What are trade secrets and how are they being regulated throughout Europe and the US?
Authors: Javier Fernández-Lasquetty, partner at ELZABURU S.L.P and professor of Intellectual Property at IE Law School, and Cristina Espín, practicing lawyer specializing in Intellectual Property and Information Technologies
A trade secret is any valuable information that enables a business to be competitive and innovative. Legally speaking, a trade secret is defined as any piece of information or knowledge that is not known either by the public or by experts in the sector in question, has commercial value, and reasonable measures have been taken to maintain its secrecy. This means that practically any kind of knowledge generated by a company may be considered a trade secret if it meets these requirements.
Trade secrets include a huge range of information that is not protectable or cannot be protected through patents or copyrights. This could be a formula, design, tool, or pattern, a particular method or process, or a piece of financial or technical information.
There are many well-known trade secrets—like the recipe for Coca-Cola—but in today’s digital economy, there are many secrets that may be less recognizable but equally important to a business. For instance, in the IT and AI industry, algorithms are vital to a company’s USP and ultimately its commercial success. On a simpler level, consider a marketing strategy, which brings together highly significant commercial information to outline a plan for business development.
Should a rival company acquire any of these secrets, an organization is likely to suffer, depending on the significance of that information to their core business. While a larger company may be able to absorb lost profits or market share and remain successful, smaller companies or startups that sell only one particular product or service will be at risk of collapse.
How are trade secrets regulated in the European Union?
Trade secrets are regulated by the EU Directive 2016/943 of the European Parliament and of the Council of the 8th of June 2016, which protects undisclosed business information—trade secrets—against their unlawful acquisition, use, and disclosure.
The Directive states the minimum standards of protection for trade secrets across the EU, and has been implemented in almost all member countries. Spain complied with the Directive by implementing the Trade Secret Act 1/2019, which replaces article 13 of the Unfair Competition Act. The Directive has raised the legal recognition of trade secrets to that of other intellectual property rights.
The Trade Secret Act includes both substantive and procedural laws and regulates what are considered legitimate and illegitimate activities. The statute also regulates the co-ownership of trade secrets, and outlines the special conditions for their licensing and sale.
Thanks to their definition as intangible assets, trade secrets can be the object of transactions—just like patents or copyrights. In fact, the statute frequently refers to the Spanish Patent Act 24/2015, demonstrating the overlap and similarities between these two areas. For instance, the Trade Secret Act establishes rules of civil procedure similar to those established for patents, with actions for cessation and compensation for damages—as well as precautionary and preparatory measures—available to litigants.
How are trade secrets regulated in the US?
The United States has a long tradition of regulating trade secrets with jurisprudence dating back to the 19th century. The earliest record of such a case took place in the Supreme Judicial Court of Massachusetts in 1837, where John Vickery and Jonas Welch were in dispute of Welch’s refusal to uphold Vickery’s “exclusive right and arts or secret manner of manufacturing chocolate” at his recently purchased chocolate mill.
The United States Patent and Trademark Office considers trade secrets one of the four types of intellectual property in the US, the other three consisting of patents, trademarks, and copyrights. Currently, trade secrets are regulated by the Defend Trade Secrets Act 2016 (DTSA) as federal legislation, and all states have adopted some form of the Uniform Trade Secrets Act (UTSA).
Are the US and EU aligned when it comes to regulating trade secrets?
Regulation in the US and EU are increasingly similar and show signs of moving in the same direction.
The majority of key issues in both regulations are alike, such as the definition of trade secrets; the classification of reverse engineering as a prima facie lawful activity; the remedies against infringements; and the protection of trade secrets during litigation.
There are certain provisions that differ between the two jurisdictions. This includes distinct approaches to the unlawful acquisition of trade secrets. In the US, there must be actual awareness that information is a trade secret in order to assign responsibility. In the EU, on the other hand, there are two types of objective liability situations. Firstly, third parties who knew or should have known they were infringing a trade secret, and secondly, a so-called “ultra-objective,” according to which even a bona ﬁde third party is considered liable. In the latter case, it is worth bearing in mind that although liability is assigned, this is less stringent than in the prior scenario.
What’s more, while the US Defend Trade Secrets Act (DTSA) of 2016 establishes that the applicable jurisdictions should be transnational if the infringer is a US citizen or permanent US resident, the EU Directive and Spanish law make no mention of that issue.
Why is trade secret regulation crucial for companies?
Trade secret regulation now gives all companies the opportunity to protect vital information that was previously at risk of disclosure. For this reason, it is essential that organizations implement trade secret asset management in order to take advantage of the protection aﬀorded by these regulations. Otherwise, trade secret owners are not able to benefit from this new Act.
Similarly, companies must be particularly diligent with the information they receive and use whenever this is considered secret, since, as stated above, they could be liable for infringements even when acting as third parties in good faith.
Today, it’s not uncommon for newspapers to bring news of breaches of trade secrets, whether by a supplier, a partner, or an employee. Considering this new legal scenario, it is foreseeable that we will witness an increasing number of cases in Spain in particular and in Europe in general. Only time will tell if we will reach the level of conflict and litigation that exists in the US in this field.
Javier Fernández-Lasquetty is partner at ELZABURU S.L.P. and professor of Intellectual Property at IE Law School and practicing lawyer since 1982, specializing in Intellectual Property and Information Technologies. Previously a lawyer in several ICT and consultancy firms, as well as a partner at a multinational law firm. Javier is also a panelist at WIPO’s Arbitration and Mediation Center (IP General and Media & Entertainment), President of the Spanish Fashion Law association. Member of the Board of LES Spain & Portugal and DENAE (Spanish entertainment law association). Active member of AIPPI, ALAI and INTA.
Cristina Espín Martí is associate at ELZABURU S.L.P., Cristina is a practicing lawyer specializing in Intellectual Property and Information Technologies. Cristina holds a Law Degree and a degree in International Relations from Universidad Pontificia de Comillas (ICADE) and a Master of Laws in IP from Universidad Autónoma de Madrid.
Note: The views expressed by the author of this paper are completely personal and do not represent the position of any affiliated institution.