Reed Smith Client Alerts

Before the last Election for the European Parliament took place, the European Commission rushed to move forward with an important project by publishing the Draft of the Know-How Directive. Then for a long time nothing happened until the parties involved in the legislative proceedings became active again at the end of 2015. In the meantime, a revised Draft Directive has been drawn up which should pass the European Parliament before the end of the year.

“It’s about time”, one is tempted to say. Operational know-how of a business or technical nature is a decisive competitive factor and may be crucial for a company to successfully compete with its competitors. The current Draft Directive will significantly improve the protection of undisclosed know-how and business information by awarding to know-how a status similar to an industrial property right. In some points, however, the draft does not meet the legitimate expectations of businesses. If the Directive will be adopted in this version, as is expected, the owner of a trade secret will have to adjust to various changes in the law:

What’s coming?

Definition of a trade secret Along the lines of the provisions of the TRIPS Agreement, Art. 2 (1) of the Draft Directive establishes three cumulative conditions for the existence of a trade secret: the information in question must (i) be secret, i.e. not generally known or readily accessible, (ii) have commercial value, and (iii) be subject to reasonable measures to keep it confidential. The third criterion is new from a German perspective, because according to current law a trade secret is deemed to exist if secret facts of a commercial value shall be kept secret according to the clear intention of the owner. The intention to keep the trade secret confidential is usually presumed. In case the German legislature decided to change the current definition, companies should take reasonable confidentiality measures, e.g. set up clear internal guidelines on how to deal with sensitive information (store documents in a manner as to prevent unauthorized access etc.).

Know-How as quasi-intellectual property right As mentioned above, the Draft Directive “knights” know-how by approximating it to the status of an intellectual property right. Subject to the fulfillment of the criteria of a trade secret it is protected against infringement similar to a patent or trademark.

However, the scope of the Directive is not limited to the definition of infringement of trade secrets. Owners of trade secrets should also address their attention to the catalogue of lawful acts in Art. 2 a of the Draft Directive. Companies may not be very pleased by the provision in Art. 2 a (1) d) of the Draft Directive stipulating that the act of obtaining access to trade secrets shall be considered lawful if the trade secret is obtained by observation, study, disassembly or testing of a product or object that has been made available to the public. This provision represents a paradigm shift in terms of the assessment of “reverse engineering”. On an international level German law currently has a special position. According to S. 17 (2) of the German Act Against Unfair Competition the gaining of unlawful access to a trade secret may be subject to prosecution if it has been gained by using technical means and by investing considerable efforts. After the adoption of the Directive and its national implementation the owner of the trade secret will have to adjust to the fact that protection against “reverse engineering” can only be achieved contractually.

However, the Draft Directive does not meet the expectations of owners of trade secrets mainly due to the numerous indeterminate legal terms. In this manner the Draft Directive declares all such actions to be lawful which are in conformity with honest commercial practices pursuant to Art. 2 a (1) c). Conversely, this indeterminate legal term is used again in Article 3 (2) f) of the Draft Directive according to which any other conduct shall be considered unlawful if it is “contrary to honest commercial practices”. Someone who expected that the Draft Directive would establish a Union-wide protection standard will therefore have to wait until the indeterminate legal terms are filled with life by case law.

The exceptions in Art. 4 of the Draft Directive are also likely to cause dissatisfaction among owners of trade secrets. Without the possibility to balance conflicting interests, claims based on infringement pursuant to Art. 4 e) of the Draft Directive will be dismissed if the alleged use or disclosure of the trade secret was carried out “for the purpose of protecting a legitimate interest recognized by Union or national law”. In addition, the protection of a whistleblower will also prevail over the interests of the owner of the trade secret without balancing the conflicting interests. According to Art. 4 e) of the Draft Directive the use and disclosure of a trade secret as part of a revelation of a misconduct, wrongdoing or illegal activity does not constitute an infringement provided that such use and disclosure was done in the public interest. This provision is particularly unsatisfactory as it is no longer subject to the requirement that the use and disclosure of the trade secret was necessary for revealing the misconduct. In other words, the whistleblower is always privileged.

Legal Consequences and Enforcement Unfortunately, to some extent the proposed rules for the enforcement clearly failed to address practical requirements. In a particular dispute the owner of a trade secret is regularly confronted with problems of proof and with information deficits. The draft does not help the owner of a trade secret with respect to a reversal of the burden of proof nor does it stipulate that the alleged infringer surrender information about the infringing products. Rather, the Member States shall ensure, according to Art. 10 of the Draft Directive that the courts ask the applicant in proceedings for interim relief to provide such proof which can likely be obtained without problems. From this we will not be able to draw the conclusion, however, that evidence need not be presented if – in the wording of the draft – such proof cannot be procured without any difficulty.

However, in case the company can overcome the problems relating to the burden of proof, the owner of the trade secret will appreciate the uniform remedies that can be enforced both in interim relief and in main proceedings. As interim measures the Draft Directive provides in Art. 9 (1) for (i) an injunction regarding the use or disclosure of the trade secret on a provisional basis, (ii) the prohibition to produce, offer, etc. infringing goods and (iii) the seizure or delivery up of the suspected infringing goods. Pursuant to Arts. 11 and 13 of the Draft Directive further appropriate remedies (such as a recall or the destruction of the infringing goods) may be ordered and the infringer may be sentenced to pay damages. This again reflects the upgrading of know-how to a quasi-intellectual property right.

Practical Consequences The current revised draft of the Know-How Directive does not meet all the needs of businesses. Therefore companies have to realize – more than ever – that the protection of trade secrets can only be ensured if companies undertake contractual safeguards and sensitize their employees by means of trainings with respect to the protection of trade secrets. Should the German legislator decide that the definition of trade secret needs to be amended in line with the Directive, owners of trade secrets must take reasonable steps in order to gain protection of the trade secret. In this case it is particularly advisable that companies conclude confidentiality agreements both with their employees during, and – to the extent legally permissible under S. 74 et seq. of the German Commercial Code – after the end of the employment relationship and also with their business partners. With respect to licensing agreements, it is highly recommended to include provisions on the right to disclose trade secrets to third parties and to include prohibitions regarding “reverse engineering”.


Client Alert 2016-011