Article Post on 06 September 2016

Entrepreneurs and trade secrets in 5 points

Far from the controversy raised by the Luxleaks and Panama Papers scandals and the acquisition of confidential information, the key to success for entrepreneurs can in reality depend on their secrets; the great idea they had one day in the bath, the secret ingredient in a recipe revealed by their grandmother, or long years of research leading to the creation of the perfect product.

The concept of “trade secrets” and their protection or infringement depends on whether one is an employer or an employee.

On the entrepreneur-employer’s side, in their relationship with their employees, trade secrets are disclosed, shared, created or developed in a context of mutual trust which is an essential part of the employment relationship, in order for the business to prosper. On the employee’s side, trade secrets may be the experience acquired throughout the employment relationship or their technical skills, i.e. know-how.

The European parliament recently adopted a new directive which seeks to protect trade secrets.

The directive defines trade secrets and also sets limits on the protection of those secrets, particularly as regards employees. The directive therefore does not seek to prevent the lawful use of know-how acquired throughout an employee’s career.

So what do the provisions of this directive mean for entrepreneurs in practice? Here we present an analysis of this question, broken down into 5 points.


1. Not everything is a trade secret

By trade secret, the directive means commercial information which has actual or potential commercial value because it is secret and has been subject to reasonable steps to keep it secret1.

The protection therefore covers know-how2 and commercial information that has not been disclosed, provided that its holder has:

  • stated that it is a secret;
  • stated that this secret has a commercial value; and
  • put measures in place to protect it.

This definition excludes a secret that is not one because:

  • the information it contains is not confidential or is public3
  • the information cannot be valued; and
  • the secret or the confidential information that constitutes the secret is not otherwise (i.e. officially and correctly) protected. 

However, the definition does include:

  • sales methods;
  • distribution methods;
  • client profiles, employee profiles;
  • marketing strategy;
  • list of suppliers and clients;
  • prices charged and the method of determining those prices, etc4

Entrepreneurs would therefore be well advised to make it clear that the secret is a secret, that the value of the secret can be quantified, and that measures have been taken to ensure that it remains a secret.


2. The holder of the secret is not necessarily the creator of the secret

The holder of the secret is defined as any natural or legal person who lawfully has control of a trade secret.

This definition does not specify whether or not the holder must have an exclusive right over the secret.

In other words, the entrepreneur for whom the trade secret constitutes an economic value and a competitive advantage is not necessarily the creator of the secret who is, first and foremost, the owner of the secret.

In the employer–employee relationship, in the absence of a clear agreement on the ownership of the secret, control of the trade secret could come into conflict with the rights of the creator of the secret.

Entrepreneurs should therefore ensure that they always enter into clear contracts with their employees (and independent service providers) concerning ownership of the rights relating to what the entrepreneurs consider to be their trade secrets.
 

3. Protection of secrets concerns only the unlawful nature of the appropriation, use or disclosure

The directive seeks to prevent cases of proven dishonesty, i.e. the fraudulent acquisition, use or disclosure of trade secrets5 which is liable to damage the interests of the person lawfully controlling those secrets or which harms that person’s scientific and technical potential, financial or economic interests, strategic positions or ability to compete.

The acquisition, use or disclosure is lawful unless it is prohibited by a valid legal duty or the trade secret is protected by a legal or contractual provision6

For there to be an infringement of trade secrecy, it is necessary for the person concerned, either intentionally or as the result of gross negligence, to have:

  • acquired the trade secret unlawfully (by unauthorised access, theft, deception, etc.); or
  • acted in breach of a confidentiality agreement or any other duty to maintain secrecy (for example, in breach of the legal duty for (ex-) employees not to disclose or use the employer’s trade secrets); or
  • acted in breach of a contractual or legal obligation to disclose a trade secret only in a limited manner.

Entrepreneurs should be careful to draw their employees’ attention to the confidential nature of their trade secrets and to clarify the degree of confidentiality or even to classify access rights to what must be considered secret. Entrepreneurs should also be clear about the importance of the secret information and data that are subject to confidentiality.


4. Infringement of trade secrecy is not always sanctioned

Entrepreneurs who are victims of the theft or misappropriation of trade secrets should note that they are cannot expect redress if a trade secret was obtained, used or disclosed:

  • by virtue of exercise of the right of freedom of expression and information;
  • in order to reveal professional or other misconduct or illegal activity, provided that the defendant acted in order to protect the general public interest (such as public safety, consumer protection, public health and environmental protection);
  • with a view to disclosure by employees to their representatives as part of the legitimate exercise of their representative functions, where such disclosure was necessary;
  • to protect a legitimate and/or general interest.

In other words, protection of trade secrets is limited by the freedom of the press, the right to information and the protection of legitimate interests (employee representation) or the general public interest.


5. Protection of trade secrets cannot take precedence over the freedom to work or to conduct a business

The directive does not seek to create unjustified obstacles to workers’ mobility. Thus, it does not allow:

  • restrictions to be placed on the use by employees of information that does not constitute a trade secret;
  • restrictions to be placed on the use by employees of their know-how, i.e. the experience and skills honestly acquired in the normal exercise of their duties; or
  • the imposition of additional restrictions on employees in their employment contracts.

The principle of the freedom to work means that, in principle, employees can change employer as they wish or set up on their own. Employees cannot be prevented from using the experience and know-how they acquired from their former employer, or even from poaching their former employer’s clients7

The directive therefore does not prevent the use of knowledge acquired during an employee’s previous employment, provided that such knowledge is not subject to either legal protection or contractual protection.

Entrepreneurs should ensure that the provisions of the employment contract relating to trade secrets and what is to be considered know-how are clear and unequivocal.
 

Summary

The new directive is not intended to protect ideas or to sanction acts of unfair competition. That is the job of intellectual property protection law and unfair competition legislation.

The directive protects only trade secrets, for which it provides a definition.

It also sets limits on the protection of trade secrets, in particular as far as employees are concerned, and it therefore does not seek to prevent the lawful use of know-how acquired by employees over their working lives.

Entrepreneurs would be well advised to draw up an inventory of all the agreements and contracts entered into with their employees, service providers, suppliers and independent consultants who could come into possession of information or data considered secret. As far as possible, entrepreneurs should update those contracts and agreements to ensure that they include the appropriate protective measures.

Entrepreneurs can also, as either a preventive or corrective measure, streamline the protection of their trade secrets by drawing up a charter, regulation or memorandum which:

  1. contains clear instructions concerning the confidential nature of the information and data within the company, the commercial value of such information and data, and what must be considered to be sensitive and/or secret information or data;
  2. provides for and describes the specific levels of access restriction according to the confidential and/or secret information or data concerned;
  3. sets out the reasonable measures of protection put in place within the company in order to protect trade secrets;
  4. specifies what is considered to be an infringement of trade secrecy according to the importance of the information and data subject to confidentiality and what is considered to be good faith use;
  5. possibly provides for training/induction courses for employees to ensure that they are and remain aware of the existence of the arrangements in place for the company’s trade secrets.

For further information on trade secrets, do not hesitate to contact:

1. The definition is not really new. In fact, the Belgian Court of Cassation defines a trade secret as the technical process which, by contributing to the carrying out of operations in a factory in order to obtain a specific product, is of such a nature as to procure technical advantages for the manufacturer and to provide the manufacturer with superiority over his competitors of such a nature that there is an economic advantage for him in the secret not being known by his competitors (c.f. Belgian Court of Cassation, 27 September 1943, Pas. 1943, I, page 358).

2. A trade secret is defined as the manufacturing process that provides a practical or commercial interest, implemented by a manufacturer and kept secret from that manufacturer’s competitors; the process may consist of a simple technique or a complex process, even one of minor importance (c.f. Gérard Cornu, Vocabulaire juridique, Association Henri Capitant, page 765)
3. Or has had to be disclosed, in particular to the public for reasons of public interest or to the administrative or judicial authorities.
4. Information that is not readily accessible to third parties concerning the commercial organisation of a company (including the list of clients and the prices charged) is covered by trade secrecy. Therefore, the company’s personnel, whether they still work for the company or no longer work for it, cannot disclose to a third party information protected by trade secrecy that came into their possession when they worked for the company (c.f. Court of Appeal, 15 October 2003, no. 27.824 on the list).
5. The exercise of this protection is, however, limited by the exercise of the right to freedom of expression and information, disclosure for reasons of public interests, disclosure by the EU institutions or national public authorities of information communicated by companies which they hold by virtue of EU or national rules, and the autonomy of social partners and their right to enter into collective agreements.
6. The directive provides that it will be for Member States to decide the measures, procedures and remedies necessary to ensure the availability of civil redress for unlawful acquisition, use and disclosure of trade secrets.
The sanctions provided for by the directive do not fundamentally change the sanctions that national legislation provided for with regard to trade secrets, i.e. the destruction of all or part of any physical and/or electronic medium containing or implementing the trade secret or, where applicable, the delivery up to the trade secret holder of all or part of such physical and/or electronic medium.
The courts are free to decide whether or not to order publication of information concerning their decisions, taking into consideration whether or not the information concerning the infringer is of such a nature as to make it possible to identify a legal person and, if so, The courts are free to decide whether or not to order publication of information concerning their decisions, taking into consideration whether or not the information concerning the infringer is of such a nature as to make it possible to identify a legal person and, if so, whether or not publication of the information is justified, having regard in particular to any adverse effect such an order could have on the infringer’s privacy and reputation.
7. According to the principle of economic freedom, the poaching of clients is not wrong in itself. In effect, a business’s clients do not belong to that business; those clients can receive offers from competitors and it is irrelevant that those competitors may be former suppliers or former employees. For such poaching to be illegal, it is necessary for means to have been used that are either fraudulent or, at least, questionable or unusual (c.f. DE CALUWÉ: Les pratiques du commerce T.I n° 716 et s.). A distinction is also made between the know-how attached to the person of the employee, which the employee remains free to use, and the employer’s know-how, which can consist of confidential information and is therefore part of the company’s intellectual property (Y. SERRA, Concurrence déloyale, Rép. Com. Dalloz, p. 36, n° 183).

Share this content