TABLE OF CONTENTS

COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT

Executive Summary Sheet............................................................................................................. 6

Introduction.................................................................................................................................. 9

1........... Procedural issues and consultation of interested parties.................................................. 10

1.1........ Procedural issues.......................................................................................................... 10

1.2........ External expertise and consultation of interested parties.................................................. 11

2........... Policy context, problem definition and subsidiarity.......................................................... 12

2.1........ Background and context............................................................................................... 12

2.1.1..... Trade secrets and their importance................................................................................ 12

2.1.2..... The misappropriation of trade secrets............................................................................ 15

2.1.3..... The legal protection against misappropriation of trade secrets: overview......................... 17

2.2........ Problem definition......................................................................................................... 18

2.2.1..... Summary...................................................................................................................... 18

2.2.2..... The regulatory failure: uneven and fragmented legal protection of trade secrets against misappropriation within the Internal Market............................................................................................................. 19

2.2.3..... Problems: sub-optimal incentives for cross-border innovation activities and reduced competitiveness 27

2.2.4..... Wider consequences for the EU economy..................................................................... 34

2.3........ Baseline scenario.......................................................................................................... 38

2.4........ The EU's right to act and justification............................................................................. 40

3........... Objectives.................................................................................................................... 41

4........... Policy options............................................................................................................... 43

5........... Analysis of impacts....................................................................................................... 45

5.1........ Impacts of Option 2...................................................................................................... 46

5.2........ Impacts of Option 3 (and impacts common to Options 3 to 5)....................................... 46

5.3........ Impacts of Option 4...................................................................................................... 56

5.4........ Impacts of Option 5 (criminal law aspects).................................................................... 57

5.5........ Other impacts: environment, fundamental rights and transparency of public administrations 58

5.6........ Summary of impacts and administrative burden.............................................................. 59

6........... Comparing the options.................................................................................................. 59

6.1........ Comparison of the options............................................................................................ 59

6.2........ Coherence of the options with other EU policy areas..................................................... 65

6.3........ Choice of legal instrument............................................................................................. 65

6.4........ Transposition and compliance aspects........................................................................... 67

7........... Monitoring and evaluation............................................................................................. 67

Annexes..................................................................................................................................... 69

Annex 1 – The knowledge and innovation economy in a globalised world: Europe’s role............... 69

A1.1. .... The knowledge and innovation economy in a globalised world....................................... 69

A1.2. .... The importance of knowledge and innovation for Europe............................................... 73

Annex 2 – Results of the public consultation................................................................................. 80

Annex 3 – The specific industry survey........................................................................................ 99

A3.1...... Methodology and replies............................................................................................... 99

A3.2...... Findings of the survey................................................................................................. 101

Annex 4 – Trade secrets and their scope: the relation with business secrets and professional secrecy 107

A4.1...... What are trade secrets?.............................................................................................. 107

A4.2...... “Business secrets”, “professional secrecy” and transparency rules: access to confidential business information held by public authorities.................................................................................................... 112

Annex 5 – Intellectual property rights: the EU Legal framework.................................................. 119

A5.1...... Intellectual Property Rights.......................................................................................... 119

A5.2...... Main differences between trade secret protection and formal intellectual property rights 120

A5.3...... The EU legal framework on Intellectual Property Rights............................................... 122

A5.4...... The EU rules on enforcement of intellectual property rights........................................... 127

A5.5...... The international legal framework for the protection of intellectual property................... 128

Annex 6 – Trade secrets, trade secrets law and innovation......................................................... 129

A6.1...... Introduction................................................................................................................ 129

A6.2...... The appropriation of innovation: the need to protect intellectual property as an incentive to develop innovation 129

A6.3...... Trade secrets as a strategy to appropriate innovation................................................... 130

A6.4...... Trade secrets and intellectual property rights, two different ways of appropriating innovation 132

A6.5...... The protection of trade secrets and social and economic welfare.................................. 139

Annex 7 – The use by and importance of trade secrets for EU companies.................................. 145

A7.1...... The importance and relevance of trade secrets for EU companies................................ 145

A7.2...... The particular case of SMEs and start-ups.................................................................. 148

A7.3...... The importance of trade secrets with regard to different industry sectors....................... 150

Annex 8 – Misappropriation of trade secrets............................................................................. 155

A8.1...... What is misappropriation of trade secrets?.................................................................. 155

A8.2...... Protective measures against the misappropriation of trade secrets................................. 157

A8.3...... Vulnerability to the misappropriation of trade secrets................................................... 158

A8.4...... Threat of misappropriation of trade secrets: typologies................................................. 161

A8.5...... Trade secrets misappropriation trends......................................................................... 162

A8.6...... Misappropriation of trade secrets: selected cases......................................................... 166

A8.7...... Harm caused by the misappropriation of trade secrets................................................. 174

Annex 9 – Legislative framework in EU Member States on the protection of trade secrets against misappropriation 178

A9.1...... Introduction................................................................................................................ 178

A9.2...... Civil/commercial law protection in national law............................................................ 181

A9.3 ..... Criminal law protection in national law......................................................................... 184

A9.4 ..... Weaknesses identified by stakeholders regarding the protection of trade secrets at national level. 185

Annex 10 – The protection of trade secrets in Sweden............................................................... 187

Annex 11 – Legislative framework in third countries on the protection of trade secrets against misappropriation 191

Annex 12 – Legal differences in national law: civil/commercial law.............................................. 195

A12.1.... Scope of protection: the trade secret and the misappropriation..................................... 195

A12.2.... Remedies: injunctions, destruction of goods and compensation for prejudice suffered.... 198

Annex 13 – Imports of goods infringing trade secrets into the EU............................................... 204

Annex 14 – Legal differences in national law: criminal law.......................................................... 206

A14.1.... Offences: conducts considered as crimes..................................................................... 206

A14.2.... Penalties..................................................................................................................... 212

A14.3. Litigation and enforcement............................................................................................. 215

Annex 15 – Legal differences in national law: procedural rules before national courts on the protection of trade secrets during legal proceedings........................................................................................................ 216

Annex 16 – Cross-border civil law litigation within the EU: specific issues related to trade secrets misappropriation 225

A16.1.... The question of the applicable law............................................................................... 226

A16.2.... Cross-border recognition of judgments, in particular as regards injunctions and decisions on damages 228

A16.3.... The link between arbitration and civil law proceedings................................................. 230

A16.6.... Disputes involving defendants from outside the EU....................................................... 232

Annex 17 – Legal basis............................................................................................................. 234

Annex 18 – Subsidiarity analysis................................................................................................ 236

Annex 19 – Detailed policy options selected for examination...................................................... 239

Annex 20 – Discarded policy options........................................................................................ 243

Annex 21 – Impact on Fundamental rights................................................................................. 248

A21.1.... The protection of trade secrets and the Charter on Fundamental Rights of the European Union 248

A21.2.... Impacts of policy options on fundamental rights........................................................... 251

Annex 22 – Policy Option 2: costs............................................................................................ 263

Annex 23 – Choice of legal instrument....................................................................................... 265

Annex 24 – Economic research on the Impact of Trade Secret Legislation on Labour Mobility and Wages 269

Annex 25 – Monitoring and evaluation....................................................................................... 272

Abbreviations........................................................................................................................... 276

References................................................................................................................................ 277

Legislative References............................................................................................................... 290

Executive Summary Sheet

Executive Summary Sheet

Impact assessment on a proposal for a Directive of the European Parliament and of the Council on the protection of undisclosed know-how and business information (trade secrets) against misappropriation.

A. Need for action

Why? What is the problem being addressed?

86% of companies and research institutes participating in a recent survey considered trade secrets as an important tool for business and research bodies in the EU to protect their valuable information. If not protected by formal intellectual property rights (IPR; e.g. patents), such information is only relatively weakly protected by national law against misappropriation by third parties in almost all Member States; in most cases this protection is not even clearly defined. In view of trends such as globalisation, increased outsourcing and use of ICT, the threat of misappropriation of trade secrets is expected to continue to increase in the future. Particularly vulnerable to this threat are SMEs and small research institutions which often can neither afford and effectively defend formal IPR nor inform themselves about trade secrets protection nor risk defending their trade secrets in court in view of the risks and uncertainties involved under current conditions. As a result of the poor legal protection and the increased risk of misappropriation of trade secrets, businesses’ competitive advantages which are based on trade secrets are at risk and incentives for cross-border innovative activities within the EU are sub-optimal (e.g. owners of trade secrets are reluctant to share trade secrets with business partners or in research projects, and even less so in a cross-border context as knowledge about the level and form of protection in other Member States is scarce and expensive to buy from, e.g., law firms).

What is this initiative expected to achieve?

The initiative aims at improving the effectiveness of the legal protection of trade secrets against misappropriation within the Internal Market. It does so by - ensuring adequate and comparable scope and conditions of such legal protection; - providing access to a sufficient and comparable level of redress in cases of misappropriation; - preserving confidentiality of trade secrets during and after litigation; and – deterring third parties more effectively from misappropriating and dishonestly exploiting trade secrets within the EU. Such improved legal protection should enhance the competitiveness of European businesses and research bodies which is based on trade secrets and also improve the conditions/framework for the development and exploitation of innovation and for knowledge transfer within the Internal Market. These incentives should help to improve the EU’s competitiveness in the global knowledge economy.

What is the value added of action at the EU level?

Member States have not taken unilateral actions to address this problem. Even if they would do so, while unilateral action could help to improve the level of protection at national level, it could not be expected to result in a sufficient harmonisation of the relevant national legal frameworks that would allow for a smooth functioning of the Internal Market in terms of enhanced cross-border business and research activities. Such cross-border activity is, however, crucial in particular for companies in smaller Member States which could otherwise not reach a market of sufficient size and specialisation for efficient research and sales once the marketing of the innovation is to be launched.

B. Solutions

What legislative and non-legislative policy options have been considered? Is there a preferred choice or not? Why?

Option 1: status quo (‘do nothing’/Baseline Scenario). Option 2: provide information on and raise awareness of the existing scope of protection of trade secrets, available redress tools at national level and arbitration/mediation procedures. Option 3: Legislative proposal defining the scope of protection of trade secrets against misappropriation by defining trade secrets in accordance with the WTO Agreement on Trade-related Aspects of Intellectual Property Rights and rendering certain acts of acquisition, use and disclosure of trade secrets unlawful. This also includes a general principle requiring Member States to take appropriate and proportionate measures to preserve the confidentiality of trade secrets during and after legal proceedings, while ensuring the conditions for a fair trial. Option 4: Harmonisation of national civil law remedies against misappropriation of trade secrets. This adds to option 3 requirements to establish harmonisation of civil law remedies and rules on the preservation of confidentiality during and after the litigation on misappropriation of trade secrets. This option would include anti-abuse safeguards to ensure that resulting remedies would be proportionate. Option 5: Harmonisation of national civil law and criminal law remedies against the misappropriation of trade secrets. This option consists of option 4 plus a requirement to criminalise certain acts of misappropriation of trade secrets and establishing minimum penalties. Preferred option is 4, as options 1-3 would be unlikely to achieve the objectives to a satisfactory degree while option 5 might go further than needed at this stage. The preferred legal form would be a Directive.

Who supports which option?

Industry stakeholders, in general, support a legal initiative along the lines of the preferred option. Non-industry stakeholders, in their replies to the 2013 Public Consultation, are not favourable to an EU legislative initiative in this field. Stakeholders are generally against option 5.

C. Impacts of the preferred option

What are the benefits of the preferred option (if any, otherwise main ones)?

The proposal would provide trade secrets owners with an EU wide legal framework to stop third parties from exploiting misappropriated trade secrets. This would not only hold vis-à-vis misappropriators from within the EU, but also in cases where a trade secret had been ‘stolen’ in the EU and goods that had been produced with this knowledge were imported into the EU. Trade secret owners could rely on confidentiality during and after proceedings, and thus would be more inclined to seek legal redress against misappropriators. Enhanced protection against misappropriation and higher expectation to recover damages would increase the expected value of innovation or knowledge within the Internal Market. This, in turn, should provide innovators with a strong incentive to increase investments to innovate and to improve their competitiveness. This dynamic impact would hold in particular with regard to cross-border activities within the Internal Market and lead to an improvement of its smooth functioning. Increased (innovative) activity would not only benefit trade secrets owners but in turn the job market, the economy as a whole and consumers, as they would benefit from a larger choice of innovative products and services. Trade secret protection against misappropriation will have positive dynamic economic and social effects as regards the encouragement of innovative activities, more jobs and an increased competitiveness of the EU economy. There will be no direct environmental impacts. Due to the inherent nature of trade secrets hardly any (public) data exists, but extensive surveying and academic research supports this analysis.

What are the costs of the preferred option (if any, otherwise main ones)?

There are no direct costs involved other than the transposition of the proposed Directive into national law.

How will businesses, SMEs and micro-enterprises be affected?

Business and researchers as trade secrets owners would benefit from improved knowledge and certainty of what would be legally considered as trade secrets within the EU. They would also be reassured that they can protect and defend their trade secrets more effectively across the EU. Their (law-abiding) employee, business partners and competitors would also benefit from greater legal clarity. SMEs and micro-enterprises would be among the main beneficiaries of the proposal as the costs to find out about the national rules on trade secrets at home and in other Member States as well as for the enforcement of their rights are currently potentially prohibitive for them. Economic studies highlight that SMEs rely more than large companies on trade secrets for protecting their competitive advantages.

Will there be significant impacts on national budgets and administrations?

No.

Will there be other significant impacts?

No.

D. Follow up

When will the policy be reviewed?

There will be a report on the application of the Directive five years after the transposition deadline and an evaluation eight years after the transposition deadline.

Introduction

It is widely agreed that “knowledge is the currency of the new economy”[1]. Every economic activity, and in particular those relying on innovation[2], requires a certain level of information and know-how. Acquiring, developing and improving information and knowledge requires time and money, and often also talent and creativity. If this investment allows a business[3] to have the potential to do something in an innovative way and to gain competitive advantage in its market, it will seek to optimise that potential, i.e. to “appropriate” the results of the innovation, and eventually to recuperate its investment. Appropriation of innovation may be done in different ways. In some cases a business may try to have its specific knowledge (e.g. inventions) protected by intellectual property rights created by law, which provide it with an exclusive right to use such knowledge: patents, design rights etc. However, it might take a long time before the intellectual property right is granted and, in other cases, recourse to intellectual property rights may not be possible. In these cases or during the ‘waiting period’ the only way for a business to protect its “proprietary” knowledge in view of its exploitation is to keep it secret and to prevent its accidental or unauthorised disclosure to third parties, notably by controlling by whom, when and in which circumstances it can be accessed. If companies or research institutions protect access to their knowledge, and if that knowledge is valuable and not widely known already, this ‘undisclosed know-how and business information’ becomes a ‘trade secret’[4].

Contrary to a patent or other intellectual property rights, a trade secret does not provide its holder with an exclusive right on the knowledge protected. A competitor may discover in parallel the same knowledge and lawfully use it. However, a dishonest competitor may try to acquire the trade secret using dishonest practices (such as, theft, unauthorised copying, breach of confidentiality requirements etc.) with a view to subsequently exploit it. A number of trends (globalisation, outsourcing, longer supply chains, increased use of information and communication technology, etc.) suggest that businesses are increasingly vulnerable and exposed to such “misappropriation”[5] of their trade secrets, from within and outside the Union. The misappropriation of a trade secret compromises the original holder’s ability to obtain the first mover returns from the exploitation of that secret (causing harm to businesses), while the inability or uncertainty to recover the investment in developing innovation undermines the incentive to engage in innovative activity in the first place (causing overall harm to society).

Legal protection of trade secrets mitigates the risks faced by innovative businesses, by providing them with mechanisms of redress against the unlawful appropriation of trade secrets by others. However, while trade secrets are the most used form of protection of innovative knowledge, they are at the same time the least securitised against unlawful appropriation within the EU. Protection offered by national rules against the misappropriation of trade secrets is uneven and uncertain, impairing the ability of businesses to take full advantage of the Internal Market (e.g. legal protection of trade secrets is essential for cross-border collaborative research and open innovation which requires sharing of valuable information by multiple business and research partners). This Impact Assessment analyses if and why the legal protection of trade secrets in the EU is insufficient; what are the consequences of this deficiency and how this problem might be resolved.

This initiative integrates within the wider “Europe 2020” strategy[6], which aims at strengthening knowledge and innovation as drivers of economic growth in the EU. Under the flagship initiative “Innovation Union”[7], the Commission intends to improve the framework conditions for businesses to innovate through, inter alia, the optimisation of intellectual property. In this context, the Commission adopted in May 2011 a comprehensive strategy to revamp the legal framework which governs intellectual property in the Internal Market[8]. That strategy undertook to examine the question of misappropriation of trade secrets. The initiative covered by this Impact Assessment meets that latter undertaking, which was confirmed by the Commission in its 2012 Communication on industrial policy[9].

1. Procedural issues and consultation of interested parties

1.1. Procedural issues

This Impact Assessment was carried out by the Commission services, led by DG Internal Market and Services. It is part of the Commission Work Programme for 2013[10]. An initial Roadmap was published in October 2012[11]. The Impact Assessment work was formally launched in July 2012. The Impact Assessment Steering Group (IASG), comprising of the relevant departments within the Commission[12], met on 4 occasions: 12 September 2012, 30 November 2012, 1 February 2013 and 21 March 2013. The minutes of the last meeting were submitted to the Impact Assessment Board (IAB).

The IAB met on 24 April 2013 and provided a first opinion on the draft Impact Assessment Report on 26 April 2013. Following the IAB meeting and its first opinion, the following changes were made to the Impact Assessment Report: the problem description was improved to better show the differences between national legislation and the resulting fragmentation of the legal protection across the EU; the assessment of impacts was strengthened and the description of the impacts on innovation and labour mobility were reviewed; the effectiveness of the policy options has been more critically assessed and the arguments supporting the choice of legal instrument reinforced; and stakeholders’ views have been presented in a more balanced and complete manner.

A revised version of the Impact Assessment Report was submitted to the IAB on 24 June 2013. The IAB issued a positive opinion on the revised draft Impact Assessment report on 31 July 2013. The main recommendations were (1) to further strengthen the problem definition with further factual evidence and (2) to further strengthen the analysis of the impacts and to better demonstrate the effectiveness of the retained measures. Changes were made to the text to account for that opinion by highlighting the reasons for a lack of quantitative data in this field and further reviewing the text on labour mobility impacts. Given the nature of the subject it was not possible to produce further factual evidence. However, some references to related subjects such as industrial espionage and data theft have been added. For the same reason it was not possible to produce a quantitative assessment of the expected impacts. If no quantitative evidence of the problem is available, it follows naturally that the expected changes cannot be quantified either. The argument that the options could impact the costs of protective measures of the trade secret owners was only mentioned for sake of completeness in the revised report and was not used in the discussion of the impacts and the comparison of options. Therefore, no further changes have been made in this respect.

1.2. External expertise and consultation of interested parties

The Commission services have used external expertise. A first external study[13] (published in January 2012) provided a snapshot of the EU national legal frameworks on the protection of trade secrets against misappropriation. A second external study[14] (published in [June] 2013) completed the analysis of the national legal frameworks and gathered economic evidence on the positive and negative effects of protecting against the misappropriation of trade secrets. An earlier external study in 2009 examined, inter alia, the protection granted by national laws to the transfer of technological know-how and the need for harmonisation in this area[15]. Additional academic literature has been used for this impact assessment (see References).

Interested parties have been consulted throughout the preparation of this Impact Assessment. A public hearing was held on 29 June 2012[16], with the attendance of a wide range of stakeholders. A public consultation (hereinafter the “2013 Public Consultation”), focusing on the possible policy options and their impacts, was carried out between 11 December 2012 and 8 March 2013. 386 replies were received, mostly from individual citizens (152 replies) and businesses (125 replies). The results of this consultation are summarised in Annex 2. The Commission's standards for consultation were respected[17]. Additional targeted consultations were carried out. An industry survey (hereinafter the “2012 Industry Survey”) was undertaken in the context of the second external study[18]. 537 European companies active in 17 sectors replied to it and Small and Medium-Sized Enterprises (SMEs)[19] accounted for 60% of the sample (see Annex 3). Other surveys have also been considered and are cited, where appropriate. The drafting team involved in the preparation of this Impact Assessment Report also met with stakeholders’ representatives. These included industry and non-industry (e.g. trade unions or consumer) representatives as well as academics and national administrations.

In general, interested parties have split views on the problem and possible solutions to it. The majority of businesses, whether in the 2012 Industry Survey or in the 2013 Public Consultation, believe that the legal protection of trade secrets against misappropriation is weak in EU Member States, particularly in a cross-border context. They also think that such uneven legal protection increases their risk when doing business cross-border in those Member States with weaker protection and reduces the incentive to undertake cross-border innovation and research and development (R&D). The majority of businesses would support an EU initiative addressing the protection of trade secrets against misappropriation. On the contrary, many non-industry stakeholders (e.g. citizens and trade unions) replying to the 2013 Public Consultation did not see the need for an EU initiative in this field. Stakeholders’ opinions are highlighted in the different chapters of this Impact Assessment Report.

2. Policy context, problem definition and subsidiarity

2.1. Background and context

2.1.1. Trade secrets and their importance

What are trade secrets?[20] Whenever a business holds information of economic value[21] that is not generally known and treats it as confidential, this business owns[22] a trade secret. Secrecy or, rather, confidentiality is a business’ innovation management tool, covering a diversified range of information, which extends beyond technological knowledge to business-related data (see Box 1). Trade secrets exist irrespective of legislation but they may benefit from legal protection against their misappropriation too (see Section 2.2).

Box 1 - Information and knowledge covered by a trade secret.

A trade secret can consist of technical/scientific information (e.g. an invention or a manufacturing process) or information of a commercial nature (e.g. a customer or client list, new business solutions or marketing strategies). Such information can be of strategic importance for decades (e.g. a recipe, a chemical compound) or more or less ephemeral (the results of a marketing study, the name, price and date of launching of a new product, the price offered in a bidding procedure, etc.).

The competitive advantage(s) provided by trade secrets and their importance for appropriating the results of innovation. Trade secrets often grant their holders a competitive advantage (whether a first mover advantage or of other type) related to the use of the information and know-how (representing the result of R&D investments, creativity and business initiative) covered by such trade secret[23].

In addition, it is undisputed in the economics literature that trade secrets, like formal intellectual property rights (e.g. patents, design rights, copyright etc.) are important means for businesses to appropriate the results of their innovative activities and thus to benefit from first mover competitive advantages. In doing so, there are important differences between trade secrets and intellectual property rights (see Annex 5):

– (1) some of the formal legally recognised intellectual property rights require a formal registration and/or approval process, while trade secrets do not need legislation to exist;

– (2) intellectual property rights grant an exclusive right, and thereby a monopoly on the exploitation, to their holders over an innovation during a limited period of time. In contrast, trade secrets do not provide any exclusive or monopoly rights granted by a State authority on the information protected by secrecy or its use. Third parties may discover through honest means the same information covered by a trade secret. This can be achieved through parallel research or reverse engineering (i.e. discovering how something functions or is being built by analysing a copy produced by someone else). Such third parties are not prevented from innovating and developing their own competitive products, services, devices, recipes or methods, including similar or even identical ones;

– (3) the scope of application of trade secrets is broader as it includes information which is not protectable by intellectual property rights;

– (4) the term of protection is different. For trade secrets it is undetermined and it continues as long as the information can be kept secret. Intellectual property rights have a definite term of protection granted by law;

– (5) Intellectual property rights protection entails application (not for copyright) and monitoring costs to detect infringements. The costs of trade secret protection are essentially internal costs of protective measures (locks, IT security, etc.) and transaction costs (confidentiality agreements etc.).

Intellectual property rights and trade secrets also interact between themselves (trade secrets can be substitutes or complements to intellectual property rights, or the only option, see Annex 5):

– (1) when an innovation is protectable by intellectual property rights, trade secrets can be used as a substitute for such rights[24];

– (2) more frequently, trade secrets complement the protection offered by intellectual property rights, in particular patents: e.g. trade secrets often cover non-protectable know-how such as research in pre-patent stage, know-how collateral to patented inventions[25] and incremental improvements on patented inventions[26];

– (3) finally, trade secrets may include valuable information which cannot be protected by intellectual property rights, but still requires investment to be developed and is important for its competitiveness: e.g. new business solutions or marketing strategies.

This economics literature shows that seeking and obtaining competitive advantages is the underlying motivation for business to invest in and undertake innovative activity. Insufficient innovation appropriation makes it harder for companies to recuperate the investments made and, as a consequence, weakens their incentive and ability to raise new funds for further activity of this type (see Annex 6 for a review of the economic literature).

Trade secrets are important for businesses, in particular SMEs and start-ups, in all sectors. Trade secrets are valuable business assets to companies. In a knowledge and innovation economy, knowledge-based capital and intangible assets account for the largest share of most companies’ assets. In some countries such as Sweden or the United Kingdom investment in knowledge-based capital matches or exceeds investment in physical capital. An estimation made in 2007 expressed that "as much as 75 percent of most organizations' value and sources of revenue (or wealth) creation are in intangible assets, intellectual property and proprietary competitive advantages."[27] Nevertheless, the value of trade secrets in absolute terms is not easy to estimate (largely because of the secrecy involved). In relative terms, a recent study based on US data suggests that: "enterprises in highly knowledge-intensive industries like manufacturing, information services, professional, scientific and technical services, and transportation accrue between 70% and 80% of their information portfolio value from secrets."[28]

Economic research (see Annex 7) confirms that businesses, irrespective of their size, value secrecy as equally important or more important than patents and other forms of intellectual property rights as a way to appropriate and exploit knowledge. A recent research paper[29] indeed shows that only about 10% of important industrial innovations are patented, suggesting that the remaining rely on secrecy or other type of competitive advantage. SMEs and start-ups seem to rely on trade secrets more intensively than larger companies, in particular as substitutes for intellectual property rights[30]. More than 50% of respondents to the 2013 Public Consultation find trade secrets highly important for R&D, exploitation of innovation (that is, turning an invention into a marketable product) and the competitive performance of SMEs[31]. 58% of the respondents (but 99% of the business and research bodies) also consider trade secrets to be an important tool for businesses and research bodies to protect their valuable information.

Trade secrets are important to all EU economic sectors[32], irrespective of their geographical origin, and including non-innovative industries[33]. They are considered particularly important for process innovation[34]. Trade secrets are also particularly important for (and largely used by) the services sector, notably business services (e.g. advertising, marketing, business consulting, financial services) and information society services, where recourse to intellectual property rights is often not possible (see Annex 7). Empirical evidence also suggests that trade secrets are important both to wholesale and retail trade[35].

2.1.2. The misappropriation of trade secrets

Protective measures. Businesses ensure secrecy through different protective measures[36] (see Annex 8): e.g. use of safes/locks, firewalls in computers, confidentiality policies restricting the persons who can have access to the information, contractual protection (e.g. confidentiality or non-compete clauses[37] with employees or licensees)[38] etc. However efficient such measures might be, absolute secrecy can never be ensured: information may still be stolen or accidently disclosed.

Vulnerabilities, typologies and trends. Developments in recent years have made trade secrets increasingly vulnerable to misappropriation:

– (1) the economy is increasingly information-intensive and based on intangible assets and therefore trade secrets have grown in importance (knowledge economy – see Section 2.1.1 and Annex 1);

– (2) the economic playing field is now global (globalisation[39]) as better and faster transportation has shortened time and distance and manufacturing plants and service centres are transferred or set up in distant low cost locations, so trade secrets may be vulnerable across those various locations, while competition is fierce at global scale;

– (3) business models are network-based, as businesses tend to specialize in their core competitive competences and become more reliant on other players: they outsource many of their activities[40], interact with suppliers (establishing longer supply chains) and customers, use external expertise through consultancy, enter into business alliances and joint ventures, etc. Therefore, innovation is now increasingly the result of collaborative efforts and networking (in a recent innovation survey, 87% of respondents believe that their firm would innovate better by partnering than on their own[41]), where expertise and valuable information is shared[42] – thus, trade secrets are exposed to misappropriation by a larger number of players;

– (4) increased mobility of skilled labour, which opens more opportunities for unauthorised disclosure and use of confidential information by former employees in their new placements or as entrepreneurs[43];

– (5) shorter product cycles and associated importance of first-mover advantage[44]; and

– (6) the value and production chain is now heavily dependent on information and communication technology; the digital revolution has also made espionage per se simpler as large quantities of documents or data can easily be downloaded, copied and transmitted in a matter of seconds – physical presence is no longer necessarily required for misappropriation to take place[45].

This heightened risk is confirmed by stakeholders: 38% of the respondents to the 2012 Industry Survey believe that the risk of exposure to trade secrets misappropriation has increased either moderately or significantly in the past ten years[46]. Studies show that just as trade secrets are increasingly more open to espionage attacks from the outside, so they are also more and more threatened by misappropriation from within the company (e.g. employee theft of sensitive information[47]) or from business partners (such as licensees, suppliers/service providers, consultants, joint-venture associates etc.), including from third countries (see Annex 8 for further detail on vulnerabilities, typologies and misappropriation trends). A few cases described in Box 2 illustrate these trends.

Box 2- Selection of cases of misappropriation of trade secrets

15 selected cases are described in Annex 8. Three of them are summarised here.

Third party espionage impacting on R&D. A French tyre manufacturer was testing a (not-yet commercialised) prototype tyre in May 2005 during a rally in Japan. After the competition one of the tyres was stolen from their stand. Following the theft, the misappropriator accessed the secret compound and design (through reverse engineering) and caused serious damage to the company by depriving it of its first-mover advantage on the professional rally market.

Business partner unlawful disclosure, also impacting on R&D. A research partner of a start-up active in a high-technology market (nanotechnology) circulated a sample of a research outcome to a third party in another Member State, without the permission of the start-up. This allowed the third party to obtain valuable information and annulled the start-up’s first-mover advantage. This information was not patentable, so secrecy had been the only means to protect the value of the research.

Insider espionage. A German insider was convicted of economic espionage in 2008 for passing helicopter technology to Russian individuals in exchange for USD 10000.

Collecting data on the total number of cases of trade secrets misappropriation within the EU is a quasi-impossible task. For reputational reasons[48], EU businesses are often reluctant to disclose that they have been the victims of trade secret misappropriation and/or are also reluctant to openly litigate trade secret cases. Even when they do litigate, national judicial statistics do not necessarily identify them as trade secret cases. Even Member States intelligence services recognise that they are "groping in the dark" as regards the cases of economic espionage[49]. However, the existing evidence and the results of the 2012 Industry Survey and the 2013 Public Consultation show that the number of companies affected is high:

20% of the businesses replying to the 2012 Industry Survey reported to have suffered attempts or acts of misappropriation within the EU in the last 10 years[50].

Anecdotal national data also support these findings: e.g. in France, according to economic intelligence official sources, 1000 economic attacks took place in 2010, of which a quarter qualified as trade secret misappropriation[51]; in a survey on security breaches (including trade secrets misappropriation) in the UK[52], the vast majority of respondents reported incidents: 93% of large organisations reported malicious breaches and two-thirds of them had a serious incident; while 76% of small businesses reported a breach and half of these were deemed to be serious.

Harm caused. The misappropriation of trade secrets causes harm both to businesses, as it destroys trade secrets owners’ competitive advantages, and to society at large, as it affects innovation. Arguably the most severe adverse impacts are of a dynamic nature, caused by the sub-optimal incentives to innovate (see Sections 2.2.3 and 2.2.4). For instance, estimations suggest that industrial espionage (part of trade secrets misappropriation) could cost the German economy between € 20 and 50 billion per year; while cyber-attacks, including industrial espionage, could cost USD 34 billion annually to the private sector in the UK, of which more than 40% represents theft of intellectual property and company trade secrets[53]. The harmful effects on society explain the public interest in providing trade secret owners with the right to protect their valuable information against their misappropriation (see next Section).

2.1.3. The legal protection against misappropriation of trade secrets: overview

The importance of the legal protection of trade secrets for their owners to obtain redress in cases of misappropriation. The nature of trade secrets is such that, in cases of their misappropriation, trade secrets owner’s access to rapid and effective injunctive relief against third parties is essential to guarantee that the information protected as a trade secret remains valuable to him and that he can exploit it: e.g. in the event that a misappropriated trade secret was publicly disclosed (i.e. entering the public domain), it would be impossible to revert to the situation prior to the loss of the secrecy, which could have devastating effects on the trade secret owner; thus, the importance of cease and desist orders in protecting trade secrets is evident[54]. In addition, obtaining compensation for any prejudice suffered from the misappropriation of a trade secret is important to ensure that a trade secret remains valuable.

Limited protection offered by contract. Once misappropriation has occurred, enforcing contractual (non-disclosure or non-compete) obligations before courts can be a reaction to a misappropriation committed by an employee or a licensee. However, contractual protection is not available when the trade secret is further transmitted to or was originally misappropriated by a third party.

Extra-contractual legal protection against acts of misappropriation of trade secrets. The limitations of the contractual protection explain why most, but not all, legal frameworks, whether in the EU or in third countries[55], provide for some sort of statutory protection against trade secret misappropriation by third parties. This legal protection is, in principle, an international obligation[56]. For the most part, this type of legal protection aims at preventing the person who misappropriated the trade secret from taking advantage of his dishonest act (e.g. the judge will order him to stop using the trade secret) and/or at compensating the trade secret owner for any prejudice caused. In some cases, trade secrets misappropriation may also be a crime and prosecuted as such. However, criminal law aims at punishing the offender rather than at providing redress to the victim of the misappropriation. The legal protection against the adverse consequences of acts of misappropriation coexists with the businesses’ own protective measures and it is also expected to have a certain deterrent effect. However, the current level of this legal protection within the Member States of the EU presents deficiencies (see Section 2.2).

2.2. Problem definition

2.2.1. Summary

The problem definition is summarised in the problem tree depicted in Figure 1 below.

Figure 1: Problem tree

2.2.2. The regulatory failure: uneven and fragmented legal protection of trade secrets against misappropriation within the Internal Market

The legislative framework in the EU and its Member States. The TRIPS Agreement requires its signatories (i.e. all WTO members) to make fair and equitable civil judicial procedures available to combat dishonest practices that infringe trade secrets, as defined in that Agreement. Pursuant to the TRIPS Agreement courts must have the authority to issue injunctions ordering the termination of the infringement[57], to order the infringer to pay damages to the holder of trade secrets and to order that infringing goods be confiscated or destroyed without any compensation to the infringer (see Annex 9). There is, however, no specific EU law directly[58] dealing with the legal protection of trade secrets against misappropriation. Civil law protection of trade secrets has therefore, to date, been addressed by Member States[59] laws independently. They use different types of legal instruments: a trade secret specific law (Sweden); Intellectual Property Codes (Portugal and Italy); unfair competition laws (several Member States); a few Member States only rely on general tort law (or breach of confidence law for common law Member States) or contract law only. Labour laws of most Member States are partially addressing the issue in so far as they may impose on employees a duty of loyalty towards their employers, including explicitly (or implicitly) the duty not to disclose their employers’ trade secrets[60]. In addition, as illustrated in Figure 2, most Member States also protect trade secrets, at least partially, through their criminal laws: whether sanctioning conduct specifically related to a trade secret misappropriation or by applying general offences (e.g. theft). See Annex 9 for further detail.

Figure 2 – Member States laws protecting trade secrets

Uneven national protection (differences across national laws). These national rules differ significantly, so the legal protection within the Member States is uneven (and arguably insufficient in some cases). These differences are explained in points (i) to (v).

(i) Civil law: uncertain scope of legal protection of trade secrets against misappropriation[61]. Civil law protection is the first defence line against third party misappropriation of trade secrets (see Annex 9). However, the scope of protection (what a trade secret is and when it is misappropriated) differs depending on the Member State. Six Member States have no legislation directly addressing trade secrets misappropriation. The scope of protection is not guaranteed by law but left to the discretion of judges’ interpretation of general principles. Belgium, France, Luxembourg and the Netherlands provide legal protection against the misappropriation of trade secrets indirectly through the (complex to apply) combination of tort law (general liability for non-contractual responsibility) and its judicial interpretation as regards unfair competition. For instance, French civil law protection depends on the courts’ interpretation of Article 1382 of the French civil code, drafted in 1804: “Tout fait quelconque de l’homme, qui cause à autrui un dommage, oblige celui par la faute duquel il est arrivé, à le réparer.”[62] The precise protection offered can only be found by detailed analysis of the jurisprudence, which is itself limited. In the case of Ireland and the United Kingdom (common law countries), no legislation is addressing this issue; legal protection against misappropriation of trade secrets is granted, in certain cases, on the basis of case-law development on the “breach of confidence” doctrine, which has limitations where no duty of confidence exists. The uncertainty associated with litigation in this field is, as a consequence, very high. In addition, Malta exclusively relies on contract law (which does not protect trade secrets against misappropriation by third parties) and in Cyprus there is no civil liability arising from trade secret misappropriation[63].

This situation contrasts with that of the remaining Member States. Their civil law specifically addresses trade secret misappropriation, but to different degrees: Sweden stands out as the only Member State having an Act specifically designed against the misappropriation of trade secrets (see Annex 10); Italy and Portugal have specific provisions on trade secrets misappropriation in their intellectual property codes; and the majority of Member States deal with trade secret misappropriation through unfair competition laws (Austria, Bulgaria, Czech Republic, Germany, Denmark, Estonia, Greece, Spain, Finland, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic and Slovenia). However, out of these nineteen Member States, only ten define trade secrets as subject of protection in their laws[64]. These definitions of trade secrets, despite their common grounds and the TRIPS Agreement, differ significantly in national law. They make use of different eligibility criteria and concepts, thus failing to ensure comparable coverage (Box 3 provides a comparison against the TRIPS Agreement definition and Annex 12 further detail).

Box 3 – Definition of trade secrets – comparison with the main requirements of Article 39(2) of TRIPS Agreement

– (1) Type of protectable information. The TRIPS Agreement does not limit the type of information that can be protected. In principle, any type of information, whether technical or commercial, is potentially capable of being protected as a trade secret. Existing national definitions do not seem to restrict the type of protectable information either, although the expressions used are not necessarily similar and may result in divergent interpretations.

– (2) Secrecy requirement. The TRIPS Agreement requires that the information is not generally known among, or easily accessible to, persons within the circles that normally deal with the kind of information in question. This is a relative secrecy requirement. Several of the national definitions appear to follow the TRIPS Agreement in that regard. However, the Bulgarian, Hungarian, Lithuanian and Swedish definitions may be read as requiring absolute secrecy. It is unclear which criterion is followed by the Slovenian definition.

– (3) Commercial value. The TRIPS Agreement requires that the information has commercial value (because it is secret), in abstracto. The idea behind this criterion is generally addressed by most national definitions (referring to commercial or economic value, or to potential, tangible or intangible). However, in some cases, the eligibility standard used is different (e.g. by reference to the interests of the trade secret owner) and the scope of protection seems different (e.g. based on subjective, rather than objective criteria): the Bulgarian definition requires that the secrecy serves the “interests of the undertakings concerned”, while in Hungary, publication, acquisition or use of a trade secret by an authorised person is prohibited if this violates or imperils “the financial, economic or market interests of the owner of such secret”; the Swedish definition requires “damage to the business proprietor from a competition point of view”. In Slovenia any information, the disclosure of which would clearly cause substantial damage, is protected as a trade secret.

– (4) Reasonable steps to keep the information secret. The TRIPS Agreement requires the person lawfully in control of the trade secret to take reasonable steps to keep the information secret. These reasonable efforts are generally required by national legislations too, although this does not directly result from the Swedish definition. In Slovenia, information is treated as a trade secret as long the company has adopted a written resolution to that effect without any apparent additional requirement.

Concerning the question of when a trade secret is considered to be misappropriated, there are also significant divergences among national laws. An important issue concerns the possibility, for a victim of a trade secret misappropriation, to launch a legal action against a third party who in principle obtained the trade secret in good faith, ignoring the unlawful origin of the information (e.g. a misappropriator may have provided the trade secret in question to a good faith third party under a licence agreement). Such a possibility is particularly important to prevent the further disclosure of a misappropriated trade secret and to avoid the circumvention of the legal protection[65]. In some countries (Austria, Czech Republic, Denmark, Estonia, Finland, Germany, Ireland, Latvia, Lithuania, Portugal), but not in all, injunctions are potentially available against anyone who obtained the misappropriated information, regardless of his bad or good faith[66].

As a result, in a substantial part of the EU, for a trade secret owner, it is unclear and unpredictable what would qualify as a trade secret for legal protection. As outlined by the external study, these legal differences create the risk of inconsistent practices across the EU as to what is protectable as trade secret and under which circumstances[67]. The resulting inconsistent level of protection is confirmed by stakeholders: 38% of respondents to the 2013 Public Consultation are convinced that the scope of protection in the EU Member States is different for objectively similar misappropriation acts.

(ii) Civil law: differences and shortcomings concerning remedies (level of redress not comparable). There is no consistency across Member States as regards the remedies a trade secret owner can seek when bringing before a court a case against the misappropriation of trade secrets by third parties with no contractual relationship with such an owner. The main differences are as follows[68]:

– (1) Cease and desist orders (injunctions). This type of orders is an available remedy in all Member States[69]. However, the possibility to request cease and desist orders against the (mis)use of misappropriated trade secrets by third parties (e.g. to block the commercialisation of “resulting goods”) varies from Member State to Member State and in certain Member States such orders are not available: (a) when trade secrets are protected under unfair competition rules[70], the trade secret owner cannot always sue a person who is not a direct competitor but may still have unlawfully acquired the secret (e.g. with a view to sell it to another third party); (b) solutions diverge across Member States regarding the possibility to obtain a cease and desist order against negligent third parties or third parties who obtained the misappropriated trade secrets in good faith before the trade secret has reached the public domain (see above); and (c) cease and desist orders may be limited in time in certain Member States even if the trade secret has not yet reached the public domain (Belgium, Cyprus, Denmark, Greece, the Netherlands, Poland and Slovenia). Thus, there is no guarantee that third parties using misappropriated trade secrets and the "resulting goods" could be stopped from being placed in the market throughout the EU. This also leads to differences across Member States in being able to stop “resulting goods” originating from third countries[71].

– (2) Corrective measures (see Figure 3). Rules in seven Member States (Bulgaria, Cyprus, Estonia, Greece, Finland, Luxembourg, Malta) do not guarantee to trade secret owners that “resulting goods“ will be destroyed or that the misappropriator will have to destroy or return the documents, files or materials containing or implementing the misappropriated trade secret. The possibility to seize “resulting goods” would not be allowed in Austria, Bulgaria, Cyprus, Germany, Estonia, Finland, Ireland, Luxembourg, Latvia and Romania. The possibility to request the withdrawal of resulting goods from the market would not be possible in Austria, Bulgaria, Cyprus, Germany, Estonia, Finland, Ireland, Luxembourg, Latvia, Slovenia, Slovakia and the United Kingdom (see Annex 12 for details). In any case, this type of measures seems to be rarely awarded by courts[72].

Figure 3 – Differences in corrective measures (source: Baker and McKenzie (2013), p.29).

– (3) Methods for the calculation of damages[73]. Traditional methods in many Member States are inadequate for trade secret cases, as proving the actual prejudice to the victim (e.g. accruing damage, lost profits etc.) or the unjust enrichment of the defendant is often difficult since there is usually no identifiable market value for the intangible assets at stake. This explains the difficulty for trade secrets owners in justifying the damages suffered (and could help explain why compensation obtained is often low). A minority of Member States (Austria, Denmark, Germany, Greece, Hungary, Italy, Netherlands and the United Kingdom) use the abstract calculation of damages (i.e. calculated on the basis of reasonable royalties which could have been due should a licence have existed), which is a recognised criterion to calculate damages when intangible assets, as protected subject matter, may be licenced (cf. Article 13(1)(b) of Directive 2004/48/EC)[74]. Thus, national laws do not guarantee in all circumstances that the trade secret owner be adequately compensated for any prejudice suffered from such misappropriation.

The fact that a third party cannot always be prevented from using a misappropriated trade secret and that no fair compensation is granted for the prejudice suffered are identified by respondents to the 2013 Public Consultation as the most important weaknesses of national laws (see Section A9.4 of Annex 9).

(iii) Civil law: the applicable law to the misappropriation of trade secrets in cross-border cases – why differences in national rules matter in a cross-border context. Beyond insufficient legal protection in some Member States, national differences have a particular impact in the cross-border context. In the case of a cross-border dispute concerning the misappropriation of a trade secret within the Internal Market, EU rules on the applicable (civil) law to the dispute stipulate that such a dispute should normally be governed by the “law of the country in which the damage occurs irrespective of the country in which the event giving rise to the damage occurred and irrespective of the country or countries in which the indirect consequences of that event occur”[75]. As a result, more than one national law could be potentially applicable, at the same time, to a trade secret misappropriation case if damages are caused in more than one Member State. Thus, when engaging in cross-border economic activities, a trade secret owner will be confronted with a different extent (and probably uncertain to him) of civil law protection of his trade secret from that which he is familiar with in his Member State, without being in a position to avoid the application of less protective laws[76] (see an example in Box 4).

Box 4 – Theoretical example on the effect of the applicable law

A company manufactures a product in Member States A and B using a trade secret and this company also sells its product in Member State C (the company does not produce in that Member State because of the perceived lower level of protection of trade secrets against misappropriation in that Member State); the company in question becomes the victim of a trade secret misappropriation by a third party who then exploits the trade secret in country C. While Member States A and B offer a good level of protection, Member State C does not. The applicable law to the dispute concerning the damages in Member State C could be that of Member State C: the law into which the trade secret owner did not have trust[77].

Therefore, given that national rules on the legal protection of trade secrets against misappropriation show important divergences, different cases based on objectively similar facts would not necessarily lead to identical or similar outcomes when the applicable law differs[78]. This fragmentation of the legal protection within the Internal Market weakens the overall protection offered to trade secret owners[79]. When more than one legal system is involved, the protection of a trade secret is ultimately no stronger than the weakest link in the chain[80]: e.g. if a secret has been made public following an unsuccessful court case in a Member State offering relatively narrow protection, the information will no longer be protectable elsewhere within the Internal Market as it will no longer be secret[81]. This means that the goods produced by the misappropriator in that Member State will, thanks to the Internal Market, freely circulate into other Member States. This further results in a poor protection of EU businesses against goods produced in third countries with the use of their stolen trade secrets. Trade secret protection in the Union is ultimately no stronger than the weakest link in the chain[82].

(iv) Civil procedure law: differences and shortcomings in litigation rules[83]. Procedural rules in national law do not always guarantee the preservation of secrecy in legal proceedings related to trade secrets misappropriation: except for a few Member States[84], there are no specific rules protecting secrecy of confidential information during litigation. Thus, trade secrets subject to litigation may end up being disclosed to the other party or to the public (see Box 5), and the trade secret owner could lose his market advantage[85]. This could also lead to the paradoxical result that an alleged misappropriator, who was in fact not in possession of the trade secret before the trial and therefore innocent, would nevertheless get to know the trade secret during the trial and this appropriation would not be an unlawful one, so that he could make full use of the knowledge. The trade secret may also be misused or further disclosed by other persons having access to the hearing or the court documentation. This will have a chilling effect on litigating to seek redress[86].

Box 5 – Risks of disclosure of trade secrets in the course of litigation.

(1) the need to describe the misappropriated trade secret in the application, so that the judge can understand it, could imply that, if the plaintiff does not know exactly the extent of the information misappropriated by the defendant, he could disclose to the defendant (since the application is served to him) more confidential information than actually needed to defend his case;

(2) the general rules on the production of evidence[87] could require the disclosure of information otherwise considered confidential[88];

(3) the inherent publicity of judicial proceedings could also result in the disclosure of trade secrets, in this case to the public: e.g. hearings are often public; judicial decisions may describe in full the misappropriated trade secret when explaining the reasons for the decision; and in some countries other judicial documents (including applications) may be accessed by third parties.

(v) Criminal law protection: different scope of protection and limitations of criminal law. Criminal law protection (see Annex 9) cannot compensate for the described shortcomings in the protection provided by civil rules against the misappropriation of trade secrets within the EU internal market. Firstly, the advantage of criminal law protection is its, a priori, stronger deterrent effect. If penal sanctions were sufficient to deter such activity, and only then would it result in less cases of misappropriation, the need to use civil law to stop the exploitation of misappropriated trade secrets and to obtain damages for the prejudice suffered might be reduced. All the evidence suggests that existing criminal rules in the EU that can be applied in this field (see Annex 14) do not offer anything like the deterrent effect that would be required to meet this condition: (a) only 12 Member States (Austria, Cyprus, the Czech Republic, Denmark, Finland, France, Germany, Greece, Portugal, Romania, Spain and Sweden) provide for an extensive criminal framework specifically devoted to trade secrets violations[89], including against disclosure, misappropriation, use or other infringement; (b) the scope of protection provided by national law varies depending on the aims pursued by the different criminal law provisions which could address trade secret misappropriation (industrial espionage etc.); (c) in four Member States (Bulgaria, Ireland, Malta and the United Kingdom) there are no specific criminal law provisions with respect to trade secret misappropriation (although related offences such as fraud may partially cover such conduct).

Secondly, prosecution in the criminal law area is more difficult than in civil law. On the one hand, given inter alia the higher level of proof required compared to civil law, it is more difficult to build a case under criminal law for claims requesting that third parties stop using misappropriated trade secrets or pay damages for the prejudice caused[90]. On the other hand, the territorial nature of criminal law contrasts with the misappropriation act that typically will increasingly have a cross-border dimension: e.g. in an industrial espionage case affecting a French company, the alleged misappropriator moved from France to the United Kingdom, where no specific criminal law framework for trade secret violations exists, with a view to trying to escape prosecution[91]. Results in this area are not encouraging: by way of example, Germany's Federal Prosecutor General initiated 31 preliminary proceedings on espionage in 2007, resulting in only one arrest and one conviction[92].

Thirdly, in some cases, civil proceedings may be needed anyway: in Austria, Cyprus, Germany and Slovenia, claims for damage compensation are not filed within criminal proceedings and the aggrieved party should separately file a civil lawsuit for recovery of damages suffered as a consequence of the offence[93].

Fragmented overall legal protection. Figure 4 shows the fragmentation of the legal protection of trade secrets against misappropriation within the Internal Market, by comparing Member State laws to several selected important measures that any such legal protection could be expected to offer (i.e. building blocks of a performing legal protection of trade secrets against their misappropriation): the absence or presence of a definition of trade secret in civil law legislation; the availability of injunctive relief against third parties in good faith; the possibility to obtain injunctions not limited in time; the availability of orders on the destruction of resulting goods and on the destruction of the misappropriated information (or its return to the original trade secret holder); the possibility to calculate the damages suffered using a fair royalty fee as criterion; the possibility to ensure that the confidentiality of trade secrets will be preserved during litigation; and the existence of criminal legislation specifically addressing trade secrets misappropriation. As the following figure shows, no single EU Member State would have complete legislation on the protection of trade secrets against misappropriation.

Figure 4 – The fragmentation of the legal protection (selected measures) Source of data: Baker & McKenzie (2013).

Selected measures || AT || BE || BG || CY || CZ || DE || DK || EE || EL || ES || FI || FR || HU || IE || IT || LT || LU || LV || MT || NL || PL || PT || RO || SE || SI || SK || UK

Definition of trade secret in civil law legislation || || || || || || || || || || || || || || || || || || || || || || || || || || ||

Availability of injunctions against third party in good faith || || || || || || || || || || || || || || || || || || || || || || || || || || ||

Injunctions not limited in time || || || || || || || || || || || || || || || || || || || || || || || || || || ||

Availability of orders on destruction of TS/resulting goods || || || || || || || || || || || || || || || || || || || || || || || || || || ||

Calculation of damages based on fair royalty fee || || || || || || || || || || || || || || || || || || || || || || || || || || ||

Performing rules on preservation of secrecy (civil proceedings) || || || || || || || || || || || || || || || || || || || || || || || || || || ||

Sufficient criminal legislation || || || || || || || || || || || || || || || || || || || || || || || || || || ||

N.B. A blank cell means that the measure concerned is not provided for in national legislation

Industry claims that the existing legislative framework within the EU is essentially a “patchwork which of itself represents a major deterrent from taking legal action”[94].

Litigation practice. The varying levels of national legal protection in case of misappropriation of trade secrets appear unattractive to trade secret holders and seem to deter their use of litigation (including in a cross-border environment)[95]. According to the 2012 Industry Survey, companies hardly defend their trade secrets before courts in case of misappropriation within the EU: only 13,6% of the respondents who reported having suffered misappropriation of their trade secrets sought legal remedies before courts located in the EU in all cases, 27% of the respondents did it in some cases only. Reasons for this differ, but: “lack of effective remedies” (cf. point ii above) was identified as a reason by 29% of the respondents and “fear of losing trade secrets in court proceedings” (cf. point iv above) by 14%[96].

2.2.3. Problems: sub-optimal incentives for cross-border innovation activities and reduced competitiveness

The fragmented legal protection of trade secrets within the Internal Market against their misappropriation contributes to the following two problems: (1) sub-optimal incentives for businesses to engage in innovation activities across borders and (2) reduced competitiveness of European businesses because of threats to trade secret-based competitive advantages.

Ideally the Commission services would have wished to provide detailed costings of these problems but this has proven impossible. An extensive literature review (see Annexes 6 and 7) and the external study by Baker & McKenzie (2012) have confirmed that no such data are currently available. This is because holders of trade secrets do not always wish to reveal that they have them and are even less willing to describe the nature and level of investment in securitising those secrets for obvious commercial reasons.

Given this fact, the Commission’s services commissioned the Industry Survey and undertook the Public Consultation to provide a qualitative assessment of the scope and extent of the problem. Anecdotal examples of the problem are also revealed by the case law (see Annex 8) although this is again limited, not least because the current legal fragmentation within the EU gives rise to lengthy and costly procedures that dissuade cross-border litigation (see in particular Case 5 in Annex 8).

Problem (1): Sub-optimal incentives for cross-border innovation activities.

The misappropriation of trade secrets causes adverse dynamic impacts: when trade secrets are under a high risk of misappropriation with ineffective redress against such misappropriation in cross-border scenarios, incentives to undertake the work necessary to discover and create valuable information, including at a cross-border scale, are affected (see also Annex 6). This undermines the very purpose of the protection of trade secrets, as recognised by the economics literature. In the words of Posner: "the purpose of […] according legal protection to secrecy […] is to create an incentive to invest in the creation of information"[97]. Two factors in particular contribute to undermining those incentives: (i) lower expected value of innovation and higher costs for protecting it; and (ii) higher business risk when sharing trade secrets.

(i) Lower expected value of innovation and higher costs for protecting it reduce the innovator’s incentive to innovate and undermine the returns on investment in innovative and R&D activities[98]. Weak legal protection of trade secrets against misappropriation has a number of negative impacts on potential innovators who would want to protect their innovation – partially or exclusively – by treating it as a trade secret. Net profits from innovation are reduced from both sides, due to lower revenues and higher costs.

There is a negative impact on the expected revenue streams: the higher the likelihood that the trade secret will one day be misappropriated[99], without the owner having much hope to recover the damages this might cause to him (because of the fragmented legal protection of trade secrets against misappropriation), the lower the returns he can safely expect. Even a relatively low risk of losing the competitive advantage resulting from the trade secret can turn a potentially profitable investment into one where a net loss could be expected[100]. The risk to the entrepreneur of not being able to profit from one’s own innovations but to see those benefits being exploited by misappropriators would stifle the innovative activities of those who still believe in fair competition and simply encourage profit-seeking businesses to steal and exploit the dwindling innovation of others.

There is also an adverse impact on costs: the weaker and less certain/clear the legal protection, the more each innovator has to invest in his own protective measures[101] and legal search/compliance costs (which are to a large extent non-productive costs). This is exacerbated in cross-border contexts, as shown by the replies of trade secret holders to different surveys illustrated in Box 6[102]. While the level of the adverse impact on costs is not easy to estimate (as it depends on different factors, such as the type of trade secret, size of the company, sector in which the latter operates etc.), it is undisputed from those replies that such costs exist.

Box 6 – Increased costs for protecting knowledge

(1) Increased expenditure on protective measures: 35% of respondents to the 2012 Industry Survey identified “increased expenditure in protection measures” as a direct consequence of acts (or attempts) of misappropriation within the EU (cf. Baker & McKenzie (2013), p. 129). The survey also shows that companies have to adjust to the specific national regimes in their choice of protective measures in different EU Member States: almost a quarter of respondents apply different trade secret protective measures depending on the Member State of location (cf. Baker & McKenzie (2013), p. 127). Similar results were obtained in the 2013 Public Consultation: 54% of the companies responding reported increased expenditure in preventive measures to protect information. Economic research supports this trade-off between legal protection and individual measures[103]. 38% of respondents to the 2013 Public Consultation consider that weak cross-border protection of trade secrets and insufficient knowledge about the legal regime in other EU Member States makes it difficult to optimise protective measures.

(2) Increased transaction costs for the sharing of trade secrets with employees or business partners, in particular technological/innovative know-how. As the trade secret owner has to regard each person to whom he confides a trade secret as a potential misappropriator, he has to take protective measures in each case. Research shows that the transaction costs of the trade secret owner negotiating with each potential misappropriator would be extremely high without a sufficient level of statutory protection[104]. 31% of respondents to the 2013 Public Consultation reported increased costs in adapting licencing models to different national rules. These transaction costs will be greater in the cross-border context because of the uneven level of protection across the EU[105].

(3) Information/compliance costs for businesses with cross-border activities resulting from the uneven national rules (when devising a business plan to protect their trade secrets or in the event of litigation abroad, they need to investigate what law protects what information)[106]. These costs are allegedly higher because of the uncertain scope of protection, which in many cases depends on the interpretation of case-law in the absence of definition of trade secrets in the laws. Research shows, however, that not every entity investigates differences in legislation, either because they suspect that any differences would be immaterial or because the investigatory costs would be too high[107].

(ii) Higher business risk when sharing trade secrets for innovation-related activities affects incentives for collaborative innovation in cross-border scenarios. As noted above, innovation is less often the fruit of individual efforts, but increasingly that of collaborative activity (collaborative research, technology transfer, joint ventures etc.), often across borders (since one has to use the scope of the Internal Market to find the most appropriate partners to be competitive in the global knowledge economy) and between different actors (both private and public bodies)[108]. However, the willingness to share innovation and knowledge within EU networks at cross-border level diminishes as, all other things being equal, such sharing bears a risk of misappropriation which is not efficiently addressed by the legal protection within the EU[109]. According to the 2012 Industry Survey, 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[110]; similarly, 38% of the respondents[111] to the 2013 Public Consultation found that different national rules on the protection of trade secrets against misappropriation result in less incentives to undertake R&D activities in a cross-border context (e.g. with other companies, research entities such as universities or even with their own affiliates located in other Member States)[112]. A recent global innovation survey confirms these findings: 64% of respondents would be reluctant to collaborate with others because of lack of protection of confidentiality or intellectual property; and this factor was identified as the most important barrier to collaboration[113].

Cross-border knowledge spill-overs and technology transfer (i.e. network innovation) would be adversely affected if trade secret owners were dissuaded from collaborating cross-border in innovation-related activities where trade secrets would be shared within the Internal Market[114]. This adverse effect also hinders the efficiency of the development and exploitation of innovation[115] in the EU Internal Market and undermines its smooth functioning[116]. The effect is aggravated by the fact that, as evidence shows[117], the cross-border dimension of innovation-related cooperation enhances its efficiency.

Problem (2): Trade secret-based competitive advantages are at risk (reduced business competitiveness).

As explained above (Section 2.1.1), trade secrets are of particular importance for businesses to secure their lawfully acquired competitive advantages. However, third parties misusing trade secrets gain an unfair competitive advantage by exploiting the (often long-term) investment made by the market innovator to gather, develop or acquire the valuable information in question. They produce/supply competing goods/services using the trade secrets in question (hereinafter "resulting goods/services") – in some cases, the ”resulting goods” may be produced outside the EU and subsequently imported into the EU.

Figure 5 – Consequences arising from attempts and successful acts of trade secrets misappropriation. Source: 2012 Industry Survey.

This will cause harm to the trade secret owner (who is likely to face losses of sales, clients, contracts, image, goodwill and to see the value of his information diminish or even vanish altogether; and who, in extreme cases, might be forced out of business completely), unless he receives sufficient legal protection. Indeed, the results of the 2012 Industry Survey confirm that respondents believe that acts of misappropriation have mostly resulted in loss of sales/clients/contracts (56% of the cases): see Figure 5[118].

The loss of sales, clients, and contracts are reported as significant in a wide variety of industries, including the Chemicals, Pharmaceutical, Computer, Machinery and Equipment manufacturing sectors, for both large and small/medium firms alike. The fragmented legal protection within the EU does not guarantee a comparable scope of protection and level of redress among the EU Member States, thus putting trade-secret based competitive advantages (whether innovation-related or not) at risk and undermining trade secret owners’ competitiveness within the Internal Market[119]. The European chemical industry, which strongly relies on process innovation secured by trade secrets, considers that misappropriation of a trade secret could often entail a turnover reduction of up to 30%[120]. Similarly, a large European company active in the aeronautics sector claimed that 40% of its turnover could be at risk in case of trade secret theft[121].

Again, this risk is higher for SMEs and start-ups: (a) SMEs suffer disproportionately more from low and fragmented levels of legal protection than larger companies. Evidence shows that they rely more on secrecy to protect their innovation (cf. Annex 7). Even when their innovation is patentable, for cost reasons they often prefer not to apply for a patent. So in many cases, trade secret protection will be their only option; and (b) since innovation-related collaboration is dissuaded (cf. problem 1), they will need to rely more on their own innovation capacity, which could create higher market barriers to SMEs' growth and development within the EU. Similarly, the risk is particularly important in the services economy (accruing to 70% of the EU’s GDP) where trade secrets are often the only way to appropriate innovation, since the scope of formal intellectual property rights in the EU does not cover, in the vast majority of cases, innovation in the services field (cf. Annex 7).

Business competitiveness is also affected by the sub-optimal incentives for cross-border innovative activities (problem (1)). The lower expected value of innovation and the higher costs incurred by businesses to protect it logically affect the profitability of trade secret-protected innovation. This is likely to impair businesses’ ability to obtain returns from the initial innovation investment (e.g. either by directly exploiting the innovation or by transferring its results to others in exchange for compensation – i.e. licensing or selling) and also its ability to obtain external financing. A trade secret may have a high value in many cases (e.g. process innovations) and be taken into consideration by banks or private equity firms. For instance, 15% of the respondents to the 2012 Industry Survey expect that better protection of trade secrets against their misappropriation across the EU could result in better conditions for accessing funding and venture capital. For SMEs and start-ups, consequences may be even more critical. If unable to directly exploit their innovation because of the risk, they may be forced to sell it to larger/wealthier companies (perhaps at below market value), which affects the overall level of competition within innovating sectors of the EU economy. Less cross-border cooperation with partners on innovation-related activities contributes to inefficiencies as regards the development and exploitation of innovation: it actually promotes more secrecy (e.g. more in-house-only activities and increased expenditure on protective measures)[122], whether this is efficient or not. It will be inefficient if it prevents the company from focusing on those core functions where it is most competitive and efficiently outsourcing other functions. The inefficient resource allocation to pre-empt the misappropriation of trade secrets contributes to reducing businesses’ competitiveness[123]. Thus, the opportunities offered by the Internal Market in terms of cooperation and specialisation are underused in this regard.

2.2.4. Wider consequences for the EU economy

Adverse impact on economic growth in the Internal Market. Sub-optimal incentives to cross-border innovative activity and reduced business competitiveness are likely to result in less economic activity within the Union in the long run, when such activity depends on the protection of secrecy for its commercial success[124]. Respondents to the 2013 Public Consultation expressed that different (or divergent) national rules on the protection of trade secrets would result in: higher business risks in the Member States with weaker protection (50% of respondents) and reduced cross-border business activity within the EU “as trust in legal protection in other Member States diminishes” (32% of respondents)[125].

This reduced business activity is likely to have stronger impacts on SMEs, in so far as other innovative businesses have fewer incentives to enter into licensing or sub-contracting agreements[126]. For instance, at the June 2012 Conference organised by the Commission, a major French company explained that it largely relied on subcontractors, the majority of which are SMEs. These subcontractors were closely involved in the conception and construction of products and services provided by the company, and were subject to reciprocal obligations of protection of confidential information, from which both sides benefited. The lack of adequate redress against misappropriation of confidential information undermines the value of the commitments between contractors and therefore diminishes the benefits of such cooperation because the companies would prefer to keep some of the information secret and therefore tend to limit the scope of exchange and the overall level of sub-contracting. Furthermore, those businesses having and needing the scale of cross-border activities may find other, more legally certain, third country markets of similar size more attractive for their expansion.

It could be argued that these arguments of less cross-border activity and reduced competitiveness present only a partial view from the perspective of the trade secret owner, as some of his foregone revenues would not be entirely lost to the economy but just ‘moved’ to the company producing and selling the ‘resulting goods or services’ and to the providers of protective measures. This, however, is only true if one assumes that the businesses’ (cross-border innovative or other) activity will take place anyway, but this cannot be taken for granted. If businesses have to expect that their investment in innovation or in the creation of a competitive advantage does not pay off in the end, one cannot actually expect them to undertake such investment in the first place.

From an Internal Market perspective, the use and exploitation of trade secrets in the innovation process to the benefit of growth will be distorted by the fragmented legal protection against the misappropriation of trade secrets in the EU. The European chemical industry, for instance, highlights that: “[…] investors in industry are more willing to invest in countries where they believe that their secrets are adequately protected from misuse or misappropriation […].”[127] As previously stated in the a 2011 Commission Communication, the significant differences in national laws regarding the nature and scope of trade secrets protection, as well as the available means of redress and respective remedies, inevitably result in different levels of protection, so that “some companies are better equipped than others to face the challenge of an information-based economy"[128].

Less jobs and potential contractual restrictions to labour mobility/entrepreneurship. Limited incentives to innovate hinder job creation. This could be detrimental to the sustainability of growth and employment within the EU, particularly for skilled and qualified employees: it has been estimated that between 30000 and 70000 jobs per year would be lost in Germany as a result of foreign espionage[129]. Recent research[130] has demonstrated that innovative companies perform better in creating new jobs across all size classes and are much better in retaining employment during economic downturns[131].

Employees’ mobility (and their ability to become entrepreneurs) may also be affected[132]. In the absence of appropriate trade secret protection, businesses have to rely more on their own protective measures to protect their trade secrets and non-compete/non-disclosure covenants imposed on employees are a key tool[133]. The likelihood increases that such covenants include stricter internal constraints on employees than necessary if there was a respected legal definition of trade secrets. The evidence arising from cross-state comparisons in the United States suggests that welfare enhancing knowledge spill-overs through skilled labour mobility are optimised by a combination of a transparent and proportionate legal protection of IP including against the misappropriation of trade secrets with restrictions on non-compete clauses (see Png (2012) and Ghosh (2009)). Without the former, there is a risk that employers could disproportionately extend the contractual protection to cover information which would normally not qualify as a trade secret (e.g. because known or readily accessible in the circles that “normally” deal with the kind of information in question)[134]. Uncertainty regarding whether using certain information or communicating it to a third party would be regarded as misappropriation of a trade secret makes that information less attractive for future employers and employees themselves[135]. This is likely to further inhibit innovative activity given its positive correlation with job mobility[136].

The fact that there is no hard evidence and that even the number of unreported cases might be relatively small compared to the number of labour contracts in the EU should not be misinterpreted. Firstly, the people concerned are often ‘key enablers’, i.e. people in key positions whose availability is crucial for the viability of projects, in particular when it comes to technology transfer. Secondly, it is this cross-border mobility of researchers, specialists and young professionals that the EU wants to increase, precisely because of their multiplier effects, through various initiatives and programmes.[137]

Reduced competitiveness of the EU. The EU currently suffers from an innovation gap relative to major third countries (such as the US or Japan), in particular as regards innovation in the private sector. This has been recently recognised by the European Commission: “There is a widening gap between the EU and its world competitors, notably due to weaker business R&D investment”[138]. The Commission has pointed at the insufficient attractiveness of the EU's knowledge economy to growth-enhancing capital, compared with other major trading blocks: “[w]eaker framework conditions for business R&D and a fragmented European market for innovation are hampering private R&D investments and affecting the attractiveness of Europe”[139].

The European chemical industry has highlighted that the fragmented legal protection of trade secrets against misappropriation could lead to a “loss of confidence in the entire internal market, lowering investment and innovation and threatening the competitiveness of all European companies”[140]. Moreover, the Commission has identified a low level of cross-border cooperation in R&D in the Union as an important reason for this innovation gap, as many national economies in Europe are too small to support stand-alone R&D at national level[141]. In this context, the EU’s policy goal is to increase investment in R&D (3% GDP target) in order to increase growth. Any inefficiency in the allocation of businesses resources to (cross-border) innovative activity (such as those identified in Section 2.2.3) could, ceteris paribus, contribute to undermining this goal[142].

Any adverse impact on the Union’s competitiveness in the area of innovation weighs heavily on its economic prospects as, given its scarceness in terms of natural resources and relatively high costs of labour, knowledge and knowhow are seen as the factors in which the Union possesses a comparative advantage vis-à-vis the other regions of the world. A quote from the USTR which aptly summarises the chain of the effects of trade secret misappropriation on the U.S. therefore applies equally to the EU: “If a company’s trade secrets are stolen, its past investments in research and development, and its future profits, may be lost. Moreover, trade secret theft threatens national security and the U.S. economy, diminishes U.S. prospects around the globe, and puts American jobs at risk.”[143]

Fewer (innovative) products and services and potentially higher prices. Although misappropriators might sell their resulting goods cheaper than the original trade secret owner in the short term, they might exploit their market power in the same way as the owner did, once he has been forced out of the market. But what is more, it cannot be expected that misappropriators would replace the innovator as well in the development of new products in the future. However, if this does not happen, and if the innovator does not continue its innovative activities beca