Thursday, January 30, 2014, 00:01 by
Paul Micallef Grimaud and Philip Mifsud
Traditionally businesses treat physical assets as their most valuable. Intangible assets are, however, increasingly relevant. This is particularly true of intellectual property. The new challenge for businesses is keeping the ingredients that define their product or service secret.
The European Commission’s Proposal for a Directive on the Protection of Trade Secrets published in November 2013 will likely be well received by European commercial players across the spectrum. Its objective: a uniform level of protection and certainty for trade secrets throughout the single market.
As defined, a trade secret has three constituent elements: (i) the information must be confidential; (ii) it should have commercial value because of its confidentiality; and (iii) the trade secret holder should have made reasonable efforts to keep it confidential.
Trade secrets are substantially different from Intellectual Property Rights (IPR They do not confer exclusivity over a “secret formula”. Competitors can attempt to replicate that formula through their own genuine endeavours. Nevertheless, the proposed directive recognises that incentivising innovation requires holders of trade secrets to be shielded from underhand practices.
For all businesses, but especially start-ups and SMEs, this is fundamental – often that secret is the key asset of that enterprise. For Google, it was the PageRank algorithm and an understanding that it could optimise internet search. Trade secrets or confidential know-how, if kept secret, can give the developer the means to edge out his competitors.
Today, Europe-wide protection is inconsistent or even absent. If implemented, the proposed directive will accord trade secrets harmonised statutory protection against unauthorised acquisition and use.
Setting out a common understanding of unlawful use or acquisition of trade secrets, the proposed directive addresses these threats through a uniform set of protective measures affordable to proprietors of secrets and remedies, including sanctions, and enforcement actions that may be resorted to.
The proposed directive protects against disclosure of trade secrets during litigation proceedings by requiring confidentiality throughout any litigious proceeding, while addressing abuses of statutory protection of trade secrets to undermine competition. The proposed directive forbids frivolous litigious proceedings intended to undermine legitimate competition.
Critics of the proposed directive have queried its silence on disclosure of trade secrets during the course of employment given that the majority of trade secrets’ leakages are occasioned by current or former employees seeking to leverage the knowledge they acquired while in the employment of established market players.
If Malta intends to make its name as a strong intellectual property jurisdiction… it ought to be pro-active in offering robust protection to those whose livelihoods and ventures depend on trade secrets
Malta’s current position and the proposed directive
SMEs form the backbone of Malta’s economy, contributing to about 65 per cent of Malta’s GDP. With this in mind, the need for Malta to be proactive in the protection of trade secrets that may constitute the most valuable assets of these entities is fundamental.
Trade secrets per se do not qualify for intellectual property protection. Until trade secrets are used to develop a product or service consituting IPR, they are exposed to potential violation.
Even where a protectable product or service is actualised, the costs and administrative procedures to obtain IPR protection may serve as a barrier. This applies particularly to SMEs. In recognition of this reality, trade secrets should be safeguarded against abuses.
Currently, and until such time as the Maltese legislator opts to offer ad hoc legal protection to trade secrets, the proprietors of trade secrets may turn to laws and principles of general application to safeguard their interests, including fiduciary obligations, non-disclosure agreements and even some criminal sanctions.
Fiduciary obligations in our Civil Code subject any person who receives information (like trade secrets) from another to fiduciary obligations including that of not divulging or using that information in a manner contrary to that intended by the originator. These obligations extend to third parties who receive information from a fiduciary. Non-compliance will expose recipients of the information to damages.
Non-disclosure agreements, binding recipients of information to secrecy, are generally employed when proprietors of trade secrets enter into commercial relationships with third parties with the intention of developing a product or service through the use of the trade secret. Liquidating damages in advance (contractually) offers some peace of mind that the recipient of the trade secret will not divulge the information to third parties. Although the contracted party will generally be obliged to ensure that confidentiality extends to its employees, agents or sub-contractors, these agreements do not bind those third parties.
Some protection is afforded by the Criminal Code which renders misappropriation of trade secrets a criminal offence. Mention should also be made of the Professional Secrecy Act which also prohibits the misuse and disclosure of information obtaining from a position of confidence as a professional. This act, however, enjoys only limited application to specific professions.
If Malta intends to make its name as a strong intellectual property jurisdiction and foster a knowledgebased economy, it ought to be pro-active in offering robust protection to those whose livelihoods and ventures depend on trade secrets.
There are two main factors hindering the protection against trade secret abuses in EU members state courts, as identified by the ‘Study on trade secrets and confidential business information in the internal market’ (April 2013), contracted by the European Commission.
These are (1) the risk of the proprietor of the trade secret having to leak the trade secret in court proceedings in order to substantiate his claim that the secret has been breached; and (2) the general impossibility of enforcing a trade secret against a third party who obtains the information in good faith.
As outlined in the study (conducted by Baker & McKenzie – Milan “The inherent difficulty of building a case against the relevant adverse party in terms of qualification of right and burden of proof is aggrieved by the risk of losing control over trade secrets for lack of efficient protection during the court proceedings.”
A trade secret register to briefly identify a trade secret (naturally not the details of the trade secret per se) and its proprietor is one way to achieve better certainty. While the existence and ownership of a trade secret should not be determined exlusively by its registration, a register can create a legal presumption as to the protected status of the secret and the identity of its legitimate proprietor.
If registered trade secrets end up in the hands of third parties, the recipient of the information is presumed to know its status as such, and will be bound by fiduciary obligations, precluding disclosure to any other person,making use of the secret in any manner, and requiring that the legitimate proprietor of the secret be notified. Failure to take these steps would expose the said person to damages and possibly criminal responsibility. This measure will tackle the problematic possession of secrets in good faith and concurrently limit the possibility of the perpetrator of the original misappropriation from making any gain from his unlawful acts.
The suggestion goes a long way in limiting what the aforementioned study has identified as the two main defences availed of by the perpetrators of a breach of a trade secret throughout the European member states, namely that the information is not a trade secret and that the information was legitimately obtained or not misappropriated.
In essence, the proposed directive should serve as a springboard for Malta to recognise the importance of trade secrets. Rather than passively transposing the proposed directive when (and if) this is approved, Malta might harness the opportunity for an introspective analysis of domestic IPR protection and set about engineering a legislative, commercial apparatus becoming of a jurisdiction with designs on achieving excellence for innovation and research and development.
Paul Micallef Grimaud and Philip Mifsud form part of the Intellectual Property & TMT practice group at Ganado Advocates.