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Monday, 4 April 2016

Fordham 2016: Without disclosure mechanisms or criminal sanctions is the EU Trade Secrets Directive a poor cousin to US trade secrets law?

The AmeriKat had flagged, highlighted and circled the trade secrets panel session on this year's Fordham programme so much that she ripped the page.  She was so excited for the discussion on one her favorite areas during a year which sees the introduction and likely introduction of important trade secrets legislation in Europe and the US.   As is often the way, the AmeriKat unfortunately missed the first part of the session where John Richards of (Ladas & Parry)  introduced the panel and Paul Maier (Director, EU Observatory on Infringements of IP Rights, EUIPO) spoke on the impending European Trade Secrets Directive.  The European Parliament plans to approve the new Directive this April and the provisions will have to be adopted by Member States in less than 3 years.  Paul also pointed out that, as well as the US's proposed Defend Trade Secrets Act (DTSA) (on which see posts here), the EU Trade Secrets Directive expressly provides that trade secrets are not "intellectual property rights". This is where the AmeriKat picks up the tale...

James Pooley:
The Trade Secrets King
IPKat friend James Pooley addressed the provisions in the EU Trade Secrets Directive and DTSA which state that trade secrets are not intellectual property rights.  The philosophy behind the respective provisions was to avoid application of other laws that apply to intellectual property rights, such as the Enforcement Directive. Notwithstanding some academic arguments, James continued, that really all of us here know that trade secrets are IP; otherwise we wouldn't be talking about them at this IP conference. Indeed, surveys consistently show that secrecy is the IP of choice to protect the intangibles that now constitute the backbone of the modern economy. Clearly, there is special and growing interest in trade secrets, reflected in part by all the headlines about hacking. However, James said he was here to talk about the fact that, thanks to strong pressure from industry there are legislatures on both sides of the Atlantic looking at ways to make trade secret remedies more robust. James focused on a comparison of those two efforts which are both on the verge of coming to fruition. As Paul had stated earlier, the EU Trade Secrets Directive is about to be approved. This coming Monday there will be an unusual event in Washington, as a floor vote will be taken in the U.S. Senate to approve the Defend Trade Secrets Act. There are 65 co-sponsors out of 100 Senators, with broadly bipartisan support also in the House of Representatives. So things are looking pretty good. Trade secret law in the U.S. has traditionally been determined by individual states. The federal government entered the area only in 1996 with the Economic Espionage Act, which however addressed only criminal process and remedies. The DTSA would amend the EEA to provide trade secret owners with the option of filing civil claims directly within the federal court system. It also includes the possibility of applying to the court for a seizure order to prevent the destruction or dissemination of misappropriated secrets, a provision that has drawn some controversy. James instead focused on the comparison between the U.S. and European legislative efforts and two other provisions of the DTSA: one on employee mobility and the other on whistleblower protection.

On the first, the draft DTSA included language taken directly from the Uniform Trade Secrets Act, allowing judges to issue injunctions against “threatened” misappropriation. Opponents expressed concern that this might be used by federal courts to apply the so-called “inevitable disclosure doctrine” to prevent employees from moving to a competitive job simply because they knew too much. The ultimate solution to this concern was specific and narrow: in concluding the existence of a “threat,” courts had to have evidence of untrustworthy behavior and could not rely simply on what someone knows. The DTSA whistleblower provision is similarly specific and narrow, providing immunity to individuals who reveal confidential information about wrongdoing, but only for communication in confidence to law enforcement officials. The EU Trade Secrets Directive is of course a step forward in European harmonization of definitions and remedies, but it mostly re-states the language and standards already required by TRIPs. It does add provisions covering confidentiality of information in judicial proceedings, but there is a requirement that at least one party representative always be given access, so the common U.S. practice of “attorneys eyes only” protective orders appears to be unavailable under the EU Trade Secrets Directive. In addition, the Directive does not require countries to provide criminal remedies, and it fails to address the fundamental challenge of every trade secret case: how can the trade secret owner get access to information to prove the misappropriation? This probably reflects the tension between common law and civil law systems, but the need is real. James is even more concerned about the broad and undefined “exceptions” of the Directive, allowing the use or disclosure of information for “exercising the right to freedom of expression” or “for the purpose of protecting a legitimate interest recognized by Union or national law.” As for whistleblowers, the exception broadly applies to any disclosure to anyone, so long as this is done “for the purpose of protecting the general public interest.” What James concludes from all of this is that the U.S. remains the leading jurisdiction in meeting customer needs and expectations for the protection of trade secrets. With the EU Trade Secrets Directive, we will need to wait for rulings from the CJEU to see whether the exceptions will present serious problems for trade secret owners.

James reminds us about
the power of criminal
trade secrets
James Stronski (Crowell & Moring) addressed the use of criminal prosecution of trade secret theft under the Economic Espionage Act.  He stated that the number of EEA prosecutions between 2012-2013 have increased by 30%.  This is not surprising given we are in the Cybercrime Age.  The question for trade secrets owners is to determine if they have the kind of case where it makes sense to involve the FBI.  FBI involvement is likely to be suitable if the product is commercially significant.  However, there are pros and cons in getting the FBI involved.  On the upside, the government does most of the work and has additional tools at their disposal that private companies and the courts do not have access to.  On the downside, trade secret owners will lose control, even though they are often kept involved.  If a trade secrets owner wants the involvement of government, it is important that they obtain and package up a convincing bundle of evidence to present to the government to get them interested in their case.  James highlighted the case of DuPont v Kolon - which concerned the Kevlar trade secrets (read about the case here in the testimony from Karen Cochran) - and recent cases concerning Chinese espionage (US v Xu and Zi, US v Xi and US v Chen) as examples of criminal trade secrets prosecution.  On the latter, James stated that the US government is particularly interested in pursuing a case if a foreign entity is involved.

Professor Mark Schultz explains recent
dropped criminal trade secrets prosecutions
 as examples of "when you have a hammer, 
everything looks like a nail"
Professor Mark Schultz (Southern Illinois University School of Law) focused on the need for a multilateral governmental dialogue about best practices for reforming national laws regarding trade secrets and coordinating cross-border enforcement.  He agreed that criminal investigations are a really important tool.  However, they are limited as they are resource intensive and require specialist knowledge on behalf of the investigators.  Recent research indicated that there has not been more than 13 trade secrets cases under federal criminal law.  This is a small fraction as compared to the number of civil cases.  Trade secret owners may have the kinds of cases that are suitable for criminal investigation, for example if they involve a foreign defendant or actor.  If they do then they probably really do need the help of the government as the government has tools to help trade secrets owners do things that they can't do via civil enforcement.  He also noted that there are certain cases which grab the attention of the courts and authorities in that they involve a product or a company that is important to a judicial district (i.e. Monsanto trade secret theft via a Chinese agricultural body).   More than half of the cases since 2013 have had a Chinese link.  This seems to be a sweet spot for the government and the courts, even when its a bad case (e.g., where the government is so focused on Chinese hacking some innocent individuals are wrongly charged such as the Temple University professor).  Mark said that some of the overzealous prosecutions have caused him to reflect on the fact that when you have a hammer, everything looks like is a nail.  Indeed, the FBI has dedicated significant resources to Mandarin-speaking technical specialists, so perhaps they are suffering from this a bit.

Victoria Cundiff  notes the power
of publicity in cases
where trade secrets are
effectively enforced
Victoria Cundiff  (Paul Hastings) wondered whether actually the publicity of these cases (even the bad ones) has a peripheral benefit of publicizing how serious the US government is tackling trade secret theft (for example in the case of the recent GSK indictment in US v Xi - see indictment here).  Marty Adelman commented that he thought it was fascinating that there were only three cases against Chinese nationals, when we are told that China is hacking the US all the time; there should be more cases, he thought.

Jim responded that the constant focus on China is understandable, but it is also dangerous because hacking comes from many different directions and is very difficult to attribute to a particular source.  Some of these cases have been brought a little too hurriedly and are examples of how prosecutors have to think a bit harder about the evidence.  Trade secret owners may benefit from criminal prosecutions being free and fierce, but they lose control. Even if they want to settle the case, they cannot.  Further, many things can and do happen during prosecution which you may not want to have happen. But, you are stuck.

Picking up on the issue of criminal liability, Mark Ridgway (A&O) noted that the margin between a defendant being subject to a criminal prosecution (potentially spending years in jail) and the defendant walking away without even a civil case being brought, can be very fine. These cases can turn on whether the would-be claimant finds any smoking gun evidence - with such evidence criminal prosecutions can occur (e.g. for computer misuse offences in the UK), but without it even a civil claim can be difficult to bring. Disclosure can therefore be an important tool in exposing the extent of any wrongdoing and it is a shame that the EU Trade Secretes Directive did not include disclosure provisions, particularly given that it contains numerous safeguards that serve to protect defendants' interests. If you really want to strengthen trade secret protection, Mark said, you need to provide for the possibility of disclosure in appropriate circumstances. Otherwise, absent the defendant doing something plainly wrong, claimants are potentially left without recourse.

Jim agreed, noting that if you do not provide some mechanism to find out basic facts of a transaction you won't have the ability to identify facts.  In such a case, you will never get before a judge.  Jim hopes that is an issue the EU will confront at some point and make the means of obtaining disclosure a fundamental predicate available to trade secret owners.  Although Jim noted the lack of disclosure was a structural issue between common and civil law countries, it is what industry needs.

Paul Maier commented that trade secret cases are incredibly difficult.  Much will depend on how the judges address the issues.  If we want something that looks like a common EU approach to trade secrets, he stated, the only possible way of doing that is to make sure that the judges who deal with these cases get together and discuss the issues.  However, unlike in other areas of IP such as patents and trade marks where those judges meet to discuss issues, it is incredibly difficult to identify the relevant judges who will hear trade secrets cases.

Victoria concluded the session by reminding the audience that trade secrets misappropriation sometimes occurs through hacking.  However, not all hacking results in trade secrets misappropriation.  Hacking may actually have the aim of obtaining other types of information such as personal data.  Trade secret protection is only one aspect of information theft.


Anonymous said...

Sigh... it may be worth looking into the issue of what competence the EU has to introduce criminal sanctions in a previously unharmonised field. For this you need to check the Treaty.

Anonymous said...

I'm not sure anyone was suggesting the Directive introduced harmonised criminal provisions in Europe, or even that this was a good idea. From memory the Dirctive expressly does not impact on criminal law.

Anonymous said...

Is it right that personal data cannot be protected as trade secret in the US? If not then how is it protected (and is there any difference in substance)? I appreciate that the Directive doesn't cover personal data (because it generally doesn't have commercial value), but under English law personal data and trade secrets are all protected as "confidential information". A terminological nightmare, but in essence it's all the same I think.

Anonymous said...

The blog post reads "In addition, the Directive does not require countries to provide criminal remedies," as an implicit criticism or a shortcoming of the Directive. The reason it does not do so,is because the EU cannot do so in the current state of EU law in this field. MS may, nevertheless, choose to do so but they are not required to do so.This though would be unlikely in practice.

In contrast, MS are required to "criminalise" certain behaviour and also have criminal sanctions in place for insider dealing now called market abuse. The two fields are not a million miles apart in terms of behaviour (although one is addressed to markets) but in terms of EU law very different.

Anonymous said...

Ah, you're right, although you're potentially being a bit touchy given the limited emphasis on the point in the post. I don't think there was much appetite in Europe for introducing mandatory criminal provisions - these things are dealt with elsewhere. The Directive was mainly intended to protect commercial information passing between commercial entities, not hackers and rogue employees. Also, the parliament would never have tolerated the idea of employees being banged up for their mis-deeds (even though that's already possible in many countries).

Anonymous said...

Criminal sanctions were not even on the political agenda and had they been, it would not have been legally possible to introduce them in this directive and all institutions (Commission, EP and Council) were aware of that.

BTW, re employees and who is on their side -the Council did not hold back on employees for insider dealing and wanted a lot more under the Irish Presidency (which wanted near anti-terrorism rules (no surprise we get so many preliminary references on rights in Ireland) -and the EP was fairly weak on this point. Thankfully, they had robust advice and held back in the end.

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