faced with different protection regimes on mosaicked secrets on different sides of the Atlantic.
Preserving secrecy - the requirement to take reasonable steps/measures
The second part of this article will consider in more detail the now highly important question of the steps businesses should take to ensure their secrets have been subject to reasonable steps and measures to keep them secret.
In short, the crucial point to note is that if businesses fail to take reasonable steps and measures to keep their information secret, these secrets will lose their protection. Article 2(1)(c) EUTSD makes it a continuing requirement of protection that a trade secret has been “subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret”, and under USTSA §1839 (3)(a) “the owner … has taken reasonable measures to keep such information secret.”
Misappropriating/infringing trade secrets
The EUTSD expressly notes that businesses are increasingly exposed to dishonest practices aimed at misappropriating trade secrets, including theft, unauthorized copying, economic espionage, or a breach of confidentiality obligations. The EUTSD notes that the unlawful acquisition, use or disclosure of a trade secret compromises legitimate trade secret holders’ ability to obtain first-mover returns from their innovation-related efforts.
The EUTSD and the USTSA adopt a consistent approach to infringement of trade secrets (i.e., the unlawful acquisition, use, or disclosure of a trade secret; see box 2).
Both the American and European regimes align on what conduct constitutes an actionable misappropriation – wrongful acquisition, use, or disclosure of trade secrets.
Under the EUTSD, the acquisition of a trade secret without the owner’s consent is unlawful if this is the result of unauthorized access, appropriation, or copying of the trade secret. This is given broader ambit by the provision that if the trade secret can be deduced from (i.e., the further step of working it out from) any such misappropriated materials, that will also be an infringement. Additionally, Article 4(3) makes prima facie unlawful the use or disclosure of a trade secret by a person who:
- acquires the trade secret unlawfully
- is in breach of a confidentiality agreement or any other duty not to disclose the trade secret
- is in breach of a contractual or any other duty to limit the use of the trade secret.
Under 18 U.S.C. §1839 (5)(A) USTSA, the acquisition of a trade secret is unlawful if “the trade secret was acquired by improper means.” Improper means is defined in §1839(6)(A) as “[including] theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.”
The two regimes therefore take a similar approach to the issues of misappropriation by unlawful/improper means. Where they diverge is in the degree of knowledge required by the person who unlawfully acquires the trade secret.
The EUTSD distinguishes between direct and indirect acts of infringement. If a secret is acquired while it is under the lawful control of the trade secret holder, Article 4(2) makes that act unlawful if it is “unauthorised”, or is otherwise “contrary to honest commercial practices.” If the secret is acquired from a third party, the EUTSD requires actual or constructive knowledge for that to be unlawful. Article 4(4) makes acquisition from a third party unlawful “whenever a person, at the time of the acquisition … knew or ought, under the circumstances, to have known that the trade secret had been obtained directly or indirectly from another person who was using or disclosing the trade secret unlawfully” within the meaning of Article 4(3) (i.e., from a person who does not have lawful control of the secret, whether that person be the owner or a licensee).
The USTSA does not distinguish between modes of a secret’s acquisition. It requires actual or constructive knowledge irrespective of whether the secret is acquired directly from the secret’s owner, or indirectly from a third party.
The position of an innocent acquirer of a secret (i.e. one without the requisite degree of knowledge) is therefore different under the two regimes, with the US regime conferring broader protection than the EU. An innocent acquirer of a secret in the U.S. will be protected against liability irrespective of whether the secret came directly from the owner or indirectly via a third party, whereas the innocent acquirer in the EU will not be protected if the secret came directly from the owner (unauthorized access always being unlawful), but only if the secret came indirectly from a third party. This strict liability may of course be mitigated in appropriate cases when a court considers what relief to order, if the court considers that the acquirer was indeed innocent.
Reverse engineering
Importantly, because trade secrets are not a form of exclusive intellectual property right, the EUTSD clarifies that a competitor’s freedom to reverse engineer and engage in parallel innovation must be guaranteed. The US position also expressly permits reverse engineering, independent derivation, or any other lawful means of acquisition (see box); 18 U.S.C. §1839(6)(B).
The EUTSD adopts the position that the independent discovery or creation of the same know-how or information must remain possible (Article 3(1)(a)), and that reverse engineering of a lawfully acquired product is to be treated as a lawful means of acquiring information, except when otherwise contractually agreed. Article 3(1)(b) provides that acquisition of a trade secret shall be considered lawful when the trade secret is obtained by “observation, study, disassembly or testing of a product or object that has been made available to the public or that is lawfully in the possession of the acquirer of the information who is free from any legally valid duty to limit the acquisition of the trade secret.”
The position under the USTSA is straightforward. “Independent means” do not include reverse engineering, independent derivation, or any other lawful means of acquisition; 18 U.S.C. §1839(6)(B).
Jonathan Radcliffe is a partner in the intellectual property, technology, and data group of Reed Smith LLP and is based in London.
Kirsten Rydstrom is a partner in the intellectual property, technology, and data group of Reed Smith LLP and is based in Pittsburgh, Pennsylvania.