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# 52013SC0471

**COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document 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 their unlawful acquisition, use and disclosure /\* SWD/2013/0471 final \*/**

  

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 because of low prospects to market them successfully in the face of
misappropriation, then the overall level of innovation will be reduced, leading
to less/inferior choice for consumers and potentially higher prices of goods
and services.

Stakeholders’ perception. Respondents to the 2013 Public Consultation do not have a uniform
view on whether divergent national protection of trade secretes against
misappropriation has an impact when carrying out business across Member States
(question I.7): 62,5% of the respondents identified at least one negative
impact resulting from different national laws on the protection of trade
secrets against misappropriation, whereas 34% do not see any negative impact.
This latter perception comes essentially from non-industry stakeholders (67% of
the responding citizens believed that there are no impacts; while less than 10%
of the responding companies shared that view). It appears from other responses
to the 2013 Public Consultation that the vast majority of responding citizens
do not attach economic importance to trade secrets and would not share the view
that they are important for innovation. Several of them also expressed negative
views about the role of intellectual property generally (intellectual property
is seen by certain sectors of civil society as imposing unnecessary or unacceptable
limitations on their freedom and fundamental rights) which could explain their
negative views on trade secrets and their fear that this initiative on trade
secrets could lead to the creation of a new sui generis intellectual
property right. This impact assessment will try to address those civil society
concerns, in particular: (a) this initiative is not about creating a new
intellectual property right, as explained below in Section 4 on policy options
(e.g. independent research and reverse engineering remain possible); and (b)
this initiative will not limit fundamental rights, as explained below in
Sections 5 and 6 on impacts and Annex 21 on fundamental rights).

2.3.        Baseline
scenario

In a knowledge economy, the amount of
valuable proprietary information and the value of businesses intangible assets
increase continuously[144].
However, not every innovation or knowledge can be patented, nor are patents an
efficient form of protection in all cases[145].
With the lowering of entry barriers for manufacturing that globalisation,
technology and outsourcing have brought, trade secrets appear to protect most
of the knowledge from which businesses derive competitive advantages. About
half of the respondents to a recent innovation global survey believe that the
development of new business models (which are typically protected as trade
secrets) would contribute more to their businesses’ performance in the future[146]. According to this
survey, business leaders recognise that growth strategies rooted in linear
thinking (first creating a product and then continuing to advance it) will, on
their own, be insufficient to achieve long-term goals in a complex, globalised
world[147].
This implies that the importance and value of information protected as trade
secrets are likely to increase in the future. At the same time, important
factors influencing the misappropriation of trade secrets (e.g. globalisation,
increased outsourcing and longer supply chains, increasing reliance on
information and communication technology, etc. – see Section 2.1.2) are
not likely to diminish in relevance. As a result, misappropriation trends are
unlikely to decrease per se. On the contrary, they are expected to
increase. According to a representative telephone survey of 400 German managers
by the consultancy Ernst & Young in July 2013, while considering the
current threat level to be relatively low, three quarters of the managers expected
the threat of industrial espionage and data theft to increase for their company
in the future. For the economy as a whole even 9 out of 10 expect such an
increase.[148]
According to recent counterintelligence research in the US, “[e]merging
trends indicate that the pace of economic espionage and trade secret theft
against U.S. corporations is accelerating”[149]. And the 2013 Special
301 Report of the USTR also “reflects increased emphasis on the need to protect
trade secrets”.[150]
In a recent global innovation survey, 41% of respondents identified “protecting
trade secrets” as the most pressing need when asked about the main
priorities their country should focus on to efficiently support innovation[151].

In the absence of an EU initiative, it is
predicted that no voluntary convergence of national civil rules will take place
within the EU[152]
and that the level of civil protection against the misappropriation of trade
secrets is unlikely to be improved systematically at national level[153]. This is evident from
how the adoption of the TRIPS Agreement in 1995 has not led to any particular
convergence in the EU Member States’ approaches to the civil law protection of
trade secrets against misappropriation. Only Sweden enacted legislation
specifically addressed at trade secret protection (but it did it before the
TRIPS Agreement was adopted) while most of the other Member States simply rely
on their general tort or unfair competition law. This fragmentation effect
described in Section 2.2 is therefore likely to continue. Given the
increased importance of trade secrets, it is expected that major trading
partners with a high level of protection against misappropriation of trade
secrets will advocate for harmonised legal protection against trade secrets
misappropriation within the EU in the context of the negotiations of future
bilateral trade agreements[154].
However, considering the TRIPS Agreement experience, it is not likely that
future bilateral trade agreements could result in sufficient national
convergence without EU intervention. Convergence in criminal law (not required
by the TRIPS Agreement) seems to be even less likely.

Some argue that contractual protection (confidentiality
and/or non-compete clauses) “may act to negate any differences between
Member States laws” in this area[155].
However, contractual protection cannot address the misappropriation of a trade
secret by a third party not contractually bound to the trade secret owner.
Physical protective measures have limitations as well, as they only make
misappropriation more difficult, but once a trade secret has been
misappropriated, they do not help to stop the exploitation/misuse of the trade
secret by the misappropriator. Existing intellectual property rights can only
provide protection to valuable innovative information when such information
comes into the (restricted) scope of protection of those rights[156].

Therefore, in the absence of EU action, the
adverse consequences resulting from the misappropriation of trade secrets will
remain insufficiently and unevenly addressed by the legal means made available
to owners of trade secrets for their defence by EU Member States. In addition,
the deterrent effect of existing national rules protecting against
misappropriation of trade secrets will continue to be low. The detected
problems as well as their consequences (see Section 2.2) will therefore
remain or, probably, increase over time.

2.4.        The
EU's right to act and justification

Legal basis (see Annex 17 for a more detailed analysis). Article 114 of
the Treaty on the Functioning of the European Union (TFEU) allows for the
adoption of EU rules harmonising national legislation, provided that they are
necessary for the smooth functioning of the Internal Market. The need to establish
a sufficient and comparable level of redress across the Internal Market in case
of trade secret misappropriation (while providing sufficient safeguards to
prevent abusive behaviour) is at the core of the policy intervention, as far as
civil law is concerned. The national rules described above provide for an
uneven level of protection across the EU of trade secrets against
misappropriation. They thus lower the incentives to undertake any innovative-related
cross-border activity (e.g. establishment in a different Member State,
supplying goods/services to a company in another Member State etc.) which would
depend on the use of information protected as a trade secret[157]. They also render
cross-border networking in R&D and innovation less attractive and create a
higher business risk in Member States with lower levels of protection, with
adverse effects on the whole of the EU economy as “resulting goods” may spread
across the Internal Market. Any rules on criminal offences and sanctions
(Policy Option 5) would require a different legal basis (Article 83(2) TFEU),
and a separate legal instrument.

Subsidiarity (see Annex 18 for a more detailed analysis). According
to the principle of subsidiarity laid down in Article 5(3) of the Treaty on
European Union (TEU), action on the EU level should be taken only when the aims
envisaged cannot be achieved sufficiently by Member States alone and can
therefore, by reason of the scale or effects of the proposed action, be better
achieved by the EU. The problem addressed in this Impact Assessment relates to
fragmented legal protection of trade secrets across the EU. The objectives of
the initiative to address these problems (see Section 3) cannot be
achieved by Member States alone. This is shown by the continuing uncoordinated
national legal approaches in this field (see Figure 2, above). In
addition, national responses are necessarily limited in their geographical
scope and cannot be compared with or substitute for a co-ordinated or
systematic response on the EU level. EU action is particularly needed to
establish a legal framework which could protect and so enhance the cross-border
flow of innovation-related trade secrets among research and business partners
by ensuring that the benefits of any misappropriation of such information are
minimised if not completely eliminated. This flow of information is paramount
for the exploitation of innovation in the EU and for R&D (see Annex 1).
Thus, the inconsistencies between the different national regimes hinder the
functioning of the Internal Market.

An EU action providing for civil law
redress measures would fulfil the necessity test in this regard. At the same
time, such EU action would not establish any specific sui generis monopoly/exclusive
right on secret information but would be limited to provide legal redress to
holders of trade secrets when those trade secrets are misappropriated by third
parties.

In terms of stakeholders’ perception,
52% of the respondents to the 2013 Public Consultation support EU action on the
legal protection against the misappropriation of trade secrets. Box 7
shows the extent of such support within each specific category of stakeholders.
Support is higher for measures based on civil law compared to criminal law (see
Section 6 below).

Box 7 – Stakeholders’ views on an EU initiative, 2013 Public Consultation.

Respondent profile || No. of respondents || EU should act || No EU action required || No opinion or no answer

All respondents || 386 || 52% || 41% || 5%

Citizens || 152 || 19% || 75% || 6%

Companies (including SMEs) || 125 || 80% || 12% || 6%

SMEs || 59 || 66% || 22% || 11%

Professionals || 35 || 48% || 40% || 11%

Business associations || 34 || 94% || 6% || 0%

Research entities || 19 || 57% || 31% || 10%

Trade unions || 4 || 25% || 75% || 0%

In terms of added value, harmonising
the legal protection of trade secret against misappropriation, at least in
civil and commercial law, across the EU would bring positive effects for trade
secret owners. This notably includes a comparable level of legal protection
ensured throughout the Union resulting in overall better protection of trade
secrets (expected by 77% of the companies which replied to the 2013 Public
Consultation) and easier cross border litigation (expected by 54% of the
companies which replied to the 2013 Public Consultation), or a reduction of
cost of protective measures for about a quarter of EU companies (expected by
26% of the companies which replied to the 2013 Public Consultation) (see Sections
5 and 6 below for a more detailed assessment of impacts). Such
harmonisation efforts are in general better achieved by EU action than by
Member States action. Similar lessons come from third countries with a federal
structure have federal legislation addressing trade secrets or are currently
considering doing so (see Annex 18). There could be additional added
value in harmonising this area at EU level from an international viewpoint: (a)
to provide for a coherent implementation of the EU’s international obligations,
i.e. TRIPS and (b) to influence (by example), in the context of trade
negotiations, legislative developments in third countries having currently a
low level of protection of trade secrets to the detriment of EU companies
active there. The lack of harmonisation in the field of trade secrets contrasts
with the field of intellectual property rights that have largely been regulated
at EU level (see Annex 5), including most recently the unitary EU
patent. As confidential know-how is often associated to patents and involved in
patent infringement litigation, harmonised EU law regarding trade secrets would
simplify future unitary EU patent-related litigation when the dispute would
also involve a claim on misappropriation of trade secrets.

3.           Objectives

Objectives ||

General objective || Ensure that the competitiveness of European businesses and research bodies which is based on undisclosed know-how and business information (trade secrets) is adequately protected and improve the conditions/framework for the development and exploitation of innovation and for knowledge transfer within the Internal Market.

Specific objective || Improve the effectiveness of the legal protection of trade secrets against misappropriation within the Internal Market.

Operational objectives || A) ensure adequate and comparable scope of such legal protection across the Internal Market; B) provide access to a sufficient and comparable level of redress in cases of misappropriation across the Internal Market; C) preserve the confidentiality of trade secrets during and after litigation within the EU;

|| D) increase deterrence of third parties from misappropriating and dishonestly exploiting trade secrets within the EU.

Consistency with EU policy. These objectives are consistent with
existing EU policy on innovation and industrial policy, intellectual
property, competition and fundamental rights.

(i) Innovation and industrial policy: improved legal protection of trade secrets in the Internal Market
should create better conditions for knowledge transfer among innovators and
reduce incentives for misappropriators’ use of the free movement principles of
the Internal Market as a means to maximise profits from misappropriation. The
promotion of knowledge transfer throughout the Union has been identified by the
Europe 2020 growth strategy as an important tool for strengthening research
performance (European Commission (March 2010)). Facilitating knowledge
transfer, including confidential know-how, and improving the framework
conditions for business to innovate are also at the heart of the EU policy as
reflected in the Commission's communications on Innovation Union (European
Commission (October 2010)), on the European Research Area (European Commission
(July 2012a)) and on Industrial Policy (European Commission (October 2012)).
These objectives also address the need to facilitate innovation by SMEs and
start-ups.

(ii) Intellectual property in the
Internal Market: putting in place a seamless,
integrated Single Market for intellectual property to stimulate growth and
employment is the aim of EU policy, as outlined in the 2011 Commission
Communication (European Commission (May 2011a)). While trade secrets are not
intellectual property rights as such, they complement or substitute for such
rights.

(iii) Competition: facilitating legal action in cases of misappropriation of trade
secrets does not restrict the possibility for antitrust authorities to act in
cases where: (a) horizontal anti-competitive restrictions are set up by
economic actors when trying to protect their trade secrets[158]; or (b) a dominant
firm abuses its dominant position by refusing to deal[159] or by carrying out
abusive litigation to exclude competitors[160].

(iv) Fundamental rights: the objectives fully respect the fundamental rights of the Charter
of Fundamental Rights of the European Union, notably the right to access to
justice or the right to privacy and secrecy of communications (see Annex 21).
The protection of trade secrets has been recognised as a general principle of
law by the European Court of Justice[161].

Consistency with international
commitments. The objectives are also consistent
with international commitments of the Union and its Member States, in
particular Article 39 of the TRIPS Agreement which requires its signatories to
protect trade secrets (called undisclosed information in that Agreement)
against misappropriation[162].
Under Article 41 of the same Agreement, signatories are called to ensure
effective action against any infringement of the intellectual property rights
recognised in the Agreement (trade secrets are part of that category for the
purpose of the Agreement)[163].

4.           Policy
options

Policy options. The following table presents a summary description of the policy
options retained for further examination (see Annex 19 for a more
detailed description).

Policy option 1 || Status quo: do nothing option (see Baseline Scenario in Section 2.3).

Policy option 2 || Provide information on and raise awareness of the existing scope of protection of trade secrets and available redress tools in case of misappropriation of trade secrets. This option consists of (a) preparing fact sheets including appropriate information on the scope of legal protection (what can be protected as trade secrets; when trade secrets are misappropriated, etc.); measures, procedures and remedies available against trade secret misappropriation in each Member State; and on the availability of arbitration/mediation procedures. The fact sheets would be made available on a website, which could be that of the EU IPR helpdesk[164] and/or the European Judicial Network[165]. As a by-product, this option could also provide information on protective measures, including contractual clauses[166]; (b) making stakeholders aware of the measures, procedures and remedies currently available at national level to obtain relief in cases of the misappropriation of trade secrets or to help preventing misappropriation occurring (specific campaigns at EU and/or national level); and (c) promoting the use of arbitration/mediation procedures to solve disputes.

Policy option 3 || Harmonisation of laws regarding the unlawfulness of acts of misappropriation of trade secrets. This option consists in defining the scope of protection of trade secrets against their misappropriation by: (a) defining trade secrets (i.e. information which is not generally known or readily accessible to persons within the circles that normally deal with the kind of information in question, has commercial value and has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret); and (b) establishing that certain acts of acquisition, use and disclosure of trade secrets are unlawful (i.e. the willing or negligent unlawful acquisition of the trade secret by theft, bribery, misrepresentation, breach or inducement to breach a duty to maintain secrecy, industrial espionage, and other unlawful practices; as well as the disclosure or misuse of a trade secret by a person without the consent of the trade secret holder, when such person was under a duty not to disclose it or misuse it or when that person obtained knowledge of the trade secret following an act of unlawful acquisition) in a way that is consistent with the TRIPS Agreement. Under this option, Member States would also be called to ensure that their national rules provide for measures, procedures and remedies, available to trade secret holders, in case of misappropriation; including measures to preserve the confidentiality of trade secrets during and after the legal proceedings. The detailed implementation of those measures, procedures and remedies would, however, be left to Member State, subject to a general requirement on Member States to ensure they are fair, equitable and proportionate, and are applied in such a manner as to avoid the creation of barriers to legitimate trade and to provide for safeguards against their abuse.

Policy option 4 || Harmonisation of national civil law remedies against misappropriation of trade secrets. Firstly, this option integrates Option 3 as regards the scope of protection of trade secrets against misappropriation. Secondly, Member States would be required to establish principles-based minimum harmonisation rules on civil law remedies allowing to obtain relief in case of misappropriation of trade secrets. These rules would in particular address the availability of (a) provisional and definitive injunctive relief; (b) prohibition of imports of “resulting goods” from third countries; (c) corrective measures (i.e. destruction of goods violating the misappropriated trade secrets, delivery up of copies of documents containing the trade secret etc); and (d) rules on the calculation of damages for the compensation of the prejudice suffered from the misappropriation of trade secrets (i.e. allowing the judicial authority to calculate damages on the basis of a fictitious royalty fee, similarly to Article 13 of Directive 2004/48/EC). Thirdly, Member States would be required to establish minimum harmonisation rules on the preservation of confidentiality during and after the litigation on misappropriation of trade secrets, while ensuring the conditions for a fair trial. In particular, the rules would address:  the protection of trade secrets included in any document (i.e. evidence) submitted during the judicial proceedings; the carrying out of in-camera hearings to the exclusion of the general public; a confidentiality obligation for the parties and persons involved and other persons assisting or participating in the proceedings; and the preparation of non-confidential versions of relevant documents and judicial decisions. Fourthly, Member States would be required to establish specific safeguards to ensure a proportionate application of the law by judicial authorities, by balancing different interests at stake, when deciding on the granting of these measures and remedies. Fifthly, the general anti-abuse clause in Option 3 would be complemented by a requirement to sanction manifestly abusive behaviour during litigation.

Policy option 5 || Harmonisation of national civil law and criminal law remedies against the misappropriation of trade secrets. This option builds on Option 4 and adds a requirement for Member States to criminalise certain acts of misappropriation of trade secrets (i.e. unauthorised use or disclosure of trade secrets and business/industrial espionage and to establish an effective penalty framework for those offences (i.e. maximum penalties to be set at least at 2 and 4 years imprisonment respectively).

Legislative or non-legislative
character of options. Option 2 is a
non-legislative option (e.g. a Commission Communication). Options 3, 4 and 5 are
in principle legislative options: Options 3 and 4 would require the adoption of
a single legal instrument; and Option 5 would require the adoption of two legal
instruments (one for the civil law rules and another one for the criminal
rules). However, it could also be conceivable to employ a non-legislative
solution (e.g. a recommendation to Member States) for Options 3, 4 and 5. Section 6
addresses the choice of legal instrument(s) and the underlying reasons.

Discarded policy options. Other policy options have also been
considered: uniform EU rules (i.e. maximum harmonisation) on civil law remedies
against misappropriation of trade secrets; regulation of protective measures
which trade secret holders would be required to adopt to protect their trade
secrets against possible misappropriation; uniform rules applicable to
non-compete clauses and/or to non-disclosure clauses between the trade secret
holder and its employees and/or business partners who have access to trade
secrets[167];
extension of the scope of existing intellectual property rights and/or creation
of sui generis intellectual property rights[168]; and extension of the
scope of the Regulation on customs enforcement of intellectual property rights
to include trade secrets misappropriation. However, these options have not been
retained for further examination, mostly for lack of effectiveness or
proportionality (see Box 8 for one of these discarded options and Annex
20 for further explanations on the reasons for excluding those options).

Box 8 - Possible extension
of the scope of existing intellectual property rights and/or creation of sui
generis intellectual property rights to protect trade secrets as subject
matter.

This possible option has
not been retained for further examination for the following reasons.

(1) There is little (if
any) justification supporting the need for creation of additional monopoly
rights. The extension of the scope of existing intellectual property rights or
a sui generis intellectual property right on trade secrets could hardly
cover the whole spectrum of valuable information currently protected by secrecy[169]; therefore
this option would result in over protection for some trade secrets and under
protection for others[170].

(2) A monopoly right
would not allow for distinguishing between the misappropriation of information
and the mere acquisition of knowledge (e.g. by reverse engineering or by
parallel discovery).

Proportionality. Under the principle of proportionality (Article 5(4) TEU), the
content and the form of EU action shall not exceed what is necessary to achieve
the objectives of the Treaties. The initiative under consideration is
proportionate to the problems detected and the objectives set. It takes into
account that this is not a ‘greenfield area’ and that there is
national legislation in place. The policy options retained for further
examination constitute a proportionate range of possible EU action: from an
informative action to a harmonisation of rules in the civil and criminal law
areas. At the same time, they do not go beyond what is necessary to achieve the
objectives. While they would facilitate the legal redress across the EU against
acts of misappropriation of trade secrets, thus trying to ensure that
wrongdoers will not benefit from the misappropriation,[171], these options do
not create any exclusive or monopoly right for the benefit of the trade secret
holder. Innovation through parallel invention and reverse engineering remains
possible and competition is therefore not impaired. The proportionality of preferred
option(s) will be analysed further below while evaluating their respective
impacts.

5.           Analysis
of impacts

This section analyses the main impacts of
the options presented above[172].
For Option 1 (status quo), see the ‘baseline scenario’ (Section
2.3) and Section 2.2.4 of the problem definition. In contrast to Option
2, Options 3 to 5 would normally require legislative changes at
national level and the following analysis assumes that this would be the case
(either following the enactment of EU rules or because of the voluntary
implementation of a Commission Recommendation; see below Section 6.3 on
the choice of legal instrument).

5.1.        Impacts
of Option 2

Member States’ legal frameworks. An information and awareness action would have no direct impact on
the different national laws currently in place. Some Member States might,
however, react with amendments of their laws to the provision of information.

Trade secrets owners. In any event, knowing about one’s rights is obviously a necessary
precondition to ensure that they are properly enforced. Option 2 would therefore
lead to a certain improvement in the situation for trade secrets owners, in
particular SMEs, compared to the status quo, as they would be better
informed about the scope and extent of protection of trade secrets against
misappropriation and redress procedures available to trade secret owners. This would not only hold for their home country but also for other
Member States thereby reducing the costs and risks involved in expanding
business across borders. Even if the legal protection would not improve, better
knowledge about it should allow trade secret owners to
take better informed decisions and they could become more open to engage in
cross-border activities involving trade secrets[173].

Innovation, Internal Market and
Competition. Since this option does not result
in a reduction of the risk associated with the cross-border sharing and
exploitation of trade secrets, it is unlikely to have direct impacts on innovation
compared to the status quo. However, as information about the legal
protection of trade secrets in Member States would be easier accessible, the
(cost) barrier and uncertainty for trade secret owners to engage in
cross-border innovation activities should be reduced, which could lead to a
slight increase in the level and quality of innovative activity in the Union. For
the same reason, Option 2 might also have a slight positive impact on the Internal
Market. It cannot be expected that this option will have a significant
impact on competition compared to the baseline scenario; and it would
not lead to material changes of the status quo regarding economic
growth within the Union.

Social impacts and consumers. Option 2 is unlikely to have direct social impacts (employment
levels, income) at macro level. An information and awareness action on the
existing laws of Member States protecting trade secrets would not directly
impact the mobility of employees of trade secret owners either. Any
litigation regarding non-compete or non-disclosure covenants would be governed
by the law of contractual relationships and not by other laws. Indirectly,
employees who are better informed about whether the use of particular knowledge
could result in a misappropriation of a trade secret could be influenced in any
decision to change employer within the Internal Market or to set up their own
business. However, it is not likely that better information on its own will
result in relevant increases in job mobility. Option 2 could result in
increased transparency for wider civil society. The low level of
additional innovative activity resulting from this option is not likely to
provide consumers with significantly more choice of innovative products
and services.

Third countries. Option 2 is not expected to have direct impacts on third countries.

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

Options 4 and 5 comprise all elements of
Option 3. Thus, the impacts of Option 3 would also be triggered by Options 4
and 5. The main differences would lie in the strength and likelihood of these
impacts to materialise. This will be discussed in the respective sections
below.

Member States’ legal frameworks Option 3 would lead to a harmonisation of what information qualifies
as a trade secret and of the scope of protection it enjoys (in civil law)
across Member States[174].
Therefore, it would have an important impact on Member States’ legal frameworks
(civil law only), as Member States will need to either align their existing
definitions of trade secrets (ten Member States) or to adopt such definition
from scratch. The definition of a trade secret in Option 3 will match that of
the TRIPS Agreement and not be narrower than existing national definitions (see
Section 2.2.2). Therefore, this option will not result in a narrower
protection of trade secrets than that provided in the national laws.

In this context, 35% of the respondents to
the 2013 Public Consultation invoked the risk of EU rules endangering the
current balance between labour, civil and criminal law at national level. This
is a particular feature underlined by three responding Swedish Trade Unions,
which fear the interference of EU rules with collective agreements between
companies and trade unions. The Swedish Government[175] seems to sustain a
similar view. However, based on further discussion of the issue, this concern
seems to be unjustified as far as the impact of the convergence of the civil
law rules is concerned. Options 3 to 5 (civil law aspects) will not have any
direct impact on contractual freedom and contract law: contractual relations,
whether among companies or between companies and their employees, will remain
untouched. These options are also neutral with regard to labour law: they will
neither require Member States to establish in their (labour) law a confidence
duty on employees nor prohibit Member States from doing so. The convergence is
neutral in this respect.

Trade secret owners. Harmonised rules of Option 3 will
provide greater legal certainty at the EU level in respect of the scope of
protection of trade secrets[176].
The future role of the European Court of Justice in providing uniform
interpretation of the EU rules will greatly contribute to this (in the US, this
is the main argument being made to enact civil law protection at federal level)[177]. Over time, relevant
case law would build up for a better interpretation of the envisaged EU rules
in specific situations[178].
Two main consequences follow, bringing positive impacts on trade secret owners
(Figure 6 schematically illustrates these impacts, which would be
common to Options 3 to 5).

Figure 6 – Common
impacts on trade secrets owners of options 3 to 5.

Firstly, businesses’ competitiveness within
the EU would be reinforced.

–
(i) A comparable legal framework to stop third
parties from using/exploiting the misappropriated trade secrets within the EU
should result in better cross-border protection of the competitive advantages
that trade secret holders derive from their trade secrets. Trade secret holders
seem to be convinced of the increased protection that EU law could bring: 77%
of the companies that replied to the 2013 Public Consultation believe that
better protection against the misappropriation of trade secrets would result
from EU rules[179]
and 54% believe that litigation in other Member States would improve[180]. The
expected deterrent effect of the rules is also an important element of the
protection. Businesses see the increased deterrent effect as the most important
positive factor arising from EU rules in this area: 49% of the positive replies
in the 2012 Industry Survey[181],
see Figure 7.

–
(ii) In addition, thanks to the convergence of
national laws on the legal protection against third party misappropriation,
trade secret owners would be in a better position to protect their trade
secrets in the Internal Market. Firstly, they could better tailor protective
measures across the EU (including contractual non-disclosure/non-compete
clauses). Secondly, costs of investigations on the legal regime in other Member
States (information costs) would logically be reduced. Thirdly, it is likely
that, at least some, trade secret owners could afford investing less in
protective measures: 26% of companies which replied to the 2013 Public
Consultation believe that the
convergence of EU law could result in less expenditure for companies’ specific
protective measures[182];
and 22% of the replies to the 2012 Industry Survey believe that such
convergence would result in less resources spent, by their own companies, on
trade secret protection measures (see Figure 7). The importance of such
savings in protecting measures, for those trade secret holders, is not easy to
estimate as it would depend on different factors: the size of the company; the
sector in which operates; the importance of the trade secret; the fact that the
trade secret holder would need to show, in case of litigation, that he took
reasonable measure to protect his trade secrets. This implies that some
investment in protecting measures would be unavoidable and that savings are
likely to be of moderate nature.

This could improve the allocation of
resources from unproductive expenses to pre-empt misappropriation to more
productive use, including for innovation purposes (see next paragraph). This
beneficial effect would be disproportionately high for SMEs. SMEs usually do
not have the financial means to seek sophisticated legal advice regarding the
protection of trade secrets against misappropriation when they plan to expand
activities into other Member States. In addition, SMEs are often among the most
innovative companies (e.g. start-ups) that (have to) rely extensively on trade
secrets[183].
This improved cross-border legal protection of trade secrets against
misappropriation (and the underlying competitive advantages), combined with a
more efficient allocation of resources and the expected increase of value of
trade secrets (see next paragraph) should reinforce competitiveness of
businesses in the EU. This conclusion is supported by economic research on the
use of trade secrets by companies as a tool to enhance their competitiveness (see
Annex 7).

Secondly, there would be greater incentives
to innovate[184].

–
(i) Because of the increased legal certainty and
the convergence of rules across the EU the current risk that misappropriation
of a trade secret could not be stopped within the EU would be reduced. This has
positive effects on the value of trade secrets: when the risk of losing trade
secrets is lower for companies, the expected value of the trade secret
increases[185].
Option 3 would also establish a general principle requiring Member States to
ensure that courts take appropriate and proportionate measures to preserve the
confidentiality of trade secrets during and after civil law proceedings. A
common definition of the scope of protection of trade secrets against
misappropriation, both for the purposes of seeking legal remedies and the
preservation of confidentiality during litigation, ensures that no further
divergences would arise in cases where the applicable law to a trade secret
misappropriation was different from the procedural rules of the forum. In this
manner, trade secrets owners would not risk their trade secrets becoming public
if they chose to go to court. Without such reassurance the greater legal
certainty that would be achieved by the scope of protection might not help
trade secrets owners, as they would not go to court because of the risk that
the breach of the trade secrets could be aggravated in the proceedings. If
trade secrets owners can rely on confidentiality during and after legal
proceedings, they may be more inclined to seek legal redress against potential
damages by misappropriators of trade secrets at the EU scale. This would
contribute to the increase of the expected value of innovation or other
knowledge/know-how protected as trade secrets[186].

–
(ii) In addition, the convergence of the legal
protection of trade secrets against misappropriation and the increased legal
certainty should enhance the incentives to share knowledge, in particular
(because of the harmonisation effect) across borders, at least for some trade secret
owners[187].
Concerning the opportunities for knowledge sharing: 63% of the companies which
replied to the 2013 Public Consultation think that “safer business
environment [resulting from harmonised EU rules] would create better
opportunities for different players to cooperate in R&D and innovation
projects (network/collaborative innovation as opposed to in-house innovation)”[188]; and 24% of
the respondents to the 2012 Industry Survey saw better opportunities, for their
own company, to cooperate with other players for R&D and innovation, as a
result of possible EU common rules on the protection of trade secrets (see Figure
7). Concerning the expected returns from knowledge sharing: 49% of the
companies which replied to the 2013 Public Consultation believe that such EU
rules would deliver greater returns from sharing, licencing and transferring
know-how[189];
and 18% of the respondents to the 2012 Industry Survey believe that their own
company would obtain such greater returns (see Figure 7).

Figure 7 –
Positive or negative effects from possible EU rules; cf. 2012 Industry Survey.[190]

Competition. The facilitation of legal action (Options 3 to 5) against
misappropriation of trade secrets will promote a more competitive environment
in the Internal Market. In a static scenario, competitors and business
partners of trade secrets owners would benefit from these options as, thanks to
the increased cross-border legal certainty and the harmonisation, they would
benefit from a comparable legal framework defining in a clear manner what they
can do and what they cannot do in order to appropriate themselves of trade
secrets. At the same time, the scope for misappropriating competitors’ to
undertake economic activities on the edge of law, or to free-ride on other
businesses by taking advantage of the misuse of their trade secrets, would
diminish as trade secret owners could defend their rights better[191]. However, the
protection of trade secrets against their misappropriation as per Options 3 to
5 should not be seen as enacting any additional barrier to entry (39% of the
respondents to the 2013 Public Consultation saw the risk that litigation on
trade secrets could amount to creating market barriers), since competitors
remain able to develop the same innovation through lawful means, e.g. parallel
independent R&D or reverse engineering. Nor would such protection have any
negative impact on the freedom to conduct a business (Article 16 of the
Charter, see Annex 21). Moreover, greater legal certainty and the
inclusion of specific safeguards and anti-abuse clauses in these policy options
(particularly Options 4 and 5, which provide for more detailed rules) should
contribute to reducing the concern of honest businesses that EU rules in this
area could result in trade secret holders trying to abuse the litigation rules
in order to raise market barriers to competitors (23% of the responses of the
2012 Industry Survey selected this factor as the most important possible
negative effect of the rules, see Figure 7; also 36% of the respondents
to the 2013 Public Consultation highlight this risk)[192]. In a dynamic
scenario, better protection of trade secrets against their misappropriation
will encourage innovative activities (rather than facilitating free-riding
activity which relies on unlawful copying with little added value involved) and
increase the competitiveness of the EU economy. Honest competitors/business
partners would also benefit from those opportunities.

Innovation. Options 3 to 5 should better ensure that benefits resulting from an
innovation can actually be enjoyed by the innovator. This should lead to a
reduction of the wasteful employment of business resources[193] to protect trade
secrets and should further increase businesses’ incentive to innovate and to
create the most efficient cross-border innovation networks (knowledge sharing).
This, in turn, should logically result in a certain increase in innovation in
the EU (see Figure 8)[194].
Empirical data tend to confirm these hypotheses:

–
Firstly, trade secret owners believe that
investment in innovation will increase: 55% of the companies which replied to
the 2013 Public Consultation believe that a “better legal protection of the
results of innovative activities would trigger more investment in R&D and
innovation”[195];
and 20% of the companies which replied to the 2012 Industry Survey believe that
they would invest more in R&D and innovation because of the convergence of
EU rules (see Figure 7). There are views, however, that legal protection
of trade secrets could lead to waste of resources in duplicative research and
make incremental innovation more difficult: 36% of the respondents (mostly
citizens or non-industry stakeholders) to the 2013 Public Consultation support
that view. It seems, however, that this view is not shared by those directly
affected: only 10% of the companies replying to the 2013 Public Consultation
believe that there would be waste of resources in duplicative research and only
11% believe that incremental innovation would be made more difficult.

Non-industry views are often based on the
belief that patent protection is preferable as it results in disclosure of
inventions for the benefit of society, thus avoiding duplication of research
and allowing to build on others’ inventions. However, this reading of patent
and trade secret legal protection seems to be overly simplistic. There is
duplication of research in the patent environment (e.g. patent races) as well.
The consequences are often more severe than in the case of trade secrets as the
winner takes all the benefits (i.e. a monopoly on the invention) and the losers
not only lose their R&D investment but have to pay licence fees to the
winner for the use of the patent[196].
Economic research suggests that patent races are the rule rather than the
exception and the “sole inventor” notion is a myth[197]. In a trade
secret protection environment, any investment in R&D is directly
exploitable by the innovator (e.g. two competing companies may have the same
trade secret), as long as he has not misappropriated knowledge of another
party. In other words, even if there is duplication in research, all parties
may exploit their own investment because there are no monopoly or exclusive
rights granted.

Concerning the question of incremental
innovation, legal protection of trade secrets does not make incremental
innovation as such more difficult: on the one hand, in the absence of monopoly
or exclusive rights, the trade secret holder is encouraged to carry out
constant innovation as a trade secret will in the vast majority of cases
guarantee little more than a first-mover advantage; on the other hand,
competitors of the trade secret holder are incentivised to develop their own
research. In addition, recent economic research shows that the positive impact
of patents descriptions on knowledge spill-overs has been somewhat
over-emphasized[198].

–
Secondly, trade secret owners also believe that
cross-border cooperation in innovation (network innovation) within the Internal
Market will increase[199].
Indeed, the positive impact of the legal protection of trade secret against
misappropriation on knowledge spill-over and the dissemination of information,
which are essential to innovative activity, as well as on socio-economic
welfare, is recognised by economic research[200].
It should be noted that such knowledge spill-overs may not only result from
collaboration between firms, but also from the mobility of skilled labour
However, stakeholders views about the actual magnitude of the impact are split:
40% of the respondents to the 2013 Public Consultation found that greater legal
certainty and easier enforcement of EU rules protecting trade secrets would
encourage the exchange of intellectual property across borders in the EU[201], while 39%
of the respondents (mostly citizens) stated that research cooperation and
transfer of know-how across borders in the EU will not increase much as other
factors hamper such activities much more and would not be solved.

Figure 8 –
Common impacts of Options 3 to 5 on innovation, internal market, EU economy,
social impacts and consumer benefits

Internal Market. Establishing clear common rules to protect trade secrets against
misappropriation in the Union (Options 3 to 5) would make cross-border business
activities involving trade secrets (be it cooperation with other companies or
direct investment in other Member States) more attractive within the Union: 72%
of the companies responding to the 2013 Public Consultation found that the
functioning of the Internal Market for intellectual property would benefit from
EU legislation on misappropriation of trade secrets[202]. Such a reliable legal
framework may also have positive effects on the cross-border circulation of
knowledge in case of labour mobility, thus having overall positive spill-overs
effects as regards the circulation of knowledge within the Internal Market.
Such enhancements (for trade secret owners and employees) should have direct
positive follow-on impacts on the functioning of the Internal Market for goods
and services. They would allow researchers and companies, SMEs in particular,
to make better use of their innovative ideas by cooperating with the best
partners across the EU.

Economic growth within the Internal
Market. The incentive to innovate, and to do so
more efficiently, as well as the partially reduced costs in terms of seeking
legal advice or having to apply potentially excessive protective measures
resulting from Options 3 to 5 should stimulate innovative activity of EU
businesses and research partners at a wider EU scale, thereby contributing to
increase private sector investment in R&D. This should have, over time,
positive effects on the competitiveness and growth of the EU economy. This
should in turn benefit the job market.

Social impacts. It is not possible to evaluate the social impact of Options 3 to 5
at a macro level. For any of the options the impact in terms of, say,
employment levels or income will be far too small to isolate them from others.
At micro level, these options could make it easier for (highly) skilled
employees (those who create or have access to trade secrets) to change employer
within the Internal Market or to set up their own business.

Indeed, the issue arises as to whether the
legal protection of trade secrets against their misappropriation has an impact
on key[203]
employees’ ability (and right) to change jobs or to become entrepreneurs.
It could be argued that their employers could litigate more easily for alleged
misappropriation of trade secrets either against leaving employees and/or
against their future employers[204].
In the 2013 Public Consultation, 29% of respondents considered that EU rules
could negatively impact on labour mobility. However, this perception diminishes
when trade secrets owners (which can be existing employers but future employers
too) are concerned: only 6% of the replies to the 2012 Industry Survey believe
that convergence of EU rules could result in less labour mobility, see Figure
7. For the analysis of the impacts of the options on employees’ mobility,
two issues should be noted: (a) employers will often have recourse to
contractual protection of trade secrets (non-compete or non-disclosure clauses)
in their contracts with key employees and/or in some cases national labour law
imposes a confidence duty on employees; and (b) the policy options assessed do
not interfere with either contract law or labour law governing relations with
employees.

It could be argued that the harmonisation
effect of Options 3 to 5 (as regards civil law) could potentially have some
positive impact on the conditions for labour mobility or becoming an
entrepreneur of key research and management personnel within the EU. In any
case, these options would not result in conditions restricting labour mobility
compared to the status quo and thus they would not negatively impact on
the freedom to choose an occupation (Article 15 of the Charter, see Annex 21).

–
Firstly, future employers would be able to
better value the knowledge that mobile workers could bring in without revealing
trade secrets of former employers and therefore be in a better position to
offer the corresponding job opportunities.

–
Secondly, a clearer and harmonised legal
framework could result in the alignment of the scope of contractual protection
of trade secrets to that of the law[205],
thus alleviating the negative effects of over-stringent and over-resorted to
non-compete clauses on employees[206].
If this happened, (i) it would reduce the theoretical risk for employees who
have changed job to a competitor or decided to start a new business to be the
target of disproportionate claims by their former employer for alleged
misappropriation of trade secrets; and (ii) future employers would also benefit
from this reduced uncertainty.

–
Thirdly, increased legal certainty would possibly
place an employee in a better position to assess whether the information he or
she possesses would be a trade secret and if so, whether and how he or she
would be allowed to deal with this information, in case he or she changes job
(or becomes entrepreneur) and wants to make use of this knowledge in his/her
new capacity. Thus, it could be easier for the employee in question to make the
choice to work for the employer for which he feels best suited and providing
the greatest added value. In view of the (expected) shortage of highly
qualified innovative employees in the Union, an efficient allocation of
resources would not only be very important for EU workers but would make the
Internal Market also a more attractive job market for people from third
countries[207].

Greater incentives to innovate resulting
from Options 3 to 5, thanks to increased innovative activity, could possibly
result in increasing numbers of innovation-related (and possibly higher
quality) jobs, thus contributing to the sustainability of employment within
the EU. In a dynamic setting, additional jobs will be created in the production
of the goods resulting from innovations by the better incentivised employees[208]. Options 3 to 5 could
have negative effects on employment provided by free-riders who
misappropriate others’ trade secret-based innovation with little added value.
This free-riding activity, and associated cheap labour, is likely to be – in
its vast majority – in the grey market and/or outside the EU. The net social
impact would therefore be positive.

Finally, as employers are better able to
defend their rights in court, the need to monitor employees’ behaviour
is less pressing. Accordingly, both the costs of monitoring and the risk of
personal data protection breaches would be reduced[209].

Consumers. Options 3 to 5 should have a more significant effect on innovation
and businesses’ competitiveness than Option 2. Assuming economic success of at
least some of these innovative activities, this would result in greater choice
and potentially lower prices for innovative goods/services for consumers[210].

Wider civil society. Options 3 to 5 will have significant positive impacts at the level
of legal certainty and regarding the promotion of honest practices of trade as
opposed to unfair competition. At the same time, Options 3 to 5 will not allow
the use of litigation with a view to undermining the right of expression and
information (in particular whistleblowing action and journalistic freedom).
Therefore, they should not have negative effects on the achievement of the
objectives of Article 11 of the Charter (see Annex 21).

Third countries. Better EU rules (Options 3 to 5) could be expected to have a
positive impact on honest players from third countries willing to invest or
carry out business in the Internal Market in the same manner and under the same
conditions as an EU business would do. At the same time, these rules will
negatively impact on third country economic actors who would try to
misappropriate trade secrets from European companies: i.e. their activity would
be unlawful.

Moreover, as regards the international rule
setting on trade secrets, common rules in the EU (Options 3 to 5) could, over
time, influence third countries to establish similar regimes and thereby raise
the global level of protection of trade secrets against misappropriation in the
spirit of the TRIPS Agreement. This would then provide better protection of
European trade secrets in third countries laws[211]. In turn, this could
result in increased knowledge transfer and investment vis-à-vis those third
countries[212].

5.3.        Impacts
of Option 4

Option 4 would have the same impacts as
Option 3 as described in Section 5.2. This section deals only with the specific impacts of the civil law
aspects of Option 4 which are not part of Option 3.

Member States’ legal frameworks. Option 4 establishes, in addition to
the elements of Option 3, specific rules on remedies against the
misappropriation of trade secrets which will require most Member States to
adapt (at least a component of) their civil law frameworks. The risk exists
that ad hoc measures applicable only to trade secrets misappropriation
could negatively impact the functioning of the entire justice system in the
Member States. However, Option 4  rules are similar to those of Directive
2004/48/EC and already known in their national civil law systems. From the
perspective of the national civil law frameworks and judicial systems, this
option would largely extend the scope of existing measures to cover trade
secret misappropriation and the need for national adaptation should be limited.
As a result, the proposal would not cause fragmentation of procedural rules at
national level and it should not have negative impact on the effectiveness of
the national judicial systems.

Trade secret owners. The positive impacts of Option 3 on
trade secret holders are reinforced by the additional elements regarding civil
law contained in Option 4. Trade secret owners[213] would not only benefit
from improved legal certainty regarding the delimitation of what would be
considered as trade secrets within the EU, but also regarding the necessary
actions to take to comply with the requirements. They would also be reassured
that they can defend their rightful trade secrets more effectively across the
EU as they could trust that available remedies would be sufficient. This would
also hold in case a misappropriator uses a stolen trade secret to produce goods
outside the EU with a view to market them in the EU: available remedies would
allow to prohibit the imports of such “resulting goods” from third countries.
Also, the reassurance that suing a misappropriator would not result in the
revelation of the trade secret to the public during or after the legal
proceedings would increase under Option 4, thanks to the common minimum rules
on the preservation of confidentiality. Thus, the risk of losing a trade secret
during litigation will be removed and at least substantially lowered. Finally, Option
4 should reinforce the deterrence effect of civil law rules on the legal
protection of trade secrets.

Innovation. Option 4 is likely to have a similar but stronger impact in this
regard than Option 3, because of the higher degree of convergence of trade
secret laws.

Internal Market. Option 4 would better protect trade secret owners from damages
resulting from misappropriation, not only in their own country, but also in other
Member States. Better opportunities to defend their rights and the expectation
to recover any damage incurred should provide companies with a stronger
incentive to actually undertake 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 thereby contribute to
its smooth functioning. Moreover, because of the improved legal protection,
there should be fewer “resulting goods” in the Internal Market, giving a
further boost to business confidence and secure returns on investment by trade
secret owners within the EU.

Third countries. Option 4 would in particular make sure that the import of goods, which
have been produced using misappropriated trade secrets, from third countries could
be stopped anywhere in the EU, thus providing a comparable level of redress
against trade secret misappropriation across the EU. This feature could be
particularly helpful when the misappropriation takes place outside the EU or
online from outside the EU. Option 4 would, therefore, make the production of goods,
which have been produced using misappropriated trade secrets, in third
countries less attractive. While this might reduce the investment and
employment in such illicit production it might at the same time increase the
incentive for licit production in third countries thereby balancing the impact
on third countries to some extent.

5.4.        Impacts
of Option 5 (criminal law aspects)

Option 5 comprises all elements of
Option 4, as far as civil law is concerned. In this respect the impacts of option
5 will be the same. This section deals therefore only with the specific
additional impacts of the criminal law aspects of Option 5.

Member States’ legal frameworks. The criminal law aspects of Option 5
would require a significant alignment of Member States criminal law. Difficult
issues might arise where these amendments diverge from the rules applying to
offences against formal intellectual property rights. In addition, the criminal
rules of Option 5 could endanger the balance between protection of trade
secrets by civil and criminal law at national level (irrespective of whether that
current balance is appropriate or not) referred to in Section 5.2.

Trade secret owners. The threat of imprisonment combined with more forceful prosecution
represents a significant additional deterrence effect of Option 5. Thus, trade
secrets owners would enjoy a more effective protection.

Innovation. While the greater deterrence of misappropriators
should provide additional incentives to innovate, these might be somewhat
mitigated by overly conservative behaviour of some businesses fearing criminal
consequences. This could reduce their willingness to share information obtained
from third parties, thus having a negative/chilling effect on overall
innovative activity.

Social impacts. Similarly, the criminal law aspects of Option 5 could have a
deterrent effect on labour mobility/self-employment: in case of doubt about the
scope of the protected trade secret, an employee might prefer not to engage in
any activity that could potentially place him or her in breach of criminal
rules. In order to mitigate this risk rules would have to be as clear as
possible.

Third countries. Option 5 would not have any significant additional deterrent
effect compared to Option 4 regarding third country misappropriation of trade
secrets, as the punishable conduct would take place outside the EU and/or the
misappropriator would be located outside the EU. In the former case, the
territorial nature of criminal law would prohibit prosecution, in the latter
enforcement of the rules would be impossible without the cooperation of third
countries, which is not guaranteed. This largely weakens the additional deterrent
effect of this option, in particular against state-sponsored industrial
espionage.

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

Environment. None of the policy options would have a traceable impact on the
environment[214].

Fundamental Rights. Option 2 does not present any impact on fundamental rights
compared to the baseline scenario. Options 3 to 5 would have positive impacts
as regards the right to private life (Article 7 of the Charter). In addition,
Options 4 and 5 would have positive impacts on the right to an effective remedy
(the essence of these options), while providing safeguards to ensure that the
protection of personal data (Article 8 of the Charter) and the rights of
defence and to a fair trial are not negatively affected (cf. Articles 47 and 48
of the Charter). See Annex 21 for a more detailed analysis.

Public administrations, including
European institutions and bodies, as holders of third parties’ trade secrets. None of the options interfere with existing rules on the
protection of business secrets which are disclosed by companies to public
administrations because of regulatory obligations, nor with the rules on the
transparency of public administrations.

5.6.        Summary
of impacts and administrative burden

Figure 9: Summary of impacts of policy options || Summary of impacts on stakeholders and economy/society as a whole\*

Policy options || Member States legal frameworks || Trade Secret owners || Innovation || Competition || Internal Market || Employees’ mobility || Other  social impacts || Consumers || Civil society || Third countries || Fundamental rights

1. Status quo. || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0

2. Information/ awareness on existing redress tools in case of trade secret misappropriation. || 0 || 0/+ || 0 || 0 || 0/+ || 0 || 0 || 0 || + || 0 || 0

3. Unlawfulness of acts of trade secret misappropriation || + || +/ ++ || +/ ++ || ++ || +/ ++ || + || + || + || ++ || + || +

4. Convergence of national civil law remedies against trade secret misappropriation || ++ || ++ || +/ ++ || ++ || ++ || + || + || + || ++ || ++ || +

5. Convergence of national civil and criminal law remedies against trade secret misappropriation || +/ ++ || ++ || +/ ++ || ++ || ++ || - || + || + || ++ || + || +

\* Comparison vis-à-vis
Baseline: -- significant deterioration of the situation; - slight
deterioration; 0 no relevant change; + slight improvement; ++ significant
improvement.

Administrative burden. None of the options would result in administrative burden for businesses,
administrations or employees.

6.           Comparing
the options

6.1.        Comparison
of the options

This section discusses how effective and
efficient the policy options are in achieving the operational objectives. As it
is not possible to quantify the impacts, this comparison has to be done
primarily in a qualitative manner. Options will be compared to the baseline
scenario. Figure 10 below summarises this analysis.

Comparable scope of protection. Option 2 would help mitigate some of the
short-comings of the baseline scenario, in particular from the perspective of
trade secret owners. However, it would hardly result in any improvement concerning
the operational objectives, notably because of low likelihood that improved
information and awareness raising would eventually lead to any improvements in
the legal protection at national level. The potential benefits of this option are
very limited and would not, as such, address the unequal protection against the
misappropriation of trade secrets throughout the EU and their adverse effects
(e.g. the need to develop tailor-made strategies for protecting its trade
secrets in each jurisdiction in which a company is active; etc.). Therefore,
there are no improvements as regards the objective to ensure adequate and
comparable scope of legal protection across the Internal Market. Option 3
would go a step further by providing harmonised legal definitions of
trade secrets and their misappropriation. Greater legal certainty created by
this option would result in a significant improvement as regards the comparable
scope of protection of trade secrets across the Internal Market regarding civil
law protection. Option 4 would achieve similar results as
Option 3. Option 5 would achieve a considerable
convergence as regards the scope of protection of trade secrets. It would not
only integrate Option 3 as far as civil law protection is concerned, but it
would also go furthest in this protection by harmonising the rules that
criminalise certain acts of misappropriation of trade secrets[215]. This would constitute
a very significant improvement in protection compared to the baseline scenario.

Sufficient and comparable level of
redress. For the
reasons explained with regard to the previous objective, Option 2 would
not result in any improvement with regard to the objective to provide access to
a sufficient and comparable level of redress in cases of misappropriation
across the Internal Market. Option 3 merely calls Member States to
provide for effective and proportionate remedies without specifying them.
Hence, only a slight improvement as towards a sufficient and comparable level
of redress can be expected. It would not be ensured that minimum standards
would be raised effectively. Option 4 would go one step further to
address the shortcoming of Option 3 as regards the legal remedies, in terms of
civil law protection. To the extent that the harmonised civil law remedies would
ensure that the trade secret owner is appropriately compensated for any
prejudice suffered (e.g. payment of damages by the misappropriator) and that
the misappropriator cannot benefit from his action (e.g. injunctions against
further use of the trade secret, destruction of “resulting goods” and other
corrective measures), the higher level of convergence of the rules would
represent a significant improvement in terms of providing a sufficient and
comparable level of redress across the Internal Market in case of
misappropriation of trade secrets. With regard to this objective, Option 5
would have the same effect as Option 4 as regards civil law redress. However,
the criminal law aspects of Option 5 would be less effective in improving the
level of redress as criminal law protection is less effective than civil law
protection in terms of stopping the unlawful use of trade secrets and obtaining
compensation thereof. For the trade secret owner, the use of criminal law would
have the disadvantage that the rules of burden of proof or presumptions as in
civil law cases would not apply, a conviction of a perpetrator would only be possible
if the judge had no doubts about the wrongful conduct (“in dubio, pro reo”)[216]: i.e. the level of
evidence required is higher. It is true that criminal law generally provides for
faster and better access to evidence, as the public prosecutor and/or judge can
use investigative means to have evidence produced. However, this additional
benefit would be limited by the fact that the public prosecutor acts in the
public interest, not in the interest of trade secret owners[217].

Confidentiality in legal proceedings. Option 2 does not result in any improvement with regard to the poor
protection of confidentiality in legal proceedings. No substantial improvement
could be expected from the general principle of Option 3 concerning the preservation
of confidentiality of trade secrets during legal proceedings. It is unlikely
that this option would lead to significantly greater harmonisation (and the
degree of convergence that could be achieved would not be known in advance). There
would therefore remain a risk that national rules on remedies and preservation
of confidentiality of trade secrets would continue to differ significantly. These
shortcomings would require trade secrets owners to analyse the legal situation
separately for each Member State in which they are active in order to assess
whether trade secrets could be effectively protected in court – thus
information costs would be lowered but not entirely eliminated. Option 4
would be more effective than Option 3 to achieve this objective: the
convergence of detailed rules will provide certainty that their effects will
materialise. Option 5 does not propose to address the preservation of
confidentiality of trade secrets in criminal proceedings as it could negatively
impact on the right of defence and to have a fair trial. Therefore, there is no
improvement beyond what would be achieved by Option 4[218].

Deterrence. Better information and awareness
actions (Option 2) may have a positive impact on the deterrent effect of
the national rules in so far as it could facilitate trade secret owners’ legal
actions. It might, however, also have the detrimental effect of encouraging
potential misappropriators when they learn about the low level of trade secret
protection in a given jurisdiction. The deterrent effect of Option 3,
despite the significant improvement on the scope of protection, would be moderate.
Harmonisation of civil law remedies under Option 4 would be a
significant disincentive for potential misappropriators in Member States where
remedies are currently weak. A strong point of Option 5 would be that,
by criminalising certain acts of misappropriation of trade secrets and
establishing minimum rules for sanctions, it would significantly strengthen the
deterrent effect of the legal protection against misappropriation. The
deterrent effect of criminal sanctions is generally recognised as greater than that
of civil law remedies, as people involved in misappropriation risk penal
sanctions.

Overall effectiveness. Option 2 does not address the question of the consistency
of the legal protection across the Internal Market, as national rules would
remain as they are. Therefore this option would not address the problem in its
entirety. Hence, it would be ineffective in achieving the operational
objectives and, a fortiori, the specific objective (improving the
effectiveness of the legal protection of trade secrets against misappropriation
within the Internal Market)[219].
Overall, Option 3 would address only part of the provisions which are
necessary to establish an effective legal framework for the protection of trade
secrets against misappropriation within the Internal Market, its positive
impacts would be relatively limited as trade secret owners could not rely on a
sufficiently effective protection should their trade secret be misappropriated.
Therefore, this option would achieve the specific objective of the measure only
to a limited extent. In summary, Option 4 would create a more consistent
legal protection of trade secrets against misappropriation across the Internal
Market, as far as civil law is concerned. It would address three important
conditions for an effective protection: the scope of protection (the subject
matter), the remedies and the measures on the preservation of the trade secret
during litigation. These rules would also be consistent with EU rules on civil
law remedies and measures in place addressing infringements of intellectual
property rights (Directive 2004/48/EC), therefore avoiding contradictions in
the way intellectual property (in its wide sense) is protected. However, this
consistency does not extend beyond civil law to criminal protection. In terms
of consistency of the legal protection, Option 5 presents some problems
compared to Option 4. While the combination of criminal and civil law
protection would arguably result in a more coherent approach, Option 5 would go
beyond the existing situation regarding infringements to intellectual property
rights[220]
and it raises questions as to the relationship with national criminal law
sanctioning infringements of intellectual property right (patent infringements
and trade secret misappropriations are often litigated together). Moreover,
this option could endanger the balance between civil law and criminal law at
national level in so far as it significantly reinforces criminal law
protection. For these reasons, despite the potentially high effectiveness of
this option, these systemic inconsistencies reduce its efficiency, by creating
potential frictions in the legal system.

Efficiency. In terms of costs, in order to
ensure a sizable impact, Option 2 would notably incur costs in the form
of: (a) the preparation and regular updating of fact sheets and information
documents on all Member States, ideally in all languages; and (b) regular
specific awareness raising campaign[221].
Integrating the information leg of this action into the regular activities of
the IPR Helpdesk EU and the European Judicial Network could somehow limit those
costs but the impact of making available information-only action will be
limited without related (and expensive) awareness raising campaigns. In
conclusion, this option would not be effective in achieving the objective and
even to have a limited effect it would require substantial and continuous
efforts, so that its overall efficiency would be “low”. In view of the costs of
the legislative procedure needed to implement Option 3, the
overall efficiency of the option would be “medium”. Option 4 constitutes
a significant improvement compared to the baseline scenario and Option 2. It
would be more effective than Option 3. Given that legislative costs for the two
options would be comparable, Option 4 would also be more efficient than Option
3 – thus, its overall efficiency would be “high”. Option 5 would result
in higher legislative costs than Options 3 and 4 as it would require the
negotiation of two different legal instruments at the EU level and it would
also require changes in national criminal law which is at the heart of national
sovereignty and where the need to ensure consistency of national regimes in
terms of scope of protection would be higher. Therefore, though potentially a
very effective solution (at least in terms of the deterrent effect), its overall
efficiency would be “medium” and lower than that of Option 4.

Figure 10: Summary comparison of options || Effectiveness\* || Efficiency & Costs\*\*

Policy options || Comparable scope of protection || Sufficient and comparable level of redress || Preservation of confidentiality in litigation || Deterrence || Costs || Efficiency

1. Status quo. || 0 || 0 || 0 || 0 || 0 || 0

2. Information/ awareness on existing redress tools in case of misappropriation of trade secrets. || 0 || 0/+ || 0 || 0/+ || H || L

3. Unlawfulness of acts of misappropriation of trade secrets. || ++ || + || + || + || M || M

4. Convergence of national civil law remedies against misappropriation of trade secrets.[222] || ++ || ++ || ++ || ++ || M || H

5. Convergence of national civil law and criminal law remedies against the misappropriation of trade secrets. || +++ || ++ || ++ || +++ || H || M

\* Comparison vis-à-vis
Baseline: --- very significant deterioration of the situation; -- significant
deterioration of the situation; - slight deterioration; 0 no relevant change; +
slight improvement; ++ significant improvement; +++ very significant
improvement.

\*\*
Overall assessment of the option with regard to the achievement of the
objectives. L: Low; M: Medium; H: High.

Stakeholders’ opinions. A slight majority of 52% of the
respondents to the 2013 Public Consultation supported the view that the legal
protection of trade secrets should be addressed at EU level. Companies
(including SMEs), professionals, business associations and research entities
are generally much more favourable: 80% of the companies supported such action.
However, a vast majority of the 152 replying citizens (mostly from Germany) and
three Swedish trade unions (see Section 5) do not think that the EU
should act.

When possible options for EU action are
considered, Option 2 received little support in the 2013 Public
Consultation: only 10% of the respondents who were favourable to EU action
supported this Option, as opposed to 83% in favour of the legislative solutions
(Options 3 to 5). Trade secret owners particularly support an EU
legislative action: more than 70% of the companies that replied to the 2013
Public Consultation favour EU legislative action along the lines of Options 3
to 5. Similarly, 69% of the replies to the 2012 Industry Survey were favourable
to a European Commission proposal for EU legislation with a view to ensuring
that national rules providing relief against the misappropriation of trade
secrets provide effective and equivalent protection across the EU and only 17% were
against[223].

Option 3 was
supported by 53% of all respondents (82% of companies) to the 2013 Public
Consultation. Respondents to the 2013 Public Consultation were consulted on
possible remedies (Option 4): 49% of all respondents (76% of companies)
agreed to empower courts to order the unlawful use of misappropriated trade
secrets (42% against); 43% of them (65% of companies) agreed that rules on
calculation of damages should be addressed (43% against) and several
respondents suggested, in their comments, to address the destruction of
“resulting goods”. Concerning the preservation of confidentiality of trade
secrets during litigation, 51% of respondents (77% of companies) to the 2013
Public Consultation supported rules on this issue (41% against). Option 5
received less support in the 2013 Public Consultation: a majority of 52% of the
respondents were against the introduction of criminal rules at the EU level; only
39% supported the idea. The picture is, however, almost the reverse when
looking at companies only: 62 % were in favour of criminal rules.

Figure 11 –
Benefits of the EU intervention for EU companies. Source: 2012 Industry Survey.

Business respondents to the 2012 Industry
Survey seem to be convinced that their companies benefit most from the possible
measures which are included in Options 3 to 5 (see Figure 11)[224]. The two measures that
obtain the largest positive rates (clarifying what the protectable trade
secrets are and the prohibition of acts of misappropriation) correspond to the
essence of Option 3: 56% and 45% respectively. The additional elements
in Option 4 and the criminal law aspects of Option 5, also obtain
significant positive rates of support above 30%.

Member States which have expressed a formal
position[225]
are not opposed to a EU action but Sweden and Denmark prefer that the
Commission undertakes further study first (i.e. by publishing a Green Paper),
Estonia suggests that the Commission should adopt a recommendation while France
could support a legislative approach at this stage.

Preferred policy option. Option 4 appears as the most balanced option in terms of
effectiveness and efficiency and it received significant support in the surveys.
While Option 5 could be more effective, the need to introduce EU
criminal law legislation must be carefully considered, in particular paying
regard to the general subsidiarity requirement of EU legislation. Also, a small
majority of the respondents to the consultation were against the introduction
of criminal rules at the EU level. It seems therefore more prudent and
reasonable, at this stage, to set aside Option 5 and focus on the
implementation of the proposed changes in civil law and to see whether they
might already suffice to achieve the objectives (following the principle of
proportionality, criminal law must remain a measure of last resort). This is
also in line with the conditions set out in Article 83(2) TFEU[226] for the approximation
of criminal laws at the EU level. Implementation of the criminal law elements
of Option 5 at a later stage, if considered necessary, would therefore
not lead to significant additional costs. Hence, Option 4 is the
preferred policy option.

6.2.        Coherence
of the options with other EU policy areas

There is no indication that any of the
policy options would adversely affect other EU legislation which may be
applicable to information qualifying as trade secrets, such as: rules requiring
the disclosure of information, including trade secrets, to the European
Commission, EU institutions and bodies or national authorities; rules requiring
these institutions, bodies and authorities to disclose information they hold
under certain circumstances[227];
rules on the disclosure of information to employees' representatives[228]; and rules on personal
data protection or in the anti-trust field. For a discussion showing the
consistency of the options with Directive 2004/48/EC (on enforcement against
infringements of intellectual property rights), considering that litigation
about misappropriation of trade secrets is often carried out together with
litigation on infringements of intellectual property rights, see Section 6.1.

6.3.        Choice
of legal instrument

Non-binding legal instrument vs. a
binding legal instrument. A non-binding legal
instrument (i.e. a Commission Recommendation) does not appear as an appropriate
solution to implement the preferred policy option. A Recommendation, lacking
binding effect, would not guarantee the achievement of any of the objectives of
the proposal. As the TRIPS Agreement has acted as a de facto
recommendation, this is not a greenfield area. However, the TRIPS Agreement has
manifestly failed to achieve any significant convergence in the protection of
trade secrets within the Union. A Commission Recommendation would add little,
if any, compared to the requirements of the TRIPS Agreement. Under these
circumstances, the likelihood that the baseline scenario continues to apply
remains high. In addition, the subject matter covered by the preferred policy
options concerns the protection of a right before courts. Other factors, which
are of particular importance in this context, such as the need to ensure a fair
trial, the right to effective remedies or the right of defence, can hardly be
guaranteed by a non-binding instrument. Finally, the inter-institutional
balance has evolved and the case for Commission’s Recommendations in areas
where a legal basis for legislation exist is weaker[229].

A binding legislative instrument is
preferable since the EU added value in this case essentially relies on the
compulsion that only a binding instrument has. In terms of effectiveness, it
would provide legal certainty and convergence in the level of protection across
the Internal Market, thus guaranteeing that identified positive effects could be
delivered. A legally binding solution is also the preference of the respondents
to the 2013 Public Consultation: 79% of the those in favour of EU action would
prefer a legislative solution as opposed to a mere 3,5% in favour of a
Recommendation.

Directive vs. Regulation. Contrary to a Regulation, a Directive would provide the necessary
flexibility to Member States on how to integrate the requirements into their
national law. This is particularly important in the current context as the
substance of the preferred policy option is closely related to the rules on the
enforcement of intellectual property rights, which are dealt with in a
Directive as well, and to the national rules on civil law litigation, which
reflect different legal traditions existing in Member States. One might argue
that national divergences may subsist after transposing a Directive and that
therefore a Regulation would be preferable. This risk, however, is not likely
to materialise at the level of legislation. The scope for national divergences
depends on the margin of manoeuvre that would be left by the Directive’s terms.
In this case, the preferred policy option would not leave any significant
leeway to the Member States. Also, the language of the definitions of trade
secret/misappropriation and on the remedies could be sufficiently precise so
that, in practice, the scope for deviation in substance at the level of the
national transposition would be minor, if any[230]. A Directive therefore
appears as the most suitable legal instrument.

Independent Directive vs. amendment
of Directive 2004/48/EC. In this connection, it
appears preferable to propose an independent Directive rather than to extend
the scope of Directive 2004/48/to civil redress measures against the
misappropriation of trade secrets. The main reason is the important differences
between trade secrets and intellectual property rights. Contrary to
intellectual property rights, the protection of trade secrets against
misappropriation does not institute any exclusive right and the use by a third
party of the information protected as a trade secret without the consent of the
trade secret holder is not sufficient to qualify as illegal conduct: it will
also be necessary to demonstrate the misappropriation conduct by a third party.
It is also necessary for the legal instrument implementing Option 4 to address
the question of the scope of protection, an issue which is not addressed in
Directive 2004/48/EC as regards intellectual property rights. In addition, the
scope of the selected option and of Directive 2004/48/EC also differs: e.g.
rules on preservation of secrecy are not included in Directive 2004/48/EC; in
contrast, the initiative on trade secrets does not include rules on evidence
that are included in Directive 2004/48/EC. Moreover, integration of trade
secrets into Directive 2004/48/EC could also create confusion, if they were
interpreted as falling within the “intellectual property rights” category, as
regards the applicability of the Rome II and Brussels I Regulations on the
applicable law and choice of forum in cross-border disputes. These Regulations
distinguish between litigation on traditional tort/delict, which encompasses
litigation on trade secrets (see Annex 16) and litigation on
intellectual property rights for the criteria determining the applicable law
and the choice of forum. For these reasons, this initiative would be better
dealt with in a separate legal instrument. See Annex 23 for further
explanations.

6.4.        Transposition
and compliance aspects

National transposition measures are required to integrate the preferred option into
national law, but no specific technical difficulties are envisaged in this
regard[231].

Compliance. It appears appropriate to provide for a general sanctioning regime
to ensure compliance with the preferred option. Member States will be required
to provide for effective, proportionate and dissuasive sanctions in case of
non-compliance with certain types of orders which judicial authorities could
take pursuant to a claim on misappropriation of trade secrets: i.e. cease and
desist orders, orders for corrective measures or orders in relation to the
preservation of confidentiality of trade secrets during litigation. The
sanctioning regime would remain at a general level and respect national legal
frameworks: it will not set the level of any of the penalties; nor the type of
penalty. Member States will, however, be required to provide for judges to
apply recurring penalty payments in case of non-compliance with cease and
desist orders and orders for corrective measures. The regime will not harmonise
any rules regarding liability or procedure for the imposition of sanctions.
Therefore, it will preserve Member States’ rules for ensuring compliance with
fundamental rights such as the right to an effective remedy and a fair trial
(Article 47 of the Charter), the presumption of innocence and the right of
defence (Article 48 of the Charter).

7.           Monitoring
and evaluation

The monitoring and evaluation of the
preferred option will be carried out in 3 steps: (1) a Transposition
Plan, preparing for the application of the rules; (2) the Regular
Monitoring activity by the Commission (assisted by Member States), as guardian
of the Treaty, on the timely adoption and correctness of the transposition
measures and on their application thereafter; and (3) the Evaluation of
the effects of the policy, in the medium term (after enough time has lapsed for
the impacts of the implementation of the option to materialise).

This Evaluation would be done in 3 steps:
firstly, a preliminary examination carried out by the European Observatory on
infringements of intellectual property rights (the Observatory) of the
litigation trends regarding trade secret misappropriation; followed, secondly,
by an intermediate report by the Commission on transposition and the initial
application of the rules; and, thirdly, the evaluation itself, to be carried
out at a later stage (see Figure 12 for the timing). Selecting the
appropriate monitoring indicators for the assessment of the success (or lack of
it) of the policy presents particular challenges, which also appear with regard
to infringements of intellectual property rights and other types of
infringements in general: e.g. are there more cases because there are more
infringements or because the rules are better designed and courts are better
enforcing them, so that victims are more willing to file new cases?; also,
would trade secret owners continue to be reluctant to litigate on trade secrets
for reputational reasons? Considering those difficulties, it is proposed to
define data needs in cooperation with the Observatory during the transposition
period. In doing this, it might not be appropriate to rely only on levels of
litigation on trade secrets to assess the policy. It might be useful to
periodically repeat an industry survey to test how companies’ perceptions of
the level of trade secrets protection, as well as their innovative behaviour
and competitiveness, has evolved following this proposal and how other
stakeholders assess the overall impact of the measure. See Annex 25 for
more detail on monitoring and evaluation.

Figure 12 –
Monitoring and evaluation

Annexes

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

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

Intangible assets are essential for the
competitiveness of companies in the knowledge and innovation[232] economy in a
globalised world. Companies are more open to the exterior (e.g. increased used
of contractors, consultants and outsourcing) and innovation is more and more
achieved in a networking environment.

The knowledge and innovation economy

As will all Western economies, the EU is
increasingly moving towards a knowledge and innovation economy (and society) in
which the management of information is essential. Recent international research
estimates 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."[233]

In a knowledge and innovation economy, the
competitive performance of companies, and of the economic regions where they
are established, depends on how well they manage intangible assets as a core
asset and source of value. Investment in intangible assets and other assets
related to innovation (e.g. investment in information and communication
technologies (ICTs) and other tangible assets that improve the joint
productivity of capital and labour) accounted for between two thirds and three
quarters of GDP growth in several OECD countries between 1995 and 2006[234]. Income gaps between
countries are closely related to differences in total factor productivity,
which is a close proxy for differences in technology and innovation performance
levels[235].
In particular, most advanced economies have become progressively intensive in
the use of knowledge-based capital[236].
In some countries such as Sweden, the United Kingdom or the United States,
investment in knowledge-based capital matches or exceeds investment in physical
capital (see Figure A1.1)[237].

Figure A1.1: Business investments in knowledge-based
capital and tangible capital, 2009 (% GDP)[238]

Intangible assets are principally composed
of valuable (innovative) information processed by a company in a particular
manner (e.g. know-how) and not necessarily available to other companies or
society at large. Such proprietary information is an important and valuable
tool for its owner in that it is the source, as long as such information is not
in the public domain (or in the hands of his competitors), of competitive
advantage. For instance, in the automotive sector, valuable trade secrets now
lie in the electronic controls that regulate the operation of motors, generators
and batteries. Huge volumes of computer code are required, especially by hybrid
and electric vehicles: the Chevrolet Volt plug-in hybrid uses about 10 million
lines of computer code[239].

The importance of such secret information
is estimated by Forrester as follows "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."[240]

In this context, trade secrets appear as
essential components of business or research policies to manage and protect
valuable intellectual property related intangible assets, and a tool for
competitiveness strategy[241].

Globalisation and the exploitation of
innovation

Globalisation of trade, production,
innovative activity and research has resulted in drastic changes in the
business environment within which R&D takes place and innovation is
exploited. Unlike in the past, European businesses, in striving to be globally
cost competitive, increasingly set up in or transfer their labour-intensive
manufacturing operations to third countries (delocalisation). For the same
reason, they increasingly rely on – whether or not at the cross-border level –
joint-ventures, contractors, consultants or other outsourcing strategies, which
often involve the sharing of valuable proprietary information (including
licensing of know-how and technology transfer). Recent innovation surveys show
that business players believe that a combination of players partnering together
will most likely drive innovation through the next decade[242].

Hence, proprietary information flows within
these networks of businesses and has become a tradable commodity. In this new
international networking model, businesses have had to become more open to the
exterior and therefore have become more exposed to losing control of their
valuable proprietary information – or to having it misappropriated by a third
party[243].

At the same time, increased globalisation
of trade, production, innovative activity and research contributes to the
emergence and multiplication of a range of new competitors to challenge
innovative firms and scientific institutions in Europe (and elsewhere)[244]. These developments
increase the pressure on the EU to continue to be globally competitive in terms
of the quality of its research, its innovative goods and services[245] and its ability to
attract researchers and innovators of the highest calibre.

Network innovation

It is not only the exploitation of innovative
ideas that has been affected by globalisation. The development and creation of
such ideas (i.e. research and development) is similarly affected by the
specialisation that the globalisation of the economy calls for. "Network
innovation" – i.e. innovation via collaboration between different
businesses, research centres, universities etc, that is often cross-border – is
increasingly becoming the main path, both in Europe and elsewhere, to undertake
and pursue research and development efforts[246].
This also involves the transfer of confidential information (which may subsequently
become commercially valuable, if the fruits of the research and development
activity can be exploited on the market) between the parties involved.

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

The European Commission has repeatedly
recalled in recent times the importance of knowledge and innovation for Europe,
setting notably an important target for the 2020 horizon. It has also explained
that the gap with major third countries needs to be reduced. Two important
areas are, inter alia, identified for action: the need to increase
R&D intensity in the private sector and need to facilitate network
innovation and knowledge transfer within the internal market. The Commission
has also underlined the job creation dimension of an improvement in knowledge
and innovation in Europe.

The importance of knowledge and
innovation for Europe: the 2020 target

In its Europe 2020 strategy for smart,
sustainable and inclusive growth, the Commission established as a priority the
development of an economy based on knowledge and innovation. It also maintained
an important target for the 2020 horizon: “3% of the EU's GDP should be
invested in R&D”[247].
Europe also faces a series of crucial internal challenges: economic and
financial crisis, low growth, ageing population, and a diverse set of
environmental and grand challenges.

Pursuing this avenue should deliver
important benefits[248].

–
Macro-economic model simulations suggest that
increasing R&D investment in the EU to 3% of GDP could have significant and
positive impacts on GDP growth in all Member States over a 25-year period[249].

–
In particular, a recently completed simulation
of the impact of increasing average R&D investment across the EU27 to 3% of
GDP by 2020 suggested that GDP could increase by 3% and employment by 1.5% by
2020. The corresponding figures for 2025 are 5.4% for GDP and 2.5% for
employment, leading to overall potential gains of €795 billion in GDP and 3.7
million jobs[250].

–
Investment in ‘intangible assets’ that give rise
to innovation (R&D, software, human capital and new organisational
structures) now accounts for up to 12% of GDP in some countries and contributes
as much to labour productivity growth as investment in tangible assets (e.g.
machinery and equipment)[251].

Public opinion also acknowledges that
research and innovation are critical for sustainable growth. According to an
Eurobarometer survey of EU citizens, conducted in autumn 2009, the most widely
supported priority concerning ways to boost growth in a sustainable way is
through the stimulation of research and innovation in European industry (31%)[252].

The need to reduce the innovation gap
with other major economies

As underlined by the Commission, European
research is still among the best in the world[253]. However, Europe
suffers from an innovation gap with the US, Japan and other competitor
economies. Europe has been investing too little in research – despite the 3%
target – compared to major competitors, thus “under-investing in our
knowledge base”[254].
In relative terms, the investment is lower than in the US (1.92% of GDP in
Europe - or 201 billion Euros PPP in 2008- vs. 2.79% of GDP in the US (or 283
billion Euros PPP in the same year) (Eurostat)[255]. Europe is spending
every year 0.8% of GDP less[256]
than the US and 1.5% less than Japan in R&D[257].

The 'Innovation Union Scoreboard 2011'[258] showed that the US,
Japan and South Korea have a performance lead over the EU27[259]. This is confirmed by
the ‘Innovation Union Scoreboard 2013’[260].
New economic powers such as Brazil, China and India have emerged and their
R&D weight is already growing. This implies that, on the one hand, Europe
is losing ground, in relative terms, in producing knowledge[261]. On the other hand,
global innovation leaders such as the US and Japan are particularly ahead of
the EU27 on indicators of business activity[262].
This reflects a lower presence of EU industry in sectors based on new
technological paradigms (such as ICT and biotechnologies), as Europe has been
less able, compared to the US, to develop competitive new technology-based
business[263].

Indeed, one key driver of the differences
is the fact that the EU has not played a role comparable to the US in the IT
revolution. In the US much more than in the EU, the IT revolution has given
rise to the creation of many R&D intensive firms which have developed and
grown into global leaders. But this "IT story" seems not to be an
isolated case as we see again that the US biotech sector attains a size which
is about the double that of the EU[264].
Also in nanotechnologies, in spite of a higher level of public research
expenditures in the EU than in the US, EU/US comparisons on the volume of
business activity generated (based on indicators such as private R&D
investments, number of patents and market introduction of new products) are
clearly not favourable for the EU[265].

On the contrary, the EU scores well in
'traditional' scientific fields, such as Agricultural science, Chemistry,
Physics and Engineering, while it lag the farthest behind the US in
fast-developing fields such ICT, Nanotechnology, Biotechnology, Molecular
biology and Genetics[266].
Bonaccorsi developed the following diagnosis: "European science is weak
in the upper tail of quality, in fast moving new fields, and in fields
characterised by divergent growth and new forms of complementarities, many of which
are also responsible for breakthrough technological developments"[267].

Two areas for action: increase of
private sector R&D and facilitation of network innovation and knowledge
transfer within the internal market.

Europe's average growth rate has been structurally
lower than that of our main economic partners, largely due to a productivity
gap that has widened over the last decade. The Commission’s diagnosis is that
much of this is due to differences in business structures combined with lower
levels of investment in R&D and innovation, insufficient use of information
and communications technologies, reluctance in some parts of our societies to
embrace innovation, barriers to market access and a less dynamic business
environment[268].

Two areas are examined the following
paragraphs: firstly, the need to increase private sector R&D; secondly, the
need to facilitate network innovation and knowledge transfer within the
internal market.

Need to improve the conditions for
private sector R&D

R&D is by far the most important driver
for company innovations. However, the Commission has expressed that the
innovation gap with the US and Japan is mainly the result of lower levels of
private investment in R&D[269].
The major gaps identified are related to business R&D (business R&D in
the EU is 66% lower than the US[270]
and 122% lower than Japan, as a share of GDP; and €100 billion more in business
R&D investment would be needed every year to reach the 3% of GDP target) and
venture capital investments (Europe invests about €15 billion a year less in
venture capital than in the US, so venture capital investments are 64% lower
than the US). Banks are reluctant to lend to knowledge-based companies that
lack collateral. The financial crisis has made a bleak picture worse[271].

It is not only the
absolute amounts spent on R&D that count: the European smaller share of
high-tech firms explains half of our gap with the US[272]. Indeed, the
low levels of investment in R&D are largely due to differences in
industrial structure and company demographics[273] and not to
the propensity of individual EU-headquartered firms to invest less than similar
companies headquartered elsewhere.[274]
High R&D intensity sectors in the EU are generally smaller than in the US
and Japan and contain proportionately more SMEs, which invest less per firm
than larger companies. Currently, too few of European innovative SMEs grow into
large companies[275].
These sectors are thus less R&D intensive than their equivalents in other
countries (20% less R&D intensive than in the US)[276] and make lower
contributions to overall R&D intensity than they do in either the US or
Japan[277].

The productivity gap is
further aggravated by the fact that, compared to the US, private sector R&D
investment in the EU is more concentrated in the medium-high tech sector than
in the high-tech sector, since the impacts of R&D investment on
productivity are greater in high-tech sectors than they are in medium- and
low-tech sectors[278].
Bridging the gap between the EU and the US would require a substantial increase
in the share of high-tech, high R&D intensity sectors in the EU economy,
but this is hindered by the fact that few R&D intensive SMEs grow into
large corporations capable of gradually shifting the structure of the economy
towards large, high R&D performing and wealth creating sectors[279]. Few large
European high-tech companies have been created over the last couple of decades
and the average age of big R&D spenders in the EU is consequently much
higher than in the US.[280]
The drivers of change are young leading innovators (or ‘Yollies’), which are
far more numerous in the US than in the EU, especially in leading-edge sectors
such as semiconductors and biotechnology[281].

Also, Europe is short in
the cutting-edge research that can deliver the breakthroughs required to fuel
science and technology (S&T)-based business development. The EU deficit
with respect to the US in scientific excellence is particularly important in
some fast-moving fields which are precisely those where the US has generated
most S&T-based growth (e.g. Information and Communication Technologies,
Nanotechnology, Biotechnology, Molecular biology, Genetics)[282].

The case of
nanotechnology is a good illustration of the underperformance of the European
research system[283].
In this key enabling technology, which is critical for future international
competitiveness, the EU spends more public money annually than other countries.
According to several recent estimates[284],
the European Union spends around 1.5 billion Euros annually (including the 27
Member States' national funding and EC funding), which is considerably more
than the USA (1 billion Euros), Japan (0.47 billion Euros) and China (0.1
billion Euros).

However, if one looks at
highly cited scientific publications in this field, 10% of EU publications are
in the top 10% most cited publications, compared to 16.1% for the USA, 5.4% for
Japan and 8.1% for China. Another indication of Europe lagging behind is the
market introduction of nanotechnology-based products and applications.
According to a recent nanotechnology product inventory compiled by the Project
on Emerging Nanotechnologies at the Woodrow Wilson International Centre, a
total of 53% of identified nanotechnology-based products come from the US,
followed by companies in East Asia (24%), Europe (15%), and other world regions
(8%). Fragmented public funding in Europe leads to lower scientific and
technological outputs per euro invested: the efficiency of EU countries can be
seen lagging behind the US and the OECD average.

Translating R&D into exploitable
innovation is an additional problem. Despite the
fact that European research has been excellent and has been responsible for
many new technologies used in industries worldwide[285], our past record has
not always been so good when it comes to translating scientific leadership into
industrial advantage. The situation in lithium batteries is a clear example of
this with European firms holding more than 30% of the relevant patents, without
any production of such batteries taking place in the EU[286].

Additionally, private sector R&D is
increasingly outsourced to emerging economies and thousands of our best
researchers and innovators have moved to countries where conditions are more
favourable[287].

As a result, the Commission has underlined
that Europe needs to improve the conditions for private sector R&D in
the EU[288].
Investing in the early stages of the adoption and diffusion of new technologies
should give Europe a technological lead to ensure that it secures the returns
from its innovation in terms of growth and jobs. "First mover advantage"
can boost productivity, resource efficiency, and market shares – provided that
business uncertainties are lifted[289].

Need to facilitate network innovation and
knowledge transfer within the internal market

Although the EU market is the largest in
the world, it remains fragmented and insufficiently innovation-friendly. For
instance,

–
although our services sector accounts for 70% of
the economy, our knowledge-intensive services are still under-developed[290];

–
the share of companies in the EU that
demonstrate innovative behaviour (via the introduction of new or improved
products, processes, services, marketing methods or organisational changes)
stood at 53% in 2007, but only 25% of such companies typically introduce new
goods or services in national markets other than their own, thus failing to
take advantage of the single market[291].

The Commission has pointed out as the
insufficient knowledge-transfer within the internal market as an important
problem, despite evidence showing that cross-border co-operation enhances the
quality and impact of R&D[292].

It has stressed that barriers in the single
market make it more difficult for different players to work together across
border, using and sharing knowledge from all sources, which is increasingly how
successful innovations are developed[293].
Recent estimations regarding publicly funded research show that a reallocation
of national funds to transnationally coordinated funding could benefit the EU's
economy and job market[294].

In this context, the Commission has
underlined that it is more important than ever to deliver the so-called
"fifth freedom", which is not only the free movement of researchers
but also the free movement of innovative ideas. Genuinely open innovation
requires brokerage, intermediaries and networks in which all players can
participate on an equal basis. Internationally competitive clusters play a
vital role in bringing together – physically and virtually - large companies
and SMEs, universities research centres and communities of scientists and
practitioners to exchange knowledge and ideas. The Commission considers that
knowledge transfer between business and academia should be strengthened, and
made to happen trans-nationally[295].

Knowledge, innovation & jobs

Innovation is a key factor for job growth.
Although it is possible for innovation to displace employment due to gains in
labour productivity, recent firm level evidence suggests that the overall,
long-term impact on employment levels is positive in many countries due to
factors such as lower costs and increased demand[296].

Businesses seem convinced of this. 86% of
the Respondents to a global survey in 2011 agreed that investing in innovation
is probably the best way to create jobs in their own country[297].

However, overall European underperformance
and differences in scientific output and quality amongst Member States entail
missed opportunities notably in terms of growth and jobs[298]. The number of
researchers in Europe as a share of the population is well below that of the
US, Japan and other countries. Moreover, the EU has only 46% of its research
labour force in business compared to 69% in China, 73% in Japan and 80% in the
US[299].
It is estimated that the EU will need at least one million new research jobs if
it is to reach the R&D target of 3%[300].

The role of the private sector, and in
particular of SMEs, appears of paramount importance in this regard. Recent
research 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[301].
In addition, it is worth highlighting that all the jobs created by SMEs (which
accounted for 85% of all jobs added in the EU between 2002 and 2010) only came
from young companies (up to 5 years old) while SMEs older than 10 years lost
jobs over that period of time. This indicates that innovation, which is
essential to all new businesses, is the backbone for social prosperity[302].

Annex 2 –
Results of the public consultation

The public online consultation was launched
on 11 December 2012 and closed on 8 March 2013. The questionnaire was made
available in all official languages of the Union. This summary provides an
overview of the responses and results.

386 responses were filed using the online
tool[303], coming from almost every Member State. No replies came from
Greece, Lithuania, Luxembourg, Latvia, and Malta[304] Germany (111 replies)
and France (70) were by far the Member States from which most responses came
from. Together Germany and France account for 47% of the responses. Belgium
(36) Sweden (26), Poland (22), Spain (18), Italy (15), Austria (11) have also significant
levels of participation and together account for one third of the total number
responses. Around 10% of the responses came from EU wide organizations.

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Concerning the type of respondent[305], The consultation
triggered many replies from both citizens (152 responses - 39% of the total)
and companies (125 - 32%). 35 responses came from professionals (9%), 32 from
business associations (8%), 19 from research entities (5%), severn from trade
unions (2%), 5 from NGOs (1%) and three public authorities (1%)[306]. The eight remaining
respondents did not indicate any of the above categories. 15% of the
respondents were SMEs and micro-enterprises (59 responses in total).

Box 1:
Observations regarding multiple or copied contributions

An analysis
of individual responses suggests that there has been a particularly strong
mobilisation in some sectors. Two economic groups have provided a total of
eight replies via four affiliated companies in each case. Another economic
group provided three replies from different affiliated companies, and in one
case, an economic group provided two replies. Citizens have also been mobilised
by a political party in several Member States. This led to a significant number
of identical responses which follow a dedicated template (‘answering guide’)
published on the Internet and promoted by that party.

I. Role and importance of trade
secrets

The importance of Trade secrets for
R&D, innovation, competitiveness, growth and jobs (questions I.1 and I.2)

The majority of respondents see a strong
positive influence of trade secrets on: R&D in companies (44%); the
exploitation of innovation (45%); innovation and competitive performance of
SMEs (42%); large companies operating internationally (44%).

More than 65% of companies see a strong
positive influence of trade secrets in the above-mentioned areas.

For 67% of SMEs trade secrets have a strong
positive impact on SMEs’ innovative and competitive performance.

Citizens have a contrasting view on the
role and importance of trade secrets. While a majority sees a weak positive
impact on the exploitation of innovation, trade secrets are otherwise generally
seen as having a negative impact (either weak or strong) on R&D (in both
research entities and companies), on innovative and competitive performance (of
both SMEs and large companies) and on growth and jobs as well as on
competitiveness of the EU in the world.

There was a split across the respondents as
to whether trade secrets have a strong negative (37%) or strong positive (31%)
influence on research in research institutions. 37% of research entities find
that trade secrets have a strong negative influence on research in research
institutions, while 26% see a strong positive influence. However, 53% of
research entities regard trade secrets as having a strong positive influence in
R&D in companies.

37% of all respondents indicated that trade
secrets have a strong positive influence on the competitiveness of the EU in
the world, whereas 13% see a strong negative influence.

Views are split about the importance of
trade secrets for growth and jobs: 37% of all respondents consider that they
are of high importance, 17% find them important and 43% stated that trade
secrets are of low importance. 44% of SMEs and micro-enterprises, and 60% of
all companies, find trade secrets highly important for growth and jobs.27% of
all respondents find that trade secrets have a positive influence on consumer
choice and 23% are of the opinion that they have a negative effect. 51% of all
respondents see a negative correlation between trade secrets and lower prices
for goods and services. The majority of citizens see no influence on consumer
choice (56%), but a larger number of them (69%) regard trade secrets as having
a strong negative effect on prices of goods and services.

Trade secrets as a tool for business
and research bodies (question I.3)

58% of respondents find that trade secrets
are an important tool for business and research bodies to protect their
valuable information. 40% of the respondents do not agree that trade secrets
are an important tool for business and research bodies to protect their
valuable information.

63% of responding research entities finds
that trade secrets are an important tool for business and research bodies to
protect their valuable information.

91% of participating companies see trade
secrets as an important tool. Nearly half of those see trade secrets as
complementing intellectual property rights, while the other half finds them
important both as a complement and as an alternative to other intellectual
property rights. Only 2% of responding companies see trade secrets exclusively
as an alternative to intellectual property rights

II. Views on existing level of
protection of trade secrets against their misappropriation

Under the current state of affairs
the protection of trade secrets is weak, appropriate or excessive? (question I.4)

A substantial part of the respondents
(between 37% and 39%) find that protection of trade secrets is excessive at
national level and internationally, both within the EU and globally (for
example when trade secrets are misappropriated in a non-EU country and used in
the EU against to compete with its legitimate owner).

23% of respondents find legal protection
appropriate at national level. 15% find it appropriate throughout the EU and
only 8% find it appropriate at International level.

28% of respondents find that the existing
national protection against misappropriation of trade secrets is weak; 37% are
of the opinion that protection in the EU on a cross-border context is weak, and
43% see the protection at global scale as weak.

Replies from companies and research entities
(i.e. those more likely to hold trade secrets and to be exposed to trade secret
misappropriation) show a substantially different picture: 45% find the
protection at national level weak (whereas 31% find it appropriate); 57% find
that protection in a cross-border context in the EU is weak (whereas 16% finds
it appropriate); and 63% find that the protection at a global level is weak.

Member States referred to as
providing weak level of protection (question I.5)

Respondents that considered national
protection as weak were asked to indicate the Member State or Member States
they were referring to.

The table below shows the number of
respondents that have indicated a particular Member State has having a weak
level of legal protection of trade secrets against misappropriation.

Sweden, Finland, Denmark, Portugal and
Germany were the least mentioned countries.

France, Poland, Bulgaria, Czech Republic,
the United Kingdom, Belgium and Cyprus were identified by at least 20
respondents as countries with a weak level of protection.

Weakness of protection (question I.6)

Respondents were also asked to specify
where they see the weakness on the current legal protection against
misappropriation of trade secrets when doing business across borders. Multiple replies
were possible.

15 respondents indicated other weaknesses.
Some reported that in certain Member States trade secrets protection
legislation is fragmented or embedded in different pieces of legislation, thus
hindering its legibility and visibility. Others highlighted that insufficient
respect for trade secrets in the EU makes the EU less attractive for industry
compared to third countries with more robust regimes. Other respondents
referred to difficulties obtaining sufficient evidence of misappropriation.

Impact of divergent national
protection of trade secrets against misappropriation when carrying out business
across borders in the EU (question I.7)

Respondents were asked whether different or
divergent rules had an impact, and if so what the nature of the resulting
impact would be. According to one third of the respondents (131) there is no
impact, whereas 62% of the respondents (241 in total, including 114 companies,
53 citizens, 32 business associations, 19 liberal professions and 16 research
entitites) find that such an impact exists, in particular the following:

·
higher business risk in the Member States with
weaker protection when doing business across borders (indicated by 50% of all
respondents and 82% of the companies);

·
less incentive to undertake cross-border R&D
(38% of all respondents, 59% of companies and 42% of research entities), and

·
increased expenditure in preventive measures to
protect information (37% of all respondents, 54% of companies and 42% of
research entities)

51% of the companies and 42% of the
research entities have further indicated that different national rules on the
protection of trade secrets against misappropriation reduce cross-border
business activity as trust in legal protection in other Member States is
diminished.

For 67% of citizens differences in national
laws have no impact on trade secret protection. 18% find that that such
differences cause higher business risk in the Member States with weaker
protection.

III. Possible action from the
European Union

Should legal protection against
misappropriation of trade secrets be addressed at EU level? (Question I.8.)

According to 52% of the respondents the
legal protection against the misappropriation of trade secrets should be
addressed by the EU. Companies, SMEs, professionals, business associations and
research entities are in general favourable to EU action. A vast majority of
citizens, however, does not see a need for EU action. The table below shows the
extent of support for an EU initiative within the specific categories of respondents.

Respondents of the opinion that no action
is required (158 in total) are mostly citizens (114). There are also 15
companies and 14 liberal professionals. Nearly 80% of respondents that do not
see a need for an EU initiative come from Germany, Belgium or Sweden.

46% of respondents not favouring an EU
initiative declare not to hold any trade secrets and 15% claim to hold trade
secrets of crucial importance. The charts below provide an overall view of the
profile and geographic distribution of respondents for whom no EU action
is required. For the position of trade unions and public authorities, see boxes
5 and 6.

||

General options for an EU initiative (question I.8.1)

Respondents favourable to an EU action
(202), of which half are companies, are geographically more widespread (29%
from France, 14% from Germany, 12% from an EU wide organisation, 8% from
Poland, 7% from Spain, 5% from Italy and 4% from Belgium). 12% hold no trade
secrets and 58% of them hold trade secrets which they consider of crucial
importance. These respondents were provided with four general options for a
possible EU initiative and asked to choose only one:

·
55% indicated that “there should be uniform EU
legislation on the misappropriation of trade secrets”

·
24% opted for an “EU legislation establishing a
comparable level of protection

The two other options were (a) the
provision of information on the differences in national legislation (preferred
by 10% of respondents favourable to an EU action) and (b) a Recommendation from
the European Commission inviting Member States to improve national laws (4% of
respondents favourable to an EU action).

Other options suggested by respondents:
some supported the combination of a legislative option and an information
action by an EU body. One respondent was in favour of the “fastest option to
implement”. Some respondents suggested that EU action should also address the
protection of trade secrets/confidential information disclosed by companies to
public authorities, including EU institutions.

What should be content of a possible
EU legislation or recommendation? (Question
I.9).

Respondents were asked to give their views
on the content of a possible recommendation from the European Commission or EU
legislation. They were provided with seven non-exclusive options (multiple
replies possible) and the possibility of suggesting other measures.

According to the majority of respondents an
EU initiative should include the following:

N.B. The percentages
here indicate the portion of all respondents to the consultation that are in
favour of the measure in question

For a majority of respondents the EU should
not act on the following areas:

Views are split as regards to whether or
not there should be EU Rules on the calculation of damages allowing to take
into consideration all relevant factors, such as lost sales, unjustified
profits by the defendant or fictitious/presumed royalties:

The great majority of citizens are not
favourable to any of the above-mentioned measures (with rejection rates above
75%).

By contrast the following content is
supported by more than 60% of the companies:

Half of the companies also find that an EU
initiative should comprise uniform contractual rules. 30% of the companies do
not agree.

Concerning other stakeholders, see the
following table.

Other possibilities

Several respondents called for clear
definitions of ‘trade secrets’, ‘misappropriation’ and ‘owner of trade
secrets’. At the same time, it was recognised that these definitions should not
be overly prescriptive as these concepts are likely to evolve together with
technology.

Some respondents were in favour of
legislation on corrective measures, such as the destruction of the goods
manufactured using misappropriated trade secrets.

A few respondents suggested addressing
evidence-related issues. A respondent underlined that, in his view, reverse
engineering should not be allowed.

In the comments, several respondents
underlined that contractual freedom is important, thus reinforcing the replies
against EU action on uniform contractual rules on non-compete/non-disclosure
clauses. However, a few of them suggested that, even if EU action is not
appropriate, Member States should improve their rules in this regard.

Positive effects and impacts of a
possible EU level legislation (question
I.10)

For 51% of the respondents EU legislation
would have positive effects. Respondents were allowed to indicate more than one
positive effect (if any) and more than one negative effect (if any).

58% of research entities and 81% of the
companies indicated one or more positive effects. Only 6% of citizens have
indicated positive effets.The table below shows the different positive effects
indicated by respondents.

For 95% of companies an EU action would
result in better protection against misappropriation.  A majority of companies
expected the positive effects suggested to materialise (with rates ranging from
54% to 78%); the only exception being ‘savings would be made on
company-specific protective measures’ which only one third of the companies
expect.

Some respondents referred to increased
deterrence , more legal certainty and encouragement of innovation as additional
positive impacts which could result from EU rules.A few respondents underlined
that the international credibility of the EU would increase providing a
positive example to third countries which are currently not protecting trade
secrets.

Negative effects and impacts of a
possible EU level legislation (question
I.10)

43% of all respondents attach at least one
negative effect to a possible EU legislation.

The negative effect most often mentioned by
respondents is the increase in the number of court cases where companies try to
raise market barriers for competitors. This is also the case when only citizens
or only companies are considered

The least frequently mentioned negative
effect indicated by respondents is lower job mobility. Once again, this is also
the case when only citizens or only companies are considered.

Similar results are obtained when
separately looking at the responses provided by liberal professionals, business
associations and research entities: a higher number of litigation cases brought
for the purpose of raising barriers for competitors and the risk of abusive
behaviour are the two possible negative impacts most often mentioned, whereas
lower labour mobility is the least frequently mentioned negative impact
associated with a possible EU legislation on misappropriation of trade secrets.

In their comments, some respondents
expressed concerns that protection of trade secrets at EU level could be
detrimental to innovation (e.g. contrary to a patent, protected information is
not disclosed to the public, so society would not benefit) and could result in
anti-competitive behaviour. A few respondents highlighted that protection of
trade secrets could threaten the freedom of speech, the right of information
and whistleblowing practices. It was also invoked that EU rules on trade secret
protection could facilitate opaque political action and undermine the
transparency of public institutions and companies.

EU legislation on misappropriation of
trade secrets and the Internal Market for intellectual property (question I.11)

46% of respondents find that the
functioning of the Internal Market for intellectual property would benefit from
EU legislation on misappropriation of trade secrets, mainly because:

·
greater legal certainty and easier enforcement
would encourage the exchange of intellectual property across borders in the EU
(156 respondents or 40% of total respondents);

·
better coordination and/or harmonisation would
help in deterring misappropriation from non-EU countries and make intra-EU
cooperation more interesting (144 respondents or 37% of total respondents). 72%
of the companies agreed with these views.

However, a similar percentage of
respondents (43%) do not agree. According to them the functioning of the
Internal Market for intellectual property would not benefit from EU legislation
on the misappropriation of trade secrets because such legislation would only
incentivise companies to control and protect their intellectual property even
more (143 respondents – 37% of all respondents) or because research cooperation
and transfer of know-how across borders in the EU will not increase much as
other factors hamper such activities and would not be solved (135 respondents
35% of all respondents).

Some respondents noted that EU legislation
would in addition increase competitiveness of EU industry as well as
accelerating growth and sustainable economic recovery. It was also underlined
that improved protection against misappropriation of trade secrets will not
result in fewer patents, but in a better tool to foster innovation and it would
provide greater choice and flexibility to R&D companies. According to some
respondents, EU entities would be less reluctant to develop certain markets and
more willing to engage and partner with other actors across borders. A
respondent indicated that “the current lack of harmonised protection for
intellectual property in the form of trade secrets remains a big hole in the
achievement of the single market”.

Several respondents added that the concept
"internal market for intellectual property" was not understandable.
Individual comments also included the following:

–
focusing on intellectual property is negative
for society, research, innovation and the economy.

–
less laws is better than new laws.

–
the EU should protect individuals, not
corporations.

IV. Use of trade secrets, their
misappropriation and legal action

Holding trade secrets and making
efforts to protect them (questions II.1 and
II.2)

223 respondents (58% of all respondents)
declare to hold trade secrets. Of these, 150 respondents (40% of all
respondents) claim to hold trade secrets that they consider of crucial
importance. 37. 37% of all respondents make considerable effort to protect
their trade secrets.

Most respondents declaring to hold trade
secrets of crucial importance are companies (63%), individuals working in
liberal professions (7%) and research entities (4%) but, interestingly, a substantial
part of those trade secret holders are citizens (19%). The views expressed by
these different stakeholders diverge. For the majority of the citizens that
claim to hold trade secrets that they consider of crucial importance trade
secrets are not an important tool for business and research bodies in the EU
(55%), they consider legal protection at national level excessive (52%) and do
not see a need for EU action on legal protection against misappropriation of
trade secrets (52%). By contrast, companies, liberal professionals and research
entities, holding trade secrets of crucial importance, regard trade secrets as
an important tool for business and research bodies in the EU (95%), consider
legal protection at national level weak (54%) and favour EU action (88%).

70% of all responding companies and
research entities hold trade secrets of crucial importance and 65% make
considerable effort to protect them; for SMEs and micro-enterprises the
respective figures are 61% and 58% .

Technology and know-how agreements (question II.3)

41% of all respondents have entered in
technology or know-how transfer agreements. These are mostly companies (60%),
but also citizens (22%), liberal professionals (8%) and research entities (6%).
Most companies (77%) are or have been parties to such agreements either at
national level or abroad.

Instances of trade secret
misappropriation and typical actors
(questions II.4 and II.5)

75 respondents (19% of all respondents), mainly
companies (77%), but also citizens (15%), report to have suffered
misappropriation of an important trade secret, either once or twice (38
respondents) or more frequently (37 respondents). Typical perpetrators of trade
secret misappropriation are:

·
former employees (indicated by 53% of
respondents that have been subject to trade secret misappropriation),

·
suppliers/customers (indicated by 52%), and

·
competitors (48%).

The percentages do not add up as some
respondents have suffered misappropriation more than once. In addition several
actors may be involved in one instance of misappropriation (for example, one
competitor acting together with a costumer or employee).

32% of the responding companies reported
never to have been victims of trade secret misappropriation, whereas 46% have
at some point suffered misappropriation of important trade secrets. (22% once
or twice and 25% more often). The vast majority of companies from which trade
secrets have been misappropriated are either active EU wide (24%) or operating
from France (29%), Germany (14%) Austria, Spain or Poland (5% each).

Legal action against misappropriation
of trade secrets (question II.5)

Respondents that have reported instances of
trade secret misappropriation were asked to indicate whether they have sought
legal redress. Given that half of them suffered trade secrets misappropriation
more than once multiple choices were allowed and therefore percentages do not
add up. On at least 33 instances no action was taken. On at least 18 instances
action was taken but it was not successful. On 19 cases, at least action was
taken but it was not sufficient to compensate for the damages suffered. On at
least 3 instances, action was taken and damages were sufficiently compensated.

In order to cover other courses of action
and outcomes respondents were given the possibility of submitting comments.
This was used by some respondents to indicate that in some cases legal
proceedings have been but subsequently settled out of court. In at least one
case, the settlement was, in view of the respondent, for an “inappropriately low
amount”, a result essentially due to “inappropriate protection”. Another
respondent pointed out that it was unsuccessful in obtaining the destruction of
the infringing goods. A respondent underlined that the decision not to initiate
legal action was based on costs. Another one reported that once an injunctive
order is obtained, claims for damages are often not pursued, due to complexity.
In some cases, the legal action initiated by respondents was still pending.

Trade secrets and use of other forms
of intellectual property (questions II.7 and
II.8)

54% of all respondents use copyright, 38%
trademarks, 32% patents and 24% designs.

Respondents do not have strong views on
what could be a reason for not using patents, with 42% indicating ‘no opinion’.
Some respondents stated that sometimes they would not be using patents because
they were expensive (19%), not effective (17%) or because they were not
available for the subject matter at hand (17%). Within companies the reason
most often indicated for not using patents is lack of availability (25%).

Respondents were even less assertive in
respect of other intellectual property rights and possible reasons behind
non-use of such forms of protection, with ‘no opinion’ rising to 47% in case of
designs, 52% in case of trademarks, 49% in case of copyright and 53% in case of
geographical indications.

V. Views of respondents by category

This chapter presents the findings of this
consultation by category of respondents instead of by question.

What citizens say

Of the 152 participating citizens, nearly
half (46%) are from Germany, 15% from Belgium, 11% from Sweden, 7% from France,
4% from Austria and 3% from Spain.

Most citizens regard trade secrets as
having low importance for R&D (75%) as opposed to 18% that find them highly
important. 77% do not believe that trade secrets are important for economic
growth and jobs in the EU (77%). A similar majority considers that trade
secrets are of medium importance for: (a) exploitation of innovation (i.e.
turning an invention into a marketable product) (71%), (b) Innovative and
competitive performance of SMEs (74%) and (c) Innovative and competitive
performance of large companies which operate internationally (69%). While 55%
of citizens find that trade secrets have no impact on consumer choice, 24% find
that they have a strong negative impact on prices.

Three in four citizens regard existing
legal protection of trade secrets as excessive at all levels (National, EU and
International). 67% find that divergence of national laws has no impact on the
protection of trade secrets against misappropriation and 75% do not see a need
for an EU action, (against 19% that are supportive of an action at EU level). A
large majority of responding citizens finds that a EU legislation would have
the following negative impacts: more court cases where companies try to raise
market barriers for competitors (97%), waste of resources in duplicative
research (96%); incremental innovation would be more difficult (94%), increase
risk of abusive behaviour by competitors (88%).

What SMEs and micro enterprises say

SMEs

48 SMEs (excluding micro enterprises)
participated in the consultation. 13 respondents are from France, 9 from
Germany, 6 from Italy, 5 from Poland and 3 from Spain. The remaining come from
Austria, Belgium, Denmark and the Netherlands (with either one or two
participants).

SMEs tend to regard trade secrets as highly
important for R&D (81%) and exploitation of innovation (i.e. turning an
invention into a marketable product) (75%). 25% find trade secrets of medium
importance to the innovative and competitive performance of SMEs, whereas 69%
see trade secrets as highly important for that matter. 88% consider trade
secrets an important tool to protect valuable information either complementing
or replacing intellectual property rights.

A significant proportion of SMEs finds
protection in the EU weak at national level (44%) and even more consider it to
be weak on a cross-border level (52%). 80% find that having different/divergent
national rules means that there is a higher business risk in the Member States
with weaker protection and for 60% of the SMEs this implies that there is less
incentive to undertake research and development activities in a cross border
context. According to 54% SMEs different/divergent national rules reduces
cross-border business activity. 10% do not see a negative impact.

Half of the respondent SMEs hold patents.
The major reasons for not using patents are: nonavailability (indicated by one
in three) and expensiveness (23%). 65% of SMEs consider trade secrets to be of
crucial importance. 23% of SMEs were victims of trade secret misappropriation
once or twice whereas 13% have been misappropriated more frequently. Thus, 36%
of responding SMEs have suffered from trade secret misappropriation.

73% of the SMEs are in favour of having EU
legislation on misappropriation of trade secrets, and 13% find that no such
initiative is required. Those calling for action believe that such an
initiative should cover: prohibition and definition of trade secrets (75%),
empowering courts to order the stop of the use of the misappropriated trade
secrets in the whole EU and rules ensuring confidentiality of trade secrets
during litigation (73%) and empowering EU customs authorities to stop
infringing goods at borders (71%).

Micro enterprises

11 micro enterprises participated in the
consultation. 55% consider that trade secrets have low importance for R&D
and are not an important tool to protect valuable information. At the same time
91% find that trade secrets have a medium to high importance in the innovative
and competitive performance of SMEs. 55% find existing protection at national
level excessive (against 36% that see it as too weak) and see no negative
impact from having different national laws throughout the Union. 64% are of the
opinion that no EU action is required in this field.

What business organisations say

32 business organisations responded to the
consultation, a large portion being French-based and EU wide organisations (10
and 8, respectively). 81% of the business organisations consider trade secrets
to be highly important for growth and jobs in the EU, and around 90% find trade
secrets as highly important for: R&D, exploitation of innovation,
innovative and competitiveness of SMEs as well of large companies operating
internationally. Business organisations tend to find trade secret protection as
weak at national level (40%) against 16% that find it appropriate and 3% that
find it excessive. There is a broader consensus on the weakness of protection
on an EU level (81%) and globally (75%).

For 94% legal protection against the
misappropriation of trade secrets should be addressed at EU level. 50% favour
the adoption of uniform EU legislation, 22% would prefer legislation
establishing a comparable level of protection across the EU, whereas for 8%
Member States should be invited to improve their laws.

All responding business organisations
perceive negative impacts in having different/divergent national rules on the
protection of trade secrets against misappropriation. These include: higher
business risk in the Member States with weaker protection (91%), increased
expenditure in preventive measures to protect information (88%), less incentive
to undertake research and development activities in a crossborder context
(78%), increased costs in adapting licensing models to different/divergent
national rules (63%) and reduced cross-border business activity as trust in
legal protection in other Member States diminishes 53%).

A vast majority (94%) see positive effects/impacts
in an EU initiative, including: better protection against misappropriation
(91%), a safer business environment with better opportunities for different
players to cooperate in R&D and innovation projects (88%), more investment
in R&D and innovation and greater expected returns from sharing, licensing
or transferring know-how (78%), more reliable cross-border enforcement and
lower litigation costs (72%) and better conditions for SMEs to raise funding or
venture capital (69%).

Some business organisations have also
indicated negative impacts associated with an EU initiative, such as more court
cases where companies try to raise market barriers for competitors (13%), risk
of abusive behaviour by competitors and less labour mobility (9%)

According to more than 87% of responding
business organisations an EU initiative should address the following (1)
prohibition of acts of misappropriation of trade secrets and definition of such
acts; (2) empowerment of courts to stop unlawful use of misappropriated trade
secrets throughout the EU, and (3) rules ensuring the confidentiality of trade
secrets during court proceedings and hearings.

Business organisations do not support the
setting up of EU rules on non-compete and/or nondisclosure clauses, and are
split on whether the EU should put forward criminal penalties or fines on
misappropriation of trade secrets (47% in favour and 41% against).

What Member States say

Sweden agrees that it is meaningful to
examine the possible benefits of EU action, but notes that misappropriation of
trade secrets involves not only economic issues but also difficult and
sensitive issues of how EU legislation would interrelate with national rules on
labour law, whistleblowing and freedom of expression, which have not been
addressed in the consultation. As a possible initiative from the European
Commission Sweden would favour a Green Paper or a Communication (not limited to
an economic or technical perspective) to be subsequently subject to a public
consultation before any further action is taken.

Estonia finds trade secrets highly
important for R&D, exploitation of innovation, innovative and competitive
performance of both SMEs and large companies. It considers the protection of
trade secrets against misappropriation weak at cross-border level in the EU and
it favours the adoption by the European Commission of a recommendation inviting
Member States to improve their respective national laws.

Denmark and France have sent written
contributions outside the framework of the Internet based questionnaire.

Denmark attaches considerable importance to
an effective protection of business and research information, which it
considers of vital importance for competition in European markets, growth and
employment in the European Economy and the international competitiveness of
Europe as a whole. Legal protection against cross-border use of illegally
acquired trade secrets can be improved. However, the public consultation in
Denmark has resulted in no responses from stakeholders, and therefore the
Danish Government finds that a more detailed examination of the issue, i.e.
through a Green paper, should be carried out before taking any steps further
towards legislation.

France considers that trade secrets have a
strong positive impact on: (1) R&D in companies and research entities; (2)
exploitation of innovation, innovation and competitive performance of SMEs and
large companies; (3) growth and jobs as well as in competitiveness of the EU in
the world, and (4) competitiveness of the EU in the world. France considers the
existing legal protection of trade secret against misappropriation to be weak
in the EU on a cross-border level and also at the global level. A definition of
trade secrets at EU level should be inspired by the definition provided by
TRIPS, and be sufficiently flexible to allow some margin of manoeuvre to Member
States. France favours the dissemination of reliable information by a European
body on the legal frameworks and the importance of protecting trade secrets as
well as guidance on best practices. A possible EU legislation, or
Recommendation, should comprise a definition of trade secrets and of
misappropriation of trade secrets, and allow for court orders stopping unlawful
use of trade secrets in the EU.

What trade unions say

Four trade unions have participated in the
survey. The three Swedish trade unions do not favour an EU initiative of legal
protection on the trade secrets against misappropriation as they fear that it
may disrupt the existing balance between labour, civil and criminal law in
Sweden and hinder job mobility.

Two of them further stressed the need to
preserve transparency and freedom of expression, and expressed particular
opposition to any EU initiative on criminal sanctioning of misappropriation of
trade secrets.

A French association is in favour of an EU
initiative leading to uniform EU legislation on the misappropriation of trade
secrets.

What NGOs say

Five respondents have filed their replies
to the public consultation as NGOs (Non-Governmental Organisations) although
one of the contributions does not actually express any view on any of the
questions asked. Two NGOs (Vrijschrift and European Digital Rights) do not see
trade secrets as having a positive role for in R&D, innovation,
competitiveness or growth and jobs, and do not support an EU initiative in this
field. Two others (Foundation pour le droit continental and ECTA –European
communities Trade Mark Association) have the opposite view.

What patent owners say

122 respondents (31% of all respondents)
are patent owners. Trade secrets are generally perceived as complementing other
industrial property rights. The views expressed by patent holders strongly
support this assertion. Between 79% and 82% considered trade secrets highly
important for R&D, exploitation of innovation, innovation and competitive
performance of SMEs, and for large companies operating internationally.

88% of responding patent owners consider
trade secrets as either complementary or both complementary and alternative to
intellectual property rights. One patent owner sees trade secrets exclusively
as an alternative to intellectual property rights.

78% find that EU legislation should address
misappropriation of trade secrets. 80% state that they hold trade secrets of
crucial importance and 48% have been victims of trade secret theft, either once
or twice (21%) or more frequently (27%).

What owners of design rights say

93 respondents (one in four of all
respondents) own design rights. 82% of them hold trade secrets which they
consider of crucial importance and they consider trade secrets as being
complementary (39%) or both complementary and alternative to intellectual
property rights (44%). 18% of design owners were once or twice victims of trade
secret misappropriation and 30% have suffered from misappropriation of trade
secrets more frequently.

76% find that the legal protection against
the misappropriation of trade secrets should be addressed at EU level, in
particular for the purposes of prohibiting misappropriation of trade secrets
and providing a definition of what is misappropriation (81%), empowering courts
to order all customs authorities in the EU to stop at the EU borders imports of
products manufactured in a non-EU country using misappropriated trade secrets
(75%), and ensuring that the confidentiality of the trade secrets/confidential
business information is kept during court proceedings and hearings (75%).

Annex 3 – The
specific industry survey

An industry survey (referred to as the
“2012 Industry Survey”) was undertaken in the context of the second external
study carried out for Commission[307].

A3.1.      Methodology
and replies

Methodology

The 2012 Industry Survey followed, to the
extent possible, the guidelines provided by the OSLO Manual 3rd edition (2005)
for the collection and interpretation on innovation data, developed by the OECD
and EUROSTAT.

The Target Population for the survey was a
subset of the EU business enterprise sector, including both goods-producing and
services industries. Enterprises belonging to the public administration were
not covered.

The primary statistical unit is the
“enterprise” according to the EU definition (see OSLO Manual, ch. 4): “the
smallest combination of legal units that is an organisational unit producing
goods or services, which benefits from a certain degree of autonomy in decision
making, especially for the allocation of its current resources. It may carry
out one or more activities at one or more locations and it may be a combination
of legal units, one legal unit or part of a legal unit.” In particular, for
multinational corporations, local branches were considered as independent
units.

In the statistical investigation,
enterprises were classified according to their “size,” according to the number
of employees:

Small: 1-49 employees

Medium: 50-249 employees

Large: 250 employees and above

Economic activities were classified
according to NACE rev. 2.

17 sectors were covered:

1. Manufacturing: Textiles

2. Manufacturing: Chemicals and chemical

3. Manufacturing: Basic pharmaceutical and
Biotech

4. Manufacturing: Computer, electronic, optical

5. Manufacturing: Machinery and equipment

6. Manufacturing: Motor vehicles

7. Electricity, gas steam and air-conditioning
supply and water supply; sewerage, waste management and remediation activities

8. Wholesale trade, except of motor vehicles
and motorcycles

9. Transportation and storage

10. Information services activities

11. Publishing activities

12. Telecommunications and Computer
programming, consultancy and related activities

13. Fast moving consumer goods

14. Financial and insurance activities

15. Scientific research and development

16. Advertising and market research

17. Legal and accounting activities

The sample frame includes the following
(13) countries: Austria, Belgium, Czech Republic, France, Germany, Hungary,
Italy, The Netherlands, Poland, Spain, Sweden, Switzerland, and the United
Kingdom.

The sample was stratified so as to include
at least two respondents for each activity and each country: one small-medium
and one large enterprise. Thus, the theoretical sample includes 1 respondent x
2 enterprise sizes x 13 countries x 17 activities = 442 respondents.

For each country, a sample of firms
belonging to the frame identified above was established. This sample was
obtained by random selection from the official statistical sources. On top of
the basic sample (with 442 elements), other companies willing to take part in
the survey were allowed to participate.

The survey was carried out online,
following standard CAWI (Computer Assisted Web Interviewing) methodology, and,
where needed, on the phone (Computer Assisted Telephone Interview).

The time span for the interviews run from
14 November to 4 December 2012.

Replies

The 2012 Industry Survey received 537
responses from European companies (see Figure A3.1).

Figure A3.1 –
Responses to the 2012 Industry Survey by sector and geographical origin

Geographical origin of replies:

–
493 replies came from EU Member States: AT, BE,
CZ, FR, DE, HU, IT, NL, PL ES, SE and UK.

–
37 replies came from Switzerland and 7 from
other countries.

Size of respondents: SMEs accounted for 60%
of the sample (323 companies).

A3.2.      Findings
of the survey.[308]

Highlights Survey Section A: Your
Trade Secrets

Importance

The survey results strongly affirm the
observations from the legal and economics literature that trade secrets and
confidential business information (“TS/CBI”) are critically important to the
growth, competitiveness, and innovative performance of European companies.

Overall, 75% of the survey respondents
ranked TS/CBI as being strategically important to their company’s growth,
competitiveness and innovative performance. The survey results also confirm the
importance of TS/CBI to individual business sectors, although their relative
importance varies by industry sector as previously observed. Sectors providing
the largest share of “High Importance” responses are scientific research and
development (55%), chemical manufacturing (52%), and motor vehicles
manufacturing (44%). The industries with the lowest share of “high” responses
include publishing activities (21%), information services activities (19%),
wholesale trade (other than motor vehicles) (17%), and legal and accounting
services (7%). Overall, the survey results indicate that TS/CBI represent very
important components of intellectual property to both large and small/medium
firms.

Nature of Trade Secrets

The survey responses confirm that TS/CBI of
all types are viewed as valuable to European companies.

The most highly-valued types of TS/CBI
relate to “Commercial bids and contracts, contractual terms”, followed by
“Customer or supplier lists and related data”, and then “Financial information
and business planning”. TS/CBI information related to “R&D data”, “Process
know how and technology”, “Formulae and recipes”, “Product technology”, and
“Marketing data and planning” were also ranked by respondents as highly
valuable. As suggested by prior economic research, there are significant
differences among industries in terms of the relative importance assigned to
different types of TS/CBI. Commercial bids and contracts are ranked as the most
valuable in the chemical, computer, wholesale trade, telecommunications,
fast-moving consumer goods, and scientific research and development sectors. In
pharmaceuticals, the most valuable TS/CBI is associated with marketing data and
planning, while customer and supplier lists are perceived as high value for the
machinery and equipment, motor vehicles, transportation and storage,
advertising and market research, and legal and accounting service sectors.
Overall, large firms seem to attach greater value to each category of TS/CBI
than small/medium firms, but the survey results make clear that all types of
TS/CBI are important to firms of every size.

Relationship with other intellectual
property rights

Consistent with the findings of the
economics literature, the survey results confirm that European companies rely
upon many forms of intellectual property protection in addition to TS/CBI, such
as copyrights, patents, trademarks, and designs.

Survey respondents indicated that copyrights
were of medium-to-high importance (combined 43.7% of medium and high importance
responses). Patents were also viewed as of medium-to-high importance (combined
49.4%) in addition to TS/CBI. As expected, reliance on other forms of
intellectual property protection varies substantially across industries.
Copyrights rank highly in the pharmaceutical, advertising, publishing, and
telecommunications, and computer programming industries, whereas patents rank
highly in the pharmaceutical, chemical, machinery and equipment, and scientific
research sectors. Firms of all sizes rely upon other forms of intellectual
property protection in addition to TS/CBI.

A significant number of respondents,
however, assigned low importance to other categories of intellectual property
rights, or otherwise indicated that such other categories were “Not
Applicable”. The large number of responses in these categories suggests that
many firms may rely on trade secret protection exclusively, or to a much
greater degree than reliance on other forms of intellectual property
protection. Firms that rely exclusively or principally on trade secret
protection may therefore benefit from strengthened protection independently of
Commission initiatives with respect to other forms of intellectual property.

The survey confirms that there are many
considerations faced by companies when choosing to rely on TS/CBI as compared
to other potential forms of intellectual property protection.

The most important reason identified by
survey respondents for relying upon TS/CBI concerns the preference to avoid
disclosure of valuable information (52% positive responses). Non-disclosure was
ranked as the most important reason for protecting knowledge by almost every
industry sector (with the exception of motor vehicle manufacturing). The second
most important reason for reliance on TS/CBI relates to the lack of eligibility
of the knowledge for protection under other protection means (30% positive
responses). The least important reasons for reliance of TS/CBI as compared to
other intellectual property rights relates to the short duration of information
(19%) and inadequate protection of other intellectual property rights (19%).

Trade Secrets sharing

Approximately 60% of survey respondents
stated that they used or shared TS/CBI regularly or occasionally with third
parties.

The sectors with the greatest amount of
sharing occur in the scientific R&D, motor vehicles, and chemical sectors.
Both large and small firms share TS/CBI with third parties, although larger
firms appear to share more than smaller firms. Focusing on reasons why
companies do not share TS/CBI with third parties, companies cited strategic
reasons (49% positive responses) and concerns over losing confidentiality of
information (39% positive responses) as the most important reasons. Concerns
over confidentiality are viewed as most important to the chemical (67%), motor
vehicle (61%), and pharmaceutical (57%) sectors. Fears over the loss of
confidentiality and other strategic reasons are important to firms of all
sizes, but were cited more heavily by large firms compared to small/medium
firms.

Highlights of Survey Section B:
Threats to Your Trade Secrets

Asked about primary means by which
companies usually obtain information about products, services and strategies of
other market players, survey respondents identified clients and customers as
the most important means (34% of high responses), followed by suppliers (22%),
employee mobility (17%), and conferences (16%). Of special importance are acts
of espionage. Survey respondents in the motor vehicle (39%) and pharmaceutical
(21%) industries ranked espionage as high concern. Divulgation by regulators is
regarded as particularly important by respondents in the pharmaceutical and
motor vehicle sectors.

Threat of misappropriation

Companies were also asked about the extent
to which various persons posed a risk of unauthorized access, disclosure, or
leakage of TS/CBI.

Survey respondents indicated that threats
were presented from many sources, including current and former employees,
competitors, customers, and suppliers. In the telecommunications and financial
sectors, former employees are considered of special concern to companies,
whereas in the pharmaceutical, publishing, and financial sectors, competitors
are of greatest concern. Regulatory agencies are also of concern to the
pharmaceutical sector.

Risk of misappropriation over time

Companies were also asked whether the risk
of exposure to TS/CBI misappropriation has increased over the last 10 years.

The majority of survey respondents
perceives the risk of misappropriation as having increased over the last 10
years (38% affirmative responses) or remained constant (44.5% affirmative
responses). The perception that the risk of misappropriation has increased is
particularly strong in the chemical and pharmaceutical sectors.

Highlights of Survey Section C:
Protection and Misappropriation of Your Trade Secrets

Differential treatment of TS across
countries

Survey respondents were asked, if trading
in more than one EU country, whether they apply different TS/CBI protection
measures (e.g., confidentiality agreements, non-compete covenants, physical
access restrictions, etc.) depending on the country in question.

In the aggregate, only 23% of survey
respondents responded that they apply different measures. The percentage of
affirmative responses varies significantly by industry, although the chemical
and pharmaceutical industries show the highest level of affirmative responses.
It is interesting to note, however, that the survey results vary significantly
across member countries. For example, 41.5% of the survey respondents in
Germany indicated that they would apply different TS/CBI protection techniques
in different countries, whereas only 8.1% of Italian companies operating in more
than one country reported that they apply different protection techniques.

Attempts/acts of misappropriation

Survey respondents also confirm they had
suffered attempts or acts of misappropriation of TS/CBI over the last 10 years,
both within and outside the European Union.

Out of the 537 respondents, 110 (20.5%)
have suffered at least one attempt of misappropriation within EU countries.
Companies experiencing such acts are found to be highest in the chemical, motor
vehicle, and pharmaceutical sectors, with slightly lower rates in the
telecommunications, electricity and gas, and computer sectors. Attempts or acts
of misappropriation outside the European Union also occurred frequently in the
last 10 years, albeit at a lower frequency (91 instances out of a sample of 537
companies). The motor vehicle, scientific research, and chemical sectors
reported the highest rates of attempts or acts of misappropriation outside the
EU. Larger firms report a higher frequency of attempts or acts of
misappropriation than small/medium firms both inside and outside the European
Union.

The parties identified as being primarily
responsible for the attempts or acts of misappropriation are the competitors
(53% of positive responses), former employees (45%), and customers (31%).

Consistent with other survey questions, the
results vary widely across sectors. Instances involving former employees are
slightly more frequent for large firms. Occasional problems with regulators are
reported by both the chemical and pharmaceutical industries.

Consequences of misappropriation

Companies report substantial adverse
consequences as the result of attempts of acts of misappropriation of TS/CBI.
Asked to indicate the consequences suffered as a result of attempts or acts of
misappropriation, survey respondents indicated they had suffered a loss of
sales, clients, and contracts (56% of affirmative responses); costs for
internal investigation (44%); increased expenditure for protection (35%); costs
for negotiating settlements (34%); and costs for prosecuting and litigating
(31%).

The loss of sales, clients, and contracts
are reportedly important in a wide variety of industries, including the
chemical, pharmaceutical, computer, and machinery and equipment manufacturing
sectors, and to both large and small/medium firms.

Highlights of Survey Section D:
Litigation to Protect and Defend Your Trade Secrets

Of the 140 companies that reported attempts
or acts of misappropriation in response to the Section C survey questions, only
57 (40.7% of responses) sought remedies in EU courts.

Of the 57 companies that sought remedies in
EU courts, the following remedies were obtained by companies: Court orders to
search and secure evidence of misappropriation (32%); award of damages or other
monetary compensation (32%); criminal sanctions against the perpetrator (30%);
and court orders stopping the unlawful use of misappropriated trade secrets
(28%). Companies seldom obtained relief from a court order to seize goods at
the EU border, and, in a significant percentage of instances (17.5%), companies
listed “none of the above” for the remedy sought.

Survey respondents who indicated that they
had obtained a court order from a national court to stop the use of
misappropriated TS/CBI in the territory of the respective Member State were
further asked whether they had sought to enforce the order in other Member
States.

Out of the 57 companies concerned, 10
companies were successful in enforcing the orders in all Member States; 16
companies were not successful in all Member States; eight preferred to start
separate legal actions; three companies reported that it was too costly; seven
companies reported that the uncertainty was too great; and nine reported that
there was no need, although the reason for not needing were not specified.

Companies deciding not to seek a legal
remedy against misappropriation in the European Union cited a wide variety of
reasons for not doing so.

Of particular importance, companies cited
difficulty in collecting evidence (43% of positive responses); reputation (30%
of positive responses); and litigation costs (30%). Less important factors were
lack of trust of the judicial system of the relevant Member State; fear of
losing TS/CBI during the court proceedings; and inability to identify the
offender. Companies were also asked whether they had experienced in the past 10
years, as a defendant, abusive litigation by a competitor trying to intimidate
the company with false accusations of misappropriation.

Abusive litigation

The survey responses indicate that abusive
litigation is of some concern.

Sixty companies out of a sample of 537
report instances of abusive litigation within the EU. This concern appears to
be particularly important to the motor vehicle, chemical, and pharmaceutical
industries.

Highlights of Survey Section E: Added
Value of Any EU Action in this Area

Surveyed companies were asked whether they
believe that the European Commission should propose an EU legislation with a
view to ensuring that the national rules providing relief against
misappropriation of TS/CBI provide effective and equivalent protection across
the EU. Significantly, 69% of the respondents indicated support for an EU
proposal.

Companies supporting such an initiative
outnumber those objecting or indifferent to such a proposal in all industries.
Support rates for such a proposal are particularly high in the motor vehicles
(83%), chemical (79%) and wholesale (79%) sectors. Conditional and
unconditional support are roughly equal (34% and 35%, respectively). Large
firms are marginally more supportive than small/medium-sized enterprises,
although firms of all sizes appear to support such a proposal.

Scope of EC intervention

Companies were further asked whether they
would benefit from common rules on various policy actions, such as clarifying
the nature of TS/CBI to be protected, prohibition of acts of misappropriation
of TS/CBI, and a definition of such acts, etc.

The survey responses indicate that
companies would derive some benefits from all the measures listed. The measures
that obtain the largest positive rates are: clarifying what TS/CBI is to be
protected (55%), and prohibition of acts of misappropriation of TS/CBI and a
definition of such acts (45%). Clarification of TS/CBI to be protected is
regarded as providing a benefit by the majority of the companies in the
advertising (81%), pharmaceutical (71%), chemical (71%), scientific research
(65%), transportation and storage (58%), publishing (57%), legal (54%), and
machinery (53%) sectors.

Prohibition of acts of misappropriation of
TS/CBI and a definition of such acts is regarded as providing a benefit by the
majority of the companies in the chemical (67%), motor vehicle (61%),
pharmaceutical (57%), legal (53%), advertising (52%) and scientific research
(50%) sectors. Rules on the calculation of damages are regarded as providing a
benefit by the majority of the companies in the chemical (52%), scientific
research (50%) and legal (50%) sectors. National court orders rank the least
(28% of positive rates). Still, they are regarded as providing a benefit by
majority of the companies in the pharmaceutical (50%) and motor vehicle (50%)
sectors.

The final survey questions seek to identify
potential costs and benefits of EU common rules with respect to the protection
of TS/CBI.

On the positive side, companies regard
deterrence as the most important factor (49% of positive responses), followed
by greater legal certainty (43%). Somewhat less important is attached to better
opportunities to cooperate (24%), less resources on company-specific protection
measures (22%), higher investment in R&D and innovation (20%), greater
returns from sharing, licensing or transferring know-how (18%), and better
conditions for accessing funding (15%). Responses vary greatly across
industries. Deterrence is highly ranked in the chemical (73%), motor vehicle
(61%), pharmaceutical (61%), advertising (57%), machinery (55%), wholesale
trade (54%) and legal (50%) sectors, while ranked less high in the
telecommunications (28%), electricity (30%) and information services (30%) sectors.
Better opportunities to cooperate ranks exceptionally high in the
pharmaceutical sector (60%). The sector which seems to benefit less from EU
common rules are the information service activities, where 48% of the companies
perceive no positive benefits, and the electricity sector, where 38% of the
companies perceive no positive benefits.

On the negative side, companies rank the
following factors as potential costs. First, nearly one in four companies
believe that “Competing trade secret holders could try to raise market barriers
by carrying out abusing/intimidating litigation or similar behaviour” (23% of
positive responses). A smaller fraction of companies think that EU common rules
will make it difficult to carry out incremental innovation (17%), that there
will be duplicative research (15%), and that there will be less labour mobility
(6%). The latter factor is if some importance in the machinery sector (16%). On
average, 76% of the companies perceive some potential negative effect (77% of
small/medium firms, 75% of large firms). Nearly 30% of the respondents
expresses no opinion.

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

A4.1.      What
are trade secrets?

What are trade secrets?

Companies carry out their business on the
basis of information and knowledge. The search of what can be sold, to whom,
through which means, at what price, under what conditions and how to get it
done or manufactured at the lowest cost possible while providing customer satisfaction
is capital to companies. Acquiring, developing and continuously improving
information and knowledge requires time, resources, talent and creativity. It
also generates benefits that may pay off such efforts. A company that
implements a new and more cost-efficient manufacturing method, unknown to other
market players, will be in advantageous position vis-à-vis competitors. This
company may try to preserve such advantage gain (i.e. to “appropriate” the
results of the innovation) by preventing accidental or unauthorised disclosure
of information not known to competitors. Thus, whenever a company holds
valuable information that is not generally known and treats it as confidential,
one can say that such company owns[309]
a trade secret.

Thus, in economic terms, a trade secret may
be defined as economically valuable information or knowledge[310] which is not generally
known and which an entity (e.g. a company or research body) chooses to protect
through secrecy rather than to disclose it in order to obtain an economic/commercial
advantage[311].

A terminology problem?

The use of the term “trade secret” is not
universal. Other expressions are often used with a similar or overlapping
meaning: e.g. "confidential business information", "(secret)
know-how", “technological know-how”[312],
“proprietary information/technology”, “undisclosed information”[313], “business secrets”[314], “commercial trade
secrets”[315]
etc. In this impact assessment, the term “trade secret” will be preferred.

The distinction between such expressions is
not always self-evident. Their precise meaning may depend on the context in
which they are used. For instance, “proprietary technology” is often used to
refer to technology that a company considers to be of its own – be it because
it owns a patent over it, because it holds it secretly, or because it is
partially covered by patents, with secrecy being applied to the remainder.

In other cases, these terms are sometimes
used interchangeably. This applies in particular to “know-how” which “can be
somewhat synonymous”[316]
with trade secrets. Indeed, in certain contexts, such as in a know-how
transfer agreement with confidentiality clauses, the know-how subject to the
transaction may be to a large extent formed by trade secrets; however,
generally speaking “know-how” does not imply secrecy and it can be used as a
reference to certain skills or expertise that have become of common knowledge
within specialised circles.

A large overlap exists with the term
“confidential business information” which is also often used as interchangeable
with “trade secret”. Not all the information generated or kept by a company is
or should be confidential. Following IPR Helpdesk (see Figure A4.1),
confidential information may refer to personal information (e.g. journals,
pictures), professional information (e.g. information supplied in the course of
professional duties) and information in the context of business, commerce or
trade (e.g. trade secrets or secret know-how)[317].

Source:
IPR Helpdek (2012), p.2.

Figure A4.1 –
Confidential information

Trade secrets distinguish themselves from
“custodial data” which companies are compelled to protect by legislation or
regulation (e.g. because of data protection rules or other) such as customer
data, employees medical records, payment means related data etc.[318]

Trade secrets, often alongside intellectual
property rights (see Annex 5 on those rights), are encompassed by
broader concepts used in the economic field, such as intangible assets or
knowledge-based capital (see Annex 1).

Information and knowledge covered by
a trade secret

The type of information covered by the
trade secret concept is rather broad. It may cover an invention that may be
eligible for patent protection, but it can also encompass other innovation
steps that cannot be patented. Often, trade secrets cover information on
processes that relates to a patented invention and which is of great relevance
to its subsequent use in the market, including incremental improvements
developed after the filing and granting of a patent.

Furthermore, trade secrets have a scope of
application that goes beyond the realm of scientific inventiveness to embrace
new business solutions and marketing strategies. Hence, the information can be
of a technical (an invention or a manufacturing process) or commercial nature
(lists of costumers, lists of suppliers); it can be strategic for decades (a
recipe, a chemical compound) or more or less ephemeral (a patentable invention
before the application for a patent is filed, the results of a marketing study,
the name, price and date of a new product launch, the price offered in a
bidding procedure, etc.).

Even negative information that certain
applications or commercial strategies that are technically or commercially
unfeasible may be of economic value[319].

Box A4.1
provides an attempt to categorise the information covered by the trade secret
concept.

Box A4.1 –
Categories of information that may constitute a trade secret

A Canadian report of
1986[320]
established four broad categories of information covered by the definition of
trade secrets.

1st
category: secrets relating to highly specific products[321]. In such a case, the product is the
secret and even if the secret is patentable, no patent has in fact been sought.
It is a characteristic of this type of trade secret (a) that those who own it
pass it down within a tightly controlled hierarchy; (b) that the product is
freely available on the market, so that in principle a competitor could break
the secret (e.g. through reverse engineering) and so imitate (or even
replicate) the product; and (c) that the business, being wholly dependent on
the secret, would be likely to be destroyed if the secret came into the hands
of a competitor.

2nd
category: technological secrets. The ability of an enterprise to flourish (or sometimes even to
survive) is directly related to its success in acquiring, protecting and
exploiting some aspect of modern technology. Knowledge of the processes that
increase efficiency is usually referred to as technological know-how. By
contrast with the first category of trade secret, an enterprise would not
necessarily be ruined if information of this kind became available to others in
the industry; but its market competitiveness would be reduced and may be less
likely to invest in further new technological processes.

3rd
category: strategic business information, such as internal marketing studies, industry
forecasts and lists of customers. This type of insider information forms the
data on which decisions on, for example, marketing or finance may be based. Its
acquisition could alert a competitor to the business strategy likely to be
adopted in a particular sector of the market, or save valuable start-up or
expenditure in assembling the information.

4th
category: private collations of individual items of publicly available information, the value of which lies in their
“packaging” rather than on the individual items (which are useless in
themselves)[322].
These packages are sold like any other commodity. Information of this kind has
become of much greater practical significance with the advent of the computer
and the information society. This fourth category relates to information as a
product in and of itself. However, as the Canadian report outlines, in this
category, the problem could be conceived to be the protection of a database, rather
than the protection of the trade secrets[323].

Legal definitions of trade secret

Different definitions of trade secrets are
used in legislation (see Box A4.2). The criteria of secrecy and value
are usually included.

Box A4.2 – Definitions
of trade secrets in legislation

World Trade
Organisation TRIPS Agreement, Article 39:

Undisclosed information
is protected “so as long as such information:

(a)       is secret
in the sense that it is not, as a body or in the precise configuration and
assembly of its components, generally known among or readily accessible to
persons within the circles that normally deal with the kind of information in
question;

(b)       has
commercial value because it is secret; and

(c)        has been
subject to reasonable steps under the circumstances, by the person lawfully in
control of the information, to keep it secret.”

Sweden, Act (1990:409) on the Protection of Trade
Secrets[324]:

“a ‘trade secret’
means such information concerning the business or industrial relations of a
person conducting business or industrial activities which that person wants to
keep secret and the divulgation of which would be likely to cause a damage to
him from the point of view of competition. The term "information"
comprises both information documented in some form, including drawings, models
and other similar technical prototypes, and the knowledge of individual persons
about specific circumstances even where it has not been documented in some form.”

United States, Section 1(4) of Uniform Trade Secrets
Act:

“’Trade secret’ means
information, including a formula, pattern, compilation, program, device,
method, technique, or process that:

(i) derives independent
economic value, actual or potential, from not being generally known to, and not
being readily ascertainable by proper means by, other persons who can obtain
economic value from its disclosure or use, and

(ii) is the subject of
efforts that are reasonable under the circumstances to maintain its secrecy.”

Japan, Article 2 of the Unfair Competition
Prevention Act, according to which trade secret means:

(i) technical or
business information useful for commercial activities such as manufacturing or
marketing methods;

(ii) that is kept
secret; and

(iii) that is not
publicly known.

France, 2012 proposal for an Article 226-15-1 of
the French Criminal Code[325]:

“Constituent des
information protégées relevant du secret des affaires d’une entreprise, quel
que soit leur support, les procédés, objets, documents, données ou fichiers de
nature commercial, industrielle, financière, scientifique, technique ou
stratégique, ne présentant pas un caractère public, dont la divulgation non
autorisée serait de nature à compromettre gravement les intérêts de cette
entreprise en portant atteinte à son potentiel scientifique ou technique, à ses
positions stratégiques, à ses intérêts commerciaux ou financiers ou à sa
capacité concurrentielle, et qui ont, en conséquence, fait l’objet de mesures
de protection spécifiques destinées à informer de leur caractère confidentiel
et à garantir celui-ci.”

The Commission antitrust regulation on
knowledge transfer agreements contains a definition of know-how[326] which includes the
criteria of secrecy and substantiality (which one could interpret as being
similar to the value criteria put forward by the TRIPs definition). Article
1(1)(i) provides as follows:

“"know-how" means a package of
non-patented practical information, resulting from experience and testing,
which is:

(i) secret, that is to say, not generally known
or easily accessible,

(ii) substantial, that is to say, significant
and useful for the production of the contract products, and

(iii) identified, that is to say, described in
a sufficiently comprehensive manner so as to make it possible to verify that it
fulfils the criteria of secrecy and substantiality”.[327]

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

Companies, businesses are often required by
law, regulation or administration compulsion to disclose confidential
information to public authorities. This business-originated confidential
information may, or may not, include trade secrets. The disclosure of such
information to the competitors or third parties may harm the business concerned
by the information. Therefore, EU rules have already addressed how to protect
the confidential business information held by public authorities because of regulatory obligations: first and
foremost as regards information held by EU institutions and bodies themselves,
but also by national authorities.

In this section, a distinction will be
drawn between the protection of such confidential business information, which
is often referred to as “business secrets”, and trade secrets as understood in Section
A4.1 of this Annex. A reference to “professional secrecy” and the
transparency obligations will also be made.

It should be noted that the specific
protection of confidential business information held by public authorities and
the rules regulating their disclosure is outside the scope of this impact
assessment.

“Business secrets” are not identical to
“trade secrets”

The EU already recognises the need to
protect “business secrets”:

–
According to settled case-law of the European
Court of Justice, “the protection of business secrets is a general principle
of European Union law”[328].
The relevant case-law concern “business secrets” held by European institutions
(e.g. the Commission) pursuant to regulatory obligations, mostly (but not
exclusively) in the antitrust field.

–
This principle is also included in relevant
secondary legislation. For instance, in the antitrust field: “[the parties]
shall be entitled to have access to the Commission’s file, subject to the
legitimate interest of undertakings in the protection of their business secrets.”[329]

–
Moreover, this principle has been recently
confirmed by Article 41(2)(b) of the Charter of Fundamental Rights of the
European Union which provides as follows: "This right [of good
administration] includes: […] (b) the right of every person to have access to his
or her file, while respecting the legitimate interests of
confidentiality and of professional and business secrecy"
[emphasis added].

However, the concept of “trade secret”,
understood as defined in Section A4.1 of this Annex, is not identical to
the one of “business secret”, as understood by the Court of Justice:

–
The Court of Justice has defined business
secrets as “information of which not only disclosure to the public but also
mere transmission to a person other than the one that provided the information
may seriously harm the latter's interest”[330].

–
The Court has also stated that three criteria
need to be met: (a) it is necessary, first of all, that the information in
question be known only to a limited number of persons; (b) it must be
information whose disclosure is liable to cause serious harm to the person who
has provided it or to third parties[331];
and (c) the interests liable to be harmed by disclosure of the information must
be objectively worthy of protection[332].

In principle, the type of information
protectable as “business secret” could possibly be wider than that protectable
as “trade secret”. It could possibly include confidential information generated
by a company which do not have economic value per se but whose
disclosure is likely to cause harm to the interests of the holder.

The protection of business secrets in
EU law: the application of the professional secrecy principle to EU and
national authorities

In this context, the general principle that
undertakings are entitled to the protection of their business secrets finds
expression in Article 339 TFEU as regards professional secrecy of the staff of
the Union institutions and bodies:

"The members of the institutions of the
Union, the members of committees, and the officials and other servants of the
Union shall be required, even after their duties have ceased, not to disclose
information of the kind covered by the obligation of professional secrecy, in
particular information about undertakings, their business relations or their
costs components."[333]

It must be noted that the information
covered by the professional secrecy is wider than “business secrets” or “trade
secretes”.

The professional secrecy principle has been
implemented in secondary legislation, and extended beyond the staff of EU institutions
and bodies (see Box A4.3).

Box A4.3 –
Selected professional secrecy obligations.

Specific professional
secrecy rules applicable to the EU regulatory agencies have been enacted, e.g.
when cooperating with other authorities:

"[…] 2. Without
prejudice to cases covered by criminal law, any confidential information
received by persons referred to in paragraph 1 whilst performing their duties
may not be divulged to any person or authority whatsoever, except in summary or
aggregate form, such that individual financial institutions cannot be
identified.

Moreover, the
obligation under paragraph 1 and the first subparagraph of this paragraph shall
not prevent the Authority and the national supervisory authorities from using
the information for the enforcement of the acts referred to in Article 1(2),
and in particular for legal procedures for the adoption of decisions.

3. Paragraphs 1 and 2
shall not prevent the Authority from exchanging information with national
supervisory authorities in accordance with this Regulation and other Union
legislation applicable to financial institutions.

That information
shall be subject to the conditions of professional secrecy referred to in
paragraphs 1 and 2. The Authority shall lay down in its internal rules of
procedure the practical arrangements for implementing the confidentiality rules
referred to in paragraphs 1 and 2."[334]

Professional secrecy
rules have also been extended to national authorities: e.g. regulatory
authorities when dealing with their own competencies[335] or when
cooperating with EU institutions. For instance, EU rules regarding professional
secrecy in the antitrust field[336]
provide as follows:

“2. Without prejudice
to the exchange and to the use of information foreseen in Articles 11, 12, 14,
15 and 27, the Commission and the competition authorities of the Member States,
their officials, servants and other persons working under the supervision of
these authorities as well as officials and civil servants of other authorities
of the Member States shall not disclose information acquired or exchanged by
them pursuant to this Regulation and of the kind covered by the obligation of
professional secrecy. This obligation also applies to all representatives and
experts of Member States attending meetings of the Advisory Committee pursuant
to Article 14.”[337]

The protection of confidential business
information in public procurement cases presents specific particularities, as
this involves economic transactions between public authorities and businesses
in which trade secrets (or confidential business information generally) could
be disclosed to the public authorities. It is noteworthy that EU legislation
specifically refers in this case to “trade secrets” rather than to “business
secrets” (see Box A4.4).

Box A4.4 – The
specific case of the protection of confidential business information in public
procurement cases

Industry often expresses
the fear that valuable confidential information (i.e. a trade secret) which is
disclosed to a public authorities as part of a tender procedure for public
procurement could not be sufficiently protected against misappropriation.

This concern has been
addressed by EU legislation. Current EU rules provide for protection in this
regard: "Without prejudice to the provisions of this Directive, in
particular  those concerning the obligations relating to the advertising of
awarded contracts and to the information to candidates and tenderers […] the
contracting authority shall not disclose information forwarded to it by
economic operators which they have designated as confidential; such information
includes, in particular technical or trade secrets and the confidential aspects
of tenders."[338]

This protection is also
integrated in the 2011 Commission proposal for a new directive on public
procurement[339]:

Article 18
of that proposal[340]
requires the contracting authority not to disclose information forwarded to it
by economic operators which they have designated as confidential, including,
but not limited to, technical or trade secrets and the confidential aspects of
tenders. In addition, Article 19(2) of the proposal requires the contracting
authorities to ensure, in all communication, exchange and storage of
information, that the integrity of data and the confidentiality of tenders are
preserved.

Other
provisions in the proposal also require the contracting authorities not to
reveal to the other participants in the tender solutions proposed or other
confidential information communicated by a candidate participating in the
"competitive procedure with negotiation[341]"
or in the "competitive dialogue"[342]
without its agreement. Such agreement shall not take the form of a general
waiver but shall be given with reference to the intended communication of
specific solutions or other specific confidential information.

The underlying rationale
was explained by an English Court of Appeal judge as follows: "...it is
plain that there is a strong public interest in the maintenance of valuable
commercial confidential information … If the penalty for contracting with
public authorities were to be the potential loss of such confidential
information, then public authorities and the public interest would be the
losers, and the result would be potentially anticompetitive."[343]

The transparency policy: balancing of
interests

At the same time, EU institutions have a
general policy of transparency and allow third parties to access to the
documents they hold, under certain conditions. Given that businesses may
disclose confidential business information to EU institutions in the context of
specific procedures (e.g. a complaint against a Member State for failure to
apply EU law etc.) the risk exists that such confidential business information
could be disclosed to a third party[344].

This concern has been considered when
adopting the EU general rules[345]
dealing with access to documents held by a European institution. Regulation (EC)
No 1049/2001[346]
provides for the protection of business secrets when the information has been
forwarded to an EU institution or body – although this protection is not
absolute. Article 4(2) states in particular that

"the institutions shall refuse access
to a document where disclosure would undermine […] the protection of the
commercial interests of a natural or legal person, including intellectual
property, […] unless there is an overriding public interest in disclosure"[347].

However, as stated by the Court of Justice,
the assessment as to the confidentiality of a piece of information requires the
legitimate interests opposing disclosure of the information to be weighed
against the public interest that the activities of the EU institutions take
place as openly as possible[348].

Private sector professional secrecy

The professional secrecy principle may also
apply to the private sector.

Financial intermediaries and some regulated
professionals (e.g. lawyers, auditors) often know trade secrets owned by their
customers. This is why (inter alia) they are subject to professional
secrecy rules, which is a guarantee to their clients. As a result, they are
prevented from disclosing their clients’ confidential business information
(including trade secrets).

Nevertheless, a specific issue may arise
when public authorities require those intermediaries or regulated professionals
to disclose to them, in the context of their supervisory functions, confidential
information which is sensitive for their clients.

EU rules have addressed this issue and
exceptions to the principle of respecting professional secrecy have been
established in exceptional circumstances. For instance, the EU anti-money
laundering rules[349]
require financial intermediaries and regulated professions to disclose to
specific authorities (so-called financial intelligence units) data regarding
situations suspected of involve money laundering.

In other cases, EU rules underlined the
need to protect the business secrets of clients. A recent Commission
legislative proposal indirectly addressed the protection of business secrets in
the specific circumstance where an EU auditor would be required by a third
country public authority, for their supervisory purposes[350], to disclose to it
audit working papers containing business secrets of the audited entity. In
accordance with this proposal, the EU auditor could only transfer the audit
working papers to the third country authority provided that "the
protection of the commercial interests of the audited entity, including its
industrial and intellectual property is not undermined"[351].

              Annex
5 – Intellectual property rights: the EU Legal framework

A5.1.      Intellectual
Property Rights

The term "intellectual property
right" refers to various types of legal instruments established in order
to protect different kinds of creations of a mind (the so called intangible
forms of property)[352].
In principle, an intellectual property right grants the rightholder an
exclusive right on the economic exploitation of such intellectual property. The
following box includes generally recognized types of intellectual property
rights.

Box A5.1 – Generally
recognised types of intellectual property rights

Patent: A patent constitutes an exclusive right
granted to an inventor for a limited period of time in reward for the public
disclosure of his invention. This right shall prevent third parties from
making, selling, distributing, importing or using the invention, without
appropriate licence or authorisation.

Utility model: Some countries provide for utility model
as a separate form of protection. This so called “small patent” generally
establishes an exclusive right similar to the one resulting from a patent,
but is meant for innovations of lesser inventiveness, and is granted for a
shorter time.

Design: A right for industrial design aims at
protecting the appearance of an object resulting from its particular features.
In order to qualify for protection, a design must be new and must have individual
character. Protection is granted only for the elements of design that are not
purely utilitarian. Right resulting from a design registration gives the owner
an exclusivity to use it and entitles him or her to prevent any use of design
made by a third party who has not obtained an owner’s consent. Meanwhile, the
owner of an unregistered design is only able to prevent a use of design
resulting from an unauthorized copying.

Topography of
semiconductor products:
Topography of a semiconductor product, understood as a representation of the
three-dimensional pattern of layers of conducting, insulating or semiconducting
material in semiconductor products intended to perform an electronic function,
may be protected by intellectual property law when it is a result of its
creators own intellectual effort and is not commonplace in the semiconductor
industry. The exclusive rights granted for its protection include the right to
authorise or prohibit reproduction of a protected topography and the right to
authorise or prohibit commercial exploitation or the importation for that
purpose of a topography or of a semiconductor product manufactured using
the topography.

Plant variety
protection: A breeder of a
variety of any botanical genera and species that is distinct, uniform, stable
and new can be granted a plant variety right. This right gives the breeder an
exclusive control over the propagating material and harvested material of the
registered variety for a limited period of time.

Trademark: Trade mark law establishes grounds for
protection of any sign that may be represented graphically and is capable of
distinguishing goods or services of one undertaking from those of other
undertakings. A right resulting from a trademark registration gives its owner
an exclusivity to use a trademark and the possibility to prevent any
unauthorized use of the trademark in the course of trade.

Geographical
indications and designations of origin: A geographical indication and designation of origin
refer to a name or a sign that may be used on a product/foodstuff in order to
indicate its associated qualities, reputation or characteristics that result
from the fact that this product/foodstuff originates from a specific geographic
location. Once such a name has been registered it may only be used by operators
marketing products/foodstuffs conforming to the corresponding specification.

Copyright and related
rights: Copyright is
vested on authors whereas related rights (or "neighbouring rights")
are vested on performers, phonogram and film producers as well as broadcasting
organisations. Copyright and related rights include so-called "economic
rights" such as a right to reproduce, distribute, and communicate or
"make available" to the public which – to different degrees – allow
rightholders to control and to be remunerated for the use of their works and
other protected subject matter (i.e. performances, phonograms, audiovisual
productions and broadcasts). These rights normally take the form of exclusive
rights who can be managed directly by the original rightholder, by those to
whom the rights have been transferred or by a collecting society that is
entrusted to do so by the rightholder. Some jurisdictions recognize also
"moral rights" of the authors, such as the right of attribution, the
right to have a work published anonymously or pseudonymously, and the right to
the integrity of the work.

Protection of
databases: Depending on
whether a database can be perceived as original it can be protected either by
copyright or by a sui generis right. In principle only databases that,
by reason of a selection or arrangement of their contents, can constitute the
author's own intellectual creation, can be protected by copyright. A sui
generis protection of databases aims to reward the creators for their investment
of time, money and effort, and does not depend on the originality of the
database.

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

There are some fundamental differences
between trade secret protection, on the one hand, and formal intellectual
property rights, on the other hand. Firstly, formal intellectual property
rights grant their holder an exclusive right[353]
on an innovation and allow for excluding others' use. This is not the case for
trade secrecy. Secondly, the scope of protection is also different. Thirdly,
there are differences on the term of protection. Fourthly, the cost of
protection differs.

Owning a trade secret does not amount
to having an exclusive right on its use

When a company's (or a research entity's)
chooses to protect its valuable intangible assets through secrecy (i.e. as
trade secrets), it does not have any "intellectual property right"
granted by a State authority.

'Owning' a trade secret does not involve
any administrative procedures as trade secrets do not require registration to
qualify for protection[354].
Nor does it amount to having an exclusive/monopoly right on the information
protected by secrecy or its use. Third parties may discover the same
information through parallel research or reverse engineering[355] and they are not
prevented from innovating and developing their own competitive (including
similar or even identical) products, services, devices, recipes or methods.
Therefore, trade secrets diverge from intellectual property rights which grant
to their holders an exclusive right over an innovation during a limited period
of time[356].

Of course, a trade secret may de facto
grant some monopoly value to its owner for as long as the owner manages to keep
the relevant information secret. However, such de facto monopoly is not
imposed or protected by law. It merely results from the investments made by the
owner of the secret and it only lasts until competitors catch up with the same,
similar or alternative solutions (i.e. it is contestable at any time).

Scope of protection.

The subject matter of a trade secret is
very diverse. The scope of protection of trade secrets is wider than that of
(formal) intellectual property rights (in particular than that of patents). For
instance, in contrast to patent law, which provides specific criteria for
inventions to be patentable, no specific categories exist for defining (or
limiting) the subject matter that qualifies for trade secret protection[357].

Almost any information maintained as a
secret, not generally known to competitors, and which enhances firm value and
provides a competitive advantage, is potentially protectable by trade secret
law. This broad definition of trade secrets encompasses innovations that are
patentable, but also innovations that may not qualify for patent protection.

Thus, a company (or a research entity) may
protect valuable information as a trade secret which could not be validly
protected by patents or other intellectual property rights but still requires
investment to be developed and is important for its competitiveness: e.g. new
business solutions, marketing strategies etc. As a result, trade secrets allow
companies to be ahead of their competitors even when using mature technologies.
This is often achieved through continuous investment in research and
development for more efficient processes.

In other terms, trade secrets protection is
a mechanism that allows for greater appropriability of innovation than, for
instance, patents. As Arrow noted, patent laws "would have to be
unimaginable complex and subtle to permit such appropriation on a large scale"[358].

The term of protection.

Moreover, whereas patents are granted
protection for a definite, but limited term, trade secrets have no definite
term of protection: trade secret protection continues as long as it remains
secret and enhances firm value and business performance. Consequently, a trade
secret can exist for an indefinite period of time, or can cease to exist at any
time upon disclosure, perhaps by mistake, or by lawful means such as reverse
engineering or independent discovery by third parties[359].

Thus, with trade secrets, predictions as to
the protectable life of the trade secret and its economic value is less certain
as compared to patents or copyrights where lifetime and value may be more
readily ascertainable. As long as maintaining secrecy around its valuable
intangible assets (e.g. a hard to imitate non patentable innovation) gives it a
competitive advantage, a company/research entity will most likely take steps to
preserve the confidential nature of that information. The owner of the secret
information will in most cases have worked to discover or create it and has
therefore a (private) economic interest in the information and in its remaining
secret[360].

Cost of protection.

Compared to trade secrets, patent
protection may be more costly than trade secret protection. For example,
preparation of a patent application can involve a significant amount of fixed
cost, amounts that can be particularly burdensome to SMEs. In addition, the
protection of a patent or copyright may involve substantial cost to monitor
possible infringement and even greater expenditure to pursue legal recourse
when infringement is detected[361].

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

Legislative steps undertaken on the EU
level aim on one hand to harmonize the protection for the intellectual property
rights throughout the Member States, and on the other hand, where it is
possible and advantageous, to create unitary rights, enforceable in all Member
States.

Areas of harmonization

Harmonisation measures have been adopted in
relation to certain aspects of copyright, trademark law and design law. This
legislation has been complemented by various practical measures, adopted by
both public authorities and private sector bodies, at national and
international levels in order to improve existing knowledge about
counterfeiting and piracy and to enhance the cooperation of all actors involved
in fighting this phenomenon[362].

Although there is no unitary approach to
copyright law within the EU, the harmonization process have touched upon
several important copyright-related areas. Four horizontal directives has been
adopted, regarding: rental right, lending right and certain related rights[363]; facilitation of cross
border transmission of audiovisual programs[364];
harmonisation of the terms of protection of copyright and neighbouring rights[365]; and adapting existing
legislation to reflect technological developments[366]. In addition to the
above three vertical directives were implemented creating conform EU standards
for protection of computer programs by copyright[367], new exclusive 'sui
generis' right for database producers[368]
and granting the resale right to the authors of an original work of art[369].

The latest developments in the area of
copyright concern a directive on the establishment of permitted uses of orphan
works[370]
and a Commission's initiative concerning governance of collective rights
management[371].

In case of both trade mark[372] and design law[373], the main aim of the
harmonization was to "approximate" the national laws of the Member
States. The respective directives unified the fundamental rules governing law
of individual Member States on trademarks, designs and their registration. Yet,
it is not a complete harmonization as there are still some differences left,
e.g. on what concerns the recognition of the "passing off" offence or
the possibility to protect an unregistered trade mark or design on the national
level.

Protection of topographies of semiconductor
products was also harmonized on what regards general principles of national law[374].

European unitary rights

In addition to the above examples of
harmonization, specific intellectual property titles were created within the
European Union in order to provide for a unitary level of protection. Such is
the case of the Community trade mark[375],
the Community design[376],
and the Community plant variety right[377],
where one registration provides protection in all of the Member States. EU
legislation also provides for unitary protection for geographical indications of
agricultural products and foodstuffs[378],
wines[379],
spirit drinks[380] and aromatised wines[381].

A European Union patent has recently joined
the group of the EU unitary rights[382].
This unitary patent, however, will only apply to 25 EU Member States[383].

\* In so far as trade
names are protected as exclusive property rights in the national law concerned.

Table A5.1 – Summary of the EU and international legal framework regarding the protection of intellectual property rights

Intellectual Property Right || EU legislation

Generally || EU Charter of Fundamental rights: Article 17(2) Article 118 Treaty on the Functioning of the European Union

National intellectual property rights harmonised by EU law

Copyright and rights related to copyright || Directive 2006/115/EC of 12 December 2006 on rental right and lending right and on certain rights related to copyright in the field of intellectual property Directive 93/83/EEC of 27 September 1993 on the coordination of certain rules concerning copyright and rights related to copyright applicable to satellite broadcasting and cable retransmission. Directive 2006/116/EC of 12 December 2006 on the term of protection of copyright and certain related rights Directive 2001/29/EC of the Council of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society Directive 2009/24/EC of 23 April 2009 on the legal protection of computer programs. Directive 2001/84/EC of 27 September 2001 on the resale right for the benefit of the author of an original work of art

Sui generis right of a database maker || Directive 96/9/EC of 11 March 1996 on the legal protection of databases

Rights of the creator of the topographies of a semiconductor product || Directive 87/54/EEC of 16 December 1986 on the legal protection of topographies of semiconductor products.

National trademark rights || Directive 2008/95/EC of 22 October 2008 to approximate the laws of the member states relating to trade mark

National design rights || Directive 98/71/EC of 13 October 1998 on the legal protection of designs

EU intellectual property unitary rights

EU trademark rights || Regulation 207/2009 of 26 February 2009 on the Community trade mark

EU design rights || Regulation 6/2002 of 12 December 2001 on Community designs

Geographical indications || Regulation 510/2006 of 20 March 2006 on the protection of geographical indications and designations of origin for agricultural products and foodstuffs Regulation 1234/2007 establishing a common organisation of agricultural markets and on specific provisions for certain agricultural products Regulation 110/2008 on the definition, description, presentation, labelling and the protection of geographical indications of spirit drinks Regulation 1601/91 laying down general rules on the definition, description and presentation of aromatized wines, aromatized wine- based drinks and aromatized wine-product cocktails

Plant variety rights || Regulation 2100/94 of 27 July 1994 on Community plant variety rights

EU Patent with unitary effect (25 Member States)[384] || Regulation (EU) No 1257/2012 of the European Parliament and of the Council of 17 December 2012 implementing enhanced cooperation in the area of the creation of unitary patent protection, OJ L 361, 31.12.2012, p.1. This Regulation is complemented by Council Regulation (EU) No 1260/2012 of 17 December 2012 implementing enhanced cooperation in the area of the creation of unitary patent protection with regard to the applicable translation agreements, OJ L 361, 31.12.2012, p. 89.

National intellectual property rights not harmonised by EU law

Patent rights, including rights derived from supplementary protection certificates || No general EU legislation on patents in force, but proposed (see above). But EU legislation on supplementary protection certificates concerning medicines.

Utility design/model rights; National protection of unregistered trademarks; National right for unregistered designs; Trade names || No EU legislation. National legislation may protect them as exclusive property rights.

Intellectual property rights
established on a national level

Certain types of intellectual property
rights protection have been established only on the basis of national
legislation of particular Member States. Among those types we can distinguish:

–
national patent rights,

–
national rights for unregistered designs,

–
protection of unregistered trademarks,

–
protection of utility designs,

–
protection of traditional knowledge; and

–
protection of trade names, in so far as they are
protected as exclusive property rights in the national law concerned.

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

Directive 2004/48/EC[385] represented the first
attempt to achieve an efficient and proportionate European civil enforcement
framework in case intellectual property rights were infringed[386]. Article 3 of Directive
2004/48/EC requires Member States to provide for the measures, procedures and
remedies necessary to ensure the enforcement of the intellectual property
rights covered, so as to achieve a similar level of protection for all
rightholders across the EU. These measures, procedures and remedies should be
(i) fair and equitable and shall not be (ii) unnecessarily complicated or
costly nor (iii) entail unreasonable time-limits or unwarranted delays. Moreover,
according to paragraph 2 of that article, they must also be (i) effective, (ii)
proportionate (iii) dissuasive, (iv) applied in such a manner as to avoid the
creation of barriers to legitimate trade and (v) provide safeguards against
their abuse.

This Directive does not specify the intellectual
property rights to be protected and, allegedly, this would be a matter for
national law. However, the European Commission published a statement in 2005[387] in which it considered
that the following intellectual property rights are covered by the scope of the
Directive:

–
copyright;

–
rights related to copyright;

–
sui generis right
of a database maker;

–
rights of the creator of the topographies of a
semiconductor product;

–
trademark rights;

–
design rights;

–
patent rights, including rights derived from
supplementary protection certificates;

–
geographical indications;

–
utility model rights;

–
plant variety rights; and

–
trade names (in so far as these are protected as
exclusive rights in the national law concerned).

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

At the international level, the Agreement
on Trade-Related Aspects of Intellectual Property Rights (TRIPS), administered
by the World Trade Organization (WTO), establishes minimum standards of
protection for copyright and related rights, trademarks, geographical
indications, industrial designs, patents, layout-designs (topographies) of integrated
circuits and undisclosed information. This Agreement also provides for civil and
administrative procedures and remedies as well as criminal procedures,
establishes some special requirements related to border measures and lays
ground for the use of dispute settlement mechanism. This Agreement has
universal scope as it binds all WTO members.

Among the most important international
initiatives on the protection of intellectual property rights the following
should be put forward:

–
Berne Convention for the Protection of Literary
and Artistic Works,

–
Paris Convention for the Protection of Industrial
Property,

–
European Patent Convention and Patent
Cooperation Treaty in the field of patent protection,

–
Madrid system for the international registration
of trademarks,

–
Hague system for the international registration
of industrial designs, and

–
Convention for the Protection of New Varieties
of Plants.

Annex 6 – Trade
secrets, trade secrets law and innovation

A6.1.      Introduction

Confidential business information is as old
as business itself[388].
Trade secrets have been used by entrepreneurs, creators, researchers and
inventors before and after the advent of intellectual property law. They are
used in the absence of trade secret law and despite the existence of trade
secret law. What then may justify a specific branch of law focusing on trade
secrets? And why trade secrets misappropriation is considered to be a crime in
the majority of jurisdictions?

The reason is that trade secrets are
considered an indispensable tool to promote the creation of added value
information, generating knowledge and progress. Trade secret law protects
information as a valuable asset, and helps creators and innovators repealing
dishonest or improper practices of parasitism aimed at ripping off the results
of their efforts. By doing so trade secret law provides some reassurance to innovative
companies, by raising their ability to:

–
appropriate the information they have developed,

–
use it to increase their competitiveness,

–
exploit the information as a transactional
asset, contributing to a more efficient and productive  allocation of intellectual
capital, and

–
collect rewards for their investment in R&D.

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

“Appropriation” is a key feature of trade
secrets as innovation enablers. Economists[389]
have long recognized that protection of intellectual property (in the wide
sense, thus here understood as encompassing trade secrets) encourages
innovation by helping inventors capture (“appropriate”) the returns to
innovative activity, typically manifested by resulting financial rewards.

Appropriability is indeed a concern for
investors since one of the outputs of inventive and innovation activity is
often knowledge, an intangible asset; hence it is difficult to exclude others
from using this knowledge at a fraction of the initial cost of the invention
development[390].

The desire to encourage innovation stems
from the findings of economists who have concluded that innovation and its
diffusion are critical determinants of economic growth and development[391]. In the absence of any
legal protection, innovators would not be able to appropriate the full rewards
of their invention; all or a substantial portion of the benefits from the
innovation would go to “free riders,” who invest nothing in the innovation but
nevertheless seek to use the valuable innovation without paying for it. Without
means to appropriate the returns to innovation, underinvestment in innovative
activity would likely occur, adversely impacting competitiveness and economic
growth.

The importance of capturing the rewards to
innovation was highlighted in a seminal article published fifty years ago by
Arrow (see Box A6.1).

Box A6.1 – Arrow
(1962)

Arrow (1962) interpreted invention broadly as the
production of knowledge through the use of research inputs, a process
considered risky in the sense that the output of the production process cannot
be predicted perfectly from the applied inputs. Arrow also viewed information
obtained through invention as “indivisible,” meaning that one person’s use of
the information does not limit its use by others[392]. Information
thus obtained from an invention process may be easily transferred at low or
zero cost, making it relatively easy for others knowledgeable in the field to
take advantage of the transmitted information.

Under such
circumstances, information will remain of commercial value only if other firms
are prevented from using the information obtained (i.e., only if the owner is
able to keep the information secret or otherwise assert rights that prevent
others from using the information for their own benefit). If competitors can
easily obtain and use the secret information, inventive firms may choose not to
engage in the innovative activity, understanding that there will be little
prospect for financial reward to an innovation investment. Arrow argued that,
absent some mechanism to protect the valuable information, a suboptimal amount
of investment in innovation will occur along with the adverse consequences of
such underinvestment.

As suggested by Arrow, and many other
economists since, firms have an incentive to invest in innovation only if they
reasonably expect to receive an appropriate return. For instance:

"Scientific knowledge, for example, is
generally the product of much time and effort. It is expensive to produce.
Whether rational actors will engage in the production of costly information
depends on whether they can recoup enough of the benefits the knowledge brings
to make the search worth their while"[393]

"To have the incentive to undertake research
and development, a firm must be able to appropriate returns sufficient to make
the investment worthwhile"[394]

If potential innovators are limited in
their ability to capture this value, they will not have the appropriate
incentive to engage in the socially optimal amount of innovative activity.

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

Trade secrets, like patents, allow companies
to appropriate R&D outputs and benefit from an advantage vis-à-vis their
competitors[395].
Seeking and obtaining such advantage is generally the underlying motivation
behind business R&D. If outputs of business R&D are consistently made
public and without any sort of protection being sought, the company investing
in innovation will support all the inherent costs without getting in return
much advantage towards its competitors. This can make it harder for the company
to recuperate the investment made and as a consequence it may weaken its
ability to capture new funds to further finance its research activity. By protecting
trade secret holders against acts of misappropriation, trade secret law like
patent law, avoids the risk of underinvestment inherent with public goods,
which are more costly to invent than to imitate once invented.

Although trade secrets protection does not
grant any exclusive rights on the use of the information in question[396], secrecy can provide a
de facto exclusivity. For as long as competitors are not in possession
of the information in question, secrecy ensures some form of appropriation.
Arguably, the less obvious the information is, the longer it will take for
competitors to annul such advantage by reaching the same, similar or better
results through their own efforts. Until then, the trade secret holder will be
able will have a lead time advantage and remain the sole user of the
information at stake, having also the option of sharing it at a price through
technology or know-how transfer agreements with confidentiality clauses. In
other words, de facto exclusivity grants the holder of a trade secret
with an advantage similar to that offered by patent protection[397].

Trade secrets are therefore used by
companies to manage competitiveness gains steaming from strategic information
and knowledge, increasing the potential for business performance based on innovation.

At the same time; trade secrets create
competition in innovation by keeping market players committed to constant
improvement in order to catch up or outshine their peers. Because appropriation
provided by trade secrets is much less intensive than that afforded by
exclusive IP rights, maxime patents, competitors are not constrained by
legal fences which would otherwise force them to either work around a given
technical solution or pay a price to obtain access to it – such when it happens
when inventions are patented.

Lemley considers the incentive
justification for encouraging new inventions straightforward:

“Granting legal protection for those new
inventions not only encourages their creation, but enables an inventor to sell
her idea. And while we have other laws that encourage inventions, notably
patent law, trade secrecy offers some significant advantages for inventors over
patent protection. It is cheaper and quicker to obtain, since it doesn’t
require government approval, and it extends to protection of types of business
and process information that likely would not be patentable.”[398]

The flexibility featured by trade secret is
particularly well suited form of protection for rapidly evolving technologies[399].

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

Not surprisingly, much of the literature
examining the role of trade secrets trade in innovation uses patents as a
reference. In doing so, researchers work on the basis of assumptions and models
that tend to present trade secrets and patents as mutually exclusive, at least
as from the point where research brings to life an invention that can be
patented. This is done for analytical reasons, that is, to better capture the
distinguishing features of each path and provide comparative findings.

Reality shows, however, that patents and
trade secrets are often used hand-in-hand to protect different parts of a
package of information relating to inventions. Additionally, trade secrets are
used in areas where patent protection does not reach. Trade secrets are
therefore an appropriation instrument that complements patents and other IP
rights.

Trade secrets complementing patents

Trade secrets have a territory of their
own, filling the gap left by the inherent scope limitations of patents,
copyright, designs, and intellectual property rights in general. There is an
extensive field of information and knowledge – and innovation outputs - that
cannot be captured by existing intellectual property rights. Patents, copyright,
designs and other intellectual property rights have each a defined scope of
applicability, leaving unattended large portions of intellectual creations
which business feel the need to appropriate and protect. This is the case of
non-technical business innovation, incremental improvements of technical nature
that do not meet patent requirements, and all sort of scientific discoveries[400]. As a result, some
sectors of industry may benefit less from the patent system. As pointed out by
Lemley: “The additional incentive provided by trade secret law is important
for innovation. Trade secret law reaches into a number of corners patent law
cannot.”[401]

The services industry, for example, does
not rely much on patents, at least when compared to the manufacturing sector –
yet, the services sector is very dynamic and innovative. It also represents
around 70% of the whole economy. Commenting on the challenges faced by service
innovation a Finnish study notes that:

“meeting the requirements for patent
protection may be quite impossible. Novelty and inventiveness might be
achieved, but demonstrating industrial application and technical
characteristics is likely to be too challenging (see Andersen and Howells
1998). In fact, only around five percent of service firms have applied for a
patent (Blind et al. 2003)”[402]

In other areas patents and trade secrets
are used in a combined fashion. The combined use of trade secrets and other intellectual
property rights creates synergies which are attractive to intellectual property
assets management (for instance, patenting an invention while keeping
collateral data confidential, such as information and know-how that is vital
for the commercial viability of the invention).

The complementarity between patents and
trade secrets should not be underestimated. Trade secrets are important to the
well-functioning of the patent system, which requires novelty and therefore
absence of previous disclosure. Business research is normally conducted in
secrecy so to not jeopardise patentability of respective outputs. Secrecy is
therefore used in the pre-patent phase of the creating inventions.

In reality, all intellectual property
rights (trademarks, copyrights, patents, designs, etc.) start by being a trade
secret.

Commenting on the interaction between
optimal patent policy and optimal trade secret policy, Erkal notes the
following:

“The process of innovation starts with the
conception of an idea. During the development of the idea until the stage of
commercialization, innovators explore the potential of the idea and identify
the ways in which it is novel. Patent and trade secret policy are complementary
to each other during this process to the extent that one plays a role that
cannot be fulfilled by the other one. This may be the case for innovations that
are not developed enough to qualify for patent protection or for innovations
that are outside of the subject matter that can be patented under the patent
law. In both of these cases, it is the strength of trade secret protection that
shapes the investment incentives of innovators”[403].

But trade secrets are also used after a
patent is obtained.

Confidentiality is many times used to
protect valuable information relating to an invention, but not included in the
patent specification. Most notably, trade secrets will cover the type of
information that is not subject to public disclosure by patent law but which is
paramount to the bringing of ideas (inventions) into real innovation
(products), producing the sort of market impact that generates growth and jobs.
This is obviously true in respect of information that is not yet available when
an early patent filing strategy is used: the best mode, for commercial
manufacture and use remain to be developed at a later stage. However, even if
available, at the time of filing, patent applicants are not required to
disclose manufacturing details or production specifications[404].

In addition, inventions are subject to
constant improvements, much of those being incremental and not patentable.
Throughout the lifespan of a patent, more know-how is aggregated; the patented
invention is enriched with valuable information that is protected through
secrecy.

As a result, patents may sometimes protect
only a portion of the total technology involved in the commercial exploitation
of an invention as “Considerable expenditure of time, effort, and capital is
necessary to transform an [inventive concept] into a marketable product"[405].

Trade secrets are in fact an important
component of many patent licensing agreements. According to some authors trade
secrets “can increase the value of a license for the licensee and the
licensor up to 3 to 10 times the value of the deal if no trade secrets are
involved.”[406]

Trade secrets as an alternative to
patents

Zooming into the field of technical
inventions ready to be patented, there are circumstances in which a company may
opt for using secrecy instead. The relative attractiveness of secrecy over
patents depends of many factors, including, firm size and financial strength,
the nature of invention in question, the functioning of the patent system and
considerations of pure strategy. Seeking to understand what factors may
influence such an option may shine a light on the role of trade secrets.

If patent eligibility of the invention at
stake is doubtful or uncertain and therefore risky, secrecy may be preferred.
If the invention cannot be easily be discovered by competitors through reverse
engineering the case for secrecy is stronger. This is usually the case with
process innovation, as opposed to product innovation: it is generally easier
for a third party to find out how a device works than discovering the process
used in its manufacturing. At the same time, patents over process innovations are
harder to enforce than product innovations, given that infringements and
copying are harder to detect.

The attractiveness of secrecy over patents
also depends of the manner in which patent system is perceived. If obtaining a
patent is considered as too slow, complex or expensive a procedure, than
certain companies (and in particular SMEs – see Box A6.2) may prefer to
use secrecy. Maintaining, enforcing and defending your patent rights may also
require substantial financial strength.

A6.2 – Trade secrets,
patents and small-sized companies

Informality, simplicity
and cheapness are features of secrecy that are particularly appealable to small
firms:

“large high
technology development firms employ many lawyers, all with sophisticated
expertise in this subject are. Extensive strategy sessions are held to
determine the best mode of protection of a particular development. Outside such
entities, advise on the intricacies of this area of the law is difficult to
come by, and expensive. Small firms tend to get on with the job of development
without paying a great deal of attention to such issues. If trade secret
protection was abolished, such firms would be disadvantaged”[407]

While preparing and
obtaining a patent may already be harder to small companies, managing a patent
portfolio presents greater challenges:

“The patent is
effective to the extent the innovator has the funds to enforce the patent. That
is, the degree of protection that innovators receive depends on how successful
they are in detecting infringement and in defending their rights in court”[408].

“Even if adequate
funds exist to obtain patent protection sufficient capital must exist to
enforce patent rights against infringers. Typically, patent infringement
litigation, which often costs millions of dollars, is among the most expensive
litigation to engage in. This enables accused infringers to aggressively
exploit the limited funds available to a patent owner. For example, a well
financed infringer can respond to a patent owner's assertion of infringement by
filing a declaratory judgment action asserting the patent is invalid. This can
seriously threaten the finances of a small enterprise that owns patents”[409].

Such considerations are
particularly pertinent to SMEs and start-ups. Smaller organisations are
generally less able to monitor the market for possible infringers, and not
sufficiently robust, financially, to litigate over enforcement and patent
validity disputes[410].

In other words obtaining a
patent does not, on its own, necessarily deliver effective appropriation.
Further activity and expenditure is required.

Using the results of the
1993 Community Innovation Survey CIS, Arundel notes that small firms are less
likely than large firms to find patents to be of greater value than secrecy - a
possible explanation being, he adds, that small firms lack the financial
reserves to protect their patents from infringement[411].

Discussing the results of
a survey collecting the views of 1478 R&D labs in the American
manufacturing sector in 1994, a paper published by the National Bureau of
Economic Research, indicates that “the costs associated with patents,
particularly their defence, disproportionately dissuades small firms from
availing themselves of patent protection”[412].

Reviewing the surveys and
studies on the use of patents Mogee concludes that “Most studies, however,
have found that small businesses do not use the patent system much, use it
ineffectively or do not regard patents as important as informal mechanisms for
protecting IP such as proprietary know-how and trade secrets. These findings
are consistent with a major survey of large firms conducted in 1987 by Levin et
al. That study found that trade secrets and being the first to the market were
viewed the most important forms of intellectual property (IP) protection while
patents were low on the list of effective mechanisms of IP protection”[413].

As Almeling puts it: “Study
after study confirms that small businesses rely disproportionately on trade
secrets, instead of patents, to protect their innovations”[414].

Thus, trade secrets may be attractive in
order to avoid the costs inherently associated with intellectual property
ownership (see above in respect of small firms) as well as in offsetting some
of the possible limitations and inefficiencies of the patent system.

Interrelationship between trade
secrets and patents: theoretical studies

The interrelationship between trade secret
and patent policy has been summarized succinctly by Erkal (2005)[415]. The author
differentiates between innovations that are sufficiently developed to be
patentable, as compared to innovations that are potentially patentable if
developed further. The distinction is important given that one goal of trade
secret policy is to protect knowledge that has not reached the patentable
stage, or may not ever reach the patent stage. Erkal emphasizes the importance
of trade secrets at different stages of the innovative process:

–
Trade secret law and patent law are
complementary in the early stages of innovation by allowing innovators to
develop their ideas further and avoid early disclosure. Trade secret protection
may continue to be important later in the innovation process for innovations
that are ultimately determined to be ineligible for patent protection. In both
cases, it is the strength of trade secret protection that determines the
investment incentives faced by inventors. “As long as innovators use patent
and trade secret protection in order to protect themselves against
misappropriation in different stages of the innovation process, the two methods
supplement each other.”[416]

–
After innovations become patentable, however,
patent and trade secret protection become alternative forms of protection
available to innovators, and innovators must then choose the form of protection
that maximizes the likely returns to the innovative activity[417].

The interrelated nature of patent and trade
secret protection has been further discussed by Jorda (2008) and Sherwood
(2008):

–
Jorda (2008) focuses on collateral trade secrets
that are essential for the use of patented technology, typically licensed to
users as part of a package technology license. Although patents may be the
centerpiece for the protection of an innovation, other forms of protection may
be valuable for protecting unpatented subject matter, or for strengthening
exclusivity, invoking additional remedies in litigation, and serving as a
back-up if the primary protection right is determined to be invalid[418]. Jorda
concludes that patent and trade secret protection “are not mutually
exclusive but are highly complementary and mutually reinforcing.”[419]

–
Sherwood (2008) describes how the use of trade
secrets by innovating firms can create value by facilitating the
commercialization of partially-finished innovations, or innovations that do not
meet the requirements for patent issue. The author notes, similar to Erkal
(2005), that trade secret protection can be critical at various phases of the
innovation process. For example, trade secrets can play a critical role in
securing private funding to begin or continue research into the
commercialization of innovations prior to patenting or for those innovations
that will never be patented.

Based on the review of literature,
economists and other commentators have identified certain benefits and costs
(from the point of the view of the innovator) associated with the protection of
innovations as trade secrets relative to patent protection. The benefits and
costs may be summarized as follows (Table A6.1):

Table A6.1 - Trade Secret Protection Compared to Patent Protection

Benefits || Potential Costs

No formal registration required Excessive registration costs avoided Unlimited term of protection || Invention not protected against lawful copying through reverse engineering, independent discovery, or inadvertent disclosure

Broad range of protectable subject matter Protection available for inventions that may not qualify for patent protection Applies to innovation in early stages of innovative process ||

Disclosure of invention not required || Requires substantial investments and on-going expense for internal controls to protect trade secrets from misappropriation Require explicit non-disclosure and covenant-not-compete clauses in employee contracts Employee contract arrangements may inhibit employee mobility or payment of excessive wage premia Non-disclosure of inventions may inhibit the low cost dissemination and adoption of invention by others.

May be used in combination with other IP protection mechanisms to protect complex inventions Assists in appropriating returns to innovation investment Assists in arranging for financing of further commercial development ||

Availability of legal remedies upon misappropriation || Application of trade secret laws uncertain and remedies may vary by enforcement jurisdiction

The economics literature underlines
concludes that trade secret and patent protections are separate, but
nevertheless compatible and mutually reinforcing parts of the overall scheme of
"intellectual property" protections available to inventive firms. The
selection of trade secret presents both benefits and costs relative to the use
of patent protection for new innovations. Firms can thus select the types of
protection mechanism best suited to protect their innovations at different
stages of the innovation process, balancing the costs and benefits of patent
protection against cost and benefits of non-disclosure permissible under trade
secret protection.

Interrelation between patents and
trade secrets: empirical studies

Empirical studies (see also Annex 7)
suggest that not only smaller companies, but indeed companies from all sizes
tend to rate secrecy as a more efficient form of appropriation of innovation
outputs.

–
Erkal observes that “Studies carried out in
the US (Cohen et al., 2000; Levin et al., 1987), Europe (Arundel, 2001; Harabi
1995) and Australia (McLennan, 1995) consistently report that manufacturing
firms regard secrecy as a more important protection mechanism than patenting”[420]

–
The 1993 Community Innovation Survey CIS, for
example, indicated that a higher percentage of R&D-performing firms in all
size classes find secrecy to be a more effective means of appropriation than
patents[421].
Research conducted in the USA lead to similar results.

–
Discussing the results of a survey collecting
the views of 1478 R&D labs in the American manufacturing sector in 1994, a
paper published by the National Bureau of Economic Research, indicates that “most
firms in complex product industries do not consider patents, but first move
advantages, secrecy and the exploitation of complementarity capabilities as the
key means of protecting their inventions”[422].

–
A survey conducted in the USA in 2003[423] showed the relative
importance of the patent system: two thirds of respondents indicated that the
competitive advantage of their company would quickly erode without patent
protection, while 80% stated that the same would happen without trade secret
protection.

–
Having analysed the Mannheim Innovation Panel, a
survey conducted yearly by the Centre for European Economic Research on behalf
of the German Federal Ministry of Education and Research (BMBF), focusing on
the firms’ innovation behaviour, Katrin Hussinger concluded that while the
survey results show that there more companies using trade secrets than those
using patents, the latter have a greater impact on sales of new products. She
concludes that “patent protection is used to secure monopoly profits, where
they are large. Secrecy, however, may be rather applied for early-state
inventions that will enter the market in a later period. Another explanation
might be that firms use secrecy to protect their process inventions, which is
not captured by the sales figure of new products.”[424]

Empirical evidence therefore shows that
business, regardless of form size, generally regard both patents and trade
secrets as two instrument that support their efforts for innovation, which
complement each other.

Interrelationship between trade
secret protection and copyright

To a large extent, copyright and trade
secret protection are co-extensive. For example, as described by Risch (2011),
one might protect computer software source code as a copyrighted work and also
as a trade secret because copyright registration does not require disclosure of
trade secret source code[425].
Thus, the two protection mechanisms complement one another and are employed
simultaneously for certain types of inventions.

As with patents, there may be instances
where the valuable information, such as ideas, facts, and processes, may not be
copyrightable. Examples might include unwritten business plans, initial product
ideas, and customer names and telephone lists that may be copied without
copyright infringement liability. Such information, on the other hand, may be
protectable by trade secret law: trade secret law is “designed to protect
certain types of information that copyright law expressly disclaims.”[426] In this sense, trade
secret law supplements copyright law for innovations relating to the creation
of information not subject to copyright protection.

Economists have not focused extensively on
the relationship between trade secret and copyright law. However, as explained
by Baker & McKenzie (2013), the available discussion suggests that trade
secret protection is interrelated to copyright protection and the two
mechanisms are also fully compatible and mutually re-enforcing[427].

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

The role of trade secret protection
in promoting disclosure and innovative efficiency[428]

Arrow and others have considered whether
non-disclosure of the information about inventions, although perhaps optimal
for individual firms, may not be optimal from a social standpoint. Spillovers
and diffusion of knowledge are considered important determinants of dynamic
economic efficiency as innovations spread through industries and economies over
time. For this reason, economists and other commentators have considered
whether it is preferable from a social standpoint for inventions to be patented
because, in addition to protecting the returns to innovation, the disclosure
required by patents encourages further innovation as others build upon the
original idea in future periods.

For instance, it is argued that “[s]ecrecy,
as an alternative to patents, could decrease public welfare by reducing the
flow of ideas among firms, thus reducing the overall rate of innovation.
Consequently, from a policy point of view, patents are more desirable than secrecy
and other alternative protection measures”[429].

Some authors have further noted that
intellectual property policies should encourage invention at the lowest
possible economic cost[430].
Costs in this context may encompass not only the cost of the original innovation,
but also the costs associated with registering the intellectual property (in
the case of patents and copyrights), implementing internal controls to protect
the intellectual property, and pursuing legal actions against possible
infringement and misappropriation that occurs through unlawful means.

However, a distinction must be made between
secrecy and trade secret law. While secrecy may be the opposite of disclosure,
one should focus not on secrecy in itself but on the impact that trade secret
law has on secrecy and disclosure. In this context, although trade secret law
may appear to encourage secrecy and non-disclosure, commentators have
convincingly argued that trade secret laws instead encourage innovative
efficiency and disclosure. These objectives are accomplished through at least
two separate channels: (1) trade secret law provides serves as a partial
substitute for excessive investments in physical security of trade secrets,[431] and (2) trade secret
law facilitates disclosure in contract negotiations over the use or sale of the
invention that otherwise would not occur in the absence of such protection.[432]

Paradoxically”, using the words of Lemley, “trade secret law actually
encourages broader disclosure and use of information, not secrecy”[433]. By establishing a
safer environment, trade secret law facilitates the exchange of information[434]. In other words, trade
secret law promotes diffusion of knowledge.

The obligation of firms to take reasonable
steps to protect trade secrets is an integral part of the trade secret
protection scheme. Although economists have not performed studies of the costs
incurred by firms to protect trade secrets, the measures required of firms to
prevent disclosure of trade secrets, such as sophisticated IT controls,
investments in physical security, management of employee contract arrangements[435], etc., are undoubtedly
costly and distract management from the day-to-day operation of the business.
Trade secret protection policies that help to reduce the resources expended by
firms on such controls assist firms in maximizing the returns to innovation
investments. Framed in this manner, trade secret protection plays an important
role in innovative efficiency and encouraging the disclosure and dissemination
of inventions beyond levels that would occur if such protection was not
available.

The protection of trade secrets do
not provide perpetual protection

Another feature of trade secrets that
raises reservations is the potential for overpassing the temporary limits of
patent protection. Trade secrets may in theory last for ever. In practice, they
last for an uncertain amount of time, and cease to exist due to reasons that
are beyond the control of the trade secret holder.

The likelihood of a long lasting secrecy is
increasingly shorter. As long as there is need and demand, competition in
innovation will sooner or later lead to the end of secrecy. In this respect, it
is interesting to note that, while trade secrets are extensively used, most
companies feel that secrecy is a short term affair. 80% of respondents
(precisely the same percentage that perceive trade secrets as crucial to their
competitiveness) find that it is very difficult to keep new technology secret
for long, given the speed at which new technology diffuses in their industry.

Thus a trade secret will normally only last
for the period time needed for the involving community and competitors to come
up with an independent discovery or reverse engineering. As mentioned above,
the less obvious the information is, the longer it will take for competitors to
reach the same, similar or better. In other words, protection will last for a
period of time that is proportionate to the merits of the inventor.

Trade secrets and models of economic
welfare maximisation[436]

In recent papers, economists have analyzed
issues of optimal trade secret protection using modelling frameworks that
jointly consider innovation incentives and maximization of social economic
welfare. The rich model structures presented in these papers allow for
simultaneous consideration of intellectual property protection policies and
market competition issues.

These state-of-the art models emphasize the
interrelationships between trade secret and patent policy and compare policy
alternatives based on a consistent comparative evaluation of social welfare
outcomes. The complexity of these models demonstrates the difficulty of
determining the optimal trade-off between protecting the returns to first
inventors as compared to promoting disclosure and the range of inventions that
may result as firms duplicate or improve on the original invention.

For example, Denicolo and Franzoni (2004)
present a model of optimal patent design where innovators can rely on secrecy
and patents to protect innovations. Noting the empirical work of Levin et al.
and Cohen et al., the authors consider whether the prevalence of trade secret
protection by innovating firms is socially desirable. The authors present a
model with two stages: an innovation stage and a duplication stage. In the
innovation stage, the innovator chooses the level of R&D effort, and also
decides whether to adopt trade secret or patent protection. In the duplication
stage, a follower decides how much to invest in replicating the innovation. In
deciding whether to patent, the innovator must weigh the limits of patent
protection against the risk of disclosure of the secret invention.

The authors frame their model in a way that
facilitates a comparison of the impact of different trade secret and patent
policies on economic welfare. The model allows for alternative market
structures and competitive conditions. To keep the model tractable, the authors
assume that patent rights are “strong,” focusing on optimal patent life as a
critical variable affecting innovator choice between patent and secret protection.[437]72 The model structure
is specifically designed to consider the impact of prior user rights, patent
duration, and competitive conditions. The analysis of social welfare compares
the “deadweight loss” under the monopoly conditions of patent ownership to the
deadweight loss stemming from duplication of inventions by followers.
Successful replication by the follower causes a shift in competition conditions
from monopoly to a duopoly market structure. The authors also confirm that
selection of patent life materially affects the determination of whether
patents or secrecy is socially desirable.

Denicolo and Franzoni (2012) refine their
earlier analysis, in particular by allowing for the possibility of knowledge
spillovers. The analysis presented in the paper demonstrates the difficulty of
determining the optimal trade-off between protecting the incentives to engage
in innovative activity versus achieving the benefits of disclosure, spillovers,
and diffusion. The authors note that patents provide a strong form of
protection since they grant an exclusive right to use patented technology for a
defined period of time. Trade secret law, by contrast, provides weak and
non-exclusive protection, prohibiting misappropriation of knowledge and
know-how by unlawful means, but not duplication through reverse engineering or
parallel development. As the authors state: “Where strong exclusive
protection of IPRs is ostensibly intended to ensure a large reward for the
innovator, weak protection aims to foster imitation and competition. Policy,
then, must solve a difficult trade-off between incentives for innovation and
the need to encourage diffusion.”[438]

Allowing for knowledge spillovers, the
authors investigate the relationship between the structure of intellectual
property rights and the nature of the innovation process. As in their prior
paper, the authors incorporate considerations of market structure, comparing
the deadweight loss under monopoly conditions to the dead weight loss under a
more competitive market structure. The authors find that knowledge spillovers
change the analysis in significant ways. Regarding trade secret policy, the
authors conclude that strong exclusive rights are preferable from a social
welfare standpoint in highly innovative sectors where firms compete
aggressively for major innovations, where research knowledge is jealously
guarded, and where product competition is weak. In the absence of such industry
conditions, trade secrecy may be socially optimal.

Ottoz and Cugno (2011) present a model analyzing
optimal trade secret policy based on the optimization of economic welfare and
incorporating elements of game theory and alternative specifications of
competitive conditions. The model assumes that an incumbent firm has a
proprietary product whose technology consists of at least two components, one
of which is patented while the other is kept secret. The authors specify a
model in which social costs associated with a mixture of trade secrets and
patents includes, in addition to dead-weight losses and innovative R&D
costs, the costs borne by an entrant trying to duplicate the part of a
technology protected by trade secret. The authors then focus on the
relationship between duplication costs by legal means and social welfare.

A special feature of the authors’ model is
the relationship between duplication expenses, the probability of duplication
success, and the scope of trade secret law. Another unique feature of the model
is the explicit incorporation of considerations of employee mobility including
restrictions imposed by contractual and legal restrictions, such as
postemployment non-disclosure or covenants not-to-compete, intended to limit
spillovers of proprietary and non-patented information.[439] The authors conclude
that a strong trade secret protection may be collectively efficient by allowing
society to save on duplication costs that would be incurred by the new entrant.
Such savings may be sufficient to more than compensate the dead-weight losses
incurred over time associated with a low probability of duplication success.[440] In this rich model
structure, the authors find conditions under which a strong trade secret policy
is desirable.

Trade secrets protection in
alternative market structures[441]

The economic theoretical literature
suggests that trade secrets play an important role in protecting the returns to
innovative activity in a variety of innovation market structures. The following
paragraphs present recent economic studies discussing the consequences of trade
secret protection under alternative assumptions of competitive behaviour and
market conditions in which innovations occur.

Trade secret protection when patents are
defined broadly

Ottoz and Cugno (2008) consider the
implications for an optimal patent-secret mix for “complex” products that
incorporate a mixture of patents and trade secrets in a single innovative
product. As the authors note, electronic products tend to incorporate a large
number of patents, and often a mixture of patent, copyright, and trade secret
technology. In the case of complex innovations, firms can rely on more than one
protection mechanism to protect a product. Under some circumstances, the
innovator has no choice but to use trade secret protection since certain
components may not qualify for patent. In many instances, however, innovators
can choose the extent of protection through trade secret versus patent
protection. Consequently, trade secret protection may be important not only
during the patent application process, but also during the term of and after
expiration of a patent.

Ottoz and Cugno (2008) present a model
where an innovator, possessing all the complementary pieces of the new
technology and using the pieces directly, choose an optimal patent-secret mix.
The authors conclude, somewhat counter intuitively, that an increase in the
level of patent protection may induce an innovator to rely more on secrecy. The
intuition for the authors’ conclusions is as follows: an increase in the
patented and disclosed knowledge decreases the likelihood that a rival will
invent around the patented knowledge, but also increases the probability that
the remaining trade secret leaks out (since there is less knowledge to leak).
Because of these two opposing effects, the optimal disclosure is somewhere
between none and all of the knowledge. In addition, although an increase in
patent breadth causes innovators to substitute patent for trade secret
protection, an increase in patent breadth allows the innovator to disclose a
lower fraction of knowledge, inducing the innovator to rely more on trade
secrets. Thus, the opposing economic incentives cause innovators to choose a
combination of patent and trade secret protection. This article illustrates how
the availability of both trade secret and patent protection enable firms to
select the optimal combination of protection that maximizes the rewards to the
inventive activity. In addition, the article is contrary to the usual view that
an increase in patent breadth necessarily implies that innovators would rely
less on trade secret protection.

The effect of trade secret protection on
subsequent innovations

Erkal (2005) examines the use of patents
and secrecy when the innovative environment is characterized by a process of
cumulative innovation. Cumulative innovation occurs when a first innovating firm
develops an idea, and then there is a race by a second firm (or firms) to build
on and develop an improved version of the first innovation. Erkal shows that if
innovators can rely on secrecy after the first stage of R&D, competitors
must allocate substantial resources to duplicate the R&D output of the
first stage. The investments designed to copy the first innovation are assumed
to reduce competitiveness in the second stage of R&D. This in contrast to
patent innovations where the competitors can use the disclosed patent of the
innovator in order to compete on equal terms in the second R&D stage. The
decision by the first innovator to use trade secrets or patents in the first
stage then affects the investment required and returns to the second stage
innovator. Models of cumulative innovation demonstrate how the use of trade
secrets and patents in various stages of the innovative process interact,
impacting both the incentive to innovate and the level of investment in
subsequent R&D races.

The likelihood of simultaneous invention
can impact the choice between patent and trade secret protection

In Kultti et al. (2006, 2007), the authors
examine the implications for optimal patent policy by considering simultaneous
innovation, situations where separate firms operating separately develop the
same invention simultaneously. The authors demonstrate that the possibility of
simultaneous innovations changes the firms’ decision dynamics: firms may choose
patents instead of secrecy for defensive purposes, “since the choice is no
longer between patenting or resorting to secrecy, but between patenting or
letting competitors patent.”[442]
The models developed by Kultti et al. (2006, 2007) demonstrate that the choice
between secrecy and patenting is the result an optimization process whereby the
innovator must consider the likelihood that the invention will be disclosed and
by the strength of the patent protection: a strong patent protection system
militates in favour of patent, whereas a weak system militates in favor of
secrecy. The authors conclude: “For intermediate levels of patent
protection, … the model predicts a mixed equilibrium where both secrecy and
patenting coexist.”[443]
The authors further find that, whether an innovator may prefer patent versus
trades secret protection, depends on the probability that a competitors will
discover the same invention simultaneously. A strong likelihood of simultaneous
invention diminishes the gains from secrecy and encourages innovators to patent
new inventions even though the protection afford by the patent may be weaker
than protection provided by continued secrecy. A low probability of
simultaneous invention can have the opposite effect.

Trade secret protection when patents are
weak

The role of secrecy in an environment where
patent rights are “weak” has been considered by Anton & Yao (2004), and by
Anton, Greene, & Yao (2006). The authors note that patents vary
substantially in the degree of protection provided against unauthorized
imitation. Weak patents are defined as patents that have a significant
probability of being overturned or being circumvented relatively easily. The
authors note that, if patent or copyright laws could fully protect all
economically important inventions, circumvention and possible infringement
would be of less importance to the management of intellectual property by
firms. Under such circumstances, maintaining inventions in the form of trade
secrets would be of less importance. The authors note, however, citing to
empirical studies, that firms do not view patents as providing strong
appropriability. The authors conclude that, in an innovation setting where the
breadth and scope of patent protection is viewed as potentially weak, such
conditions encourage firms to rely more heavily on secrecy. Thus, secrecy may be
viewed as a rational alternative to patenting or copyright where inventors
conclude that there is a reasonable probability that a patent may be overturned
or easily circumvented. As a result, the choice between patent versus trade
secret protection depends in part of the innovator’s view regarding the
relative strength or weakness of a patent.

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

Economic empirical studies in Europe and
elsewhere consistently find that innovators routinely use means other than
patents (and generally intellectual property rights) to protect innovations and
appropriate the returns to their innovation investment. The use of trade
secrets is prominent among these alternative protection methods.

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

Empirical studies in the EU

The 2012 Industry Survey[444] carried out by Baker
& McKenzie for the Commission in 2012 confirms that trade secrets are
highly valuable for companies in the EU, both as regards technical information
and business/commercial information[445].
The most highly-valued types of Trade secret relate to “Commercial bids and
contracts, contractual terms”, followed by “Customer or supplier lists and
related data”, and then “Financial information and business planning”. Trade
secret information related to “R&D data”, “Process know how and
technology”, “Formulae and recipes”, “Product technology”, and “Marketing data
and planning” were also ranked by respondents as highly valuable.

Concerning the importance of trade secrets
for the competitiveness/innovative growth performance of their company, 74% of
the respondents attached medium or high importance to trade secrets[446] (see Figure A7.1).

Figure A7.1 –
Importance of trade secrets for the competitiveness/innovative growth
performance of businesses. Source: 2012 Industry Survey.

Other empirical studies in the EU also show
that companies, irrespective of their size, often value secrecy as equally
important or more important than patents and other forms of intellectual
property as a way to appropriate and exploit knowledge (see Box A7.1).

Box A7.1 –
Empirical studies in the EU

Brouwer and
Kleinknecht (1999)
analyzed the Netherlands portion of the European Community Innovation Survey
(“CIS”)[447]
for 1992 and 1988 covering 1,300 manufacturing firms[448]. The authors
observe, consistent with other studies, that secrecy is “more important than
patent protection” in protecting both process and product innovations[449].

Arundel (2001) also analyzes European firm preferences in
7 countries for the use of secrecy versus patents as an appropriation
mechanism, using data from the 1993 European CIS[450]. The results
show that a higher percentage of firms in all size classes rate secrecy as more
valuable than patents. However, with respect to product innovations, the
authors find a statistically significant trend towards declining importance of
trade secrets as firm size increases.

Hussinger (2005), using German data[451], also
analyzes whether companies prefer patents versus secrecy to protect their
innovations. Hussinger finds (similar to other studies) that firms tend to use
patents more for the protection of product innovations, which are subject to
re-engineering, whereas secrecy may be more favourably applied to protect process
innovations. In addition, different protection tools may be used at different
stages of the innovation process, and firms may protect different elements of a
single invention through the combination of different protection tools.
Hussinger finds that, for German manufacturing firms in 2000, patents are more
important to protect innovations embodied in products sold in the marketplace,
whereas secrecy is important for inventions that are not yet commercialized.

Gonzalez-Alvarez and
Nieto-Antolin (2007) similarly
analyze the selection of protection mechanisms by Spanish manufacturing
companies. Appropriations methods considered by the authors are patents,
industrial secrets, cost and time for imitation, and continuous innovation.
Manufacturing industries where trade secrets were found to be more important
than patents as an appropriability mechanism are food and kindred products;
textile mill products; apparel and other textile products; lumber and wood
products; paper and allied products; printing and publishing; chemicals and
allied products; leather and leather products; stone, clay, glass and concrete
products; primary metals; fabricated metal products; and transportation
equipment.

Empirical studies outside the EU

Studies in the US obtained similar results
(see Box A7.2).

Box A7.2 –
Empirical studies in the US

Levin et al. (1987) analysed the most important mechanisms by
which US firms are able to appropriate returns to investments in innovation[452]. Analysis of
the survey data revealed that firms in many manufacturing industries consider
protection mechanisms other than patents more effective in appropriating
returns from innovation. For example, lead time, speed down the learning curve,
and sales and service efforts were all found to be more effective than patents
with respect to both process and product innovations. Secrecy was found to be
more effective than patents for process innovations, but slightly less
effective than patents for product innovations.

Cohen et al. (2000) conducted another well-known study of
appropriability mechanisms in the US[453].
Similar to Levin et al. (1987), the authors observed that firms capture the
returns to innovations using a range of protection mechanisms, including
patents, secrecy, lead time, and complementary marketing or manufacturing
capabilities. The authors found that patents tend to be the least emphasized by
firms in the majority of the manufacturing industries, whereas secrecy and lead
time tend to be emphasized most heavily.

Png (2011) also provides an empirical analysis of the
importance of trade secrets for US manufacturing for the period 1976-2006. The
authors examines the impact of the adoption of the Uniform Trade Secrets Act
(UTSA) by US states on R&D and the decision whether to patent or hold
inventions as trade secrets. The results imply that trade secrets matter for
R&D investment and, for some industries, whether to patent technical
innovations. Png concludes: “In the realm of public policy, my results
suggest that policy-makers concerned about technical innovation should look
beyond patents, and give more attention to trade secrets.”[454]

Jankowski (2012) summarizes the business use of
intellectual property protection following a National Science Foundation survey[455]. In this
survey trademarks and trade secrets are identified by the largest number of
businesses as important forms of intellectual property protection.
Nevertheless, when only the replies made by firms with R&D activity are
counted, trade secrets comes first: it is cited as an important protection
method by more than 60% of the respondents with R&D activity[456].

These findings are also confirmed by
studies in other European countries (see Box A7.3).

Box A7.3 –
Empirical studies in Switzerland

Harabi (1995) conducted a survey of 358 Swiss R&D
executives, spanning 127 lines of business mainly in the manufacturing sector[457]. The author
reports survey results that are broadly similar to those of Cohen et al.
(2000). Secrecy, lead time, moving quickly down the learning curve, and
superior sales and service were all found to be at least as effective, if not
more effective, than patents for appropriating the returns to product and
process innovations[458].
The author concludes: “Facing the decision of either patenting or keeping an
innovation secret, innovators tend to choose secrecy in cases of process
innovations and patenting in the case of product innovations”[459].

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

European research shows that trade secrets
are important to all sizes of firms, but SMEs and start-ups seem to rely on
trade secrets more intensively than larger companies[460]. The literature
suggests that SMEs and start-ups may be using trade secrets not only as
supplements/complements to patent (or other intellectual property right)
protection, but also as substitutes for it (see Box A7.4).

Box A7.4 – Trade
secrets and SMEs in the EU

Arundel and Kabla
(1998)[461] found that patent propensity rates tend to
increase with firm size, i.e., smaller firms file patent applications for a
smaller percentage of their innovations than larger firms. This result was
observed for both product and process innovations.

From a German
perspective, Blind et al. (2006) also found that the importance of
patents grows with increasing company size[462].

Drawing upon the results
of case studies of eight Finnish firms in 2007, Olander et al. (2009)
find that SMEs prefer to rely on informal protection measures, such as trade
secrets, in protecting their intellectual property[463]. They also
show that firm size and the business type affect the preferred method for the
protection of innovations.

Additional support for
the observed reliance of small firms on trade secrets was provided by Pajak
(2009). This author found that the use of patents as an intellectual
property protection tool for process innovations, as compared to using trade
secrets, increases with firm size[464].

Leiphonen & Byma
(2009) also found that
small firms prefer to rely on informal intellectual property protection
measures, such as speed to market or secrecy[465].

In a report to the UK
Intellectual Property office, Hughes & Mina (2010) showed that small
firms are less likely to use patents as a means of protecting innovation
investments as compared to other means such as confidentiality agreements,
secrecy, or being first to market[466].

Similar findings result from US research
(see Box A7.5).

Box A7.5 – Trade
secrets and SMEs in the US

The results of Lerner
(1995)[467]
suggest that smaller, less established firms tend to employ trade secrecy more
intensively than larger, longer established firms, due in part to the
substantial direct and indirect costs of patenting and protecting against
infringement.

Cordes et al. (1999) determined that small high technology firms
often prefer informal intellectual property protection mechanisms, such as
trade secrets and gaining lead time, over formal intellectual property rights
protection, such patents, copyrights and trademarks to protect innovation[468]. Cordes et
al. (1999) conclude that the two main reasons why small, high technology firms
may choose secrecy over patents are the costs involved in enforcing patent
rights and the requirement to disclose the innovation as part of the patent
application[469].

Cohen et al. (2000) confirm a positive correlation between
patent effectiveness and firm size, suggesting that patents may play a more
central role at large firms. Analysis of survey results suggests that the costs
associated with patents, particularly their defense, disproportionately
dissuade small firms from using patent protection as an appropriability measure[470]. The authors
state: “ … larger firms are better able to spread the fixed costs of
applying for and defending patents over greater levels of output”[471].

Searle (2010b) concludes that “there is a negative
relationship between firm size and the intensity of trade secrecy”: i.e.
smaller firms prefer trade secrets as an appropriability mechanism over patents[472]. Because
smaller firms face high costs for obtaining patents, secrecy may be perceived
as “a more efficient method of protecting innovations”[473].

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

The 2012 Industry Survey shows that the
protection of trade secrets is important to EU industries, irrespective of
their economic sector or geographical origin, although their importance varies
depending on the type of trade secret.

–
While this survey confirms that trade secrets of
all types are viewed as valuable to European Companies, there are significant
differences among industries in terms of the relative importance assigned to
different types of trade secrets. Commercial bids and contracts are ranked as
the most valuable in the Chemicals, Computer, Wholesale Trade,
Telecommunications, Fast moving consumer goods, and Scientific Research and
Development sectors. In Pharmaceuticals, the most valuable trade secrets are
associated with Marketing data and planning, while Customer and supplier lists
are perceived as high value for the Machinery and Equipment, Motor Vehicles,
Transportation and Storage, Advertising and Market Research, and Legal and
Accounting services sectors[474].

–
Concerning the importance of trade secrets for
the competitiveness/innovative growth performance of their company[475], this survey
confirms the importance of trade secrets to individual business sectors,
although their relative importance varies by industry sector. Sectors providing
the largest share of “High Importance” responses are Scientific Research and
Development (55%), Chemicals Manufacturing (52%), and Motor Vehicles
Manufacturing (44%). The industries with the lowest share of “High” responses
include Publishing Activities (21%), Information Services activities (19%),
Wholesale Trade (other than motor vehicles) (17%), and Legal and Accounting
services (7%).

In manufacturing industries, US research
showed that secrecy is considered very important in particular for process
innovation (not only for product innovation), which spans many more sectors
(see Box A7.6).

Box A7.6 – Secrecy
for process and product innovation

In an above-mentioned
study[476],
Cohen et al. (2000) presented the effectiveness of different
appropriability mechanisms for product innovations separate from those for
process innovation in different US manufacturing industries.

For product innovations,
the mean effectiveness as an appropriability mechanism of lead time and trade
secrecy exceeds that of patents on average for all industries, followed in
importance by complementary sales and service and complementary manufacturing.
The relative effectiveness of trade secrets varies significantly across industries
and is viewed as most important in the miscellaneous chemicals, metal,
textiles, petroleum, machine tool, and semi-conductor industries. With
the exception of two industries – special purpose machinery and medical
equipment – the effectiveness of trade secrets as an appropriation mechanism
exceeds that of patents in all other industries. See Table A7.1, below.

Similar industry
patterns hold for the effectiveness of appropriability mechanisms for process
innovations. On average across all industries, lead time and secrecy are found
to be the two most important appropriability mechanisms. The effectiveness of
trade secrets exceeds that of patents by more than a 2-to-1 margin for process
inventions. The relative effectiveness of trade secrets for product innovations
varies significantly across industries and is viewed as most important in the
miscellaneous chemicals, drugs, metal, plastic resins, and textile industries.
The authors further observed that the effectiveness of trade secrets exceeds
that of patents in every industry with only one exception, medical equipment[477]. See Table
A7.2, below.

Table A7.1 - Mean Percentage of Product Innovations for which Mechanism Considered Effective

|| || Mean Percentage of Innovations

Industry || N || Secrecy || Patents || Other Legal || Lead Time || Complementary Sales/Services || Complementary Manufacturing

Miscellaneous Chemicals || 29 || 70.69 || 39.66 || 25.52 || 55.52 || 55.17 || 48.97

Metal || 6 || 65.83 || 20.00 || 5.00 || 50.83 || 58.33 || 61.67

Textiles || 23 || 63.70 || 20.00 || 25.87 || 58.26 || 55.22 || 58.26

Petroleum || 15 || 62.00 || 33.33 || 6.33 || 48.67 || 40.33 || 35.67

Machine Tools || 10 || 61.50 || 36.00 || 9.00 || 61.00 || 43.00 || 34.50

Semiconductors & Related Equipment || 18 || 60.00 || 26.67 || 22.50 || 53.33 || 42.22 || 47.50

Food || 89 || 58.54 || 18.26 || 21.18 || 53.37 || 39.83 || 51.18

Rubber & Plastic || 35 || 56.86 || 32.71 || 10.14 || 40.86 || 34.29 || 37.71

Plastic Resins || 27 || 55.93 || 32.96 || 18.15 || 38.33 || 44.63 || 46.11

Aerospace || 48 || 55.10 || 32.92 || 16.15 || 58.02 || 34.58 || 46.88

Paper || 31 || 55.00 || 36.94 || 26.45 || 47.10 || 40.00 || 39.84

Drugs || 49 || 53.57 || 50.20 || 20.82 || 50.10 || 33.37 || 49.39

Chemicals || 65 || 52.77 || 37.46 || 21.62 || 48.62 || 44.92 || 41.31

Medical Equipment || 67 || 50.97 || 54.70 || 29.03 || 58.06 || 52.31 || 49.25

Motor & Generator || 22 || 50.91 || 25.23 || 19.09 || 48.86 || 47.27 || 45.23

Auto Parts || 30 || 50.83 || 44.35 || 15.65 || 64.35 || 44.84 || 53.06

TV & Radio || 8 || 50.00 || 38.75 || 35.63 || 53.75 || 24.38 || 38.75

Other Manufacturing || 84 || 49.29 || 33.81 || 26.61 || 63.51 || 42.56 || 45.30

General Purpose Machinery || 74 || 49.19 || 38.78 || 20.88 || 52.23 || 41.15 || 43.65

Search & Navigational Equipment || 38 || 48.95 || 28.68 || 24.08 || 46.84 || 32.89 || 40.53

Basic Chemicals || 35 || 48.00 || 38.86 || 11.57 || 38.29 || 45.86 || 44.71

Precision Instruments || 35 || 47.29 || 25.86 || 20.86 || 54.14 || 49.57 || 45.57

Communications Equipment || 34 || 47.21 || 25.74 || 20.15 || 65.59 || 42.06 || 41.18

Glass || 6 || 46.67 || 30.83 || 11.67 || 50.00 || 62.50 || 70.00

Mineral Products || 18 || 46.11 || 21.11 || 12.22 || 39.72 || 37.78 || 40.00

Special Purpose Machinery || 64 || 45.08 || 48.83 || 23.05 || 59.69 || 46.33 || 51.09

Concrete, Cement, Lime || 10 || 45.00 || 30.00 || 17.50 || 38.00 || 45.50 || 40.00

Computers || 25 || 44.20 || 41.00 || 27.20 || 61.40 || 40.20 || 38.00

Metal Products || 44 || 43.07 || 39.43 || 18.18 || 48.18 || 37.05 || 40.11

Car & Truck || 9 || 42.22 || 38.89 || 19.44 || 65.56 || 41.67 || 42.22

Electrical Equipment || 22 || 39.09 || 34.55 || 15.00 || 33.41 || 32.27 || 31.82

Steel || 10 || 37.00 || 22.00 || 11.50 || 61.50 || 34.50 || 42.00

Electronic Components || 26 || 34.04 || 21.35 || 20.19 || 45.58 || 50.00 || 51.15

Printing & Publishing || 12 || 32.50 || 12.08 || 21.67 || 48.33 || 66.25 || 60.42

ALL || 1118 || 51.00 || 34.83 || 20.71 || 52.76 || 42.74 || 45.61

Source:
Cohen et al. (2000), (re-ranked highest to lowest based on trade secret
intensity)

Table A7.2 - Mean Percentage of Process Innovations for which Mechanism Considered Effective

|| || Mean Percentage of Innovations

Industry || N || Secrecy || Patents || Other Legal || Lead Time || Complementary Sales/Services || Complementary Manufacturing

Miscellaneous Chemicals || 28 || 76.25 || 27.32 || 15.71 || 33.93 || 40.36 || 54.46

Drugs || 48 || 68.13 || 36.15 || 16.04 || 35.52 || 25.21 || 44.17

Metal || 6 || 65.83 || 31.67 || 12.50 || 66.67 || 46.67 || 50.00

Plastic Resins || 27 || 62.96 || 21.30 || 7.22 || 23.70 || 25.19 || 34.26

Textiles || 23 || 60.65 || 25.22 || 24.35 || 48.70 || 44.35 || 53.91

Rubber & Plastic || 35 || 59.14 || 19.86 || 11.43 || 35.86 || 23.00 || 37.43

Paper || 31 || 58.87 || 27.58 || 19.35 || 34.52 || 20.65 || 34.03

Basic Chemicals || 35 || 58.43 || 29.71 || 11.71 || 25.71 || 26.71 || 40.14

Glass || 6 || 58.33 || 30.83 || 18.33 || 31.67 || 42.50 || 50.00

Semiconductors & Related Equipment || 18 || 57.50 || 23.33 || 8.33 || 47.78 || 32.22 || 42.50

Petroleum || 15 || 57.33 || 36.67 || 6.33 || 32.00 || 27.67 || 31.33

Auto Parts || 31 || 56.45 || 24.35 || 15.16 || 50.16 || 36.94 || 55.97

Food || 89 || 55.84 || 16.40 || 15.00 || 41.91 || 29.78 || 46.52

Concrete, Cement, Lime || 10 || 54.00 || 18.50 || 15.50 || 26.50 || 31.50 || 33.50

Chemicals || 63 || 53.65 || 20.40 || 12.86 || 27.14 || 28.41 || 42.30

Other Manufacturing || 79 || 51.65 || 23.42 || 20.76 || 44.56 || 31.39 || 38.29

Aerospace || 47 || 49.26 || 21.38 || 13.30 || 42.23 || 28.40 || 44.89

Medical Equipment || 66 || 49.24 || 34.02 || 22.27 || 45.15 || 32.12 || 49.55

Mineral Products || 18 || 48.89 || 23.33 || 11.11 || 28.61 || 27.50 || 46.94

Machine Tools || 10 || 48.00 || 18.00 || 9.50 || 43.00 || 34.00 || 39.00

TV & Radio || 8 || 47.50 || 18.75 || 18.75 || 38.75 || 32.50 || 46.88

Electronic Components || 26 || 46.54 || 15.19 || 15.00 || 42.69 || 42.31 || 55.77

Metal Products || 42 || 46.19 || 22.50 || 15.36 || 39.05 || 35.36 || 47.38

Search & Navigational Equipment || 37 || 43.65 || 13.24 || 16.35 || 39.05 || 31.89 || 42.97

Precision Instruments || 31 || 43.55 || 16.77 || 15.81 || 35.48 || 32.74 || 40.81

Motor & Generator || 21 || 42.62 || 22.14 || 17.86 || 44.52 || 31.67 || 39.29

Computers || 20 || 42.50 || 30.25 || 16.75 || 39.75 || 23.50 || 35.50

Special Purpose Machinery || 63 || 41.83 || 28.57 || 16.03 || 44.92 || 35.48 || 41.27

Steel || 10 || 41.00 || 15.50 || 11.50 || 42.00 || 25.00 || 42.00

General Purpose Machinery || 69 || 37.54 || 23.62 || 16.30 || 34.86 || 28.33 || 40.00

Communications Equipment || 33 || 35.30 || 14.70 || 13.94 || 43.03 || 33.64 || 40.61

Car & Truck || 9 || 34.44 || 21.67 || 17.22 || 34.44 || 26.67 || 41.11

Electrical Equipment || 22 || 31.59 || 19.09 || 6.82 || 19.09 || 11.82 || 18.86

Printing & Publishing || 11 || 20.45 || 8.64 || 10.91 || 33.64 || 50.91 || 63.64

ALL || 1087 || 50.59 || 23.30 || 15.39 || 38.43 || 30.73 || 43.00

Source:
Cohen et al. (2000), (re-ranked highest to lowest based on trade secret
intensity)

While most of the empirical studies, both
in the EU and in the US, focus exclusively on manufacturing industries (and do
not evaluate empirically the importance of trade secrets in non-manufacturing
setting) a few of them have also looked at the non-manufacturing sector. This
research shows that trade secrets are also relied upon in the services sector[478], including the
business services area[479]
or the information services, and in the sectors characterised by
products/services or processes with a short lifecycle (see Box A7.7).

Box A7.7 – Use of
trade secrets in non-manufacturing sectors

Baker & McKenzie
(2013), based on French
data[480],
ranked industries according to the intensity of use of trade secrets as an
appropriability mechanism. In addition to manufacturing industries, the CIS
data for France shows that many important non-manufacturing industries also
rely on trade secret protection. The service and trade industries with
significant reliance on trade secrets include water, gas, and electricity;
advisory and assistance; financial services; wholesale trade; operational
services; real estate; car trade and repair; hotel and restaurant; transports;
and retail trade.

Two US studies, using
litigation data, also confirm the importance of trade secrets in
non-manufacturing industries.

Searle (2010a) is the only published US study that
provides evidence of the importance of trade secrets in non-manufacturing
industries. In a doctoral thesis, Searle reports the results of an economic
analysis of litigated trade secrets cases, relying on data collected from
prosecutions under the US Economic Espionage Act for the period 1996-2008.
Drawing on court filings and other financial data, the author classified victim
companies according to Standard Industrial Classification (SIC) code.
Consistent with other studies, Searle (2010a) finds that approximately 57% of
the victim companies were classified as manufacturing firms. Of the
manufacturing firms, the major manufacturing industries represented in the litigation
claims were electronic and other electrical equipment and components (excluding
computer equipment, but including semi-conductors), chemicals and allied
products, and industrial and commercial machinery and computer equipment).
Significantly, service companies represented 17% of the total number of victim
companies, with business services specifically representing 12% of the total.
Finance, insurance, and real estate companies represented 4% of the total
victim service companies, followed by transportation, communications, electric,
gas and sanitary services (3%), and wholesale trade (2%). Although focused on
US litigation patterns, the results reported by Searle (2010a) nevertheless
confirm the importance of trade secrets to non-manufacturing industries, such
business services and wholesale trade.

In addition, Lerner
(2006) reported the results of an analysis of trade secret litigation cases
from California and Massachusetts, coding the cases by name and number,
parties, procedural posture, date, industry, whether a violation occurred,
whether injunctive relief was granted, whether damages were granted and the
amount of damages. Lerner found that computer programming industry (SIC 737)
topped the list of eight industries ranked in terms of cases brought, followed
by miscellaneous business services (SIC 738); insurance agents, brokers and
services (SIC 641); electronic components and accessories (SIC 367);
professional and commercial equipment (SIC 504); services to dwellings and
other buildings (SIC 734); laundry, cleaning and garment services (SIC 721);
eating and drinking places (SIC 581).

Finally, Jankowski
(2012), using data of a National Science Foundation survey[481], explains
that a diverse group of industries reported trade secrets as very or somewhat
important to their businesses. Included among the top six industries are both
high-technology manufacturers (electrical equipment, appliance and components)
and low-technology manufacturers (food), manufacturing industries serving
well-established industrial bases (chemicals) as well as more recent entries to
the economic landscape (computer and electronic products), and businesses most
directly representative of the knowledge-intensive service economy (publishing
and Internet services providers). Among 4-digit NAICS industries, more than 70%
of software publishers (NAICS 5112), pharmaceutical and medicine manufacturing
businesses (NAICS 3254), and basic chemical manufacturing businesses (NAICS
3251) reported trade secrets as important to their operations. Further, 98% of
businesses in the semiconductor machinery industry (NAICS 333295) reported
trade secrets as important – no other NAICS industry reported a higher share of
any type of intellectual property right as important[482].

Interestingly, Jankowski
also explains that businesses in the information sector[483] rated
(copyrights, trademarks and) trade secrets considerably more important than did
businesses in the manufacturing sector (see “Figure 1”, below)[484]

Annex 8 – Misappropriation of trade secrets

A8.1.      What
is misappropriation of trade secrets?

When a company protect information and
knowledge as trade secrets, it is also taking a decision as to when, how and to
whom such information and knowledge lawfully under its controlled will be, if
ever, disclosed to other parties or to the public. However, other parties may
attempt at obtaining such information without the consent of the owner of the
trade secret either through espionage, hacking, bribery of employees, breach of
contract etc. The use of an "improper" mean to acquire the
information constitutes the essence of the misappropriation concept.

While there is no definition of
misappropriation in EU law, the definition in the WTO TRIPS agreement may be
used as a proxy to frame the debate. The TRIPS agreement addresses the
question of misappropriation as follows:

"Natural and legal persons shall have
the possibility of preventing information lawfully within their control from
being disclosed to, acquired by, or used by others without their consent in a manner
contrary to honest commercial practices…"

For the purposes of this provision, "a
manner contrary to honest commercial practices" shall mean at least
practices such as breach of contract, breach of confidence and inducement to
breach, and includes the acquisition of undisclosed information by third
parties who knew, or were grossly negligent in failing to know, that such
practices were involved in the acquisition."[485]

According to academic research, this definition
of the concept of contrariety to honest commercial practices implies the
adoption of a subjective standard of analysis (i.e. a standard based on a
finding of bad faith)[486].
The type of prohibited behaviours are:

–
Unauthorised disclosure of a trade secret;

–
Acquisition of a trade secret[487]; and

–
Use of the trade secret[488].

In the US, the definition of
misappropriation in the US Uniform Trade Secrets Act of 1985 is more detailed.
Misappropriation means:

"(i) acquisition of a trade secret of
another by a person who knows or has reason to know that the trade secret was
acquired by improper means; or

(ii) disclosure or use of a trade secret of
another without express or implied consent by a person who

(A) used improper means to acquire knowledge
of the trade secret; or

(B) at the time of the disclosure or use,
knew or had reason to know that his knowledge of the trade secret was

(I) derived from or through a person who had
utilized improper means to acquire it;

(II) acquired under circumstances giving
rise to a duty to maintain its secrecy or limit its use; or

(III) derived from or through a person who
owed a duty to the person seeking relief to maintain its secrecy or limit its
use; or

(C) before a material change of his [or her]
position, knew or had reason to know that it was a trade secret and that knowledge
of it had been acquired by accident or mistake."

'Improper means' includes "theft,
bribery, misrepresentation, breach or inducement of a breach of a duty to
maintain secrecy, or espionage through electronic or other means".

In Sweden, the Swedish Act applies
to “unwarranted infringements of trade secrets”, but there is no single
definition of misappropriation, for the purposes of civil action, at such.
However, Articles 5 to 8, define conduct which triggers civil liability.

Article 5 refers to the following conduct
triggering civil liability: unlawful acquisition (by reference to Articles 3
and 4 of the Act which contain criminal provisions in this regard); and/or
subsequently exploiting or revealing the trade secret without authorisation.

“5. Anyone who commits an offence under
Article 3 or 4 shall pay a compensation for the damage caused through the
offence or through the fact that the trade secret is, without authorization,
exploited or revealed.”

Articles 6 to 8 refer to other specific cases of
exploitation and revelation of the trade secrets by persons who did not
originally obtained the trade secret in an unlawful manner (i.e. business
partners, employees, or in the course of legal proceedings). Article 9 refers
to the absence of authorisation for the exploitation/revelation as a factor.

“6. Anyone who wilfully or through
negligence exploits or reveals a trade secret in a person’s business or
industrial activity of which he has been informed in confidence in connection
with a business transaction with that person shall compensate the damage caused
through his action.”

“7. Anyone who wilfully or through
negligence exploits or reveals the trade secret of his employer of which he has
been informed in the course of his employment under such circumstances that he
understood, or ought to have understood, that he was not allowed to reveal it,
shall compensate the damage caused by his action.

Where the action took place after the
termination of the employment, the first paragraph shall apply only where there
are extraordinary reasons for it.”

“8.Anyone who wilfully or through negligence
exploits or reveals a trade secret which, according to what he understands or
ought to understand, has been the subject of an action under this Act shall
compensate the damage caused through his action. The same applies in where a
person otherwise wilfully or through negligence exploits or reveals a trade
secret, which, according to what he understands or should understand, has been
revealed contrary to the provisions in the Secrecy Act (1980:100).”

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

Companies try to protect their trade
secrets through different protective measures[489] to maintain control of
the trade secret and avoid its misappropriation. The EU IPR Helpdesk, for
instance, gives guidance on trade secret protection management[490]. It suggests that any
company should take measures and implement a range of best practices to
maintain confidentiality of trade secrets, in particular as regards the following
issues:

–
(1) identification of trade secrets and
establishment of a trade secret protection policy: e.g. confidentiality
policies restricting the persons who can have access to the information etc.;

–
(2) store confidential information safely: e.g. use
of safes/locks for physically stored information, use of technology to protect
electronically stored information (e.g. use of passwords to access systems,
automated control enabling to trace additions/changes back to the originator);

–
(3) employee awareness: training of employees,
applying non-disclosure clauses and non-compete agreements with key employees,
monitoring employee activity, marking confidential document;

–
(4) business partner commitment: ensuring the
appropriate management of confidential information by confidentiality, licence
and joint-venture agreements.

In addition, sharing a trade secret with a
partner in a foreign country may pose specific challenges, requiring additional
safeguards (see Box A8.1 for suggestions in this regard)[491].

Box A8.1 – Protective
measures when sharing a trade secret with a foreign partner

CREATE (2012)[492] suggests
that companies need to take 5 steps in order to protect their trade secrets
against misappropriation:

(1) conduct a
strategic assessment of their trade secrets: e.g. establish an internal trade secret policy which
identifies the confidential information and the consequences for its improper
use or disclosure; integrate that policy into the company’s supplier code of
conduct; consider which trade secrets should be transferred to suppliers;
consider how best to structure operations to minimize vulnerabilities (e.g.
segmenting the manufacturing process, either among suppliers or across
different locations);

(2) undertake
appropriate pre-contractual due diligence: conduct an assessment to ensure that potential
suppliers are able to adequately protect the company’s trade secrets; evaluate
the supplier’s track record as regards intellectual property-related issues;
scrutinize the supplier’s employment and non-disclosure agreements; perform due
diligence with respect to the supplier’s sub-contractors, where possible;

(3) employ strong
contractual protections, backed by enforceable audit rights and penalties: the company’s contract with the supplier
should ensure strong protections for the duration of the business relationship
and afterward (including the right to enforce violations of the contractual
provisions, obtain damages for breach, and seek injunctive relief); consider
specifying the recourse to arbitration/mediation and the applicable law;
consider entering into agreements directly with the supplier’s employees;
consider contractual protections against misconduct by the supplier’
subcontractors;

(4) utilize
appropriate operational and security measures during the life of the business
relationship: build a
culture of compliance so that the supplier’s employees understand and are able
to fulfil their obligations to protect confidential information; consider
physical security measures to protect trade secrets (e.g. marking documents,
transfer protocols, restrictions on physical access etc.).; technological
safeguards; systematically engage with the supplier to ensure that these
personnel, physical and technological measures are working effectively;

(5) take appropriate
action after business relationship has ended (both with respect to the supplier
and the supplier’s employees):
remind departing employees of their continuing obligation not to disclose trade
secrets; ensure that former business partners do not leak trade secrets.

However efficient such protective measures
are, it is difficult to guarantee absolute secrecy: information may still be
accidently disclosed or could be stolen.

While protective measures often include
some sort of contractual protection (e.g. confidentiality or non-compete
clauses with employees or licensees), to the extent allowed by labour,
civil/commercial or antitrust law[493],
which is enforceable before courts, they are hardly enough and certainly
inefficient vis-à-vis third parties.

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

In recent years trade secrets have become
increasingly vulnerable to misappropriation. The main reasons for the increased
vulnerability of trade secrets to misappropriation are the following[494]:

–
(1) technology has changed the nature of
modern business in a number of respects. Business
has become a race against time and technology – which are both the essential vectors
of competitive performance – and as a consequence competitive advantage is
volatile and short lived. The combination of this market pressure with
globalisation, intensifies greatly the need for any business to know what its competitors
are doing. This may give raise to an increase of dishonest practices in the
marketplace for business information;

–
(2) labour mobility is now greater than at anytime in history[495]: as a
result, valuable information is often placed in "less controllable
loyal hands"[496]. It has also become easier for an employee to leave a company and
compete directly with his ex-employer[497];

–
(3) as a result of globalisation, networking has increased and supply chains have lengthened, making
the transfer and processing of information more vulnerable[498];

–
(4) technology has made espionage per se
simpler[499]. Information and communication technologies (ICT) – including
enhanced data exchange capabilities and the increased use of the internet –
have been revolutionised business models and allow for the swift processing of
information within a business. Valuable proprietary information can and is stored
electronically, which allows it to be more easily managed, copied and
transferred[500].
However, corporate ICT networks are not immune to third party infiltration[501], including
hacking[502], and the use of ICT makes it easier to copy and transfer huge
volumes of information almost instantly. Indeed, unauthorised access by
outsiders (including hacking attempts) is considered to be one of most
disruptive incidents for businesses[503];

–
(5) the value of intangible assets is
increasing[504].

Stakeholders' perception in the EU also
confirms that trade secrets are increasingly vulnerable to misappropriation
(see Figure A8.1). For 38% of the respondents to the 2012 Industry
Survey carried[505],
the risk of exposure to trade secret misappropriation has increased, either
moderately or significantly, in the past ten years. Only 5,8% thought that the
risk has decreased. The perception of a significant increase is particularly
strong in the Chemical (29%) and Pharmaceutical (29%) industries.

Figure A8.1 –
Risk of exposure to trade secrets misappropriation. Source: 2012 Industry
Survey.

It is particularly noticeable as well that
about a quarter of the respondents (9% ranked this issue as of high concern,
while 17% of medium concern) believed that espionage is one of the primary
means, in their own business sector, by which companies usually obtain
information about products, services, strategies of other market players (see Figure
A8.2). According to the replies, the most exposed sectors are the motor
vehicles (39% of respondents ranked espionage of high concern) and the
pharmaceutical industries (21% of respondents ranked espionage of high
concern).

Figure A8.2 – Means
of acquiring information about products, services and strategies of other
market players. Source: 2012 Industry Survey.

In this context, studies are also pointing
at the problem of state-sponsored trade secrets (and intellectual property
generally) misappropriation or theft. Some countries are perceived as
undertaking sophisticated (and often successful) efforts to access (and
misappropriate) proprietary information/trade secrets from companies[506]. This threat was at
the origin of the US federal Economic Espionage Act of 1996, which criminalises
certain types of misappropriation of trade secrets: one of the Act's two main provisions
criminalizes misappropriating trade secrets with the knowledge or intent that
the misappropriation will benefit a "foreign power"[507].

Trade secret owners have their own
responsibility in those vulnerabilities. Recent research by an international consultancy
firm reveals that mid-market companies are not good at protecting their
information, notably because of complacency, ignorance and poor management[508].

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

Studies show that just as trade secrets are
increasingly more open to espionage attacks from the outside[509], so they are also more
and more threatened by misappropriation from within the company (e.g.
employee theft of sensitive information[510])
or from business partners (such as licensees, suppliers/service
providers, consultants, joint-venture associates etc.)[511].

The misappropriated trade secrets may be
further disclosed to a third party, who may apply it in bad faith (i.e. knowing
the origin of the secret) but also in good faith (e.g. a licensee transferring
know-how to a third party claiming to have the permission of the know-how owner
despite the contractual clause not to do so in the original licence contract)
or simply may have acquired a valuable piece of information through gross negligence
(that is, in circumstances which would normally suggest that the information
that is being transmitted has been improperly acquired)[512].

Data from the 2012 Industry Survey carried
out by Baker & McKenzie for the Commission show the respondents' perception
about the main threats in this regard (see Figure A8.3). The risk of
trade secret misappropriation seems to stem from a variety of sources,
generally ranked of medium importance (current and former employees,
competitors, customers and suppliers). Slightly greater risk is posed by former
employees (25% of high responses) and competitor (23%). In the
telecommunication and the financial sectors, former employees are a special
reason of concern (above 30% of high responses), in the pharmaceutical, publishing,
and the financial services, competitors are a special reason of concern; while
in the pharmaceutical sector, regulatory agencies are a special reason of
concern.

Figure A8.3 –
Risk of unauthorised access, disclosure, use or leakage of trade secrets. Source:
2012 Industry Survey

A8.5.      Trade
secrets misappropriation trends.

While the risk of trade secret
misappropriation is real, reliable figures on actual trade secret
misappropriation cases in the EU is a difficult task. There are no official
statistics on this issue and data is scarce within the EU. Sometimes, companies
do not realise they have been the subject of an attack, in particular when
carried out through electronic means: for instance, Alperovitch, vice-president
for Threat Research at McAffee, recently stated that he “divide[s] the
entire set of Fortune Global 2000 firms into two categories: those that know
they have been compromised and those that don’t yet know”[513]. In other cases, for
reputational reasons, EU businesses are often reluctant to disclose that they
have been the victims of trade secret misappropriation and/or to openly
litigate trade secret cases. For instance, in the words
of French deputy Carayon, “[d]’autres [entreprises], bien que conscientes de
l’attaque dont ells ont été victims, hesitant à deposer plainte, pour éviter de
médiatiser l’atteinte dont ells on fait l’object et de pas degrader leur image
de marque”.[514] Finally, when companies choose to litigate
on the misappropriation of trade secrets, national judicial statistics do not
necessarily identify them as trade secret cases. It has been argued that
studying and research this subject in a professionally robust manner in the EU
is a real challenge[515].

By way of comparison, data in the US are
easier to collect and companies seem to have less problems to litigate trade
secret misappropriation cases (see box A8.2).

Box A8.2. –
Litigation on trade secrets in the US

Two empirical studies on
civil law trade secret litigation in the US (in Federal courts and in State
courts) show that:

(a) trade secret
litigation is growing exponentially in federal courts (while federal litigation
has decreased overall). Trade secrets cases doubled in the seven years from
1988 to 1995, and doubled again in the nine years from 1995 to 2004. Only for the
year 2008, at least 482 cases before US district courts dealt with trade
secrets claims;

(b) in State courts, the
growth rate is much lower (the empirical study analysed appellate decisions
only), however the growth of trade secret cases is generally faster than the
growth of (general) litigation in state courts[516].

Nevertheless, according to the industry
survey carried out by Baker & McKenzie for the Commission in 2012, 20,5%
(15,3 + 5,2) of the respondents (110 out of 537) claimed to have suffered attempts
or acts of misappropriation within the EU over the last 10 years (see Figure
A8.4).

Figure A8.4 – Attempts
or acts of misappropriation of trade secrets. Source: 2012 Industry Survey

A quarter of those respondents further
claims that such attempts or acts happened more than 5 times in that period.
The share of the companies with such an experience is largest (about one out of
3) among the chemicals, motor vehicle, pharmaceuticals sectors and lest (about
one in ten) among the telecommunications, electricity and gas and computer
sectors.

A similar trend can be noticed regarding
conduct outside the EU, with about 17% of these EU respondents (91 instances
out of the 537 replies) claiming to have been victims of attempts or acts of
trade secrets misappropriation. The Motor Vehicle, Scientific Research, and
Chemicals sectors reported the highest rates of attempts or acts of
misappropriation outside the EU. Larger firms report a higher frequency of
attempts or acts of misappropriation than small/medium firms both inside and
outside the EU.

The parties identified as being primarily
responsible for the attempts or acts of misappropriation (see Figure A8.5)
are competitors (53% of positive responses), former employees (45%), and
customers/clients (31%). Consistent with the other survey questions, the
results vary widely across sectors. Instances involving former employees are
slightly more frequent for large firms. Occasional problems with regulators are
reported by both the chemical and pharmaceutical industries.

Figure A8.5 – Authors
of attempts/acts of misappropriation. Source: 2012 Industry Survey

National data comes in support of those
trends.

–
For instance, a Spanish report prepared by
corporate investigators explained that corporate fraud (involving misappropriation
of confidential information) was detected in 27% of the 4000 investigations
they carried out in Spain in 2008, leading to a 60% increase that year[517].

–
In France, according to economic intelligence
official sources, 1000 economic attacks took place in 2010, of which a quarter
qualified as trade secrets misappropriation[518].

–
In a survey on security breaches (including
trade secrets misappropriation) in the UK[519],
the vast majority of respondents reported incidents of security breaches: nine
tenths of large organisations reported malicious breaches and two-thirds of
them had a serious incident; while three quarters of small businesses reported
a breach and half of these were serious[520].
Moreover, they expect this trend to continue: almost two-thirds of them expect
the number of breaches to increase in the next year[521]. The survey
also reports that attacks by unauthorised outsiders (including hacking
attempts) are increasing and affected three quarters of large organisations[522]; also that
one in eight large companies had had intellectual property stolen by an
outsider[523]
and that one in eleven respondents reported that an outsider had stolen
confidential data[524].

Figure A8.6 –
How serious were the incidents reported in PWC (April 2012)[525]

Figure A8.6
gives an indication of the seriousness of those incidents, in particular as
regards the misappropriation of trade secrets: theft or unauthorised disclosure
of confidential information was considered “serious”, “very serious” or
“extremely serious” in 80% of the cases. Only in 20% of the cases, incidents
were “not serious”. To be noted that in none of the cases, incidents related to
theft or unauthorised disclosure of confidential information were considered
(not at all serious).

Concerning the involvement of staff in those
incidents, the survey notes that staff accidentally lost confidential
information at half of large organisations and one fifth of small organisations
and, more importantly, staff actively misused confidential information at a
third of the large corporations and about 13% of the small organisations[526].

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

The following is a selection of recent
cases of misappropriation of trade secrets[527].
All but one are connected to a European company.

Cases 1 and 2 present how the misappropriation of a trade secret can affect the
R&D phase of a new product.

–
Case 1[528]. The owner lost the competitive advantage in terms of lead time
before marketing the new product.

The French tyre manufacturer Michelin
was testing a prototype tyre in May 2005 during a rally in Japan. The new tyre
had proven to be a huge success, giving Michelin's team supremacy in the
rally. After the competition one of the tyres was stolen from Michelin's
stand. The tyre, being a prototype, had not been previously commercialised and
as such its compound and design was a trade secret. Following the theft, the
misappropriator could get access to the secret (through reverse engineering)
and caused serious damage to Michelin by depriving it of its first-mover
advantage on the professional rally market.

–
Case 2[529]. This case concerns a start-up active in a high-technology market
(nanotechnology) and shows how difficult is for an SME to defend its trade
secrets/intellectual property.

A research partner of the company circulated a
sample of a research outcome to a third party in another Member State, without
the permission of the company. This allowed the third party to obtain valuable
information through reverse-engineering. The valuable information was not
patentable, so secrecy was important to appropriate the value of research.
Nevertheless, the owner of the trade secret decided not to bring a legal suit
as it regarded cross-border litigation as too costly, too demanding and too
time consuming for a company of its size. Incidentally, the owner of the trade
secret raised that it did not really have a full choice in terms of protective
measures: (a) it needed to cooperate in/subcontract research activities with
universities and research centres in different countries despite the fact that
employees of those universities/research centres do not pay enough attention to
confidentiality and university students/researchers do not stay for long taking
trade secrets with them when they change jobs; (b) monitoring ex-employees activities
is too complex and costly; and (c) entering into non-compete covenants with
employees is too expensive if the company has to provide financial compensation
to the ex-employee in exchange. It also raised that the value of
confidentiality agreements with research partners and employees is limited
because they are difficult to enforce the moment this implies cross-border
litigation.

Cases 3 and 4 are internal market cross-border cases in which trade secret
misappropriation is linked to the infringement of an intellectual property
right (copyright). Both cases concern the sport automobile industry.

–
Case 3[530]. This case showed the difficulties in providing evidence, and
damages awarded were low. This case also covered a contractual dispute between
the parties on the payment of certain work already carried out.

Force India Formula One Team brought a claim before a UK court for misuse of its confidential
business information and breach of copyright in relation to the design of a
scale model of a F1 racing car of a rival F1 team. The five defendants were all
linked in various ways with Team Lotus and two of them were Italian
companies (Aerolab and its parent company FondTech) specialised
in the aerodynamic development of F1 cars. Aerolab had previously worked
for Force India and its contract contained confidentiality provisions
prohibiting Aerolab from sharing any of Force India’s
confidential information with rival F1 teams. Also, the intellectual property
developed was the property of Force India. Aerolab eventually terminated
the contract with Force India due to non-payment and subsequently
entered into an agreement with another F1 team (Team Lotus). During some
period, Aerolab employees had access to Force India’s data and
CAD files (which were covered by copyright), even if they had started work for Team
Lotus. When the new Lotus model was presented (only two months after
Aerolab had started working with Team Lotus), Force India
felt that the shape of the Lotus model bore more than a resemblance to
its car and that is confidential business information had been misappropriated
by Aerolab. Force India claimed compensation in excess of £13
million for the alleged copying of 71 of its designs.

The High Court decision of 21 March 2012 found
that the confidential information in question was akin to that of a trade
secret. However, the court was not convinced that the misuse of confidential
information was as widespread as Force India claimed and its claim was
only upheld in respect of 11 of the designs. Moreover, the court did not accept
Force India’s contentions that the confidential information was of great
value. The court accepted that Aerolab did misuse some of Force India’s
confidential information but that they did not obtain any benefit other than
saving time. The court had some difficulties to find the principles applicable
to the assessment of damages for breach of confidence (it stated that “the
case law is very confused…”).The court eventually ordered that a sum of
€25000 be awarded in damages. This sum was calculated on the basis of this was
a reasonable sum that a willing licensor and a willing licensee would have
negotiated.

–
Case 4[531] shows the interaction between different legal proceedings in
different instances and Member States.

In 2007, a copy centre in the UK informed
Italian car manufacturer Ferrari that it had been required by a person
to copy on a compact disc hundreds of pages of drawings and technical
information related to a Formula 1 car. It appeared that the person in question
was connected to a key employee in a rival Formula 1 team (McLaren).
Upon Ferrari’s request to the England’s High Court, an ex parte search
order was performed on 3 July 2007 and a dossier of 780 pages of confidential
information belonging to Ferrari was discovered in the rival employee’s
home. The information had been originally disclosed to him by a Ferrari
employee. This led to different legal proceedings in different instances and
Member States. (a) The World Motor Sport Council of the FIA (Fédération
international de l’automobile) decided in July 2007 that McLaren had
unduly come into the possession of Ferrari confidential information (although
it also decided that there was insufficient evidence about the misuse of the
information) and was in breach of Article 151(c) of the FIA International
Sporting Code[532],
although no penalty was initially imposed. (b) Criminal proceedings were
launched in Italy in order to gather additional evidence about the
communication between Ferrari’s employee and the rival’s employee. (c)
Thanks to the additional evidence, the World Motor Sport Council of the FIA
took a new decision in September 2007 reaffirming the breach of Article 151(c)
of the FIA International Sporting Code and accepting that some misuse of the
confidential information had taken place. McLaren was excluded from the
Formula 1 2007 Constructors Championship and imposed a USD 100 million fine.
(d) Concerning the civil claim in the UK against the rival’s employee, Ferrari
reached an out-of-court settlement with the employee in question.

Cases 5 and 6 present complex civil litigation cases in a cross-border
environment.

–
Case 5[533] describes the misappropriation of a trade secret in one Member
State, its consecutive use in two Member States and the related litigation in those
two Member States.

Vestergaard Frandsen, a Danish company, produced insecticidal fabrics and particularly
long-lasting insecticidal fabrics. It strongly relied on trade secrets
(contained in a database called Fence). In 2004, two employees left the company
and, associated to a consultant who previously worked for Vestergaard
Frandsen, entered into competition with the latter. Verstergaard
Frandsen accused the competitors of having misappropriated their trade
secrets to produce similar products. Vestergaard Frandsen obtained in
2005 an injunction in Denmark against the competing company (Intection A/S).
In March 2006, a Danish Court judgement decided that Intection A/S had
violated Verstergaard Frandsen’s rights. As a result, the two former
employees established a new company in the UK (Bestnet). Vestergaard
Frandsen then initiatied legal proceedings in the UK. In 2009, the English
High Court ordered an injunction against Bestnet first generation
products (NetProtect, an anti-mosquito bed net) for misappropriation of
trade secrets (even if the defendants could have obtained the necessary
knowledge by independent research, which they did not). This was confirmed by
the Court of Appeal in 2011. The 2009 judgement also ordered Bestnet to
disclose information about its sales so as to allow Vestergaard Frandsen
to file for damages. Bestnet was also ordered to pay £5.5 million as
interim legal costs, the balance to be decided by the Court at a later stage
However, concerning the subsequent versions of the defendant’s products (Whopes
I and II), the High Court did not order an injunction considering
that, although they derived from the misuse of confidential information, they
owed a lot to independent work done by the defendants (i.e. incremental
innovation), so an injunction would have been disproportionate. The Court of
Appeal upheld the lower decision on this point, noting that proportionality was
a relevant factor when deciding whether to grant an injunction[534]. To be noted
that Vestergaard Frandsen also launched legal proceedings in France,
against the former consultant[535].

–
Case 6[536] presents the difficulties to obtain redress (in particular stopping
the continued use of the misappropriated trade secret) and compensation for the misappropriation of a trade secret covering technological
process innovation. It also shows how the trade secret is vulnerable in a
global commercial chain, despite the protective (e.g. contractual) measures.

In 2004 Alstom licensed technology on
wet flue gas desulphurisation[537]
for the Chinese territory under an agreement with a Chinese company named
"Insigma". One year after entering in this contractual
relationship, Insigma stopped paying royalties and sublicensed the
technology to an affiliate. Alstom therefore terminated the agreement and took
action in the Singapore International Arbitration Centre to seek redress.
During the proceedings, Insigma denied committing any infringement and
claimed that once the agreement was terminated by Alstom, it had
reverted to using technology provided by its former Italian partner named
"Idreco". In 2010, the Singapore Arbitration Court awarded
Alstom USD 35 million as compensation for the unpaid royalties and the illicit
use of its technology in China.

Meanwhile, in 2008 Insigma and its
Italian partner Idreco formed a consortium and submitted a tender for
the Maritza East 2 power plant project in Bulgaria, initially funded by the EU
and EBRD. Despite the warnings from Alstom to the Bulgarian authorities,
the Commission and EBRD[538],
on the illicit use of Alstom's technology by the consortium, and information
about on-going litigation in the Singapore Arbitration Court, the Bulgarian
authorities awarded the contract to Insigma. In addition to this, Alstom
also denounced the fact that the consortium had fraudulently misrepresented its
references in order to meet the qualification criteria. This matter was
investigated by OLAF and the EBRD, who confirmed the fraud. In early 2011, Alstom
filed a complaint before the Bulgarian Commission for the Protection of
Competition. Whereas the latter recognised that OLAF's final case report
confirmed the fraudulent misrepresentation of the references of the Idreco/Insigma
consortium, it ruled (ignoring the Singapore arbitration decision) that Alstom's
technology was not "an exceptional engineering achievement"
which could constitute a valuable trade secret, and therefore that redress on
the basis of unfair competition could not be sought[539]. An appeal
court later invalided that judgement on procedural grounds. As of June 2012, Alstom
had been unable to obtain any recognition of a trade secret infringement within
Bulgaria, though an extraordinary appeal is pending. At the same time, the
contract granted to Insigma and Idreco in Bulgaria has been
show-cased by the same company in subsequent bids. Alstom stressed that
the above case has had serious consequences for Alstom, including
substantial job losses in Europe.

Cases 7 to 12 present cases in which employees unlawfully obtain confidential
information from the companies in which they were working. Cases 7 and 8 are
straightforward and led to criminal prosecution. Case 9 also concerned a
criminal case, but prosecution was more difficult because of the internal
market dimension. In case 10, the misappropriation of the EU company trade
secret and subsequent criminal prosecution took place in a third country. Case
11 presents and on-going civil case between two companies (while the
misappropriation of the trade secret would have allegedly been carried out by
an employee) and case 12 only reports about the misappropriation modus
operandi.

–
Case 7 concerns
the theft of trade secrets by an intern.

In 2005, a student, who was engaged as intern
by French company Valeo, transferred several confidential digital files
to her private hard drive, despite her confidential obligations. She was
punished with 1 year imprisonment for abuse of confidence under French law[540].

–
Case 8[541] presents the theft of technology by an insider.

A German insider was convicted of economic
espionage in 2008 for passing helicopter technology to the Russian Foreign
Intelligence Service (SVR) in exchange for USD 10000. The case concerned
Eurocopter-related technology, belonging to European aerospace group EADS. The
insider communicated with his Russian handler through anonymous e-mail addresses.

–
Case 9[542] presents the difficulties for criminal prosecution of a trade
secret misappropriation in the EU case as well as the difficulties in obtaining
compensation for the real damages incurred.

Michelin
received a phone call from a competing tyre manufacturer in 2007, explaining
that its company had received an e-mail from an unidentified person offering to
sell confidential information on Michelin's production processes. With
the support of French authorities the company found out that the person in
question was a former employee who used to work at Michelin's research
centre, and managed to leave the company with a hard disk containing more than
13.000 files. The fact that most of these files were encrypted, and that
information was classified as confidential, was irrelevant as the person in
question disposed of codes necessary for the encryption. The information stolen
covered a vast array of secrets including new more efficient production
processes, mould and plate designs, high performance data launch times and
plans for new tyres over the forthcoming three years and their development plan
development plan up to 2012, which included i.a. the quantities of tyres to be
manufactured by each plant and organizational chart for Michelin's technical services
in Asia. This information was offered to Michelin's competitor for a
mere 115 000 EURO. In the course of investigation it was identified that the
e-mail had been sent from a cyber café in London. Since the alleged theft had
not taken place in the UK and since in the UK no specific criminal law
framework for trade secret violations exists, the former employee was
"trapped" to return to Paris form London, arrested and eventually
convicted in June 2010 to a (suspended) two year imprisonment and € 5000 penalties
and to the payment of €10000 for damages to Michelin[543]. This was of
little consolation to Michelin, given that they discovered that he had
managed to contact three other different companies.

–
Case 10[544]
relates to the theft of trade secrets from an EU company
in the financial services area. The facts happened in the US, where subsequent
criminal prosecution took place.

Over a period of several months, a trader of
French bank Societé Générale in the US visited his office after hours
and copied, printed and stole hundreds of pages of source code for the bank's
proprietary high frequency trading platform. This trader planned to use the
stolen cod to create a similar trading platform at a competing hedge fund. The
plan was eventually detected (thanks, inter alia, to video surveillance which
recorded his off-hours activities and computerised logs documenting the use of
his computer). The former employee was arrested the day before starting his new
job and the stolen code recovered. After trial, he was sentenced to three years
in prison.

–
Case 11[545] presents a case of the theft of trade secrets where prosecution
turned out not to be possible.

Mueller Weingarten, a German company making pressing, stamping and cutting technology
products for the automotive industry, fired a third country national in early
2008 after noticing that he was frequently and surreptitiously downloading
files containing confidential information. The case was temporarily suspended
in late 2008 because of the inability of the public prosecutor to find the
alleged misappropriator.

–
Case 12 presents
a modus operandi similar to the one for cases 11 and 1.

A Chinese citizen downloaded highly sensitive
product data from an unidentified German company where he worked to 170 CDs.

Case 13[546] concerns an on-going dispute between two EU companies as to whether
one illegally obtained trade secrets from the other.

–
Case 13.

Dyson, the
vacuum cleaner and hand dryer manufactured, filed proceedings at the High Court
in London claiming an employee (an engineer working on digital motors) passed
trade secrets to a competitor for up to two years. The motors would be a key
component in the firm's cordless technology and hand dryer. According to Dyson,
the company would have invested over 15 years and £100m developing high-speed
brushless motors.

Cases 14 shows
that the misappropriation of a trade secret can also take place in a third
country, with the risk that the misappropriator starts competing in the EU
later on. It also shows the complexity of international litigation.

–
Case 14[547].

An Austrian company, subsidiary of the larger
US-based AMSC group, active in the wind power market designed turbines
and licenced their intellectual property and know how to their partners. The
company however retained the control of the electrical control system for the wind turbine - a "box" that is incorporated into the
turbine, and which the company does not license, but sells, maintains and
updates during the lifetime of the turbine. The software and system in this box
was considered as a key trade secret for the company and is central to their
business model as all their partners know. This Austrian company help a Chinese
partner (Sinovel) to develop its manufacturing business in China,
becoming over time a large wind turbine manufacturer and the largest AMSC
client. In 2011, the Chinese partner stopped the partnership and refused
further supplies. The Austrian company accidentally discovered that this
Chinese partner had colluded with an ex-employee who had stolen parts of the
Austrian company intellectual property: the code of the wind turbine control
software with low voltage ride through (the latter being of particularly
importance due to the specificities of the Chinese market) as well as power
converter software code[548].
Later, the Chinese company started trying to expand to foreign markets,
including in the EU (i.a. Ireland, Greece, Romania). The company initiated
legal suits in China for copyright infringement and trade secret
misappropriation seeking[549],
inter alia, a cease and desist order as well as to recover more than USD
1.2 billion for contracted shipments and damages[550].

This case also shows the impact that a trade
secret theft may have not only on the trade secret owner[551] but also on
employment. As a consequence of the alleged misappropriation of one of the
company's key trade secrets: AMSC reduced its workforce in August 2011
by 30%[552]
and announced in November 2012 that it further reduced its work force by 25%[553]. While in March
2011 the parent group was employing over 800 people worldwide in activities
related to the wind power sector, now employs about 340 employees.

Case 15 also
shows the ability of third country firms to take advantage of a
misappropriation of a trade secret, on the one hand, and how the US litigation
system is able to grant large amounts of damages for the prejudice suffered
(partially resulting from the discovery rule for the production of evidence).
This is a purely US case, but has an indirect effect in Europe in so far as the
US company has manufacturing plants in the EU.

–
Case 15[554].

This case concerned the US company DuPont de
Nemours and related to "Kevlar" - a high performance fibre
invented in 1965 and manufactured commercially from 1971 with production plants
currently located in the USA, Europe and Japan. Since patents for the fibre and
its production have largely expired, the viable and competitive exploitation of
plants is secured today largely via incremental process and consequential
product "improvements" that are protected as trade secrets[555]. In 2007, a competitor
hired a former DuPont employee as a consultant in its American branch
office. After running internal investigations it became clear that some
transfers of data occurred, and the company sought the FBI's assistance. While
the US Department of Justice and other law enforcement agencies were running
their investigations, DuPont suffered from other attempts to access
confidential information. Eventually the suspected employee was found guilty
and went to prison (18 months)[556].
In parallel to the criminal case, DuPont launched a civil claim against
said competitor under the Virginia enactment of the Uniform Trade Secret Act
for concerted and persistent theft of DuPont's trade secrets. As a
result of document discovery ordered by the court, the defendant returned 5000
pages of documents, some of which had not been identified as being leaked
beforehand. Subsequent discovery revealed that additional DuPont
employees were involved in passing documents and information. DuPont was
awarded damages of USD $ 920 million calculated on the basis of the investment
in the on-going R&D.

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

Third parties misusing trade secrets take
an unfair competitive advantage on the (often long-term) investment made by
others in the market to gather, develop or acquire the valuable information in
question. They will often produce/supply competing goods/services using the
trade secrets in question (hereinafter "resulting goods/services").
As a consequence, there is harm to the trade secret owner who is likely to face
loss of sales, clients and contracts and would see the value of their secret
diminish[557]
as well as a devastating effect on companies' competitiveness[558]. In extreme cases, this
may amount to a total diversion of business[559].

For instance respondents to a survey organised
by CEFIC among businesses in the chemical sector claimed that a 30% potential
loss of turnover could be the likely result of the misappropriation of a trade
secret. This percentage could reach up to 80-100% when the trade secrets are
the foundation of the product differentiation or the manufacturing process;

The trade secret owner will also face other
costs linked to the act of misappropriation of the trade secret, such as cost
of internal investigation/staff time responding to a breach, as well as
litigation/prosecution costs or costs for negotiating settlements. The threat
of misappropriation also entails increased expenditure in protective measures.

The results of the 2012 Industry Survey carried
out by Baker & McKenzie for the Commission show that respondents believe
that acts of misappropriation have mostly resulted in loss of
sales/clients/contracts (56% of the cases): see Figure A8.7. Also
relevant are the cost for internal investigation (44%), the increase in
expenditure for protection (35%), the costs for negotiating a settlement (34%),
and the costs for prosecuting and litigating (31%). The loss of sales, client,
and contracts are reported important in a wide variety of industries, including
the Chemicals, Pharmaceutical, Computer, Machinery and Equipment manufacturing
sectors, and to both large and small/medium firms.

Figure A8.7 – Consequences
arising from attempts and successful acts of trade secrets misappropriation.
Source: 2012 Industry Survey.

In a Spanish report prepared by corporate
investigators[560],
the following consequences were found:

–
In 83% of the investigations involving such
corporate fraud losses amounted to between €15000 and €300000 per company and
in some cases, losses exceeded €1M.

–
In 73% of the cases, companies' turnover
diminished by 3-15%; in 7% of the cases, companies had viability problems or
stopped business.

–
No tangible consequences: competitiveness loss
and loss of corporate image.

In Germany, estimations made in 2010 considered
the actual damage caused by industrial espionage in Germany "is in the
region of 20 billion euros", although other experts consider that the
real damage could be closer to 50 billion. The huge discrepancy between the two
"could perhaps be explained by the fact that many espionage cases never
actually come to light"[561].
This may explain why Germany's Federal Office for the Protection of the
Constitution (BfV), presumably better informed, estimates that German companies
lose USD 28 billion – 71 billion per year from economic espionage[562].

A survey[563]
among mid-size companies in 6 European countries concerning business data loss
or theft (i.e. the scope of the misconduct is wider than trade secret
misappropriation, and may also include losing customers data etc) found that
the main impacts on businesses arising from data lost/theft were: professional
liability/exposure (54%); reputational impacts (48%), financial impacts,
including loss of business (33%) and regulatory penalties or sanctions (25%).
This survey also quantified the main impacts on SMEs:

–
business disruption: on average, 2-4 days of
lost business at an average cost of £15000-30000;

–
incident response cost, mainly staff time,
resulting in an average cost of £4000-7000;

–
direct financial loss, which may include fines,
imposed by regulators and compensation payments to customers – on average
£3000-5000; and

–
indirect financial loss, such as the loss of
intellectual property, revenue leakage, brand damages – on average,
£10000-15000.

Another recent survey, limited to the UK[564], provides estimations
on the cost related to security incidents (including theft or unauthorised
disclosure of confidential information). These costs may involve direct
financial loss, indirect financial loss (e.g. loss of intellectual property)
and damage to reputation. Figure A8.8 provides an estimation of the
overall cost for the worst incident in the precedent year. Authors of the
survey state that “our best estimate of the total cost to UK plc is in the
order of several billion pounds per annum.”[565]

Figure A8.8 –
Overall cost of an organisation’s worst incident in the precedent year[566].

Yet, another report citing UK official
sources notes that "the cost of an information security incident
averages between USD 16000 and USD 32000 for a small company and between USD
1.6 million and USD 3.2 million for firms with more than 500 employees. The UK
estimates that attacks on computer systems, including industrial espionage and
theft of company trade secrets, cost the private sector USD 34 billion
annually, of which more than 40% represents theft of intellectual property such
as designs, formulas, and company secrets."[567]

Society at large is also harmed by the
misappropriation of trade secrets[568]

Annex 9 – Legislative framework in EU Member States
on the protection of trade secrets against misappropriation[569]

A9.1.      Introduction

The TRIPS agreement

Article 39 of the Agreement on
Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement)[570] requires its
signatories to protect "undisclosed information" (see Box A9.1).

Box A9.1 - Article
39 of the TRIPS

"1. In the course of ensuring effective protection
against unfair competition as provided in Article 10bis of the Paris Convention
(1967)[571],
Members shall protect undisclosed information in accordance with paragraph 2 and
the data submitted to governments or governmental agencies in accordance with
paragraph 3.

2. Natural and legal
persons shall have the possibility of preventing information lawfully within
their control from being disclosed to, acquired by, or used by others without
their consent in a manner contrary to honest commercial practices10
so as long as such information:

(a)       is secret
in the sense that it is not, as a body or in the precise configuration and
assembly of its components, generally known among or readily accessible to
persons within the circles that normally deal with the kind of information in
question;

(b)       has
commercial value because it is secret; and

(c)       has been
subject to reasonable steps under the circumstances, by the person lawfully in
control of the information, to keep it secret.

[…]"

10          For the purpose of this provision,
"a manner contrary to honest commercial practices" shall mean at
least practices such as breach of contract, breach of confidence and inducement
to breach, and includes the acquisition of undisclosed information by third
parties who knew, or were grossly negligent in failing to know, that such
practices were involved in the acquisition.

Under Article 41 of the same Agreement, its
signatories are called to ensure effective action against any infringement of
the intellectual property rights recognised in the Agreement (trade secrets are
part of that category for the purpose of the Agreement)[572]. Pursuant to Part III
of the TRIPS Agreement[573]:

–
WTO members must make fair and equitable civil
judicial procedures available to combat dishonest practices that infringe trade
secrets, while providing means to identify and protect confidential information
(Article 42 of the TRIPS Agreement);

–
these procedures should not be hampered by the
non-cooperation of the defendants (Article 43 of the TRIPS Agreement);

–
courts must have the authority to issue
injunctions ordering the termination of the infringement, including prohibiting
the marketing of imported goods that have been cleared by customs and that are
found to infringe trade secrets (Article 44 of the TRIPS Agreement);

–
courts must also have the authority to order the
infringer to pay damages to the holder of trade secrets (Article 45 of the
TRIPS Agreement) and to order that infringing goods be confiscated or destroyed
without any compensation to the infringer (Article 46 of the TRIPS Agreement).

–
The TRIPS Agreement also provides for
provisional measures (Article 50 of the TRIPS Agreement).

EU and national law

There is no specific EU law directly
dealing with the misappropriation of trade secrets by third parties (i.e. the
case referred to in paragraph 2 of Article 39 of the TRIPS).

Therefore, the protection of trade secrets
against misappropriation by third parties is primarily addressed by national
legislation.

National laws in this area provide for
civil/commercial law and, in some cases, criminal law protection against the
misappropriation of trade secrets. Figure A9.1 provides an overview of
the legal protection per Member State.

Figure A9.1 –
Main protection against trade secrets misappropriation by national law

These types of protection pursue different
objectives.

–
Civil law protection essentially aim at placing the injured party (i.e. the trade secret
holder) in the same position, had the misappropriation of the trade secret not
happen. For this, it will endeavour to prevent the person who misappropriated
the trade secret from taking advantage of his dishonest act and/or to make sure
that the trade secret owner is appropriately compensate for any prejudice
caused[574].

–
Criminal law protection, on the contrary, aims at sanctioning wrongful conduct and has a
more important deterrent effect. In some cases, trade secrets misappropriation
may also be a crime and prosecuted as such. The legal protection against the
adverse consequences of acts of misappropriation coexists with the protective
measures (they are not mutually exclusive).

Figure A9.2
below explaining how these types of protection interact

Figure A9.2 –
Different aims pursued by legal protection against the misappropriation of
trade secrets

The following sections of this Annex
introduce the national legal protection against the misappropriation of trade
secrets:

–
Section A9.2
deals with civil law protection;

–
Section A9.3
deals with criminal law protection.

–
Section A9.4
deals with the weaknesses identified by stakeholders.

A9.2.      Civil/commercial
law protection[575] in national law

All EU Member States offer some, more or
less extensive, form of protection against the misappropriation of trade
secrets, albeit this is achieved in different ways[576].

Some Member States have specific provisions
in their civil/commercial law providing protection against the misappropriation
of trade secrets:

–
Sweden has an Act specifically directed against
the misappropriation of trade secrets.

–
In Italy and Portugal, specific provisions on
the protection of trade secrets are included in their respective codes of
industrial property – although this does not mean that trade secrets are
intellectual property rights[577].

Other Member States have more general
legislation which can be applied.

–
In many Member States their unfair competition
law is explicitly addressing trade secrets[578]:
Austria, Bulgaria, Czech Republic, Germany, Denmark, Estonia, Greece, Spain,
Finland, Hungary, Latvia, Lithuania, Poland, Romania, Slovenia and Slovakia.
Tort law (liability for non-contractual responsibility) may supplement unfair
competition law.

–
In a few Member States, trade secrets are not
addressed in legislation as such. Therefore, these countries need to rely on
the general provisions on tort law (or liability for non-contractual
responsibility) as the main mean to address trade secrets misappropriation
(Belgium, France, Luxembourg, Netherlands)[579];
or simply rely on case-law (cf. regarding breach of confidence) in the absence
of legislation (Ireland and United Kingdom).

–
Contract law can be used to protect trade
secrets in all of them, but only Malta seems to exclusively rely on contract
law to protect trade secrets. In Cyprus no civil liability arises in case of
trade secret misappropriation.

Almost all jurisdictions have general
provisions included in their labour laws or civil codes to prevent employees
disclosing their employers' trade secrets, at least during the employment
relationship.

See Box A9.2 for further detail.

Box A9.2 - Civil
rules in Member States[580]

AT (Austria): Austria's Unfair Competition Act provides
civil (and criminal) sanctions against trade or business secret misuse by
employees and those who exploit such information without consent for the
purposes of competition. Other legislation such as the Patents Act and the
Criminal Code also provides legal remedies in particular circumstances, such as
disclosure of inventions by employees or in cases of industrial espionage. In
addition, the Austrian courts have held that obtaining trade or business
secrets by breach of confidence (in the course of contractual negotiations)
falls within the Unfair Competition Act.

BE (Belgium): There is no one piece of legislation on
the protection of trade secrets as such in Belgium but there are several
provisions of Belgian law which can be used against the misuse or disclosure of
trade secrets. Trade secret owners generally rely on the general law of tort (Article
1382 of the Belgian Civil Code), unfair competition and specific provisions in
Belgian labour law.

BG (Bulgaria): There is no specific legislation on trade
secrets in Bulgaria but various laws including the Law on Protection of
Competition and the Law on Access to Public Information contain general
provisions which may be used to protect trade secrets. In fact, there are over
60 such statutory and non-statutory provisions (including criminal liability
under the Criminal Code).

CY (Cyprus): There is no specific legislation
governing trade secret misuse in Cyprus but there are a number of different
laws which mention trade, business and professional secrets. For example, the
Commercial Descriptions Law, the General Product Safety Law and the Competition
Law. However, liability is criminal; there is no civil liability for trade
secret misuse.

CZ (Czech Republic): The Czech Commercial Code defines a trade
secret and provides remedies for trade secret infringement. The TRIPS Agreement
is directly applicable in Czech law and thus the definition of a trade secret
under Article 39(2) of the TRIPS Agreement also applies in Czech law. The basis
of trade secret protection in the Czech Commercial Code, however, is the civil
law of unfair competition.

DE (Germany): There are a number of provisions in
German legislation protecting trade secrets. The most important statutory
provisions for the protection of trade secrets are found in the Act against
Unfair Competition. These provisions apply to employees and to third parties.
Many of the statutes protecting trade secrets under the criminal law also have
civil law provisions. These provisions allow for damages and injunctive relief
if one of the relevant criminal law provisions is violated. Civil law remedies
are also available under the Civil Code (tort law). German contract law also
provides effective protection where there is a contractual obligation to
maintain the secrecy of trade secrets.

Special rules relating
to the protections of trade secrets apply to stock corporations (AG) and
limited liability companies (GmbH). As for stock corporations, pursuant to art.
93 sec. 1 of the Stock Corporation Act (Aktiengesetz - AktG), the members of
the management board shall keep confidential any information and secrets of the
company, namely trade or business secrets. If they fail to comply with this
duty, they are liable to the company for any resulting damage

DK (Denmark): In Denmark there is no statutory
definition of trade secrets; however case law has clarified the types of
information that are protectable to include both technical and commercial
information. Several statutes, both civil and criminal, are used to protect the
rights of trade secret owners as well as legal principles derived from contract
law, competition law, employment law and unfair competition law. Most notably,
the Criminal Code and the Marketing Practices Act contain provisions protecting
trade secrets.

EE (Estonia): Estonian legislation provides specific
provisions on the protection of trade secrets, most notably in the Competition
Act, the Commercial Code, the Employment Contracts Act and the Penal Code. The
Competition Act includes an illustrative list of information considered to
constitute trade secrets. The Supreme Court has also held that in addition to
this definition, the definition of trade secrets provided in the TRIPS
Agreement can also be used to interpret the term "trade secrets"
under Estonian law.

EL (Greece): Greek Unfair Competition Law provides
specific provisions on the protection of trade secrets. More general protection
is found in the Greek Civil Code which includes general tort provisions.

ES (Spain): Trade secrets are mainly protected in
Spain under the Unfair Competition Act and the Criminal Code. The Act contains
provisions specifically aimed at trade secrets. There are also other laws which
deal with trade secret protection indirectly, for example, the laws
establishing the obligations of directors and other employees[581].

FI (Finland): There are a number of Acts which include
provisions for the protection of trade secrets, most importantly the Unfair
Business Practices Act, the Employment Contracts Act and the Criminal Code.
Finland does not have one piece of legislation directed specifically to the
protection of trade secrets. Although the Finnish law encompasses the
protection of trade secrets under the Unfair Business Practices Act, trade
secrets are not considered to be intellectual property rights.

FR (France): There are a number of references to trade
secrets in French law and case law but no statutory definition of trade
secrets. Trade secret owners generally rely on the unfair competition law
(against competitor) and the general law of tort (against any third party)
which correspond to the same reference of the French Civil Code, namely Article
1382. However the only specific trade secrets legislation is dealing with
protecting “manufacturing secrets” in the Intellectual Property Code (Article
L. 621-1) in link with the Labour Code, which provides criminal liability for
trade secret violations by employees or former employees. When parties are
bound by a contractual obligation not to disclose secret information, an action
lies for breach of contract.

HU (Hungary): Hungarian law provides specific
provisions on the protection of trade secrets. The main general rules are
established in the Civil Code as part of the moral rights section. Besides,
rules on the protection of know-how are currently laid down separately in the
Civil Code, within the general provisions on the protection of intellectual
property. The unfair competition law aspects of trade secret protection (based
on the definition of trade secrets enshrined in the Civil Code) are regulated
in the Unfair Competition Act. Provisions also exist in the Labour Code and in
various financial/banking laws.

IE (Ireland): There is no specific legislation in
Ireland directed to the protection of trade secrets. However, proceedings may
be brought under laws relating to breach of confidence, data protection and
specific sectorial pieces of legislation. As in England, Irish law has the
equitable principle that a person who has received information in confidence
cannot take unfair advantage of it. Generally, Irish law imposes a duty of
confidentiality in both non-employment cases and employment cases. In both
situations, there must be an obligation of confidence and once it is
established that such an obligation exists then the person to whom the
information is given has a duty to act in good faith and only use the
information for the intended purpose. Again, as in England, an obligation to
keep information confidential may either be imposed by contract; implied
because of the circumstances of the disclosure or implied because of the
special relationship between the parties.

IT (Italy): Specific provisions on the protection of
trade secrets are contained in the Italian Code of Industrial Property (IPC).
Secret information may only be protected if the requirements set out in the IPC
are met. There are also general tortious obligations and unfair competition
provisions in the Civil Code which can be employed to compensate for trade
secrets misuse.

LT (Lithuania): Lithuanian legislation provides specific
provisions on the protection of trade secrets, most importantly in the Civil
Code, the Law on Competition, the Labour Code and the Criminal Code. Under the
Civil Code, anyone unlawfully acquiring a commercial secret is liable to
compensate the owner for the damage caused. There are also express provisions
in the Labour Code regarding disclosure by employees who disclose a commercial
secret in breach of their employment contract.

LU (Luxembourg): There are no specific legal provisions
protecting trade secrets in Luxembourg. However, trade secrets can be protected
by unfair competition law, criminal law, tort law and contractual law.

LV (Latvia): Latvia has a number of pieces of
legislation which provide specific provisions on the protection of commercial
secrets. The Commercial Law is the main Act regulating commercial activities.
It defines "commercial secrets" and provides express protection for
them. The Labour Law also includes provisions regarding use of commercial
secrets by employees. Latvia also has an Unfair Competition Act which expressly
provides that the acquisition, use or disclosure of commercial secrets of
another competitor without their consent is a form of unfair competition.

MT (Malta): There is no specific legislation on the
protection of trade secrets in Malta. Trade secrets may be protected
contractually, by express or implied terms, and, an employee is presumed to be
under an obligation not to disclose confidential information. If no contract
exists there will be no civil law right to protect a trade secret.

NL (Netherlands): There are no specific provisions on the
protection of trade secrets in Dutch legislation. In the Netherlands, the
protection of trade secrets is based on the general principle of tort law i.e.
an unlawful act. In 1919, the Dutch Supreme Court held that the provision in
the Dutch Civil Code on unlawful acts could be used to secure protection
against trade secret infringement. Contract law also provides some protection
in contractual relationships if there are confidentiality obligations in the
contract.

PL (Poland): There are specific provisions on the
protection of trade secrets in Polish legislation, notably in the Unfair
Competition Act. A number of other Acts mention trade secrets, for example, the
Civil Code, the Labour Code, the Act on Competition and Consumer Protection,
the Code of Commercial Companies and Partnerships etc. The Labour Code includes
express provisions requiring employees to maintain the confidentiality of
information the disclosure of which could cause damage to their employer.

PT (Portugal): The Portuguese Industrial Property Code
has specific provisions relating to the protection of trade secrets. The
Industrial Property Code is directed towards unlawful acts against competitors.
A violation is punished, not as a crime, but as an administrative office
punished by a fine. The Labour Code also contains provisions which stipulate
that an employee may not disclose information, while employed, relating to his
employer's organisation, production methods and company business.

RO (Romania): There is specific legislation in Romania
on the protection of trade secrets. Provisions regulating protection of trade
secrets have been included in the Law for the Prevention of Unfair Competition
("Law on Unfair Competition") and specify that the unfair use of a
competitor's trade secrets is regarded as contrary to honest commercial
practices.

SE (Sweden): Sweden is the only country in the EU to
have an Act specifically protecting trade secrets. The Act provides a
definition of trade secrets, penalises trade secret espionage and contains
provisions on civil liability.

SI (Slovenia): Trade secrets are specifically protected
in Slovenia by a number of pieces of legislation, in particular, the Companies
Act, the Employment Relationship Act, the Protection of Competition Act, the
Penal Code and the Code of Obligations.

SK (Slovakia): Civil protection of trade secrets in the
Slovak Republic is regulated by the Commercial Code. The relevant fields of
protection are civil law, commercial law, intellectual property law,
non-contractual liability and unfair competition law.

UK (United Kingdom): There is no legislation providing
specific protection for trade secrets. Trade secrets are protected by contract
and/or by the law of equity.

A9.3       Criminal
law protection in national law

Criminal protection of trade secrets
against misappropriation differs from Member State to Member State on several
levels, although almost all of them have provisions in this respect. Since
there is a lack of a common/shared definition of the scope of trade secrets
from the criminal law perspective, the actual extent of the protection provided
by Member States may vary depending on the aims pursued by the provisions
implemented for this purpose.

Only four Member states (i.e., Bulgaria,
Ireland, Malta and the United Kingdom) have not established any specific
criminal framework with respect to trade secrets violations. However, even in
those Member States, the conduct of the infringer may be punished under other
related criminal offences (see on related offences, in Section A14.1 of Annex
14).

In some cases, where no specific criminal
provision has been implemented, criminal sanctions of trade secrets
misappropriation apply under unfair competition laws or commercial laws. Sweden
is the only EU Member state that has implemented a specific law on trade secrets
which contains criminal provisions (see Annex 10), even though some
relevant provisions are also contained in the Criminal Code[582]. In France, the
intellectual property code sanctions the violation of manufacturing rights[583].

Table A9.1
summarises the criminal provisions in force:

Table A9.1 – Criminal provisions applying to trade secrets misappropriation[584]

|| 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

Criminal code || P || P || || P || || P || P || P || P || P || P || P || P || || P || P || P || P || || P || P || || P || P || P || P ||

Unfair competition / commercial law || P || || || P || P || P || P || || P || || P || || || || || || || || || || || P || P || || || ||

Specific law on trade secrets || || || || || || || || || || || || || || || || || || || || || || || || P || || ||

Intellectual Property Code || || || || || || || || || || || || P || || || || || || || || || || || || || || ||

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

In the 2013 Public Consultation,
respondents’ views were relative split as to the level of protection of trade
secrets offered by national law. 28% of the respondents (106) found that
protection weak; 23% of them (88) appropriate, 39% of them (152) excessive
while 10% (40) did not have an opinion. If only replies from companies and
research entities (i.e. those more likely to suffer trade secret
misappropriation) are considered, the picture is substantially different: 48% of
them find the protection at national level weak.

When the 106 respondents (out of 386) who found
national law protection weak were asked to specify the Member States they were
referring to, the following results appeared (respondents were able to select
more than one Member State): France was identified 68 times; 18 Member States
were identified between 15 and 24 times (AT, BE, BG, CY, CZ, EE, EL, HU, IT,
LT, LU, LV, NL, PL, RO, SI, SK and UK), Spain was identified 11 times, and 7
Member States 4 times or less (DE, DK, FI, IE, MT, PT and SE). In particular
DK, FI and SE hardly attracted criticism (mentioned only once or twice).

Concerning the identified weaknesses,
respondents’ views were as follows (multiple choices were possible):

–
31% of all the identified weaknesses related to
"insufficient scope of protection (e.g. a third party is not always
prevented from using the misappropriated trade secret)". This is an
important issue for most Member States: when the replies are examined by Member
State, this weakness was identified at least 75% of the cases for all Member
States except regarding DE, DK, ES, FI, IE, PT and SE;

–
the second most often  identified weakness is
"no fair compensation granted for the prejudice suffered",
which is identified in 22% of the cases. This issue is often mentioned in
several countries: when the replies are examined by Member State, this weakness
was identified in more than 40% of the cases for AT, BG, CY, CZ, DK, EE, EL,
ES, FR, HU, LT, MT, PL, SI and SK;

–
respondents also considered as a weakness the
fact that "trade secrets misappropriation is not punishable as a
criminal offence": 19% of the cases. When the replies are examined by
Member State, this weakness was often mentioned in BG, CY, CZ, EE, EL, FR, HU,
IE, LT, LU, LV, PL, RO, SI and SK (more than 40% of the replies in each of
these Member States);

–
other types of weaknesses were les mentioned by
respondents. Only 6% of the replies found that "criminal penalties and
sanctions were too low to serve as deterrent" (although of concern in
ES and FR, with more than 40% of the replies in these Member States; also,
several respondents added in the "comments" that sanctions in Italy
and the Netherlands were not dissuasive) or that "legal action would
require disclosure of confidential information" (although of concern
in DE and FR, with more than 50% of the replies in these Member States, and in
ES, with 36% of the replies). Less than 4% of the replies considered the cost
of the legal action a weakness (of some concern in ES, FR and IE, as mentioned
in 20% of the replies).

In addition, as regards the specific
comments made by respondents, the following additional issues were raised:
difficulties as regards the destruction of the misappropriated information in
disputes to prevent further use by the defendant (AT), the absence of permanent
injunctions (BE, BG, DK), absence of ex parte orders to search/preserve
evidence in civil proceedings (CY, DK, EE, RO, SI) or preliminary measures able
to surprise the defendant (ES) , too lengthy proceedings (ES, FR, PL), the test
as to whether the information/knowledge is a trade secret or is part of the
general skills of the employees would always be in favour of employees (FR),
difficulties to proof the misappropriation of intangible assets (FR), not
enough knowledge of judges on trade secrets (FR, PL), defendant cannot be
ordered to provide information about the whereabouts of documents (PT) and
corruption (RO). The insufficient scope of protection was particularly recalled
as regards FR (available remedies vary depending on whether the trade secret is
a manufacturing secret or not), NL (general protection only), MT (contractual
protection only), PT (violations of trade secrets are only a misdemeanour), UK
(case-law only, no specific references to unfair competition). The French
regime attracted major criticism. A respondent summarised it by saying that
there is a general impression that "nothing can be done".

The above described weaknesses will be
further examined in the following Annexes:

–
Annex 12: civil
law issues;

–
Annex 14:
criminal law issues;

–
Annex 15:
procedural rules regarding litigation.

Annex 10 – The
protection of trade secrets in Sweden

Sweden is one of the few countries that
have a specific Act on the Protection of Trade Secrets with an explicit
definition of ‘trade secrets’, which has showed to function well by
interpretations in precedents of the Supreme Court and of the Labour Court. Since
1990 Sweden has provided a specific law regarding protection of trade secrets,
the Act (1990:409) on the Protection of Trade Secrets [Sw. Lag
(1990:409) om skydd för företagshemligheter] (hereinafter referred to as
the “Trade Secrets Act”). The Trade Secrets Act contains criminal
regulations on trade espionage an unlawful dealing with trade secrets as well
as civil regulations on liability for damages for criminal and non-criminal
acts involving unlawful use and disclosure of trade secrets. The Trade Secrets
Act stands on three pillars: one being rules on trade espionage; one being
rules regarding the relations between employer and employees and one being part
of regulating unfair competition. A unique feature of the Swedish Trade Secrets
Act is that employees normally do not have a penal liability in situations
where they use or disclose the employer’s trade secrets.

The Trade Secrets Act together with case
law from the Swedish General Courts and the Labour Court is the central source
of law in this respect. The TRIPS Agreement is not self-executing under Swedish
law. In addition to the Trade Secrets Act there are also criminal provisions in
the Swedish Penal Code that can be applicable.

The Public Access to Information and
Secrecy Act (2009:400) [Sw. Offentlighets- och sekretesslag (2009:400)]
contains some rules regarding the protection of trade secrets. The Swedish
Competition Act also contains regulations on the protection of trade secrets
constituting technical information in connection with dawn raids.

Trade secrets are not regarded as
intellectual property in Sweden. They are considered closely related to
intellectual property, however not protected as such. Trade secrets are not
exclusive rights per se and do not have the same protection. The legislation
that implemented the Directive on enforcement of intellectual property rights
(Directive 2004/48/EC of the European Parliament and of the Council of 29 April
2004 on the enforcement of intellectual property rights), namely amendments in
i.a. the Trademarks Act, Design Protection Act, and the Patents Act, is not as
such applicable to the protection of trade secrets.

Different types of information can be
recognized as trade secrets in Sweden, such as manufacturing technology,
commercial know how, price lists, customer lists and financial reports etc.
Also relatively trivial details can qualify as trade secrets. The requirement
is that they fall within the scope of the definition[585] in Section 1 in the
Trade Secrets Act. Different types of trade secrets are not treated differently
by the law.

The Trade Secrets Act applies to “unwarranted infringements of trade secrets”[586][587], but there is no
single definition of misappropriation, for the purposes of civil action,
at such. However, Articles 5 to 8, define conduct which trigger civil
liability.

Article 5 refers to the following conduct
triggering civil liability: unlawful acquisition (by reference to Articles 3
and 4 of the Trade Secrets Act which contain criminal provisions in this
regard); and/or subsequently exploiting or revealing the trade secret without
authorisation.

“5. Anyone who commits an offence under
Article 3[588]
or 4[589]
shall pay a compensation for the damage caused through the offence or through
the fact that the trade secret is, without authorization, exploited or
revealed.”

Articles 6 to 8 refer to other specific
cases of exploitation and revelation of the trade secrets by persons who did
not originally obtained the trade secret in an unlawful manner (i.e. business
partners, employees, or in the course of legal proceedings). Article 9 refers
to the absence of authorisation for the exploitation/revelation as a factor.

“6. Anyone who wilfully or through
negligence exploits or reveals a trade secret in a person’s business or
industrial activity of which he has been informed in confidence in connection
with a business transaction with that person shall compensate the damage caused
through his action.”

“7. Anyone who wilfully or through
negligence exploits or reveals the trade secret of his employer of which he has
been informed in the course of his employment under such circumstances that he
understood, or ought to have understood, that he was not allowed to reveal it,
shall compensate the damage caused by his action.

Where the action took place after the
termination of the employment, the first paragraph shall apply only where there
are extraordinary reasons for it.”

“8. Anyone who wilfully or through
negligence exploits or reveals a trade secret which, according to what he
understands or ought to understand, has been the subject of an action under
this Act shall compensate the damage caused through his action. The same
applies in where a person otherwise wilfully or through negligence exploits or
reveals a trade secret, which, according to what he understands or should
understand, has been revealed contrary to the provisions in the Secrecy Act
(1980:100).”

Article 11, on injunctions, refers however
to violations of trade secrets.

“11. Anyone who has violated a trade secret
under this Act may be prohibited by a Court, under penalty of a fine, to
exploit or reveal the trade secret. Such a prohibition under penalty of a fine
may, however, ordered only where an exploitation or a revelation would be a
violation of the provisions of Article 2.”

The relevant criminal provisions in
the Trade Secrets Act do not establish any requirements as to the purpose that
the infringer may pursue. The requirement is that the offender accessed the
trade secret wilfully and without authorization. Regarding the prerequisite on
wilfulness, liability also includes offences where the offender suspected that
the information was confidential and still carried on with his/her actions
unconcerned of the result thereof. There is no requirement regarding the
purpose, e.g. obtaining advantages or the like. It is neither required that the
offender actually used or disclosed the trade secrets.

Section 3 in the Trade Secrets Act
regulates criminal liability for trade espionage. Anyone who wilfully
and without authorization accesses a trade secret can be sentenced for trade
espionage to fines or imprisonment up to 2 years, or when the offence is serious
up to 6 years. Circumstances that may lead to a serious offence is if the act
was of particularly dangerous kind, concerned a considerable monetary value or
resulted in a particular serious damage. The penalty will not be sentenced if a
more serious penalty follows under the Swedish Penal Code. Attempts and
planning of espionage is penalized in accordance with Chapter 23 in the Penal
Code.

Section 4 in the Trade Secrets Act
regulates criminal liability for unauthorized dealing with a trade secret.
Anyone who obtains a trade secret knowing that the person who made available
the trade secret, or anyone before him, accessed it through an act of trade
espionage can be sentenced for unauthorized dealing with a trade secret to fine
or imprisonment up to 2 years, or if the offence is serious, up to 4 years. The
penalty will not be sentenced if a more serious penalty follows under the
Swedish Penal Code.

Section 5 in the Trade Secrets Act
regulates civil liability, for anyone who commits an offence in
accordance with section 3 or 4, to pay damages caused through the offence, or
the use or disclosure of the trade secret without authorization.

The TRIPS Agreement was not considered when
the Trade Secrets Act came to force. In 2008 a Governmental Legislative Committee
was assigned to review certain issues on the protection of trade secrets and to
consider possible amendments to the Trade Secrets Act. The Committee’s report
was presented in 2008 (Swedish Government Official Report, SOU 2008:63). The
legislative work is under progress but it is unclear if and when these
proposals will be effectuated. In accordance with information from the Swedish
Ministry of Justice we can at least not expect a government bill before October
2012. The Governmental Legislative Committee proposed that the Trade Secrets
Act should be amended in accordance with Section 50 in the TRIPS Agreement
regarding provisional measures. A new rule was proposed concerning a new
measure for securing evidence, corresponding to the provision on infringement
investigations related to intellectual property infringements. It would then be
possible to apply for a court order for a search for evidence, enforceable
through the Enforcement Agency. The Committee also proposed a new rule on
liability for damages for anyone who without valid cause, uses or discloses
trade secrets obtained in court proceedings in its business operations.

As regards criminal liability, it is
conditioned upon that the prosecutor can prove that the suspect has gained
access to the information in an unlawful manner. This means that criminal
liability cannot be charged upon somebody that was informed of confidential information
in a business meeting or gained knowledge of confidential information in line with
his or her work tasks. In such cases it might be possible to initiate civil
proceedings instead, if the information was unlawfully used or disclosed. In
some cases it might also be possible to apply other criminal regulations in the
Penal Code. The Governmental Legislative Committee has proposed an extension of
the criminal liability under the Trade Secrets Act to also cover persons who
have gained access to information in a lawful manner in their employment or as
consultants or the like when participating in the owners business.

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

United States

In the US the protection of trade secrets
was recognized at common law by the middle of the 19th century.

Trade secrets protection has evolved in the
US largely from individual state statutes and common law. The most widely
accepted rules of trade secrets law in the US were set forth in the Restatement
(First) of Torts, Section 757. Courts have adopted the definitions from the
restatement of Torts, which is one of a series of codifications of common law
principles by the American Law Institute. The Restatements of Law are not
binding law but have often been adopted by courts as reflecting existing law.

In 1973, the US Supreme Court recognized
the constitutionality of trade secret protection for all information, including
patentable subject matter, in Kewanee Oil Co. v Bicron Corp., 416 U.S.
470(1974).

In 1979, the National Conference of
Commissioners on Uniform State Laws promulgated the Uniform Trade Secrets
Act (UTSA). The original Act or its revision has now been adopted in 46
states and the District of Columbia, and has helped to increase uniformity
among state trade secret laws. At this time, the States of Massachusetts, New
York, North Carolina and Texas have not enacted the UTSA, although a bill for
adoption of the UTSA was introduced this year in Massachusetts. Among the
remaining States, New York and Texas have no general trade secrets statues but
rely on common law.

In 1984, the US Supreme Court held that a
trade secret was a property right in Ruckelshaus v Monsanto, 467 U.S. 986
(1984). Recognizing trade secret rights to be property rights has important
consequences under the US law, not the least that trade secrets enjoy the Constitutional
protection from under the taking clause of the Fifth Amendment to the US
Constitution, i.e., that property may not be taken without just compensation.

In 1994, the American Law Institute adopted
and promulgated the Restatement Third, Unfair Competition, Sections 39-49
[Trade Secrets]. Section 39 sets forth the following modern definition of trade
secrets and includes “any information that can be used in the operation of a
business or other enterprise and that is sufficiently valuable and secret to
afford an actual or potential economic advantage over others”. This definition
of a trade secret is consistent with the definition of a trade secret in
Section 1(4) of the UTSA.

In 1996, the US enacted the federal
Economic Espionage Act of 1996, 18 U.S.C. Section 1831 et seq. which makes the
theft of a trade secret a federal criminal offense (Section 1832) as well as
acts of economic espionage (Section 1831) committed by anyone for the benefit
of a foreign government, foreign instrumentality or foreign agent. Theft of
trade secrets is also a form of unfair competition.

Trade secrets may be protected against
misappropriation under the UTSA, state common lawn and the federal Economic
Espionage Act. There are three layers of protection.

Firstly, the federal Economic Espionage Act
criminalises misappropriation of trade secrets with imprisonment up until 10
years, and organizations are subject to fines up to USD 5 000 000.

Furthermore, the US International Trade
Commission[590]
is empowered under federal legislation to block imports of goods manufactured
in third countries following trade secret misappropriation.

Finally, concerning civil law protection,
there is no federal legislation. However, State legislation is fairly
harmonised. All but 3 States (Massachusetts, New York and Texas) have adopted a
"uniform act" on this issue. This uniform act codifies and harmonises
standards and remedies regarding misappropriation of trade secrets that had
emerged in common law on a State by State basis. In the case of the 3 States
that do not have that specific law, they rely on traditional common law
developments[591].
Indeed, judicial practice in all US States in this area is deemed to be
similar. It should be noted that while civil law trade secrets cases would
normally be heard in state courts, they may also be brought before federal
courts (applying state law through diversity or supplemental jurisdiction).

Japan

Until about 1990, the trade secret was used
to be protected by the Civil Code and the Commercial Code that provided for
injunctions or damages against contract violations. Also, to protect trade
secrets, the Penal Code was applicable to cases where, for example, documents
or drawings were taken out by outsiders or insiders (who would be accused of
theft or professional embezzlement). There was no law that was designed
exclusively for trade secret protection. Trade secrets were protected by the
general laws such as the Civil, Commercial, and Penal Codes. Then the Unfair
Competition Prevention Act (the “UCPA”) was revised in 1990 and the revised
Act gave a defection of trade secrets and provided for protection measures.

Currently, under the Japanese legal system,
the protection of trade secrets is awarded by the Unfair Competition Prevention
Act (the “UCPA”, as amended). Trade secrets may also be protected by the
contract law, tort law, Penal Code (theft, professional embezzlement, breach of
trust), and Companies Act (duty of loyalty of director, duty of care of prudent
manager, duty of non-competition), although the protection by these laws became
less important after the introduction of trade secret protection by the Unfair
Competition Prevention Act. The criminal liability for trade secrets violation
is to protect the interests of the owners of trade secrets, and the public
interests for fair competition. The potential penalties are imprisonment with
work and fine.

Also, the Intellectual Property basic Act
(the “IPBA”. Law No. 122 of December 4, 2002, as amended) is the statute about
basic principles for the creation of new intellectual property and effective
exploitation of such intellectual property. It provides the definition of
intellectual property which includes trade secrets.

Further, in civil proceedings, certain
documents, which are necessary for the case, are also to be protected as trade
secret. The Code of Civil Procedure provides the general rules for the
submission of documents as evidence and for the protection of the documents as
trade secrets. Plus, certain acts related to the intellectual property (e.g.,
the Patent Act) provide the specific rules in certain types of litigation
(e.g., patent litigation).

It is generally thought that a trade secret
has a property value but is not classifies as a property right. The Unfair
Competition Prevention Act does not recognize any exclusive right (such as
industrial property right) to trade secrets; it only prohibits types of highly
wrongful acts as those of unfair competition and provides for several types of
remedies. The right to seek an injunction against trade secret infringement may
be extinguished by prescription.

Switzerland

In Switzerland, there is a long tradition
of trade secret protection. Therefore, different provisions on trade secrets
can be found in various legal fields and laws. The most relevant provisions are
contained in unfair competition law, in contract law, in criminal law as well
as in procedural law. At the same time this means that, in Switzerland, there
is not one main provision containing a general definition of a trade secret
valid in all legal fields.

The legal provisions protecting trade
secrets use different definitions of trade secret depending on the scope of
prohibition/protection (Unfair Competition Act art. 5 lit. a: “work product
entrusted to him”; lit. b: “work product”, lit. c: the “market-ready work
product”, art. 6, art. 162 Criminal Code: “fabrication or business secret”).

They do not protect all sorts of
information that is commercially valuable. In particular procedures and methods
(as opposed to their embodiment in a work product) and preliminary stages of a
work product are not protected. Information that is held by several unrelated
persons, who all keep it secret and do not disclose it outside their group, is
not protected. As a consequence, information is the subject of contracts and
transferred or made available for consideration that is not protected by law.

Trade secret protection does not
distinguish between valuable and trivial information. It does not provide for a
time limitation for protection, so that secret know-how is potentially
protected forever.

In Switzerland trade secrets are not
considered to be intellectual property rights.

The Unfair Competition Legislation
(Unfair Competition Act, “UCA”) deals with the protection of trade secrets
in various provisions. These provisions do not protect the trade secrets as
such but they offer a remedy in case of an unfair way of obtaining or
exploiting trade secrets. Accordingly, they only provide for an indirect
protection of trade secrets.

The Code of Civil procedure has specific
procedures which allow a Court to take all required measures to protect trade
secrets of a party, including limitation to inspection of files and private
hearing of a party. The remedies are in principle available also against a
third party who acquires the secret in good faith, although the absence of the
bad faith may affect the possibility to obtain damage compensation.

Switzerland provides for an extensive
criminal framework concerning trade secrets violations.  The relevant scope of
protection, in addition to breach of confidentiality, provides for the
punishments of industrial espionage and other crimes related to specific types
of secrets (i.e. professional or official secrets). The violation of trade
secrets may also entail theft, trespassing or unauthorized penetration of a
secured data system and is punished by imprisonment up to three years or
monetary fine.

Switzerland punishes violation of secrets
provided that the infringer acted with intent. Mere betrayal constitutes an
offence regardless of the purpose of the offender, whereas the exploitation of
the secret requires that the infringer acted to obtain a financial advantage.
Additionally the crime of business espionage requires that the offender acted
to render the information available to a foreign destination.

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

See Annex 9 for an introduction to
this topic.

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

The absence of homogenous pieces of legislation
in this area implies that there is no uniform understanding of what a trade
secret[592]
is:

–
In Italy, Portugal and Sweden, there is a
specific statutory definition of trade secrets in their intellectual property
or trade secrets specific legislation.

–
A statutory definition of trade secrets is also
available in the unfair competition/civil code provisions of Bulgaria, Czech
Republic, Greece, Hungary, Lithuania, Poland and the Slovak Republic. In
Slovenia, information is deemed to be a trade secret if so determined by a
company in a written resolution.

–
In all other EU Member States, there is no
definition of trade secrets in the law. This matter has been developed by
courts and legal commentators.

Box A12.1
shows the national definitions in question.

Box 12.1 – Definitions of trade secrets[593]

TRIPS Agreement – Article 39(2)

“Natural and legal persons shall have the
possibility of preventing information lawfully within their control from being
disclosed to, acquired by, or used by others without their consent in a manner
contrary to honest commercial practices so long as such information:

(a) is secret in the sense that it is not, as a
body or in the precise configuration and assembly of its components, generally
known among or readily accessible to persons within the circles that normally
deal with the kind of information in question;

(b) has commercial value because it is secret;
and

(c) has been subject to reasonable steps under
the circumstances, by the person lawfully in control of the information, to keep
it secret.”

Bulgaria - Section 9 of Supplementary provisions
of Law on Protection of Competition

“a manufacturing or trade secret is any
circumstance, information, decision or data related to a business activity, the
secrecy whereof serves the interests of the undertakings concerned and
necessary measures to this end have been undertaken”.

Czech Republic - Section 17 of the Czech
Commercial Code

“… A trade secret comprises all facts of
commercial, manufacturing or technical nature related to an enterprise that
have actual or at least potential material or immaterial value, are not
commonly available in the relevant business circles, should be maintained in
secrecy on basis of the trader’s decision and the trader ensures their secrecy
adequately”.

Greece - Law no. 2290/1995

This law has transposed into Greek national law
TRIPS Agreement and consequently the definition of trade secrets provided by
Article 39(2) of the TRIPS Agremeent applies.

Hungary - Article 81 of the Hungarian Civil
Code

"all facts, information, solution or data
pertaining to economic activities the publication of which, or the acquisition
or use of which by unauthorized persons, is likely to violate or imperil the
financial, economic or market interests of the owner of such secret, provided
the right holder has taken all the necessary steps to keep such information
confidential".

Italy – Art. 98 of Italian Code of Industrial
Property

“The business information and the
technical-industrial expertise, including the commercial ones, subject to the
owner's legitimate control, are protected as long as:

a) they are secret, in the sense that they are
not, as a whole or in the exact configuration and combination of their
components, generally well-known or easily accessible for experts and operators
in the field;

b) they have an economic value due to their being
secret;

c) they are subjected, by the persons who
legitimately control them, to measures which may be deemed reasonably adequate
to keep them secret.

[…]”

Lithuania - Article 1.116 “Commercial
(industrial) and professional secret” within the Lithuanian Civil Code

“Information shall be considered to be a
commercial (industrial) secret if a real or potential commercial value thereof
manifests itself in what is not know to third persons and cannot be freely
accessible because of the reasonable efforts of the owner of such information,
or of any other person entrusted with that information by the owner, to
preserve its confidentiality. The information that cannot be considered
commercial (industrial) secret shall be determined by laws”.

Poland - Article 11(4) of Polish Unfair
Competition Law

"A company trade secret is understood to
include any technical, technological, organizational information, or other
information of commercial value, concerning an enterprise, undisclosed to the
public, with regard to which an entrepreneur has taken necessary steps to
maintain confidentiality".

Portugal - Article 318 of the Portuguese Code
of Industrial Property

“PROTECTION OF UNDISCLOSED INFORMATION

Pursuant to the preceding article, an illicit act
is defined in particular as the disclosure, acquisition or use of the business
secrets of a competitor without its consent, provided that said information:

a) Is secret in the sense that it is not common
knowledge or easily accessible, in its totality or in the exact configuration
and connection of its constitutive elements, for persons in the circles that
normally deal with the type of information in question;

b) Has commercial value based on the fact that it
is secret;

c) Has been the object of considerable diligences
on the part of the person with legal control over it, with a view to keeping it
secret.”

Slovakia -  Articles 17 of the Slovak Act No.
513/1991 Coll. „Commercial Code“

“[...] Trade secrets consist of all business,
manufacturing and technological facts related to the enterprise with actual, or
at least potential, tangible or intangible value. Trade Secrets are not
normally available in the appropriate industry and should not be disclosed
without the entrepreneur’s consent, providing the entrepreneur adequately
ensures such non-disclosure”.

Slovenia – Companies Act

Information is deemed to be a trade secret if so
determined by a company in a written resolution.

Sweden - Section 1 of the Trade Secret Act

“For the purpose of this Act a trade secret means
such information(\*) on business relations or operating conditions of a business
in somebody’s business which is kept secret and of which the disclosure is
aimed at causing damage to the business proprietor from a competition point of
view”.

(\*)The term “information” means “information
documented in some form, including drawings, model and other similar technical
prototypes, as well as the knowledge of single individual about specific
circumstances even where it has not been documented in some form”.

While some common grounds appear in the
above-quoted national definitions, they do not always conform to 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. The
definition is broad in this respect and, in principle, any type of information,
whether technical secrets[594]
or commercial secrets[595]
, is potentially capable of being protected as trade secret[596]. In
principle, the 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[597].
This is a relative secrecy requirement. Several of the definitions above appear
to follow the TRIPS Agreement in that regard. However, the Bulgarian,
Hungarian, Lithuania 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 (by reference to the interests of the trade secret
owner) and the scope of protection seems different (based on subjective, rather
than objective grounds): 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”. It is unclear
which criterion is followed by the Slovenian definition.

–
(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[598]. These
reasonable efforts are generally required by national legislations too,
although this does not directly results from the Swedish definition. It is
unclear which criterion is followed by the Slovenian definition.

Case-law development in Member States
without statutory definition seems to follow similar patterns[599].

The lack of a uniform definition and scope
of protection entails a risk of inconsistent interpretation of what is
protectable as trade secret, consequently making trade secrets enforcement
difficult and costly to handle[600].

Concerning the question of
misappropriation, the main divergences relate to the situation of the third
party who obtained the misappropriated trade secret in good faith[601]: see below on
remedies.

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

(i) General

The remedies available in civil/commercial
law proceedings for the misappropriation of trade secrets do vary and appear to
depend on the origin of the action: e.g. based on tort, unfair competition law
etc.)[602]:
see Table A12.1 for a summary view.

Table A12.1 – Available civil remedies[603]

|| 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

Injunctions (cease and desist orders: ordinary action || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P

Injunctions (cease and desist orders: interim relief || P || P || P || P || P || P || P || || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P

||

Return/destruction of trade secrets / goods produced using misappropriated trade secrets: ordinary action || P || P || || || P || P || P || || || P || || P || P || P || P || P || || P || || P || P || P || P || P || P || P || P

Return/destruction of trade secrets / goods produced using misappropriated trade secrets: interim relief || P || P || || || P || P || || || || P || || P || P || P || P || || || P || || P || || || P || || || || P

||

Seizure of trade secrets / goods produced using misappropriated trade secrets: ordinary action || || P || || || P || || P || || P || P || || P || P || || P || P || || P || || P || P || P || || P || P || P || P

Seizure of trade secrets / goods produced using misappropriated trade secrets: interim relief || || P || || || P || || P || || P || P || || P || P || || P || || || P || || P || P || P || || || || P || P

||

Withdrawal from the market of goods produced using misappropriated trade secrets: ordinary action || || P || || || P || || P || || P || P || || P || P || || P || P || || P || || P || P || P || P || P || || ||

Withdrawal from the market of goods produced using misappropriated trade secrets: interim relief || || P || || || P || || || || P || P || || P || P || || P || || || P || || || || P || P || P || || ||

||

Damages || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P

||

Publication of decisions: ordinary action || || P || P || || P || || P || || || P || P || P || P || || P || || P || || || P || P || P || P || || || P || P

Publication of decisions: interim relief || || P || || || || || || || || || || P || || || P || || || || || || || || || || || ||

||

Restraint measures (e.g. penalty for future breach of the Court's order): ordinary action || P || P || P || P || P || || || || P || || P || P || || || P || P || P || || || P || || || || P || || ||

Restraint measures (e.g. penalty for future breach of the Court's order): interim relief || || P || || P || P || || || || P || || P || P || || || P || || P || || || || || || || P || || ||

|| 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

The above remedies are, in general, all
cumulatively available to the trade secret owner, with few exceptions[604]. For example, in
Belgium, damages are available but not for cease-and-desist claims brought
under the Unfair Competition Act (in the form of expedite action). In Bulgaria,
it appears that final injunctions are not available (at least cease-and-desist
orders in the strict sense of the word) with damages being the usual final
remedy. In Latvia, although potentially available, it is not clear which
remedies can effectively be used as there is no case law as to whether remedies
provided in the Civil Procedure Code for intellectual property rights apply
also to trade secrets (trade secrets are not expressly included among the
definition of intellectual property). In Italy damages may only be awarded in
ordinary proceedings. In Luxembourg, while injunctions are granted by the
President of the Commercial Court, damage claims shall be brought before the
District Courts.

(ii) Injunctions (cease and desist
orders)

In general, injunctions (cease and desist
orders) are available in all EU Member States. In all Member States,
injunctions (i.e. cease and desist orders) are usually available also as
interim relief remedy (i.e. during preliminary and summary proceedings where
the claimant’s requests are summarily examined by the court and measures are
granted within a very short time limit).

Therefore, there is civil law redress in
order to block the commercialisation of goods (or services) which have been
manufactured (or designed) using misappropriated trade secrets (so-called
"resulting goods/services"). However, this redress varies from Member
State to Member State and there is no guarantee that the "resulting
goods/services" will be stopped everywhere in the EU. Cease and desist
orders against the use of misappropriated trade secrets by third parties (i.e.
beyond a contractual relationship) are not always available:

–
(i) when trade secrets are protected under
unfair competition rules, the trade secret owner needs to sue a competitor but
cannot sue a person having the secret with a view to sell it to another third
party or to exploit it for other purposes than competing with the original
owner of the secret;

–
(ii) solutions diverge 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 but before
the trade secrets had reached the public domain. In some EU Member States, remedies
are potentially available regardless of the recipient’s good or bad faith
(Austria[605],
Czech Republic, Denmark, Estonia, Finland, Germany, Ireland, Latvia, Lithuania
and Portugal)[606]
and injunctions can be obtained also against a third party who obtained the
secret in good faith – however, the third party is likely not to be held liable
for damages, unless the use of the secret information  continues even after the
recipient has been informed of the confidential nature of the information. In
others, this is not possible[607];
and

–
(iii) cease and desist orders may be limited in
time even if the trade secret has not yet reached the public domain. Belgium[608], Cyprus,
Denmark[609],
Greece, The Netherlands[610],
Poland and Slovenia, which do not allow unlimited injunctions. In Common Law
countries, injunctions are equitable remedies and, as such, courts are free to
determine terms and duration of the restrictions.

Concerning the situation of employees, the Baker
& McKenzie study finds that though in general, whilst employed, employees
have a (statutory) duty of loyalty (including non-disclosure and non-compete obligations)
towards the employer, a common practice in most jurisdictions is to provide for
non-use and non-disclosure, as well as non-compete clauses in contracts of
employment[611].
However, the position differs as to what can be done in relation to an ex-employee
who uses or discloses secrets after leaving employment. The balance between the
interests of the employer and the employee is indeed assessed differently in
the relevant countries. In general, post-employment, an employee cannot be
prevented from using the skill and knowledge gained during the employment,
provided that said knowledge does not consist of trade secrets or confidential
information that the employee wilfully memorised or (mis)appropriated with the
purpose to misuse them after termination of the employment relationship[612].

(iii) Destruction of the goods
produced using the misappropriated trade secrets or the restitution of the
misappropriated information

Compared to injunctions, other measures
such as the destruction of the goods produced using the misappropriated trade
secrets or the restitution of the misappropriated information) are not
available everywhere and are available in interim proceedings in certain
countries only (see Table A12.1). Since resulting goods are not always destroyed,
there is no guarantee for the trade secret owner that such goods will no
reappear in the market.

(iv) Damages[613]

Compensation for the prejudice suffered from
the misappropriation of a trade secret is available in all jurisdictions[614]. Damages claims are mainly
based on tort or contract and only in a few cases specific provisions on
damages are included in either the unfair competition laws (see for example
Spain) or in the specific provisions applying to trade secret misappropriation
(Italy and Sweden).

Damages based on tort cover both accruing
damages (“damnum emergens”) and loss of profits (“lucrum cessans”).
Loss of profits, however, is in most cases very difficult to prove, since the
misappropriated information is an intangible asset[615]. This helps explaining
the often low compensation obtained[616].
A claim for unjust enrichment is available in some countries only, such as
among others, Belgium, Estonia, Finland, Lithuania and Spain (for further
details please see Table A12.2 below). In some other countries (for
example, Austria, Germany, Italy, Ireland, Lithuania, Poland, Sweden and the
United Kingdom) the claimant has the right to claim the account of profits
obtained by the infringer from its wrongdoing. In most of the cases, however,
the account of profits is alternative to the loss of profits or is considered a
criterion to calculate said loss. In Italy, the owner of trade secrets may
claim the restitution of the infringer’s profit in addition to the loss of
profits to the extent that the infringer’s profits exceed the claimant’s loss.
In Greece, account of profits and unjust enrichment are alternative ways to
calculate the loss of profits. Similarly in the Netherlands loss or profits
excludes account of profits.

Table A12.2 – Available damages options[617]

|| 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

Accruing damage (damnum emergens) || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P

Loss of revenues (lucrum cessans) || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P || P

Moral damages || || || P || || || || || || P || || || P || P || || P || || || || || P || || P || P || || || P ||

Punitive damages || || || || || || || || || || || || || || P || || || || || || || || || || || || || P

Other monetary compensation || || || || || P || || || || || || || || || || || || || || || || P || || || || || ||

||

Account of profits || P || || || P || P || P || || P || P || || P || || P || P || P || P || || P || || P || P || || || P || || || P

Fair royalty || P || || || || || P || P || || P || || || || P || || P || || || || || P || || || || || || || P

Unjust enrichment || || P || || || P || || || P || P || P || P || || || || || P || || P || || || P || P || P || || P || P ||

Ex aequo et bono global account || || P || P || || || || || P || || || P || || P || || P || P || P || || P || P || || P || P || || || ||

||

Cumulation of these options || || P || P || || P || || P || || P || P || P || || || || P || P || || P || P || P || P || || || P || P || P ||

If damages are claimed on contract,
liquidated damages (if provided by the agreement) can also be claimed in
addition to damages. Contractual liability, however, is often limited to the
damages which were foreseeable at the time of conclusion of the contract.

Many EU Member States[618] do not have specific
criteria for the calculation of damages, they apply the general criteria of
tort liability (i.e., damnum emergens and lucrum cessans). The license
analogy has been indicated as a possible criterion for the calculation of
damages[619],
among EU Member States in Austria, Denmark, Germany, Greece, Hungary, Italy, the
Netherlands and the United Kingdom.

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

This annex describes the situation as
regards the imports of goods into the EU when those goods have been
manufactured or produced using misappropriated trade secrets.

Goods infringing intellectual
property rights: specific EU rules

Regulation (EC) No 1383/2003 provides for
specific customs action in case that goods subject to customs supervision and
control are suspected of infringing intellectual property rights[620].

In essence, the customs authorities may,
upon their own initiative or upon request of a holder of an intellectual
property right, detain or suspend the release of the goods suspected of
infringing an intellectual property right and which are under customs controls.
Once the suspected goods are detained, the holder of the intellectual property
right has the possibility to file a case before a civil court which will decide
on the existence (or not) of the infringement.

Goods misusing a trade secret: no EU
regime

In the specific case of goods imported from
third countries which would have been manufactured or produced using
misappropriated trade secrets of EU companies, there is, however, no specific
administrative procedure before customs authorities to detain them.

EU Regulation (EC) No 1383/2003 only applies
as regards infringements of intellectual property rights and does not extend to
claims for the misappropriation of trade secrets. Hence, national customs
authorities do not process applications for action against goods suspected of
being the result of the misappropriation of trade secrets[621].

The Commission examined in 2011 whether the
customs regime applicable to goods suspected of infringing intellectual
property rights should also be extended to goods suspected of misappropriating
trade secrets[622].
However, it eventually decided not to include the misappropriation of trade
secrets in the scope of protection of the proposal for a new Regulation in this
area[623].

This regime differs from that in the United
States.

In the United States, it is possible to engage
legal proceedings before an administrative body, the US International Trade
Commission (ITC), in order to block imported goods manufactured using
misappropriated trade secrets[624].

Section 337 of the Tariffs Act[625] gives power
to the US ITC to deal with claims involving infringements of intellectual
property rights but also other forms of unfair competition involving imported
products, such as misappropriation of trade secrets. The US ITC has
investigative powers. The procedure includes trial proceedings before
administrative law judges and review by the US ITC. In terms of remedies, the
primary remedy available in Section 337 investigations is an exclusion order
that directs US Customs to stop infringing goods from entering the US. In
addition, the US ITC may issue cease and desist orders against named importers
and other persons engaged in unfair acts that violate Section 337 of the
Tariffs Act.

In practice, in order to block goods
imported from third countries which would have been manufactured or produced
using misappropriated trade secrets of EU companies, the EU holder of the trade
secrets in question would need to:

·
(1) file a case before a national court against
the person who would allegedly be misusing the trade secret requesting the
court to: declare that the trade secret had been misappropriated; order such
person not to continue using the trade secret in question (“cease and desist”
order/injunction); and order the seizure and destruction of the goods; and

·
(2) (if the national court uphelds his claim)
have the cease and desist order enforced by customs authorities, so that the
misappropriator is prevented from importing the goods in question; and have the
seizure and destruction order enforced by customs authorities, provided that
they have detain such goods under their control.

Compared to proceedings for infringements
of formal intellectual property rights, there is an inversion of the burden of
proof in so far as the holder of the trade secret needs to demonstrate that the
trade secret has been misappropriated before customs authorities can take
action.

Particular difficulties appear, compared to
proceedings for infringements of formal intellectual property rights:

–
Firstly, proceedings on the misappropriation of
trade secrets concerns primarily the conduct of another person in obtaining
(and subsequently using) the information covered by a trade secret. Without the
misappropriation of the trade secret having been previously declared by a
court, any suspected goods would not violate any trade secret: independent
discovery of the relevant information or reverse engineering of a lawfully
acquire good to learn about such information is always possible. This means
that the trade secret holder would need to engage proceedings against any
importer of litigious goods independently and to prove the unlawful
appropriation of the trade secret by each of them. Bad faith misappropriators
may take advantage of this and use strawmen as importers so as to make legal
action more difficult.

–
Secondly, in theory, since the possibility to seize
goods imported from third countries at EU borders (when the imported goods have
been produced using misappropriated trade secrets) depends on a previous court
decision, misappropriators could take advantage of the national differences to
import the goods through the EU Member States with weaker protection.

Annex 14 – Legal
differences in national law: criminal law[626]

A14.1.    Offences:
conducts considered as crimes

(i) Unauthorised disclosure/use of
trade secrets (trade secrets infringement)

As explained in Annex 9, many Member
States have established criminal provision regarding trade secrets infringements,
whether in a special law, in the criminal codes or in other laws (e.g. unfair
competition). Several 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, including against disclosure, misappropriation, use or
other infringement. Criminal penalties for trade secrets protection are set
forth also under unfair competition law in Austria, Cyprus, the Czech Republic,
Denmark, Germany, Greece, Poland and Romania[627].

Member States' common legal basis to punish
trade secrets infringement with criminal sanctions lays in the protection of
the following legitimate interests: protection of the owner's right to exploit
the confidential information and to gain, as a result, an advantage over
competitors, the company’s “right to privacy”, and the proper functioning of
the market[628].

However, the extent to which violations of
trade secrets are criminalised under national law depends on the various
definitions of trade secret (or confidential business information) in place.
The following elements need to be highlighted:

·
There is no common definition of trade secret in
criminal law, so the scope of the actual protection afforded by criminal law
varies to a significant degree from Member States to Member States[629].

·
A few legal systems provide a definition of
trade secrets in criminal law. In the absence thereof, courts have developed
certain standards to set out the scope of the criminal protection relating to
trade secrets. In particular, the concept of trade secret is deemed to refer to
any information that: concerns the business of the owner/company (i.e.,
qualifies as a business/professional secret); confers to the owner a
competitive advantage (that the owner has a legitimate economic interest to
exploit), so that the disclosure may cause to him damage in terms of financial
loss; is known/disclosed to a limited group of people only[630]; and whose
confidentiality is protected through proper measures[631]. The
definition of trade secrets would cover an extensive range of items, except for
Cyprus, Denmark, Estonia, Latvia and Portugal[632].

·
In general, criminal provisions on trade secrets
violation do not pose as a prerequisite that the owner had specifically
identified the information as confidential. In all Member States application of
criminal protection is afforded subject to an objective test i.e. the secret
information must be such that the owner has a reasonable and objective
interest to exploit in an exclusive way in order to gain a competitive
advantage in the relevant market[633].Nonetheless,
in some cases the relevant protection is afforded to any information having
economic value that the owner deems it opportune for his benefit to keep secret
according to a subjective criterion and that are subject to reasonable
measures for protection of confidentiality (e.g. this broader interpretation
seems to be prevailing in Czech Republic, Finland, Greece, Poland, Romania and
Slovenia)[634].

However, the lack of more specific criteria
than those reported above (, i.e., disclosure to a limited group of individuals
only, economic value, protection through proper measures) may give rise to some
problems from a criminal law point of view, as the conduct subject to
prohibition may be found to be not completely defined and, accordingly, the border
between legal and illegal activities may remain uncertain in some cases[635].

Box A14.1
describes the characteristics of the conduct. Almost all Member States[636] require that the
offender acted with intent. Therefore, it emerges that whoever commits a trade
secrets infringement must have clearly the knowledge that the business
information constituted trade secrets, even if there is no express obligation
to keep such information confidential.

Box A14.1 –
Characteristics of the conduct[637]

–
In Austria the offender
to be held criminally liable for trade secrets violations must have acted at
least with conditional intent.

–
Cyprus does not
establish any specific requirement that the offender must meet to be charged
with criminal liability for trade secret violations. Nor is there any stated
obligation on the company to keep information confidential.

–
In the Czech Republic
the offender must act deliberately to commit the offence. As the relevant
conduct is defined as an act of unfair competition, the offender must qualify
as a competitor or someone participating in the competitive process. The
concept of competition has nevertheless been construed very broadly, including
even indirect or potential competitors.

–
In Denmark the offences
provided for under the Criminal Code require intent. Only under certain
circumstances if the employee causes a substantial risk of dissemination of
confidential information by negligence he or she may be charged with criminal
liability pursuant to Section 19 of the Marketing Practices Act.

–
Finland requires that
the infringer acts intentionally and in order to obtain financial benefit for
himself or herself or another, or to injure another, unlawfully discloses the
business secret of another or unlawfully utilises such a business secret.

–
Germany partly requires
that the infringer acts with intent and, specifically, for the purpose of
competition, for personal gain, for benefit of a third party or causing damage
to the owner of the secret. Pursuant to sec. 85 of the Limited Liability
Company Act (GmbHG), any person who reveals a secret of the company without
authorization, particularly an operational or business secret, that became
known to him in his capacity as managing director, member of the supervisory
board or liquidator shall be subject to imprisonment for a period of up to one
year or a fine. Indirect intention (dolus eventualis) is sufficient for
such act.

–
In Greece the offender
must act (with intent) for purpose of competition, that means that two criteria
have to be met: (i) the conduct of the offender must be suitable to serve the
purpose of competition; (ii) he or she must act with the “intention of
competition”, i.e. enhance his or third parties’ competitiveness.

–
As to Hungary and
Italy, the offender may be punished only if he or she acts with intent.

–
In Latvia the employer
is obliged to identify in writing the information considered to be commercial
secrets. In any case, intent is required for the offence to occur.

–
Lithuania requires that
the offender, in case of business espionage, acted with the intent to
unlawfully obtain a trade secret, whereas, in the case of violation of trade
secrets, major property damage to the victim is required.

–
In Luxembourg,
Netherlands and Portugal the offender must act with the intent to reach a
competitive advantage or to cause harm to the owner.

–
Also Poland requires
intent, as the offender must breach an obligation of confidentiality that must
be prior established by the owner of the secret, either directly or indirectly.

–
Under Romanian and
Slovak law the offender must act with intent, but no specific purpose is
required.

–
Spain also requires
intent and a specific purpose which varies depending on the type of offence
considered (for instance, commercial advantage).

–
The Swedish Act on the
Protection of Trade Secret does not pose any requirement as to the purpose that
the offender acts for. It only requires that he acted wilfully and without
authorization.

(ii) Related offences[638]

Regardless of the existence of rules
dedicated to trade secrets infringement, the conduct of the offender may also
fall under the remit of other offences (see Box A14.2). However, “application
of general offences may not fit specifically to trade secrets protection and
may result less effective”[639].

Box A14.2 –
Related offences

In Belgium a person who
commits the offence under Section 309 of Criminal Code (unauthorized disclosure
of trade secrets) may also be charged with theft or misappropriation (provided
that he qualifies as an employee with the company). Similarly, Section 491
applies when a person who is entrusted as a data processor/handler
manufacturing secrets that are physically stored breaches his duty of
confidence.

In Bulgaria, for
instance, the offence of business bribery is punishable and applicable to any
individual who discloses to third parties information that he knows in return
for something.

In France there is a
wide range of crimes that may arise in connection to trade secrets violations:

–
First, the offence of
theft may occur when the conduct at stake consists in the fraudulent
appropriation of third parties’ data carriers containing confidential
information. Such an offence has been found by the Cour de cassation to
apply even in connection to disclosure of trade secrets. Theft is punished by
imprisonment up to three years and a fine of Euro 45,000.00.

–
Additionally, the
offence of breach of trust may be committed where an individual with the
company misappropriates documents containing confidential information entrusted
to him for temporary use. In such a case, the offender shall be punished by
imprisonment up to three years or a fine of Euro 375,000.00.

–
Also, other provisions
of the Criminal Code punish the act of supplying secret information to foreign
powers by imprisonment up to fifteen years and a fine of Euro 225,000.00.

In Germany cases of
industrial espionage may result in theft or misappropriation.

In Greece the
infringement of trade secret may constitute, among other offences, a breach of
trust under Section 390 of the Criminal Code. In such a case, the offender
shall be punished by imprisonment up to ten years and a fine up to Euro
15,000.00.

Depending on the
circumstances, violations of trade secrets may result, further to civil
lawsuits, in a number of offences, including but not limited to insider
trading, unauthorized access to computer systems and a breach of privacy.

As to Italy, the conduct
of the offender who commits an unauthorized use or disclosure of trade secrets
may also constitute theft or misappropriation.

In Latvia acts of
unauthorized disclosure or acquisition of trade secrets may constitute unfair
competition practices where repeated within a one-year period and, thus, result
in a punishment by imprisonment of up to two years and a fine, in addition to
disqualification penalties.

Violations of trade
secrets may constitute fraud or bribery in Lithuania or theft in Luxembourg. In
the Netherlands the conducts may also result in the theft of secret documents
or hacking of computer systems. In Portugal the related offences include
computer and communications fraud. Slovakia, in addition to breach of trade
secrets, criminalizes the misuse of participation in economic competition
through unfair acts.

In Slovenia the same act
may be punished under the crime of “disclosure of and unauthorized access to
trade secrets” as well as, for instance, the offence of abuse of insider
information. Spain provides an extensive regulation of trade secrets infringements:
however, pursuant to Section 278.3 of the Criminal Code the specific provisions
apply without prejudice to the penalties that may arise for appropriating or
destroying the computer media, i.e. for the offences of theft or
misappropriation.

In Sweden, further to
the offences provided for under the act on the Protection of Trade Secrets,
other criminal provisions may apply, including unauthorized access to computer
systems, unlawful dispossession, unlawful use, espionage, unlawful dealing with
secret information and negligent dealing with confidential information.

Offences in any way related to trade
secrets violations have significant importance in the legal systems that do not
establish any specific provision in this respect[640]:

–
In Bulgaria violations of trade secrets may be
punished only indirectly. The relevant offences in this respect include the
disclosure of service/office secrets, the business bribe and computer crimes.

–
Under Irish law, for instance, trade secrets
infringements may result in: (i) disclosure of personal data obtained without
authority; (ii) unauthorised accessing of data; (iii) unlawful use of a
computer; (iv) theft or (v) criminal infringements of intellectual property
rights.

–
Under Maltese criminal law, in the absence of provisions
specifically concerning trade secrets, one could be charged with
misappropriation and fraudulent gains as a result of his conduct[641].

–
In the U.K. the criminal provisions that may
apply in connection to trade secrets infringement cases include theft, fraud,
conspiracy to defraud as well as, upon certain circumstances, some of the
offences provided for under the Computer Misuse Act (such as unauthorized
access to information contained on a computer) and the Data Protection Act
(although it is very unlikely that personal data qualify as trade secrets).

In Belgium, Bulgaria, Cyprus, France,
Germany, Greece, Hungary, Italy, the Netherlands, Portugal and Romania certain
criminal provisions also punish infringements of specific categories of
secrets, e.g. office secrets that are connected to the specific qualification
of the offender or to the nature of the information that is covered by secrecy.
Even though such offences do not directly refer to trade secrets, they are part
of a wider legal framework applicable under certain circumstances.

(iii) Qualified offences[642]

Certain Member States also establish
qualified offences when the revelation or use of confidential information is
committed by a person acting in a particular capacity (e.g., as civil servant,
public official, or as person handling confidential information by reason of
his job, e.g. lawyers, officers). This does not mean that for each of the
offences a specific provision is established. Separate provisions may have been
implemented (e.g. Italy) or, like in Estonia, the same provision may apply to
professional and official secrets, also covering trade secrets[643]. See Table A14.1:

Table A14.1 – Qualified offences

|| 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

Breach of professional secrecy || P || P || || P || || P || || P || P || || || P || P || || P || || || || P || P || || P || P || P || P || P ||

Breach of official secret || P || || P || P || || P || || P || P || || P || P || P || || P || || || || P || || || P || P || || || ||

Other breach of confidence || || || || || || P || || || P || || || || P || || || || || || || || || || || || || ||

Separate provisions || Y || Y || N || N || N/A || || N/A || N || N || || Y || N || Y || Y || N || || || || N/A || N || || Y || Y || || || N ||

(iv) Threshold for the applicability
of criminal penalties[644]

In the Czech Republic only violations
resulting in a damage of at least Euro 2,000.00 may give rise to criminal
liability. The offender must cause harm to a competitor or a consumer equivalent
to such an amount or provide someone else than the owner of the secret with a
benefit of the same amount. The offender does not necessarily need to be a
legal person or an enterprise.

A de minimis threshold for the
disclosure of a trade secret applies in Lithuania, where for the offender to be
prosecuted it is required that the conduct caused a damage of at least EUR
5,648.00. However, the threshold does not apply to commercial espionage.

Something like a de minimis
threshold is established in Poland, where the conduct must have caused
substantial damage to the owner, although no quantification of this concept is
provided for in the law.

Slovakia establishes that for the offender
to be prosecuted a significant damage (more than EUR 26,600.00) must be caused
by his conduct to another competitor. It also provides for a more severe
penalty in cases where the conduct causes a large scale damage (over EUR
133,000.00).

Also under Estonian criminal law a general
safe harbour clause applies, preventing prosecution in case the offence is
found to be of minor harm.

In Austria the offender will not be
prosecuted if his conduct is justified by a compelling public or private
interest.

No safe harbour seems to exist in Latvia
and Sweden. In Cyprus disclosure of trade secrets is allowed, for instance,
when protection of health and safety of citizens is affected, i.e. where
compelling public interests are at stake or to prove the violations of
statutory provisions.

Similarly, no safe harbour or de minimis
threshold applies in Denmark, Finland, Italy, Luxembourg, Slovenia. Germany
does not provide for any safe harbour; however, disclosure of trade secrets is
justified when committed to avert an imminent danger to life, limb, freedom,
honour, property or other prevailing legal interests. In Greece trade secrets
are not protected in case a witness is examined to represent certain
circumstances before the Court, excluding state secrets. In Hungary Section
300(2) of Criminal Code expressly sets forth some safe harbours that justify
infringement of trade secrets. These clauses include:

–
(i)       fulfilment of duties prescribed in a
separate act governing the publication of information and information to be
disclosed in the public interest;

–
(ii)      fulfilment of duties subject to
statutory reporting obligations, even in the case the report was filed in good
faith and proved to be unfounded.

In the Netherlands a specific provision
sets out an exemption for those who disclosed in good faith a trade secret
assuming that the disclosure was in the public interest. Portugal and Romania
consider the consent of the owner to the disclosure of a secret as a safe
harbour clause. In addition to that, Romanian law permits the disclosure of
trade secrets where compelling public interests are at stake. Spain does not
consider information about illegal activities carried out by the owner to be a
trade secret: therefore, its revelation would not determine any prosecution.

Generally speaking, the risk of
dissemination of confidential information does not amount to a criminal offence
(except for Slovakia, Slovenia). The conduct carried out by the infringer must
result in an actual violation of the interest protected under the relevant
provisions. In contrast, most legal systems (including Austria, Belgium, Czech
Republic, Denmark, Finland, France, Germany, Greece, Italy, Latvia, Lithuania,
Slovakia, Slovenia) provide criminal protection against the intent to commit a
trade secret violation. The acts carried out with the purpose of disclosing or
using confidential business information which reach a certain threshold in the
realisation of the offence are likely to trigger criminal liability.

A14.2.    Penalties[645]

The conducts which normally give rise to
violations of trade secrets include the access to confidential information, the
use or the disclosure thereof or the illicit acquisition for exploitation by
the offender or third parties. These conducts are generally punished regardless
of the fact that the offender qualifies as a competitor and may be committed
either by (past) employees of the company or by external persons (such as
consultants, contractors, agents).

It is quite frequent, however, that the
violation of trade secrets committed by an employee of the company owning the
confidential business information results in a more severe punishment than that
provided for the same offence in other cases (i.e., in Belgium, Greece and
Spain).

Table A14.2
below provides a summary of the main conducts concerning trade secrets
violation and the related punishment provided for under the legal systems.

Table A14.2 – Criminal penalties applying to trade secrets misappropriation

Country || Offender || Conduct || Penalties

Austria || Whoever || Disclosure or exploitation of trade or business secrets || Up to six months imprisonment; up to one year if the conduct is committed with the purpose to obtain a pecuniary advantage or to cause harm to the owner or monetary penalties

Spying out trade or business secrets for their exploitation by somebody else or disclosure || Up to two years imprisonment OR monetary penalties

Spying out trade or business secrets for their exploitation abroad || Up to three years imprisonment AND monetary penalties

Belgium || Whoever || Communicating in bad faith manufacturing secrets appropriated  during the (past) employment with the owner || From three months up to three years imprisonment AND monetary fine from Euro 50 to 2,000.00

Bulgaria || || There is no specific criminal provision concerning violation of trade secrets. However, depending on the characteristics of the conduct, the offender may be charged with more general offences, such as business bribe or computer crimes ||

Cyprus || Whoever || Disclosure of trade secrets || Imprisonment up to one year OR monetary fine up to Euro 1,275.00

Disclosure of information protected by professional secrecy involving trade secrets || Imprisonment up to six months AND/OR monetary fine up to Euro 1,700.00

Czech Republic || Whoever || Acts of unfair competition infringing trade secrets and causing damage in or in excess of Euro 2,000.00 to other competitors/consumers or providing someone with unjustified benefit in the same or greater amount || Monetary fine up to Euro 1.5 Million\*

Denmark || Whoever || Unauthorized misuse or appropriation of trade secrets ||  Imprisonment up to 1 year and 6 months OR monetary fine

Serious violations such as appropriation of trade secrets in a contract of service or in the performance of assignments || Imprisonment up to six years

Estonia || Whoever || Unauthorized disclosure or use of business secret learned by reason of the professional or official duties with the purpose of causing damage || Imprisonment up to one year OR monetary fine

Finland || Whoever || Violation of a business secret: disclosure or use of trade secrets known by reason of the employment, position or other lawful activities to obtain financial benefit or to injure the owner || Imprisonment up to two years OR monetary fine

Misuse of trade secrets obtained or revealed through an unlawful act || Imprisonment up to two years OR monetary fine

Business espionage: Unlawfully obtaining information regarding trade secrets || Imprisonment up to two years OR monetary fine

France || Whoever || Revelation of manufacturing secrets (only employees or directors) || Imprisonment up to two years AND monetary fine of Euro 30,000.00

Theft (for instance, of carriers or materials containing trade secrets), breach of trust || Imprisonment up to three years AND monetary fine of Euro 375,000.00

Germany || Employees || Unauthorized communication of trade or business secrets that the offender was granted access to for the purpose of obtaining financial advantage or injuring the owner || Imprisonment up to three years OR monetary fine. Imprisonment up to five years if aggravating circumstances occur

Whoever || Unauthorized acquiring or securing trade or business secrets or using thereof || Imprisonment up to three years OR monetary fine. Imprisonment up to five years if aggravating circumstances occur

Greece || Whoever || Copying, printing, using, disclosing or in any way violating data or computer programs constituting secrets of an enterprise || Imprisonment from three months up to one year. Imprisonment from one year to five years if the offender is in the service of the owner and the secrets are of great financial significance

Employees || Unauthorized communication to third parties of secrets that the offender has known by reason of his employment to obtain financial advantage or to  cause a  damage to the owner; Unauthorized use of the information so obtained || Imprisonment up to six months AND monetary fine up to Euro 8.80

Hungary || Whoever || Illegally obtaining, using, communicating or publishing trade secrets for financial gain or causing pecuniary disadvantage to others || Imprisonment up to three years

Ireland || Not applicable || ||

Italy || Whoever || Disclosure or use of  any information concerning scientific discoveries or inventions or industrial applications that is intended to remain secret known by the offender by reason of his status, function, job or art, to obtain a profit || Imprisonment up to two years

Latvia || Whoever || Revelation of non-disclosable information other than a state secret; Unauthorized acquisition and disclosure of commercial secrets || Imprisonment up to five years OR monetary fine

Lithuania || Whoever || Unlawful acquisition of commercial secrets or communication to third persons; Disclosure of information that the offender was entrusted with by reason of his employment || Imprisonment up to two years or fine (up to 18 825 euro) or restriction of liberty or community service.

Luxembourg || Employees || Use or disclosure, during the employment or within two years after its expiration, trade or manufacturing secrets known by reason of the job to obtain financial advantage or to cause damage to the owner || Imprisonment from three months to three years AND monetary fine from Euro 251 to 12,500.00

Malta || || There is no specific criminal provision concerning violation of trade secrets. However, depending on the characteristics of the conduct, the offender may be charged with more general offences, such as fraud. ||

A person in a particular capacity || Fraud: misappropriation or disclosure of information by which is derived an economic benefit || Imprisonment up to 2 years AND/OR monetary fine up to EUR 46,587.47

Netherlands || Employee || Intentional disclosure of confidential information that may harm the owner || Imprisonment up to six months AND/OR monetary fine up to Euro 19,500.00

Poland || Whoever || Disclosure or exploitation of trade secret in breach of confidential duties that causes substantial damage to the owner; Use of information illegally acquired or disclosure to third persons || Fine (up to Euro 260,000.00\*), restriction of liberty or imprisonment up to two years.

Portugal || Whoever || Use or disclosure to third parties of secrets that the offender knows by reason of his status, job, profession or art || Monetary fine (administrative offence)

Romania || Whoever || Disclosure, acquisition or use of trade secrets without the consent of the owner, as a result of an action of commercial or industrial espionage || Imprisonment from six months up to two years OR monetary fine from Euro 570 to 5,000.00\*

Disclosure of data or information not intended to be publicly known by a person who knows it by reason of his employment, provided that the offence is likely to cause damages || Imprisonment from two up to seven years; Imprisonment from six months to five years if the disclosure is made by another person

Slovakia || Whoever || Spying out trade secrets with the intention to disclose them to unauthorized persons || Imprisonment from six months up to three years; Imprisonment from seven to twelve years if aggravating circumstances occur

Slovenia || Whoever || Disclosure of trade secrets; Providing unauthorized third parties with access to trade secrets; Collection of trade secrets with the purpose of delivering them to unauthorized persons; Unlawful obtainment of trade secrets with the purpose of delivering them to unauthorized persons || Imprisonment up to three years; Imprisonment up to five years if the information is of particular importance

Spain || Whoever || Acquiring data, documents, media and other objects to discover trade secrets; Disclosure, revelation or communication to third parties of the discovered information || Imprisonment from two up to four years AND monetary fine; Imprisonment from three to five years AND monetary fine in case the secrets are disclosed

Diffusion, disclosure or communication of trade secrets in breach of duties of confidentiality || Imprisonment from two up to four years AND monetary fine, in case the information is disclosed in breach of confidentiality

Sweden || Whoever || Unauthorized access of trade secrets as business espionage || Imprisonment up to two years OR monetary fine; Imprisonment up to six years in case of information of significant importance

Acquiring trade secrets knowing that the person who made it available accessed the trade secret through acts of business espionage || Imprisonment up to two years OR monetary fine; Imprisonment up to four years in case of information of significant importance

U.K. || Not applicable || ||

\* Monetary penalties are expressed in local currency and converted to Euro for the reader’s convenience

Generally, punishment of the offender is by
imprisonment, even though he or she may also be charged, either in addition to
that or alternatively, with monetary penalties: see Table A14.3 with
penalties that shall apply for the main offence (for instance, unauthorized
disclosure/use of trade secrets).

Table A14.3 – Penalties[646]

|| 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

Imprisonment OR monetary penalties || P || || || P || P || P || P || P || || P || P || || || || || P || || P || || P || || || P || P || || ||

Imprisonment AND monetary penalties || || P || || || || || || || P || P || || P || || || || || P || || || P || P || || || || || ||

Imprisonment ONLY || || || || || || || || || || || || || P || || P || || || || || || || || || || P || P ||

Monetary penalties ONLY || || || || || || || || || || || || || || || || || || || || || || P || || || || ||

Hungary, Italy, Slovakia and Slovenia only
provide for the imprisonment of the offender.

In most of the Member States trade secrets
infringements are punished with imprisonment up to a term of two-three years.
There are a few exceptions: in Denmark the offender may be charged with up to
six years imprisonment, provided that serious violations have taken place; in
Slovenia imprisonment may be up to five years when the acts carried out by the
offender concerns information of particular importance. Under the Swedish Act
on the Protection of Trade Secrets, terms of imprisonment of up to six years
are foreseen for cases of business espionage and up to four years for the
unlawful acquisition of trade secrets of significant importance.

With respect to the extent of punishment,
the Czech Republic is the state where the heaviest fines apply: under Czech
law, the infringer may be punished with a fine up to 1.5 Million Euro (in the
Czech Republic, the infringer shall be punished with to up 3 years
imprisonment, the mentioned statutory fine or forfeiture of property).

A14.3.
Litigation and enforcement[647]

Criminal court proceedings present a
certain degree of consistency in Member States, in line with the more uniform
legal background existing in criminal procedure. However, differences exist for
trade secrets misappropriation: proceedings can be initiated ex officio
by the public prosecutor in Belgium, Bulgaria, the Czech Republic, Cyprus,
Estonia, France, Hungary, Lithuania, Slovakia, Slovenia and Sweden; while in
others commencement of criminal proceeding is ex parte by the aggrieved
person e.g. Austria, Denmark, Finland, Germany, Greece, Italy, the Netherlands,
Poland, Portugal, Romania and Spain.

In certain cases, if the public prosecutor
dismisses the case, private prosecution may be pursued. Differences among
Member States are minimal. Czech Republic, Lithuania, Poland and Slovakia
provide for thresholds on the damages caused as a condition for criminal
prosecution.

Generally (except for Austria, Cyprus,
Germany, Slovenia), claims for compensation may be filed within criminal
proceedings. In any cases, the aggrieved party or the person harmed by the
offence may nevertheless separately file a civil lawsuit for recovery of
damages suffered as a consequence of the offence.

When a trial is commenced, reportedly the
public prosecutor is not subject to special requirements regarding the type of
evidence brought before the Court to prove the offence. In some jurisdictions
(Cyprus, Finland, Italy, Lithuania, Malta, Sweden and the UK), general
principles of criminal procedure require the prosecutor to bring evidence to
the Court that the offender committed a trade secret violation "beyond any
reasonable doubt". It is for the prosecutor to provide evidence to
demonstrate that an offence occurred. According to Baker & McKenzie, “[t]his
may be considered the main reason why criminal jurisdiction is not frequently
activated in many countries, since it is seen as a hazardous way of protection,
because of the high standard of proof required.”[648]

Thus, injunctions and orders to seize or
search are widely available to the prosecutor in the course of the proceedings,
except that precautionary measures are not available in Austria, Latvia and
Romania. Only a few jurisdictions (Bulgaria, Greece, Poland, Portugal and
Slovakia) provide the aggrieved person with the power to apply for an ex
parte order in this respect, as criminal proceedings are generally
understood as a matter of public policy where the participation of individuals
is limited.

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

Introduction

In principle, there is tension between, on
the one hand, the principle that the truth should be revealed as much as
possible in litigation and, on the other hand, the desire not to disclose
particular information during legal proceedings[649].

This tension appears prominently in the
case of litigation concerning the misappropriation of a trade secret. Secrecy
of information is often at risk during legal proceedings, whether of civil or
criminal nature. At the same time, national procedural rules are not always
adapted for the preservation of the secrecy of information during or after
litigation concerning the misappropriation of trade secrets. It has also been
observed that the way in which trade secrets are preserved in litigation
practice is very much judge-made law and differs from country to country[650].

Thus, trade secrets may end up being
disclosed to the other party or to the public and this fact will have a
chilling effect on litigating to seek redress in case of misappropriation of
trade secrets, in particular in cross-border scenarios. Hogan Lovells (2012)
identified this issue as a problem in the following terms (as regards Belgium)[651]:

“Although laws are in place to protect trade
secrets, plaintiffs in Belgium face serious problems in enforcement. The
plaintiff must usually describe his trade secret in his pleadings and can be
forced by the court to file documents describing the trade secret. Court hearings
(and decisions) are public, again leading to possible further disclosure of the
trade secret. The court must also describe the trade secret in its judgment
when it issues a cease and desist order (injunction). Although the court can
decide that some confidential information should not be disclosed in the
decision in order to limit public disclosure22, this is not the
usual practice and cannot be relied upon. The enforcement system in Belgium
does appear to work against the interests of the holder of a trade secret and
may discourage litigation. Preventing further disclosure of the trade secret is
usually the plaintiff's main aim in litigation as damages may not be an
adequate remedy. A system which requires further disclosure of the trade secret
to bring a successful claim cannot be attractive to most plaintiffs.

22 See, for example, Brussels Court of
Appeal, 20 June 2008, ICIP 2008, p.566 where the serotypes of GSK's vaccine
were blanked out.”

The Baker & McKenzie study also
outlined that “the main factor that hinders enforcement of trade secrets in
Court derives from the lack of adequate measures to avoid trade secrets leakage
in legal proceedings”[652]
It goes by saying that “the lack of effective measures for the protection of
trade secrets during court proceedings, with the consequent risk of losing
control over trade secrets, makes recourse to legal actions often unappealing
for trade secrets owners.”[653]

This Annex will present the risks to the
preservation of secrecy when litigating to defend a trade secret and the
existing safeguards in procedural rules. It will focus on civil litigation
rather than criminal litigation. Three main situations will be addressed as
regards civil litigation: (1) the filing of the application; (2) the production
of evidence; and (3) the publicity of judicial proceedings. Figure A15.1
summarises how the litigation rules affect the problems described in Section
2.2.3 of this Impact Assessment.

Figure A15.1 –
Summary of how litigation rules affect the problems described in Section
2.2.3

(1) Filing of the application.

The risk

When initiating a civil case for the
misappropriation of a trade secret, the plaintiff will file an application
describing the facts (i.e. the misappropriation), the consequences thereof
(e.g. the prejudice suffered) and the requested measures (e.g. a request for an
injunction, the award of damages etc.). This application is served to the
defendant (i.e. the alleged misappropriator). It must be sufficiently detailed
for the alleged misappropriator to defend his position and for the judge to
understand the case.

As explained by Baker and McKenzie, “[t]his
issue is key, because typically the plaintiff must substantiate its claims by
disclosing the allegedly infringed trade secret”[654] The plaintiff will most
likely need to describe in the application what the trade secret at stake is
about, so as to be in a position to claim that the misappropriation took place.
Depending of the circumstances, the plaintiff will have a certain margin of
manoeuvre as to the extent of detail of the information to be disclosed. In any
case, this choice is not without consequences: on the one hand, if the
plaintiff chooses to disclose minimal information about the trade secret, he
runs the risk to weaken his case; on the other hand, if the plaintiff chooses
to disclose a great detail of information about the trade secret, he runs the
risk to disclose to the defendant more confidential information than was
actually misappropriated (in particular in those cases where the plaintiff does
not know the extent of the information misappropriated by the defendant) and
would be needed to sustain his case.

Existing safeguards

Courts could require the plaintiff to
submit additional evidence (see next point) and safeguards to preserve the
confidentiality of the trade secret would apply in that context.

(2) Production of evidence.

The risk

In case of civil litigation on the
misappropriation of trade secrets, the national rules on the production of
evidence applicable to civil proceedings would apply: in common law countries,
the disclosure rules; in continental countries, each party may ask for certain
documents/evidence to be presented by the other party when such evidence lies
in the control of that party. These rules apply both to plaintiff and defendant.

The application of those rules could imply the
need to disclose trade secrets to the other party, either by the plaintiff or
by the defendant. In particular, the judge may require the plaintiff to
describe in detail the trade secret at stake, if necessary to prove its
misappropriation. As seen above, this may deter the plaintiff from undertaking
any legal action in the first place. But since those rules play both ways, bad
faith plaintiffs could also try this way to obtain trade secrets from defendants
(including fishing expeditions), therefore abusing the litigation rules[655].

Existing safeguards: the TRIPS Agreement
and EU rules

The need to protect confidential
information (including trade secrets) in the context of intellectual property
related litigation enshrined in the TRIPS Agreement, as far as civil and
administrative procedures are concerned[656].

Article 42 of the TRIPS Agreement, in
relation to fair and equitable civil and administrative procedures, requires
the contracting parties to ensure that those procedures “provide a means to
identify and protect confidential information, unless this would be contrary to
existing constitutional requirements.” This general principle is further
developed in Article 43 of the TRIPS Agreement as regards evidence. This
Article, similarly to Article 6 of Directive 2004/48/EC, allows judicial
authorities to order the submission of evidence by any of the parties, “subject
in appropriate cases to conditions which ensure the protection of confidential
information.” Similarly, Article 34(3) of the TRIPS Agreement also
integrates this principle in relation to civil proceedings regarding patent
infringements. Article 34 of the TRIPS Agreement shifts the burden of proof in
a particular case: when the subject matter of the patent is a process for
obtaining a product, the judicial authority may order the defendant to prove
that the process to obtain an identical product is different from the patented
process. However, paragraph 3 of that Article provides that “the legitimate
interests of the defendants in protecting their manufacturing and business
secrets shall be taken into account.”

This issue has been addressed in general
terms only by EU legislation in the context of litigation regarding
infringements of intellectual property rights. Directive 2004/48/EC provides
for procedural safeguards in this regard. Article 6, as regards the production
of evidence, provides that the competent judicial authorities may order the
opposing party to present relevant evidence, “subject to the protection of
confidential information.” Similarly, Article 7, on measures to preserve
evidence, also empowers judicial authorities to order provisional measures to
preserve relevant evidence in respect of the alleged infringement, “subject
to the protection of confidential information”.

However, contrary to the TRIPS Agreement,
the EU legislation on enforcement of intellectual property rights only apply to
infringements of formal intellectual property rights: i.e. to the exclusion of
trade secrets.

In any event, neither the TRIPS Agreement
rules, nor the EU rules on infringement of intellectual property, provide any
guidance as to how to implement those principles on the protection of
confidential information during litigation.

Existing safeguards: national
rules/practice

There are safeguards in some Member States
to preserve the confidentiality of trade secrets. For instance:

–
BE: in Belgium, courts can adopt measures to
protect trade secrets. In particular, In particular, confidential elements can
be blanked out and courts can also rule than only certain persons/services
within the plaintiff’s or defendant’s company are allowed to have access to the
documents containing the trade secrets[657].

–
BG: in Bulgaria, the Supreme Administrative
Court has consistently held that trade secrets of a party shall not be
disclosed to other parties of a dispute even when they represent evidence in
court[658].

–
FR: during pre-trial proceedings, French courts
may protect a party’s trade secrets by restricting the access to the information
by the defendant - e.g., only court’s experts and the parties’ counsel may
access the information - and excluding information from written reports by not
mentioning it or by putting it into sealed enveloped not accessible to the
parties[659].

–
IT: in Italy, in cases where a party needs to
protect its confidential information from being accessed by the other party, it
may require the court to limit the access to the adverse party’s lawyers and
consultants only or to limit the access to certain information only – full
information would remain available to the court and its experts only[660].

–
NL: in the Netherlands, courts developments
resulted in requiring the disclosure of the relevant information to a neutral
person under an obligation of confidentiality[661], restricting
access to the relevant information on file with that neutral person to only the
lawyers of the parties[662],
or allowing the inspection of seized documents only by a third party[663]. There is
also a practice in the Netherlands with a view to protect trade secrets in the
context of proceedings dealing with patent infringements. If the defendant can
convince the court that there is an interest in not disclosing steps (to the
plaintiff) which are no relevant to the patent, the court can appoint an expert
(who is under a secrecy obligation) to review the relevant evidence:

“Under Dutch law, a party who wishes to
obtain proof of a particular fact in order to assess the changes of success in
a claim can request the court to organize a provisional witness hearing. In a
case concerning a process patent, the patentee requested a provisional witness
hearing for the purpose of hearing the individuals at the alleged infringer’s
company who were responsible for the manufacturing process in question. The
alleged infringer claimed that such a hearing would necessarily result in these
people disclosing trade secrets. The court’s obvious solution was, firstly, to
decide that it would see the questions to be put to the witnesses beforehand,
in order to avoid the operation becoming a fishing expedition and, secondly, to
order that particular steps be reported only to an expert under an obligation
of secrecy, in order to avoid any unnecessarily disclosure.7 If it
appeared that no satisfactory protective measures could be taken and that the
preliminary witness hearing would amount to a fishing expedition the court
would have the possibility to deny the request for the hearing on the grounds
of abuse by the patentee of his right to request such a hearing.8

7
District Court of The Hague, September 27, 1996, docket no. 96.310 and 3 June
1998 docket nos. 96/1455 and 96/1471 – Allied Signal/DSM.

8 See for
the basic rule: Hoge Raad 19 February 1993, 1994 Nederlandse Jurisprudentie 345
– Van de Ven/Pierik c.s.. See for the application of this rule in a patent
case: District Court of Arnhem (rechter-commissaris) April 19, 1984, 1986
Bijblad bij de Industriele Eigendom 71 – Dupont/Enka.”[664]

–
In the United Kingdom the parties may agree or
apply to the court to ensure that certain information to be revealed during the
pre-trial disclosure procedure remains confidential. The parties may enter into
a contractual agreement whereby the parties agree that certain information may
remain confidential or only be disclosed to legal counsel or where the parties
do not reach such agreement, a party may unilaterally apply to the court
requesting that confidential information is not disclosed to the other party
during the proceeding. Requests for restriction of disclosure are at the
discretion of the court[665].

(3) Publicity of judicial proceedings.

The risk

The inherent publicity of judicial
proceedings (civil proceedings in all EU Member States are public) could also
result in the disclosure of trade secrets, in this case to the public.

–
Firstly, hearings are often public. While
national procedural laws normally include general provisions which allow courts
to exclude the public from the hearing for reasons relating to security, public
order and decency, there do not necessarily apply to trade secrets litigation.

–
Secondly, publicity of judicial decisions and
documents may lead to the disclosure of a trade secret. Judicial decisions
may describe the misappropriated trade secret in question when explaining the
reasons for the decision[666];
and in some countries other judicial documents (including applications) may be
accessed by third parties. According to Baker & McKenzie (2013), in most
countries, pleadings and in general court documents are public and potentially
accessible by anyone[667].

Existing safeguards: national rules and
practices

Nevertheless, there are procedural
safeguards in several EU Member States with a view to prevent the disclosure of
trade secrets in this context.

Concerning hearings, a party has the express
right to request the court to order that the entire proceeding or a part
thereof is to be heard in private to preserve the secrecy of trade secrets in
some Member States[668].
However, according to Baker & McKenzie (2013), this seems to rarely happen
in practice and there would be no case law on this point[669].

–
BG: in Bulgaria private hearing is specifically
provided for cases related to “protection of trade, manufacturing, invention
or tax-related secrets” if public disclosure may impair a party’s
legitimate interest. When publicity is precluded, only the parties, their
attorneys, experts and witnesses are allowed to enter into the court room and
are subject to a statutory obligation not to disclose subject matter and
content of the relevant proceeding (breach of such obligation entails liability
for compensation)[670].

–
DE: in Germany, courts can exclude the public
from the hearing for reasons relating to trade secrets (section 172 no. 2 of
the German Courts Constitution Act [Gerichtsverfassungsgesetz -GVG]). Besides
the exclusion of the public if trade secrets are to be discussed, legal
practice has developed the so called “Düsseldorf Procedure” (originally
developed for patent law claims but likely applicable to trade secrets cases),
which consists in a procedure where courts order independent proceedings for the
preservation of evidence as an interim injunction handed to the defendant
together with the statement of claims so that there is no chance to destroy
evidence. Evidence is then examined exclusively by authorized experts and
attorneys bound to confidentiality. The parties do not have access to the
confidential information[671].

–
DK: in cases involving trade secrets in Denmark,
the court may order that the public be excluded from the proceeding according
to Section 29 of the Danish Administration of Justice Act[672].

–
EE: in Estonia, in-camera examination can be
ordered for the protection of trade secrets if the interest in a public hearing
is not deemed to be greater than the commercial interest in protecting the trade
secret[673].

–
FI: Secrecy of information is protected by
excluding the public from proceedings. It is common practice to exclude the
public from proceedings which involve trade secrets. The exclusion may concern
only trade secret discussion or the entire proceeding[674].

–
FR: hearings in French civil proceedings are
normally public. The parties may, however, ask the judge to exclude the public
if confidential information needs to be discussed. Lacking the parties’
request, the hearing remains open[675].

–
HU: in Hungary, when the Court orders in-camera
examination, the parties are also prohibited from making copies of the minutes
of the hearing or of any document containing a trade secret. Examination of
documents containing trade secrets is subject to a declaration of
non-disclosure and special review procedures are established by the Judge[676].

–
IE: Irish courts can make a variety of orders
ensuring that the secret information is not further disclosed, including having
parts of the case heard in private[677].

–
LT: the public may be excluded from the hearings
in Lithuania[678].

–
LV: to prevent disclosure of secret information
during a proceeding, a Latvian court may, on its own initiative or upon a
party’s request, exclude the public if necessary to preserve secrecy of the
information of a party[679].

–
NL: the possibility for courts to hold in
camera hearings is explicitly provided for under Dutch law. A court can
order a hearing to take place behind closed doors in certain circumstances. One
such circumstance is where the requirements of due observance of privacy so
dictate, which, in the context of legal entities, means the protection of
confidentiality. There is also a statutory duty for litigants and experts not
to disclose to any third person the information they have obtained in those in
camera hearings[680].

–
PL: Polish courts may exclude the public from
the hearings to protect trade secrets during proceedings. Exclusion may be
ordered for a part or the entire proceeding, at the court’s own discretion or
upon a party’s request[681].

–
RO: in general, civil hearings are public in
Romania. However, the public can be excluded from courts’ hearing if public
discussions could harm public order, morality or the parties. In trade secrets
cases, a party may ask the court to exclude the public, if public discussion
could endanger that party’s interests[682].

–
SE: courts proceedings are public in Sweden.
However, the court may exclude the public from the proceeding to protect
confidential information under the Public Access to Information and Secrecy Act[683].

–
SI: hearings in civil proceedings are generally
public in Slovenia. However, the public may be excluded from the proceedings if
it is necessary for the purpose of protecting trade secrets of the parties[684].

–
SK: hearings in civil proceedings are usually
public in Slovakia. However, the court may ex officio or upon a party’s
request, exclude the public from the hearing in whole or in part if public
hearing of the case could endanger state, business, trade or professional
secrecy, important interest of the parties, or morality[685].

Concerning the documents held by courts,
judicial authorities have in general a duty to adopt adequate measures to
safeguard the secret information of a party, for example, by restricting access
to those documents which contain trade secrets only to the other party’s
attorney or to the court’s expert (in certain cases the confidential
information can be put under closed seals), or not disclosing certain
information in the court’s final decision (by blanking out the relevant
information in the decision and other court’s documents). However, according to
Baker & McKenzie (2013), such measures have proved to be of limited effect
to prevent the actual leak of confidential information during proceedings[686].

Conclusion

The Baker & McKenzie study concludes
that only Hungary (through in camera proceedings), Germany (through the
so-called Dusseldorf procedure) and the UK (by means of specific agreement
between the parties limiting the duty of disclosure) seem to have in place
effective procedural measures to prevent disclosure of trade secrets in the course
of civil proceedings.[687]

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

Cross-border dimension of litigation
on trade secrets misappropriation. Civil law cases
involving misappropriation of trade secrets in the EU are likely to have a cross-border
dimension: e.g. the misappropriated trade secret is used by a third party in a
different Member State (or in a third country); the "resulting
goods/services" are marketed in other Member States; the "resulting
goods/services" are imported (from a third country) into any Member State
etc. This type of cases are likely to become more frequent with the integration
of the internal market, the development of the internet, globalisation
generally etc. See, for instance, the selected cases reported in Section
A8.6 of Annex 8.

EU legal framework. At Union level different legal instruments have been adopted with
a view to ensure legal certainty for litigants in cross-border litigation in
civil and commercial matters, and in particular, in order to avoid
fragmentation of litigation. Some of them are relevant to litigation on the
misappropriation of trade secrets. Firstly, some EU legal instruments address
traditional private international law issues, such as: the question of the
applicable law (conflict of laws) regarding contractual (Rome I Regulation)[688] and non-contractual
obligations (Rome II Regulation)[689];
and the allocation of jurisdiction and recognition of judgments (Brussels I
Regulation)[690].
Secondly, EU law also addresses justice cooperation issues, such as cooperation
between the courts of the Member States in the taking of evidence in civil or
commercial matters[691].
These rules greatly contribute to facilitate cross-border litigation and the
cross-border recognition and enforceability of judgments.

Specific issues in relation to
cross-border civil law litigation on trade secrets misappropriation. This Annex will address some specific issues arising in relation
to the cross-border civil law litigation on trade secrets misappropriation:

–
A16.1. The question of the applicable law and
the application of more than one law;

–
A16.2. The cross-border recognition of
judgments, in particular injunctions and decisions on damages;

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

–
A16.4. Disputes involving defendants from
outside the EU.

Some of these issues have already been
raised in the context of infringements of intellectual property rights (where
the territorial nature of the intellectual property rights renders more
difficult an efficient enforcement in cases of cross-border situations) and may
serve as a proxy to examine these difficulties. In this context, it must be
acknowledged that trade secrets are often used as complements/supplements (and not
as an alternative) to intellectual property rights (mostly patents or designs,
but also copyrights). As a result, it often happens that a claim on a patent or
design infringement also concerns an alleged trade secret(s) misappropriation[692].

A16.1.    The
question of the applicable law

Rome II Regulation (Regulation (EC)
864/2007) governs the law applicable to legal disputes on non-contractual
obligations in the EU[693].
Therefore, this Regulation would be applicable to civil litigation on the
misappropriation of a trade secret between a trade secret owner, on the one
hand, and a third party having allegedly misappropriated the trade secret, on
the other hand[694].

Within the torts/delict chapter of the
Regulation, Article 6 applies to acts of unfair competition, which would
encompass litigations on trade secret misappropriation. Paragraph 2 of that
Article indicates that where an act of unfair competition affects exclusively
the interests of a specific competitor (as opposed to the interests of
consumers)[695],
the general rule for torts/delicts (cf. paragraph 1 of Article 4) must apply:

“the law applicable to a non-contractual
obligation arising out of tort/delict shall be 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”[696].

By derogation to the general rule of
paragraph of Article 4, other situations are also possible[697]. Firstly, the parties to
the litigation may agree to submit the dispute to the law of their choice (cf.
Article 14). Secondly, there are rules of secondary connection in the following
two cases:

–
where both the plaintiff and defendant have
their habitual residence in the same country at the same time when the damage
occurs, then the law of that country shall apply (cf. paragraph 2 of Article
4); and

–
where it is clear from all the circumstances of
the case that the tort/delict is “manifestly more closely connected with a
country other than that indicated in paragraphs 1 and 2, the law of that other
country shall apply.” The Regulation explains that a manifestly closer
connection with another country might be based in particular on a pre-existing
relationship between the parties, such as a contract, that is closely connected
with the tort/delict in question (cf. paragraph 3 of Article 4).

The case of diversity of applicable laws. The general rule of Article 4(1) of Rome II may lead to a fragmentation
of claims. The criterion for the choice of law (place “where the damage
occurs”) implies that if a misappropriated trade secret is exploited in
more than one Member State, there will very probably be more than one country
where damages occur[698].
The Commission proposal for the Rome II Regulation acknowledged that in
international situations, anti-competitive conduct “commonly has an impact
on several markets and gives rise to the distributive application of the laws
involved.”[699]
The Commission also stated in relation to Article 4(1) that: “[t]he rule
entails, where damage is sustained in several countries, that the laws of all
the countries concerned will have to be applied on a distributive basis,
applying what is known as “Mosaikbetrachtung” in German law.”[700]

In this case, it would be necessary to
perform a different legal analysis for each of the countries concerned as the
law applicable would be different.

This fragmentation of claims is worse for
trade secrets (compared to industrial property rights) given the absence of
harmonised law at EU level. This means that trade secret protection, when more
than one legal system is involved, is ultimately no stronger than the weakest
link in the chain. In the words of a scholar: “Patents for the same
invention benefit from the international principle of mutual independence under
Art.4bis of the Paris Convention, so that revocation in one country of the
Union has no effect on patents for the same invention elsewhere, but trade
secrets have no such international firewall to protect them from rogue judgments.
Once a secret has been made public, whether wrongfully or pursuant to some kind
of judgement, no matter where in the world, it will for ever have lost
essential “quality of confidence” which justified its protection in the first
place. This is not a negotiable question of res iudicata but an
incontrovertible fact, which the law can try to avert, but can do nothing to
reverse one publication has happened.”[701]

The potential fragmentation may be
eliminated if any of the other alternative criteria is applicable. In such a
case, there could be in a single body of law governing multi-jurisdictional
claims. Two different situations appear:

(i) Article 4(2). If both the plaintiff and defendant have the habitual residence in
the same country at the time in which the damage occurs, only one single body
of law will apply: that of the place of residence of the parties.

(ii) Article 4(3). The other alternative criterion (the country with which the tort is
manifestly most closely connected[702])
may also be used. If there was a previous contractual relationship between the
parties[703],
the applicable law may be derived from the contract[704]. Despite the
advantages of Article 4(3) in that its application leads to a single applicable
law governing the claims, however, from the perspective of a trade secret owner
who has his trade secret misappropriated by an unconnected third party (i.e. no
pre-existing relationship between the parties), this criterion does not appear prima
facie as particularly relevant compared to the general rule[705]. In any event, the
Commission stated in this regard that: “[s]ince this clause generates a
degree of unforeseeability as to the law that will be applicable, it must
remain exceptional.”[706]

The case of a single applicable law. While the diversity of applicable laws may lead to problems, the
question remains, in case a single law is applicable, whether that law will be
effective in protecting the trade secret against misappropriation. The conflict
of laws rule cannot provide a reply to this question and requires that the
issue is examined at the level of substantive law.

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

Existing regime: exequatur needed. Brussels I Regulation provides for the cross-border recognition
and enforcement of judgements. The rules currently in place (Regulation (EC) No
44/2001) require a formal declaration of enforceability in a special procedure
(exequatur) prior to enforcement in the Member State addressed. This may
create an obstacle to cross-border recognition and enforcement of judgment[707].

Indeed, EU companies do not seem to be
convinced about the recognition and enforcement of judgments in practice.
According to the replies to the 2012 Industry Survey[708], out of 57 companies
which litigated trade secrets within the EU, only 10 (17,5%) were successful in
enforcing an order from a national court to stop the use of misappropriated
trade secrets in other Member States while 16 of them (28%) claimed not to be
successful in all Member States where they tried[709]. The rest of the
respondents preferred to start separate legal actions or did not try to enforce
the order in another Member State (either because of cost or of uncertainty).
See Figure A16.1.

Figure A16.1 –
Enforcement of judicial orders in other Member States. Source: 2012 Industry
Survey.

The abolition of exequatur as of 2015. In 2012, a recasted version of Brussels I Regulation was adopted
by the European Parliament and the Council (Regulation (EU) No 1215/2012).
According to Chapter III of the recasted Brussels I Regulation, a judgment
given in a Member State shall be recognised and enforceable in any other Member
State without the need for any special procedure: i.e. the formal declaration
of enforceability is no longer necessary. As a result, “a judgment given by
the courts of a Member State should be treated as if it had been given in the
Member State addressed”[710].
Regulation (EU) No 1215/2012 will apply as of 10 January 2015.

Recognition and enforcement of
judgements: injunctions and decisions on damages. This recognition and enforcement of judgements applies, inter
alia, to injunctions in cases concerning a misappropriation of a trade
secret (e.g. a court order requiring the misappropriator not to use the trade
secret) and to decisions on damages.

Limits to recognition and
enforcement: ex parte measures. There are
however limits to the recognition and enforceability of judgements[711]:

–
In the case of provisional injunctions (and even
if in principle the court could adopt cross-border injunctions), such
provisional orders do not benefit from automatic recognition and enforcement if
they were issued without the defendant having been heard and without the order
having been served on him prior to enforcement[712].

–
However, ex parte injunctions do benefit
from the automatic recognition and enforcement regime if they are given on the
merits, not as provisional relief.

Limits to recognition and
enforcement: the case of excessive punitive damages. Brussels I Regulation allows the court of a Member State to refuse
the recognition/enforcement of a judgment given by a court of another Member
State if contrary to public policy[713]
(i.e. where the substance of a foreign judgment is at variance to an
unacceptable degree with the legal order of the Member State of recognition/enforcement)[714]. In theory, this could
affect cases where excessive punitive damages[715] are granted[716]. Nevertheless, the public policy exception has rarely been used in
practice[717] and that this issue may be more theoretical than practical. There are no instances known in the Union of excessive punitive
damages, which is a problem more likely to arise in respect to judgments issued
in third State jurisdictions.

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

Arbitration in international trade
and as regards intellectual property matters.

Recourse to arbitration is particularly
important in international commerce. It is a way for companies to resolve their
disputes out-of-court, which has certain advantages over court litigation,
notably in terms of confidentiality, speed and informality of proceedings[718]. As stated in the
impact assessment on the review of Brussels I Regulation:

"The effectiveness of arbitration is of
key importance for a significant number of notably larger companies and
multinationals which use this method of dispute resolution on a regular basis.
Surveys show that about 63% of large European companies prefer arbitration over
litigation to resolve their business disputes; this is mainly due to the confidentiality
and speed of arbitration proceedings74. Where they have a choice,
European companies prefer to arbitrate within the EU: […] [74 Oxford
Study on Civil Justice Systems in Europe, question 48, 49; 95% of the companies
questioned have more than 250 employees.]"[719]

Arbitration in the field of intellectual
property (including trade secrets) is particularly developed and encouraged by
the World Intellectual Property Organisation (WIPO)[720]. Arbitration is
largely used in the case of technology/know-how transfer through licensing
agreements and particularly recommended when the licensee is in third
countries. An industry report about managing the threat of trade secret theft
in extended supply chains (in foreign countries) stated the following:

“[…], some experts recommend specifying that
trade secret and other IP disputes are to be resolved through confidential
mediation or arbitration in a convenient and trusted jurisdiction rather than
litigation in the local courts. As one practitioner has warned, ‘in many offshore
jurisdictions trade secret litigation can lead to the open disclosure and
consequential loss of the trade secrets at issue if the legal proceedings are
not closed’. Moreover, mandatory mediation or arbitration can sometimes help
avoid the delays, inefficiencies, and risk of bias and corruption that often
plague litigation in foreign countries.”[721]

Recognition of arbitration decisions.

The recognition of arbitration decisions
within the EU, whether such decisions were issued by arbitration tribunals in
the EU or in third countries, falls outside the rules of Brussels I Regulation.
The recognition of arbitration decisions is ruled by national law within the
framework created by the 1958 New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards, which requires the courts of the
Contracting States to give effect to a private agreement to arbitrate and to
recognize and enforce an arbitral award made in another Contracting State. All
EU Member States are party to that Convention and it is also widely ratified
throughout the rest of the world.

In practice, it appears that parties seem
to be able to by-pass arbitration awards. See for instance Case 6 in Section
A8.6 of Annex 8. In this case a third country company having
misappropriated trade secrets from an EU company managed to undertake business
in the EU despite an arbitration decision preventing it from doing so. The
arbitration decision was awarded in Singapore, which is a Contracting State to
the 1958 New York Convention.

Relation between arbitration
proceedings and court proceedings

There are some difficulties concerning the
relation between arbitration proceedings and court proceedings. There are
situations in which state courts may be requested to intervene in disputes
which have been submitted to arbitration. For instance, courts may be seized to
grant interim relief or to evaluate the validity of an arbitration agreement
(in the latter case, the party challenging the validity of the arbitration
agreement will usually request the court to decide also on the merits of the
case). This could lead to parallel proceedings and irreconcilable decisions
between courts and arbitral tribunals where the agreement is held invalid in
one Member State and valid in another[722].
As a result, there is a risk for abusive litigation tactics[723] which, considering the
importance of arbitration in relation to trade secrets and generally
intellectual property protection, could negatively impact on the protection of
trade secrets against misappropriation.

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

Misappropriators of trade secrets outside
the EU (e.g. a former licensee in a third country) could try to take advantage
of the misappropriation by exporting their "resulting goods/services"
to the EU (see for instance Cases 6 and 14 in Section A8.6 of Annex 8).

In those cases, litigation in the EU may
involve defendants situated outside the EU. This issue is not regulated by
Brussels I Regulation. Therefore, the capacity of EU trade secrets owners to
sue defendants from outside the EU before EU courts depends on the national law[724]. National rules on
jurisdiction for third country defendants vary widely between Member States,
leading to a situation where EU trade secret owners would have “unequal
access to justice in cases where the defendant is domiciled outside the
European Union.”[725]

This situation creates unequal conditions
for companies doing businesses in the EU:

"Companies from Member States which
handle access to courts restrictively in disputes with third country defendants
will usually incur higher business risk and higher legal costs than companies
based in Member States which grant generous access to their courts in these
circumstances. Not being able to litigate in a close jurisdiction has a negative
economic impact on companies, albeit one that is difficult to quantify:
claimants are not familiar with the foreign legal system, lack access to their
known and trusted lawyers and have the inconvenience of travelling and wasted
management time. Moreover, companies might not always get a fair trial and an
adequate protection of their rights before the courts of a third State. Such
problems can notably arise in countries where the judiciary cannot be
considered to be independent or is riven by corruption."[726].

In addition, the rules on the recognition
and enforcement of third country judgments are also regulated by national law.
This is not without problems:

"The absence of common rules in the EU
on the effect of third State judgments leads to a situation where such
judgments may enter the EU in some Member States and not in others. Some Member
States are very open to recognise and enforce third State judgments, others are
very strict, yet others do not recognise and enforce third State judgments at
all except in the event of a bilateral convention with the third State
concerned. This creates unequal protection of EU citizens and companies
against third State judgments, in particular when the third State court has
taken jurisdiction on the basis of exorbitant grounds of jurisdiction […] or on
the basis of grounds which violate the exclusive jurisdiction of Member States'
courts. It may also lead to market distortions."[727] (cf. ).

The Commission proposed, in the review of
Brussels I Regulation (Regulation (EC) No 44/2001), to address those issues[728]. However, this part of
the Commission proposal was not accepted by the European Parliament and the
Council. Hence, EU trade secret holders remain with a fragmented legal
framework in this regard[729].
It should be noted, however, that the Union started informal discussions at the
international level to remedy these problems.

Annex 17 –
Legal basis

Article 114 TFEU provides for the adoption
of

"measures for the approximation of the
provisions laid down by law, regulation or administrative action in Member
States which has as their object the establishment and function of the internal
market".

Hence, it allows for the adoption of EU
rules[730]
harmonising national legislation, provided that they are necessary for the
smooth functioning of the Internal Market. Concerning the legal protection of
innovation, this Article is the legal basis of Directive 2004/48/EC, which
provides for civil law remedies (and some related procedural rules) against the
infringements of intellectual property rights[731]. Article 114 TFEU
would also be applicable to the present case[732],
as far as the civil remedies in case of misappropriation are concerned,
including the prohibition of acts of misappropriation[733] and any ancillary
rules on the protection of confidential information during litigation[734] (see Policy Options 3
and 4).

Any rules on criminal offences and
sanctions (Policy Option 5) would require a different legal basis (Article
83(2) TFEU)[735],
and a separate legal instrument.

The policy options considered in this
impact assessment are those deemed to best resolve the hindrances/obstacles to
the Internal Market created by the different absence of a uniform and efficient
EU regime in this area[736].
The need to establish a sufficient and comparable level of redress across the
EU Internal Market in case of trade secret misappropriation is at the basis of
the intervention[737].
From an economic perspective, national rules in place contribute to the
creation of innovation-related inefficiencies as well as lower value of
innovation and higher costs for protecting it. This affects the Internal Market
in different ways, inter alia: rendering cross-border network R&D
and innovation less attractive and more difficult (because companies will be
reluctant to undertake innovation-related work with possible partners in other
Member States if the relevant rules against misappropriation of trade secrets
are unclear or differ significantly and will only do so if additional
investment in securitisation is guaranteed through the relevant network), which
leads to less efficient investment in R&D and innovation development in the
EU; creating a higher business risk in Member States with lower level of
protection with adverse effects on the whole of the EU economy as “resulting
goods” spread across the Internal Market and dissuading innovation-related
cross border activity. In addition, inefficient allocation of capital to
growth-enhancing innovation within the internal market will also appear: e.g.
increased expenditure on trade secrets protective measures so as to compensate
for the insufficient protection in some Member States, which could result in an
unproductive expenditure/misallocation of capital in certain activities within
the Internal Market.

The different national rules described
above offer an uneven level of protection across the EU. They contribute to
dissuading trade secrets misappropriation litigation outside the home Member
State, thus lowering the incentives to undertake any innovative-related
cross-border activity which would depend on the use of information protected as
trade secret. This disproportionately affects SMEs' ability to exploit the full
benefits of the Internal Market since they are less likely to be established in
every Member State. In contrast, they incentivise the use of misappropriated
trade secrets across the borders of the Internal Market and the “resulting
goods” that circulate freely within it further undermine and dissuade
investment in cross-border R&D and innovation and sustainable growth and
employment opportunities within the EU, undermining the EU2020 objectives.

Annex 18 –
Subsidiarity analysis

Necessity test.

According to the principle of subsidiarity
laid down in Article 5(3) of the TFEU, action on the EU level should be taken
only when the aims envisaged cannot be achieved sufficiently by Member States
alone and can therefore, by reason of the scale or effects of the proposed action,
be better achieved by the EU.

The problem addressed in this Impact
Assessment relate to fragmented legal protection of trade secrets across the
EU. The objectives of the initiative to address these problems (see Section
3) will not be achieved by Member States alone. This is shown by the
existing uncoordinated national legal approaches in this field (see Figure
3, in Section 2.2.2; and Annexes 9, 10, 12, 14 and 15). In addition,
national responses are necessarily limited in their geographical scope and
cannot be compared with or substitute a co-ordinated or systematic response on
the EU level.

EU action is particularly needed to
establish a legal framework which could protect the cross-border flow of
innovation-related trade secrets among research and business partners by
ensuring that the benefits of any misappropriation of such information are
minimised if not completely eliminated. This flow of information is paramount
for R&D but also for the exploitation of innovation in the EU (see Annex
1). Thus the inconsistencies between the different national regimes hinder
the functioning of the Internal Market. Achieving greater consistency in
measures on transparency across Member States and product sectors is central to
addressing the problems identified in this Impact Assessment. Yet such
consistency cannot be achieved by action taken solely on the Member State level.

In terms of stakeholders’ perception, 52%
of the respondents to the 2013 Public Consultation, support EU action on the
legal protection of trade secrets against misappropriation . Figure A.18.1
shows the extent of support within each specific category of stakeholders.
Companies, SMEs, professionals, business associations and research entities are
in general favourable. A vast majority of responding citizens sees no need for
EU action (respondents of the opinion that no action is required are mostly citizens
originating from Germany), and three out of the four trade unions who have
participated in the consultation find that no EU action is required, while the
other three are in favour of addressing the issue at EU level. Support is
higher for measures of civil law compared to measure of criminal law.

Figure A.18.1 – Stakeholders’ views on an EU initiative, 2013 Public Consultation.

Respondent profile || No. of respondents || EU should act || No EU action required || No opinion or no answer

All respondents || 386 || 52% || 41% || 5%

Citizens || 152 || 19% || 75% || 6%

Companies (including SMEs) || 125 || 80% || 12% || 6%

SMEs || 59 || 66% || 22% || 11%

Professionals || 35 || 48% || 40% || 11%

Business associations || 34 || 94% || 6% || 0%

Research entities || 19 || 57% || 31% || 10%

Trade unions || 4 || 25% || 75% || 0%

A second step in the reasoning on subsidiarity
is whether the protection of trade secrets against misappropriation should be
achieved by civil law or by criminal law.

An EU action providing for civil law
redress measures would fulfil the necessity test in this regard. At the same
time, such EU action would not establish any specific sui generis
monopoly/exclusive right on secret information but is rather limited to
providing legal redress to holders of trade secrets when those trade secrets
are misappropriated by third parties.

EU added value.

In terms of added value, harmonising
national rules on the legal protection of trade secrets against
misappropriation, at least in civil and commercial law, across the EU would
bring positive elements for trade secrets owners. This notably includes a comparable
level of legal protection ensured throughout the Union resulting in overall
better protection for trade secret owners (believed by 77% of the companies
which replied to the 2013 Public Consultation), easier cross border litigation
(believed by 54% of the companies which replied to the 2013 Public
Consultation), or the reduction of cost of protective measures for about a
quarter of EU companies (believed by 26% of the companies which replied to the
2013 Public Consultation). See Sections 5 and 6 below for a more
detailed assessment of impacts.

Harmonisation efforts are normally better
achieved by EU action than by Member States action. Experience in this field
shows that even when Member States are coordinated to a certain extent, e.g. by
the TRIPs rules (which in principle oblige all EU Member States), a sufficient
degree of substantive harmonisation of national rules has so far not been
achieved (see Section 2.3).

There could be additional added value in
harmonising this area at EU level from an international viewpoint:

–
(a) this would allow to provide for a coherent
implementation of the EU’s international obligations, notably Article 39 of the
TRIPS Agreement[738].
Indeed, this is one of the few areas covered by the TRIPS Agrement where there
is no specific EU law.

–
(b) to influence (by example), in the context of
trade negotiations, legislative developments in third countries having
currently a weak level of protection of trade secrets to the detriment of EU
companies active there.

Finally, providing for trade secret
protection at Union level would not be at odds with practice in third countries
having a federal structure, which either have federal legislation addressing
trade secrets or are considering doing so

–
in the US there are views calling for enacting a
civil law trade secrets act at the federal level[739];

–
in Switzerland there is federal law on this
issue[740];
and

–
in Canada there has been debate about it too[741].

This lack of harmonisation in the field of
trade secrets contrasts with the field of intellectual property rights, which
similarly protect innovation, that have largely been regulated at EU level (see
Annex 5).

Annex 19 – Detailed
policy options selected for examination

Policy Option 1. Status quo.

Cf. Baseline Scenario.

Policy Option 2. Provide information
on and raise awareness of the existing scope of protection of trade secrets and
available redress tools in case of misappropriation of trade secrets.

This option consists of

–
(a) preparing fact sheets including appropriate
information on the scope of legal protection (what can be protected as trade
secrets; when trade secrets are misappropriated, etc.); on the measures,
procedures and remedies available against trade secret misappropriation in each
Member State, as well as on the availability of arbitration/mediation
procedures. The fact sheets would be made available to interested users on a
website, which could be that of the EU IPR helpdesk[742] and/or the
European Judicial Network[743].
As a by-product, this option could also provide information on protective
measures, including contractual clauses[744];

–
(b) making stakeholders aware of the measures,
procedures and remedies currently available at national level to obtain relief
in cases of the misappropriation of trade secrets or to help preventing misappropriation
occurring (specific campaigns at EU and/or national level); and

–
(c) promoting the use of arbitration/mediation
procedures[745]
to solve disputes.

Policy Option 3. Harmonisation of
laws regarding the unlawfulness of acts of misappropriation of trade secrets.

This option consists in defining the scope
of protection of trade secrets against their misappropriation, by:

–
(a) defining trade secrets (i.e. information
which is not, as a body or in the precise configuration and assembly of its
components, generally known or readily accessible to persons within the circles
that normally deal with the kind of information in question, has commercial
value and has been subject to reasonable steps under the circumstances, by the
person lawfully in control of the information, to keep it secret); and

–
(b) establishing that certain acts of
acquisition, use and disclosure of trade secrets are unlawful (i.e. the willing
or negligent unlawful acquisition of the trade secret by theft, bribery,
misrepresentation, breach or inducement to breach a duty to maintain secrecy,
industrial espionage, and other unlawful practices; as well as the disclosure
or misuse of a trade secret by a person without the consent of the trade secret
holder, when such person was under a duty not to disclose it or misuse it or
when that person obtained knowledge of the trade secret following an act of
unlawful acquisition) in a way that is consistent with the TRIPS Agreement[746].

Under this option, Member States would also
be called to ensure that their national rules provide for measures, procedures
and remedies, available to trade secret holders, in case of misappropriation.

These national rules should include appropriate
and proportionate measures to preserve the confidentiality of trade secrets
during and after the legal proceedings, while ensuring that the conditions for
a fair trial are respected and the processing of personal data done in
accordance with EU law.

Under this option, the detailed
implementation of those measures, procedures and remedies would be left to
Member States, subject to a general requirement on Member States to ensure that
these measures, procedures and remedies are fair, equitable and proportionate,
and are applied in such a manner as to avoid the creation of barriers to
legitimate trade and to provide for safeguards against their abuse.

This option would also make clear that this
option does not interfere with whistleblowing obligations, with rules on the
disclosure of business secrets to public authorities pursuant to regulatory
obligations and with rules on the transparency obligations of public
authorities in this regard[747].

Policy Option 4. Harmonisation of
national civil law remedies against misappropriation of trade secrets.

Firstly, this option integrates Policy
Option 3 as regards the scope of protection of trade secrets against
misappropriation.

Secondly, Member States would be required
to establish minimum harmonisation (and principles-based) rules on civil law remedies
allowing to obtain relief in case of misappropriation of trade secrets.

In particular, these rules would address
the following issues:

–
(a) the availability of (interim and definitive)
injunctive relief allowing for the adoption of cease and desist orders
against third parties (i.e. irrespective of whether there is a contractual
relationship between the third party and the trade secret holder) so that they
are prohibiting from using/disclosing the trade secret or requested to stop
using/disclosing it. This option will not deal with the characteristics of
injunctions, such as regards their duration[748];

–
(b) the prohibition of imports of
“resulting goods” from third countries;

–
(c) the availability of corrective measures
allowing for: the seizure and destruction of goods made using misappropriated
trade secrets; and the destruction (or delivery up to the trade secret holder)
of documents, materials or files containing or implementing the misappropriated
trade secret;

–
(d) the availability of compensation
(damages) for the prejudice suffered when the violation of trade secrets
has been carried out in bad faith. The rules would ensure that judicial
authorities may calculate the damages on the basis of different options,
including the possibility to award "abstract damages", based on a
fictitious royalty fee[749].

Thirdly, Member States would be required to
establish minimum harmonisation rules on the preservation of confidentiality
of the trade secret during and after the litigation on misappropriation of
trade secrets, while ensuring that the conditions for a fair trial are
respected and the processing of personal data is done in accordance with EU
law. In particular, the rules would address:

–
(a) the protection of trade secrets included in
any document submitted by the parties[750]
or third parties (e.g. in reaction to a request to submit evidence) during the
judicial proceedings. The rules would require that the need to protect trade
secrets is taken into account by the court when ordering the production of
evidence and that appropriate measures are taken in that regard, such as the
following: examination of the document containing trade secrets would only be
possible for persons subject to a confidentiality obligation and no copies
could be made by the other party (or the parties if the trade secret was
disclosed by a third party); or the evidence is not disclosed to the other
party, but merely to their legal representatives and authorized experts (see
below on hearings);

–
(b) the carrying out of in-camera hearings, thus
excluding the general public from those hearings. The rules would also address
the possibility to carry out the hearings only in the presence of authorised
experts and the legal representatives of the parties, to the exclusion of the
parties themselves[751];

–
(c) the preparation of non-confidential versions
of documents containing trade secrets;

–
(d) the publication of non-confidential versions
of judicial decisions. The court would be required to ensure that the judicial
decisions do not disclose trade secrets. For this, the court should be able to
publish only a non-confidential version of the decision in which the passages
containing trade secrets are deleted and replaced by summaries.

–
(e) confidentiality obligations of the parties.
The parties to the court cases as well as other persons participating or assisting
in the proceedings would be required not to disclose trade secrets whose
knowledge has been acquired in the course of the court case.

Fourthly, Member States would be requested
to establish specific safeguards to ensure a proportionate application
of the law by judicial authorities (by balancing different interest at stake)
and the respect of the rights to a fair trial and rights of defence (see Annex
21) when deciding on the granting of these measures and remedies:

–
(a) judicial authorities are requested to take
into account the value of the trade secret, the seriousness of the conduct of
the person who violated the trade secret, the impact of the unlawful use or
disclosure of the trade secret, the legitimate interests of the trade secret
owner but also impact of the measures in the market, including on the
legitimate interests of third parties;

–
(b) injunctive relief when the trade secret is
in the public domain (i.e. the information is no longer secret) should not be
possible[752];

–
(c) when injunctive relief would be
disproportionate, good faith third parties could continue using the trade
secret subject to the payment of appropriate compensation.

Fifthly, the general anti-abuse clause (cf.
Policy Option 3) would be completed by a request to sanction manifestly abusive
behaviour during litigation.

These rules would be similar to those
contained in Articles 3 and 9 to 14 of Directive 2004/48/EC on the
infringements of intellectual property rights. They would be integrated into
the general rules of procedure of the Member States.

These rules could, in principle, be
included in either a recommendation or a directive.

Policy Option 5. Harmonisation of
national civil law and criminal law remedies against the misappropriation of
trade secrets.

This option integrates Policy Options 4[753]. In addition, it
consists of requiring Member States to criminalise the most important acts of
misappropriation of trade secrets and to establish a penalty framework for
those. The criminalised conduct would be:

–
the unauthorised use or disclosure of trade
secrets; and

–
business/industrial espionage.

The penalty framework would ensure that
maximum penalties are set at, at least, two and four years imprisonment
respectively.

Annex 20 – Discarded
policy options

The policy options described in this annex
have not retained for further examination in the context of this impact
assessment.

DO1. Uniform EU rules on civil law
remedies against misappropriation of trade secrets.

This option would consist in establishing
uniform EU rules (i.e. a Regulation achieving maximum harmonisation) on civil
law remedies applicable in case of misappropriation of trade secrets, thus
completely replacing national rules in this area.

This option has not been retained for
further examination for the following reasons.

–
While it could be prima facie seen as an
effective option to address the objectives, in practice a uniform EU regime
would introduce additional complexity to litigation before EU courts.
Litigation on misappropriation of trade secrets is not necessarily done in
isolation; it is often done in combination with litigation on the infringement
of an intellectual property right or on other breaches of law (e.g. contractual
breaches). This could be overly burdensome and lead to incoherent civil procedure
at national level with different ways of handling matters, depending on the
subject matter involved.

–
Furthermore, a uniform EU regime would be
disproportionate in so far as it would create a specific EU regime for torts in
this area, derogating from the general national regime, without sufficient
justification.

DO2. Regulation of protective
measures which trade secret holders would be required to adopt to protect their
trade secrets against possible misappropriation.

Under this option trade secret holders
would be requested to adopt protective measures to protect their trade secrets
against possible misappropriation. Such protective measures could consist in:
marking documents as confidential, restricting access to the information to key
staff and on a need-to-know basis, physical access restrictions, security
measures in connection to digital and information systems, contractual
protection (e.g. non-disclosure clauses), etc.

This option has not been retained for
further examination for the following reasons.

–
Firstly, protective measures alone are
insufficient to prevent third parties from benefiting from the misappropriation
of the trade secrets, as they do not provide for relief once the trade secret
has been misappropriated (unless on the basis of contractual clauses and
against the contractual counterparts only). Therefore, operational objectives C
(access to a sufficient and comparable level of redress in case of
misappropriation) and D (deterring third parties from misappropriating trade
secrets) are not addressed.

–
Secondly, EU rules of this type are likely to be
inefficient and disproportionate. Trade secrets holders already apply
protective measures to safeguard the confidential character of their valuable
information voluntarily, as otherwise they would not be in a position to claim before
a judge that the information in question was a trade secret in the first place
(i.e. there is an ex-post judicial assessment). In order to avoid a
disproportionate limitation of business freedom, possible EU rules requiring
trade secret holders to take specific protective measures would need to be
general in nature – thus unable to provide a sufficient granularity having
regard to the context and circumstances[754],
and likely to result in the adoption of costly protective measures by trade
secret holders who would otherwise not need to do so. This would be less
efficient and less proportionate than an ex-post case-by-case judicial
assessment (when litigating for relief against misappropriation of the trade
secret), which will take account of the circumstances of the case without
imposing a one-size fits all approach.

DO3. Uniform rules applicable to
non-compete clauses and/or to non-disclosure clauses between the trade secret
holder and its employees and/or business partners who have access to trade
secrets

This option would regulate contractual
relationships by requiring trade secret holders to include uniform non-compete
and/or non-disclosure clauses in their contracts with their employees and/or
business partners who have access to the relevant trade secrets. This option is
a sub-option of the discarded policy option n°2 (DO2) in so far as the
contractual non-compete/non-disclosure clauses are protective measures. The
difference compared to the DO2 is that in the discarded policy option n°3
(DO3), clauses are uniform.

DO3 is different from Policy Options 3 and
4 which do not address contractual clauses at such, although there would be
interactions. Policy Options 3 and 4 set out the conduct that is considered to be
misappropriation of trade secret and the consequences, in civil law terms[755], thereof. They apply
irrespective of the existence of a contractual relationship, but may impact on
contractual clauses in two different, opposite, ways. On the one hand, they somehow
restrict the risk that contractual clauses are overly protective to the
advantage of the trade secret holder. It would be difficult, if not impossible,
for the trade secret holder to establish confidentiality/non-compete
restrictions beyond the terms of the statutory definition of trade secret (i.e.
if the information is generally known or readily accessible to person within
the circles that normally deal with the kind of information in question). On
the other hand, a contractual relationship may modulate the application of
Policy Options 3 and 4. Contractual clauses would remain important for the
purpose of granting consent on the lawful use of the trade secret (absence of
consent of the trade secret holder is a condition for proving the misappropriation
of the trade secret). Contractual non-compete/non-disclosure clauses are also
likely to remain important for a trade secret holder willing to claim before a
judge that the information in question was a trade secret in the first place.

This option has not been retained for
further examination for the following reasons.

–
Firstly, in terms of effectiveness, uniform
rules of this type, which are of preventive nature, are insufficient to prevent
third parties from benefiting from the misappropriation of the trade secrets by
themselves. These contractual clauses would allow the trade secret holder to
try to obtain judicial enforcement of the contract, thus making his
counterparts liable for breach of contract. However, the enforcement of the
contract would be ineffective vis-à-vis third parties who may have acquired the
trade secret in the meantime. Therefore, redress would be insufficient. The
fact that the clauses would be uniform across Europe does not change the
analysis.

–
Secondly, in terms of efficiency, the need of
DO3 is questionable. Such rules, despite the fact of being uniform, are
unlikely to be able to provide sufficient granularity for all cases, having
regard to the context and circumstances[756].
Setting EU uniform rules on non-compete clauses (or on non-disclosure clauses) would
be in contradiction with one of the advantages that Policy Option 4 may have:
the convergence of national rules dealing with judicial redress in case of
misappropriation of trade secrets is likely to result in less expenditure
(lower transaction cost) on protective measures, including in particular as
regards confidentiality or non-compete agreements with partners and employees
(which may not be needed in certain cases). This would be at odds with a
requirement to apply uniform rules in all cases, which would de facto
result in imposing a minimum cost (even if having model clauses would limit
such cost) in cases where such incurring such cost would not be needed.

–
Also, in terms of proportionality, imposing
uniform clauses of the type in question in business-to-business relationships
may lack proportion. Setting uniform EU rules on contractual clauses would be
an intrusive measure inevitably restricting the freedom of contract principle,
which lies at the heart of the law of contracts and economic activity. It would
be more proportionate to allow trade secret holders to decide how they want to
use their contractual freedom to protect their trade secrets. In this
connection, there is already guidance at EU level of this type of contractual
protection, including model clauses, which do not interfere with the freedom of
contract principle[757].
At the same time, justification of the uniformity of such clauses on public
ground/interests would be difficult.

–
As a result, DO3 would be less efficient and
less proportionate than an ex-post case-by-case judicial assessment (when
litigating for relief against misappropriation of the trade secret), which will
take account of the circumstances of the case without imposing a one-size fits
all approach.

DO4. Extension of the scope of
existing intellectual property rights and/or creation of sui generis
intellectual property rights.

It could be conceivable to extend the scope
of existing intellectual property rights and/or creation of sui generis
intellectual property rights to protect trade secrets as subject matter[758]. This has been done in
the past. For instance, copyright protection was extended in Europe to
databases[759]
although this has not been done in other countries, such as the US. In this
context, one could imagine extending the scope of patent protection to
technological know-how which today is not patentable: e.g. incremental
innovation etc. Also, a sui generis right was created for the protection
of the topography of semi-conductors[760].

This option has not been retained for
further examination for the following reasons.

–
Following this option would result in creating
monopoly rights on information which would be opposable erga omnes. However,
there is little (if any) justification supporting the need for creation of
additional monopoly rights. The extension of the scope of existing intellectual
property rights or a sui generis intellectual property right on trade
secrets could hardly cover the whole spectrum of valuable information currently
protected by secrecy[761];
therefore this option would result in over protection for some trade secrets
and under protection for others[762].

–
Additionally, a monopoly right would not allow
for distinguishing between the misappropriation of information and the mere
acquisition of knowledge (e.g. by reverse engineering or by parallel
discovery).

–
Finally, existing intellectual property rights
already provide a certain degree of (exclusive) protection to innovation
developed by secrecy: protection of innovation through trademark or design
rights once the products are in the market is likely to be sufficient in most
cases to secure a competitive advantage (being first in the market) to the
trade secret holder, without restricting others' possibility to reverse
engineer the innovation, thus allowing society to achieve maximal benefit from
innovation.

DO5. Extension of the scope of the EU
rules on customs enforcement of intellectual property rights to also include
trade secrets misappropriation.

This option would consist in extending the
scope of Regulation (EC) No 1383/2003 so that the customs regime applicable to
goods suspected of infringing intellectual property rights would also be
extended to goods suspected of misappropriating trade secrets.

This option has not been retained for
further examination for the following reasons.

–
Such an extension would not be without problems.
In the case of an intellectual property right, there is a presumption of
validity of that right, which explains why the right holder can ask customs authorities
to detain suspected goods entering into the EU before filing a case with a
court for the infringement of the right in question. Also, the rightholder will
be enforcing an exclusive right on the subject matter protected by the
intellectual property right: in other terms, the goods in question would
infringe the intellectual property right whenever the authorisation of
rightholder to the use of the intellectual property right in question is
missing. A case on the misappropriation of a trade secret presents, however, a
different scenario. The misappropriation of a trade secret results from the
unlawful conduct of a person (a third party) in obtaining the relevant
information that will be used for the manufacturing of the goods. At the same
time, the owner of the trade secret does not have an exclusive right on that
information. In other terms, a person unconnected to the misappropriation of
trade secrets but producing identical goods would not be infringing any trade
secret[763].
Therefore, the act of misappropriation would need to be first proved and a
court decision would be needed on this issue. In this context, it does not
appear prima facie proportionate to allow customs authorities to detain
imported goods on the basis of an alleged trade secret misappropriation in the
absence of a judicial decision establishing the existence of an unlawful act
first and requiring that the goods in question are detained.[764].

–
Moreover, the Commission examined in 2011
whether the customs regime applicable to goods suspected of infringing
intellectual property rights should also be extended to goods suspected of
misappropriating trade secrets[765].
However, it eventually decided not to include the misappropriation of trade
secrets in the scope of protection of the proposal for a new Regulation in this
area[766].

See Annex 13 for further detail.

Annex 21 – Impact
on Fundamental rights

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

The Charter on Fundamental Rights of the
European Union[767]
(hereinafter, the "Charter") can be read as supporting that trade
secrets are worth being protected.

Article 7 of the Charter: respect for
private and family life

First of all, Article 7 states that “[e]veryone
has the right to respect for his or her private and family life, home and
communications”. The rights guaranteed in this Article correspond to those
guaranteed by Article 8 of the European Convention on Human Rights
(hereinafter, ECHR). In accordance with Article 52(3) of the Charter, the meaning
and scope of the right covered in Article 7 are the same as those of the
corresponding article of the ECHR[768].

Several judgments of the European Court of
Human Rights have interpreted that the notion of 'private life' cannot be taken
to mean that the professional or commercial activities of either natural or
legal persons are excluded[769].
This case-law has been recognised by the European Court of Justice, which
refers to the right to respect for private life as flowing from the common
constitutional traditions of the Member States[770]. As a result, an
economic actor who protects valuable information through secrecy (i.e. as a
trade secret) is indeed exercising his or right to private life and, as a
result, a misappropriation of a trade secret constitutes an intrusion
into/interference with such right[771].

For the purpose of the analysis in Section
A21.2 of this Annex, it is concluded that the Charter guarantees the
protection of trade secrets under Article 7.

Article 41 of the Charter: right to
good administration

Moreover, Article 41 of the Charter confers
a right to every person “to have his or her affairs handled impartially,
fairly and within a reasonable Institutions, bodies and agencies of the Union.”
It confirms the view that trade secrets (understood as included in the
“business secrets” category) have a value for the owner of the secret because
of their secrecy, which is worth preserving. This Article aims at avoiding that
a "business secret" held by a public administration is disclosed to
third parties or the public and it refers to the need for the administration to
respect "the legitimate interests of confidentiality and of
professional and business secrecy"[772].

While article 41 of the Charter is not
directly applicable to Member states and their administrations, there is
settled case-law of the European Court of Justice. The Court has acknowledged
that the protection of "business secrets" is a general principle of
law[773].
For the Court, "business secrets" are information of which not only
disclosure to the public but also mere transmission to a person other than the
one that provided the information may seriously harm the latter's interest[774]. For instance, the
Court of Justice ruled in the Varec case that the undertaking concerned
might suffer 'extremely serious damage' if there were improper
communication of certain information to a competitor[775].

Article 17 of the Charter: right to
property

In the third place, one could raise whether
Article 17 of the Charter could also support that trade secrets must be
protected. This article has two paragraphs. According to the first paragraph,
"[e]veryone has the right to own, use, dispose of and bequeath his or
her lawfully acquire possessions." This first paragraph is based on
Article 1 of the Protocol to the ECHR which states that every natural or legal
person is entitled to the peaceful enjoyment of his possessions. The protection
of intellectual property, one aspect of the right of property, is explicitly
mentioned in paragraph 2 of this Article[776]
"because of its growing importance and Community secondary legislation"[777]. In doing so, it also
complies with the case-law of the ECHR which has recognised that intellectual
property is protectable under Article 1 of the Protocol to the ECHR[778]. In accordance with
Article 52(3) of the Charter, the meaning and scope of the right provided for
in Article 17 of the Charter are the same as those of the right guaranteed by
the ECHR and the limitations may not exceed those provided for there.

The question at stake is whether trade
secrets could be protectable, either within the category of "intellectual
property" or as a generic "possession".

The question of whether trade secrets are
“intellectual property” is subject to debate. It could be argued that trade
secrets should not be protected under Article 17(2) of the Charter because they
are not intellectual property rights, such as patents or trademarks[779]. However, there are
other legislative texts or case-law where they are recognised as intellectual
property rights: (a) in the TRIPS Agreement, trade secrets are considered
intellectual property rights (cf. Article 1(2) of TRIPS Agreement[780]); (b) the technology
transfer block exemption regulation[781]
includes know-how[782]
as an intellectual property right alongside industrial property rights, copyright
and neighbouring rights[783]; (c) in the Microsoft case, the Court of First Instance
accepted that trade secrets could be assimilated to intellectual property
rights[784].
Whether trade secrets are intellectual property rights or not, the Charter does
not say either that intellectual property must be protected in all cases
through intellectual property rights[785].
Indeed, it does not provide a definition of intellectual property. The
explanatory text says that "intellectual property covers not only
literary and artistic property but also inter alia patent and trademark
rights and associated rights"[786].
One can conclude that trade secrets are neither explicitly included nor
excluded from this definition.

Even if trade secrets were not
"intellectual property", the question remains as to whether they
could fall within the generic provision of the first paragraph of Article 17:
the "possessions". The European Court of Human Rights has given
autonomous meaning to the concept of possessions, "which is not limited
to ownership of physical goods and is independent from the formal
classification in domestic law: certain rights and interests constituting
assets can also be regarded as 'property rights', and thus as 'possessions' for
the purpose of this provision"[787].
While there appear to be no cases of the European Court of Human Rights that
directly pronounces on the right to protection of trade secrets[788], there are no cases
speaking against such an interpretation either. On the contrary, commentators
raise different arguments suggesting that, if confronted to such a case, the
Court of Human Rights could accept that trade secrets be covered by the
protection[789]:
(a) that Court has given a fairly broad and open-ended description of economic
interests in intangible knowledge goods that would fall under the protection of
Article 1 of the first Protocol to the ECHR[790];
(b) information protected as trade secrets may represent a substantial
financial value[791],
as traditionally requested by the Court for the object for which protection is
claim as 'possession'[792];
(c) such information can be licenced to third parties for consideration[793]; (d) that Court has
not considered that exclusivity is a condition for the 'possession', at least
regarding intellectual property[794];
and (e) finally, "there is no conceptual barrier to characterising
trade secrets as intellectual property because of the limitation which are
generally recognised (in the United States, in the EU as well as in TRIPS) as
inherent in the protection of trade secrets, such as independent development or
reverse engineering"[795].

Having said this, it must be acknowledged
that there is no consensual view as to whether the holder of the trade secret
has property rights over information kept as a trade secret. In the absence of
such property rights, the application of Article 17 to trade secrets remains to
be proven. In any event, the economic rationale behind Article 17, and in
particular its second paragraph, would support the idea that trade secrets are
worth being protected.

A21.2.    Impacts
of policy options on fundamental rights

The analysis below will examine the impacts
of the policy options on certain fundamental rights. Further to Articles 7, 41
and 17 of the Charter (see Section A21.1 of this Annex), the following
fundamental rights will be included, where appropriate, in the examination:

–
Article 8(1), protection of personal data: “Everyone has the right to the protection of personal data
concerning him or her.”;

–
Article 11(1), freedom of expression and
information: “1. Everyone has the right to
freedom of expression. This right shall include freedom to hold opinions and to
receive and impart information and ideas without interference by public
authority and regardless of frontiers.”;

–
Article 15, freedom to choose an occupation
and right to engage in work: “1. Everyone has
the right to engage in work and to pursue a freely chosen or accepted
occupation. 2. Every citizen of the Union has the freedom to seek employment,
to work, to exercise the right of establishment and to provide services in any
Member State. […]”;

–
Article 16, freedom to conduct a business: “The freedom to conduct a business in accordance with Union law
and national laws and practices is recognised.”;

–
Article 47, first subparagraph, right to an
effective remedy: “Everyone whose rights and
freedoms guaranteed by the law of the Union are violated has the right to an
effective remedy before a tribunal in compliance with the conditions laid down
in this Article.”;

–
Article 47, second subparagraph, right to a
fair trial: “Everyone is entitled to a fair and
public hearing within a reasonable time by an independent and impartial
tribunal previously established by law. Everyone shall have the possibility of
being advised, defended and represented.”;

–
Article 48(2) right of defence: “2. Respect for the rights of the defence of anyone who has
been charged shall be guaranteed.”;

–
Articles 49 and 50: principles of legality
and proportionality of criminal offences and penalties[796]; right not to be tried or punished twice in criminal proceedings
for the same criminal offence[797].

Policy option 1 (Baseline scenario).

Under the current regulatory scenario, the
risk of misappropriation of trade secrets is higher while the legal means at
the disposal of the trade secret owner to stop the misappropriator and obtain
compensation for the wrongdoing are uneven across the EU and do not guarantee
that the misappropriator would not take advantage of the wrongdoing. This has
negative impacts on: (i) primarily, the right to a private life and
communications (Article 7 of the Charter), which is not sufficiently
protected[798];
(ii) the freedom to conduct a business (Article 16), since the conduct
of legal businesses in accordance with the law are disrupted by unfair and
dishonest practices by competitors; and (iii) the right to an effective remedy
(Article 47), which is compromised by the absence of appropriate
remedies in case of misappropriation of trade secrets. Moreover, increased
reliance by companies on protective measures implies that they could be tempted
to impose working conditions on employees which could undermine their
fundamental rights to privacy (Article 7) and right to the protection of
personal data (Article 8): e.g. companies could in theory attempt
at disproportionally monitoring employees’ behaviour to avoid breaches of
secrecy obligation[799].
Also, the uneven rules across the EU create legal uncertainty as to when a
conduct constitutes a misappropriation of trade secrets in the different Member
States, which may discourage the cross-border mobility of workers, thus
affecting the right to work (Article 15).

Policy option 2 (Information and
awareness).

The impacts on fundamental rights of the
previous option would be maintained. Option 2 would neither entail any
significant improvement nor a deterioration of the situation.

Policy option 3 (Prohibition of acts
of misappropriation of trade secrets).

Option 3 has
beneficial effects as regards Article 7 in so far as it implies a better
delimitation of the scope of protection of trade secrets across the EU[800]. Also, this option has
indirect beneficial effects as regards personal data protection (Article 8).
Information kept as trade secrets (such as list of clients/customers; internal
datasets containing research data or other) may include personal data. The
protection of trade secrets against misappropriation therefore reinforces the
protection of personal data from unauthorised used by third parties. In
addition, this option is likely to reduce the need for the use of extraordinary
protective measures, thus reducing the risk of intrusion in the privacy sphere
of employees and of disproportionate personal data processing.

However, from the perspective of the right
to an effective remedy (Article 47), this option has a moderate positive
impact. While this option would require that remedies are available nationally,
it would leave the design of the appropriate remedies to national law. Thus,
this option does not ensure that the remedies will be effective.

This option does not affect, interfere with
or undermine the right of good administration and the related preservation of
professional secrecy and secrecy of business in cases of access to documents
held by Union institutions and bodies (Article 41(2)(b)): this option
does restrict the right of the Union institutions and bodies to require
companies to submit information when so provided by law; it does not restrict
either the possibility for the Union institutions and bodies to provide access
to relevant documents when the conditions for such access are met pursuant to the
relevant legislation. Moreover, by clarifying this relationship it will add
clarity and legal certainty, thus having a slight positive effect.

For the impacts on the rights to a fair
trial (Article 47) and to defence (Article 48), see below the
analysis regarding the rules on preservation of confidentiality of trade
secrets during and after litigation.

The prohibition of acts of misappropriation
of trade secrets improves the situation as regards the freedom to conduct a
business (Article 16 of the Charter)[801].
On the one hand, better protecting a trade secret has positive effects for the
freedom to conduct a business of the trade secret owner in so far as he is
protected from unfair competition or dishonest practices of competitors. On
other hand, the rights of competitors to conduct business are not affected:
Article 16 cannot be read as supporting the idea that the misappropriation of
trade secrets should be acceptable as a normal business method[802]. Moreover, since the
trade secret does not create any exclusive right on the information,
competitors are entitled to develop the same information independently or to
reverse engineer any product they have legally acquired. In this sense, their
business opportunities are not restricted. Furthermore, this option also
include appropriate safeguards (an anti-abuse clause) to ensure that bad faith
abusive litigation, with the intention to foreclose markets and competitors
and/or establish barriers within the internal market, which could potentially
result from rules facilitating the enforcement of trade secrets, does not take
place. Therefore, this option provides enough guarantees to ensure that the
freedom to conduct business is not affected.

Policy Option 3 does not restrict the freedom to choose an occupation and right to
engage in work (Article 15 of the Charter). Firstly, this option does
not restrict employee mobility. While any protection of trade secrets against
their misappropriation may result in restricting the information that an
employee can take with him and use in any future working assignment for another
employer, Article 15 of the Charter, however, cannot be read as giving an
unconditional right to an employee to use all information obtained from his previous
employer in future working assignments. This option fully recognises that any
judicial authority deciding on a misappropriation case will need to carefully
evaluate different factors before deciding on whether a misappropriation of a
trade secret has taken place. It notably considers that “information which
is generally known among or readily accessible to persons within the circles
that normally deal with the kind of information in question cannot be
considered trade secrets”. This criterion should allow to distinguish
between the general knowledge in the field accumulated by an employee working
in a particular field and true trade secrets owned by the particular company
where he is working. Moreover, the anti-abuse clause of this option should make
sure that the trade secret owner does not initiate legal proceedings with the
purpose of intimidating employees exercising mobility. Secondly, this policy
option could have positive impacts as regards employees' possibilities to
exercise mobility in so far as it provides more legal certainty on what is misappropriation
of a trade secret, in particular in a cross-border scenario. Such increased
legal certainty may facilitate employee mobility.

This policy option does not
disproportionately limit the freedom of expression and information, and in
particular journalistic freedom, guaranteed by Article 11 of the Charter[803]. Considering the wide
freedom of expression and information formulated in the Charter, it is
certainly legitimate to wonder whether this policy option, by rendering
unlawful the use and disclosure of misappropriated trade secrets, would not
restrict or limit that freedom. Therefore, it is necessary to examine the
conditions of Article 52(1) of the Charter in order to see if such
limitation could be justified: "Any limitation on the exercise of the rights
and freedoms recognised by this Charter must be provided by law and respect the
essence of those rights and freedoms. Subject to the principle of
proportionality, limitations may be made only if they are necessary and
genuinely meet objectives of general interest recognised by the Union or the
need to protect the rights and freedoms of others." The second
paragraph of Article 10 ECHR already indicates that the freedom of expression
and information may be limited, if such limitation is prescribed by law,
pursues a legitimate aim and is necessary in a democratic society (i.e. a
balancing of interests would need to be carried out). In this context, the
following must be considered:

–
(a) the second paragraph of Article 10 ECHR
states that “preventing the disclosure of information received in confidence”
would be a legitimate aim. Protection of information shared in confidence
appears therefore as an objective of general interest in the light of Article
52(1) of the Charter. The measures envisaged by policy option A3 should be seen
in this context. They aim, inter alia, at preventing the unlawful acquisition,
use and disclosure of trade secrets, including in particular of trade secrets
which are shared for R&D and innovation purposes within research and/or trading
partners. The European Court of Justice has expressed that safeguarding the
right to respect for private life would undoubtedly constitute a legitimate aim
in the general interest[804];

–
(b) the second paragraph of Article 10 ECHR also
states that the protection of the reputation or rights of others” could
also be a legitimate aim. Policy option A3 would also aim at protecting the
rights and freedom of others, namely the trade secret owner who developed the
valuable information at stake and invested time and money on it. This policy
option would ensure that the acquisition, use or disclosure of his trade secret
by any third party without his consent would be unlawful;

–
(c) concerning the balancing of interests (and
the test on the necessity in a democratic society), the Court of Justice has
already expressed that where several rights and fundamental freedoms protected
by the European Union legal order are at issue, the assessment of the possible
disproportionate nature of a provision of European Union law must be carried
out with a view to reconciling the requirements of the protection of those
different rights and freedoms and a fair balance between them[805]. It should
be noted in this regard, that the restrictive measures in question would be
limited to the prohibition of certain practices, such as the unlawful
acquisition of a trade secret through theft,[806]
which are likely to unduly harm the owner of the trade secret. In this
balancing of interests, the protection and the reputation of the rights of
others has already been accepted by the European Court of Human Rights as a
valid reason to accept the compatibility with the ECHR of an injunction
addressed at a third party in order to prevent the dissemination of
confidential business information without the consent of the owner, paying
regard to the particular harm which could be suffered by the company should the
information be publicly disclosed[807].
The fact that the third party could be a journalist does not change the
reasoning on this point[808].
At the same time, it would possibly be unreasonable to allow a trade secret
owner to rely on trade secret protection in order to prevent an employee, or
another third party, to report suspected wrongdoings or otherwise complying
with a whistleblowing obligation in the public interest. For this reason, a
specific safeguard clause in this regard is included in this policy option.

As a result, the measures envisaged by Policy
Option 3 should be seen as being compatible with the requirements of
Article 52(1) of the Charter, as far as the limitations to Article 11 are
concerned

Policy Option 4 (Prohibition of acts
of misappropriation of trade secrets and convergence of national civil law
remedies).

This option integrates Option 3.
Therefore, the impacts of the latter would remain.

In addition, this option would reinforce
the right of access to justice (Article 47, on the right to an effective
remedy) of the trade secret owner in so far as this option would
specifically provide for effective remedies, such as the possibility to request
the misapropriator to stop using the misappropriated trade secrets and to
compensate for the prejudice caused.

This option would also provide for the
publication of judicial decisions and possible additional publicity measures as
a specific remedy, in order to deter the misappropriation of trade secrets. In
order to ensure that such publicity measures do not affect the right to privacy
(Article 7) and the protection of personal data (Article 8) of
natural persons, a safeguard clause has been introduce. The judicial
authorities will be required to balance different interests at stake before
granting the applicant’s request to publish the judicial decision. Those
interests are: the possible harm that such measure could cause to the privacy
and reputation of the misappropriator, the value of the trade secret, the
seriousness of the conduct, the impact of the misappropriation and the
likelihood of any further unlawful use of the trade secret in question by the
misappropriator.

Policy Options 3 and 4 as regards the
preservation of confidentiality/secrecy during and after legal proceedings.

Policy Options 3 and 4 also deal with procedural rules to ensure the preservation of the
confidentiality of the trade secret during and after legal proceedings. By
guaranteeing such preservation, these options contribute to ensuring that the
trade secret owner will be in a position to apply for an effective remedy
before a tribunal in case of misappropriation of a trade secret and to secure
that the secrecy of his trade secret will be maintained in the future.
Therefore, from the perspective of ensuring a fair remedy (Article 47,
first subparagraph) and of enforcing the right to private life and
communication (Article 7)[809],
these policy options have a positive effect.

These policy options require that the
processing of personal data concerned by the trade secrets in question is done
in accordance with relevant EU law on data protection[810]. Therefore, from this
perspective, it contributes to providing clarity and certainty on this issue.

The application of these policy options on
the preservation of confidentiality/secrecy during legal proceedings by
judicial authorities could imply in practice that certain information is not
disclosed among (or to) the parties or the need to restrict access to hearings,
so as to preserve the confidential character of trade secrets. The possibility
to adopt such measures is explicit in Policy Option 4, but not in Option
3 which merely refers to a general principle requiring Member States to
take appropriate and proportionate measures to preserve the
confidentiality/secrecy of the trade secrets during and after the legal
proceedings. However, the measures referred to above (restricting access to
documents/evidence or to hearings) neither disproportionally limit the second
subparagraph of Article 47 of the Charter, which provides for a "fair
and public hearing"[811],
nor the right to defence of Article 48[812]
of the Charter as regards civil law litigation[813].

As regards the question of access to
evidence, the European Court of Human Rights has consistently held that the
adversarial nature of proceedings is one of the factors which enables their
fairness to be assessed, but it may be balanced against other rights and
interests. According to its case-law, the adversarial principle means, as a
rule, that the parties have a right to a process of inspecting and commenting
on the evidence and observations submitted to the court. However, the European
Court of Human Rights has stated that in some cases it may be necessary for
certain information to be withheld from the parties in order to preserve the
fundamental rights of a third party or to safeguard an important public
interest[814].
The European Court of Justice, in is Varec judgement, has stated that
one of the fundamental rights capable of being protected in this way is the
right to respect for private life, enshrined in Article 8 of the ECHR (and
Article 7 of the Charter)[815].
In this case (concerning the review of a decision taken by a contracting
authority in relation to a contract award procedure) the Court further decided
that

"[…] the adversarial principle does not
mean that the parties are entitled to unlimited and absolute access to all of
the information relating to the award procedure concerned which has been filed
with the body responsible for the review. On the contrary, that right of access
must be balanced against the right of other economic operators to the
protection of their confidential information and their business secrets.

The principle of the protection of
confidential information and of business secrets must be observed in such a way
as to reconcile it with the requirements of effective legal protection and the
rights of defence of the parties to the dispute […] and, in case of judicial
review or a review by another body which is a court or tribunal within the
meaning of Article 234 EC, in such a way as to ensure that the proceedings as a
whole accord with the right to a fair trial".[816]

Concerning the question of the public
hearing, the European Court of Human Rights has also stated the right to a
public hearing under Article 6 entails an entitlement to an “oral hearing”
unless there are exceptional circumstances that justify dispensing with such a
hearing[817].

Policy Option 4 presents specific safeguards in this regard. It provides that the
competent judicial authorities, when deciding on the granting or the rejection
of the application[818]
to preserve the confidentiality of a trade secret, must take into account the
legitimate interest of the parties (and, where appropriate, third parties), as
well as any potential harm for either of the parties (and, where appropriate,
third parties) resulting from the granting or rejecting of such application. It
also provides that the judicial authorities shall ensure that any measure to
preserve the confidentiality of a trade secret is proportionate and reasonable
and does not unduly limit the rights of the parties to a fair trial. It is also
specifically provides that, where judicial authorities restrict parties the access
to certain documents or to the hearing of certain witnesses, they may
nevertheless authorised that the legal representatives of the parties – subject
to appropriate confidentiality conditions – could have access to such documents
or hearings. Moreover, this option also provides that any obligation to
maintain confidentiality ceases to exist if the information covered by the
trade secret does no longer meet the conditions to remain a trade secret.

These procedural safeguards are in line
with the European Court of Justice case-law regarding disclosure of business
secrets, which requires that a balance between the different interest is found
as regards each piece of information. For instance, in a request for
confidential treatment made before the Court of First Instance[819], the president of the
chamber explained that:

“[a]ccording to case-law, for the purpose of
determining the conditions under which confidential treatment may be given to
certain documents in the file, it is necessary to balance, in respect of each
document or part of a document on the Court’s file for which confidential
treatment is claimed, the applicant’s legitimate concern to prevent substantial
damage to its business interests and the interveners’ equally legitimate
concern to have the necessary information for the purpose of being fully in a
position to assert their rights and to state their case before the Community
Court (orders of the Court of First Instance in Case T-30/89 Hilti v Commission
[1990] ECR II‑163, paragraph 11, and of the President of the First
Chamber of the Court of First Instance in Case T‑168/01 Glaxo Wellcome v Commission
[2003], not published in the ECR, paragraph 35).”[820]

By clarifying the rules and providing for
appropriate safeguards, policy option 4 contributes to increasing legal
certainty and has therefore observable positive impacts as regards the rights
to a fair trial and the right to defence.

Policy Option 3 is, however, less explicit in this regard. It only provides for a
general principle on the need, for Member States, to ensure the conditions for
a fair trial but it is silent as to how to achieve it. Therefore, it does not
result, as such, in any observable improvement (nor in a deterioration of the
situation either).

These policy options do not have any negative
impact from the perspective of Article 11 of the Charter: cf. the
reasoning above concerning Policy Option 4 on the possibility to
restrict the disclosure of information in order to protect the reputation or
rights of others and to prevent the disclosure of information received in
confidence.

Sanctions (as regards Policy Option
4)

Policy Option 4 would provide for a general sanctioning regime with a view to
ensure compliance with their rules[821].
It would include a general principle requesting Member States to provide for
effective, proportionate and dissuasive sanctions in case of non-compliance
with certain types of orders which judicial authorities could take pursuant to
a claim on misappropriation of trade secrets: i.e. cease and desist orders, orders
for corrective measures (e.g. order to a misappropriator to destroy documents
containing the misappropriated trade secret) or orders in relation to the
preservation of confidentiality of trade secrets during litigation. The
sanctioning regime would remain at a general level and respect national legal
frameworks: it would not set the level of any of the penalties; nor the type of
penalty (although it would require Member State to allow judges to apply
recurring penalty payments in case of non-compliance with cease and desist
orders and orders for corrective measures); it will not harmonise any rules as
regards liability or procedure for the imposition of sanctions. Therefore, it
will preserve Member States’ current arrangements for ensuring compliance with
procedural rights such as the right to an effective remedy and to a fair trial
(Article 47), the presumption of innocence and the right of defence (Article48).

Policy option 5 (Prohibition of acts
of misappropriation of trade secrets and convergence of national civil law
remedies and criminal law remedies against the misappropriation of trade
secrets).

This option would integrate Policy
Options 3 and 4. The impacts of both options would remain.

For the same reasons as those explained
above, this policy option would not restrict the freedom to choose an
occupation and to conduct a business (Articles 15 and 16).

Policy Option 5 would, in addition, have positive impacts on the right to an
effective remedy included in Article 47 of the Charter. This option would
have additional legal remedies before courts (criminal proceedings, entailing
criminal penalties for acts of misappropriation of trade secrets), therefore
having, from the perspective of the trade secret owner, additional effective
remedies.

Harmonisation of definitions of offences
and sanctions may have a direct effect on certain fundamental rights:
presumption of innocence (Article 48); principles of legality and
proportionality of criminal offences and penalties (Article 49); and
right not to be tried or punished twice in criminal proceedings for the same
criminal offence (Article 50). However, the provisions considered by
this policy option do not restrict any of those rights and are in line with the
principles set in Articles 48 to 50[822].
At the same time, they do not constitute any particular improvement regarding
the existing situation at national level from the perspective of those rights:
no information is available suggesting that the Member States which have
criminal provisions in place on the misappropriation of trade secrets would be,
by reason of those provisions, violating or undermining any of these three
articles of the Charter.

Summary of impacts on fundamental
rights

Table 21.1 – Summary of impacts of policy
options on fundamental rights

Policy options || Article 7 (respect for private and family life) and 17 (right to property) || Article 8 (protection of personal data) || Article 11 (freedom of expression and information) || Article 15 (freedom to choose an occupation and right to engage in work) || Article 16 (freedom to conduct a business) || Article 41(2)(b) (right to good administration, access to file and preservation of secrecy of business) || Article 47 (right to an effective remedy) || Article 47 (right to a fair trial) || Article 48 (right of defence) || Articles 49  (principles of legality and proportionality of criminal offences and penalties) || Article 50 (non bis in idem rule in criminal proceedings)

1. Status quo: (Baseline) || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0

2. Information/ awareness on existing redress tools in case of misappropriation of trade secrets: || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0

3. Prohibition of acts of misappropriation of trade secrets. || + || + || 0/- || 0/+ || + || 0/+ || 0/+ || 0 || 0/- || N/A || N/A

4. Prohibition of acts of misappropriation of trade secrets and convergence of national civil law remedies. || + || + || 0/- || 0/+ || + || 0/+ || + || 0/+ || 0/- || N/A || N/A

5. Prohibition of acts of misappropriation of trade secrets and convergence of national civil law and criminal law remedies against the misappropriation of trade secrets. || + || + || 0/- || 0/+ || + || 0/+ || ++ || 0 || 0 || 0 || 0

\* Comparison vis-à-vis
Baseline: -- significant deterioration of the situation; - slight
deterioration; 0 no relevant change; + slight improvement; ++ significant
improvement.

Annex 22 –
Policy Option 2: costs

Implementation of Policy Option 2
would involve some costs. This Annex tries to give a very rough estimate
of the costs of the three elements of the option:

(a) Preparation of fact sheets including
appropriate information on the measures, procedures and remedies available
against trade secret misappropriation in each Member State, as well as on the
availability of arbitration/mediation procedures.

The preparation could either (i) be done by
an EU institution (i.e. the Commission) or body (e.g. the EU IPR Helpdesk run
by the Executive Agency for competitiveness and innovation) or (ii) be
outsourced to qualified third parties (e.g. law firms).

In order to produce the 28 fact sheets (including Croatia), it would
be necessary to closely analyse the relevant laws in all Member States and
potentially administrative orders, e.g. on arbitration/mediation procedures. On
the assumption that this information gathering, processing and editing would
take between 5 and 10 man/working days per country[823]., this would add up to
between 140 and 280 man/working days. If it was done in-house this would amount
to between €45 000-90 000€, if it was outsourced, costs could be
around €154 000 to 308 000[824].

To keep these fact sheets up-to-date they would have to be reviewed,
probably at an annual basis. As one could revert to the original analyses it
should not take more than a man/day per Member State, i.e. max.
€9 000-18 000 or €30 800-61 600.

(b) Providing awareness to stakeholders about the measures,
procedures and remedies currently available at national level to obtain relief in
case of the misappropriation of trade secrets or to help preventing
misappropriation occurring and (c) promoting the use of arbitration/mediation
procedures to solve trade secrets disputes

A one-off awareness campaign planned by an
EU agency is currently budgeted at €730 000€ for two events, a school
campaign and the development of an online information centre. However, these
costs include neither the operating costs for the information centre nor the
costs of events on the spot in Member States, e.g. with SMEs or research
institutions, which would most likely be necessary in order to ensure
sufficient outreach. As more than one event would be needed for the larger
Member States, there might be around 50 events in total of about €20 000€
each, i.e. €1 000 000€ in total.

These costs would only cover a one-off
awareness campaign. If, after a number of years, the campaign would need to be
reproduced, cost would be multiplied by the number of campaigns.

Summary table

Table A22.1

Elements || Lower end estimate || Upper end estimate

a) preparation of fact sheets || 45 000€ (initial cost) 9 000€ (per year) || €308 000 (initial cost)  €61 600 (per year)

(b) and (c) providing awareness about national measure and promoting use of arbitration/mediation (one-off campaign) || €730 000 || €1 730 000

Total: || €775 000 (initial cost) + 9.000€ (per year) || €2 038 000 (initial cost) + €61 600 (per year)

Annex 23 – Choice
of legal instrument

Single legal instrument vs different legal
instruments for each of the policy options

The preferred policy options would be best
implemented in a single legal instrument because of their interrelation
and complementarity, as it would ensure the coherence and effectiveness of both
policy options.

Non-binding legal instrument vs binding
legal instrument

A non-binding legal instrument, e.g.
a Commission Recommendation, could a priori be a conceivable option to
implement Policy Option 4. It would set a target for the protection of trade
secrets against misappropriation and recommend Member States to align their
legislation to such target. The advantage of such an approach is the
flexibility granted to Member States to adapt the recommendations to their own
legal frameworks, both in terms of substance and timing. However, this approach
also has important drawbacks:

–
Member States would be under no obligation to
act. In other terms, the above-described positive impacts of these options
(e.g. legal certainty, harmonisation of the level of protection – see Section
5 and Section 6.1) would only materialise to the extent that Member
States voluntarily implement the recommendation. It should be noted that this
area is not a fully greenfield area and the TRIPS Agreement has acted as a de
facto recommendation, but failed to achieve any significant convergence in
the protection of trade secrets. A Commission recommendation would add little,
if at all, compared to the TRIPS Agreement requirements. Under those
circumstances, the likelihood that (at least) a few Member States would not
follow the Recommendation is high and thus, the harmonisation effect leading to
a similar scope of protection and the positive impacts on the Internal Market
could not be guaranteed.

–
In addition, the subject matter covered by the
preferred policy options concerns the protection of a right before courts. In
this context, other factors, which are of particular importance in this
context, such as the need to ensure a fair trial, the right to effective
remedies or the right of defence, can hardly be guaranteed by a non-binding
instrument.

–
Finally, the inter-institutional balance has
evolved over time and the case for Commission’s recommendations in areas where
a legal basis for legislation exist is weaker[825].

On the contrary, a binding legal
instrument – Regulation or Directive – appears more appropriate to
implement the preferred policy options, since the EU added value in this case essentially
relies on the compulsion that a binding instrument can have. In terms of
effectiveness, both a Regulation and a Directive would provide for sufficient
legal certainty and convergence in the level of protection across the Internal
Market (in the case of the Regulation this is fully guaranteed since rules
become uniform), thus guaranteeing that positive effects could be delivered. A
legally binding solution is also the preference of the respondents to the 2013
Public Consultation: 79% of the those in favour of EU action would prefer a
legislative solution as opposed to a mere 3,5% in favour of a recommendation.

Directive vs Regulation

A Regulation has the advantage of
its rapid implementation (thus, being more efficient), as no national
transposition measures (and the subsequent related monitoring work) are
required. However, a Regulation would create complexity (both for
judicial authorities and for litigants) as regards the relationship with
national law in related areas: e.g. enforcement of intellectual property
rights, unfair competition, civil litigation etc. and may not be fully
compatible with the principles of subsidiary and proportionality.

A Directive needs to national
transposition measures. This would provide flexibility to Member States on how
to integrate the requirements into their national law (i.e. allowing for better
consistency with national alw). This is particularly important since the
substance of the preferred policy options is closely related to the rules on
the enforcement of intellectual property rights (which are dealt with in a
Directive and transposed into national law) and to the national rules on civil
law litigation (which reflect different traditions existing in Member States).

One might argue that national divergences
may subsist after transposing a Directive and that, therefore, the
harmonisation effect could ultimately not be achieved. This could be
particularly dangerous as regards the scope of protection. This risk, however,
is not likely to materialise at the level of legislation. The scope for
national divergences depends on the margin of manoeuvre that would be left by
the directive terms. In this case, the preferred policy option would not leave
choices to make or options to take to Member States. Also, the language on the
definitions of trade secret/misappropriation and on the remedies could be
sufficiently precise so that, in practice, the scope for deviation at the level
of the national transposition would be minor, if any. A different issue is the
application of the rules by courts to specific cases. There is the possibility
that divergences between courts appear, whether within the same Member State or
cross-border. However, this will happen whether the rules to be applied by the
judges are in an EU Regulation or in national rules transposing a Directive. The
way to correct these divergences is through appeals to higher courts which can
provide uniform interpretations. This is like in any other area of law where
judges take decisions; it is not trade-secret specific issue. Concerning the EU
dimension, the European Court of Justice will have an important role to play in
this regard and, actually, this is one of the most important factors for the
future success of the measures.

A Directive therefore appears as the most
suitable legal instrument.

A self standing directive vs amendment
ofh Directive 2004/48/EC

In principle, it could be conceivable to
extend the scope of Directive 2004/48/EC on the enforcement of intellectual
property rights to also encompass the measures addressing the misappropriation
of trade secrets. Directive 2004/48/EC deals with on the civil law measures to
enforce intellectual property rights before courts and the type of measures
(rules on injunctive relief, damages etc) would be similar the remedies
envisaged under Policy Option A, at least to a certain extent.

Legally speaking, the extension of the
scope of Directive 2004/48/EC could be done by enacting, for the purposes of
that directive only, a definition of “intellectual property right” which
would include trade secrets in addition to the rights listed in the 2005
Commission Statement. In essence, this is what the TRIPS Agreement did, where
“undisclosed information” is considered an “intellectual property right” for
the purposes of that Agreement. It should be noted, however, that adding
such definition would not grant, by itself, any exclusive right to the trade
secret in question.

Integrating the protection of trade secrets
against misappropriation into Directive 2004/48/EC is, however, not a good
solution. There are important differences that need to be taken into account:

–
Nature and type of protection: Directive 2004/48/EC deals with the enforcement of intellectual
property rights and trade secrets are not intellectual property rights.
Intellectual property rights are exclusive/monopoly rights, providing
exclusivity against any other third party (opposable erga omnes) and are
granted by public authorities (e.g. patents, trademarks) or law (e.g.
copyright). There is also publicity about the existence of the rights, either
through a registry (e.g. patents, trademarks) or publication (e.g. copyright).
The use of an intellectual property right by a third party without the consent
of the holder of the right (irrespective of his intention or bad faith)
constitutes an infringement of that right. There is also a presumption of
validity of those intellectual property rights upon enforcement[826]. This is
reflected in Directive 2004/48/EC which does not even define what an
intellectual property right is, leaving it to the Member States to decide this
issue.

On the contrary, in the case of trade secrets,
there is no exclusive right created, no registry or publicity of the trade
secret and the use of the information covered by the trade secret is not
necessarily an infringement (as the other party may have reverse-engineered a
product or conducted parallel research).

Additionally, in the case of trade secrets,
specific conduct carried out by both parties is paramount for any outcome of
litigation: the efforts done by the holder to preserve the value and
confidentiality of the trade secret (as otherwise it would not be a trade
secret), on the one hand, and the unlawful conduct of the other party to
misappropriate the trade secret (e.g. theft, breach of contract etc.) on the
other hand. Therefore, it is necessary that the legal instrument implementing
Policy Option A4 addresses the question of the scope of protection. This is not
done in Directive 2004/48/EC as regards intellectual property right.

Therefore, mixing trade secrets and
intellectual property rights in the same instrument risks adding confusion in
this area as their nature is different: litigation concerning trade secrets
traditionally belongs to the general branch of tort/delict law (and unfair
competition law within that branch). Trade secrets would appear as
“transplanted” items into Directive 2004/48/EC.

Such confusion would not be beneficial for
citizens who, in their replies to the 2013 Public Consultation, gave a negative
perception on trade secrets as intellectual property rights.

–
Different scope of the two instruments. As advanced above, some measures in Directive 2004/48/EC would
also appear in a self-standing legal instrument on the protection of trade
secrets against misappropriation (e.g. rules on injunctive relief, rules on
damages). However, there are also differences. Firstly, the legal instrument on
the protection of trade secrets would also require the integration of rules
which are not present in Directive 2004/48/EC: i.e. on preservation of the
confidentiality of trade secrets during litigation, which is not an issue for
intellectual property rights since the latter are public, as well as on stricter
anti-abuse and safeguard rules considering the nature of trade secrets (no
exclusive rights granted by legislation). Secondly, there are elements of
Directive 2004/48/EC which are not addressed by this initiative on trade
secrets. This concerns notably the rules on evidence, preservation of evidence
and right of information. Specific rules on these issues are present in
Directive 2004/48/EC. However, litigation on trade secrets would rather rely on
the normal national civil law procedural measures for evidence and preservation
of evidence. Given the different nature of trade secrets (e.g. no exclusive
rights granted to the trade secret holder), applying specific rules on evidence
and preservation of evidence would not be entirely justified at this stage.

–
Relationship with other legal instruments. Integrating trade secrets into Directive 2004/48/EC would not add
legal clarity as regards other important legal instruments on civil litigation
within the EU. Rome II Regulation (on applicable law) makes a clear distinction
between litigation on traditional tort/delict (which encompasses litigation on
trade secrets, cf. Annex 16) and litigation on intellectual property
rights as far as the criteria for determining the applicable law are concerned;
the same is true for Brussels I Regulation on the choice of forum. Bringing
together trade secrets and intellectual property rights in the same legal
instrument and/or qualifying a trade secret as intellectual property right
could create confusion as regards the application of Rome II and Brussels I
Regulations.

Therefore, this initiative would be better
dealt with in a separate legal instrument.

This would also facilitate legislative
negotiations, which would only focus on the trade secrets aspects without the
need to reopen any issue dealt with in Directive 2004/48/EC as regards
intellectual property rights. The coexistence of the two legal instruments
should, a priori, not pose any particular legal problem for the
transposition of a new instrument into national law.

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

This annex presents a short review of
economic research on the impact of non-compete clauses and trade secret
legislation on labour mobility and wages[827].

The enforcement of trade secret protection
requires that firms take pro-active steps to protect trade secrets from
disclosure. Such steps may include the use of non-disclosure provisions or
non-compete clauses in employment agreements with key employees. Such
provisions are intended to limit disclosure and spillovers of knowledge from
the inventing firm to competing firms who seek to discover and copy particular
trade secrets. However, such provisions also have the potential to restrict an
employee’s mobility and value to competing firms who may want to hire the
employee.

The enforceability of non-compete
provisions may vary substantially among jurisdictions, as they do among
different US states. As noted by Ottoz and Cugno (2011), the scope and
effectiveness of trade secret protection depends in part on the degree of
acceptance on non-compete and other provisions in specific jurisdictions[828].

As noted by some economists, worker
mobility may play a role in promoting disclosure and dissemination of
innovative ideas among firms and industries[829].
Motta & Ronde (2002), for example, analyze the trade-offs between strong
trade secret protection as compared to the use and enforcement of non-compete
clauses in employee contracts. The authors conclude strong trade secret
protection, combined with incentive compensation for successful research
output, may be preferable to non-compete clauses in terms of enhancing firm
profitability and inventive productivity. The strength of trade secret laws can
thus interact with employee contracting and compensation arrangements, thereby
impacting employee mobility in innovative industries.

Recent empirical research by Png[830] analyses the impact of
US State-level trade secret law on the mobility of engineers and scientists
among employers within states. For this, he established an index to measure the
protection granted to trade secret owners by trade secret law[831] and he also took into
account whether the state in question enforces non-compete agreements with
employees or not (e.g. in California, non-compete agreements with employees are
not enforced by Courts). He found that the evolution of trade secrets law in
states subject to his study had a nuanced effect on professional mobility with
the (negative) impact concentrated among the most highly-qualified engineers
and scientists: stronger legal protection of trade secrets was associated with
lower mobility of postgraduate-qualified engineers and scientists (for
instance, an increased in the index by 0.417[832],
representing the effect of California's enactment of the Uniform Trade Secrets
Act, was associated with 0.4% lower mobility of post-graduate-qualified
engineers and scientists). By contrast, stronger legal protection of trade
secrets was not associated with any significant effect on the mobility of
bachelor-qualified engineers and scientists or engineering and scientific
technicians. The interaction of the effect of trade secrets laws and
non-compete agreements led to interesting findings too: to the extent that a
state enforced non-compete agreements, the negative relation between the legal
protection of trade secrets and the mobility of engineers and scientists was
attenuated. Indeed, Png outlines that in a state that fully enforced
non-compete agreements, changes in trade secret law would have no significant
effect on professional mobility. Png also analyses the impact of the US
doctrine of inevitable disclosure, which is also associated with lower mobility
of post-graduate-qualified engineers and scientists.

Zabojnik (2002) analyses how trade secret
protection in the presence of employee mobility can be accomplished by means of
employees’ compensation. Zabojnik develops a theoretical model of trade secrets
in hierarchal firms, with the further assumption that each manager has access
to trade secrets corresponding to his own level, but also to trade secrets at
levels below. Zabojnik (2002) finds that managers may have an incentive to
overpay subordinates, thereby discouraging their departure, but possibly
overprotecting the firm’s trade secrets at excessive cost[833].

Png (2012) also summarises the implications
that would result from reduced labour mobility:

–
Reduced communication and spillovers of
knowledge among innovative businesses resulting in slower diffusion of
technical knowledge. Technical knowledge that is explicit can be shared though
joint ownership and licensing. However the spread of technical knowledge of a
tacit nature depends relatively more on the movement of scientists and
engineers. He also adds that the effect of reduced mobility on productivity and
economic growth would be amplified to the extent that technical professionals
increase productivity when they change employers.

–
Fewer spin-offs and start-ups. To the extent
that employees leaving established organizations to start a new business are
more constrained in using the knowledge acquired in their previous employment,
their expected profit from starting a new business would be lower.

–
At the same time, he underlines other positive
effects on longer-term incentives. If employees are less likely to quit for
other opportunities, employers would realize a greater return on investment in
overall R&D and, specifically, the development of their employees. This may
result in more employer investment in R&D and their employees' human
capital[834].

–
The impact on compensation policies would be
nuanced. In the short term, employers might pay their employees less, as their
outside opportunities would be less attractive. On the other hand, in the long
term, the reduction in outside opportunities may imply that their employers
must pay more to attract talent. With more labour mobility opportunities,
employees might be willing to trade off lower salaries for the opportunity to
acquire knowledge and then capitalize on that knowledge with another employer
or start-up. The reduction of such outside opportunities might force employers
to increase compensation.

Annex 25 – Monitoring
and evaluation

The monitoring and evaluation of the
preferred policy options will be carried out in 3 steps:

–
(1) a Transposition Period Plan;

–
(2) the Regular Monitoring activity; and

–
(3) an Evaluation of the effects of the policy.

Figure A25.1
presents the timeline for these three steps.

Figure A25.1 –
Monitoring and evaluation

The Transposition Period Plan.

A Transposition Period Plan, running for
two years after the adoption of the legal text, will be established in order to
prepare for the application of the rules.

This plan will focus on the following
issues:

·
organising Transposition Workshops with Member
States authorities in order to facilitate the understanding of the rules and
their smooth integration into national law;

·
setting up a network of national correspondents
among Member States and between Member States and the Commission for the
purposes of exchanging relevant information;

·
organising ad hoc meetings with
stakeholders to discuss regulatory issues arising in the transitional period
with stakeholders;

·
setting up a working group, possibly organised
within the European Observatory run at OHIM to define, before the end of the
transposition period, the data needs for the future monitoring of the new rules
and any subsequent evaluation[835].
This group would also set a strategy for the collection of such data.

The Regular Monitoring Activity

The Commission, as guardian of the Treaty, will
undertake a regular monitoring activity. In the short term, this will consist
in ensuring the timely adoption of and verifying the correctness of the
national transposition measures.

Additionally, in a longer perspective, the
Commission will monitor the application of the national transposition measures
and take legal action, where appropriate.

The Commission would be assisted by Member
States authorities in this monitoring task. The network of national correspondents
will be used to that end.

The Evaluation

In terms of timing, a full evaluation of
the effects of the policy options could, however, only be undertaken in the
longer term. Legal proceedings (whether regarding misappropriation of trade
secrets or other fields) take time and both plaintiffs and defendants benefit
from the possibility to appeal initial decisions. Therefore, enough time needs
to lapse before impacts of the implementation of the policy options could be
assessed.

Therefore, this evaluation would be done in
2 steps:

–
(1) the Commission will prepare an intermediate
report on the transposition and initial application of the rules within 4 years
of the entry into application of the EU rules. In order to prepare this report,
the Commission will benefit from the assistance of: (a) Member States
authorities within the network of national correspondents (e.g. responses to
questionnaires); and (b) OHIM (in the context of its activities related to the
European Observatory on infringements of intellectual property rights). The
European Observatory will be asked to carry out an examination on the
litigation trends on trade secret misappropriation following the entry into
force of the EU rules (this examination should be carried out before the
Commission’s intermediate report) and to regularly repeat the industry survey
to test how companies’ innovative behaviour and competitiveness are altered
following the proposal;

–
(2) the evaluation itself, to be carried out 8
years after the end of the transposition period. The full evaluation could be
undertaken by the Commission or conducted externally. This choice could be made
after the results of the first step (the preliminary examination and
intermediate report) are known. The examination would also use preparatory work
to be carried out by Member States (e.g. responses to questionnaires) and the
European Observatory (a second examination of litigation trends), as well as
other input from stakeholders and other sources.

In terms of content, the evaluation of the
policy would focus on two main areas: (1) the effects of the rules regarding
litigation and (2) the effects of the rules on businesses competitiveness and
innovation within the internal market and generally the economy. Different
indicators could be used. At this stage, a set of preliminary indicators is
identified (see Box A25.1), but the definitive indicators should be
identified by a specific working group during the Transposition Period phase.

Box A25.1 – Preliminary indicators

Effects of the rules on litigation and stakeholders:

– Ease of access to national courts to solve cases of misappropriation
of trade secrets: stakeholders’ perception.

–
Convergence of the national protection in terms
of scope and remedies: qualitative assessment of the transposition and legal
analysis of a representative sample of cases. The analysis would aim at
understanding the reasons for the granting of protection of information as
trade secret and the granting of remedies; and at mapping the negative scope.
Indicators would include: protection of trade secrets was granted/not granted;
(preliminary/definitive) injunctions were granted/not granted; damages were
granted/not granted; level of damages.

– Abusive litigation: analysis of litigation trends based on a
representative sample of cases. Indicators: number of cases where abusive
litigation is identified and sanctioned by judicial authorities.

– Use of litigation to defend trade secrets: stakeholders’ perception
(repeated industry survey); analysis of a representative sample of cases to
assess whether first instance cases are appealed or not; whether cases involve
non-domestic (but still EU) plaintiffs/defendts are not etc.

–
Use of measures to preserve confidentiality of
trade secrets during litigation. Indicators: qualitative assessment of the
transposition and analysis of a representative number of cases to assess
whether judicial authorities took specific measures to preserve confidentiality
of trade secrets during/after litigation (data could be disaggregated by type
of measure).

– Effectiveness of the rules on preservation of confidentiality during
litigation. Indicators: analysis of a representative number of cases to assess
whether trade secrets were lost as a result of litigation.

Impact of the rules on innovation
and the economy:

– (Cross-border) R&D and innovative activities. Indicators: levels
of cross-border information sharing and knowledge transfer among businesses and
research entities[836];
value of know-how licensing; private sector investment in R&D[837].

– Value of innovation protected as trade secrets. Indicators: value of
information protected by secrecy compared to patents.

– Cross-border labour mobility. Indicators: level of non-domestic
workers in R&D intensive sectors[838].

–
Economy (growth & jobs). Indicators:
business dynamism[839].

In terms of data collection regarding
litigation, it is expected that access to relevant national databases should be
possible. The European Judicial Network on civil and commercial matters will be
used where appropriate.

Abbreviations

CEFIC: the European Chemical Industry Council.

EBRD: European Bank for Reconstruction and
Development.

ECHR: European Convention on Human Rights.

EU: European Union.

OLAF: European Anti-Fraud Office.

OHIM: Office for Harmonization in the
Internal Market.

R&D: Research and development.

SME: Small and medium-sized enterprise.

TRIPS Agreement: Agreement on Trade-Related
Aspects of Intellectual Property Rights.

WIPO: World Intellectual Property
Organisation

WTO: World Trade Organisation.

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[1]               European Commission (July 2012a), p. 2. See also Annex
1 on the knowledge and innovation economy in a globalised world.

[2]               Innovation should be understood in the wider sense of
the term, beyond technological developments.

[3]               ‘Business’ should be understood as encompassing not
only companies but also research institutions and bodies which may also develop
and exploit innovation.

[4]               The term “trade secret” will be used in this impact
assessment as short form of “undisclosed know-how and business information”.
Both expressions are meant to have the same meaning.

[5]               The term “misappropriation” will be used as short
form for the acquisition of a trade secret using dishonest practices and/or the
use or disclosure of an unlawfully appropriated trade secret.

[6]               European Commission (March 2010), p. 12.

[7]               European Commission (October 2010).

[8]               European Commission (May 2011a).

[9]               European Commission (October 2012).

[10]             http://ec.europa.eu/atwork/key-documents/index\_en.htm

[11]             http://ec.europa.eu/governance/impact/planned\_ia/roadmaps\_2013\_en.htm#MARKT

[12]             The following Commission departments contributed to the
work of the IASG: Secretariat-General, Legal Service, Bureau of European Policy
Advisors, DG Enterprise and Industry, DG Competition, DG Employment, Social
Affairs and Inclusion, DG Research and Innovation, DG Communication Networks,
Content and Technology, the Joint Research Centre, DG Taxation and Customs
Union, DG Health and Consumers, DG Home Affairs, DG Justice and DG Trade. In
addition, DG Communication, DG Economic and Financial Affairs, DG Agriculture
and Rural Development, DG Budget and the European Anti-Fraud Office were also
invited to join the IASG.

[13]             Hogan Lovells (2012).

[14]             Baker & McKenzie (2013).

[15]             Van Eecke & al. (2009).

[16]             A summary of the conference proceedings as well as the full
webcast transmission of the working sessions are available at: http://ec.europa.eu/internal\_market/iprenforcement/conferences/index\_en.htm.

[17]             It was an open consultation, so all interested parties
have been able to participate, the questionnaire was available in all
languages, the relevant target groups were invited to reply and sufficient time
for participation was granted (13 weeks). The replies to the consultation and a
summary have been published at the Commission’s website:
http://ec.europa.eu/internal\_market/iprenforcement/trade\_secrets/index\_en.htm#maincontentSec1.

[18]             Cf. Baker & McKenzie (2013), cf. p. 117 and Annex
17 of that study.

[19]             SMEs were encouraged to reply to this survey via the Enterprise
Europe Network.

[20]             Trade secrets are often referred to as
"confidential business information", "(secret) know-how",
“proprietary information/technology”, “undisclosed information”, “business
secrets” etc. In this Impact Assessment Report the term "trade
secrets" will be preferred. See Annex 4 for further discussion.

[21]             This information must have some actual or potential
economic value to someone else than the owner of the secret to qualify as a trade
secret. "Negative information" that certain applications or
commercial strategies are technically or commercially unfeasible may also be of
economic value.

[22]             The reference to ownership is used here purely for
convenience; it does not imply that a proprietary right is involved. For a
discussion on whether information and/or trade secrets can be treated as a form
of property, see UK Law Commission (1997), p. 18 and seq.; and Bronckers &
McNelis (2012).

[23]             “In today’s economy, information and know-how have
become key factors for developing and maintaining competitive advantage” (cf. Baker
& McKenzie (2013), p.1).

[24]             It should be noted that there is free choice for the
innovator: there is no obligation for him to file for a patent; nor is he
obliged to keep the invention secret. He may also decide to release the relevant
information to the public in which case it enters the public domain and becomes
exploitable by anyone.

[25]             Without the underlying collateral know-how, patent
specifications are rarely sufficient for commercial use of patented technology.

[26]             While, as explained supra, in certain cases they
supplement the protection that companies get for their innovation through
patents, trade secrets also allow companies to be ahead of their competitors
even when using mature technologies. This is often achieved through continuous
investment in research and development for more efficient processes.

[27]             See ASIS (2007).

[28]             Forrester Consulting (2010), p. 5.

[29]             Fontana et al. (2013). This research is based on the
analysis of important industrial innovations which received the “R&D 100
awards” (prize awarded to the 100 most technologically significant new products
available for sale or licencing in the year preceding the judgment) between
1977 and 2004.

[30]             SMEs may not have sufficient financial resources to
seek, obtain and manage a portfolio of patents, or to monitor the market and
litigate in order to defend that same portfolio.

[31]             More than 81% of the responding companies find trade secrets
highly important for R&D and 78% of them highly important for the
exploitation of innovation.

[32]             Trade secrecy plays a key role in a variety of
innovation environments, including in markets where technology evolves quickly,
where inventions occur simultaneously, where innovations occur in a cumulative
manner, where combinations of trade secrets, patents, and other forms of
intellectual property are embedded in complex products, or in circumstances
where patent rights are considered weak. Cf. Baker & McKenzie (2013), p. 2.

[33]             Trade secrets can be important in non-innovative
sectors for established businesses (e.g. marketing strategies and generally
business-related information) seeking to keep their competitive advantage.

[34]             For example, they are largely used by the
pharmaceutical and chemical industry, which have the highest innovation rates in
Europe. Cf. CEFIC (2012), p. 6.

[35]             Baker & McKenzie (2013), p. 2.

[36]             Protective measures are in principle voluntary, but
trade secrets owners are de facto compelled to take them in order to
keep the secrecy of information. Also, whenever a trade secret owner seeks
judicial redress against another party who has allegedly misappropriated the
trade secret, courts will normally examine – when assessing if a piece of
information constitutes a trade secret worth being protected – whether the
plaintiff took reasonable steps (depending of the nature and value of the
information) to keep the relevant information confidential.

                For examples of
protective measures see IPR Helpdesk (July 2012) or CREATE (2012), p. 21 and
seq.

[37]             Labour law or antitrust law may not allow for
non-compete clauses in all circumstances.

[38]             In a recent survey among intellectual property
specialists, 60% of the respondents who concluded more than 50
technology-related agreements in the past two years concluded non-disclosure
agreements. This type of agreement was the category more often cited. WIPO
(2013), p. 13.

[39]             International trade in goods and services accounted for
42% of EU 27 GDP (imports) and 43% (exports). This trade increasingly involved
developing countries. According to the OECD, since 2000, there has been a
steady decline in the share of OECD imports and exports coming from other OECD
countries. In 2000, imports from OECD countries accounted for about 74% of
total world imports; by 2010, this share had fallen to 62%. For exports, the share
directed to other OECD countries also declined from 79% in 2000 to 68% in 2010.
OECD imports from non-OECD countries have risen from 26% to 38% of the total
over the same period, while exports to these countries have increased from 21%
to 32%. Cf. OECD Factbook 2013.

[40]             See for instance Create (2012), p.11 and seq.

[41]             Cf. GE & Strategy One (2013), p. 5. Survey based on
interviews with 3100 senior business executives in 25 countries, of which 6 EU
Member States. The percentage of respondents in the 6 EU Member States who
agreed with that statement were: Germany (84%), Ireland (83%), Netherlands
(90%), Poland (89%), Sweden (93%) and the United Kingdom (85%).

[42]             Business transactions on technology-related agreements
are perceived as increasingly complex, with the contractual framework often
involving multiple parties from different jurisdictions and different types of
organizations. Cf. WIPO (2013), p. 13.

[43]             Employees no longer spend their entire careers within
the same firm and it is commonplace for professionals to move to other
companies or to set up their own business.

[44]             Arguably, the long term protection provided by the
patent option may in certain circumstances become relatively less attractive in
view of the relatively long registration periods, its costs (registration and
legal fees, market monitoring and legal enforcement and legal disputes) and
risks (dubious eligibility, disclosure of invention followed by patent
invalidation, patent infringement).

[45]             This makes espionage per se simpler. See for instance
CEFIC (2012), p.14 or  Create (2012), p. 6.

[46]             The perception of a significant increase is
particularly strong in the chemical (29%) and pharmaceutical (29%) industries.

[47]             According to a joint Symantec Corp. and Ponemon
Institute survey in January 2009, polling nearly 1,000 adult participants
located in the United States who left an employer within the past 12 months,
59% of ex-employees admit to stealing confidential company information.

[48]             US research using event data shows that, on average, a
listed company’s public disclosure of a loss from economic espionage is
associated with a negative stock market response that is statistically and
economically significant. Cf. Carr & Gorman (2001).

[49]             US UNCIX (2011), p. B-1, referring to a European
intelligence service.

[50]             75 respondents to the 2013 Public Consultation reported
their trade secrets stolen from their company at least once. This corresponds
to 34% of the 223 respondents who recognised holding trade secrets.

[51]             Carayon (2012), p.9.

[52]             PWC (April 2012), p.10. In total, 447 organisations
completed this survey.

[53]             See Section A8.7 of Annex 8.

[54]             A definitive loss of secrecy would not be easily
compensated by the award of damages.

[55]             Major trading partners, such as the US, Japan or
Switzerland, have legislation on the protection of trade secrets against
misappropriation (see Annex 11 for further detail).

[56]             Cf. Article 39 and 41 and seq. of the Agreement on
Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). See Annex
9 for more information.

[57]             Provisional measures should also be possible under the
TRIPS Agreement.

[58]             There are rules dealing with the specific cases where
trade secrets (often referred to as “business secrets”) are disclosed to public
authorities, including EU authorities. This specific issue is, however, outside
the scope of this Impact Assessment. See Section A4.1 of Annex 4 for
further detail. In contrast, there is ample EU legislation on intellectual
property rights (see Annex 5).

[59]             Croatia is not included in this analysis.

[60]             Post-employment protection is not necessarily addressed
by labour law in all Member States. Cf. Baker & McKenzie (2013), p. 18.

[61]             It is assumed that intellectual property rights are not
available or are not optimal to protect the valuable information in question.

[62]             Exactly the same wording is included in Article 1382 of
the Belgian Civil Code and Article 1382 of the Luxembourg’s Civil Code. In the
Netherlands, Article 162 of the Sixth Book of the Civil Code (Burgerlijk
Wetboek) also has a similar wording.

[63]             Baker & McKenzie (2013), p. 19 and seq.

[64]             Bulgaria, Czech Republic, Greece, Hungary, Italy,
Lithuania, Poland, Portugal, Sweden and Slovakia. Cf. Baker & McKenzie
(2013), p. 24, 25.

[65]             E.g. a dishonest player may pretend to be receiving the
trade secret in good faith in order to exploit it.

[66]             However, in the latter case, damage compensation is
hardly awarded. Cf. Baker & McKenzie (2013), p. 27.

[67]             Baker & McKenzie (2013), p. 26, 46. It also creates
the risk of different practices by courts: e.g., in Germany, reverse
engineering (examination or disassembling of a product to find the method by
which it was developed) a lawfully acquired good to discover the trade secret may
be considered unfair (see Ohly (2009)).

[68]             Cf. Baker & McKenzie (2013), p. 28.

[69]             They would not be available as interim measures in
Estonia and Malta. See Table A12.1 in Annex 12.

[70]             I.e. in certain Member States, see Figure 3

[71]             There is no EU legislation in the customs field
addressing the imports of “resulting goods” from third countries (see Annex
13).

[72]             Baker & McKenzie (2013), p.
6.

[73]             The possibility to obtain damages exists in all Member
States.

[74]             See Searle (2010a), p. 132 and seq. for damages
valuation methods of trade secrets. This author argues that the reasonable
royalty method is the most appropriate for trade secret cases. Ibid. p.
188.

[75]             Article 4(1) of Regulation (EC) 864/2007 (Rome II
Regulation). See Section A16.1 of Annex 16 for further detail.

[76]             Since we are dealing with third party misappropriation,
without a contractual relationship, no contractual choice of law would be
possible.

[77]             See for instance Case 5 in Section A8.6 of Annex 8.
The misappropriation of the trade secret took originally place in Denmark, but
the trade secret owner ended up litigating in the UK, under UK rules, because
the trade secret was exploited there.

[78]             This issue should be distinguished from the recognition
and enforcement of a domestic judgment (e.g. a cross-border injunction against
a misappropriator of a trade secret or a judgment granting damages to the trade
secret owner) in another Member State. Such recognition should be
straightforward pursuant to Article 39 of Regulation (EU) No 1215/2012. This
Regulation has abolished the need to obtain a declaration of enforceability
(exequatur) as of 10 January 2015, thus removing an obstacle to cross-border
enforcement. See Section A16.4 of Annex 16 for more detail on this
issue.

[79]             Who, as noted above, must resort to cross-border
networking and activities to remain competitive in the modern knowledge economy.

[80]             Cf. Wadlow (2008), p. 314.

[81]             Trade secrets differ from patents in this case. Under
the current legal framework, if a patent owner loses its patent case in one
Member State, this revocation has no direct effects in other Member States.

[82]             When intending to have access to the Internal Market
from a third country, the misappropriator has an incentive to target the
weakest link as an entry point to the whole of the Internal Market.

[83]             See generally Annex 15.

[84]             According to the external study, only Hungary, Germany
and the United Kingdom seem to have in place effective procedural measures to
prevent disclosure of trade secrets during civil proceedings. Cf. Baker &
McKenzie (2013), p. 7, 45.

[85]             Cf. Searle (2010a), p. 58-59

[86]             This effect was for instance observed by Nasheri
(2005).

[87]             In common law countries, the disclosure rule applies;
in continental countries, the defendant may ask for certain documents/evidence
to be presented by the other party when such evidence lies in the control of
that party – which could imply further disclosure of trade secrets.

[88]             It should be noted that this plays both ways. Bad faith
plaintiffs could try this method (and therefore abusing the litigation rules)
to obtain confidential information from defendants.

[89]             Baker & McKenzie (2013), p. 7.

[90]             See UK Law Commission (1997), p. 23 and Baker &
McKenzie (2013), p. 77, supporting this view.

[91]             See Case 9 in Section A8.6 of Annex 8.

[92]             US UNCIX (2011), p. B-3, explaining that "German
authorities note that espionage cases are often hindered by diplomatic immunity
protections and by attribution issues from operating abroad through cyberspace".

[93]             Baker & McKenzie (2013), p.
75.

[94]             Statement made at the June 2012 Conference. See also
above, Section 2.2.2. Also Gielen (2009), p. 392, explains that “the
situation in the EU is patchwork quilt”.

[95]             Official statistics or specific figures on trade secret
misappropriation litigation are not available. This may be due to secrecy
inherent to the problem, different terminology used to encode cases in databases
and also to the fact that litigation regarding trade secrets misappropriation
may be related to contractual disputes with business partners, employees or
ex-employees rather than with third parties. Baker & McKenzie considers
that trade secret case law is limited throughout Europe and cross border
litigation non-existent (cf. Baker & McKenzie (2013), p. 46).

[96]             Baker & McKenzie also notes that in countries where
there are no specific provisions addressing trade secret misappropriations
(e.g. Malta) courts seem to attribute less importance to trade secret
protection and show a lower propensity to deal with cases of trade secret
violation when compared with countries where a specific law exists (e.g.
Sweden) or where specific provisions are clearly identifiable within more
general areas of law (e.g. Italy or Germany. Cf. Baker & McKenzie (2013),
p. 44.

[97]             Posner (1981), p. 244.

[98]             Theoretical research supports this conclusion. See for
instance, Almeling (2009), p.778.

[99]             The imperfect deterrent effect of existing rules
contributes to an increased risk of trade secret misappropriation activities,
although other factors are also important in this regard too (see Section
A8.3 of Annex 8). Moreover, the inability of those rules to offer
effective redress enhances the probable profit from such misappropriation:
there is an inverse relationship, ceteris paribus, between clarity of
enforcement and likelihood of misappropriation (cf. Almeling (2009), p. 778).

[100]            Scholars note that uncertainty associated with valuations
reduces the effectiveness of trade secrets as means to protect innovation. Cf.
Searle (2010a), p. 11.

[101]            This can take various forms like protecting the rooms
where the trade secret is kept with dedicated security, e.g. iris or
fingerprint scans, or sophisticated IT security to prevent online/network
theft.

[102]            Quantification of these costs in absolute terms for this
impact assessment has not been possible as they depend very much on the type of
information to be protected as a trade secret, the owner of the information,
the market in which he operates etc.

[103]            Risch (2007), p. 42 and seq. Risch
argues that savings in protective measures expenditure is a primary
economic justification for having trade secret law. The inefficiency of
protective measures has also been highlighted in economic research: a company
implementing a business plan to protect its trade secrets across the EU would
either incur excessive overheads (if different individual plans adapted to each
national legislation are to be implemented) or wasteful expenditure (if an
EU-wide plan was matching the weakest legal standard among the EU Member States,
since the company will expend additional resources although it knows that they are
unnecessary in at least some jurisdictions) – Cf. argument raised in Almeling
(2009), p. 777, as regards the US legal framework on trade secrets.

[104]            See Risch (2007), p.41.

[105]            See, for instance, CEFIC (2012), p. 12.

[106]            For employees willing to move to a new job in a
cross-border context, the law applicable to the contractual clauses should
normally not change. Thus information costs should not arise.

[107]            Litigation costs are not considered here. Litigation
outside the home Member State is generally associated to higher costs: e.g. claimants
may not be familiar with the foreign legal system, lack the possibility to rely
on their known and trusted lawyers, may need to travel and expend management
time etc. A study carried out for the Commission suggests that, in general,
embarking on litigation in another EU Member State to resolve a commercial
dispute is more expensive than comparable proceedings where the plaintiff and
defendant are both in the same country: 46% of the respondents to a key
stakeholders' survey (including national authorities and legal experts) held
that view; a different survey carried out among small businesses (European
Business Test Panel) showed that 40% of respondents with experience in
cross-border litigation considered that costs of litigation in another EU
Member State were much more expensive than the costs of litigation in their own
country (cf. CSES (2010), p. 46-47). However, in the present case, those
litigations costs are not necessarily related to the differences in national
rules on the misappropriation of trade secrets.

[108]            See European Commission Staff (October 2010), p. 28. See
also Lemley (2012) explaining that invention appears to be part of a social,
not an individual, phenomenon. Additionally, see Annex 6 on the
importance of knowledge spill-overs for innovation. See also Lemley (2012),
p.752, recalling the standard economic theory on duplication of research.

[109]            Not only the substantive law is relevant in this regard,
but also the procedural protection of trade secrets in litigation, as
underlined by de Werra (2009), p. 39, who argues that “the cross-border flow
of trade secrets may be prevented if it is considered that trade secrets could
be threatened because they may have to be disclosed […] at the time when
enforcement of the protection of such trade secrets would be sought before state
courts in the relevant jurisdiction.”

[110]            Baker & McKenzie (2013), p. 124.

[111]            60% of businesses and 42% of research entities.

[112]            This is also the opinion of the European chemical
industry, a sector which strongly relies on trade secrets: “Current differences
in the protection of trade secrets from misappropriation significantly impair
integration and cooperation in networks and clusters by preventing the flow and
exchange of information within the internal market”. Cf. CEFIC (2012), p.
13

[113]            GE & Strategy One (2013), p. 5. Survey based on
interviews with 3100 senior business executives in 25 countries, of which 6 EU
Member States. The percentage of respondents in the 6 EU Member States who
agreed with that statement were: Germany (80%), Ireland (68%), Netherlands
(65%), Poland (63%), Sweden (64%) and the United Kingdom (58%).

[114]            24% of the respondents to the 2012 Industry Survey
consider that better protection of trade secrets against their misappropriation
across the EU would result in better opportunities for their own companies to
cooperate with other players in R&D and innovation (cf. Baker &
McKenzie (2013), p. 131). This, a contrario, supports the view that
currently there is a sub-optimal level of information sharing. Moreover,
empirical research on licencing of patents (including associated know-how) in
Europe and Japan found that European companies, in general, license
significantly less (to non-affiliated entities) than their Japanese competitors
(cf. Pluvia Zuniga & Guellec (2009)). Private investment in R&D in
Japan is higher than in the EU (see Section 2.2.4 below).

[115]            While not the only factor influencing the level of
private investment in R&D or innovative activity, the legal protection of
trade secrets certainly influences investment choices.

[116]            This means that the benefits of the Internal Market in
this field are not being fully exploited. For instance, innovation may be
hampered by stifling cross-border alliances and investment within the EU and
overtly encouraging EU companies to invest in and develop their cross-border
networks in third countries offering the legal security and market scale
necessary for their continued growth. Given the global nature of most markets,
this does not contribute to a reinforcement of the confidence that businesses
need to have when investing in R&D within the EU.

                See also opinions
expressed by industry at the June 2012 Conference organised by the Commission.

[117]            E.g. the impact assessment accompanying the
communication on a Reinforced European Research Area Partnership for Excellence
and Growth explains that “[e]vidence from cross-border cooperation through
the Framework Programmes shows though that it is possible to improve R&D
performance by increasing spill-overs between sectors and nations […].” (Cf.
European Commission Staff (July 2012), p. 9). It also stated that “[t]he low
level of cross-border co-operation in research programmes implies that Europe
is not using the opportunities for enhancing the quality and impact of its
research. […] Similarly, inventions resulting from international cooperation
have on average a higher impact than purely national ones […]” (cf. ibid.,
p. 10). This paper refers to publicly funded research only, but the conclusions
on the value of cross-border cooperation on research are valid for commercially
funded R&D too.

[118]            The trade secret owner will also face other costs linked
to the act of misappropriation of the trade secret, such as costs of internal
investigation/staff time responding to a breach (identified by 44% of the
respondents), as well as or costs for negotiating settlements (identified by
34% of the respondents) and the litigation/prosecution costs (identified by 31%
of the respondents). The threat of misappropriation also entails increased
expenditure in protective measures (identified by 35% of the respondents).
Those costs also affect companies’ competitiveness.

[119]            See CREATE (2012), p. 6, claiming that “trade secret theft
can have devastating effects on companies’ competitiveness”.

[120]            This percentage could reach up to 80-100% when the trade
secret is the basis of the product differentiation or the manufacturing
process. Information based on companies interviewed by CEFIC. Cf. CEFIC (2012),
p. 13; and CEFIC (2013), p.2.

[121]            Information provided to the Commission by that company.

[122]            There is a difference between secrecy (irrespective of
the legal protection) and trade secret legal protection, which actually allows
to share information because of the protection against misappropriation. See Annex
6.

[123]            The European chemical industry explains that value chain
partners (both upstream and downstream) need to be involved in the development
of the chemical industry innovations to ensure their success and improve
competitiveness (the propensity of the chemical industry to integrate along value
chains  be one of the European’s chemical industry’s main competitive
advantages). However, companies would currently be prevented from cooperating
fully as they have to prioritise concealment of their trade secrets to avoid
misappropriation. Consequently, complete supply chain integration within
clusters would often not yet be achieved and the interconnection between
clusters would be insufficient to the detriment of the efficiency of the
industry. Cf. CEFIC (2012), p. 13.

[124]            This will particularly affect those sectors using mature
technologies and relying on process/incremental innovation, secret know-how
etc.; as well as sectors that cannot protect their innovative steps by
intellectual property rights (e.g. mostly services).

[125]            The need to pursue litigation abroad may also act as a
disincentive. A study carried for the Commission reported that: “The
possibility of having to pursue litigation abroad is a major concern to
business and one of the main reasons for not getting involved in cross-border
trade” (cf CSES (2010), p.58). Anecdotal evidence also underlines the
difficulties for SMEs in this regard. In a presentation at a European
Parliament event in 2012, an EU start-up explained that undertaking
cross-border litigation to defend its trade secrets was not a real alternative
to start-ups or small companies.

[126]            Empirical research shows that small firms are more
likely to license their inventions. Pluvia Zuniga & Guellec (2009), p. 12.
While this research is primarily about licensing of patents, in many cases the
licence also included know-how. Ibid. p. 16.

[127]            CEFIC (2012), p. 12. Indeed, when deciding where to
invest (e.g. for the establishment of a research centre or of production
facilities), businesses are likely to take into account, inter alia, the
level of protection of trade secrets against misappropriation. There is also evidence
in the US that states made strategic choices of industrial policy nature when
deciding the level of protection they want to award to trade secrets. The
Alberta Report argues that "[i]t is significant that most of the
jurisdictions which have reformed their trade secret laws in the United States
have done so because of a perceived need to provide a responsible climate for
such industries" [N.B. referring to high-technology industries, such
as micro-electronics or industries utilising genetic engineering] (cf. Alberta
Report (1997), p.119). The strategic choices may go in two directions: either a
race to implement high standards in order to attract investment or a preference
for weaker but more flexible standards, including in some cases a niche policy
to attract talent (by facilitating its mobility). The US example confirms the
risk of divergent development of legislation. However, although important, it
is not to be expected that legal protection against misappropriation of trade
secrets will rank top among the factors influencing investment decisions by
companies.

[128]            European Commission (May 2011a), p. 15. Other different
assumptions could logically (or theoretically) follow from the fragmented legal
protection: e.g. Member States with weaker legal protection of trade secrets
could become more attractive for the trading of or the import from third
countries of “resulting goods”; also unproductive expenditure on economic activities
by research-intensive industries leading to the inefficient allocation of
capital within the Internal Market could appear. However, there are no
analysis/data on these issues and they remain theoretical.

[129]            US ONCIX (2011), p. B-1, citing the Germany's Federal
Office for the Protection of the Constitution (BfV) as source. Another German
report confirms that "as many as 70000 jobs in Germany are directly
threatened by industrial espionage, not to mention those that are indirectly
threatened." Weber (2010).

[130]            De Kok et al. (2011). This study also suggests that
Member States with a strong innovation baseline have coped with the current
economic crisis better than others.

[131]            Also, the jobs created by SMEs (which accounted for 85%
of all jobs added in the EU between 2002 and 2010) mostly came from young
companies (up to 5 years old) while SMEs older than 10 years lost jobs over
that period of time. This appears to confirm that innovative activity, which is
the basis of all new businesses, is the backbone for social prosperity (cf.
European Commission Staff (February 2013), p. 133).

[132]            Ex-employees are often parties to litigation in trade
secrets misappropriation cases. See Annex 8 for selected cases. See also
Almeling et al. (2010) and Almeling et al. (2011) for figures on litigation
with employees in the US. See Annex 24 for a summary of the economic
research on the impact of trade secrets legislation on labour mobility.

[133]            Increased business reliance on secrecy could also affect
employees in so far as they may be imposed working conditions which could
undermine their fundamental rights to privacy (e.g. companies could in theory
attempt to disproportionately monitor employees’ behaviour to avoid breaches of
secrecy). According to The Economist (2013), multinational businesses are
increasingly screening their own employees' behaviour to avoid regulatory
breaches. See also Almeling (2012), p. 1101 (explaining that companies use
different security systems to detect misappropriation, including: key cards
that track employees movements, metadata about who accessed a file, when, for
how long and from where, etc.).

[134]            At the same time, it is also likely that stricter
protection (e.g. covenants not to compete) could be compensated by higher
remuneration of some key employees (premia wages). On the impact of
labour mobility on remuneration levels of employees, see Annex 24.

[135]            As Lemley points out, “if any idea, no matter how
public, is subject to a claim of legal rights [in this case, pursuant to a
contract], individuals and companies will reasonable worry about using any
information they do not themselves develop.” Lemley (2008), p. 338.

[136]            The economics literature highlights the importance of
job mobility/entrepreneurship of skilled staff for knowledge spill-overs. See Annex
24.

[137]            See for example Flagship initiatives "Youth on the
move" and "An Agenda for new skills and jobs" of the Europe 2020
initiative (European Commission (March 2010)), or the Communication “A
Reinforced European Research Area Partnership for Excellence and Growth”
(European Commission (July 2012a)).

[138]            European Commission (2011), p.3. Concerning business
R&D expenditure, the 2013 Innovation Union scoreboard reveals the second
largest gap between the EU and the US and the biggest between the EU and Japan
and South Korea respectively (even if the gap on this indicator has somehow
narrowed for US and Japan).

[139]            European Commission (2011), p.10.

[140]            CEFIC (2012), p.12.

[141]            European Commission (July 2012a).

[142]            To be sure, innovation and the commercialisation of
innovation are highly complex (decision-making) processes which are influenced
by many factors other than the uneven legal protection of trade secrets in the
EU; e.g. taxation, public subsidies to R&D activities, education of
workforce etc. However, the fragmented legal protection certainly creates
friction in the system and contributes to tie resources in unproductive
protective measures and/or to dissuade innovative activity.

[143]            USTR (2013), p. 13.

[144]            For instance, the intangible assets of the S&P500
companies constituted 17% of the companies’ total value in 1975, 32% in 1985,
68% in 1995, 80% in 2005 and 80% in 2010; cf. Ocean Tomo (2011). See also Annex 1 and OECD (May 2012).

[145]            Searle (2010a), p. 257, notes the increasing costs of
defending patents (because of patent trolls and aggressive patent enforcement),
suggesting that these costs could drive smaller firms to use trade secrets even
more intensively.

[146]            GE & Strategy One (2013), p. 4. Survey based on
interviews with 3100 senior business executives in 25 countries, of which 6 EU
Member States. The percentage of respondents in the 6 EU Member States who
agreed with that statement were: Germany (32%), Ireland (64%), Netherlands
(44%), Poland (53%), Sweden (49%) and the United Kingdom (47%).

[147]            Ibid.

[148]            Ernst & Young GmbH (2013); although data theft is
not necessarily the same as theft of trade secrets, the overlaps are
considerable.

[149]            US (2013), p. 1.

[150]            USTR (2013), p.13.

[151]            GE & Strategy One (2013), p. 6. Survey based on
interviews with 3100 senior business executives in 25 countries, of which 6 EU
Member States. The percentage of respondents in the 6 EU Member States who
agreed with that statement were: Germany (40%), Ireland (34%), Netherlands
(23%), Poland (40%), Sweden (25%) and the United Kingdom (41%).

[152]            One reason might be that Member States fear the
adjustment costs that would result from unilateral changes in their law and
hope for EU harmonisation based on their current regime. Furthermore, Member
States with a low level of protection may have little incentive to upgrade
their legislation if they have hope that a low level of protection might help
them attract investment. However, at this stage, this premise is not supported
by evidence.

[153]            For instance, the debate in France about the economic
intelligence problem has not led to any proposal regarding civil law protection
of trade secrets against misappropriation.

[154]            For instance, the US administration recently stated that
“trading partners must treat trade secret theft as a serious issue” and
explained it will focus diplomatic efforts to protect trade secrets overseas.
In particular, it announced that it will “raise trade secret protections as
a priority issue in all appropriate bilateral […] trade discussions”. Cf.
US(2013), pp. 3 and 4.

[155]            Van Eecke et al. (2009), p. 317.

[156]            Even if in the EU (contrary to the US) databases are
protected by an intellectual property right.

[157]            See Section 2.2.3

[158]            See Commission Regulation (EC) No 772/2004 and European
Commission (2004).

[159]            See European Commission (February 2009), in particular
§§ 75 and seq. on refusal to supply and margin squeeze.

[160]            See Regibeau & Rockett (November 2011).

[161]            See Section A4.2 of Annex 4.

[162]            See Peter & de Werra (2010), p. 104 and seq, for an
explanation of Article 39 of the TRIPS Agreement.

[163]            See Section A9.1 of Annex 9.

[164]            www.iprhelpdesk.eu

[165]            http://ec.europa.eu/civiljustice/index\_en.htm

[166]            There is already guidance at EU level on contractual
protection, including model non-disclosure/non-compete clauses. See for
instance, the templates made public by the European IPR helpdesk: https://www.iprhelpdesk.eu/library/useful-documents?=Apply
See also Expert Group on Knowledge Transfer (2009), p. 197, on model agreements
for technology transfer.

[167]            55% of respondents to the 2013 Public Consultation did
not support uniform contractual rules on non-compete and/or non-disclosure clauses.

[168]            E.g. copyright protection was extended in the Union to
databases although this has not been done in other countries, such as the US
(where databases are considered trade secrets).

[169]            Granting a patent right or creating a sui generis
right covering strategic business information, even if valuable to its holder,
appears disproportionate.

[170]            Lowering patentability standards would create problems
for the examination of patent applications.

[171]            It is noted that the options retained are enabling
rather than prescriptive in character: they would grant trade secret owners
easier access to redress against misappropriation of their trade secrets,
without imposing any particular solution; trade secrets owners would remain
free to choose between going to court, using arbitration proceedings or relying
solely on protective measures.

[172]            It must be noted that the exact impact of options would
depend on the type of trade secret misappropriated and the efforts to maintain
it secret before misappropriation.

[173]            Equally, the reverse could also be true. Given the
fragmentation of the legal protection, better information on it might have a
chilling effect on cross-border activities.

[174]            The convergence of the civil law rules could simplify
complex cross-border litigation in which a judge would be called to apply
foreign law as applicable law (which could indeed be a result of the combined
application of the Brussels I and Rome II Regulations). If national rules are
harmonised, the judge would apply foreign civil law rules largely similar to
those of the forum. The convergence in the definition of a trade secret would
also result in applying the same concept both for procedural rules (for the
purposes of protecting the trade secret during proceedings) and for
remedies-related rules, which, as outlined before may not be from the same
Member State in the course of the same case.

[175]            The reply from the Swedish Ministry of Justice to the
2013 Public Consultation underlined that the protection against the
misappropriation of trade secrets involves not only economic issues but also “difficult
and sensitive issues of how EU legislation would interrelate with national
rules on labour law, whistleblowing and freedom of expression”. Sweden
proposed that further consultation is carried out on those issues before any
decision is taken concerning a legislative initiative.

[176]            43% of the respondents to the 2012 Industry Survey
believe that convergence of EU rules would bring greater legal certainty. See Figure
7.

It is noted
that the benefit of improved legal certainty at national level would depend on
how well the definitions were drafted in the EU law. There is the risk that, at
least in some Member States, the harmonisation of rules would lead to a neutral
change in the law, and thereby some costs without significant benefits, or even
to a reduction in the level of protection if the new EU definitions were less
clear or appropriate than the ones in the national law. At the same time, the
benefit of harmonisation in the form of a level playing field and reduced
search costs and increased cross-border activities involving trade secrets
would materialise in any case.

[177]            In the US, the possible intervention of the Supreme
Court to interpret federal rules is one of the main arguments raised  in
support of the enactment of federal rules on civil redress against
misappropriation of trade secrets, since the current uniform State Act is
subject to separate interpretation by 47 state supreme courts.

[178]            This impact would only materialise if Option 3 (or
Options 4 or 5, as appropriated) is integrated into EU law, but not in case of
a non-legislative instrument.

[179]            46% of all respondents share this view.

[180]            34% of all respondents share this view.

[181]            Deterrence is highly ranked in the Chemical (73%), Motor
Vehicles (61%), Pharmaceuticals (61%), Advertising (57%), Machinery (55%),
Wholesale trade (54%) and Legal (50%) sectors, while it is less highly ranked
in the Telecom (28%), Electricity (30%) and Information services (30%) sectors.
See Baker & McKenzie (2013), p. 133.

[182]            19% of all respondents share this view.

[183]            43% of the companies which replied to the 2013 Public
Consultation believe that EU rules on the protection of trade secrets could
bring better conditions for SMEs to raise funding or venture capital. 27% of all
respondents agree.

[184]            Obviously, there are other factors that provide
incentives to innovation. However, the importance of legal protection of trade
secrets as a mechanism to appropriate innovation results has been largely demonstrated
by economic research (see Annex 6).

[185]            The 'expected value' of a good
weighs the value one expects the good to acquire with the likelihood with which
this value is expected to materialise. In a simplified example of the current
context, the expected value of an innovation based on a trade secret would be
the profit made from it per year multiplied by the number of years. If the gain
per year is, say, 1 and is expected for ten years the expected value is 10;
however, if there is a likelihood of 50% that the trade secret will be misappropriated
after one year, the expected value will be reduced to 50%x1 + 50%x10 = 0,5 + 5
= 5,5.

[186]            It could be argued that the effectiveness of those rules
would be doubtful as experience in some Member States shows that existing rules
on the possibility to hold in camera hearings are hardly used at
national level (see Annex 15). However, it is likely that the existence
of EU rules in this regard would result in an increased use of these rules,
because of the effect that the definition of trade secret as protected subject
matter will have, on the one hand, and the expected control that the European
Court of Justice will exercise in fine, on the other hand.

[187]            The external study explains that although trade secrets
law may appear to encourage an excessive proprietary approach and the creation
of barriers resulting in market inefficiency, the literature argues that
effective legal protection encourages efficiency and circulation of innovative
information. Policy objectives would be accomplished through at least two
separate channels: (1) trade secrets law serves as a partial substitute for
excessive investments in physical security; and (2) trade secrets law
facilitates disclosure in contract negotiations over the use or sale of
know-how that otherwise would not occur in the absence of such protection. Cf.
Baker & McKenzie (2013), p. 2.

[188]            43% of all respondents share this view.

[189]            30% of all respondents share this view

[190]            “TS/CBI”: trade secrets/confidential business
information.

[191]            In practice, unlawful competitors may be blocked by a
trade secret owner defending his rights.

[192]            Indeed abusive litigation could undermine the overall
trust in the legal protection of trade secrets across the EU. In the 2012
Industry Survey, 11% of respondents reported to have experienced, as
defendants, abusive litigation within the EU by a competitor trying to
intimidate that company with a false accusation of misappropriation of trade
secrets in the past 10 years (60 out of 537 companies). This problem would be
particularly significant in the Motor Vehicles (33% of respondents), Chemicals
(19%) and Pharmaceutical (18%) sectors. Baker & McKenzie (2013), p. 131.

[193]            As explained by Baker & McKenzie, “[t]rade secret
protection policies that help to reduce the resources expended by firms on such
controls assist firms in maximising the returns to innovation investments.
Considered in this light, trade secret protection plays an important role in
innovative efficiency and encouraging the disclosure and dissemination of
inventions beyond levels that would not be overcome were this protection not
available”. Baker & McKenzie (2013), p.3.

[194]            Ottoz and Cugno (2011) and Png (2012) have shown (using
comprehensive US data sets) that legal protection of trade secrets has a
positive effect on R&D, in particular in high tech industries. See Annex
6 and Annex 24.

[195]            36% of all respondents share this view.

[196]            Furthermore, the winner-takes-all nature of patent races
can lead to early registration of patents at a lower level of invention and
disclosure than would have been preferable for society at large.

[197]            Lemley (2012).

[198]            For instance, recent evidence shows that companies would
prevent their employees from reading patent descriptions so as to avoid being
accused of voluntary conduct in case of infringing a patent. See Hall et al.
(2012), p.4. See also, Boldrin & Levine (2007), p. 187-189.

[199]            See Section 5.1 as regards incentives to innovate

[200]            See Annex 6, in particular Section A6.5.

[201]            This percentage increases to 66% if only replies by
companies are considered.

[202]            Mainly because greater legal certainty and easier
enforcement would encourage the exchange of intellectual property across
borders in the EU and because better coordination and/or harmonisation would
help in deterring misappropriation from non-EU countries and make intra-EU
cooperation more interesting.

[203]            The issue arises only as regards employees who have
sufficient knowledge of the relevant trade secret.

[204]            For the effects of trade secret protection on labour
mobility, see the summary of the economics literature in Annex 24.

[205]            Indeed, this effect would depend on the existing
situation in the Member States involved. Should the harmonisation of rules lead
to a neutral change in the scope of the law, this effect would not materialise.

[206]            See Annex 24 on the negative effect of
non-compete clauses, in particular Png (2012), supporting the view that legal
protection of trade secrets could have positive effects compared to the status
quo.

[207]            See European Commission (July 2012a) and European
Commission Staff (July 2012).

[208]            See European Commission (March 2010) and European
Commission (October 2010).

[209]            This also reduces socially wasteful efforts to protect
information (e.g. constant monitoring of former employees to insure that trade
secrets are not revealed). See Searle (2010a), p. 19, citing Posner.

[210]            More than 50% the replies to the 2013 Public
Consultation believe that trade secrets are highly important for the
exploitation of innovation: i.e. turning an invention into a marketable
product. However, respondents do not seem fully convinced about the correlation
between trade secret protection and more choice for consumers: 27% of the
respondents find that trade secrets have a positive influence on consumer
choices (this percentage increases to 42% in the case of companies), while 23%
of respondents have the opposite view.

[211]            For instance, in a reply to a 2010 public consultation
on the customs rules applicable to the enforcement of intellectual property
rights (see Annex 13), industry representatives argued that “European
customs authorities should be able to take action in order to ensure the
protection of trade secrets in a similar fashion to authorities in other WTO
Member States”. Cf. TSIC (2010). Academic views have also raised the
argument (cf. Broncker & McNelis (2012), p. 674).

[212]            Academic research shows that the developed world is more
likely to share technology with countries that have at least some effective
level of intellectual property protection. Cf. Lemley (2012), p. 749.

[213]            On average, 78% of the companies participating in the
2012 Industry Survey perceive some positive benefits (74% of SMEs, 85% of large
firms). However, 22% of the replies do no perceive any positive impact. See
Baker & McKenzie (2013), p. 131.

[214]            However, to the extent that these options should have
positive impacts on R&D and innovation and on the development of innovative
businesses, they could indirectly benefit environment-related R&D and
innovation. This indirect effect is likely to be higher for Options 4 and 5.

[215]            It should be noted, however, that the definition of
trade secret misappropriation would need to be drafted with a high degree of
precision to be foreseeable enough and to only catch the most blatant cases of
misuse of the secret (thus resulting in a reduced scope of protection compared
to civil law). Cf. Lang (2003), p. 464

[216]            A further problem is who would carry the burden of proof
on what information is in the public domain or not. Cf. Lang (2003), p. 464.

[217]            It is also raised that public prosecutors select to
pursue cases based on the severity of the crime and the likelihood of
successful prosecution (Searle (2010a), p. 79).

[218]            It is noted that greater publicity about loss of trade
secrets brought about by criminal trials might deter many victims from filing a
case. See Lang (2003), p. 464.

[219]            One could also raise the weak legitimacy of the EU to
launch an information/awareness raising action on national rules, in the
absence of any EU harmonisation measure or soft-law in this field.

[220]            The 2003 Commission proposal to harmonise criminal rules
in that area was never endorsed by Council and Parliament. See European
Commission (January 2003).

[221]            These costs are likely to entail an initial investment
of between €775 000 and €2M. and annual recurring costs of between
€9 000 and €62 000. See Annex 22.

[222]            From the perspective of the national civil law systems,
this option ensures the application of existing civil law remedies against
misappropriation of trade secrets. From the perspective of a trade secret
holder, there is rather a convergence of national civil law remedies.

[223]            35% were generally in favour; and 34% were also in
favour “as long as EU legislation does not lower the existing national level of
protection”. Support rates are particularly high in the Motor vehicle (83%),
Chemicals (79%) and Wholesale (79%) sectors. See Baker & McKenzie (2013),
p. 132.

[224]            The uniform contractual rules on
non-compete/non-disclosure clauses have been excluded from the policy options,
see Annex 20.

[225]            Sweden and Estonia replied to the 2013 Public Consultation.
Denmark and France submitted written comments to the Commission in the margins
of the 2013 Public Consultation.

[226]            This article requires that the approximation of criminal
laws and regulations of the Member States has to be essential to ensure the
effective implementation of a Union policy in an area which has been subject of
harmonisation measures. As no specific EU (non-criminal) law deals today with
the misappropriation of trade secrets, evaluating whether measures other than
criminal law are sufficiently effective is difficult. Therefore, the conditions
for the use of Article 83(2) might not be met.

[227]            E.g. Regulation (EC) No 1049/2001.

[228]            The following Directives require employers to provide
certain types of information to employees' representatives and establish
confidentiality requirements in this respect: Directive 2002/14/EC (framework
on information and consultation); Directive 2001/86/EC (Employees' involvement
in the European Company; Directive 98/59/EC (collective redundancies); Directive
2001/23/EC (Transfer of undertakings); Directive 2009/38/EC (European Works
Council); Directive 2003/72/EC (Employee involvement in the European
Cooperative Society).

[229]            The Lisbon Treaty repealed old Article 211 of the Treaty
on the European Community which contained the express reference to the
Commission’s general power to adopt Recommendations. There is no express
reference to such a general power in the Treaty on European Union (TEU) or the TFEU.
The possibility to adopt Recommendations results from the interpretation of
Article 17 of the TEU on Commission’s role and its powers.

                According to point 43
of the 2010 Framework Agreement on relations between the European Parliament
and the European Commission (OJ L 304, 20.11.2010, p. 47), in areas where
Parliament is usually involved in the legislative process, the Commission
should only adopt Recommendations in duly justified cases and after having
given the Parliament the opportunity to express its views.

[230]            A different issue is the application of the rules by
courts to specific cases. There is the possibility that divergences between
courts appear, whether within the same Member State or cross-border. However,
this will happen whether the rules to be applied by the judges are in an EU
Regulation or in national rules transposing a Directive. The way to correct
these divergences is through appeals to higher courts which can provide uniform
interpretations. This is the same as in any other area of law where judges take
decisions; it is not a trade-secret specific issue. Concerning the EU
dimension, the European Court of Justice will have an important role to play in
this regard. This is one of the most important factors for the future success
of the measures.

[231]            The transposition into national law of EU legislation on
the enforcement of intellectual property rights, which contained similar
provisions, did not raise any technical difficulty.

[232]            Innovation is a specific function of entrepreneurship,
in either existing businesses, or new ventures. It is a process of creating new
wealth-producing resources or improving existing resources which enhance
potential for creating wealth. Cf. Drucker (1985).

                Respondents to a
recent business survey define innovation as the implementation of new
processes, products, organizational changes or marketing changes (35% of top
choices and 47% of all mentions). Other replies were: an environment/culture
that embraces positive change, creativity and continuous improvement (27% of
top choices, 42% of total mentions); research and development, new intellectual
property and inventions (17% and 41%), staying ahead in the market and being a
market leader (12% and 32%), solutions that benefit society and societal
outcomes (9% and 29%). GE & Strategy One (2012), p.30. Survey carried out among
2800 senior business executives, mostly from large companies in 22 different
markets.

[233]            ASIS (2007).

[234]            OECD (2010), cited in European Commission Staff (October
2010), p.8.

[235]            OECD (2010), cited in European Commission Staff (October
2010), p.8.

[236]            Understood as encompassing computerised information
(software and databases), innovative property (patents, copyrights, designs,
trademarks) and economic competencies (including brand equity, firm-specific
human capital, networks joining people and institutions, organisational
know-how that increases enterprise efficiency, and aspects of advertising and
marketing). Cf. OECD (May 2012), p. 3 and seq.

[237]            Ibid. p. 5.

[238]            OECD (May 2012), p.6.

[239]            OECD (May 2012), p. 9.

[240]            Forrester Consulting (2010). Almeling (2012) also points
at this factor (cf. p. 1104).

[241]            See Annex 6.

[242]            GE & Strategy One (2012), p.23. Survey carried out
among 2800 senior business executives, mostly from large companies in 22
different markets. 39% of respondents considered that a combination of players
partnering together will most likely drive innovation through the next decade;
27% replied that SMEs will drive innovation and for 21 %, large companies will
be the drivers.

                See also GE &
Strategy One (2013), p. 5. Survey based on interviews with 3100 senior business
executives in 25 countries, of which 6 EU Member States. 87% of respondents
believe that their firm would innovate better by partnering than on their own.
The percentage of respondents in the 6 EU Member States who agreed with that
statement were: Germany (84%), Ireland (83%), Netherlands (90%), Poland (89%),
Sweden (93%) and the United Kingdom (85%).

[243]            See Annex 8.

[244]            See European Commission Staff (October 2010), p.26. This
paper points out that new competition comes from Brazil, Russia, India and
China. These emerging economies would no longer be lagging behind in
technological development. Many of these economies have significant pockets of
academic excellence; strong educational programmes; major programmes to create
research infrastructures and attract leading academic researchers; strong
entrepreneurial industries; and sophisticated, well-educated users and
consumers.

                Veugelers (2013)
describes Asia’s increased innovation spending (mostly related to information
and communication technologies), although economies such as the Chinese or
Korean are still not specialised in knowledge-intensive goods and services.

[245]            A recent OECD paper maintains that in a context of
global integration of markets and deregulation, sustained competitive advantage
is increasingly based on innovation, which in turn is driven, in large part, by
investments in knowledge-based capital. For instance, research shows that
absolute levels of patenting, R&D, IT and management quality have risen in
firms more exposed to increases in Chinese imports. And in sectors particularly
exposed to Chinese imports, jobs and survival rates have fallen in firms with
lower patenting intensity, but have been relatively protected in high-tech
firms. OECD (May 2012), p. 9.

[246]            The rise of ‘open innovation’ – which involves companies
relying much more on ‘traded’ knowledge inputs and outputs instead of primarily
or even solely on self-generated inputs and outputs – is only one of the many
shifts affecting the pattern of innovative activities across the globe. European
Commission Staff (October 2010), p. 28.

[247]            European Commission (March 2010), p.5.

[248]            European Commission Staff (October 2010), p.7.

[249]            Gardiner and Bayar (2010), cited in European Commission
Staff (October 2010), p.7.

[250]            Fougeyrollas et al (2010), cited in European Commission
Staff (October 2010), p.7. See also Zagamé (2010), cited in European Commission
(October 2010), p.6.

[251]            Corrado et al (2009), cited in European Commission Staff
(October 2010), p.7.

[252]            Cf. European Commission Staff (October 2010), p. 8.

[253]            In many areas, research has enabled European companies
to be leaders or first movers in technology development and be ahead of the
game in many areas, setting the standards and performance levels for others to
follow. For example, Europe has introduced "fly-by-wire" in the
commercial aircraft industry and GSM in mobile telecommunications, promoted the
growth of capabilities in satellite development and launch, invented the
compact disc, and more recently fostered the emergence of the wind energy
industry. Moreover, Europe is still the best producer of scientific
publications worldwide and also generates more than 30% of world patent
applications. Also, EU inward Foreign Direct Investment (FDI) in R&D is
holding up, bucking the trend of a decline in overall inward FDI (Cf. European
Commission Staff (July 2012), p.4).

[254]            European Commission (October 2010), p.6

[255]            Eurostat data. Cf. European Commission Staff (July
2012), p.6.

[256]            An additional problem is that knowledge production is
concentrated in a relatively small number of Member States. Cf. European
Commission Staff (July 2012), p.6.

[257]            R&D intensity levels in China are lower (1.44% –
2007 figure), but rising faster. Cf. European Commission Staff (October 2010),
p. 11.

[258]            European Commission (February 2012); cited in European
Commission Staff (July 2012), p.5.

[259]            For instance, the US is performing better than the EU27
in 10 indicators, in particular in tertiary education, international
co-publications, most cited publications, R&D expenditure in the business sector
and public-private co-publications.

[260]            European Commission (March 2013), p.7 : “Comparing
the EU27 with a selected group of major global competitors, this year’s
Innovation Union Scoreboard edition again confims that the US, Japan and South
Korea have a performance lead over the EU27 with South Korea joining the US as
most innovative country. Although this lead has been increasing for South
Korea, the EU27 has been able to close about half of the gap with the US and
Japan since 2008.”

[261]            European Commission Staff (July 2012), p.5.

[262]            “The global innovation leaders US, Japan and South
Korea are particularly dominating th eEU27 in indicators capturing business
activity as measures by R&D expenditures in the business sector […].” European
Commission (March 2013), p.7.

[263]            Three symptoms of this are the deficits of the EU vs.
the US in terms of volume of private sector R&D investments (EU: 1.27% of
GDP, US: 2.12% of GDP in 2009), of patenting (25% of triadic patent families
originated from the EU in 2007 vs. 35% originating from the US) and of medium
and high-tech product exports (representing 47% of total EU products export in
2008 vs 59% of total US products exports) in 2008 (European Commission (2011), and
Pro Inno Europe (2009)). Cf. European Commission Staff (July 2012), p.5.

[264]            Critical I (2006), cited in European Commission Staff
(July 2012), p.46.

[265]            European Commission (2009), p. 69 and European
Commission (2007), p. 44 to 48. Cited in European Commission Staff (July 2012),
p.46.

[266]            Albarrán et al. (2009), cited in European Commission
Staff (July 2012), p.47.

[267]            Bonaccorsi (2007), cited in Cited in European Commission
Staff (July 2012), p.46.

[268]            European Commission (March 2010), p.7.

[269]            European Commission (March 2010), p.12; European Commission
Staff (October 2010), p. 20.

[270]            Business investment in R&D (which plays an important
role in determining productivity levels) reached 1.21% of GDP in the EU in 2008
compared to 2.0% in the US, with only Finland and Sweden above the US average
(cf. European Commission Staff (October 2010), p.11).

[271]            Cf. European Commission (October 2010), p.6 and 13.

[272]            European Commission (March 2010), p.12

[273]            See Moncada-Paterno-Castello et al (2009), DGPTE (2006)
and European Commission (2008). Cited in European Commission Staff (October
2010), p. 20.

[274]            Soete and Præst Knudsen et al (2009), cited in European
Commission Staff (October 2010), p. 20.

[275]            European Commission (October 2010), p.6.

[276]            European Commission (2008c), cited in European
Commission Staff (October 2010), p. 20.

[277]            DIUS/BERR (2008), cited in European Commission Staff
(October 2010), p. 20.

[278]            Kumbhakar et al (2010), cited in European Commission
Staff (October 2010), p. 20.

[279]            Hughes (2007), cited inEuropean Commission Staff
(October 2010), p. 20.

[280]            Soete and Præst Knudsen et al (2009); Veugelers (2009),
cited in European Commission Staff (October 2010), p. 20.

[281]            Veugelers and Cincera (2010), cited in European
Commission Staff (October 2010), p. 20.

[282]            European Commission Staff (July 2012), p.6.

[283]            See gnerally European Commission Staff (July 2012), p.6.

[284]            NMP Scoreboard (2011), Roco et al. (2010), OECD (2009),
cited in European Commission Staff (July 2012), p.6.

[285]            Europe remains a world-leader in many strategic sectors
such as automotive, aeronautics, engineering, space, chemicals and
pharmaceuticals. Industry still accounts for 4/5 of Europe's exports and 80% of
private sector R&D investment comes from manufacturing. Industrial
activities also have important spillover effects on production and employment
in other sectors. For every 100 jobs created in industry, it is estimated that
between 60 and 200 new jobs are created in the rest of the economy, depending
on the industrial sector.

Also, Europe
is a global leader in R&D for KETs (Key Enabling Technologies) with a
global patent share of more than 30%. The global market in KETs, which
comprises micro- and nanoelectronics, advanced materials, industrial
biotechnology, photonics, nanotechnology and advanced manufacturing systems, is
forecast to increase by over 50% from € 646 billion to over € 1 trillion by
2015, which is equivalent to around 8% of the EU's GDP.

Cf. European
Commission (October 2012), p. 3 and 8.

[286]            European Commission (October 2012), p.6.

[287]            European Commission (October 2010), p.6.

[288]            European Commission (March 2010), p.10-11

[289]            A stakeholder consultation carried out for the
preparation of the 2012 Commission Communication on A Stronger European
Industry showed that uncertainties about the future evolution of new markets
often adversely affect business confidence and hold back investment. The
Commission thus explained that it is essential to dispel the uncertainties in
new markets through the creation of a simple, stable and predictable long-term
framework of Internal Market technical rules, standards and other legislation. European
Commission (October 2012), p.7.

[290]            European Commission (October 2010), p.6.

[291]            European Commission Staff (October 2010), p. 12.

[292]            Quantitative evidence of bibliometric and patent-based
patterns show that the average impact (as measured by citations) of
internationally co-authored work in most countries is significantly higher than
purely domestic papers (exceptions
are the US, China and India which have a large pool of domestic researchers). Similarly, inventions resulting from international cooperation
have on average a higher impact than purely national ones. It is therefore not
surprising that the EU has one of its highest scientific impacts in 'space'
where research activities are highly coordinated and integrated across European
countries. Two other fields where cross-border collaboration rates are higher
in the EU are 'physics' and 'earth and environmental sciences' in which
respectively 85% and 50% of EU publications involve authors based in several
Member States. In Germany, France and the UK, these two fields are among those
with the highest scientific impact. Cf. European Commission Staff (July 2012), p.
10.

[293]            European Commission (October 2010), p.7.

[294]            For example, in the case that the removal of barriers
which would improve the conditions for cross border cooperation and interaction
would lead Member States to gradually reallocate funding to increase the
attention given to transnational activities (i.e. to reach 4% research funding
by 2020, from the current 0.8% share), this would induce a possible extra gain
of GDP of 16 billion Euros in 2030 (0.25% additional GDP growth on top of the
0.92% additional growth expected from Horizon 2020). Higher transnational
coordinated funding would create 323,000 additional jobs. The impact would be
much stronger if the Barcelona target (3% of GDP dedicated to research) were
reached by 2020. The combined effect of the Barcelona target, Horizon 2020 and
an increased share of transnational funding would imply 445 billion Euros extra
GDP and 7.2 million more jobs in 2030. Cf. European Commission Staff (July
2012), p. 29.

[295]            European Commission (October 2010), p.18.

[296]            See Blechinger et al (1998); Klette and Forre (1998);
Evangelista and Savona (2002); Harrison et al (2008); OECD (2010); Bogliacino
and Pianta (2010). Cited in European Commission Staff (October 2010), p.8.

[297]            49% strongly agreed, 37% somewhat agree. GE &
Strategy One (2012), p.14. Survey carried out among 2800 senior business
executives, mostly from large companies in 22 different markets.

                At the same time,
this survey also highlights that the human factor is the most relevant factor
for success in innovation: when asked what could most help them, at their own
company level, to be more successfully innovative, having more creative people
on the team (out of the box thinkers) was mentioned by 56% of respondents;
while having more people with advanced technical expertise was mentioned by 49%
of the replies. These two replies come well ahead other factors, including
access to finance. Ibid. p.25.

[298]            According to the Commission, this is due to a variety of
national, local-specific and international factors. Although it is difficult to
disentangle research-specific factors from those outside the research field
(i.e. factors linked to the overall economic structure and performance of a
country, its labour market, the quality of its infrastructure and education and
training systems, etc.) 'structural' factors such as different national
approaches to competition for funding and cross-border cooperation, as well as
to the fragmented labour markets for researchers; "delocalised"
working methods; and policies promoting access to scientific knowledge and high
speed interconnection of research centres with the availability of shared high
performance computing services and unique collections of research information
and data are specific to research policy. These underlying problems act as
'structural' breaks, as they do not permit the development of adequate
framework conditions for research and innovation at national and European level
– i.e. they constitute barriers or obstacles to the completion of ERA. In
addition, the current highly variable and fragmented way of structuring
research in Europe is not fostering open innovation, essential to enhance
competitiveness and attractiveness of the European economy. Cf. European
Commission Staff (July 2012), p.6.

[299]            Eurostat R&D statistics, cf. European Commission
Staff (July 2012), p. 12.

[300]            European Commission (October 2010), p. 9.

[301]            De Kok et al. (2011). This study
also suggests that Member States with a strong innovation baseline have coped
with the current crisis better than others.

[302]            European Commission Staff (February 2013), p. 133.

[303]            The Commission services also received position papers
from some interested parties, triggered by this public consultation. These
position papers have not been taken into account for this summary.

[304]            The consultation was carried out when Croatia was not
yet a member of the EU.

[305]            These figures are based on the self-declaration by
respondents. However, although seven respondents have declared themselves as
trade unions, two of them should probably not be considered as such as it seems
that the French word used for 'trade union', 'syndicat', also means
'association', and that is what these two respondents from France seem to be.
Furthermore, one trade union has submitted its contribution twice. See also Box
1.

[306]            Namely the Governments of Sweden and Estonia, as well as
the government of Friuli Venezia Giulia (Regione Autonoma Friuli Venezia
Giulia)

[307]            Cf. Baker & McKenzie (2013), cf. p. 115 and Annex 17
of that study.

[308]            Section A3.2 of this Annex is based on Baker and
McKenzie (2013), p. 132 and seq. For the charts presenting the findings, see ibid.
For more detail about the results and highlights, see Ibid. p. 119 and
seq. as well as Annex 17 of that report.

[309]            Companies treat and keep trade secrets as if they were
property. However, the reference to ownership is used here purely for
convenience; it does not imply that a proprietary right is involved. For a
discussion on whether information can be treated as a form of property, see UK
Law Commission (1997), p. 18 and seq.

[310]            The protected information must have some actual or
potential economic value to someone else that the owner of the secret (that
someone else need not be a competitor at the material time) to qualify as a trade
secret. Not all confidential information has commercial value or is
business-sensitive.

[311]            The owner must derive value from the secrecy of the
information.

[312]            Expression used in Van Eecke & al. (2009) to refer to
the acquisition, protection and exploitation of technology in the “wider
context of the protection of confidential information and trade secrets”.
Ibid. p. 28. This study also states that “most European countries have
developed legislation to protect technological ‘trade secrets’ or ‘know-how’”. Ibid.
p. 281.

[313]            This is the expression used in TRIPS to refer to trade
secrets.

[314]            This expression is often used in the context of the
protection of the information which a business must disclose to regulatory
authorities. See below Section A4.2 of this annex.

[315]            Lang (2003).

[316]            IPR Helpdesk (July 2012), p. 2.

[317]            Searle (2010a) considers that know-how does not qualify
for trade secret protection as it would involve tacit knowledge embedded in
human capital. Ibid. p.4

[318]            See Forrester Consulting (2010).

[319]            Cf. Alberta Report (1986), p. 159.

[320]            Alberta Report (1986), p. 36 and seq. These categories
were also considered by UK Law Society (1997), p. 32.

[321]            Famous examples of this kind, include the formula for
Coke, the recipe for Kentucky Fried Chicken and the composition of metals used
in the highest quality orchestra cymbals. As pointed out by the Alberta Report,
trade secrets of this kind have existed since at least the time of the Greek
Empire, and will likely always exist, regardless of the state of the law. Cf. Alberta
Report (1986), p. 36 and 37.

[322]            The information covered by this category might not, in
everyday parlance, be regarded as a secret (Cf. UK Law Society (1997), p. 33).
In other words: "'secrecy' in such cases is something of a misnomer. It
applies either because no one else has the equipment or know-how to collate the
relevant information or has not invested the time and resources required to do
so." (cf. Alberta Report (1986), p. 38).

[323]            Ibid. p. 38,39.

[324]            See Annex 10 of this Impact Assessment.

[325]            Carayon (2012), p. 38 and 63.

[326]            Commission Regulation (EC) No 772/2004 of 27 April 2004
on the application of Article 81(3) of the Treaty to categories of technology
transfer agreements, Official Journal L 123, 27.04.2004, p. 11.

[327]            Interestingly, this regulation states that
"intellectual property rights" includes know-how alongside industrial
property rights, copyright and neighbouring rights. Cf. Article 1(1)(g).

[328]            Judgment of the Court of 29 March 2012, Case C-1/11, Interseroh
Scrap and Metals Trading Gmbh v Sonderabfall-Management-Gesellschaft
Rheinland-Pfalz mbH (SAM), § 43.

                This is settled case
law. See also, Case C‑450/06 Varec, § 49; Case C-36/92P, SEP, §37; Case 53/85 AZKO v
Commission, §28; Case 85/76, Hoffman-LaRoche v Commission, §14.

[329]            Article 27(2) of Council Regulation (EC) No 1/2003 of 16
December 2002 on the implementation of the rules on competition laid down in
Articles 81 and 82 of the Treaty, OJ L 1, 4.1.2003, p. 1.

[330]            See Case T-353/94, Postbank v Commission, §87.

[331]            As regards the harm, the Court of Justice ruled in the Varec
case that the undertaking concerned might suffer 'extremely serious damage'
if there were improper communication of certain information to a competitor. Judgment
of the Court of 14 February 2008, Varec, C-450/06, §54.

[332]            See Case T-198/03, Bank Austria Creditanstalt v
Commission, §71.

[333]            The Court of Justice recognised that the duty of
confidentiality placed on the Commission and its staff by Article 339 TFEU
(Article 287 EC) was a general principle of law. See, for instance, Case
143/83, Adams v Commission, §34.

[334]            Cf. Article 70 of Regulation (EU) No 1093/2010 of the
European Parliament and of the Council of 24 November 2010 establishing a
European Supervisory Authority (European Banking Authority), OJ L 331,
15.10.2010, p. 12.

Recital 62 of
that Regulation states that: "It is essential that business secrets and
other confidential information be protected. The confidentiality of information
made available to the Authority and exchanged in the network should be subject
to stringent and effective confidentiality rules."

[335]            See for instance Article 25 of Directive 2004/109/EC of
the European Parliament and of the Council of 15 December 2004 on the
harmonisation of transparency requirements in relation to information about
issuers whose securities are admitted to trading on a regulated market and
amending Directive 2001/34/EC, OJ L 390, 31.12.2004, p.38.

[336]            There are specific rules protecting secrecy of
confidential information during antitrust proceedings in the Member States too.
All of them have measures aimed at protecting business secrets/confidential
information from being disclosed during proceedings before national competition
authorities, even if the procedural steps needed to obtain protection of secret
information varies, to a certain extent, from jurisdiction to jurisdiction. In
particular, the involved undertakings have the right to indicate the
information that, in their opinion, shall not be divulged. According to Baker
& McKenzie (2013), however, the secrecy of information may not be
sufficient to prevent disclosure when such information is relevant to prove the
infringement or for the right of defence of the parties (Bulgaria, Estonia, France,
Germany, Greece, Italy, Luxembourg, Portugal). See Baker & McKenzie (2013),
52.

[337]            Article 28 of Regulation (EC) No 1/2003.

[338]            Article 6 of Directive 2004/18/EC of the European
Parliament and the Council of 31 March 2004 on the coordination of procedures
for the award of public works contracts, public supply contracts and public
service contracts.

[339]            Commission proposal for a Directive of the European
Parliament and of the Council on public procurement, COM(2011) 896 final,
Brussels, 20.12.2011. Negotiations before the European Parliament and the
Council are on-going.

[340]            "Article 18

Confidentiality

1. Unless
otherwise provided in this Directive or in the national law concerning access
to information, and without prejudice to the obligations relating to the
advertising of awarded contracts and to the information to candidates and
tenderers set out in Articles 48 and 53 of this Directive, the contracting
authority shall not disclose information forwarded to it by economic operators
which they have designated as confidential, including, but not limited to,
technical or trade secrets and the confidential aspects of tenders.

2.
Contracting authorities may impose on economic operators requirements aimed at
protecting the confidential nature of information which the contracting
authorities make available throughout the procurement procedure."

[341]            Cf. Article 27(4) of the proposal.

[342]            Cf. Article 28(3) of the proposal.

[343]            Veolia vs. Nottinghamshire CC [2010] EWCA 1214 per Rix
LJ.

[344]            This issue is of particular importance when businesses
transfer trade secrets to EU regulatory agencies, such as the European
Medicines Agency, the European Chemical Agency or the three European financial
authorities.

[345]            There are specific rules for the access to file in
competition cases, see above.

[346]            Regulation (EC) No 1049/2001 of the European Parliament
and of the Council of 30 May 2001 regarding public access to European
Parliament, Council and Commission documents. OJ L 145, 31.5.2001, p. 43

[347]            Therefore, this is not an absolute, but a relative,
exception.

                See Articles 118 and
119 of Regulation (EC) No 1907/2006 for a presumption that providing access to
certain information would undermine the commercial interest of an undertaking.
Cf. Regulation (EC) No 1907/2006 of the European Parliament and of the Council
of 18 December 2006 concerning the Registration, Evaluation, Authorisation and
Restriction of Chemicals (REACH), establishing a European Chemicals Agency, amending
Directive 1999/45/EC and repealing Council Regulation (EEC) No 793/93 and
Commission Regulation (EC) No 1488/94 as well as Council Directive 76/769/EEC
and Commission Directives 91/155/EEC, 93/67/EEC, 93/105/EC and 2000/21/EC, OJ L
136, 30.12.2006, p.1.

[348]            See Case T-198/03, Bank Austria Creditanstalt v
Commission, §71.

[349]            Directive 2005/60/EC of the European Parliament and of
the Council of 26 October 2005 on the prevention of the use of the financial
system for the purpose of money laundering and terrorist financing, OJ L 309,
25.11.2005, p.15.

[350]            E.g. the audited entity may be an EU subsidiary of an
audited entity of that third country.

[351]            Cf. European Commission Proposal of 30 November 2011 for
a Directive of the European Parliament and of the council amending Directive
2006/43/EC on statutory audits of annual accounts and consolidated accounts,
COM(2011) 778 final. See Article 1(23), introducing a point (ba) in Article
47(2) of Directive 2006/43/EC.

[352]            Traditionally we distinguish between industrial property
rights on one hand, and copyright and related rights on the other. This
division is however not exhaustive as it does not encompass newly developed
categories of intellectual property rights such as sui generis right for
databases.

[353]            As underlined by Hall et al. (2012), p.4, from a social
point of view, the justification for the granting of the exclusive right, in
particular in the case of a patent, lies on the fact that the inventor is, in
exchange for that exclusive right, required to disclose the innovation in a
specific, standardised format. This disclosure would allow other inventors to
avoid duplication of research and carry our incremental innovation. Endogenous
growth theories underline the importance of knowledge spillovers among
companies and sectors for sustained long-run growth (cf. Romer (199)).

On this
point, however, it is important to note that there is research showing that
companies do not necessarily use patent documents to obtain information.
Lemley, for instance, explains that"[m]any companies discourage their
engineers from reading patents". The main reason being to avoid
awareness of potentially infringed patents and therefore charges of wilful
patent infringement. See Lemley (2008), p. 332, 333 and footnote 89.

[354]            Indeed, an important motivation for protecting
innovations through trade secrecy is to avoid the disclosure required by other
forms of intellectual property. Disclosure of new inventions could be
particularly detrimental to SMEs since disclosure of a key invention could mean
catastrophic loss in value and future performance for the inventing firm. Cf.
Baker and McKenzie (2013), p. 83.

[355]            Disassembling a product to figure out how it operates. This
practice is legitimate and in no way prohibited or legally restricted. Reverse
engineering has however its limitations and usually does not provide relevant
insights on manufacturing processes.

[356]            E.g. patents (20 years), design rights (25 years),
copyrights (70 years after the death of the author) and rights related to
copyright (generally 50 years after the death of the rightholder), rights on
the topographies of semiconductor products (10 years) or sui generis
rights on databases (15 years)

[357]            Intellectual property rights normally require a certain
degree of originality in the innovation to allow for its protection. Patents,
for instance, can only be granted (upon application and after examination by a
granting authority) to absolutely novel inventions in the pre-specified subject
matter fields (for example, business methods and software cannot be patented in
the EU).

[358]            Arrow (1962), at 617.

[359]            Beckerman-Rodau (2002), p. 383-84.

[360]            It should be noted that, when the information amounts to
a patentable innovation, the inventor may prefer to obtain a patent, which
implies a limited in time exclusive right to use such innovation in exchange of
its public disclosure.

[361]            Erkal (2005), p. 430-431.

[362]            One example is the creation of the European Observatory
on Counterfeiting and Piracy in April 2009 by the European Commission. This
observatory (renamed as European Observatory on Infringements of Intellectual
Property Rights) was entrusted in 2012 to the Office for Harmonisation in the
Internal Market. See Regulation (EU) No 386/2012 of the European Parliament and
of the Council of 19 April 2012 on entrusting the Office for Harmonisation in
the Internal Market (Trade Marks and Designs) with tasks related to the
enforcement of intellectual property rights, including the assembling of public
and private-sector representatives as a European Observatory on Infringements
of Intellectual Property Rights, OJ L 129, 16.5.2012, p. 1..

[363]            Directive 2006/115/EC of the European Parliament and of
the Council of 12 December 2006 on rental right and lending right and on
certain rights related to copyright in the field of intellectual property, OJ L
376, 27.12.2006, p. 28.

[364]            Council Directive 93/83/EEC of 27 September 1993 on the
coordination of certain rules concerning copyright and rights related to
copyright applicable to satellite broadcasting and cable retransmission, OJ L
248, 6.10.1993, p.15.

[365]            Directive 2006/116/EC of the European Parliament and of
the Council of 12 December 2006 on the term of protection of copyright and
certain related rights, OJ L 372, 27.12.2006 p. 12. Directive 2006/116/EC was 
recently amended by Directive 2011/77/EU of the European Parliament and of the
Council of 27 September 2011 (OJ L 265, 11.10.2011, p.1), which extended the
term of protection for performers and sound recordings to 70 years.

[366]            Directive 2001/29/EC of the European Parliament and of
the Council of 22 May 2001 on the harmonisation of certain aspects of copyright
and related rights in the information society, OJ L 167, 22.6.2001, p.10.

[367]            Directive 2009/24/EC of the European Parliament and of
the Council of 23 April 2009 on the legal protection of computer programs, OJ L
111, 5.5.2009, p. 16.

[368]            Directive 96/9/EC of the European Parliament and of the
Council of 11 March 1996 on the legal protection of databases, OJ L 77,
27.3.1996, p. 20.

[369]            Directive 2001/84/EC of the European Parliament and of
the Council of 27 September 2001 on the resale right for the benefit of the
author of an original work of art, OJ L272, 13.10.2001, p.32.

[370]            Directive 2012/28/EU of the European Parliament and of
the Council of 25 October 2012 on certain permitted uses of orphan works, OJ L
299, 27.10.2012, p. 5.

[371]            Commission Proposal of 11 July 2012 for a Directive of
the European Parliament and of the Council on collective management of
copyright and related rights and multi-territorial licensing of rights in
musical works for online uses in the internal market, COM(2012)372.

[372]            Directive 2008/95/EC of the European Parliament and of
the Council of 22 October 2008 to approximate the laws of the member states
relating to trade mark, OJ L 2999, 8.11.2008, p.25. This Directive replaced
Directive 89/104/EEC of 21 December 1988.

[373]            Directive 98/71/EC of the European Parliament and of the
Council of 13 October 1998 on the legal protection of designs, OJ L 289,
28.10.1998, p. 28.

[374]            Council Directive 87/54/EEC of 16 December 1986 on the
legal protection of topographies of semiconductor products, OJ L 24, 27.1.1987,
p.36.

[375]            Council Regulation (EC) No 207/2009 of 26 February 2009
on the Community trade mark, OJ L 78, 243.2009, p.1.

[376]            Council Regulation (EC) No 6/2002 of 12 December 2001 on
Community designs, OJ L 3, 5.1.2002, p.1. This Regulation was amended by
Regulation 1891/2006 of 18 December 2006 to give effect to the accession of the
European Community to the Geneva Act of the Hague Agreement concerning the
international registration of industrial designs (OJ L 386, 29.12.2006, p.14).

[377]            Council Regulation (EC) No 2100/94 of 27 July 1994 on
Community plant variety rights, OJ L 227, 1.9.1994, p.1.

[378]            Council Regulation (EC) No 510/2006 of 20 March 2006 on
the protection of geographical indications and designations of origin for
agricultural products and foodstuffs, OJ L 93, 31.3.2006, p.12.

[379]            Council Regulation (EC) No 1234/2007 of 22 October 2007
establishing a common organisation of agricultural markets and on specific
provisions for certain agricultural products, OJ L 299, 16.11.2007, p. 1.

[380]            Regulation (EC) No 110/2008 of the European Parliament
and of the Council of 15 January 2008 on the definition, description,
presentation, labelling and the protection of geographical indications of
spirit drinks and repealing Council Regulation (EEC) No 1576, 89, OJ L 39,
13.2.2008, p. 16.

[381]            Council Regulation (EEC) No 1601/91 of 10 June 1991
laying down general rules on the definition, description and presentation of
aromatized wines, aromatized wine- based drinks and aromatized wine-product
cocktails, OJ L 149, 14.6.1991, p.1.

[382]            Regulation (EU) No 1257/2012 of the European Parliament
and of the Council of 17 December 2012 implementing enhanced cooperation in the
area of the creation of unitary patent protection, OJ L 361, 31.12.2012, p.1.
This Regulation is complemented by Council Regulation (EU) No 1260/2012 of 17
December 2012 implementing enhanced cooperation in the area of the creation of
unitary patent protection with regard to the applicable translation agreements,
OJ L 361, 31.12.2012, p. 89.

[383]            It does not apply to Italy and Spain. This limited
geographical application followed the use of the enhanced cooperation
mechanism, as authorised by Council Decision 2011/167/EU.

[384]            Italy and Spain do not take part in this EU Patent with
unitary effect.

[385]            Directive 2004/48//EC of the European Parliament and of
the Council of 29 April 2004 on the enforcement of intellectual property
rights, OJ L 195, 2.6.2004, p.16.

[386]            The Community trademark and the Community design
regulations also contain some specific (and limited in scope) enforcement
rules.

[387]            Statement by the Commission concerning Article 2 of
Directive 2004/48/EC of the European Parliament and of the Council of 29 April
2004 on the enforcement of intellectual property rights, OJ L 94, 13.4.2005,
p.37.

[388]            Almeling (2009), p.772.

[389]            See generally Baker & McKenzie (2013), p. 83.

[390]            Cf. Hall et al. (2012), p. 4. It is noted, however, that
in some cases the fraction may be fairly large, in that successful imitation is
costly even when the imitator has acquired the relevant knowledge. Ibid.

[391]            See for instance Acemoglu, (2009).

[392]            Economists typically refer to goods with such properties
as "public goods".

[393]            Scheppele (1988), p. 29.

[394]            Levin et al. (1987), p. 783.

[395]            “One of the common assumptions made in economic
models of innovation has been that innovators always patent their
innovations. As a consequence of this assumption, the economics literature has
given a considerable attention to the design of optimal patent policy. However,
an analysis of firm behaviour reveals that trade secret protection is used at
least as widely as patent protection” Erkal (2004), Part I. The author
argues that “if innovators regard secrecy as an alternative to patenting,
the relevant policy question is not how much patent protection to have, but how
much patent and trade secret protection to have”. Ibid.

                At the same time,
there are other means that patents to appropriate the rewards of innovation.
Hall et al. (2012) categorises these other means as "informal intellectual
property". For them, informal intellectual property takes various forms:
commonly secrecy, confidentiality agreements, lead time or complexity of
design. The "informal" label does not imply, however, the absence of
legal contracts and obligations. Cf. Hall et al. (2012) p.5.

[396]            Trade secrets does not impose constrains on independent
development and use by third parties of the invention kept secret. Third
parties are also free to use any legitimate means of secret discovery including
through "reverse engineering" – such as disassembling a product to
examine its composition and to find out how it operates. This practice is
legitimate and in no way prohibited or legally restricted. Reverse engineering
has however its limitations and usually does not provide relevant insights on
manufacturing processes. Literature and surveys on the issue suggest that
companies are more likely to use secrecy, as a form of appropriation, in
relation to process innovation than in product innovation, given that the
latter is more exposed to reverse engineering.

[397]            As Lemley explains, trade secret protection addresses
some of the concerns raised by Arrow. Trade secret protection “gives the
developer of new and valuable information the right to restrict others from
using it, and therefore the prospect of deriving supracompetitive profits from
the innovation.” Although competitors are not prevented from developing the
same idea independently or reverse engineering a product to learn the trade
secret, trade secret protection provides “sufficient advantage in terms of
lead time or relative costs to minimize or eliminate the public goods problem.”
Cf. Lemley (2008), p. 330.

[398]            Lemley (2008), p. 313.

[399]            Almeling (2009), p. 784.

[400]            Beckerman-Rodau provides the following examples of
R&D outputs that cannot be patented: “the first person to discover a
revolutionary mathematical relationship, a new law of nature, a new plant
growing naturally or a new mineral cannot obtain patent coverage for the
discovery even if it has great value and utility. Additionally, the results of
extensive research efforts are not protectable via patent law if the discovery
amounts to something that occurs naturally in nature. New uses for existing
compounds or machines are likewise not eligible for patent protection.”
Beckerman-Rodau (2002), Part I..

In Europe,
where there is more stringer delimitation of patentable subject matter, a few
other examples can be mentioned: new business methods, software, etc.

[401]            Lemley (2008), p. 331.

[402]            Hurmelinna-Laukkanen & Ritala (2010), point 3.2.

[403]            Erkal (2004), part 6.

[404]            Chisum (1997).

[405]            Rosemberg (2001), vol.2, 3.08..

[406]            Jager (2002). p. 127.

[407]            Alberta Report (1986), p. 120.

[408]            Erkal (2004), part 4.

[409]            Beckerman-Rodau (2002), part III (B)(16).

[410]            According to an economic survey conducted in the USA, patent
litigation is three times as expensive as trade secret litigation: high-end patent
litigation costs a median of $3 million per side through discovery, and $5
million per side if it goes to trial; high-end trade secret cases, by contrast,
cost a median of $1 million through discovery and $1.75 million through trial).
See American Intellectual Property Law Association (2007).

[411]            According to Arundel “this difference is unlikely to
be due to smaller firms having few patentable innovations, because the analyses
have intentionally excluded firms that do not perform R&D and are,
therefore, less likely to develop patentable inventions”. Cf. Arundel
(2001), p. 623.

[412]            Cohen et al. (2000), p. 25.

[413]            Mogee (2003), p. 5.

[414]            Almeling (2009), p. 786.

[415]            Erkal notes that trade secret protection is used at
least as widely as patent protection, and that policy makers must consider the
interactions between optimal trade secret policy and optimal patent policy to
develop and implement a consistent intellectual property policy. Cf. Erkal (2005),
p. 427.

[416]            Ibid. p. 431-432

[417]            In some countries, a one year grace period is granted
from the time of discovery. Once this period has elapsed, the innovator
forfeits the right to apply for a patent. An issue that can arise is whether an
innovation that has been kept secret can be patented at a later stage by an
independent inventor. Different legal systems provide different solutions. In
most EU countries, late innovators can patent, but the first secret inventor
retains the right to use the innovation. This issue is analysed by Denicolo
& Franzoni (2004), who argue that prior user rights are not part of an
optimal patent policy.

[418]            Jorda (2008), p. 13.

[419]            Jorda (2008), p. 19: “The question is not whether to
patent or padlock but rather what to patent and what to keep a trade secret,
and whether it is best to both patent and padlock.”

[420]            Erkal (2004), part 5.

[421]            Arundel (2001).

[422]            “Exploitation of complementarity capabilities”
refers to the use of complementary sales and service capabilities.

[423]            Cockburn & Henderson (2003).

[424]            Hussinger (2005), p. 750.

[425]            Risch (2011), p. 174.

[426]            Ibid. p. 175.

[427]            Cf. Baker & Mc Kenzie (2013), p. 94.

[428]            Baker & McKenzie (2013), p. 87.

[429]            Thumm (2003), p. 66.

[430]            Besen & Raskind (1991), p. 5-6.

[431]            Risch (2007) states that trade secrets are “justified
by the economic benefits that flow from their existence, most notably
incentives for businesses to spend less money protecting secret information or
attempting to appropriate secret information.” Risch (2007), p. 5.

[432]            Lemley (2008), p. 332-337. The second channel serves as
a practical solution to what has been referred to as Arrow’s Information
Paradox. Arrow (1962), p. 615 (sellers will not disclose information to buyers in
the absence of legal protection, preventing buyers from being able to value the
information): “In the absence of any legal protection, the developer
of a potentially valuable but secret idea will have a difficult time selling
that idea to someone who could make more efficient use of it. In order to sell
the idea he will have to disclose it to allow the buyer to evaluate it, but
disclosing it destroys the value inherent in its secrecy” Lemley (2008), p.
336.

[433]            Lemley (2008), p. 333.

[434]            Without legal protection of trade secrets against
misappropriation companies and research bodies would more be reticent to share
strategic knowledge. Network research and collaborative innovation would be
riskier. R&D would be carried out mostly in-house on closed doors. Exchange
of valuable information is also needed outside collective R&D. Companies
are compelled to share information when they interact with other players and
business partners (entering into joint ventures, negotiating with suppliers or
costumers, or seeking investment or financial support for their projects). In
an optimal scenario they should be able to do so without the additional costs,
burdens and constrains of risk and fear. In a more realistic scenario,
companies should at least expect that counterparts have little incentive to
spy, deceive or infringe agreements. Competition should take place under the
common understanding that deceiving, corrupting and spying, however cheap,
however attractive, are poor alternatives to carrying out in R&D or acquiring
know-how and technology through transfer agreements.

[435]            Concerning the impact of trade secret protection on
labour mobility and wages, see Baker & McKenzie (2013), p. 88 and Annex
24 of this Impact Assessment.

[436]            Baker & McKenzie (2013), p. 89.

[437]            The model set forth by the authors does not consider the
case where patent rights may be weak. Thus, the model sets aside the conditions
that might result in the choice for secrecy due to the inability to protect the
returns to innovation.

[438]            Denicolo and Franzoni (2011), p. 2.

[439]            Ottoz and Cugno (2011), p. 220.

[440]            Ibid. p. 226.

[441]            Baker & McKenzie (2013), p. 94.

[442]            Kultti et al. (2006), p. 82.

[443]            Kultti et al. (2007), p. 36.

[444]            See Annex 3 of this Impact Assessment and Baker
& McKenzie (2013), p. 117.

[445]            Cf. Baker & McKenzie (2013), p. 121-122.

[446]            Cf. Baker & McKenzie (2013), p. 122.

[447]            The Community Innovation Survey (CIS) is a survey of
innovation activity in enterprises covering EU member states, EU candidate
countries, Iceland and Norway. CIS provides information on the characteristics
of innovation activity at the enterprise level. The survey allows monitoring of
Europe’s progress in the area of innovation, creating a better understanding of
the innovation process, and analyzing the effects of innovation on EU member
economies. The survey concepts are in line with the recommendations of the Oslo
Manual (2d edition 1997). As part of the 1993 CIS, the questionnaire asked
recipients to evaluate the effectiveness of various protection methods for both
product and process innovations of patents, registration of design, complexity
of process design, lead time advantage over competitors, and secrecy. Questions
related to preferred protection mechanisms were eliminated in later CIS.

[448]            Similarly to other studies, a weakness of the study by
Brouwer and Kleinknecht (1999) is that it focuses exclusively on manufacturing
industries and does not evaluate the role played by trade secrets in
non-manufacturing industries such a retail or wholesale trade or business
service industries.

[449]            Brouwer & Kleinknecht (1999), p. 617. The survey
asked respondents questions about both product and process innovations, as well
as questions about the relative effectiveness of patents and other means of
protecting innovations. The questionnaire also sought information about the
relative effectiveness of other factors such as lead time, retaining qualified
people, secrecy, complexity of product or process design, and other factors.

[450]            The author uses data from the 1993 European CIS for
approximately 2,849 R&D-performing firms to analyze the relative importance
of secrecy versus patents. The 1993 CIS requested information on the value of
both secrecy and patents for manufacturing firms in Norway plus six EU
countries: Germany, Luxembourg, the Netherlands, Belgium, Denmark, and Ireland.
The survey asked questions about the relative effectiveness of lead-time
advantages, secrecy, product complexity, patents, and design registrations for
protecting innovations.

[451]            Based on survey data from the Mannheim Innovation Panel,
Hussinger analyzes the importance of patenting versus secrecy for German
manufacturing firms for the year 2000. Non-manufacturing industries are not
analyzed.

[452]            The authors’ results are based on a survey questionnaire
to high-level R&D executives, asking opinions about firm and industry
technology and economic environment. The survey questionnaire employed semantic
scales to ask the R&D managers their views regarding the relative
effectiveness of alternative protection mechanisms for US manufacturing industries.
The authors received 650 individual responses representing 130 lines of
manufacturing business. The study focused exclusively on manufacturing
industries and did not address appropriability conditions in other industries,
such as business services or retail or wholesale trade. The manufacturing
industries found to rely on secrecy and other appropriability means included
pulp, paper and paperboard; cosmetics; organic and inorganic chemicals; drugs;
plastics materials; petroleum refining; steel mill products; pumps and pumping
equipment; motors, generators, and controls; computers; communications
equipment; semiconductors; motor vehicles and parts; aircraft and parts;
measuring devices; and medical instrument industries. Cf. Levin et al. (1987),
p. 797, table 2.

[453]            The authors analyzed the responses of a survey
questionnaire sent to 1,478 R&D labs in the US manufacturing sector in
1994. The population sampled are all R&D labs located in the US conducting
manufacturing industries as part of a manufacturing firm. The sample was
restricted to firms with at least five million ($US) in sales or business units
with at least twenty people. The survey observations are grouped into thirty
four International Standard Industrial Classification (ISIC) codes at the two
and three digit industry classification level.

[454]            Png (2011), p. 27.

[455]            A Business R&D and Innovation Survey (BRDIS) was
launched by the National Science Foundation in 2009. Businesses located in the
US were asked to report on the importance of various types of intellectual
property protection to their company during 2008. Specifically, they reported
whether utility patents, design patents, trademarks, copyrights, trade secrets,
and mask works (copyright protection for semiconductor products) were "very
important", "somewhat important", or "not important".
The data were weighted by industry category and size, and they were collected
for businesses with and without R&D activity.

[456]            Jankowski (2012), p.5.

[457]            The questionnaire used was a slightly modified and augmented
version of the survey questions employed by Levin et al. (1987).

[458]            The author performed detailed analysis of ten different
industry groups. Secrecy was found to be more effective in protecting process
innovations in the electronic, chemicals, food, synthetics and paper, and
private research laboratory sectors. With respect to product innovations,
secrecy was found to be most effective in the food, synthetics and paper
sectors.

[459]            Harabi (1995), at 984

[460]            Interestingly, respondents to the industry survey
carried out by Baker & McKenzie for the Commission seem to have diverging
views. According to the results of the survey, large firms seem to attach
greater value to trade secrets and to regard them as more important than
small/medium-sized firms. In any event, they survey results make clear that all
types of trade secrets are important to firms of every size. Cf. Baker &
McKenzie (2013), p. 120-122.

[461]            Based on the results of pan-European survey on
innovation among European firms, Arundel and Kabla analysed firms’ propensity
to patent, expressed as the percentage of innovations for which a patent
application is filed. This study found support for the view that large European
firms rely more on patents as compared to secrecy to protect their innovations.
The survey included European firms in a wide range of industries and sizes.

[462]            Large firms may patent for strategic reasons, tending to
build large patent portfolios, raising potential entry barriers for competitors
into the respective markets. Similar to Arundel (2001), the authors observe
that SMEs are disadvantaged in comparison to large companies regarding
patenting. The disadvantage to SMEs is not only due to the cost of patenting,
but also on the benefit side with respect to blocking further concentration by
competitors and in dealing efficiently with patent claims of other companies.

[463]            The authors found that SMEs prefer informal protection
methodologies, such as contracts, human resource management and secrecy, over
formal intellectual property rights, such as patents, which are considered more
difficult to obtain among SMEs. The preferred protection mechanism, however,
was very much dependent on the business/industry in which the company operates.

[464]            Pajak examined the use of formal (patents) and informal
(secrecy) intellectual property protection measures among firms of different
sizes using data collected in the European 2004 Community Innovation Survey.
However, the results for product innovations do not seem to support this claim.

[465]            Based on an analysis of small, innovative Finnish
manufacturing and service firms, the authors conclude that most of the small
firms analyzed find informal means of protection, such as speed to market or
secrecy, more important than patenting. However, in some situations, firms may
have a preference between speed to market versus trade secrecy. For example,
firms that cooperate in innovation with horizontal partners, or significantly
depend on vertical partners, tend to prefer speed, whereas process innovators
with modest R&D investments or few cooperative R&D activities display a
preference for trade secrets.

[466]            The authors analyse the use of alternative
appropriability measures based on the UK portion of the European CIS for 2004.
The authors analyse several different appropriability measures, including
leadtime advantages, complexity of design, secrecy, copyright, confidentially
agreements, patents, trademarks and registration of design. They also drawed on
UK, European and US data sources.

[467]            Relying on a sample of US state and federal court cases
over a four and a half year period, Lerner (1995) analyzed the importance of
trade secrets relative to other forms of intellectual property protection. The
sample encompassed litigations for 530 manufacturing firms. Lerner found statistical
evidence supporting the view that intellectual property cases litigated by
smaller firms disproportionately involve trade secrets, suggesting the critical
importance of trade secrets to smaller firms.

[468]            The study was based on a survey among 198 small US firms
operating in high technology sectors, See Cordes et al. (1999), Tables 39 and
40, p. 56-57.

[469]            Other observations from the authors’ survey regarding
why small firms choose non-patent mechanisms to protect innovations include:
“high enforcement costs (74%); competitors can legally invent around most
patents (72%); portfolio of patents is too expensive to maintain (61%); rapid
changes in technology limit patent protection (57%). Ibid. p. 58.

[470]            Cohen et al. (2000), p. 25.

[471]            Ibid.

[472]            This study analysed the relationship between firm size
and trade secret usage, relying on a regression analysis of data from 95 US
Economic Espionage Act cases from 1996 to 2008.

[473]            Searle (2010b), p. 19-21.

[474]            Cf. Baker & McKenzie (2013), p. 120.

[475]            Cf. Baker & McKenzie (2013), p. 122.

[476]            See above, Section A7.2 of this Annex.
These authors had observed that firms capture the returns to innovations using
a range of protection mechanisms, including patents, secrecy, lead time, and
complementary marketing or manufacturing capabilities. The authors found that
patents tend to be the least emphasized by firms in the majority of the
manufacturing industries, whereas secrecy and lead time tend to be emphasized
most heavily.

[477]            See Baker & McKenzie (2013), p. 97 and seq. and 111.

[478]            See above, regarding the 2012 Industry Survey carried
out for the European Commission.

[479]            Publishing, advertising, information services etc.

[480]            CIS survey results for France in 2004, using (French
classification) NES 36 industries: mans of protecting innovation activities
used between 2002 and 2004; commercial firms with 10 employees or more
innovative between 2002 and 2004 (in products, processes or operating under
discontinued operations). Cf. Baker & McKenzie (2013), p. 112.

[481]            See above, Section (A) of this Annex.

[482]            Jankowski (2012), p.4.

[483]            Including notably software publishers (NAICS 5112);
telecommunications (NAICS 517); and Internet service providers, Web search
portals, and data processing services (NAICS 518).

[484]            Jankowsky (2012), p. 3.

[485]            Cf. Article 39 of TRIPS.

[486]            Peter & de Werra (2010), p. 113. These authors cite
Pires de Carvalho (2008), p. 231, footnote 473, citing WTO document IP/Q3/AUS/1
of 22 October 1997, p. 9 (referring to a “broader principle of equity
concerned with ensuring that persons do not suffer from an exercise of bad
faith on the part of another”).

[487]            Acquisition of a trade secret is clearly distinguished
in Article 39(2) TRIPS from the use of the trade secret. This means that the
acquisition by itself would be sufficient for finding a violation of Article 39
of the TRIPS, irrespective of a potential use of the confidential information
by the person which has unlawfully acquired it or by a third party which would
have obtained such information. This is highlighted as an important issue from
a practical perspective because “it will frequently be quite difficult to
establish the effective use of the confidential information by the infringing
party”. Cf. Peter & de Werra (2010), p. 114.

[488]            The TRIPS article, as such, does not require that the misuse
of the trade secret (an unfair behaviour) leads to an advantage gain (an unfair
result).

[489]            Protective measures are in principle voluntary, but
trade secrets owners are de facto compelled to take them in order to
keep the secrecy of information. Also, whenever a trade secret owner seeks
judicial redress against another party who has allegedly misappropriated the
trade secret, courts will normally examine – when assessing if a piece of
information constitutes a trade secret worth being protected – whether the
plaintiff took reasonable steps (depending of the nature and value of the
information) to keep the relevant information confidential.

[490]            IPR Helpdesk (July 2012), p. 5. See also IPR2 (February
2011), p. 7.

[491]            See also Pagnattaro (2012) as regards protection of
trade secrets in China.

[492]            CREATE (2012), p. 21 and seq. See also Parker (2011).

[493]            Labour law or antitrust law may not allow for
non-compete clauses in all circumstances.

[494]            See generally Alberta Report (1986), p. 39 and seq. and
Mathon et al. (2009), p. 7.

[495]            See also Almeling (2012), p. 1101. Almeling points out
that "[a]s uncomfortable as it can be for companies to acknowledge,
current and former employees are the groups most often sued for trade secrete
misappropriation [in the US]." Ibid.

[496]            Alberta Report (1986), p. 40.

[497]            Almeling also points out at sociological changes. Younger
generations do not generally feel that their jobs are secure, nor do they value
loyalty to their current employees. He also underlines that the perception of
secrecy is evolving as the debate on ownership of information and intellectual
property (essentially in relation to copyright) growths. Almeling (2012), p. 1103.

[498]            See also CREATE (2012), p. 11 and seq. (on the risks of
trade secret theft when companies extend their supply chain overseas) and Almeling
(2012), p. 1109 and seq. (he points out that a major issue with the rise of
international trade secret misappropriation is the difficulty in enforcement,
including the determination of jurisdiction).

[499]            See also CREATE (2012), p. 6 and Almeling (2012), p.
1098.

[500]            And if files cannot be accessed through electronic
networks, traditional theft of hardware can make the deal. According to US
sources, German officials noted that business travellers' laptops are often stolen
during trips to China. See US ONCIX (2011), p. B-2.

[501]            A 2011 report showed that 73% of companies surveyed had
been hacked via their web applications within the past 24 months; nonetheless,
88% of them spent more on coffee than on securing their web applications. Cited
in CREATE (2012), p. 21.

                A recent KPMG report
pointed out that more than half of the respondents to an industry survey
considered that the overall level of e-crime risk faced by the respondent's
organisation increased in the previous year. KPMG (2011), p. 6.

                See also CREATE
(2012), p.6.

                See also the recent
papers disclosed by McAffee on the "Operation Aurora" (an attack
which proved successful in targeting, exploiting, accessing and exfiltrating
highly valuable intellectual property from businesses) and the "Operation
Shady RAT" (an investigation of targeted intrusions into more than 70
global companies, governments, and non-profit organisations during the last
five years and included at least 4 EU-located victims). See McAffee (2010) and
McAffee (2011).

[502]            For instance, in the US, the FBI handled nearly 1500
hacking cases while in 2010 it handled more than 2500. Cf. Almeling (2012), p.
1100.

In a 2010
barometer on data losses, KPMG claims that, between 2007 and June 2010, over
249 million people have been affected by hacking (more people than any other
case of data loss); KPMG (2010).

                One should note in
this regard that hackers are often effective at covering their tracks, so
hacking actions are not always discovered.

[503]            PWC (April 2012), p. 16, figure 36.

[504]            See ASIS (2007): "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."

See also
Forrester Consulting (2010): "[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."

Almeling
(2012) also points at this factor (cf. p. 1104).

[505]            See Baker & McKenzie (2013), p. 126.

[506]            See for instance Mandiant (2013), explaining that China
may be behind important advanced persistent threats to comutre security
breaches at hundreds of organizations around the world). See also US ONCIX
(2011), referring to Chinese actors as the world most active and persistent
perpetrators of economic espionage and indicating that Russia's intelligence
service are conducting a range of activities to collect economic information
and technology from US targets (p.1). This report also explains that the
Germany's Federal Office for the Protection of the Constitution (BfV) noted
that Russia uses computer network exploitation and e-mail interception to save
billions of dollars in R&D in the energy, information technology,
telecommunications, aerospace, and security sectors (p. B-2).

                See also Almeling
(2012), p. 1109 and seq. (he notably explains that of the 7 Department of
Justice prosecutions under the Economic Espionage Act in 2010, six involved a
link to China) and CREATE (2012), p.5 and seq. (indicating that billions of
dollars would be lost each year due to economic espionage) and p. 19 (claiming
that in some countries governments may be facilitating or even participating in
trade secret theft).

[507]            18 USC § 1831.

[508]            PWC (March 2012), p. 4. The Survey concerned 600
mid-sized businesses (with 250-2500 employees) in 6 European countries (DE, ES,
FR, HU, NL and UK).

[509]            See e.g. Bundesministerium des Innern (2009).

[510]            A KPMG barometer on data losses (lost and stolen
information) points at the "growing threat from within" explaining
that there has been rapid growth in the data loss attributed to 'malicious
insiders' (N.B. the type of lost and stolen information covered by this barometer
goes beyond trade secrets, but the barometer nevertheless provides certain
indication of the trends), KPMG (2010.

According to
a private sector study, employee theft of sensitive information, e.g., is ten
times costlier than accidental loss on a per-incident basis. See Forrester
Consulting (2010).

[511]            Two recent studies analysing trade secret litigation in
US courts showed that in over 85% and 93% of the trade secret cases
respectively, the alleged misappropriator was someone the trade secret owner
knew: either an employee or a business partner. See Almeling et al. (2010) and
Almeling et al. (2011).

[512]            It should be recalled, in this regard, that acquiring
knowledge of the content of a trade secret through independent invention,
observation or reverse engineering does not amount to misappropriation. In the
US, those are referred to as "proper means".

[513]            McAffee (2011), p. 2.

[514]            Carayon (2012), p. 9.

[515]            Wilkof (2012).

[516]            Almeling et al. (2010), p.293 and 301; Almeling et al. (2011),
p. 67.

The enactment
of the Uniform Trade Secrets Act (in particular its 1986 revised version) seems
to have influenced this growth rate. The point made by commentators is that
widespread adoption of the uniform act has increased awareness of trade secret
law (among lawyers, companies, judges and others) and has provided greater
consistency in the application of trade secret law and in the laws themselves.
This act has established a template for legal remedies to trade secret
misappropriation: when a company protects its valuable information as trade
secrets, there is a large, growing well-developed and relatively consistent
body of law on which that company can rely to protect the information. Cf.
Almeling (2012), p. 1106.

[517]            Cited by Millán (2009).

[518]            Carayon (2012), p.9.

[519]            PWC (April 2012). In total, 447 organisations completed
this survey.

[520]            Ibid., p. 10, figure 19.

[521]            Ibid., p.10, figure 21.

[522]            Ibid., p. 11, figure 22.

[523]            Ibid., p. 13, figure 27.

[524]            Ibid., p. 15.

[525]            Ibid., p. 13, figure 28.

[526]            Ibid., p. 14, figure 30.

[527]            Several of those cases were presented at the Conference
organised by the Commission on 29 June 2012.

                A summary of the
conference proceedings as well as the full webcast transmission of the working
sessions are available at: http://ec.europa.eu/internal\_market/iprenforcement/conferences/index\_en.htm.

[528]            Source: information disclosed by the company at the June
2012 Commission Conference.

[529]            Source: presentation at the European Parliament
intergroup meeting of 16 October 2012 on “The need for a better protection of
trade secrets for SMEs”.

[530]            Herbert Smith, Breach of Confidence in Formula One –
a marginal win for Force India, 30.3.2012.

[531]            Source: Peter & de Werra (2010), p. 93. These authors also report other trade secret misappropriation cases
which happened in the Formula 1 environment as well as in relation to the
America’s Cup competition.

[532]            “Any of the following offences […] shall be deemed to
be a breach of these rules: […] c) any fraudulent conduct or any act
prejudicial to the interests of any competition or to the interests of motor
sport generally.”

[533]            Source : Judgement of the Court of Appeal in Vestergaard
Frandsen et Ors v Bestnet Europe et Ors, [2011] EWCA Civ 424; Press release
of Vestergaard Frandsen, Bestnet Executives Found Liable for Misuse of Trade
Secrets, 8.7.2010 (updated March 2010) ; The IP Kat, Bestnet Bested
Over Bug-Net Boosted from the Fence, 20.4.2011.

[534]            Interestingly, the Court of Appeal noted the following:
“Whether or not conventional English law principles as to the grant of an
injunction embody that concept (I rather think they do, though the now
fashionable word “proportionate” is not to be found in the older case law), in
the case of enforcement of an intellectual property right, the requirement is
explicit. The Enforcement Directive (2004/48/EC) by Art. 3(2) inter alia
requires that measures to enforce intellectual property rights shall be
proportionate It is accepted that a claim for misuse of technical trade secrets
such as the present is a claim to enforce an intellectual property right. So
the Judge was right to consider proportionality.” Cf. Judgement of the
Court of Appeal in Vestergarrd Frandsen et Ors v Bestnet Europe et Ors,
[2011] EWCA Civ 424; §56.

[535]            The company also undertook legal proceedings in India.

[536]            Source: information disclosed by the company at the June
2012 Commission Conference.

[537]            This technology is used for environmental control in the
power generation section. It is basically composed of trade secrets including
knowhow, proprietary and confidential information. Very few parts of the
relevant equipment and devices used in the processes are patented. Although
this is a mature technology, continuous investment in R&D allows to improve
the efficiency of the wet desulphurisation process and also in order to meet
increasingly stringent emissions regulations.

[538]            Eventually, the EU and the EBRD withdrew their funding
to this project.

[539]            During litigation, authorities
refused Alstom any access to the project information which could have provided
evidence that Alstom IPR was violated on grounds that the Idreco/Insigma
consortium’s business secrets need to be protected. Alstom indicated that
contrary to what occurred in Bulgaria, further to a 6 week discovery
proceeding, Alstom was granted access by a Chilean tribunal to all the
documentation for a project in Chile where the consortium has also violated
Alstom's intellectual property.

[540]            Source : Carayon (2012), p. 8. See also the
judgment of the Tribunal de Grande Instance de Versailles, of 18
December 2007.

[541]            Source: US ONCIX (2011), p. B-2 and Gerlach (2012).

[542]            Source: information disclosed by the company at the June
2012 Commission Conference; Carayon (2012), p. 8.

[543]            Interestingly, the competent court (Tribunal
Correctionnel de Clermont-Ferrand) rejected the application of the criminal
code provision on misappropriation of “manufacturing secrets” (secrets de
fabrique) but rather convicted the accused person for abuse of confidence (abus
de confiance).

[544]            Source: DeMarco (2011). DeMarco argued that had the
employee committed his crime against an EU bank in Europe, he could very well
be a free man. He stated that "[t]he curious absence across much of
Europe – with perhaps France and Germany aside – of express criminal
prohibitions against the theft of such trade secrets, coupled with a lack of
resources and investigative experience in such cases, has created an
environment in Europe where economic espionage of this type often goes
unpunished even when detected."

[545]            Source: US ONCIX (2011), p. B-2.

[546]            Source: BBC (2012); Marsh (2012),.

[547]            Source: information disclosed by the company at the June
2012 Commission Conference and press releases published by the company, unless
otherwise stated.

[548]            AMSC found hundreds of emails between the employee and
the Chinese company, including one in which the employee sent the source code
to the Chinese company. It also found a consulting contract signed by the
Chinese company worth USD 1.7. The employee was arrested, confessed and was
sentenced to prison for distribution of trade secrets. Cf. CREATE (2012), p.7
and endnote 28.

[549]            As of June 2012, those legal suits had cost the company
USD 1.3.

[550]            See different press releases issued by AMSC on this
litigation since September 2011.

[551]            In this case, the impact was devastating since the
Chinese partner in question accounted for 70% of AMSC revenues. The stock value
plummeted 40%in a single day and let AMSC into the red numbers.  Cf. CREATE
(2012), p. 7.

[552]            AMSC press release of 11.8.2011 (American Superconductor
Announces Workforce Reduction).

[553]            AMSC press release of 28.11.2012 (AMSC announces cost
reduction plan).

[554]            Source: information disclosed by the company at the June
2012 Commission Conference, except when otherwise stated.

[555]            At the Conference, DuPont de Nemours pointed out that
the "improvements" that stem from R&D are frequently the fruit of
lengthy and costly trial periods and yet many such "improvements"
will never reach the level of patentability if considered in isolation.
However, when considering the company's competitive performance, such process
and/or manufacturing improvements and know-how are just as valuable and worthy
of protection as an individual patentable invention would be. He further
explained that key patented inventions can often take years to achieve
commercial viability, and that during this whole period they are being
incrementally improved. Therefore, without such complementary protection of
these incremental "improvements", the benefits of patentable inventions
might never reach the market.

[556]            It appears that the employee, before moving to the new
job, downloaded 22000 abstracts and 16700 documents (10% of the information
stored on the confidential servers and fifteen times the number of documents
accessed by the next most active user. Most of these documents had no relation
to the employee's responsibilities at the company. The estimated value of the
information was USD 400 million. See Almeling (2012), p. 1099.

[557]            In principle, a trade secret has both monopoly value and
use value, but only the former will normally be affected by misuse of the
secret. In the words of Cross (cited by UK Law Society (1997), p. 17):

                "[T]he spy
does not actually take the information from the original holder, but instead
merely copies the information. Copying, of course, leaves the information
itself in the hands of the owner. Because the owner still retains possession
and use of the information, its use value [i.e. the ability to use the
information to lower the marginal costs of producing the firm's output] remains
unaffected. The owner will be able to produce the product as cheaply and
efficiently as before. Only monopoly value [i.e. the value attributable to
being the only person who has access to the item of information] will be
affected, and even then only if the information is made available to one or
more competitors of the original owner." See Cross (1991), p. 560.

[558]            See CREATE (2012), p. 6.

[559]            E.g. when the secret is the product. See the first
category of trade secrets in Box X in Annex 4, above

[560]            Cited by Millán (2009).

[561]            Weber (2010).

[562]            US UNCIX (2011), p. B-1.

[563]            PWC (March 2012), p. 10. The Survey concerned 600
mid-sized businesses (with 250-2500 employees) in 6 European countries (DE, ES,
FR, HU, NL and UK).

[564]            PWC (April 2012), p. 17.

[565]            Ibid., p. 18

[566]            Ibid., p. 18, figure 39.

[567]            US UNCIX (2011), p. B-1.

[568]            On the harm to society, see generally Section 2.2.3
(problem definition).

[569]            N.B. Unless otherwise stated, the information contained
in this annex is based on the results of the two studies recently conducted for
the Commission on this matter: Hogan Lovells (2012) and Baker & McKenzie
(2013).

[570]            The TRIPS is a multilateral agreement which must be
joined to by all the members of the World Trade Organisation (WTO).

[571]            Cf. The Stockholm Act of the Paris Convention for the
Protection of Industrial Property, 14 July 1967.

[572]            See Article 1(2) of TRIPS.

[573]            See for instance Broncker & McNelis (2012), p. 679.

[574]            Out-of-court redress may achieve similar objectives.

[575]            Understood as opposed to criminal law. It therefore
includes: contract law, labour law, unfair competition law, tort law,
intellectual property law.

[576]            See Hogan Lovells (2012) and Baker & McKenzie
(2013), p. 19 and seq.

[577]            The French intellectual property code has also a provision,
which is limited to manufacturing secrets (“secrets de fabrique”) only
and for criminal law purposes only.

[578]            In some cases, the unfair competition law may also have
criminal law aspects. See Section A9.3 of this Annex.

[579]            Case-law in Belgium and France has developed unfair
competition protection from those general provisions.

[580]            See generally Hogan Lovells (2012).

[581]            In addition, Law 14/2011 on science, technology and
innovation also refers to the protection of the results of R&D (Article
35(2)).

[582]            In particular, the Act on the Swedish Protection of
Trade Secrets establishes two different offences: business espionage and the
unauthorized dealing with trade secrets. Other complimentary or more general
offences, such as, for instance, unauthorized access to computer systems or
breach of faith against principal are regulated under the Criminal Code.

[583]            Article L621-1 of the Intellectual Property Code: “Les
peines frappant la violation des secrets de fabrique sont prévues à l'article
L. 1227-1 du code du travail ci-après reproduit: "Art.L. 1227-1-" Le
fait pour un directeur ou un salarié de révéler ou de tenter de révéler un
secret de fabrication est puni d'un emprisonnement de deux ans et d'une amende
de 30 000 euros. La juridiction peut également prononcer, à titre de
peine complémentaire, pour une durée de cinq ans au plus, l'interdiction des
droits civiques, civils et de famille prévue par l'article 131-26 du code
pénal."

[584]            Baker & McKenzie (2013), p. 55 and information
provided by Member States.

[585]            Section 1 in the Trade Secrets Act contains the
following definition of trade secrets: “For the purpose of this act a trade
secret means such information on business relations or operating conditions of
a business in somebody’s business which is kept secret and of which the
disclosure is aimed to cause damage to the business proprietor from a
competition point of view.”

[586]            Article 2 of the Trade Secrets Act, which triggers the
possibility for the trade secret holder to request an injunction (Article 11)
or to request the destruction (or delivery) of the documents/objects in
possession of the other party which contain the trade secret.

[587]            Article 2 of the Trade Secrets Act also mentions cases
which are NOT unwarranted infringements: “As an unwarranted infringement is
not to be considered the fact that someone acquires, exploits or divulges what
is a trade secret of a person conducting business or industrial activities in
order to make available to the public or before a public authority divulge
something that may be an offence for which imprisonment may be adjudicated, or
which may be considered to be another serious incongruity in the business or
industrial activity of a person conducting such activities. As an unwarranted
infringement is not considered the fact that someone exploits or divulges a
trade secret about which he or someone before him acquired knowledge in good
faith.”

[588]            “Anyone who wilfully and without authorization
accesses a trade secret shall be sentenced for trade espionage to […]”.

[589]            “Anyone who obtains a trade secret knowing that the
person who makes available the secret, or anyone before him, has accessed it
through an act of trade espionage shall be punished for unauthorized tampering
with a trade secret to […]”.

[590]            In the US, the International Trade Commission was not
created to deal with trade secrets. The ITC deals primarily with
anti-dumping complaints (in the EU framework, anti-dumping complaints are dealt
with by the Commission itself [DG TRADE]; administers the harmonised tariff
schedule (in the EU framework, this is done by DG TAXUD); has an advisory role
to President, Congress etc; and it deals with certain unfair practices in
import trade (section 337 of the Tariffs Act).  It is under this last
heading that it investigates IPR infringements. The Act makes a distinction
between infringements of IPRs (automatic infringement, no need to show injury)
and unfair import practices (in which case actual or threatened injury to
domestic industry must be demonstrated). It must be underlined that the expression
"trade secrets" (or a similar one) is nowhere in section 337 of the
Tariffs Act. The Act refers only to forms of unfair import practices. The
ITC has over time considered that misappropriation of trade secrets (as well as
trade dress infringement, passing off, false advertising and violations of the
antitrust laws) may also be asserted as forms of unfair competition.

[591]            Interestingly, some commentators in the US have
suggested that the current state-based trade secrets system places the US in
violation of its obligations under the TRIPS (and also under the North American
Free Trade Agreement (NAFTA)) because TRIPS (and NAFTA) would set higher
standards than those used in the States which have not yet adopted the US
Uniform Trade Secrets Act (cf. See Lao (1998) and Pace (1995)). For others,
this issue might be more theoretical than practical in the absence of
complaints from trading partners (cf. Almeling (2009), p. 776 (footnote 27)).

[592]            See also Annex 4 on the concept of trade secret.

[593]            Source : Baker & McKenzie (2013), pp. 5 and 24
and seq.

[594]            E.g. any type of technical information, as manufacturing
processes, technical drawings and designs, prototypes, inventions (not
patentable or not patented), technical know-how, formulae or recipes etc.

[595]            E.g. customers and suppliers lists, information on
business strategies and plans, business models, marketing information etc.

[596]            The TRIPS Agreement does not exclude patentable
information from the protection, nor does it require that the information is
reducible to writing.

[597]            The TRIPS Agreement does not refer to any particular
novelty requirement.

[598]            However, the TRIPS Agreement does not require that the
trade secret owner actually uses the trade secret in question for an economic
activity or business purposes.

[599]            At least for the type of information protectable as
trade secret. Cf. Baker & McKenzie (2013), p. 26.

[600]            Baker & McKenzie (2013), p. 27.

[601]            To be sure, no Member State grants any action against a
third party who autonomously developed the same information.

[602]            Baker & McKenzie (2013), p. 27-28.

[603]            Baker & McKenzie (2013), p. 29 and information
submitted by Member States.

[604]            Baker & McKenzie (2013), p. 31.

[605]            In Austria, damage claims are also available in cases of
default; accordingly damage compensation could be awarded also in case of the
third party’s slight negligence.

[606]            Baker & McKenzie (2013), pp. 27 and 38.

[607]            For instance, in the United Kingdom a duty of
confidentiality may be implied by the circumstances (the duty of
confidentiality is easy to identify in case of an employment contract or a
non-disclosure agreement, but it could prove to be very difficult to
demonstrate where a person has obtained the confidential information in absence
of any relationship between the owner and the recipient), but a person who
innocently receives a confidential information will not be under a duty of
confidentiality until he is made aware the information is confidential.

[608]            In Belgium, courts refuse to grant final injunctions
against future trade secrets misappropriation because, contrary to intellectual
property rights, trade secret protection can potentially last forever and thus courts
are not willing to grant the owner of a trade secret a broader protection than
most intellectual property right holders.

[609]            In Denmark, although depending on a case by case
analysis, final injunctions are usually granted for a period of two to three
years from termination of the cooperative relationship.

[610]            In Greece and The Netherlands, injunctions are
considered temporary in nature.

[611]            Baker & McKenzie (2013), p. 39.

[612]            In Denmark (and similarly in Poland), the statutory
non-disclosure and non-use obligations survive termination of the employment
contract for a period of three years. In Italy, as in many other European
countries, non-compete agreements (or clauses) are commonly used to prevent use
or disclosure after the contract of employment ceases, albeit offering more
limited restrictions than those which exist during the period of employment (to
be enforceable non-compete clauses must generally be limited in time and space,
identify the activities which the former employee cannot engage in and provide
for a monetary compensation). In Sweden, damages for breach of confidentiality
obligations after termination of employment are only available where there are
"extraordinary circumstances". In Ireland and the United Kingdom
there is a distinction between general (low grade) confidential information
that the employee is not entitled to disclose whilst employed but can use and
disclose thereafter and “real trade secrets” which he cannot disclose or use
without authority at any time. The distinction depends on a number of factors
including whether the employer impressed the secrecy of the relevant
information upon the employee; and whether the "secret" can be
readily isolated from other information which the employee is free to use. Cf.
Baker & McKenzie (2013), p. 41.

[613]            Cf. Baker & McKenzie (2013), p. 35.

[614]            In Bulgaria, damage compensation is the sole final
remedy available to the owner of a trade secret.

[615]            According to Baker & McKenzie, the owner of the
trade secret often encounters difficulties in in proving damages suffered by
virtue of the trade secret violation. In some countries (Austria, Cyprus,
Denmark, France, Germany, Republic of Ireland, Sweden and United Kingdom),
damages are awarded only if the claimant is able to demonstrate that he had
suffered some loss. Other countries (Belgium, Bulgaria, Estonia, Finland,
Hungary, Italy, Lithuania, Luxembourg, Malta, The Netherlands and Portugal) allow
courts to award damages on an equitable basis - taking into account all the
circumstances of the case - if the claimant has not been able to provide
sufficient evidence on the amount of damages. Cf. Baker & McKenzie (2013),
p. 38.

[616]            According to Baker & McKenzie, damages vary on a
case-by-case basis but the average figures collected during the study "seem
not to be particularly encouraging". This study mentions a few cases in
Italy and Sweden, where courts awarded high amounts of damages: in Italy, in two cases of trade secrets infringement the Court of
Milan awarded damages for EUR 1,100,000.00 and EUR 10,000,000.00,
respectively. In Sweden, courts have awarded damages for SEK 7/10,000,000.00
and 48,000,000.00. However, the study reports that these appear to be
exceptional cases. Baker & McKenzie (2013), p. 38.

In the Force
India Formula One Team Ltd. case, only €25000 were awarded by a UK court to the
claimant. The plaintiff had claimed compensation in excess of £13 million
(which was based on the assumption that it succeeded in the entirety of its
claims for breach of confidence, which it did not). However, the judge did not
accept the plaintiff argument that the relevant information was of great value
and considered that the misuse of the information was limited in nature,
purpose and benefit. As a result, the judge considered that €25000 was the
figure the parties would have negotiated had they been in the position of a
willing licensor and willing licensee acting reasonable as at the date of the
breach of confidence.

[617]            Baker & McKenzie (2013), p. 29 and information
submitted by Member States.

[618]            Belgium, Bulgaria, France, Luxembourg, Malta, Portugal,
Romania, Slovak Republic, Slovenia and Spain. Cf. Baker & McKenzie (2013),
p. 36.

[619]            This method of calculation is used regarding
infringements of intellectual property rights, pursuant to Article 13(1)(b) of
Directive 2004/48/EC. This Article provides for the rules on abstract
calculation of damages (i.e. calculated on the basis of royalties which could
have been due should a licence have existed) as an alternative to the general damnum
emergens and lucrum cessans criteria.

[620]            Regulation (EC) No 1383/2003 of 22 July 2003 concerning
customs action against goods suspected of infringing certain intellectual
property rights and the measures to be taken against goods found to have
infringed such rights, OJ L 196, 2.8.2003, p.7.

The
Commission made a proposal in May 2011 for a new Regulation concerning customs
enforcement of intellectual property rights (European Commission (May 2011b)).
Negotiations on this text before the European Parliament and the Council are
on-going.

[621]            Unless of course the claim encompasses both the
infringement of an intellectual property right (e.g. a patent) and the
misappropriation of a trade secret (e.g. associated know-how) by the same good.

[622]            See the impact assessment accompanying the proposal:
European Commission Staff (May 2011), in particular p. 13 and p.16

[623]            See European Commission (May 2011b), in particular the
definitions of “intellectual property right” and of “goods suspected
of infringing an intellectual property right” in points (1) and (7) of
Article 2.

[624]            See generally http://www.usitc.gov/intellectual\_property/

[625]            For the text of Section 337 of the Tariffs Act, see:        
http://www.usitc.gov/intellectual\_property/documents/statute.pdf

[626]            See generally Baker & McKenzie (2013), p. 55 and
seq.

[627]            Baker & McKenzie (2013), p.7.

[628]            Baker & McKenzie (2013), p. 8.

[629]            Baker & McKenzie (2013), p.56.

[630]            In many jurisdictions, the confidential information
whose disclosure entails a violation of a trade secret is often defined by
reference to any information that a manager, director or employee has known by
reason of his employment with the company that is the owner of the secret. Baker
& McKenzie (2013), p.56

[631]            Baker & McKenzie (2013), p.56.

[632]            Baker & McKenzie (2013), p.73. Bulgaria, Ireland,
Malta and the United Kingdom do not have address trade secrets infringements in
criminal law.

[633]            Baker & McKenzie (2013), p.8. The following Member
States limit the scope of trade secrets to the information that a company has a
reasonable and objective interest to keep confidential, in accordance with an
objective criterion: Austria, Belgium, France, Germany, Hungary, Italy,
Lithuania, Luxembourg, Netherlands, Slovakia, Spain and Sweden. Baker &
McKenzie (2013), p.73.

[634]            Baker & McKenzie (2013), p.73.

[635]            Baker & McKenzie (2013), p.73.

[636]            In Belgium and Estonia the conduct may be punished even
if the offender acted with negligence. Baker & McKenzie (2013), p.57.

[637]            Baker & McKenzie (2013), p.57.

[638]            Baker & McKenzie (2013), p. 59.

[639]            Baker & McKenzie (2013), p.8.

[640]            Baker & McKenzie (2013), p. 60.

[641]            The offence of misappropriation is catered for under
Article 293 of the Criminal Code, under the subtitle of Fraud as well as a
number of articles concerning the offence of fraud. Thus by way of example if
someone makes use of trade secrets with the intent of gaining an economic
benefit, then depending on the nature of the offence itself, such person would
be charged with the offence of fraud under Articles 308, 309 and 310 and this
since there was an economic benefit as well as with the offence of
misappropriation and that of disclosing secret information. Indeed, the offences
mentioned under the subtitle of Fraud and under subtitle 10 ‘Disclosing of
secret information’ of the Criminal Code will be taken into consideration

[642]            Baker & McKenzie (2013), p. 70.

[643]            In DE, there are special regulations for special
professions/capacities, such as section 333 of the German Commercial Code
(Handelsgesetzbuch - HGB) and section 203 of the German Criminal Code
(Strafgesetzbuch - StGB)

[644]            Baker & McKenzie (2013), p. 68.

[645]            Baker & McKenzie (2013), p. 61.

[646]            Baker & McKenzie (2013), p. 67 and information
provided by national authorities.

[647]            Baker & McKenzie (2013), pp. 8 and 75.

[648]            Baker & McKenzie (2013), p. 77.

[649]            Gielen (2009), p. 391.

[650]            Gielen (2009), p. 400.

[651]            Hogan Lovells (2012), §57 regarding Belgium, at p.12.

[652]            Baker & McKenzie (2013), p. 6.

[653]            Baker & McKenzie (2013), p. 35. According to this
study, in the 2012 Industry Survey, the fear of losing control of trade secrets
in the course of Court proceedings has been reported in particular by firms
operating in the pharmaceutical, automotive, IT and chemical sectors. These are
also the industries where companies appear more sensitive and reactive to trade
secret misappropriation. Ibid, p. 6.

[654]            Baker & McKenzie (2013), p. 6.

[655]            For instance, by reference to French law: “Le
contentieux peut être aussi une menace, lorsqu’il
est utilisé à des fins détournées par un concurrent. Il est fréquent que des
plaintes abusives soient déposées, en arguant par exemple d’une soi-disant
contrefaçon ou en dénonçant une corruption supposée, aux seules fins d’obtenir
de l’entreprise attaquée des informations stratégiques sur des procédés
industriels ou sa politique commerciale, au nom du libre accès des parties aux
pièces du dossier. Il existe même une procédure, dite ‘in futurum’, permettant
au plaignant de demander au juge d’enjoindre à l’entreprise défenderesse de
fournir des informations (sensibles), qui sont nécessaires au premier pour
apporter la preuve de ses allégations.“ Juillet
& Puaux (2008), p. 24.

[656]            Under Article 41 of the TRIPS Agreement, its signatories
are called to ensure effective action against any infringement of the
intellectual property rights recognised in that Agreement. Trade secrets are
part of the “intellectual property rights” category for the purpose of the
TRIPS Agreement (cf. Article 1(2) of the TRIPS Agreement). Therefore, Articles
42 to 50 of the TRIPS Agreement would also be applicable in the case of
litigation related to violations of the rules contained in Article 39 of the
TRIPS Agreement on undisclosed information.

[657]            Baker & McKenzie (2013), Appendix 1, p. 9.

[658]            Baker & McKenzie (2013), Appendix 1, p. 14.

[659]            Baker & McKenzie (2013), Appendix 1, p. 38.

[660]            Baker & McKenzie (2013), Appendix 1, p. 63.

[661]            Gielen (2009), p. 397, 399.

[662]            Gielen (2009), p. 398.

[663]            E.g. In a case on an alleged copyright infringement, a
court in the Netherlands authorised the inspection of software seized data
carriers only by a third party who would check the software to see whether it
was of an infringing nature and then report on his findings without disclosing
any other information to the copyright holder. Gielen (2009), p. 396.

[664]            Gielen (2009), p. 393.

[665]            Baker & McKenzie (2013), p. 34.

[666]            See for instance, Hogan Lovells (2012), §57 regarding
Belgium, at p.12. See also Baker & McKenzie (2013), p. 35.

[667]            Baker & McKenzie (2013), p. 35.

[668]            Baker & McKenzie (2013), p. 34. In some Member
States (e.g. Belgium, Czech Republic, Greece or Italy), national procedural
rules may include provisions which allow courts to exclude the public from the
hearing only for reasons relating to security, public order and decency. Ibid.

[669]            Ibid.

[670]            Baker & McKenzie (2013), p.34 and Appendix 1, p. 14

[671]            Baker & McKenzie (2013), p. 34 and Appendix 1, p.
44.

[672]            Baker & McKenzie (2013), Appendix 1, p. 24.

[673]            Baker & McKenzie (2013), p. 34 and Appendix 1, p.
29.

[674]            Baker & McKenzie (2013), Appendix 1, p. 34.

[675]            Baker & McKenzie (2013), Appendix 1, p. 38.

[676]            Baker & McKenzie (2013), p.34.

[677]            Baker & McKenzie (2013), Appendix 1, p. 59.

[678]            Baker & McKenzie (2013),
Appendix 1, p. 77.

[679]            Baker & McKenzie (2013),
Appendix 1, p. 74.

[680]            Gielen (2009), p. 395. Baker & McKenzie (2013),
Appendix 1, p. 87.

[681]            Baker & McKenzie (2013), Appendix
1, p. 91.

[682]            Baker & McKenzie (2013),
Appendix 1, p. 99.

[683]            Baker & McKenzie (2013),
Appendix 1, p. 116.

[684]            Baker & McKenzie (2013), Appendix
1, p. 107.

[685]            Baker & McKenzie (2013), Appendix 1, p. 103.

[686]            Baker & McKenzie (2013), p.35.

[687]            Baker & McKenzie (2013), p.7, 35 and 45.

[688]            Regulation (EC) No 593/2008 of the European Parliament
and of the Council of 17 June 2008 on the law applicable to contractual
obligations (Rome I), OJ L 177, 4.7.2008, p.6.

[689]            Regulation (EC) No 864/2007 of the European Parliament
and of the Council of 11 July 2007 on the law applicable to non-contractual
obligations (Rome II), OJ L 199, 31.7.2007, p. 40.

[690]            Regulation (EU) No 1215/2012 of the European Parliament
and of the Council of 12 December 2012 on jurisdiction and the recognition and
enforcement of judgments in civil and commercial matters (recast), OJ L 351,
20.12.2012, p.1. This Regulation replaces Council Regulation (EC) No 44/2001 of
22 December 2000 on jurisdiction and the recognition and enforcement of
judgments in civil and commercial matters, OJ L 12, 16.1.2001, p. 1.

[691]            Council Regulation (EC) No 1206/2001 of 28 May 2001 on
cooperation between the courts of the Member States in the taking of evidence
in civil or commercial matters, OJ L 174, 27.6.2001, p. 1.

[692]            See for instance the decision of a UK court of 21 March
2012 Force India Formula One Team Limited v 1 Malaysia Racing team SDN BHD
& others, [2012] EWHC 616 Ch. This case concerned a copyrights claim and a
breach of confidence (i.e. misuse of trade secrets) claim. Experience in the US
also shows this phenomenon (e.g. in the US, federal courts are often called to
enforce State civil law on trade secrets because of the so-called
"supplemental jurisdiction" rule: i.e. authority of US federal courts
to hear additional claims (e.g. the trade secret misappropriation claim)
substantially related to the original claim (e.g. a patent claim) even though
the court would lack the subject-matter jurisdiction to hear the additional
claims independently).

[693]            The Rome II Regulation applies conflicts of law in civil
and commercial litigation on non-contractual obligations within the EU (see
Article 1 of the Regulation for the scope and exceptions). It applies
regardless of the connections of any party with a Member State and whether or
not the law identified as applicable is that of a Member State. This means that
potentially laws of third countries may be applicable to litigation within the
EU to defend trade secrets.

[694]            If litigation involved two parties linked by a
contractual relationship (e.g. the trade secret owner and an employee or the
trade secret owner and a business partner), then the applicable law would be governed
by Rome I Regulation.

[695]            The Commission proposal explains that this paragraph
deals with situations “where an act of unfair competition targets a specific competitor,
as in the case of enticing away a competitor's staff, corruption, industrial
espionage, disclosure of business secrets or inducing breach of
contract.” Cf. European Commission (July (2003)), p. 16 (emphasis added).

[696]            Article 4(1) of Rome II Regulation (Regulation (EC)
864/2007).

[697]            Had the disputed been submitted to the general rule on
the applicable law to unfair competition disputes in Article 6(1), it would
have not been possible to derogate from it.

[698]            Scholars have pointed at the difficulty of localising
the country where the damage occurs in trade secrets misappropriation cases, because
“trade secrets are even more nebulous and intangible than intellectual
property rights in general, and damage arising from their disclosure or misuse
is neither localised nor confined to a particular jurisdiction.” Cf. Wadlow
(2008), p. 313.

[699]            European Commission (July 2003), p. 16. This statement
was provided in relation to the general rule for unfair competition cases (now
Article 6(1)), not in relation to the general rules for tort/delict cases
(Article 4(1). However, the Commission text also recognised that “the two
very often coincide in territorial terms”. Ibid.

[700]            European Commission (July 2003), p. 11. See also Wadlow
(2008), p. 313 and Wadlow (2009), p. 791.

[701]            Wadlow (2008), p. 314.

[702]            “paragraph 3 is a general exception clause which aims
to bring a degree of flexibility, enabling the court to adapt the rigid rule to
an individual case so as to apply the law that reflects the centre of gravity
of the situation” Cf. European Commission (July 2003), p. 12.

[703]            Assuming that the litigation concerns a non-contractual
obligation and not the enforcement of a non-disclosure or non-compete
contractual obligation.

[704]            E.G. there was a choice of law clause. See Wadlow
(2008), p. 316.

[705]            This criterion raises an additional issue, it can allow
the judge to derogate from the general rule or from the rule of the common
residence of the parties in order to declare the law of another country as the
applicable one. However, it does not allow to derogate from the criterion of
the common residence to select the country which would have been selected under
the general rule of paragraph 1.

This is
explained by Wadlow (2009), p. 795, as follows: “Suppose that the country
identified by Article 4(1) is state X, but both parties have their habitual
residence in state Y. Since paragraph 2 always trumps paragraph 1, the law of Y
will apply unless paragraph 3 can be brought to bear. Now suppose everyone
agrees that the law of Y is totally inapplicable on any rational basis, and
that absolutely every relevant connecting factor other than common residence
points to the law of X. Does Article 4(3) operate to make X the applicable law?
No, since although paragraph 3 has the power to override paragraph 2, it cannot
turn back the clock and reinstate the law originally identified by paragraph 1
but subsequently ousted by paragraph 2. The applicable law according to
paragraph 3 must be that of a country ‘other than indicated in paragraphs 1 or
2’, say state Z.

So what if
the agreed objective ranking of laws in terms of connecting factors is first X
(closest connection with the tort), second Z (less close connection), and last
Y (no connection except that of common habitual residence, which in the
circumstances is fortuitous or irrelevant). Law X cannot apply because it has
been displaced by law Y according to paragraph (2), and cannot be restored by
paragraph (3). Law 2 cannot apply in preference to law Y because the tort is
more closely connected with X than with Z, no matter that law X is now
ineligible. We are left, by default, with the law of Y, which is admittedly the
least appropriate of the three choices.”

[706]            European Commission (July 2003), p. 12. See also Recital
18 of Rome II Regulation.

[707]            See generally European Commission Staff (December 2010),
p. 11 and seq.

[708]            Baker & McKenzie (2013), p. 128.

[709]            The reasons for this are unknown.

[710]            Recital (26) of recasted Brussels I Regulation.

[711]            The so-called substantive public policy exception (cf. Article
4

[712]            In the case of Directive 2004/48/EC dealing with
infringements of intellectual property rights, one should underline the
safeguards available (i.e. right of review, including a right to be heard for
the defendant, revocation or automatic lapse if no substantive case is brought,
possibility to require the claimant to provide security or an equivalent
assurance intended to ensure compensation for any prejudice suffered by the
defendant). One could wonder in this respect whether the level of harmonisation
and safeguards provided by Directive 2004/48/EC is not sufficiently high to
allow for automatic recognition.

[713]            Articles 45 and 46 of Regulation (EU) No 1215/2012:

In case of
recognition, Article 45: “1. On the application of any interested party, the
recognition of a judgment shall be refused: (a) if such recognition is
manifestly contrary to public policy (ordre public) in the Member State
addressed; […]”.

In case of
enforcement, Article 46: “On the application of the person against whom
enforcement is sought, the enforcement of a judgement shall be refused where
one of the grounds referred to in Article 45 is found to exist.”

See Articles
34 and 45of Regulation (EC) No 44/2001.

[714]            It must be noted that, a mere different in civil law (e.g.
different national rules on the protection of trade secrets against
misappropriation) is not enough to invoke the public policy defence, it must
amount to "a manifest breach of a rule of law regarded as essential in
the legal order of the State in which enforcement is sought or of a
right recognised as being fundamental within the legal order". Cf.
Case C-7/1998, Krombach, §37 (emphasis added).

[715]            Exemplary/punitive are in principle possible in at least
two Member States.

[716]            See for instance recital (32) of the Rome II regulation:
"Considerations of public interest justify giving the courts of the
Member States the possibility, in exceptional circumstances, of applying
exceptions based on public policy and overriding mandatory provisions. In
particular, the application of a provision of the law designated by this
Regulation which would have the effect of causing non-compensatory exemplary or
punitive damages of an excessive nature to be awarded may, depending on
the circumstances of the case and the legal order of the Member State of the
court seised, be regarded as being contrary to the public policy (ordre public)
of the forum." (emphasis added).

[717]            The Commission services impact assessment for the review
of Regulation 44/2001 explains that "to the knowledge of the Commission
there has not been a single case since the entry into force of the Brussels
Convention where recognition and enforcement of a judgment has been refused for
this reason [N.B. the substantive public policy exception]" (cf. European
Commission Staff (December 2010), p.15).

                Moreover, the need
for a substantive public policy defence has been reduced by the harmonisation
of the applicable law in Rome I and Rome II because, in theory, all courts in
the Member States of the EU will be applying the same law to the dispute.
However, both these instruments have a public policy exception: cf. Article 21
of Rome I Regulation and Article 26 of Rome II Regulation.

[718]            European Commisssion Staff (December2010), p. 34.

[719]            Ibid. p. 35.

[720]            See the WIPO Arbitration and Mediation Center : http://www.wipo.int/amc/en/index.html

[721]            CREATE (2012), p. 23. See also Pagnattaro (2012), p. 336.

[722]            See for instance case C-185/07, West Tankers.

[723]            See European Commission Staff (December 2010), p. 35 and
seq.

This is why
the Commission proposed, in the review of Brussels I Regulation (Regulation
(EC) No 44/2001) to regulate the interface between arbitration proceedings and
court proceedings (cf. European Commission (December 2010), notably
draft Article 29(4)). It would have obliged a court seised of a dispute to stay
proceedings if its jurisdiction was contested on the basis of an arbitration
agreement and an arbitral tribunal had been seised of the case or court
proceedings relating to the arbitration had been commenced in the Member State
of the seat of the arbitration. The objective of this amendment was to
enhance the effectiveness of arbitration agreements in Europe, prevent
parallel court and arbitration proceedings and eliminate the incentive for
abusive litigation tactics (see European Commission Staff (December 2010), p.
36 and seq.). However, this part of the Commission proposal was not accepted by
the European Parliament and the Council.

[724]            Article 6 of the recasted Brussels I Regulation
(Regulation (EU) No 1215/2012): “If the defendant is not domiciled in a
Member State, the jurisdiction of the courts of each Member State shall,
subject to Article 18(1), Article 21(2) and Articles 24 and 25, be determined
by the law of that Member State.”

[725]            European Commission Staff (December 2010), p. 20.

[726]            European Commission Staff (December 2010), p. 20,
emphasis added.

[727]            ibid., p. 22, emphasis added.

[728]            European Commission (December 2010). The Commission
proposed to introduce changes regarding disputes involving defendants from
outside the EU: the Regulation's jurisdiction rules would be extended to third
country defendants and, in addition, two additional fora for disputes involving
third country defendants would be added: (a) the courts of the place where
assets belonging to the defendant are located in the EU, provided their value
is not disproportionate to the value of the claim and that the dispute has a
sufficient connection with the Member State of the court seised; and (b) the
courts of a Member State will be able to exercise jurisdiction if no other
forum guaranteeing the right to a fair trial is available and the dispute has a
sufficient connection with the Member State concerned (forum necessitatis).

[729]            Extending the scope of Brussels I Regulation to also
include rules on jurisdiction regarding third country defendants would have had
positive impacts. It could have increased the possibilities for EU companies to
litigate in the EU rather than abroad. The Commission Staff impact assessment
stated the following: “This would bring about a reduction in the average
litigation costs and delays for EU companies because litigation within the
European area of justice is generally cheaper and simpler than litigation in a
country outside the EU55. Measures of judicial cooperation are
largely absent in relations with third countries and the geographical distance
of the competent court will most likely increase costs for witnesses and
parties to appear in person. Moreover, a harmonisation of the rules relating
to third country defendants will increase legal certainty and predictability
which, in turn, is likely to produce cost savings for the companies involved.
The improved legal framework might also encourage more companies to engage in
cross-border transactions. In addition, the absence of a level playing field
which results from the divergence of national rules on jurisdiction would be
remedied. SMEs: Any cost savings will be particularly beneficial for SMEs
which do not have the resources to handle complex international litigation in
the same way as large companies. [55 See CSES study]".
Cf. European Commission Staff (December 2010), p. 26, emphasis added.

[730]            A legal basis would also exist for the adoption of
non-binding measures by the Commission, such as recommendations to Member
States (Article 17 TUE).

[731]            Since the protection of trade secrets would not be
achieved by creating a "European intellectual property right", the
criteria for using Article 118 TFEU as legal basis would not be met.

[732]            Directive 2004/48/EC already suggested Member States to
extend its application to unfair competition cases. Cf. Recital (13): "[…]
Nevertheless, that requirement [N.B. defining the scope of the Directive to
encompass intellectual property rights] does not affect the possibility, on
the part of those Member States which so wish, to extend, for internal
purposes, the provisions of these Directive to include acts involving unfair
competition, including parasitic copies, or similar activities."

[733]            Any legislative proposal on trade secrets would need to
define the substantive scope of protection: i.e. what is a trade secret and
when it is misappropriated. By contrast, Directive 2004/48/EC does not define
the scope of protection: it does not contain a definition of 'infringement' or
of 'intellectual property right'. Those rights are defined elsewhere, in the
legal instruments – whether national or European – creating them. The
Commission, however, publicly stated which intellectual property rights are in
its view covered by the scope of Directive 2004/48/EC. See European Commission
(2005).

[734]            Rules on the protection of confidential information
during litigation on trade secrets misappropriation would be ancillary to the
main subject matter legal: rules with a view to prevent third parties from
benefiting from the misappropriation of the trade secrets within the internal market.
Those rules do not deal with "judicial cooperation, jurisdiction, the
recognition and enforcement of decisions in civil and commercial matters or
deal with applicable law" (expression borrowed from recital (11) of
Directive 2004/48/EC).

[735]            The conditions established by this article to adopt
criminal law measures at the EU level, however, do not appear to be met at this
stage.

[736]            See e.g. the ECJ judgment in C-58/08, Vodafone, §
32 and seq. on the requirements for using Article 114 TFEU as a legal basis.

[737]            Similarly to the objective of Directive 2004/48/EC:
"to approximate legislative systems so as to ensure a high, equivalent
and homogenous level of protection in the internal market" (cf.
recital (10)).

[738]            There is some academic debate about the transposition of
Article 39 of the TRIPS Agreement.

In the US,
there is no civil law protecting trade secrets at federal level, but this issue
is ruled by state law. All but 3 States have adopted a Uniform Trade Secrets
Act on this issue, which codifies and harmonises standards and remedies
regarding misappropriation of trade secrets that had emerged in common law on a
State by State basis. Massachusetts, New York and Texas rely on traditional
common law. While civil law trade secrets cases would normally be heard in
State courts, they may also be brought before federal courts (applying state
law through diversity or supplemental jurisdiction). Interestingly, some
commentators have suggested that the current State-based protection system
places the US in violation of its obligations under the TRIPS Agreement because
the TRIPS Agreement would set higher standards than those used in the States
which have not yet adopted the Uniform Trade Secrets Act (cf. Lao (1998) and
Pace (1995)). Other commentators, however, think that this issue might be more
theoretical than practical since there have been no complaints on this issue
from any trading partner (cf. Almeling (2009), p. 776 (footnote 27)).

Similar
arguments have been raised in Switzerland. De Werra (2009), p. 34, also wonders
whether the protection granted by the Swiss unfair competition law complies
with the minimal requirements of Article 39 of the TRIPS (the self-executive
character of TRIPS would be the only defence against a negative finding).

Within the
EU, it has also been argued that the protection of trade secrets in some Member
States falls below the TRIPS standards (see e.g. Gielen (2009), p. 392, as
regards The Netherlands).

[739]            See the discussion in Thomas (2010), p. 13 and seq., or
the views expressed by Almeling (2009).

[740]            In Switzerland, the federal law on unfair competition
was considered sufficient to meet the requirements of Article 39 TRIPS, and no
specific law on trade secrets has been enacted.

[741]            In Canada, there is no federal (civil or criminal) legislation
specifically addressing trade secrets protection. State civil law guarantees
certain protection through the common law doctrine of breach of confidence and
tort law generally. In 1986, a Federal Provincial Working Party examined the
need to enact civil law (and criminal law) at federal level to protect trade
secrets and concluded favourably to such an initiative, but there has been no
follow up to that report. See Alberta Report (1986).

[742]            www.iprhelpdesk.eu

[743]            http://ec.europa.eu/civiljustice/index\_en.htm

[744]            There is already guidance at EU level on contractual
protection, including model non-disclosure/non-compete clauses. See for
instance, the templates made public by the European IPR helpdesk: https://www.iprhelpdesk.eu/library/useful-documents?=Apply

[745]            For instance, WIPO has arbitration and mediation
procedures in place for intellectual property-related disputes. These
alternative resolution dispute procedures would allow to solve trade secret
related disputes too. In particular, WIPO promotes the use of these procedures
for disputes related to R&D and technology transfer: http://www.wipo.int/amc/en/center/specific-sectors/rd/

[746]            From a legislative technique perspective, it could be
conceivable to establish a definition of trade secret having a scope narrower
than that foreseen in TRIPS Agreement. However, it would be questionable as a
policy choice. Therefore, in this Impact Assessment, the definition of trade
secrets in the TRIPS Agreement is followed.

[747]            See Annex 4.

[748]            Member States would be free to provide for (or allow
courts to do so) either unlimited injunctions (unless the trade secret comes
into the public domain) or limited-in-time but renewable injunctions if the
circumstances have not changed.

[749]            Similarly to Article 13, second subparagraph, of Directive
2004/48/EC.

[750]            The procedural rules on civil litigation normally allows
a court to order a party to present evidence under his/her control upon request
of the other party. See for instance, Article 6(1) of Directive 2004/48/EC
regarding civil litigation on the enforcement of intellectual property rights.

[751]            As in the so-called Dusseldorf procedure, which is used
in Germany. This procedure, originally developed for patent law claims)
consists in a procedure where courts order independent proceedings for the
preservation of evidence as an interim injunction handed to the defendant
together with the statement of claims so that there is no chance to destroy
evidence. Evidence is then examined exclusively by authorized experts and
attorneys bound to confidentiality. The parties do not have access to the
confidential information. Cf. Baker & McKenzie (2013), B3.

[752]            Without prejudice to the possibility to impose an injunction
to the person responsible for the disclosure of the trade secret to make sure
that he cannot take advantage of this act.

[753]            Providing for criminal law responses to misappropriation
of trade secrets do not (and cannot) replace the need to address the
deficiencies in the civil law protection. Civil law protection and criminal law
protection are not substitute to each other in this area.

[754]            E.g. industry concerned, type of information concerned,
competitive environment, size of trade secret holder etc.

[755]            Policy Option 5 would similarly set out the consequences
in terms of criminal law. For the purposes of simplifying the analysis no
further reference to Policy Option 5 will be made here.

[756]            E.g. industry concerned, type of information concerned,
competitive environment, size of trade secret holder etc.

[757]            See for instance, the templates made public by the
European IPR helpdesk on non-disclosure agreements: https://www.iprhelpdesk.eu/library/useful-documents?=Apply

[758]            It should be noted that this discarded policy option n°4
should be distinguished from the possibility to extend the scope of Directive
2004/48/EC on the enforcement of intellectual property rights to also encompass
trade secrets (see Annex 23 on this issue).

[759]            Directive 96/9/EC of the European Parliament and of the
Council of 11 March 1996 on the legal protection of databases, OJ L 77,
27.3.1996, p. 20.

However,
Copyright protection was extended in Europe to databases, however this is not
the case in other countries where databases are not protected by copyright.

[760]            Council Directive 87/54/EEC of 16 December 1986 on the
legal protection of topographies of semiconductor products, OJ L 24, 27.1.1987,
p.36.

[761]            Granting a patent right or creating a sui generis
right covering strategic business information, even if valuable to its holder,
appears disproportionate.

[762]            Lowering patentability standards would also create
additional problems for the examination of patent applications.

[763]            For instance, this third person may have reversed
engineered a lawfully acquired product or discovered the same relevant
information in parallel.

[764]            This is without prejudice to the possibility that a
court may order the (provisional or definitive) seizure of imported goods (and
the assistance of customs authorities in this regard), upon the application of
a trade secret holder who is able to present enough evidence in support of
his/her claim (and, where appropriate, to meet the criteria for obtaining
provisional and precautionary measures).

[765]            See the impact assessment accompanying the proposal: European
Commission Staff (May 2011), in particular p. 13 and p.16

[766]            See European Commission (May 2011b), in particular the
definitions of “intellectual property right” and of “goods suspected
of infringing an intellectual property right” in points (1) and (7) of
Article 2.

[767]            OJ C 83, 30.3.2010, p.391.

[768]            See the Explanations relating to the Charter of
Fundamental Rights, OJ 303, 14.12.2007, p.17, 20.

[769]            See, for instance, Niemietz v Germany, judgment
of 16 December 1992, §29; Société Colas Est and Others v France, §41; Amann
v Switzerland, judgment of 16 February 2000, §65 ("…the term
'private life' must not be interpreted restrictively. […] furthermore, there is
no reason of principle to justify excluding activities of a professional or
business nature from the notion of "private life"); Peck v The
United Kingdom, judgment of 28 January 2003, §57 ("…That Article […]
may include activities of a professional or business nature. […]".

[770]            E.g. Judgment of the Court of 14 February 2008, Varec,
C-450/06, §48.

[771]            Similarly, it has also been claimed that industrial
espionage is an "intrusion in business life". See UK Law
Commission (1997), p. 11.

[772]            Article 41(2)(b) of the Charter: "This right [of
good administration] includes: […] (b) the right of every person to have access
to his or her file, while respecting the legitimate interests of
confidentiality and of professional and business secrecy".

[773]            See Case 145/83, Adams v Commission, § 34; Case
53/85 AZKO v Commission, §28; case C-36/92P, SEP, §37. Most of
the relevant case-law relates to "business secrets" held by European
institutions (e.g. the Commission) pursuant to regulatory obligations (e.g. in
antitrust cases).

                In this context, the
general principle that undertakings are entitled to the protection of their
business secrets finds expression in Article 339 TFEU: "The members of
the institutions of the Union, the members of committees, and the officials and
other servants of the Union shall be required, even after their duties have
ceased, not to disclose information of the kind covered by the obligation of
professional secrecy, in particular information about undertakings, their
business relations or their costs components."

[774]            See Case T-353/94, Postbank v Commission, §87.
For the Court, in order that technical information be of the kind to fall
within the ambit of the obligation of professional secrecy, it is necessary,
first of all, that it be known only to a limited number of persons. It must
then be information whose disclosure is liable to cause serious harm to the
person who has provided it or to third parties. Lasts, the interests liable to
be harmed by disclosure of the information must be objectively worthy of
protection (see case T-198/03, Bank Austria Creditanstalt v Commission,
§71).

[775]            Judgment of the Court of 14 February 2008, Varec,
C-450/06, §54.

[776]            "Intellectual property shall be protected"

[777]            Explanations relating to the Charter of Fundamental
Rights, OJ L 303, 14.12.2007, p.17, 23.

[778]            See for instance case the judgment of 11 January 2007, Anheuser-Busch
v Portugal, No 73049, §72: "[…] the Grand Chamber agrees […] that
Article 1 of Protocol No 1 is applicable to intellectual property as such."
See also Dima v Romania, No 58472/00 (admissibility decision) and Melnychuk
v Ukraine, No 28743/03 (admissibility decision). For a description of these
decisions, see Helfer (2008).

[779]            For instance, trade secrets are not included in the
interpretative statement made by the Commission in 2005 in connection to
Directive 2004/48/EC on the enforcement of intellectual property rights. Since
this Directive did not define intellectual property rights or intellectual
property, the Commission published an interpretative list of intellectual
property rights which were "at least" covered by the Directive. Trade
secrets were not included in that list. See Section A5.4 of Annex 5.

                The regulation on
customs enforcement of intellectual property rights does not include trade
secrets in its scope either. See Annex 13.

[780]            “For the purposes of this Agreement, the term
“intellectual property” refers to all categories of intellectual property that
are the subject of Sections 1 through 7 of Part II.” Part II is named “Standards
concerning the availability, scope and use of intellectual property rights”.
Section 7 of Part II of the agreement deals with the “Protection of
Undisclosed Information”. Moreover, it is undisputed that Part III of the
TRIPS (Enforcement of intellectual property rights) also applies to
trade secrets as defined in section 7 of Part II. See for instance Bronckers
& McNelis (2012), p. 677.

[781]            Commission Regulation (EC) No 772/2004 of 27 April 2004
on the application of Article 81(3) of the Treaty to categories of technology
transfer agreements, Official Journal L 123, 27.04.2004, p. 11.

[782]            The definition of know-how in the Regulation is similar
to that of trade secrets (cf. Article 1(1)(i)):

                “"know-how" means a package of non-patented practical
information, resulting from experience and testing, which is: (i) secret, that
is to say, not generally known or easily accessible, (ii) substantial, that is
to say, significant and useful for the production of the contract products, and
(iii) identified, that is to say, described in a sufficiently comprehensive
manner so as to make it possible to verify that it fulfils the criteria of secrecy
and substantiality”.

[783]            Cf. Article 1(1)(g).

[784]            Judgement of the Court of First Instance of 17.9.2007,
case T-201/04, Microsoft, §289.This case concerned the refusal to
licence interoperability information related to proprietary software. Facing
the question of whether such information was protected by a patent, copyright
or not, the Court concluded that it would proceed on the presumption that the
information in question was covered by intellectual property rights or
constituted trade secrets and that those trade secrets must be treated as
equivalent to intellectual property rights. Thus the Court of First Instance
assumed that trade secrets were entitled to the same protection as intellectual
property rights. See Bronckers & McNelis (2012), p. 683

[785]            In economic terms innovative information which is kept
secret by its holder is, no doubt, some kind of intellectual property. The
economic literature certainly regards trade secrets as part of the intellectual
property domain. Moreover, in many cases, trade secrets will interact with
intellectual property rights as regards the protected information: e.g. the
secret information may be patentable but it has not been patented (the trade
secret is used as substitute or alternative to a patent) or not yet (e.g. the
information is kept secret in the pre-patent phase). See generally Annex 6.

[786]            Explanations relating to the Charter of Fundamental
Rights, OJ L 303, 14.12.2007, p.17, 23. Emphasis added.

[787]            See case Anheuser-Busch v Portugal, No 73049, §63.

[788]            The European Court of Justice has not judged either
whether Article 17 of the Charter applies to trade secrets.

[789]            Bronckers and McNelies "expect no particular
hesitation from the ECtHR to afford protection to trade secrets under Art. 1
FAP as 'possessions', especially when the information at issue is economically
valuable" although they agree that it is "more than an open
question whether the ECtHR will characterize trade secrets as intellectual
property". See Bronckers & McNelis (2012), p. 681.

Helfer also
arrives at this conclusion, although he makes a different interpretation as
regards the question of exclusivity. See Helfer (2008), p.13.

[790]            See Bronckers & McNelis (2012), p. 680. In case
Anheuser-Busch v Portugal (No 73049), the Court accepted that an application
for a trademark registration already created an interest of proprietary nature
that is protected under Article 1 of the first Protocol to the ECHR (§78).

[791]            See generally Annexes 5 and 6.

[792]            See case Anheuser-Busch v Portugal, No 73049, §76.
See Also Helfer (2008), p. 24.

[793]            Helfer (2008), p.24; Bronckers & McNelis (2012), p.
681.

[794]            In the area of intellectual property, there are
exceptions to the exclusivity, in particular regarding copyright. Yet,
copyright is still considered a property right. Cf. Bronckers & McNelis
(2012), p. 678.

[795]            Bronckers & McNelis (2012), p. 678. These authors
recalled that the US Supreme Court has already recognised that trade secrets
are property, thus illustrating that there is no such conceptual barrier.

[796]            “1. No one shall be held guilty of any criminal
offence on account of any act or omission which did not constitute a criminal
offence under national law or international law at the time when it was
committed. Nor shall a heavier penalty be imposed than the one that was applicable
at the time the criminal offence was committed. If, subsequent to the
commission of a criminal offence, the law provides for a lighter penalty, that
penalty shall be applicable. […]”

[797]            “No one shall be liable to be tried or punished again
in criminal proceedings for an offence for which he or she has already been
finally acquitted or convicted within the Union in accordance with the law.”

[798]            And the right to property (Article 17), assuming
it would be applicable.

[799]            According to The Economist (2013), multinational
businesses are increasingly screening their own employees' behaviour to avoid
e.g. regulatory breaches.

[800]            And the right to property (Article 17), assuming
it would be applicable. If so, it must be noted that the Anheuser-Bush
judgement of the European Court of Human Rights emphasizes the state’s positive
obligations to protect private property (i.e. taking affirmative steps to
ensure that rights holders can effectively exercise their rights). According
that judgement, states must “afford the parties to the dispute judicial
procedures which offer the necessary procedural guarantees and therefore enable
the domestic courts and tribunals to adjudicate effectively and fairly in the
light of the applicable law” (§83). Should Article 17 of the Charter cover
trade secrets, this policy option would undoubtedly have positive impacts on
the application of that Article. See Helger (2008), p. 35 and seq. (on the
consequences of the protection of intellectual property by Article 1 of the
First Protocol to the ECHR – for him, intellectual property includes trade
secrets).

[801]            The freedom to conduct a business in accordance with
Union law and national laws and practices is recognised.

[802]            This conclusion is very clear as regards the wilful
misappropriation of a trade secret. However, one could argue that protection of
trade secrets against misappropriation could result in certain restriction of
the freedom to conduct business for other companies (e.g. competitors,
including competing businesses set up by former employees) to the extent that
they cannot use all the information they may have acquired in good faith (i.e.
in the event that the party in question obtained the trade secret in good
faith). If this were the case, it must be noted that in accordance with the Court
of Justice case-law, the freedom to conduct a business is not absolute, but
must be viewed in relation to its social function (see judgment of the Court of
22 January 2013, Sky Österrreich, case C-283/11, §45 and seq.).

[803]            According to the Explanations Relating to the Charter of
Fundamental Rights, the meaning and scope of Article 11 of the Charter must be
the same as those guaranteed by the Article 10 ECHR, which reads as follows:

                “1. Everyone has
the right to freedom of expression. This right shall include the right to hold
opinions and to receive and impart information and ides without interference by
public authority and regardless of frontiers. […]

                2. The exercise of
these freedoms, since it carries with it duties and responsibilities, may be
subject to such formalities, conditions, restrictions of penalties as are
prescribed by law and are necessary in a democratic society, in the interests
of national security, territorial integrity or public safety, for the
prevention of disorder or crime, for the protection of health or morals, for
the protection of the reputation or rights of others, for prevention the
disclosure of information received in confidence, or for maintaining the
authority and impartiality of the judiciary.”

[804]            See, for instance, judgment of the Court of 14 February
2008, Varec, C-450/06, §54.

[805]            See judgment of the Court of 22 January 2013, Sky
Österrreich, case C-283/11, §60.

[806]            The protection of trade secrets against misappropriation
does not unreasonably restrict the rights of third parties since no exclusive right
on the information is created: any third party could engage in parallel
developing of innovation or reverse-engineer any lawfully acquired good etc.

[807]            Judgment of 27 March 1996, Goodwin v. The United
Kingdom, No 17488/90, §42.

[808]            Ibid.

The issue
could be different should this policy option require a journalist to disclose
his sources to the trade secret owner in order to allow him to bring legal
proceedings against the journalist sources as the alleged misappropriator. The
European Court of Human Rights has already ruled twice that the “protection of
the rights of others” is not enough justification to justify the restriction of
the “freedom of information” which identifying the sources would entail. See Goodwin
v. The United Kingdom, notably §45 and Financial Times Ltd and others v.
the United Kingdom, No 821/03, §71. However, this policy option does not
envisage such measure, therefore not interfering with this case-law.

[809]            And the right to property (Article 17), assuming
it would be applicable.

[810]            It could not be done in a different manner either.

[811]            The second paragraph of Article 47 of the Charter
corresponds to Article 6(1) of the ECHR which provides as follows: "In
the determination of his civil rights and obligations or of any criminal charge
against him, everyone is entitled to a fair and public hearing within a
reasonable time by an independent and impartial tribunal established by law.
Judgment shall be pronounced publicly but the press and public may be
excluded from all or part of the trial in the interest of morals, public
order or national security in a democratic society, where the interests
of juveniles or the protection of the private life of the parties so
required, or to the extent strictly necessary in the opinion of the court
in special circumstances where publicity would prejudice the interests of
justice." [emphasis added].

[812]            The second paragraph of Article 48 of the Charter
corresponds to Article 6(3) of the ECHR which provides as follows: “3.
Everyone charged with a criminal offence has the following minimum rights: (a)
to be informed promptly, in a language which he understands and in detail, of
the nature and cause of the accusation against him; (b) to have adequate time
and facilities for the preparation of his defence; (c) to defend himself in
person or through legal assistance of this own choosing or, if he has not
sufficient means to pay for legal assistance, to be give it free when the
interests of justice so require; (d) to examine or have examined witnesses
against him and to obtain the attendance and examination of witnesses on his
behalf under the same conditions as witnesses against him; (e) to have the free
assistance of an interpreter if he cannot understand or speak the language used
in court.”

[813]            This question would be more problematic as regards
criminal law litigation. This is why measures on the preservation of
confidentiality of the trade secret during and after litigation are not
included in option 5.

[814]            See Rowe and Davis v The United Kingdom, no
28901/95 §61; and V v Finland, no 40412/98, §75. See also Antunes et
Pires v Portugal, no 7623/04, §35 referring to the exceptionality of the
situation in which the parties do not have access to elements of the file.

[815]            Judgment of the Court of 14 February 2008, Varec,
C-450/06,§48. The Court further refers to the protection of business secrets as
a general principle (§49) and the maintenance of fair competition (in the
context of contract award procedures) as an important public interest (§50).

[816]            Ibid. §§51 and 52.

[817]            See Kluger v Austria, no. 65631/01, §46 and Nevskaya
v. Russia, no. 24273/04, §§35 and seq.

[818]            In principle, both parties may be applicants for this
purpose.

[819]            The request for confidential treatment was made on the
basis of Article 116(2) of the then Rules of Procedure of the Court of First
Instance, which provided that ‘the intervener shall receive a copy of every
document served on the parties’, but that ‘[t]he President may, however,
on application by one of the parties, omit secret or confidential documents’.

[820]            Order of the president of the fifth Chamber of the Court
of First Instance of 15 June 2006, case T-271/03, Deutsche Telekom v
Commission, §10.

[821]            Option 3 would not interfere with the types of remedies
available at national level, therefore it would be inappropriate to provide for
sanctions at national level to ensure compliance with those national remedies.
Option 5 would not need such a regime, as national legislation already contains
their own provisions to ensure compliance with criminal sanctions.

[822]            The right to liberty and security (Article 6) are
not affected by any criminal sanction implying imprisonment. As provided for in
the Explanations relating to the Charter of Fundamental Rights, the rights in
Article 6 are the rights guaranteed by Article 5 of the ECHR, and in accordance
with Article 52(3) of the Charter, they have the same meaning and scope.
Article 5 ECHR recognises that a person may be deprived of his liberty after
conviction by a competent court.

[823]            Conservative estimation made by Commission staff.

[824]            Assuming a fee of €1000 man/day and related overheads at
10%.

[825]            The Lisbon Treaty repealed old Article 211 of the Treaty
on the European Community which contained the express reference to the
Commission’s general power to adopt recommendations. There is no express
reference to such general power in the Treaty on European Union (TEU) or the TFEU.
The possibility to adopt recommendations results from the interpretation of
Article 17 of the TEU on Commission’s role and its powers.

                According to point 43
of the 2010 Framework Agreement on relations between the European Parliament
and the European Commission (OJ L 304, 20.11.2010, p. 47), in areas where
Parliament is usually involved in the legislative process, the Commission
should only adopt recommendations in duly justified cases and after having
given the Parliament the opportunity to express its views.

[826]            Although a party may challenge their validity, of
course.

[827]            Most of this research is in the US, where job mobility
is often carried out more frequently than in Europe.

[828]            Ottoz & Cugno (2011), at
220.

[829]            Arrow (1962) noted the impact of employee mobility on
the disclosure and dissemination of innovations (“Mobility of personnel among
firms provides a way of spreading information.”). Arrow (1962), at 615. See also
Ottoz & Cugno (2011), Saxenian (1996), Gilson (1999), Hyde (2003), Png
(2012), and Motta & Ronde (2002).

                Gilson (1999) in
particular is of the view that the key to the success of Sillicon Valley in
California was largely due to the fact that California's law declared void
non-compete agreements and Californian courts effectively applied such ban in
California irrespective of a possible different applicable law designated by
contract. As a result, knowledge spillovers across companies (as employees leave
to take up employment with a competitor) and the creation of competing
start-ups by leaving employees flourished.

                Png (2012) slightly
disagrees with Gilson (1999) as regards the cause of Sillicon Valley's success.
His findings suggest that attention ought to be given to california's avowed
rejection of the doctrine of inevitable disclosure in trade secrets law. In the
US, by this doctrine, a firm can seek an injunction to prohibit a former
employee from working for a competitor, on the ground that he would inevitably
disclose trade secrets. The plaintiff in this case need not prove that the
former employee had used or disclosed any trade secret. Rather, the plaintiff
would simply need to show that the former employee would be employed in such a
capacity that he 'inevitably' would disclose the trade secret. This doctrine
has been developed by case law. It appeared in US federal courts in 1985, in
the Pepsico v Redmond case. In any case Png's views reinforce Gilson's
conclusion that knowledge spillovers are positive for innovation.

                To the knowledge of
the authors of this impact assessment, this doctrine does not exist in the EU.

[830]            Png (2012).

[831]            Png's index builds on 6 items representing the 3
dimensions of the law (substantive law, procedure and remedies): substantive
law (whether a trade secret must be in continuous business use; whether the
owner of the trade secret must take reasonable efforts to protect the trade
secret and whether the mere acquisition of the secret is misappropriation);
civil procedure (the limitation on the time for the owner to take legal action
for misappropriation); remedies (whether an injunction is limited to
eliminating the advantage from misappropriation; and the multiple of actual
damages available in punitive damages).

                It is noted that some
of these items (e.g. punitive damages) are not common in the EU.

[832]            The index is between 0 and 1.

[833]            Reliance on wage premia to discourage employee departure
and loss of trade secrets has also been analysed by Biger & Plaut (2000)
and Bernhardt & Dvoracek (2009). For a further discussion of the steps
required of companies to protect trade secrets, see also Ronde (2001) and
Martin (1993).

[834]            Png also underlines that it would be interesting to know
how the employees' own incentives to invest in their human capital would be
affected. They might be induced to invest more in themselves, since their
external market value would depend more on their own capabilities and less on
knowledge that they bring from previous employers. On the other hand, they might
be induced to invest less since they would have fewer external opportunities to
realize the return on that investment.

[835]            Selecting the right indicators to be used for the
assessment of the success (or lack of it) of the policy present particular challenges
(which also appear with regard to infringements of intellectual property rights
and other types of infringements in general): are there more cases because
there are more infringements or because the rules are better designed and
courts are better enforcing them (so that victims are more willing to file new
cases)?; also, would trade secret owners continue to be reluctant to litigate
on trade secrets for reputational reasons?

[836]            Annex II to the Innovation Union Communication (European
Commission (October 2010)) contains the following indicators: SMEs innovating
in-house as % of SMEs (Eurostat); Innovative SMEs collaborating with others as
% of SMEs (Eurostat).

[837]            Annex II to the Innovation Union Communication (European
Commission (October 2010)) contains the following indicator: Business R&D
expenditure as of % of GDP (Eurostat).

[838]            Annex II to the Innovation Union Communication (European
Commission (October 2010)) contains the following indicator: Employment in
Knowledge-Intensive Activities (manufacturing and services) as % of total
employment (Eurostat).

[839]            Annex II to the Innovation Union Communication (European
Commission (October 2010)) contains the following indicators: SMEs (more than
10 employees) introducing product or process innovations as % of SMEs
(Eurostat); SMEs (more than 10 employees) introducing marketing or
organisational innovations as % of SMEs (Eurostat); and High-growth enterprises
(with more than 10 employees) as % of all enterprises (Eurostat).

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