Disputes over breach of trade secrets in the age of the digital economy | In Principle

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Disputes over breach of trade secrets in the age of the digital economy

As information technology and the knowledge-based economy develop, trade secrets are increasing in importance. At the same time, theft of trade secrets and losses for the economy due to this problem are increasing. In recent years legislators have taken measures to modernise and strengthen the protection of trade secrets.

As moves towards innovation become more and more common, access to know-how and other information with potential commercial applicability (such as algorithms and big data) has become a basic commodity for many areas of the economy. In most legal systems, when the holder takes measures to preserve the confidentiality of data, the data are protected as trade secrets. Modern digital businesses are deciding more and more often to protect confidential information using a trade secret protection system rather than traditional intellectual property rights. They see this as a model that encourages innovation, as it is more flexible, does not require long-term and expensive registration, and is more suited to today’s collaborative innovation culture (see ICC publication “Trade secrets in the innovation process”).

It is therefore not surprising that the rate of theft of trade secrets is increasing rapidly. Secrets are stolen not only by people who come into physical contact with them (such as former employees and disloyal business partners). They are stolen more and more frequently through state-sponsored cyber industrial espionage.

States have realised the importance of know-how for a modern digital economy and the increasing scale of economic espionage, and have taken measures to increase legal protection of trade secrets in recent years.

In May 2016 the Defend Trade Secrets Act was passed in the United States, and in June 2016 the EU adopted the Trade Secrets Directive (2016/943). The directive is aimed at harmonising the scope of protection of trade secrets in individual member states, for instance the remedies available to injured parties and guarantee of confidentiality of information disclosed during confidentiality infringement proceedings. Work to implement the directive into Polish law is at an advanced stage and the government’s proposal for the associated act was submitted to the Sejm at the beginning of May 2018. An amendment to the Unfair Competition Act in this regard can be expected to be passed soon as well.

With the rising value and importance of trade secrets, the increasing rate of theft, and stronger protection system, the number of trade secret disputes can be expected to rise.

What remedies are available in the event of a breach?

The Unfair Competition Act provides for a broad range of remedies for an injured party. This is to be extended in the proposed amendment.

One type of remedy is to cease and desist the use or disclosure of trade secrets, and to remedy the consequences of any breach that has occurred (surrender of documents or data carriers containing confidential information, destroying products manufactured using the information). Such injunctive relief enables the adverse consequences of unauthorised use of trade secrets to be stopped directly. The drawback of this type of relief is difficulty with enforcement. The only compulsory means is ordering an entity not complying with the injunction to pay a fine or penalty to the creditor (astreinte). In the past courts have specified the amount payable for each breach or each day of noncompliance. In some cases the level of these penalties might not deter the infringer from continuing to use the secrets. These remedies might be difficult to enforce also because separate proceedings have to be instigated to impose the fine or penalty. In certain situations this can prove too time-consuming or impractical, especially in the case of recurring breaches.

Another remedy is compensation or surrender of the profits derived from the breach. These claims are intended to remedy material loss inflicted due to unlawful disclosure or use of trade secrets. Measures can also be taken to recover the profits obtained by the infringer due to use of an unlawfully acquired trade secret. In practice, problems may arise in proving a claim for compensation or surrender of profits. It has to be proved that there is a link between the value of lost profits (damage) or the value of the infringer’s profits and the unlawful use of a trade secret. These difficulties are addressed in Directive 2016/943 and the proposal for amendment of the Unfair Competition Act. There is to be an option of pursuing an alternative claim for a quasi-licence fee. Instead of compensation or surrender of profits, the injured business will have a claim for award of the relevant fee regardless of the loss incurred for use of a trade secret in the future.

The act implementing the directive is to provide for similar solutions protecting entities using another business’s trade secrets if acquired in good faith. Breach of the secret is separate from culpability. Even if we are not aware that we are using someone else’s secrets, we are formally in breach. If a secret is obtained in good faith from a person who claims to be the rightful owner, it would not be just to seek an order prohibiting continued use of the secret or surrender of all the profits generated by use (for example many years of revenue from sales of a particular product). Also, this could undermine the certainty of law in the case of trade using innovative solutions. The bill allows an infringer against whom legal action is taken who proves that they obtained and use the secret in good faith to request, regardless of the type of claim pursued by the plaintiff, that a court award the plaintiff the appropriate fee, no higher than the fee that would apply for using the secret with the holder’s consent.

Apart from the claims described above, an injured business also has other remedies available. It can seek for instance publication of an apology in the press or other media, and publication of all or part of the judgment issued in a trade secret case. In many industries remedies of this type will be vital for re-establishing reputation and credibility.

How is a trade secret protected during potential proceedings?

In the past businesses have not wished to seek legal recourse where their secrets are used unlawfully due to fear that they would have to disclose details of secrets during court proceedings. Current civil procedure does not provide appropriate means for protecting disclosed confidential information against third-party access. The only solution is to hold closed hearings, but this only applies to information disclosed during a hearing (not information contained in the court files) and is not effective against the adversary. It only applies to the public or the press.

European legislators have noticed this problem. The directive states clearly that “it is necessary to establish, subject to appropriate safeguards ensuring the right to an effective remedy and to a fair trial, specific requirements aimed at protecting the confidentiality of the litigated trade secret in the course of legal proceedings instituted for its defence.”

Many businesses expected a solution in which the most sensitive information would only be revealed to the court. A similar system is in place in proceedings before the Court of Competition and Consumer Protection (Art. 47333 of the Civil Procedure Code). Probably due to criticism of solutions preventing access to trial materials for all parties from the point of view of equal treatment of the parties, a different solution is being sought in Polish law. The proposal for the amendment to the Unfair Competition Act makes disclosure or use of trade secrets an offence if the information is obtained in the course of court proceedings. This provision will apply to all parties with access to confidential information during the proceedings (parties, counsel, expert witnesses, interpreters, stenographers and so on). The penalty for breach of this provision will be severe, in the form of a fine, probation, or imprisonment for up to two years. This solution will probably not be satisfactory to all businesses forced to litigate over breach of trade secrets. On the other hand it is a reasonable compromise between protection of trade secrets and the right to a fair trial and equal treatment of the parties.

The future of trade secret litigation

It is right to make these legislative changes, but they are far from revolutionary (the issue of restrictions in Polish civil procedure on obtaining evidence from the adversary is still unresolved). Most importantly, trade secrets have come to the attention of EU and Polish legislators, and now there are comprehensive laws to protect trade secrets. This is a good omen for the future. The new legislative solutions can be expected to encourage businesses to seek remedies in the courts, and the courts can be expected to interpret the law in a manner that provides effective legal protection.

Łukasz Lasek, adwokat, Jakub Barański, Dispute Resolution & Arbitration Practice, Wardyński & Partners