Documents considered by the Committee on 11 March 2015 - European Scrutiny Contents

4 Protection of trade secrets

Committee's assessment Legally and politically important
Committee's decisionNot cleared from scrutiny; further information requested
Document detailsDraft Directive on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure
Legal baseArticle 114 TFEU; QMV; ordinary legislative procedure

Document number

Business, Innovation and Skills

(35623), 17392/13 + ADDs 1-3, COM(13) 813

Summary and Committee's conclusions

4.1 Trade secrets can cover a wide range of different types of information, such as technical innovations, recipes, business processes or customer information. Businesses use trade secrets either alongside formal intellectual property (IP) rights or as an alternative to them.

4.2 Unlike IP rights, the knowledge contained in trade secrets is not exclusive to the trade secret holder. It is possible independently to acquire and use the same knowledge, including through taking a product apart to see how it works.

4.3 Provided it can be kept secret, a trade secret can also be protected indefinitely, in contrast, for example, to the 20-year term of patent protection. For industries with long product life cycles, trade secrets can therefore be an important part of a strategy to protect and exploit intangible assets.

4.4 Our Report of 12 February 2014 provides an outline of the Commission's proposal. Broadly it would —

·  establish a common definition of a "trade secret";

·  harmonise the circumstances which the acquisition, use and disclosure of a trade secret is unlawful; and

·  harmonise procedures for redress and the remedies that should be made available to the holder of a trade secret.

4.5 We have already concluded that the stated cross-border objectives of the proposal provide a sufficient basis to justify action at EU level, and noted that the protection of trade secrets under the UK's common and contract law is consistent with the terms of the proposed draft Directive, other than the shorter limitation period proposed by the Commission.

4.6 On 7 May 2014 we granted a scrutiny waiver to enable the government to agree the General Approach which was adopted at the Competitiveness Council of 26 May 2014, and addressed the issue of limitation periods for actions in such a manner that domestic limitation periods could be maintained. In doing so we asked the Minister for further information on the implications of the EU exercising competence in this area of the first time; and on two concerns raised by national stakeholders, namely the impact on employer/employee relations and the absence of provisions to secure evidence.

4.7 The Minister for Intellectual Property (Baroness Neville-Rolfe) now writes to indicate that trialogue negotiations involving the European Parliament are likely to start in May or June this year, and to provide a comprehensive response to the issues we have raised and an update on the outstanding issues emerging from the early deliberations of the European Parliament.

4.8 We are grateful for the informative update the Minister has provided. It is an example of good scrutiny practice.

4.9 As this matter progresses to trialogue negotiations involving the European Parliament we remain supportive of the Council's General Approach.

4.10 We draw to the attention of the House the Government's assessment that the exercise of competence by the EU in this field will have limited impact given the existing EU and international legislation.

4.11 Whilst the Minister has asked for scrutiny clearance, we consider it appropriate to retain this matter under scrutiny pending the outcome of the trialogue negotiations. We ask for a further update when there are significant developments or when the trialogue negotiations have been completed.

Full details of the documents: Draft Directive on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure: (35623), 17392/13 + ADDs 1-3, COM(13) 813.

The Minister's letter of 26 February 2015

4.12 The Minster identifies the following key issues:

·  "Confidentiality provisions. Concerns have been raised that the provisions in the Directive jeopardise the right to a fair trial and could mean that parties might be unaware of accusations made against them. The courts in the UK have experience of operating similar practices without controversy. However, the General Approach agreed by the Council goes some way to addressing such concerns.

·  "Limitation period. We were successful in securing in the General Approach a limitation period that is consistent with the periods currently applied in the UK — six years in England and Wales and Northern Ireland, five years in Scotland. The Government took the view that the period proposed by the European Commission (one to two years) would in many instances be too short a time in which to assemble a case that would be worth pursuing. There has been a suggestion from some MEPs that the period needs to be short to prevent the strategic use of litigation for anti-competitive purposes, particularly where an employee has joined another firm. The Directive already contains provisions in Article 6 that would enable courts to throw out cases or impose sanctions (in accordance with national law), if they find that a claim is manifestly unfounded and has been brought in bad faith.

·  "Labour mobility. The Government agrees that labour mobility is good for the economy. When employees move to different firms or start a new business, they bring knowledge, skills and experience that can benefit the firm and the economy as a whole. MEPs have stressed their commitment to the ability of workers to seek new jobs and some are concerned that the Directive could have a negative impact in this respect. The example of Silicon Valley has been cited, but it is important to note that California does in fact have a trade secret law. It does not require non-compete clauses in employment contracts, but these are not a necessary part of trade secret protection.

    "I am aware of stakeholder concerns that the Commission's text seemed to provide lower protection for trade secrets gained by an employee during the course of his or her employment. This is a concern because former employees are among the most commonly cited sources of risk of trade secret misappropriation. Recital 8 of the Commission text said that such information would not come within the definition of 'trade secret' if it were 'known among or accessible to persons within the circles that normally deal with the kind of information in question'. By contrast, the TRIPS Agreement requires protection of confidential information so long as it is 'not generally known among or readily accessible' to such persons. The General Approach agreed by the Council contains language that is consistent with the TRIPS Agreement. The Government is keen to see that an appropriate balance is struck between the interests of the employer and the employee."

4.13 In relation to the fact that this would be the first exercise of competence by the EU in this particular field the Minister provides this information:

    "Article 39 of The World Trade Organisation's Agreement on the Trade-Related Aspects of Intellectual Property Rights (TRIPS) requires all members to protect trade secrets. This requirement has been implemented in different ways across the European Union.

    "The EU has already exercised its internal competence in the area of trade secrets. Directive 2004/48/EC on the Enforcement of Intellectual Property Rights applies to trade secrets and, insofar as it has done so, it is not therefore open to Member States to exercise competence unless the EU ceases to do so (see Article 2(2) TFEU).

    "As regards matters relating to trade secrets which are not covered by the Enforcement Directive, the adoption of the proposed Directive would be an exercise of EU shared competence in the area of trade secrets in the internal market. The responses from business to pre-legislative studies indicate that the differences in treatment can distort the internal market, with 38% of respondents saying that they reduce the incentives to collaborate with companies or research organisations in other Member States.

    "The Government thinks that it is appropriate for the EU to exercise its competence in this area, based on Article 114 of the TFEU, allowing for the adoption of EU rules harmonising national legislation if they are necessary for the smooth functioning of the internal market. Member States have adopted different definitions of trade secrets and unlawful behaviour, so that it can be difficult for businesses to understand the scope of protection. There are also significant differences in available remedies and in the ability to maintain confidentiality during legal proceedings. Weaker protection means that trade secret holders have to accept the greater risk of misappropriation or invest more in security measures, and makes it more likely that infringing goods enter the internal market.

    "The proposed Directive would provide innovative businesses that operate across the EU with greater clarity. The text, as it currently stands, would not prevent Member States from applying more far-reaching protection, provided that this is consistent with the safeguards contained in the Directive.

    "I will now turn to the question of external competence. While the Union has exclusive competence for the conclusion of an international agreement in so far as its conclusion may affect common rules or alter their scope, in so far as the Directive would contain minimum standards, the EU would not have exclusive competence where the international agreement also contains minimum standards.

    "The Committee remarked on the role of the Court of Justice of the EU, which would have jurisdiction to interpret the provisions of the Directive, once adopted. As I have explained above, the difference in treatment between Member States decreases businesses' confidence in sharing knowledge across borders. Applying the same minimum standards across the European Union will reduce such barriers to knowledge and technology transfer.

    "Even if the Directive is not adopted, the Court of Justice of the EU has jurisdiction to interpret the provisions of Article 39 of the TRIPS Agreement by virtue of this being considered to be within exclusive EU competence. This follows from the Court's ruling in (C-414/11)."

4.14 Finally the Minister raises a new issue:

    "Stakeholders have noted the absence of provisions for obtaining evidence. Such provisions are available in the IP Enforcement Directive (Directive 2004/48/EC). Recital 13 of that Directive states that 'It is necessary to define the scope of this Directive as widely as possible in order to encompass all the intellectual property rights covered by Community provisions in this field and/or by the national law of the Member States concerned'. The Recitals of the proposed Trade Secrets Directive acknowledge that the IP Enforcement Directive applies to trade secrets: '... where the scope of application of Directive 2004/48/EC of the European Parliament and of the Council and the scope of this Directive overlap, this Directive takes precedence as lex specialis' (Recital 28). In practice, the preliminary study by Baker & McKenzie indicates that measures to secure evidence are available in all but three of the then 27 Member States."[10]

Previous Committee Reports

Forty-eighth Report HC 83-xliii (2013-14), chapter 3 (7 May 2014), Thirty-sixth Report HC 83-xxxiii (2013-14), chapter 3 (12 February 2014).

10   See Table, p.32. Back

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